Since I have joined the ranks of the gainfully employed (don’t get me wrong, I have always worked, always been employed, never before as gainfully as now, but still), and since I lived in poverty for an unfortunate period of time, and since I developed a deep seed of greed, I have been looking around me.
A lot of people work really, really hard and barely scrape by. Shop at Wal Mart, drive junky cars, live in passable homes that can’t get sorely-needed renovations in a timely fashion. They’re planning to use the equity in their home for their retirement. These folks look forward to yard sale season, go to church, have decent credit and are genuinely good people. I come from a family full of such people.
But some people work their faces off for about 20 of their most energetic years and along the way become wealthy, well-to-do, upper-upper-middle class. They have tons of dough squirreled away for retirement. They own beautiful homes with nice furniture and classy autos. They can afford subscriptions to fashion and gourmet magazines and the best cable package, new computers every year and the $50-$150 bottle of Tequila/Gin/Vodka/Whiskey instead of the nasty $8 one that needs to be diluted to be drinkable. They order beautiful pieces of furniture and jewelry to give as wedding gifts from shiny catalogues and use American Express cards which get paid off, in full, every month. They are also folks who go to church and are genuinely good. I have met several families of such people.
Neither of these two groups work harder than the other. There is nothing better about one than the other in the final, philsophical analysis. But wouldn’t you rather belong to the latter group? I sure would. I’m not thinking I will ever be Martha Stewart–that woman is a bottomless well of opportunism, energy, savvy & WORK, but I want to be able to HELP Pearl with college. I want to have the resources to help take care of my parents in their aging so that their small estate for which they have worked their whole lives will not be absorbed by a nursing home.
So what’s the difference?
Here’re the only things I can come up with: what they do with their excesses and disciplined saving habits.
Those of us who just get by, we have little windfalls–tax returns, bonuses at work, unexpected inheritances of a couple thousand bucks. What do we do with them? We pay off a credit card, or buy a few gallons of paint or a fresh toilet or a new dishwasher or put it down on a new washer/dryer set, because the 700-year-old set we inherited from our grandmother’s grandmother has finally puked–then we put the rest in checking, waiting for when it is needed. None of those things are wrong or bad, but they’re not think-ahead kinds of things to do.
People who wind up rich save, save, save. They max out IRAs and contribute the max % to their 401K at work. They look for ways to build passive income. I think the IRS calls that kind “unearned” and taxes it more. They buy a few well-researched stocks with their few hundred extra dollars, then those few hundred extra can buy more stocks and can grow into thousands extra. It’s not as mystifying as you think it is. Starbucks closed at just over $15/share on the first, and at the end of June, Hershey Foods stock was only at $37/share.
And there are free ways to learn about that stuff. My credit union offers free financial consultations. INGdirect offers a free high interest savings account (it earns 3%APY) and a very user-friendly, gradual entrance approach to investing in stocks through Sharebuilder. A friend introduced me to The Motley Fool which is a bunch of articles written about investing in plain English by entertaining, clever folks. At the end of each article, the writer-bio gives a bit of info about the kinds of stocks that particular person owns. NPR’s Marketplace segments can be downloaded in podcast form, and are an extraordinarily deep well of information.
Home Equity: In the latter category above, I would be willing to bet big dollars (which is something those in that category would likely not do) that when they buy a new house and sell one, they do not roll every penny of equity into their new house to get a lower mortgage payment. They instead take ten or twenty (or more) thousand dollars and put it in a high yield Mutual fund, CD or they invest it in stock. Maybe they put it down on a rental property or make another physical investment that will appreciate.
Making choices like these, I can see how in a much shorter time than one might expect (10 or 20 years instead of 50), one can come out in a really good spot of the world of personal finance.
So here’s my process to both resurrect my soiled credit and become one of the latter category: baby steps. I started by paying my bills on time, paying ahead where applicable. By forcing myself to consider non-necessary purchases for a week before making them. After several months of that, I started using low-balance credit-repair type credit cards. Using them responsibly but carrying balances (small ones, under $20–I don’t think they care how much interest you’re paying, just that you’re paying it). I got a car loan on a pre-owned car. Car loans are equally arguably a super or a retarded financial choice. But for me, it’s about my credit, not about my investments, because I don’t have any of those yet. I force myself to save $200/month to an interest-earning account. That’s not a ton of money, but right now I can’t afford more. And before the summer is out, I will own some stocks. I’m doing reading and research and looking around me first. In August, I’ll be eligible for my 401K through work. By winter, I’ll own at least one CD. By 2010’s end, I’ll buy my mortgage from my dad, do some renovating, sell it, move in town and invest some of my equity. Where? Who knows. I don’t think I have landlord’s chops. But I might be able to be a flipper. I have an eye for design and potential. Who knows–by then perhaps I’ll be a stockmarket guru and writing for Motley Fool myself.