A great deal of time is spent on this blog talking about saving and investing. Becoming wealthy is all about delayed gratification. Saving up until not only can you afford to pay cash, but until you can pay from investment proceeds. This way you have both the cash and the stuff.
At first this is very difficult. Other people at work will be driving in with their new cars while you’ll have your 5-year old model for which you paid cash. Others will be buying their McMansions with an office and two bonus rooms while you’ll be buying a standard three bedroom that fits easily within your budget. They’ll be going out for dinner constantly and going on various expensive vacations while you’ll be cooking at home and taking car trips to the beach and mountains.
After about ten years, however, you’ll be in reach of paying off your house. You’ll have cash available for air conditioner repairs and the next slightly newer car. You’ll be able to buy some nice appliances for cash instead of making payments or using a credit card. You’ll have zero balances on your credit cards, or no credit cards at all, tens of thousands in your retirement accounts and tens of thousands in your investment accounts. Just as your friends are starting to look at student loans for college expenses, you’ll be thinking about the best way to pay cash and how much you’ll send your children off with when they go into the world.
You’ll also start to have enough return from your investments to start looking at sprucing up your place. No doubt your brave spouse will be ready to catch up a bit with his/her friends. The difference is, while their lifestyle is a fantasy – a castle built on the clouds on credit – everything you’ll be buying will be real. Those around you will be taking a great risk, being a paycheck away from missing a credit card payment or even a home payment. You’ll be able to be out of work for several months before it even started to be an issue.
You don’t want to give up all of your hard work in a wild spending spree, however. Instead, you want to budget some of your investment return into a “home improvement fund,” a “vacation fund,” or maybe a “decorating fund.” For example, let’s say that you or your spouse have modern tastes and are looking to add some “pop” to your living room. You have saved up and now have $80,000 in investments, making an average 12% return, or $9600 per year. Most of this return should be reinvested (or, if it is from price appreciation of stocks, left in shares to continue to grow tax-deferred).
A percentage of the return, however, could be directed into a decorating fund to buy quality furnishings. For example, let’s say you chose to direct 10% of your return into a decorating budget. This would provide about $720 per year to buy items guilt free for your livingroom. You could then look to add a hanging bubble chair($800), a barcelona chair ($600), or even an Eero Aarnio Ball chair ($800).
Within a few years, your home will also be paid off, freeing up another $10,000 or so per year in income. Perhaps half of that savings could be directed into a home improvement fund, allowing granite counter tops (~$4000) to be installed, or perhaps new, upscale appliances (~$5000) to be purchased. Perhaps you’ll want to get away from your home entirely. You can easily afford to pay cash for a Disney Cruise (~$5000) or a nice visit to a resort in the Caribbean (~$4000).
The difference between you and the Joneses is that you’ll be able to do this every year, forever, while they’ll do it one year and then be paying for it for the next twenty years. With time, your ability to do things will increase, while theirs will decline as the credit card and HELOC bills build.
Perhaps most importantly of all, you’ll have the means to really help people out. Perhaps near Christmas time you can direct your decorating or vacation budget into a giving budget and pay off some stranger’s layaways at Kmart. Or perhaps you’ll hear about a family who lose their home in a fire and be able to put them up in a motel for a couple of weeks while they pull things back together. Maybe you can buy a car for a friend whose old one dies, or give a waitress or two a hundred-dollar tip. Being generous is so much easier when you aren’t spending half of your income on interest.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.