“It” factor?
“It’s” not easy and obviously not everyone can do it. Only 12% of people in their 60’s and 70’s have over $1,000,000. 30% of people in their 70’s still have a mortgage. Only 25% of people can handle a $1,000 unplanned expense without going into their credit card. Over 30% of American’s have nothing saved at all for retirement.
Just those statistics alone show that most people don’t have the “it” factor. And by “it,” I’m talking about the ability to build wealth during your lifetime. It’s still January, so there is still time to do some self-reflection to determine if you’ve got what it takes. The good news is that you can get the “it” factor … it’s totally within your power and you can get it today.
How To Get The “It” Factor
Last April, I wrote an article stating that You Are On The (Retirement) Clock that identified 10 things you can do to get started. It’s a good list but today I’d like to explain some general themes that are important to build wealth.
Let’s talk about wealth for a moment. Just driving down the road or looking at your neighborhood, look at how many $50,000+ cars are in the driveway. Knowing that only 12% of people in their 60’s and 70’s have over $1,000,000, it’s fairly safe to say that most of those Mercedes or BMW or one ton pick-up 4×4 driving neighbors aren’t wealthy.
“Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.“
The Millionaire Next Door
The important thing to remember about any article on this topic is it’s only information. Information is only good if you act on it or use it to improve your situation. If you are’t doing some of these things or you aren’t changing your personal financial situation, then you don’t have or want the “it” factor.
Sorry, that is harsh news but those statistics in the first paragraph of this article will be you someday (if not already). It was my path, which is well documented on this site. You need to get with the program just like I did or you will become another statistic.
Here are some additional factors to consider on your path to get the “it” factor and build wealth.
Living BELOW your means.
Warren Buffett still lives in the same house he bought in 1958 for $31,500. Obviously, the billionaire has the means to buy any home he desires but people that have the “it” factor know that being house rich or having the biggest home doesn’t really matter. He’s not competing with anyone on who has the largest house.
Living below your means occurs when you spend less than your earn. That might sound like an easy concept but why can so few people actually do it? There were times in my life (before I got “it”) when I didn’t live at or below my means. It’s also why at 48 years old I only had a net worth of $155,000 on an income of about the same amount ($155,000 of income).
If you can’t get control of your spending then you will never, ever be able to build wealth. It’s really that simple and it’s critical to reflect on and action this concept. The lower you are living below your means the higher you can take your savings rate. This means you get to retirement faster and become one of the 12% of people in their 60’s and 70’s to have over $1,000,000.
Just start, the earlier the better
Oh to be young again, so that I could completely take advantage of decades of compounding my returns. When I was young (started work in the mid-1980’s), I started off pretty good in my company’s fairly new 401(k) plan. I didn’t make much money but I was chipping away giving what I could.
In 1978, Congress pass the Revenue Act, which included a provision – Section 401(k) – that gave employees a tax-free way to defer compensation. The law went into effect on January 1, 1980. And by the early 1980’s, nearly half of all large companies had some kind of a 401(k) plan.
Personally, I think these plans are great for young people and I stress contributing as much as possible. Currently, my oldest daughter (25 years old) puts 7% in her regular 401(k) and 13% into her Roth 401(k). Within a few months that will increase and I hope to get her to a 25% overall contribution soon. The goal is to get her to max out the plan at $19,500 (2020’s limit for someone under 50). Once she get’s herself to that level on a regular basis, we’ll start investing her into some taxable stocks.
The greatest example of compounding is how much it takes to get to $1,000,000 at certain ages. Let’s assume a 25, 35, 45, and a 55 year old person all want $1,000,000 but they start contributing at those ages noted above. Let’s assume they all get 8% returns. How much would each person have to contribute to get $1,000,000 by age 65?
- 25 year old = $286 monthly for 40 years
- 35 year old = $671 monthly for 30 years
- 45 year old = $1,698 monthly for 20 years
- 55 year old = $5,466 monthly for 10 years
You tell me … which person do you want to be? It’s tough for a young person to contribute $286 monthly early in their life but in their 30’s it will be much easier. My 25 year old daughter is currently contributing over $1,000 per month to her retirement accounts. If she can maintain that level then she will be one of those 12% of people in their 60’s or 70’s with $1,000,000. Actually, she’ll have several million dollars if she can maintain and even increase her contributions. She is making trade-offs … she drives a 20 year old car, has no debt, and doesn’t live in the fanciest apartment. But she’s saving like crazy and it will pay off for her. She has the “it” factor.
If ever there was any magic in the world of investing, it would be compounding. It’s always one of the regrets older people have … they wish they had started investing when they were younger. Consistency is a major contributor for someone to have the “it” factor and my oldest daughter has it at a young age.
Own quality assets for the long-term
Investors think long term. Investors know that it takes time to replace your day job income with income from other sources. This replacement income could be rentals, dividend stocks, or a business. Whichever way you choose, it takes time to execute on the income replacement plan.
How you handle volatility and price declines is what keeps most people from building wealth. Regardless of the asset, many have the idea that buying high and selling low is the formula. If this is how your operate, then you don’t currently have the “it” factor. But again, you can change that immediately.
If you use volatility and price declines as your greatest wealth building weapon then you have “it.” For example, Exxon Mobil hit a 10-year price low today and currently yields nearly 5.5% – seriously unheard of metrics. Headlines of the China Coronavirus, global recession, negative interest rates, and more have depressed oil prices.
For the “it” crowd, this Exxon Mobil situation is were the real money is made. We aren’t thinking 3 months or even 3 years … we are building wealth over decades and now is when we jump in and buy Exxon Mobil. My portfolio is oil heavy right now because that is what is on sale. People are scared of oil so I’m buying.
Controlling debt before it controls you
Surprisingly, debt is a controversial topic in the financial world. Many love debt, many are a slave to it, and then there are those absolutely hate it. I’ve been all those people at some point in my life. For the most part, debt controlled me with car, electronics, and credit card payments. Many times I’ve paid off my debt but some how it would sneak back into my life … debt is “funny” like that. It can really creep up on you when you least expect it.
“Compound interest on debt was the banker’s greatest invention, to capture and enslave, a productive society.“
Albert Einstein
People like Warren Buffett, Mark Cuban, and many others tell people to get and stay out of debt. Sure, there are those times when debt can be used to buy assets and actually make money sometime in the future. But the risk is when things hit the fan, will you be able to service that debt? And for most people the answer is “no.” For the average Joe or Josephine, it’s a good rule to just keep debt to a minimum, pay it off quickly, and never carry a credit card balance.
Most people go into retirement with debt. The general rule for someone that has the “it” factor, they keep debt to a minimum and go into retirement debt-free. I agree with a debt-free retirement and that is my plan. There a just a few rare instances where it’s ok to have debt but let’s just keep it simple and say no debt going into retirement.
Conclusion
Your income is a finite resource and you’ve worked hard to achieve it. People with the “it” factor know that spending $1,000 on something will cost them effort at work (days, weeks, or months). Every time you spend money on a depreciating asset (car, TV, etc…) it ruins your ability to build wealth, delays your retirement, and the real cost is your freedom.
We need to rethink our relationship with money. We must understand it’s a tool that can provide us the ability to truly chase our passions. Know that you can get the “it” factor right now by committing to live below your means, executing on a plan to replace your work income, and controlling your debt. Right now, you can take some baby steps to having the “it” factor.
Thanks for reading!
Mr. TLR