Hi everyone! This is Dan Thompson. And I want to welcome you again to another Wise Money Tools podcast. We’re also going to shoot a video on this as well.
Today, I thought it would be good to talk about what we’ll call Debt Discipline.
Now, don’t get too worried about it. We’re not going to talk about debt and get you all depressed and all that stuff. We’re really wanting to give you a lot of good reason why you should be confident and excited if you do have that debt issue, that you can do this. You can get yourself out of this situation and get yourself on that path to financial freedom.
I go way back to when I first read the book Richest Man in Babylon. By the way, if you haven’t read that book, I highly encourage you to read it. It just gives a very good philosophy about money, debt, saving, investing and so forth.
And one of the first things he talks about is paying yourself and getting yourself at the top of that list so that all your money that you go and work so hard for every week in and week out isn’t just gone. I really know you can do this. It’s not that difficult when you put your mind to it and sadly, we get ourselves into these situations.
And quite honestly, I was there myself too. I remember when my wife and I first got married. Oh my goodness! I hadn’t figured out what I was going to do for a career. We were literally broke and we wanted this VCR. And this VCR believe or not… You’re going to laugh at this. This VCR costs $999. I don’t know. That might as well have been 10,000 or 100,000 to me.
I didn’t have a thousand dollars so what we ended up doing is we convinced ourselves that we needed it and wanted it so bad. So we decided to put it on payments and pay for it through credit. And the payments I think we’re 18 or 20 bucks a month for 20 years. Now I don’t know how long it was but yes, it seemed like forever, and we paid for this thing. What’s funny, not funny ha-ha, but funny sad, is we probably refinanced it a couple of times during that period too. So it was just a horrible situation.
But the reason why we got that particular one is because my dad had won a video camera but you needed to plug it into some sort of a video source to record. The thing was monstrosity as it is but this particular VCR, you could split it apart and part of it came off and you could actually plug in a video camera and then we could go around the house and video anything with the family and our newborn son and all that stuff All the justification in the world to buy this video camera that hung like a new surround in our neck for years and years, and it was really frustrating.
But the reason why I tell you that is because I’m not sure I ever went through any kind of… I don’t want to say a lesson or…I don’t even remember my parents sitting me down and talking to me about money, debt, and saving. It just wasn’t talked about. Partly because I don’t think my parents, well I know my parents weren’t in a position to really save or invest. My dad worked really hard but pretty much just paycheck to paycheck and I guess I thought that’s just how life was.
But as I’ve obviously been in this business now for 32+ years, going on to 33 years. Yes, you see the gray hair. It’s crazy what I wish I would have known as a young kid and we’re definitely going to be talking a little bit more about this and maybe even creating some financial courses for parents and kids to take so that the parents can really teach their kids to save money because it’s a really good thing obviously.
Well, there was something that came on the radio the other day. No, actually it was a video. I was watching a video of one of this really famous talk show host. His daughters getting into speaking and all that good stuff. I don’t want to say anything. It was really good video. Don’t get me wrong. It was about teaching your kids how to save. I thought that was awesome. The problem is I think they kind of miss the mark a little bit. They said something like you need to teach your kids to save and then depending on the things that they want to buy, it might take them a little while to save.
But it was all about saving to buy something and I got to thinking, “Wow, this is a problem.” We shouldn’t be teaching our kids to save so they can buy stuff. We need to teach them so that they can actually become investors and actually build their wealth. There’s plenty of consumers out there and we don’t necessarily need to teach our kids how to become consumers.
But what the problem is, if we teach our kids to save and build this pile of cash and then go buy something, what happens? We’re literally starting over. So you go and you save, you save, and you go spend that cash. Really nothing to show for it and you start over. And it’s really hard to get anywhere in life, whether its toys, cars, boats or whatever. If all you’re doing is saving so that you can buy stuff, it really doesn’t end up creating much wealth.
And of course, we know the theory, right? If you borrow money on credit to buy stuff, well then you’re going to not only owe the bank what you borrowed but you’ve also got to pay interest. So the idea with buying cash is so you can avoid paying interest and that’s obviously a good thing. But let’s see what happens to a guy who saves and a guy who uses credit, a debtor we’ll call him.
So what’s a debtor do? He hasn’t saved any money. He has not taken the time or the discipline to save the money and they kind of just dug themselves a hole, right? And then they slowly climb out payment after payment, finally get back to ground zero and what do they do? “Oh, I need something else.” So they dig another hole. They climb out, they climb out, they climb out, back to ground zero, and they do that year in and year out and decade after decade. And you’ve fast forward 20 or 30 years from now, and if you look back there’s a lot of holes and a lot of holes that they filled but there’s nothing to show for it except for maybe a few items that they still have, that they haven’t thrown away by now that they bought on credit. But nevertheless, they’re still at ground zero.
So what would happen if we saved and we paid cash? Well, so what we do? Now we at least have some discipline and we save and save and save, and now, we build up a little pile so we’re above ground zero, right? And then we go spend it and were back to ground zero and so we save and save and save. “Oh I can’t wait to but that new bike or that new Game Boy or whatever” and we spend it. And we say, “Hey kids! Go be productive or here’s an allowance or whatever, go make some money somehow.” So they go mow lawns or they wash windows or whatever. And so, they build, build, build, build and they save and they, “Oh! I can go buy something.” They spend it.
And that was what the message was of this video from this gal, and again, not that there was a bad message but the problem was they were basically saying, “Parents, don’t just give your kids stuff. Don’t just give your kids money so they can buy stuff. Have them learn how to be productive and to save and save and save so that they can go buy the things that they want. Don’t just buy it for them.”
This is a little bit off the subject but I remember when we were kids, my dad somehow would pull enough money together that we could go to Disneyland. And I grew up in Central California so it wasn’t that too far to go. But we’d go down to Disneyland and as we walked in, he would hand each one of me and my brothers and sisters $10. And so, okay here’s your food for the day so spend it wisely so to speak. We’d go through the day and it’s so funny how things just seem to work but my brothers and sisters were just they would see something, they’d buy it. They’d see something they want, they’d buy it, and by the time it was late afternoon and going into dinner, they were totally out of money and not knowing what they were going to eat the rest of the day. Obviously, they’d go back to mom and dad, “Hey! We spend our money.”
Somehow I don’t know what would happen. I guess my dad would end up buying them something. But for whatever reason, I was just the opposite. I would come home from Disneyland with at least 5 bucks in my pocket. I would just eat the minimal amount that I had to survive and end up coming home with cash. For some reason, I just thought it would be a good idea to save this money. That was just something natural. I guess you can say, I was just born with this cheap gene in me to want to save. My brothers and sisters had no problems spending it and spend it way too fast. It was very easy for them. Obviously, my dad is just giving them the money, easy to spend. That’s the same thing with our kids. If we’re just going to hand them money, it’s very easy for kids to go spend it. There are a thousand things they want or want to be able to do.
Anyway, getting back to the story, this gal is telling the parents, don’t just hand your kids money, make them earn it, save it and when they save it then they can go buy something. Then they save more and they go buy something. But they kind of miss the whole boat here. What we should be teaching our kids is to save their money but maybe spend a little but invest or really save it because saving it means you saved it. It’s not saving money to pile it up for 3, 4 or 5 weeks or months and then go spend it. That’s not saving. That’s not investing. That’s just putting it on the side until you’re ready to go buy something. And so, we’re really not doing our kids a very good service if we don’t teach them that holding on to that money to save it, to invest it for the long haul is really what saving is all about.
Again, if we go back to the debtor and the saver, they both end up at the same place. The debtor digs holes, gets out; digs holes; gets out; digs holes; gets out. The saver builds up, goes down; builds up, spends it; builds up, spends it. But they’re both at the end back at ground zero. They never got anywhere. We need that saver to save and to invest and to put some money away so that they got something to show for it other than like I say that one or two items that they might have left, as everything else has depreciated, become worthless and been replaced. So it just really doesn’t make sense.
So what if we taught our kids to, “Hey! When you go out and you earned some money, how about you save 10 or 20 or 50% of that? Earn 10 bucks. Save half of it. Invest half of it. Earn 20 bucks, save 10. Whatever that percentage is that you feel comfortable with your child but then let him actually see what’s going on out there with their investments as they save it and they build it and they grow it and maybe, we can change a little of what America probably struggles with most, and that is money, saving and investing. We tend to save the least amount even in our 401(k)s. It’s really interesting. There’s a study done that people save the least that they have to and they go for the greatest amount of return so that they can actually save less. And unfortunately, those great of returns have not necessarily panned out over a 2 or 3 decade period of time.
But let me just ran a couple of numbers pass to you. Let’s say, we’ll just take, little Johnny is 12 years old and he has a way to go out and earn some money or again maybe it is an allowance, maybe it’s working around the house, making his bed, cleaning his room, helping with the dishes, taking the garbage out, mowing the lawn, whatever that might be, so that they can get an allowance and have a little responsibility with his money. As they get older, again they might be able to go mow the neighbors’ lawn or to go wash the neighbors’ windows and you never know.
But let’s just say that Johnny is 12 years old now. Old enough to maybe make $40 or $50 a month. I don’t know. Somewhere in there. But let’s just say he could save $25 a month from ages 12-18. Okay, so just those short 6 years and then from 18-23, he got little bit better job. Maybe he’s working fulltime as well as going to school and now he can save 50 bucks a month. So he saves 25 bucks a month for a while and now he’s been able to save 50 bucks a month. And let’s just say he can do that through, I don’t know, age 22 or 23. And then after age 23, he’s starting to get into a little more gainful employment and now he can save $250 a month and he does that for the next 20 years.
And then at age 43, he’s really entrenched in his career, he’s had some raises along the way and now he can save $500 a month. So never in his history has he saved more than $500 a month. He started with 25, grew that to 50, grew that to 250, grew that to 500. But at age 65, if he just has a minimal return, I just use the average market return to 7% and if you had that kind of return, he’d have $1.7 million. Can you believe that? Being almost worth $2 million and never save more than $500 a month.
And I know a lot of you who are watching this video, especially if you’re in your 40’s and 50’s. There’s a good chance your saving $5, $6, $7,000, $10,000 a year or more just in your 401 (ks). You might have been even maxing those out and then you’re saving more on top of that. So it’s not uncommon in your 40’s and 50’s to be able to save $20, $30,000 dollars a year. And so, you can imagine what that would obviously grow into as well.
So now, let’s compare this to—Johnny’s got a buddy name Dag and Dag just spends everything and he’s got some toys around and some things to play with but he never saves. And then at age 30, he finally realizes, “Oh-oh I’ve got nothing. I better start saving some money.” So at age 30, he starts saving $500 a month and he does that until age 65. So for 35 years, he saves $500 a month. Do you know how much money he has? He only has $475,000. He’s got $1.3 million less than Johnny does because Johnny saved a few bucks while he was young and there’s nothing like compounding interest. There’s nothing like the time value of money.
Einstein says something like “Compound interest is the 8th wonder of the world because it truly does do some wonderful things with money if you give it time and let it grow.” So here’s little Johnny, doesn’t save a whole lot of money while his young, never saves more than $500 a month, ends up with just under $2 million in net worth in wealth that he can enjoy a little bit, better retirement, right? And Dag doesn’t do anything until he’s 30, he saves $500 a month till he’s 65 and still only ends with $475,000.
So moral of the story, again, is let’s not just teach our kids to save so they can spend and buy some kind of toy that’s going to be worthless. Although those things, I’m not suggesting those things aren’t fun and they shouldn’t have a few. Don’t get me wrong there but you want to do is also give them that desire, if you will, to save a few bucks, to really see it grow and compound and to really do everything you can not to spend it and let the magic of compounding interest do its thing.
So that’s it for this podcast. I hope it was good. I hope it’s at least something to think about. Main thing is just be very cautious of how we spend, save or spend. And just because we’re paying cash is not a way to wealth. We really got to save and invest to build that wealth.
Well, as always, if you have any questions, email them to firstname.lastname@example.org. If you’re ever interested in a strategy session where we can get together and get together online and talk about some of the objectives and goals that you have and maybe some easier ways to get there, happy to do that as well. In the meantime, subscribe to the podcast. Subscribe to the videos. Make sure you don’t miss any and we’re trying to hit this every Wednesday for our Wealthy and Wise Wednesday. So until next Wednesday. Hope you have a great week.