If I were to say that people were getting poorer, what would you immediately assume? It’s that people are making less money, right?
Wealth, though, isn’t always—or even mostly—a function of one’s paycheque. I have known physicians to go bankrupt. And many doctors are still practicing past age 65 because they can’t afford to retire, proving once again that just because people are smart at university bears very little relevance on whether or not they’re any good with money. (Many more are still practicing because of commitment to their underserviced community, but that’s another story.)
Wealth really is more a function of where one’s paycheque actually goes than it is a function of the size of the paycheque itself. Do you put it into bonds, or onto credit cards? Do you save regularly, or do you overspend regularly? Sure the wealthy may have a larger paycheque, but we all have access to something that can completely level the playing field. And that something is time. It can either be your friend or your enemy. Let me show you what I mean.
Let’s say you put a new plasma TV and a bedroom set, for a total of $5,000, on your VISA card, maxing it out. You now pay only the minimum payments. It’s going to take 41 years to pay all that off. Even if you pay slightly more, or $100 a month, it’s still going to cost you almost $10,000 over 8 years. At the end, you have $5,000 worth of stuff, but you’re $5,000 worse off. You’re poorer. What if, instead, you had saved up the same amount of money each month for the same number of years. You could have bought a nicer bedroom set, a nicer plasma TV, and still put away several thousand. Now you’re richer.
All you have to do is one simple thing: save for things before you buy them.
Let’s take another look at what time can do. Apparently 43% of Canadians between the ages of 35 and 43 have no RRSP. At some point panic is going to set in, likely around age 50, and people will try to start saving like mad for the next fifteen years. Let’s say you do manage to sock away $10,000 a year. At age 65, assuming a 9% return, you’ve now got $300,000. If, on the other hand, you were to save $10,000 every year for 15 years starting at age 25, by age 65 you’d have $2,800,000. Time was on your side.
The problem, of course, is that most 25-year-olds don’t happen to have $10,000 lying around. If they did, they’d want to buy a house, or pay off student debt. But I still can’t totally buy the excuse that they have no money to save, and here’s why. Most people with no RRSPs do have credit card debt. So they’re still spending too much money! And 31% of people with no RRSPs spend $20 a month or more on lottery tickets, with half spending $10 or more. Studies show us they’re unlikely to even break even. They’re poorer.
Take that $20 and put it in an RRSP every month, though, and at the end of 40 years you’d have $84,000. And that’s every time, not one time in a gazillion, like with the lottery. You’re automatically richer.
Here’s an even more dramatic example. If I were to take $10,000 right now and put it away for my 12-year-old’s retirement, she would never have to save again. It would be over half a million dollars by age 65, even with paying taxes all that time. Or let’s go even further back. If a benevolent grandparent were to sock $5,000 away on the birth of each grandchild for their retirement, they’d be done. They’d have over a million dollars. That may not be a great idea for a host of other reasons, but it does make one think.
Becoming wealthy isn’t a secret; it’s simply discipline and delayed gratification. At one point, these were qualities our society admired. Now we don’t. Let’s bring them back again, and maybe we’d see fewer people trying to find part-time work at 70 because there just is no money in the bank.
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