Author Michael LeBoeuf addressed students at Arizona State University with the following words of advice. This is a guest post, passing along these fruits of judgment and experience.
Last October, a friend who teaches Management at Arizona State University invited me to be a guest speaker in his classes. Knowing that I would be speaking to several hundred students, most of who were about 20 years of age, I told him, that if it was OK, I’d like to tell them how to become financially independent by age 50. Wanting to be well-prepared, I constructed a sentence outline of my remarks. Another friend suggested that I post it online and my first thought was to post it on the Bogleheads Forum . Please feel free to share and pass it along to any young person or anyone you know.
Some years ago, I saw a cartoon of two young guys looking at a very tall ladder with a sign on it that read, “The Ladder of Success.” One guy said to the other, “I was hoping for an escalator.”
Over 50 years ago I was sitting in a basic management class just like you. My goal this morning is to share with you some of the things I’ve learned in life that can help you make the climb far less difficult than it has to be.
There is an old but true saying: Rich people plan for three generations. Poor people plan for Saturday night. Your odds of being successful increase exponentially when you begin with a good plan.
Let’s begin by taking an imaginary trip into the distant future. Imagine you are 50 years of age. I picked 50 because if you have reached your 20th birthday, odds are the majority of your remaining life will be spent after 50. Imagine being 50, being healthy and having the freedom to do whatever you want. You can work if you want to but you don’t have to because you’re financially independent. You can sleep-in, stay up late, watch sports on TV, play golf, take a trip, you name it, because every day is Saturday in your life. Would you like that?
Well, I have good news for you. Every one of you is capable creating a life like that for yourself. It all comes down to making good choices as you manage your life. We are all the sum of the many choices we make every day and those choices; more than anything else determine our fate. The bad news is that historically only about 5 percent of Americans at age 65 are financially independent. Today I’m going to teach you how to be a member of the fortunate 5 percent. Whether or not you do it is up to you.
Here are four things we know about having a successful life:
- Success is the product of making good choices.
- Good choices come from good judgment.
- Good judgment comes from experience.
- Experience comes from bad judgment.
The point is to learn from the experiences of others whenever you can. Talk to successful people, find out what they did, learn from them and do something similar. That’s what education is all about – learning from others who came before us. Experience is a very tough, expensive teacher because you get the test first and then you get the lesson. It’s always cheaper and easier to learn from the experiences of others.
I want to spend the rest of our time discussing some key choices that will be critical in deciding how wealthy you become. I’m going to cover four types of choices:
- Saving and investment choices
- Educational choices
- Career choices
- Personal choices that impact wealth creation
Saving and investment choices
Know the difference between income and wealth. Making a high income is nice but that’s not where the action is. From this day forward make it your goal to become a wealth builder. For most of us this requires changing the way we think about money. Think of money as stored energy. Money you put away for tomorrow will someday free you from the need to work.
Graduate from the paycheck mentality to the net worth mentality. Making a big salary does nothing to build wealth if you spend it all or carry an enormous amount of debt. Instead, focus on building your net worth. Net worth is simply the dollar value of what you own minus the debts you owe. While you are in school it’s perfectly OK to have a zero or negative net worth. But it’s not OK to be broke at 70. Your earning years are behind you and it’s frightening. Right now your greatest asset is your potential earning power because you have years to work, save and invest. Make the most of them.
You have heard this before and you’ll hear this again. Pay yourself first. Resolve to save at least 15 percent of every paycheck you earn after taxes. The only caveat to this is to pay off any credit card debts you may have accumulated before saving. The more you can save, the faster you will reach financial independence. Save half of your salary and you’ll likely be able to retire in just 20 years.
Put six months worth of living expenses in a bank checking or savings account for emergencies. After that, I suggest you invest your money using a strategy known as passive investing or index investing. Put the rest of your savings into low-cost, no-load, index mutual funds and keep them there. If you do this, over the long-term you will outperform 80 percent of all investors who try to pick stocks or time the market.
Four excellent companies are: Vanguard, T. Rowe Price, TIAA-CREF and USAA.
Be wary of people calling themselves financial planners who want to sell you investments. The only thing required to be a financial planner is a suit and a sales pitch. The finance/investing business is filled with charlatans who want to sell you products that make high commissions for them. Never invest in anything you don’t understand or can’t explain to a 12 year-old.
Don’t put any money in stock mutual funds that you will need in the next 5 and preferably 10 years. Put any money you’ll need in the next decade in a bank savings account, short-term bond mutual fund or money market fund. Stocks are volatile, but the only long-term trend is up.
When the stock market takes a dive, ignore it. People will tell you to sell before you lose everything. Ignore the noise. The market drops 40 or 50 percent from time to time. Those who panic and sell only lock in their losses. Those who buy and hold will eventually be rewarded when the market rebounds to an all-time high. It has been doing this for over 200 years and will likely continue to do so for the rest of your life. Only two things matter when it comes to the price of an investment: How much you pay for it, and how much you get when you sell it. The rest is just noise.
When people tell you they can time the market, tell you when to get in and get out, or they can pick stocks that will outperform the market, they are either lying or delusional. The fact is they don’t know any more about the future than you or I do. Timing the market is for losers. Time in the market is what makes you rich.
If you stay the course and follow this plan, your savings will be multiplied by the power of compound interest and you’ll get rich slowly over time. Ignore people who pitch get rich quick schemes.
The problem with getting rich quick is that you have to do it so often. – Jason Zweig
In 2005, Vanguard Founder, John Bogle received a letter from a shareholder. The person writing said he had been investing with Vanguard since the mid-seventies and the value of his portfolio had grown to $1,250,000. But here is the interesting part: The man never earned more than $25,000 per year! How he did it is no mystery. It turns out that if an investor invests $601 each month in an index fund and gets an average return of 10 percent, in 30 years, their portfolio will grow to $1, 249,655.
One of the best savings vehicles is to invest $5500 each year in a Roth IRA. If you keep the money there until age 60, any withdrawals you make are tax-free. For example, let’s assume a 25 year-old couple each invest $5500 in a Roth IRA every year until age 60. If their investments earn an average annual return of 8 percent, at age 60 the combined money in their Roth IRA accounts will be worth over $2 million. If they get an average return of 10 percent, it would be worth over $3 million at age 60.
A two-career married couple can build a nest egg relatively easy. Live on one salary and invest the other.
How much is enough before you can consider yourself financially independent? Twenty times annual spending is a good rule of thumb. If you do that and withdraw no more than 5 percent per year from your investments, odds are good you’ll never run out of money.
An e-book worth reading: IF YOU CAN by William Bernstein. Available at amazon.com for 99 cents or free from his website,(http://www.efficientfrontier.com). A website where you can learn online the basics of investing: Bogleheads.org. Click-on: Start here link in the upper left-hand corner.
Education is a great investment if you keep the following points in mind:
- Don’t overspend. Graduate with as little debt as possible.
- Major in a field that will increase your value in the job market.
- What you major in is far more important than where you go to school.
- Be sure and graduate. Close only counts in horseshoes and dancing.
- Consider the increased earning potential of getting an advanced degree. Ben Franklin was correct: “An investment in knowledge pays the best interest.”
- Remember that lifelong learning is everybody’s job. We live in a rapidly changing world and in times of change, the learners inherit the earth. Another great saying: if you think education is expensive, try ignorance.
How many of you would like to be in business for yourself someday? How many of you would like to work in sales? For those of you who chose neither of the above, I have some surprising news for you: regardless of what you do for a living, you will be in business for yourself and you will sell something – either to your employer or to customers. In short, understand from day one that your career and your future are up to you. From this day forward, think of yourself as You, Inc. You are in charge of your own personal finance, production and marketing operation. You and everyone else are in business for yourself.
When it comes to choosing a career, here is the best advice I ever heard: work very hard at something that comes very easily to you. Happiness comes from doing what you are good at and it gives you a competitive edge. Everybody can be a star at something. Look for an occupation where you can shine.
Choose a career that doesn’t have a ceiling on how much money you can earn. The more money you make, the easier it to save and invest. The more you save and invest, the sooner you reach financial independence. My former students, Richard and Wayne made millions in insurance. Don made his fortune as a hotel management executive. I chose to become a business school professor because it offered a nice wage and I had the option of supplementing my income through writing, speaking and consulting.
How much money you earn will depend on three things:
- What you do.
- How well you do it.
- How difficult it is to replace you.
It’s important to enjoy your work most of the time, but don’t expect any work to always be unlimited bliss.
Wealth = Passion + Profitability
I enjoyed, teaching, writing and speaking but I never loved any of them so much that I was willing to do it for free. There’s a reason why it’s called WORK.
If you hate the very nature of doing the work you do, get another career. Life is too short to be miserable. Years ago I met an air conditioning repairman who had a degree in Accounting and was a CPA. He hated being an accountant, changed careers, started his own heating and AC business and was much happier for it.
Finally, never get married to a company because no company is married to you. Work and save with the goal of becoming financially independent because someday you will almost surely need it.
Whom you marry – Marry one frugal spouse who shares your dream of becoming financially independent. Weddings are all about love and divorces are all about money. Make sure that you and your beloved or on the same page financially before signing up for life. Between 40 and 50 percent of all marriages end in divorce and the leading cause is disagreement over money.
How many children you have– Have a moderate number of children. The average cost of raising a child born in 2013 up until age 18 for a middle-income family in the U.S. is approximately $245,340 (or $304,480, adjusted for projected inflation), according to the latest annual “Cost of Raising A Child” report from the U.S. Department of Agriculture.
The cost of living where you choose to live- Choose to live where the cost of living is moderate. Arizona is moderate. Florida and Texas have no state income taxes and moderate real estate prices. New York, Los Angeles, San Francisco, Boston, etc. are super-expensive and that makes it more difficult to save.
The choice to be a homeowner or a renter – Buy a moderately priced home if you are going to be in one place for at least 5 years. The net worth of most retirees is concentrated in their homes. Most renters reach retirement with little or no net worth.
When I was a freshman in college, I wanted to succeed, make good grades and graduate. I bought a book on how to study and take exams. I don’t remember what the details were but the author had one line in the book that served me well: Maturity is the ability to relate today’s actions to tomorrow’s results. People who can think 10, 20 or 30 years ahead and make good choices are the one’s most likely to succeed. Make it your mission to enjoy every day, but do something that will make for a better tomorrow. Don’t expect to be perfect and don’t expect everything to go as planned because you can be sure it won’t. However, if you have solid financial and personal goals, make smart choices and stay the course, you will meet with an uncommon success that escapes most people. Good luck happens when opportunity meets preparation.
And someday when you become financially independent, make it your business to stay financially independent. You only have to get rich once, and you may not get a second chance. Good luck to all of you.