I recently started working out again. Back in high school and college, I was pretty athletic. I ran track and played soccer in high school. During college, I got involved with Parkour and was working out for 2 hours a day, 4 days a week.
After I graduated though, that stopped. I didn’t work out and I could feel my body suffering because of it. Now, not all of my workout habits disappeared. I continue to take the stairs when at all possible. I still have better posture and am more conscious of the foods that I eat. Overall, it’s still better that I had worked out in the past than if I never had at all and I’m getting back into a routine now.
So what does all this have to do with becoming a millionaire? As I’ve started thinking about my physical fitness, I’ve also started thinking of personal finance in terms of “financial fitness”.
I was listening to the audiobook for The Millionaire Next Door. The book was written by Thomas J. Stanley and William D. Danko. Both individuals have Ph.Ds and interviewed/profiled countless millionaires to gain the insights for their research, and ultimately the book.
One of the insights they shared was the fact that millionaires played good offense and defense. No, they didn’t mean to say every millionaire was an all-star athlete. What they meant was that millionaires became millionaires by first playing good offense with their finances. Millionaires make sure to make enough income to support becoming financially independent. At the time the book was written, 1998, the median annual income for a millionaire was $131,000. If we adjust that for inflation, that comes out to just about $200,000. With $200,000, that puts your annual income in the top 5% of Americans.
But what if you don’t make $200,000 a year? My wife and I certainly don’t. You can take some solace in that $200,000 is just the median so there were plenty of millionaires interviewed that made less than that. Luckily, Stanley and Danko found that playing good defense is more important than playing good offense.
That is, you can’t just make a lot of money. As I’ve mentioned before, the “secret” to building wealth is spending less than you make (shocking, right?). It doesn’t matter if you make $1 million a day. If you’re spending more than you make, you will go broke.
This is exactly what Stanley and Danko found when interviewing their millionaires. Those who were able to obtain financial freedom, did so through carefully guarding the money they had. Now that doesn’t mean you have to be a scrooge. But it does mean not frivolously spending your money and being smart about what you do spend it on. They found those that looked wealthy were often not doing well financially. The ones that actually were wealthy were those who didn’t ascribe to a consumption lifestyle. Instead of buying material possessions, they purchased appreciating assets such as stocks, businesses, or real estate and kept their day-to-day expenses low.
They have one example of a 56-year-old Dr. John J. Ashton who made $560,000 annually. You’d think he’s pretty well off. At first glance, his net worth of $1.1 million seems to show that he is indeed well off. But Dr. Ashton spends nearly all his income on his expenses, as evidenced by his relatively small savings. If he were to retire now, he’d only have enough funds for 3 years at most! At that savings rate, Dr. Ashton can expect to work well into his 70s or 80s before he can completely retire.
Stanley and Danko have another example of 41-year-old Mr. Bobbins and his wife. Mr. Bobbins is a fireman and Mrs. Bobbins is a secretary. Together they make $55,000 annually and have $460,000 saved. They have less money saved than Dr. Ashton makes in a year, but Mr. and Mrs. Bobbins could survive 10 years off their savings if they had to. And they’ll still have 20 or so years in their careers to save more for a comfortable retirement!
Working on your financial fitness requires both good offense and (even more so) good defense. But we can expand this analogy even further. You don’t become a great sports star overnight.
Before the fame and the games, there are countless hours of practice and workouts that culminate in having the skills and physique needed to play. You can’t work out for a single day and then expect to get six pack abs. You have to consistently work out and integrate it into your lifestyle in order to gain physical fitness. It doesn’t have to entirely consume your life, but it does need to be a regular part.
Financial fitness is the same. You don’t become a millionaire overnight. Unless you win the lottery or gain an unexpected inheritance, you’ll have to incrementally work towards your financial goals.
You can’t spend hours perfecting your budget and then never look at it again. You need to continue to adhere to your budget and regularly look at your finances. Similarly, it’s not enough to save your tax return when you haven’t saved anything else during the year. Improving your personal finances requires consistently spending less than you make so you can save and invest the surplus.
Whether you’re working on your personal or financial fitness (or really most things in life), you need to put in consistent effort if you’re going to hit your goals.
There are lots of different ways of reaching fitness goals. You can become a workout fanatic or double down on your diet (just don’t skip the carbs). But the best plans often use a combination of both diet and workouts.
With personal finance, there’s no need to work yourself to death to get the highest salary possible. After all, most people don’t live to work, they work to live! Similarly, you don’t have to save your entire paycheck by living like a monk. Instead, make reasonable changes in all aspects of your life.
Going back to the ideas in The Millionaire Next Door, work on your offense. Make sure you’re the best employee you can be at work. The difference between being a good employee and a great employee can be a simple change in mindset that provides you with more opportunities for promotions and compensation. Also do research on the market value for your skills to ensure you’re being compensated fairly. Consider taking on a side gig to bring in more income.
On the defensive side of things, make sure you have a budget and that you stick to it. Your budget allows you to dictate where your money should go instead of wondering where it went. Invest your savings in order to grow your nest egg.
I’ve found a job that I really enjoy and take pride in. This allows me to be the best employee I can be and has rewarded me with new opportunities and promotions. For my financial defense, I take a quick peek at my budget every 2 weeks or so. This is just 5–10 minutes to see where we stand and then my wife and I can adjust our spending accordingly. Once a month, when I do our bills, I’ll review our whole financial picture, re-balance our investments, and determine what kind of spending we should plan on in the next month. This process usually takes between 30–60 minutes. All in all, outside of this blog, I spend at most 2 hours a month on our finances.
People who value having good health work towards that by regularly eating well and exercising. Most people want to have wealth as well, yet I think fewer people think about working towards their financial health than their physical health. Make your financial fitness a priority. It’ll pay dividends (quite literally) in the future.