Frightening

Sometimes my clients scare me.

When a client comes in and tells me he's 40 and making a quarter million dollars a year, I don't get excited anymore. I get suspicious. And most times I know what I'm going to find.

It's not what you think.

Currently, my favorite book (work-wise) is The Millionaire Next Door. I'm glad I read it at age 33 instead of 63, because I still have time to implement its principles - which are simple.

Following along the lines of my frightening clients, let's look at this (a synopsis of the book borrowed from a coaching web site):

The simple test for whether you are above or below the trend line for average people with your income is an average wealth accumulator. It indicates that they will have a net worth equal to one tenth of their age times their realized household income. Example, a 40 year old with a $50,000 salary would be average with a net worth of $200,000.

For a client who is 40 years old with a $250k salary, we should see a net worth of a million dollars. (Net worth is everything you own, less everything you owe.) So, in 401(k)s, IRAs, investments, homes, rental property, savings, checking, savings bonds, and other worldly goods (less credit card debt, mortgages, auto loans, personal loans, etc etc) you should expect to see $1m.

Fat chance with today's Americans.

See, here's the problem. Building wealth is dependent upon factors such as not buying in to the massive consumption society we've created, not demanding immediate gratification, actually thinking about tomorrow, and the next day, and the next, actually thinking about how much money you spend and how much money you save - and making sure the latter is more than the former, among other things. (I could go on and on.)

In the course of the authors' investigations, the following seven factors were discovered [in those with million-dollar-plus net worths]:

1. They live well below their means.
2. They allocate their time, energy and money efficiently in ways conducive to building wealth.
3. They believe that financial independence is more important than high social status.
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self sufficient.
6. They are proficient in targeting market opportunities.
7. They choose the right occupation.

The people I see? They value everything but saving money. They live beyond or just at their means. They want the Big House, the Flashy Cars, the Huge Rings, and everything else our society has deemed to reflect high social status. In many cases, their parents have provided "economic outpatient care." (Reflect on that phrase for a minute. It's funny.) Mom and Dad have been there to dig them out of whatever financial mess they've made, whether it's getting in over their heads in credit card debt, providing the down payment on their house (that they swear they'll pay back) or whatever. My very favorite is when a client chooses to work in a low-paying occupation (such as being a secretary in a doctor's office) while absolutely insisting their kids attend expensive private schools. (I have seen the mother's paycheck go entirely to paying for elementary school tuition while the parents have ZERO retirement savings.)

In society's eyes, most of these clients are "successful." In reality, they are stretched beyond their means, earning $20k per month paychecks and living check-to-check. They've given their children everything they could ever want, creating yet another generation of "entitled" (and spoiled) kids, while ignoring the future disaster of poverty hovering on the horizon. (Or, worse yet, the reality of having to work until they drop dead.) And look - I'm not talking about sacrificing so your kids can eat or have a better education or whatnot. I'm talking about sacrificing a future so the kids can be in the most expensive sorority or have the best hockey gear or the coolest stereo system - or the best new car on the high school lot.

That makes them LOOK pretty damned successful, doesn't it?

In my mind, there's nothing successful about it. I woke up a couple years ago and realized I was surrounded by stuff. Books I would never - could never - get around to reading, knick-knacks I don't even see anymore, clothes I don't wear, computer programs I don't use... the list goes on to a scary level. Every month I was fighting to just pay my bills (having a paycheck completely based on commission) while being surrounded by so much stuff. I'd purchased a car I couldn't afford (not to mention insure) and had no savings. No really. I didn't have the Roth IRA I demanded each of my clients open. I didn't have anything except debt.

For two years I've worked to pay down my debt (it will be a bit before it's all gone) and I've focused on aligning my (personal) money management with my values - my kid(s), my free time, my ability to retire when I decide. I've taken to heart the plight of my clients - especially those who come to me at age 55 and ask how they can start saving. I let them scare me. Bad. And it works.

I may not end up the millionaire next door, but I have my 401(k) and Roth IRA chugging along, even when I don't want to bother. Borders has stopped being my number one expense every year. I've grown to despise each time I pull a credit card out of my wallet. And I've become a maniac over credit card interest rates and payment terms.

I swear, if I ever, ever make $250k, my savings account will be overflowing. Not my credit cards.

Enjoying a good scare again today,
michelle

Posted by Michelle at December 30, 2004 08:15 PM | TrackBack