In a conversation I had with our CEO at Anderson Business Advisors, we discussed a financial planner that we both knew. A married couple in their early forties came into his office. They were earning about $40,000 per year, and they wanted to retire. The financial planner said, “There’s no way,” but then he looked at their numbers. They owned rental properties that were more than paying for their expenses, and they lived pretty frugally. They didn’t have any debt. They owned their house outright. They owned their cars outright. They did not have children, so they didn’t have those related expenses. They had enough assets and did not need to work. The planner was kind of shocked and asked them how they had done it. They said that they just always put 20 percent of their money aside into an investment account, and when it got big enough, they would buy another rental property.
That is the secret. They consistently put money into assets and allowed the investments to compound. They did not increase their spending as they generated wealth. They made sure that they increased their investing and purchased more assets until they had enough money coming in that they did not have to work unless they wanted to. That doesn’t necessarily mean you now need to go out and start buying rental properties; however, it is an example of how investing in assets helped this couple achieve financial freedom. They were not earning huge salaries, but one thing they did brilliantly was to not worsen their position.
Gut Check: How Far Have You Come?
An excellent speaker I know, and respect asks her clients to think about what position they were in when they were eighteen. She asks them if they had debt at that point in their lives. When you were eighteen, I’m guessing you probably didn’t have any debt. Were you in a better financial position then than you are now? In other words, what’s your net worth at that point? You might say zero because you didn’t have any assets and you didn’t have any liabilities. Fantastic. Where are you at now? Are you negative or positive? Have you done better since you were eighteen, and how much growth do you have? If you have positive net worth, how much per year have you accumulated? You can figure this out by dividing your net worth by your age minus eighteen. For example, if you are sixty and you have a net worth of $500,000, you have managed to accumulate $11,905 per year since you were eighteen. How does that relate to what you have earned per year?
Success Requires Honesty
Unfortunately, many adults are underwater. They lie to themselves about what an asset is, and they overvalue the property they have. They think, “Well, I can always sell my car for twenty thousand dollars.” No, they sell it at a fire sale, and they maybe get $7,000. They must sell their house but have never taken a hard look at the comps to have a realistic sense of the actual value on the market, not to mention taxes and transactional costs. You should take a critical look at everything to see whether you have positive net worth.
Some of us walk around thinking we have a high net worth just because we have accumulated a lot of stuff. Yet if we make the effort to calculate, we see that mathematically we were better off when we were eighteen. The whole idea is not to go backward. It doesn’t matter what your income is – the couple mentioned above had modest salaries.
No matter what your situation, you can start today. You can start with a commitment to move forward in your financial progress, not backward. Make a promise to yourself not to worsen your financial situation. If you were to make that shift in mindset, one year from now you would be able to learn how much progress can be made. Start with being honest with yourself; be honest about your true needs, wants, wishes and how you are funding them or plan to fund them. Take inventory today and get started on your new plan forward.