This episode is actually out of the request from a couple of people, having to do with debt and finances. It turns out that in the United States, very few people really are prepared for retirement or getting themselves prepared for retirement. How important is that?
Let me go backwards a little bit, because most people are well before the age of retirement, and they live paycheck to paycheck. Actually, 61% of the American public live paycheck to paycheck. 63% don’t have $500 for an emergency. Given that, what happens if the paycheck stops? This could be retirement; it could be some other emergency, or you were just laid off. You’re working paycheck to paycheck, and all of a sudden it stops.
Some people living paycheck to paycheck are actually doing that because they’re thinking through and thoroughly on a real budget, and they are allocating some money into different pockets. That’s fine, because they are saving. Those are not the people I’m talking about.
The problem is almost always on the spending side; not on the income side. It’s not that you don’t have enough income, it’s that you spend too much. What do I mean by that? Think in terms of the last time you got a pay raise, or the last time you got a promotion, or the last time you got a new job with a higher pay. What happened to that increase? Think in terms of what will happen. Over the next two years, almost everybody will have some sort of an emergency, whether it be a car repair that they didn’t count on, or an appliance breakdown, or roof that starts leaking. Something will happen, and it will be an emergency. What has been set aside, and what will people do in preparation or at that time? Too many people are worrying and hoping that they’ll somehow, someday hit that lottery, which is a ridiculous thing to be investing your money into, putting your money into, wasting your money into.
I’ve often heard and I see people that are always out, and there’s actually peer pressure to go out to do things to get the latest car, to get the latest little toy. People will say, and I’m sure you’ve heard this expression: “Live for today.” Or as a couple of people have asked me over time: “Why are you saving? You might die tomorrow.” My reaction and response to that is: “Yes, but what happens if I live?”
Remember that if you don’t retire until 65 or 66 years of age, you’ll have 25+ years in all probability that you’ll be living beyond that. There’s no chance to play catchup when you get close to retirement. There’s actually very little chance when you start hitting your 60s. You have to have and save from as early as you possibly can, and to be putting money aside both for your emergencies and for your future.
This is partially motivated at this time because somebody had sent me a note, a very nice note, about how the episode on reverse compound interest (see LifeUnsettled.com episode 56) rung home to them, that they had just received a bonus and where they had ordinarily been thinking of they would get something with it, they went and paid off the credit card, and how the elimination of that debt will actually be a large increase over time of their actual income. That’s all explained in that episode, so I won’t go back to it here.
It’s the same thing right now, because we’re on the verge of a lot of people getting their tax refunds. What are you getting with those tax refunds? Are you getting out of debt, or are you getting the new latest toy? What would happen if instead of getting a new car, you took that car payment and just put it away? Assuming you already have a car that’s maybe a few years old and it’s just at the end of its loan or you own it free and clear – what happens if you held on to that car for the next three or four years, and instead put money aside every month and just put it into a savings account or a fund so that in your future you would have that much more money? You might have an extra $20,000 or $30,000. If you were buying a car that was going to cost $25,000 and instead over the next three years or four years, you put the money that would normally be a payment, that’s how much you would have. If you’re 30 years of age, you’d be well on your way to being able to hit a million dollars when you’re 66.
You basically have a choice in your spending pattern. Also, put aside some money for an emergency so that you don’t have to draw down on something else, whether it be from your savings, or low and behold, that awful thing called your credit card. If you can’t pay your credit card off every single month, you’re doing something wrong.
If you’re forced to borrow, you enter that dire consequence of what I refer to as reverse compound interest. You are now in a position where what you’re doing is you’re building up equity for the bank, that is that your borrowing has given them compound interest so that they have millions when you retire. It’s your choice: You have the millions or they have the millions. It depends on where you want to put your money, on to credit cards so that you’re supporting them or into your own account to support yourself. Paint your own picture of where you want to be and what you want to do.
Most people do respond to fear much more so than they do to an incentive. They’re afraid of a consequence, that’s what motivates them. Here’s a little test to see if you respond to fear more so than an incentive. When you were in school, high school, college, I don’t care what it was – when did you study for your test? When did you do your report? I ask that question over and over again to groups, crowds, people individually, and almost always I get the answer: “The night before,” or “Two days before,” or “That week.” Why didn’t they start early on? Why did they study the night before? Why did you bother to study for the test at all? The only reason they studied the night before or the last two days before the test was because of the fear of the consequences of failing or doing badly on the test. That’s the only thing that got them to finally motivate themselves. Wouldn’t it be so much better off if they would have studied a little bit along the way?
What you need to do is paint your own picture. Imagine: What would happen if your paycheck stopped next week? That was the last one you got, what position would you be in? Do you have the emergency money in hand? Do you have some savings built up? Do you have X number of months, three to six months’ of expenses put aside so that you could weather a minor storm like that? It’s minor if you’re planning for it; it’s major if you’re not.
Here you are early in the year and you’re about to file your taxes, get your tax returns. All those that are building up and getting that money back, take that check, and first—you went and put on credit cards certain things—pay off your debt. Then start building up what would be needed to cover expenses for three to six months, and then start building on your retirement, and build on it as fast as you can, particularly as young… The younger you are, the easier it will be. But as you get older, it will get everywhere from very difficult to nearly impossible.
Just remember your original salary that you had wherever you’re working, if you hadn’t spent the bonuses, if you haven’t spent the pay raises… Or: Why did you spend them? Why? Because you wanted things. Try to live without that extra money, and instead, put that in towards something for your own future. If all of a sudden you are laid off, or you are fired, or your company closed in two weeks – what would you do, what would happen? You’d immediately say: “I’ll get another job.” That’s fine, but when you hit your late 60s, you’re not going to be able to, and the paycheck will stop.
If the paycheck stops and you’re not ready, what are you going to do? If that sounds like an awful picture to paint, it is and it should be. Hopefully for many people, that’ll be the kind of fear that if you have it and keep it in your mind, you’ll turn around and start working towards a better outcome for your future and for your retirement.
Scrutinize every one of your expenses currently. What do you need, what don’t you need? One of the best things that we did was a long time ago worked extremely well. We decided that every time we were out and we saw something that was interesting, exciting, or somebody showed us that was new, flashy, or whatever it was, and we felt: “Oh yes, we have to have this.” We made it an absolute rule that we did not buy it then. If we still would need it or even want it, we’ll buy it tomorrow. If it seemed like it was something we would really want to get, we actually went back the next day and got it. Most of the time, probably over 95%, we don’t. If you’re unsure that that’s what follows you around, go out to your garage or go down to your basement or whatever storage you have. Take a look at all the things that you don’t use or used very little after you bought them.
Thank you very much. I hope this gets you on to a new track for a new future. One thing is: Go to my website and develop your dreams. You cannot really have a goal until you can visualize your dream. To visualize your dream, I put together something: www.LifeUnsettled.com/Dream2016. The idea behind it is to have it so that your dream stays fresh in your mind all the time, and it actually becomes part of your life. You start thinking about it on a regular basis to help motivate yourself to a brighter, better future. Thank you very much.