by David Bach
Remember, the truth is that…
…most people overestimate what they can do financially in a year—and underestimate what they can achieve financially over a few decades.
MYTH NO. 3
We don’t make enough yet to be investors.
FACT NO. 3
Everyone makes enough to invest.
How many times have you heard someone say, “If only I could make a little more money, I could really get my financial act together”? How many times have you said it yourself? Ask most couples the source of their financial problems and they will tell you it’s that they don’t make enough money. The truth is that most couples don’t have an income problem; what they have is a spending problem. If you don’t believe me, think for a minute about how much you and your partner will probably earn over the course of your lifetime together.
To estimate how truly big a number this is, use the following earnings chart.
Source: The Super Saver: Fundamental Strategies for Building Wealth by Janet Lowe (Longman Financial Services Publishing: United States, 1990).
So what does your number look like? How much money are you and your partner likely to earn over the next decade or so? What if you take that out 30 or 40 years? My guess is that your joint lifetime disposable income probably adds up to something between $2 million and $4 million. Not quite so “disposable,” is it? I suggest that from now on you stop thinking of your earnings as disposable income but rather as what I call “critical” income.
The bottom line is that you and your partner are trading precious time in your life for this income. To me—and hopefully to you—that makes it critically important to ensure that you don’t waste what you earn, but rather that you manage it efficiently and intelligently. The key to doing this is to start saving now.
MYTH NO. 4
Taxes and inflation are now under control.
FACT NO. 4
Taxes and inflation are never going to be completely under control.
There seem to be two huge economic fallacies sweeping America today. One concerns inflation; the other, taxes.
According to the inflation fallacy, the fact that inflation rates have been low since the early 1990s means we’ve learned how to control it. That’s absurd. As I write this, the cost of housing in my community has doubled in just ten years. And the biggest example of inflation is healthcare and college education costs, which have more then tripled since the original version of this book came out. In my opinion, and in the opinion of most of the people I know, the cost of things that matter is going up tremendously.
The five-bedroom, three-bath house in which I grew up cost about $100,000 when my parents bought it (brand spanking new in a nice area) a little over 40 years ago. Today, that same house goes for over a million dollars. That’s the reality of inflation. The truth is that a great many crucial commodities and services are not going to cost less in the future. They are going to cost more. Think about what you drink. Let’s use Budweiser (not saying you drink this, but let’s just pretend). If you drank Budweiser 30 years ago, and you still do, does the beer taste any better? Nope. Does it cost more? Yep. Check this out—a Budweiser six-pack cost $1.36 in 1969. I was only three, so I wasn’t drinking it, but you get the point. Everything costs more—even beer.
In a similar vein, many people assume that when they retire they will owe less in taxes because they won’t be working. Really? Ask someone who’s retired if they pay less in taxes than they used to. I’m very confident the answer will be no. Why? Because most of the income you will live on when you retire will be taxable. Specifically, when you pull your savings out of your deductible retirement accounts, you are probably going to have to pay income tax on those withdrawals. The same goes for the profits you’ve made on those annuities and insurance policies you’ve been funding for retirement.
The good news is that there is something you can do about it. Benjamin Franklin once said the only things in life that are certain are death and taxes. He was wrong. Death may be certain, but taxes can be delayed—and in the process reduced!
Many people pay way too much in taxes because they don’t understand that there are many simple, legal ways to reduce their tax bite. One of the best involves a simple concept I call “pay yourself first.” If you do it correctly, it can reduce your tax bill by thousands of dollars a year. We’ll learn all about this concept in Step Five.
MYTH NO. 5
If we don’t talk about money, everything will work out okay.
FACT NO. 5
If the two of you don’t start talking about money, you’ll more than likely die broke.
I’m a very positive person, but when it comes to Americans and wealth management, the facts are frightening. The rich are getting richer and the poor are going nowhere fast. According to Spectrem Group’s Market Insights Report, there were about 11 million millionaires in the United States as of 2016—a record number!
Sounds like a lot of rich folks, right? Not when you consider that the population of the United States is about 330 million. Do the math. Only about 3.3 percent of us are millionaires.
So what?, you say. You don’t have to be a millionaire to be doing all right—and most everyone else is still doing pretty well, aren’t they?
Hardly. According to a recent Federal Reserve study, 46 percent of Americans couldn’t come up with $400 in case of an emergency. Truly scary. What about baby boomers? According to a recent Fidelity Investments report, 48 percent of boomers are not on track for retirement. This is not that surprising, considering that AARP recently shared that the typical retirement account for a boomer reaching retirement is only $42,000. AARP goes on to say that 75 percent of Americans between the ages of 55 and 64 have less than $30,000 in savings. Seriously, reread that statement.
According to AARP, three out of four Americans approaching retirement have less than $30,000 in savings.
So what’s the deal? How is that possible with stock markets hitting record highs and where investing tips seem to be featured on every magazine cover and television show. The answer is that while the economy as a whole might be humming along at a steady but anemic rate, most people are not really taking advantage of the situation to accumulate wealth. Many Americans are still living paycheck to paycheck. People may be earning decent incomes these days, but most of us are not saving any money. And if we are saving, we are simply not saving enough.
Later on in this book, we will spend a great deal of time on how much money you and your partner will need to save in order to become wealthy and live rich. For now, rest assured that the average American is doing a pitiful job of saving for the future. So if the two of you feel like you’re not doing enough right now to build a nest egg, there’s no need to beat yourselves up about it. You are clearly not alone, and you probably do a better job than your friends.
Then again, your goal is not to be average. It’s to live and finish rich, and that means doing what most other people won’t do.
So where do you start? That’s easy. As in so many other aspects of life, the place to start getting your finances in shape is at home. Specifically, you and your partner must learn to talk about money together. The reason I say this is that in most families money is something of a “taboo” subject. Relatively few of us grew up in homes where Mom and Dad talked freely about the family finances with each other—let alone with the kids at the dinner table. As a result, most of us have grown up knowing nothing about money, including how to talk about it—even with the person with whom we’ve chosen to spend our life.
SMART COUPLES TALK ABOUT MONEY ALL THE TIME
The fact that most of us are not raised to talk about money is a real tragedy. Show me a couple who doesn’t talk about money and plan their finances together, and I will show you a couple headed for financial trouble—if they’re not already in it. When you work together on your finances, you can compound the results. When you don’t, the same can be said for the mistakes you will invariably make. In general, two h
eads are always better than one. No matter what your specific goal happens to be, having a partner working on it with you, providing encouragement and ideas, makes achieving that goal much easier. More specifically, the two of you will probably find it easier to save more money together than either of you can save separately. Which leads me to one of the basic points of this book. Couples Who Plan Together Have a Better Chance of Being Happy Together
This, in a nutshell, is what this book is all about. By planning your finances together as a couple, you will significantly improve your chances of becoming wealthy and being happier together.
Of course, nothing worthwhile comes without some effort. Because of the need for cooperation, it can sometimes seem more difficult for a couple to make financial plans together than for a single person to do the job on his or her own. But that’s misleading. The trick is to get on the same page early on and then move forward as a team. So the place to start is by sharing your feelings about money with your partner.
FIND OUT HOW YOUR PARTNER FEELS ABOUT MONEY
Being in a relationship is a funny thing. Once we find the person we’ve been looking for all of our lives, we begin to expect that this person should be able to “read” us. We think, “Gee, we know each other so well. I’m sure each of us knows how the other feels about everything.”
We all do this. But consider the following questions: Do you really know how your partner feels about money? Do you know his or her values about money? In Step Two, you are going to learn a technique that will help you identify your values. In the process, you will discover how both you and your partner really feel about money at a core level. But that’s for later. Right now, simply ask yourself this: On a scale of 1 to 10 (1 being “money is the root of all evil,” 10 being “money is more important to me than anything else”), ask yourself: How important is money to me? Then ask yourself: How important do I think it is to my partner?
Record your answers on the following chart by circling the numbers that apply.
After you circle your own answers, ask your partner the same questions: How important is money to him or her? How important does your partner think money is to you?
How different were your responses from those of your partner? How different was your partner’s response from what you expected it to be? How different was your response from what your partner expected?
The answers to these last three simple questions may lead to some very worthwhile conversations between the two of you.
I’M NOT SURE MY PARTNER WILL TALK ABOUT MONEY WITH ME
Many people find it difficult to bring up the subject of money with their partners. As a result, the subject often gets pushed under the rug—over and over again. Maybe, they think, our money problems will just go away.
Trust me, they won’t. They will only get worse. Dealing with financial matters is something any couple can do, but you’ve got to do the job yourselves, or it just won’t get done. If the two of you don’t make your finances a priority, they won’t be one. Even if you hire a financial advisor, you’ve still got to make dealing with your finances a common goal that you both work toward together.
The couples who do the best financially are the couples who really work at it. They have done some soul-searching together, some dream-planning together, and they’ve put together a plan to make their goals and dreams a reality.
THE PLACE TO START IS AT HOME—THE TIME TO START IS NOW
The best way for the two of you to begin this process is by examining what each of you knows about your finances—and what you don’t know. After all, before you can start planning how to get more out of your money and how to invest it wisely, you need to know exactly how much you’ve got, where it’s currently parked, and just how accessible it is. You also need to understand what kind of financial commitments the two of you have—both separately as individuals and jointly as a couple.
To aid you in this task, I have created a simple true–false quiz that the two of you should take. Take it separately—and be honest with yourself—then compare your answers. The goal isn’t to get a high score or beat your partner; it’s for both of you to discover how accurately (or inaccurately) you understand your current financial situation.
THE “SMART COUPLES FINISH RICH” FINANCIAL KNOWLEDGE QUIZ
TRUE OR FALSE:
T [ ] F [ ]
I know our current net worth (i.e., the value of the assets we have minus the liabilities we owe).
T [ ] F [ ]
I have a solid grasp of what our fixed monthly overhead is, including property taxes and all forms of insurance.
T [ ] F [ ]
I know how my partner feels about our monthly overhead. We have discussed both the size and nature of our regular expenses and obligations, and are comfortable with them.
T [ ] F [ ]
I know how much life insurance my partner and I carry. I know exactly what the death benefits are, how much cash value there is in our policies (if any), and what rate the money is earning (if applicable).
T [ ] F [ ]
I have reviewed our life insurance policies sometime in the last 12 to 24 months, and I am comfortable that we are paying a competitive rate in today’s insurance market.
T [ ] F [ ]
I know the current value of our home, the size of our mortgage, the interest rate on the mortgage, and how much equity we have in our home. I also know the length of our mortgage-payment schedule and how much it would cost per month to pay down the mortgage in half the time.
OR
I know how much rent we pay, when our lease expires, how much of a security deposit we gave the landlord, and what renewal rights we have.
T [ ] F [ ]
I know what type of homeowner’s or renter’s insurance we have and what the deductibles are. I know whether or not our policy would provide us with “today’s replacement cost” or actual cash value, if our home and/or property were destroyed or stolen.
T [ ] F [ ]
I know the nature and size of all of our investments (including cash, checking accounts, savings accounts, money-market accounts, CDs, Treasury bills, savings bonds, mutual funds, annuities, stocks and bonds, real estate investments, and collectibles such as stamps, coins, artwork, etc.). I also know where all the relevant paperwork is kept.
T [ ] F [ ]
I know the annualized returns of all the aforementioned investments.
T [ ] F [ ]
I know the current value of all of our retirement accounts (including 401(k) plans, 403(b) plans, IRAs, Roth IRAs, SEP-IRAs, company pension plans, etc.). I know where the statements for these accounts are kept and I have a solid grasp of how all our accounts performed last year.
T [ ] F [ ]
I know what percentage of our income we are saving as a couple.
T [ ] F [ ]
I know how much each of us is putting into our respective retirement accounts, whether that amounts to the maximum allowable contribution, whether our employers are making matching contributions, and what our respective vesting schedules are.
T [ ] F [ ]
I know how much money each of us will be getting from Social Security when we retire, and what our pension benefits (if any) will be.
T [ ] F [ ]
I know whether or not we have a will or living trust, what its provisions are, and how up-to-date it is.
T [ ] F [ ]
I know whether our income would be protected by disability insurance should I or my partner become unable to work. If we do have disability insurance, I know the amount of the coverage, when the benefits would start, and whether they would be taxable. If we don’t have disability insurance, I know why we don’t have it.
T [ ] F [ ]
I know what my partner’s wishes are regarding medical treatment (including being kept alive by artificial means) in the event he or she falls seriously ill or is seriously injured. I know whether or not our will includes a valid power of attorney covering such situations. I also know how my part
ner feels about being an organ donor. I know the online passwords to my partner’s key online assets (or will know how to get those passwords).
T [ ] F [ ]
I know if my partner has taken an investment class in recent years.
T [ ] F [ ]
I know how my partner’s parents handled their finances and I know what effect that has had on how my partner feels about how we manage our money.
SCORING:
Give yourself 1 point for every time you answered “True,” and 0 for every time you answered “False.”
14 to 18 points. Excellent! You and your partner obviously have been planning together, as a result of which you have a good grasp of the state of your finances and how you both feel about money.
9 to 13 points. The two of you are not totally in the dark, but there are some areas in which your knowledge is less than adequate.
Under 9 points. You and your partner don’t make a habit of talking about money, do you? As a result, your chances of being hurt financially because of insufficient knowledge are enormous. You need to learn how to work together in order to protect yourselves from future financial disaster.
If you scored well on this test, congratulations! But don’t go out and start celebrating just yet. Even among knowledgeable money managers, it’s rare to find people who have a handle on every aspect of their own finances and what they could and should be doing to assure themselves secure futures. So even if you scored 12 or above, I guarantee you’ll discover a few secrets and ideas that will be of enormous value to you.