Do you want to be average? What does it mean to be an "average person" financially?
On Friday, the Honolulu Advertiser ran a story entitled "O`ahu workers face not-so-golden years." It covered a report by Americans for Secure Retirement which gave our state an "elevated risk" ranking in retirement planning. According to the article, this means that many residents aren't putting away enough or penciling out what they'll need to live comfortably after they retire.
The Average PersonWhat is the average person doing? Spending himself/herself into oblivion.
The average person has less than $10,000 in savings.
The average person spends as much (or more) than he/she earns. In 2005 the nation's personal savings rate fell to -0.5%.
The average person does not know the rule of 72 or the concept of compound interest.
The average person does not have a plan for retirement.
The average person focuses on what's in front of his/her nose rather than the horizon of the future.
The average person will have to work until they die.
The average person is in denial about his/her financial future.
Lastly, the average person spends money FIRST, then takes what's leftover and saves it.
The Smart InvestorThe smart investor understands that financial freedom can be achieved through a systematic approach to investing for the long term.
The smart investor lives within his/her means and will create more wealth if necessary.
The smart investor understands the rule of 72 and the concept of compound interest.
The smart investor has a plan for retirement.
The smart investor is ambitious, disciplined and knows that "get rich quick" is a fallacy.
The smart investor will be financially independent in 20 years or less.
The smart investor is considered an "expert in his/her field" and will eventually be able to choose how much and how often he/she works.
Lastly,.........................
The smart investor has a GOAL. To build enough wealth in investments that will create a cash flow equal to, or beyond his/her current salary.
Wouldn't you rather be a "SMART" investor?
Here are 3 tips on becoming a smart investor:
Work BackwardsAs it was pointed out earlier in the column, the average person usually gets his/her paycheck, spends MOST of it on rent, car payments, food, clothing, TV, movies, gym membership, etc. and whatever's left over, goes into a savings account (or change jar). This account is easily tapped, if there ever is a moment of weakness. (Did I hear SALE!)
Some people can calculate this out themselves, but I recommend sitting with a professional to find out how much money you will need in retirement to live the kind of lifestyle you desire (be realistic). Once this is accomplished, you can break this BIG 30 -40 year number down into monthly and daily amounts which aren't so intimidating.
From here, put this money away FIRST. David Bach (The Automatic Millionaire) recommends direct depositing your paycheck into your bank account. From there, your investment portion will be removed and you will only see what's left over. What's out of sight is out of mind.
Develop a systematic system for investingInvesting is a very simple concept, yet most people don't understand it. It is using NOW money, (the money you currently have in your bank account, wallet, etc.) to create MORE money LATER.
Most people (the average person) would rather indulge themselves than invest.
Investing could be putting money into a mutual fund, or buying an investment property, or even putting away money into an IRA. It does not have to be complicated, but it's the impetus for financial independence.
Make sure that whatever you choose to invest in, continue to do so for the long term and systematically put money away into the investment over time. For example, add $500 a month to a mutual fund, or buy a piece of real estate every 5 years. Just don't jump around and keep looking for the "rocket stock" or "dream foreclosure." Every market goes up and down and it's impossible to time.
Again, I recommend meeting with a professional in the field to help you determine what's best for you. It's almost impossible to NOT know someone who's a financial advisor or a Realtor. Ask questions. Most of these professionals will not charge you until you do a business transaction with them.
Living within means/create meansThe average person who makes $30,000/yr. spends $30,000/yr. The average person who makes $60,000/yr. spends $60,000/yr. Amazingly enough, the average person who makes $100,000/yr. somehow manages to spend $100,000/yr.
Of course, the more money made makes it easier to invest larger amounts, but the concept of systematically putting away money every month is what is going to make the difference in the long term. Remember, $4,000/yr. over 30 years can turn into close to $1 million.
What if you can't put away $4,000/yr.?.........let's stop right there....you can't afford to put away $4,000 a year? Let me help you.
$4,000 a year breaks down to $333 a month which breaks down to $84 a week which breaks down to $11 a day.
Here are some tips:
- Take home lunch to work. You know I'm a big fan of Peanut Butter and Jelly sandwiches.
- Start a carpool club
- Cut coupons
- Get a library card and read the magazines and books there
- Only buy what you need (don't buy in bulk)
- Wash your own car
- Air dry your clothes
You get the picture. Now some harder pointers:
- Work 1 day extra a week or 2 hours more a day. You will increase your productivity by 20%
- When you're at work, WORK. Don't socialize, take long breaks, talk on the phone, etc.
- If you have a hobby that you're good at, utilize it to create money to invest. (Example: if you're good a tennis, give tennis lessons on the weekends. If you're a web guy, design web pages for small companies for a cheaper price).
These are all very simple things to do yet very few people do them. Most people want to "cruise" through the week. They want their weekends off. The smart investor understands that the little extras add up and working on weekends is not forever because the miracle of compound interest is in his favor.
Understand that there is no "magic scheme" to make you rich instantly. Understand that you need to set up a SYSTEMATIC method to investing/saving. Understand that becoming independently wealthy is not easy, it requires patience, self-discipline and hard work.
Lastly, understand that YOU are capable of being a smart investor. What are you waiting for!!??
