Why I'm rich and you're not ...

Post by **jacob** » Sat Jul 14, 2012 4:53 pm

Here's a fun exercise. It's easiest on a spreadsheet. Make three columns and put $50,000 on top of the first, $0 on the second, and -$50,000 in the third. This represents starting your life with $50k, nothing, and $50k in debt, respectively. Now add 4% to all columns ($2000,0,-$2000) and also add $5000 to all of them which represents savings. That a net of ($7000,$5000,$3000) ... the next row will be (57000,55000,-47000). Again, add/subtract 4% accordingly and add $5000 in savings. Repeat for several years. Now, what does that say in terms of starting one's life by a) quickly saving money, b) spending everything, c) going into debt? Left as an exercise for the reader.
Answer: After 14 years, C will finally pay the debt off. A will at this point have $166k. B will have $83k.
For extra credit: Try starting with +$100k, 0, -$100k instead.
Interpretation: It's important to realize that the only difference is the starting amount. Everything else stays the same.
Next time someone argues that a couple of years of "sacrifice" (to get the 50k in the first place) is not worth it because we only live once, I'm going to slap them with this.

jzt83 · Post by **jzt83** » Sat Jul 14, 2012 5:11 pm

I really needed that slap in the face! Seriously. Had I not worked on a very sporadic basis since 2001, and had I not constantly wasted money to move/travel to 'find myself' and instead continually worked near full-time more consistently, I would currently have around $166k in savings (possibly more). I was broke back in January of this year, and have so far saved $9500 by living moderately frugally. I will just stick to this course until I am able earn around $1000 per month from investments. I will not allow indolence or wanderlust lead me astray!

mikeBOS · Post by **mikeBOS** » Sat Jul 14, 2012 9:24 pm

I think of those initial lean years as a "catapult" that flung me way further ahead in the race than I have a right to be.

dragoncar · Post by **dragoncar** » Sun Jul 15, 2012 4:44 am

YOLO!

secretwealth · Post by **secretwealth** » Sun Jul 15, 2012 4:47 am

Jacob, one of my favorite parts of your book is when you talk about how people think about being a millionaire. Most think about how they would spend a million dollars, not how they would earn a million dollars. That simple insight is profound, and important.
My only regret is that I didn't start saving earlier. Compound interest should be taught in preschool. Fuck that--it should be taught by prenatal nurses.

Dragline · Post by **Dragline** » Sun Jul 15, 2012 5:10 am

I keep wondering about how this relates to those posts about inheritances.

ToFI · Post by **ToFI** » Sun Jul 15, 2012 1:54 pm

The question I've been asked often about my frugal living goes like this: "What good is money if you don't spend it? or Life is meaningless if you don't spend money on stuffs or travel or sensory pleasure.Life is about enjoy pleasure. or You're so cheap. " In my observation, most people believe happiness is primarily obtained by spending money and life is all about spending money. Life is dull without spending money. This idea is global.
They asked silly questions despite I am spending 56% of my take home pay. How am I not spending money? Just because I am spending less than average guy and invest the saving, that doesn't mean I don't spend money. Most of the time, I just don't bother to fight back. People just don't get it about having freedom/liberty/option to do meaningful things.
Let's ask those people this question: Do rich peope spend 100% of their take home pay? Can you imagine Bill Gates or Warren Buffett spends billions a year? No they don't, why shoud poor/middle class people spend all their money?

M · Post by M » Sun Jul 15, 2012 2:05 pm

Thanks Jacob - this is a fun exercise! It reminds me of why I am 'sacrificing' so much. It always amazes me how making a few big decisions well can have such a positive effect on one's life. e.g. by choosing to live in a cheap house, drive a cheap car,etc.

Post by **jacob** » Sun Jul 15, 2012 3:47 pm

"What good is money if you don't spend it?"
1) No stress about financial matters. Sleep well at night.

2) Money matters is not likely to cause divorce.

3) No worries about making ends meet, ever.

4) No a$$kissing at work to avoid getting fired. No endless what if I lose my job scenarios being played out.

5) Few or no finance fees.

6) Able to get better deals (cash talks).

7) Money makes more money.

ksoto · Post by **ksoto** » Sun Jul 15, 2012 5:15 pm

I take issue with #2) Money matters is not likely to cause divorce.
When one is on board for saving and the other is not it often leads to divorce. Been there, done that!
Choose carefully.

pooablo · Post by **pooablo** » Sun Jul 15, 2012 9:49 pm

@ToFi -- I really liked your comment about billionaires being frugal and having a high savings rate. I use that Buffett as an example all the time. If one of the richest men on the planet lives in a $1,000,000 home, the average person is overspending when he is living in a $300,000 home!

C40 · Post by **C40** » Mon Jul 16, 2012 1:35 am

I wonder what Buffet's highest yearly savings rate has been. 99.9% ? 99.99%?
Also of note, Buffet's house is only one mile away from the Berkshire Hathaway office.

pooablo · Post by **pooablo** » Mon Jul 16, 2012 4:10 am

@C40 -- Haha, further to my previous post. If the richest man on the planet walks to work everyday, the average person can't afford to own a car!

dragoncar · Post by **dragoncar** » Mon Jul 16, 2012 5:12 am

The average American has a home worth $185,000 (from some googled source to take with a grain of salt). So yeah, I guess the average person is overspending when he is living in a $300,000 home.

pooablo · Post by **pooablo** » Tue Jul 17, 2012 5:51 am

@dragoncar -- I forgot that this is a US-based forum. The average home price in Canada is much higher at around the $300K mark. Price-to-rents ratios are out of whack up here!