by David Bach
THE SMART COUPLES’ SEVEN-DAY FINANCIAL CHALLENGE™
With this in mind, here’s an exercise I’d like you to try. Starting tomorrow, I want each of you to get a small pad and track your expenses for the next seven days. This is not complicated. You simply write down every expenditure you make, no matter how large or small.
In order for this to be useful, you’ve got to promise me—and yourselves—two things.
You’ll write down everything you spend money on for one week.
You won’t suddenly change your spending habits because you’re embarrassed about what you might find. Just be the wonderful human being that you always are and spend like you always spend.
Why do I suggest seven days? Because seven days is enough time to get a really clear picture of how you spend money—and it’s not so long that you’ll get tired of keeping your list.
At the end of the week, you should sit down with your partner and go over each other’s lists, with an eye toward finding simple things you can each eliminate from your regular spending patterns. By the way, when you sit down with your partner, start by sharing what you plan to cut out, not what you suggest your partner cut out. Remember, you get more with honey than vinegar here!
USE TECHNOLOGY TO TRACK YOUR LATTE FACTOR—MY TWO NEW FAVORITE APPS!
Although I still like using paper for the Seven-Day Financial Challenge, I also want to share with you my favorite websites and apps to track where your money goes and invest the Latte Factor savings you find.
ClarityMoney.com
This is my new favorite app to track where your money goes. Earlier I told you that I like Mint.com (I’ve recommended and used Mint for years). But Clarity Money, I think, is the best new financial app in town. Clarity Money says it’s Mint on steroids, and I agree. The use of this new app, which was nominated for a Webby Award as the best financial app of the year, is quickly exploding. Apple raved about it as a “new app we love.” What I personally love about this app is that it goes beyond just tracking where your money goes—it helps you cancel wasteful expenses, lower your bills, create a savings account, and invest. My favorite part of this app, which is what got me raving about it, is the “cancel wasteful expenses” feature. Once you link your accounts, Clarity Money looks at what you are subscribed to monthly, summarizes the information—clearly shows it to you—and then offers a quick Unsubscribe button! If you’ve read Start Late, Finish Rich, you know that I call these monthly automated expenses your Double Latte Factor™. I’ve always said that canceling the small things you pay for automatically on a monthly basis can easily save you $500 a year or more. Clarity Money says its users save more than $300 annually with this one feature. Candidly, companies are going to hate Clarity Money for this feature because it will cause them to lose money (but it will save you potentially thousands). When you see these expenses in black and white on your phone daily, you’ll have the impulse to click Unsubscribe and save. And for that reason alone you should try this app. I also like that it will help you lower your bills, and that you can automatically put money for emergencies into a savings account that is FDIC-insured up to $250,000 as well as invest right inside the app.
Acorns.com
Acorns is the answer to the question I am routinely asked: “David, how do you invest small amounts of money?” Acorns says right on its homepage, “Automatically invest spare change.” You need nothing to a open an account, and you can invest as little as $5 a month. This is truly a game changer—especially for young people. Acorns.com has basically solved the problem of how to automatically invest your Latte Factor savings. It allows you both to invest small amounts of money in a diversified portfolio of exchange-traded funds, or ETFs (which we will cover later, in Step 7) and to invest your spare change. Once you link your accounts on Acorns.com, you can elect to automatically roll up your purchases and invest your change in the portfolio you select. It’s simply brilliant. (I wish I had come up with this idea!) The app also now has a huge partnership platform called Found Money, where companies like Apple, Airbnb, and Nike (there are over 100 others as well) will rebate money into your investment account when you shop with them. Think frequent-flyer program for savings. This company has taken off with Millennials especially, who have already opened more than 2 million Acorns accounts. Fees for college students are waived for four years. I liked this company so much once I discovered them that I flew out and met with the founders, then invested alongside PayPal in their venture round.
THAT’S THE DUMBEST IDEA I EVER HEARD…
The Seven-Day Financial Challenge is another one of those ideas that you can easily blow off because it seems so simple. But don’t—at least not before you consider the following story.
Not too long ago, I was in New York being interviewed—live—on a major radio show with literally millions of listeners. In the middle of the interview, the host proceeded to tell me that my Seven-Day Financial Challenge was the dumbest idea he had ever heard. “David,” he said incredulously, “you’re telling me and my listeners that if we track our expenses for seven days, we’re going to be able to change our lives financially. Give me a break. I can’t tell you how dumb that is.”
“Really?” I replied. “Why don’t you just try it? If you still think it’s a dumb idea after seven days, I’ll pay you a hundred bucks.”
He phoned me a week later. Unfortunately, this conversation wasn’t broadcast live on the radio. “I’m really embarrassed,” he said, “but I had to call you. You were right. I tracked my expenses for seven days, and just like you predicted, I was stunned by what I found out.”
“Which was what?” I asked.
“Well,” he said, “this past week I spent almost $500 eating out.” (For those of you wondering how anyone could spend $500 in a single week eating out—believe me, in Manhattan, which is where the radio host lives, it’s easy.)
Anyway, he went on to tell me how he’d worked out the math and realized that $500 a week amounted to $2,000 a month. In other words, he was spending $24,000 a year on dinners out! And yet at the same time, he was not participating in the 401(k) plan his radio station offered or taking advantage of his company’s stock-purchase program. Why? Because even though he was pulling down a six-figure salary, he always felt short of cash!
As a result of what my Seven-Day Financial Challenge made him realize, the radio host cut back eating out from six nights a week to three nights a week, and he signed up for his 401(k) plan.
The moral of this story should be obvious. Don’t judge this simple idea too quickly. Try it out. Spend a week tracking your expenses. Then be brutally honest with yourself. How much money are you wasting each day? Each week? Each month? What about you and your partner combined? In other words, what is your Couples’ Latte Factor?
Take a few minutes and really think about this. The reason this simple concept is so important is that if you can get yourself to believe you can find an additional $10 a day to put away in a retirement account (which is exactly what we’re going to cover in detail in the next chapter), you can begin to take advantage of the concept called the “miracle of compound interest.”
WHAT’S THE MIRACLE OF COMPOUND INTEREST?
Albert Einstein, widely considered one of the greatest minds of all time, was once asked to name the most amazing phenomenon he had ever come across. He replied that it was the power of compound interest. It was truly “miraculous” when you looked at it, he said, and even more so when you actually put it to work.
Einstein wasn’t kidding. The miracle of compound interest is unbelievably simple yet life-changing. It comes down to this…
Over time money compounds. Over a lot of time money compounds dramatically!
You don’t have to take my word for this. On the pages that follow are some powerful charts that illustrate this concept. Take a good look at them and think about your Couples’ Latte Factor. Hopefully, now that each of you has found a way to save $5 to $10 a day (or more), let’s consider what this “small
” amount of saving can do to transform your financial future. Without worrying about what specific investments you might make (we’ll get to that later), just look at what saving money “systematically” each month can do for you.
Now think about it another way. What if you systematically put this money into a retirement account such as a Roth IRA? Take a look at this next chart. Remember, to make this chart work you have to save only $5.50 a day! It’s not a big deal…if you do it!
START INVESTING EARLY!
Are you motivated yet? How could you not be? By the way, you have my permission to copy these charts and show them to your friends. I truly wish that when I was younger, someone had shown them to me. I started working when I was 16, but I didn’t open a retirement account until I was 24. I left this chart at the original $2,000 (once upon a time, that was the IRA level) because it’s $5.50 a day, and that, my friends, is your Latte Factor number. Want to save more? Then go for it!
KEEP GOING…YOU’RE DOING GREAT
While you are really motivated, let’s head to the next chapter (Step Five) and get specific. We are now going to take a look at exactly where you should put your Latte Factor money. Because it’s not enough to just save money and spend less; you need to know what to do with these newfound savings. That’s exactly what Step Five is all about. In Step Five, building the retirement basket, we’re going to discuss two concepts that make Americans rich. The first concept is the power of “paying yourself first,” and the second concept concerns where this money actually goes…specifically, pretax retirement accounts. Combine the Couples’ Latte Factor with the power of Step Five and you will be an unstoppable couple on your road to wealth. So keep reading…you’re doing great!
STEP 5
BUILD YOUR
RETIREMENT
BASKET
By now, I hope you’ve realized at a gut level that the two of you really can afford to put money away for your future. Now it’s time to move beyond gut-level thinking to gut-level action. As I said in the Introduction, this book is not about positive thinking—it’s about positive doing. Remember, you can’t think your way to wealth; you must act your way to wealth.
My grandmother used to say that you should never put all your eggs in one basket. She was right. As I see it, there are three baskets into which you should put your eggs. I call them the retirement basket, the security basket, and the dream basket. The retirement basket safeguards your future, the security basket protects you and your family against the unexpected (such as medical emergencies, the death of a loved one, or the loss of a job), and the dream basket enables you to fulfill those deeply held desires that make life worthwhile. This three-basket approach may sound simple, but don’t let that fool you. If you fill the baskets properly, the two of you can create for yourselves a financial life filled with abundance and, most important, security.
The first basket we’re going to discuss is the retirement basket. Specifically, in Step Five, you and your partner will learn what you need to do in order to accumulate a million-dollar retirement nest egg. Needless to say, the two of you can go beyond a million dollars—and, in fact, you may need to, depending on your ages—but whatever amount turns out to be right for you as a couple, the goal here is the same. Over the course of this chapter, you will learn exactly what the two of you must do to build a substantial retirement account—in other words, how to fill your retirement basket.
THE GOVERNMENT IS NOT GOING TO FILL YOUR RETIREMENT BASKET…YOU ARE!
Depending on Social Security to provide for you after retirement is asking for trouble. At best, Social Security will just keep your head above water. According to the government and Social Security, the average wage earner who retired in 2016 received $1,360 a month in Social Security benefits. This is definitely better than nothing, but it’s certainly not enough to maintain a comfortable lifestyle.
For more than a decade now, politicians have been talking about the “crisis” facing Social Security and the need to modernize the system. Well, don’t hold your breath on this one. As my grandmother realized decades ago, if you want to be rich, forget about the government’s help—you need to plan for your own financial future. In other words, you and your partner need to make building a retirement basket a top priority.
PAY YOURSELF FIRST!
There are only a few ways of amassing substantial wealth in America today. You can inherit it, you can win it, you can marry it…or you can pay yourself first. Chances are if you’re reading this book, you and your partner missed out on the first three possibilities. So you’re going to need to build your wealth together on your own. That means paying yourself first.
I KNOW YOU’VE HEARD THIS BEFORE…BUT STAY WITH ME FOR A SECOND
“Pay yourself first” is a phrase we’ve probably all heard. That can be a problem, because often when you’re hearing something for the second or third time, your brain goes, “Hey, I’ve heard that idea already, so how good can it be? Give me something new.”
Well, this time at least, don’t let your brain do that. Just because we’ve all heard of something doesn’t mean any of us really knows anything about it or has any genuine experience with it. When I ask people in my seminars or at my lectures to raise their hands if they’ve heard of the concept of “paying yourself first,” just about everyone does. But when I ask how many of them have actually done it, most of the hands go down.
The fact is, most people don’t really know what “pay yourself first” means. They don’t know how much they should pay themselves, and they don’t know what they should do with the money once they’ve got it.
Maybe you are one of those people. Maybe your partner is. Whatever the case, let me explain it to you.
THE THREE PRINCIPLES OF PAY YOURSELF FIRST
1. WHAT “PAY YOURSELF FIRST” REALLY MEANS
Paying yourself first means putting aside a set percentage of every dollar you earn and investing it for your future in a pretax retirement account.
While that may seem simple—and sensible—enough, the fact is that most people do exactly the opposite. We take our hard-earned dollars and pay everyone else first. We pay the mortgage, our car-loan payment, the utility bill—you name it. And at the head of the list, the one we pay before everyone else is…the government.
Thanks to the miracle of payroll withholding estimated tax payments, every time we earn a dollar we immediately run to the IRS (figuratively speaking, of course) and say, “Here I am—please take a third of my paycheck.” And if we happen to live in a state like California or New York that imposes its own income tax, we say, “Oops, I don’t want to leave you out either—here’s another 8 percent of my income.”
Add up all that generosity and you’ve given away nearly half of your hard-earned money to the government before you’ve even seen it! That’s about as generous as you can get.
Now, I’m as patriotic as the next guy, but I think offering to pay the government close to half your wages in taxes is just downright dumb! Why? Because you don’t have to. The reality is that there is an entirely legal way to avoid—or at least significantly reduce—the big bite the government takes out of your paycheck. Which leads us to the second principle.
2. WHERE THE MONEY YOU “PAY YOURSELF FIRST” SHOULD GO
The bad news is that the government loves to take our money. The good news is that it’s also interested in encouraging people to save. With that in mind, Congress has passed a series of laws over the last 30 years under which smart people can minimize their tax burden—and, at the same time, create a nest egg for their future—by putting part of their earnings into what are known as pretax retirement accounts.
TO FINISH RICH, YOU SHOULD PAY YOURSELF FIRST BY CONTRIBUTING AS MUCH AS YOU CAN TO A PRETAX RETIREMENT ACCOUNT
There are many different types of pretax retirement accounts: 401(k) plans, 403(b) plans, SEP-IRAs, traditional IRAs, and so on. Later on, I’ll detail how they all work, along with the best ways of using them. For now, all you need t
o know is that these accounts all work basically the same way: money you put in them is not subject to any taxes (income or capital gains) until you take it out. The catch is that, in most cases, you can’t take it out before you reach retirement age without incurring a stiff penalty.
The great thing about pretax retirement accounts, of course, is that by making use of them, you can put your money to work without first losing 40 cents or more of your hard-earned dollar to taxes.
Here’s how it works. Let’s say you take $100 out of your paycheck every month and put it into a pretax retirement account. Well, that’s $100 a month that won’t be subject to income taxes—not federal taxes, not state taxes!
Normally, of course, if you earn $100, you’ve got to give close to $35 of it to the government. You’ll pay roughly $28 in federal taxes, and depending on where you live, as much as another $5 to $9 in state taxes. That leaves you with just $65 or so to invest, and whatever capital gains or dividends you happened to earn from that would also be reduced by taxes.
By contrast, with a pretax account, you get to put the entire $100 to work for you, and as long as you keep the money in the account, you won’t have to pay any taxes on whatever capital gains or dividends it happens to earn. In fact, you won’t have to pay any taxes on the money—no matter how large your nest egg grows—until you start to take it out of the account. (Of course, in most cases, you’ve got to leave your money in the account until you reach the age of 59½. If you don’t, in addition to paying all the taxes that are due, you’ll also get hit with a penalty. More about this later.)