‘The Difference’ between you and the rich

Moving on up
In my last book, “Make Money, Not Excuses,” I wrote about an epiphany I had — a good fifteen years into my finance career — when I realized there are only four things standing in the way of any one individual and financial security.

1. You have to make a decent living.

2. You have to spend less than you make.

3. You have to invest the money you’re not spending so that it can work just as hard for you as you are working for yourself.

4. You have to protect yourself and this financial life you’re building so that a disaster — large or small — can’t come along and take it all away from you.

I am absolutely right on these four points. Absolutely. Positively. Without a doubt.

But what I have also come to realize is that these four steps are a bit of an unbalanced equation. There are two sides to living any financial life. The left and the right sides of the ledger. The assets and the liabilities. The money coming in and the money going out. Numbers 2, 3, and 4 are all about the money going out.

Spending less than you make? Most people in this country are not. We have been, for the last two decades, living on a diet supplemented (if not on paper, then at least with a little mental accounting) by the fat values of our tech-laden stock portfolios and then, when those petered out, with the rising values of our four-bedroom Colonials. As a result, Americans have been saving an anemic one-half of 1 percent of everything we earn. That’s eight times less than the percentage of our income we spend every year eating out. Yet, it is fairly simple to right your ship by tracking your spending, cutting out needless expenditures (big and small), and reducing the interest rates you’re paying on your debts.

Investing the money you don’t spend? That’s not something most of us are doing sufficiently, either. First, of course, you have to find the money. Then you have to deal with a convoluted system of accounts ranging from 401(k)s to IRAs to Keoghs to SEPs, figuring out which is the right one for you and how to fill it with the right mix of stocks and bonds once you open it. But again, this is a situation fairly easily remedied with a series of automatic monthly transfers from paychecks into retirement accounts, from bank accounts into 529 plans, from checking into savings. And once the money’s there, if you don’t care to spend your time picking stocks, you don’t have to. Find a target-date retirement fund (sometimes called a lifecycle fund) geared to the date you plan to stop working full-time and call it a day.

Protecting everything you’ve built? Strike three. To this day, two-thirds of Americans don’t have the most basic of legal documents: a will. Or enough life insurance to take care of the people they love, should something unforeseen happen. But, again, this can be remedied relatively quickly and inexpensively. (Term life insurance prices have gotten so competitive, I just replaced my five-year-old policy with a new one and am saving hundreds of dollars a year.)

What sets numbers 2, 3, and 4 apart is that although you may be fully capable of mastering these skills — and you may have one or more of them under control — they are things you can do sufficiently only after you have taken care of number 1 — that is, after you have the money rolling in. And therein, as the Bard would say, lies the rub. Try as hard as you like to follow my advice — and I’ve been told I make understanding how to accomplish 2, 3, and 4 very easy — to track your spending, save automatically, and reduce your outstanding debt. Try to allocate your assets to perfection and pick winning stocks or mutual funds with low expense ratios. Try to secure your future with the right amount of term life insurance coupled with a well-rounded estate plan, a will, durable powers of attorney, and health-care proxies. Try all of this, but if you don’t have the money—and you can’t figure out a way to get the money — you are going to fail.

A swiftly shifting paradigm
The good news, the very good news, is that this is a situation that can change — and quickly. Ten years ago, one in ten of the people who today describe themselves as financially comfortable were slipping further into debt each month, and four in ten were living paycheck to paycheck. In other words, half of the financially comfortable made their way not only out — but up. Ten years ago, 16 percent of the individuals who today describe themselves as wealthy were mired in debt. Only 13 percent were wealthy back then, which means that for a full 87 percent of them — nearly nine out of ten — wealth has been a recent phenomenon.

And it doesn’t always take ten years to make the leap. Those individuals who transitioned from living paycheck to paycheck into a life that’s financially comfortable said it took an average of seven to eight years. Moving from financially comfortable to a life of wealth took just over eight on average. And making the big leap — from paycheck to paycheck to wealth itself — took about ten. That’s the number of years Friends spent on the air. It’s about the same time that a successful president spends in the White House. It’s equivalent to the career life span of an NFL running back. In the scheme of things, it’s a blink of an eye. And most people — no matter what strata they’re living in right now — believe making that leap is possible. Are you one of them? Read on.

Your choice
What do you need to do to find The Difference in your own life? Two things. First, you have to make the decision that this is a course you are going to embrace. You have to choose The Difference, just like you choose to exercise, eat healthier, quit smoking, read nightly to your kids. You choose The Difference; it does not choose you. The power is in your hands.

Excerpted from “The Difference” by Jean Chatzky. Copyright (c) 2009. Reprinted with permission from Random House.

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