Why It Matters
There’s an interesting statistic that’s been consistent for a long period of time, which predicts what your retirement could look like. If you take 100 Americans in their mid twenties, by the time they reach their mid sixties:
- Only one will be wealthy
- Just four of them will be financially independent
- And 95 of them will be unable to maintain their current lifestyle in retirement!
Out of the group of 95 people, without government financial assistance, like Social Security, Medicare and Medicaid many of them would literally have no money for even basic necessities, like food, in retirement.
Although, they’re receiving some funds from the government, it merely amounts to survival money, and not the road to financial security or stability in retirement.
Living a life that’s funded by handouts from the government isn’t easy or comfortable. With 76 million baby boomers currently in or approaching retirement, the future ability for the government to keep funding these programs is uncertain. More money is needed to pay social security to the boomers than is currently being paid in by the workforce. It would be unwise to depend on this as your sole source of retirement income.
Historically, the United States has maintained it’s position as the richest country in the World, yet only 5% of the population achieve financial independence.
How can that be? Because, the majority of 95% of the population end up in dire straits, due to the choices they made with how they managed their money.
The purpose of this article isn’t to scare but better prepare you.
What’s Your Money Style?
This should be easy to identify, there are three main groups and one will be a good fit for you. Your current lifestyle indicates the choices you’re making and habits you’ve adopted.
The Big Time Borrowers
This group are in the habit of justifying spending money, by telling themselves:
- “I deserve it, I work hard”
- “You can’t take it with you”
- “I just have to have it!”
They pay for purchases on their credit cards. Cash is something they seldom use. They think short term and assume time is on their side.
Their car is leased or bought with little or no money down and is probably worth less than they owe on it.
Their big house has little to no equity in it, because they bought it with next to no money down, on an interest-only variable-rate mortgage. Or, because they’ve refinanced, often more than once, and taken all the equity out and spent it on something unnecessary, to impress their friends.
If they keep making choices like this, they’re spending their way into an even worse financial train wreck.
Because the only thing they are building financially, is debt. There’s no wealth being accumulated at all.
In the event of a major illness, job loss or accident they’re at high risk for having their car repossessed and losing their home. They declare bankruptcy and all their toys get sold off to pay their creditors.
The Borrowers tell themselves it was a run of bad luck that made this happen.
It wasn’t, it was because they chose to pay for today, by stealing from tomorrow. Fortunately, this group isn’t the majority of the 95%, but they’re the most at risk. Their retirement is going to be dependent upon the government paying for it.
The Paycheck Spenders
The majority of the 95% fall into this group.
They approach spending not based on their credit card limits, but by their paycheck availability. They don’t borrow but they do spend their paycheck, and save virtually zero.
They calculate how much they can afford to spend and then go out and spend it. They also think short term.
They don’t have enough cash to pay for large purchases, like a car or big TV. But, they can afford the monthly payments so, that’s how they make it happen.
They don’t factor in how much the item will cost them in total, by adding in the interest. The ability to make the payments is good enough for them.
When they get the chance to benefit from free money or built wealth, they simply pass it up!
They don’t take advantage of their employer’s 401(k) match or investing in a Roth IRA to create tax deferred wealth for retirement.
They decide they’ll start saving after they get the things they really need now, like a new car, latest iPhone release and an expensive vacation.
They differ from the Borrowers in that they are not choosing to steal from tomorrow, they’re just renting from it.
However, they also cannot afford a job loss, illness or accident that would impact their ability to earn money. They have no cash cushion to buffer them through a financial hardship. They are only a paycheck away from financial misery.
Spending the money they earn is the way they maintain their current lifestyle. Retirement for them will also be dependent upon the government funding the majority of it.
The Smart Savers
Only 5% of the population fall into this financially savvy group!
They focus on their net worth, not their paycheck. Their income is on the same level as the Borrowers and Spenders, often they earn less but they consistently manage to accumulate more.
They manage their money by saving at least 10% from every paycheck. By doing this, they’re consistently investing in their financial freedom.
They take advantage of any employee “free money” incentives, like 401(k) matching. They contribute the maximum they can, within IRS guidelines, to a Roth IRA account every year.
When it comes to debts, they have a mortgage on a home they can comfortably afford. They buy a two or three year old car, maintain it properly and drive it for years. They have no interest in buying the latest and greatest items or impressing their friends.
If they use a credit card, they pay the balance in full each month.
They don’t live a life of extreme frugality. Once they take care of their savings, they enjoy the money they’ve earned. They know they have a good balance of saving for retirement and enjoying life now.
Because of their habit of saving and the magic of compound interest, they feel confident they will have enough money for their retirement and maybe even more than they need.
The Good News
The fact that you are reading this post and have made it to here, tells me you want to change your financial style for the better.
Be assured that all three groups have something in common, namely, the ability to make choices and adopt habits. Habits either work for or against you.
What is a habit? It’s simply a course of action that when repeated often enough has gained momentum and becomes a habit and a default behavior.
Take comfort, that even if you are in either of the 95% groups, you have proven to yourself you are able to stick with a habit.
If you want to change your financial habits for the better, first things first:
- Be honest with yourself about which group you fall into
- Decide what’s important to you and if you’re willing to gamble with your retirement
- Make the decision to change your money habits for the good
The Key To Success
Often people judge financial success by how much someone earns. That’s understandable but misguided.
The key to financial success and independence is not how much you earn, but how you much you keep!
Someone that earns $500,000 a years and spends it all, lives a high life but builds no wealth. However, the person that earns $50,000 a year and saves 10% is actually doing a much better job of managing their money and building wealth.
The next article in this series will explain the steps to shift your habit of being a borrower or spender, to becoming a saver and taking control of your financial future.