The secret of wealth
Posted by Faith, 15 May 2009
The secret of wealth is not so much about receiving a higher salary, but making the most of what you get paid.
Gavin and Terry learned this when they came to see me. They were both in their late thirties and looked like models – clean cut, well dressed, styled hair - but with frowns instead of smiles.
Gavin spoke first, “We’re not getting ahead, Faith.”
“Could you tell me what you mean by ‘getting ahead’, please?”
“Money in the bank, maybe a rental property or other investments, some retirement savings for me.”
Terry nodded, “I’ve got superannuation sorted with my employer but we can’t seem to get started on Gavin’s, or build up other savings.”
I flicked my eyes again over the figures they had brought with them. They only had a mortgage of $200,000 on a $400,000 house, their student loans were paid off, as were their late model cars and they paid their credit cards in full every month.
I said, “It looks like you don’t have a problem with debt. That’s quite refreshing these days.”
Terry nodded again. “We don’t like debt, as we don’t like to waste money on interest costs. We accept that we have to have a mortgage as we don’t have enough to pay cash up front for a house. We pay for everything else, as we need it. But as Gavin says, why can’t we get ahead? We both earn good money.”
Gavin chipped in. “We’re also really worried about the economy. One or both of us could lose our jobs and we’d like to put some money aside in case the worst happens.
Gavin was an architect and Terry was a senior cabin crewmember for a major airline. I could understand their concerns, as both the building and travel sectors were looking shaky. Between them they earned just over $200,000 per year so they should be able to save a lot. I decided to explore their attitudes to spending.
“Could you tell me how you decide to spend your money each month?”
They both looked surprised.
Gavin recovered first. “We don’t really decide. If we want something then we just go out and get it. It’s no big deal. We both have high incomes and can buy pretty much what we want.”
“What happens when you have a big ticket item like a car or holiday?”
Terry said, “We cut back on other spending for a month or two to get the money together. We holiday and have long weekends overseas together several times per year, but we arrange this around my work schedule, so we only have to pay one airfare.”
“So, how much would you spend on these holidays?”
They both shrugged their shoulders.
I prompted, “Could you give me a rough estimate?”
Gavin suggested, “A few thousand for the weekends. Maybe $10,000 each time for holidays? But, we never go into debt for these breaks.”
While their attitude to debt was commendable, I was starting to get a good picture of why they couldn’t get ahead.
“Do you have a budget?”
It was Terry’s turn to comment. “No, we don’t need to do that because we can afford everything we want.”
“Except you can’t build up any savings for an increasingly uncertain future?”
There was silence at that. I waited as they digested what I had just said.
Eventually Gavin said, “I guess that’s the real reason why we are here. We seem to be spenders, not savers. We think we’ll save at the end of each month, but there’s always nothing left.”
I turned to Terry and asked, “You said your superannuation was sorted with your employer. How does that work?”
“I contribute 5% and they do the same. I’ve been with them a long time and the amount is building up nicely.”
“Does your employer take your contribution out of your pay before you receive it?”
“Yes, every month.”
“What would happen if they didn’t and you had to pay for it after you got paid?”
As before, there was a period of silence while they both thought about this.
Then Terry continued, “I’d like to think that I’d still pay it, but now I am not so sure. Is that why we can’t get started on Gavin’s superannuation? ”
I smiled, “It’s also why you can’t save, either. You put your finger on it, Gavin, when you said that there was no cash left at the end of each month. While you both have good incomes you spend it all.”
Terry jumped in, “But, how can we save when there’s nothing left?”
I smiled. “Would you like to know the secret of wealth?”
Of course they said “yes” to that.
“Wealthy people put money aside to save first and then spend what’s left. Everyone else spends first and tries to save what is left. As you’ve discovered, there is always nothing left.”
They said together, “Is that it?”
“Think about it in light of what’s been happening to you.”
“It just seems too simple.”
The best advice sometimes is.
Gavin and Terry had mistaken having high incomes for wealth. Real wealth is about owning solid assets like debt-free properties, money in the bank and investments. Income is only money coming in, which is very nice when it is flowing. You think you are wealthy because you can pay for a good lifestyle and everything seems fine until the money stops flowing.
To be fair to Gavin and Terry, they were worried about their inability to build up a retirement nest egg or even a short-term emergency fund to help protect themselves from possible job losses.
Together we worked on a financial plan that was tailored towards their needs to ‘get ahead’, build up a cash reserve in case of redundancy, provide Gavin with superannuation, pay off the mortgage and still enjoy some travel together each year. A key part of this plan was setting money aside for these purposes as soon as their salaries were deposited into their bank accounts.
Learning with Faith:
- Get what you want in life by setting both long and short-term goals.
- Put money aside for these goals into a separate bank account (or into a longer-term investment for superannuation savings) and as soon as you get paid.
- Prepare a budget so you know exactly what you spend your money on. If you want more money you will then know where to change your spending.
- Build up an emergency fund for unexpected expenses or job loss.
---ends---
Want more out of your life and money? Then buy my book Keeping the Faith - Travel the World. Beware - it is very powerful! It was awarded a top 5-star rating by the on-line financial bookstore Good Returns, along with the warning: "This book changes lives." Click here to buy Keeping the Faith - Travel the World.
Always set goals and work towards them, but never make New Year resolutions. Want to know why? Read more...
Want to know more about how to make better choices about money? Check out Faith’s Fact Sheet.
See previous blogs:
Don't sweat the small stuff.
Can you grow a money tree?
What's holding you back?
Money or your life - which has more value?
The seven secret thieves
Five questions to change your life
Find that spark
Switching lives - what would you choose?
Who can I trust to help grow my money?
How to swim in a sea of money
Life can be unfair
The rule of happiness
No way to live
Anyone can be good with money
Best ways to warm up winter
Who wants to be a millionaire?
The secret of wealth
Keeping your money safe
Having it all
Win an all-expenses-paid trip for two to Europe (Part 3)
Win an all-expenses-paid trip for two to Europe (Part 2)
Win an all-expenses-paid trip for two to Europe (Part 1)
Make a change for good
A recipe for a happy Christmas
Nothing else matters
Rage, rage against the dying of the light
Make a wish come true
Buying or Selling a House – Those that care least, usually succeed
When is a good time to buy a house?
Sleepless Nights in a War Zone
Transitions - more life or more of the “same old, same old” boring stuff?