You Don’t Have To Live From Paycheck To Paycheck!

In my late 40’s, fresh out of a divorce, I took stock of my life. I had a good job, a small 401k, an old car and lived in a rental apartment. I’d enjoyed my share of good times and raised a family. My personal balance sheet would have fit on a Post-it-Note with room to spare; it was pretty bleak.

Soon after, I met Jo and we were married. We bought a $100K home and paid mortgage insurance; our down payment was inadequate.

Approaching 50 provided my wake-up call. I was responsible for supporting my new family. My biological clock was warning me I could forget about retirement unless I did something differently. In the past, I’d say, “We can worry about retirement later.” I was scared, which turned out to be a good thing.

I recently wrote about winning the lottery. It’s a fantasy. If you want to accumulate wealth, you have to do it the old-fashioned way; earn good money, spend less, save, and invest the difference. While it’s easy to say, unlike a get-rich-quick lottery winner, it’s a difficult, time-consuming process.

Sadly, many folks come into instant wealth, live high on the hog for a few years, and end up back where they started. They never understood what wealth is really all about.

I’ve had many friends who earned terrific incomes, lived lavishly, yet ended up with very little. They might drive luxury cars, take expensive vacations, dress in the finest clothes, send their kids to the best schools, and be members of the finest country clubs; however, their wealth is an illusion.

The author of the book, “The Millionaire Next Door” interviewed many wealthy people to learn what makes them different. One wealthy Texan referred to these folks as, “Big hat, no cattle.” Forget the lavish spending, buy some acreage, a cow and a bull and start building your herd.

The real issue is not how much you earn, but how much you keep and invest so your money is working for you, providing additional wealth and income.

My personal journey

I was fortunate to have worked with many wonderful, successful people who were willing mentors. This week I am going to share some of their tips, adding my own comments.

Pay yourself first and learn to live on the rest. I was a member of the “deposit your paycheck, pay the bills and hopefully there was money left over” tribe. Sometimes I couldn’t pay off a credit card; incurring double digit interest rates on the unpaid balances.

A mentor suggested writing a check to savings for 10%, then pay the bills and living on what was left. I scoffed, “Impossible”.

I was surprised when he said, “You don’t have to live from paycheck to paycheck, you do so because you choose to.” He went on to explain that my life, up until that moment, was a result of choices I made along the way – some good, some bad. He added, “Until you are willing to make the choice to get out of debt and build wealth, things will not improve.”

“But what about all my bills?”, I asked. He grinned and said, “They will be paid off in time. Your spending habits will also change.” He was right.

Do a personal financial assessment. He deliberately avoided the word budget, knowing it would scare me. He had me take our checkbook and credit card statements for the last two years and build a spreadsheet tracking where the money went. I paid lots of interest, I’d whip out a credit card whenever I wanted something.

He was right, when it came to spending, many of my choices were made impulsively. If I set my mind to it, I could reduce spending enough to save 10% – once I got out of debt.

Save enough for 3-6 months expenses, then begin to invest. Great theory, but it didn’t work well for me. I’d save some money and have the urge to spend it.

Here’s what I had to do….

Hide money from yourself. If I was going to really save, I had to hide it from myself. In an impulse moment I didn’t want to blow the whole plan. Instead, I maxed out my contributions for my retirement account and started making additional house payments. That was saving, building my net worth, and not available for “stuff”.

Get out of debt. Credit card interest was 22% at the time. Home mortgage interest was more than the principal payment. Renting other people’s money is expensive!

Jo and I worked well together. We targeted certain credit cards, paid them off and cut them up. We kept some for convenience and pay them off each month. When they started offering cash back, we looked for those who gave us good rebates.

Don’t wait to start investing. This required a major change in thinking. We hear stories about investors getting rich overnight, hitting the biggest, hottest investment in the market. That is gambling, not investing.

“It has been said that people who understand compound interest receive it while those that don’t understand it, pay it.” — Subscriber Scott M.

Real investors understand growing and compounding your income and net worth. Like many, I had to learn by losing money betting on get rich quick schemes as opposed to investing into solid companies that produce income like clockwork.

A personal note here. Many young, hard-working people dismiss the idea, saying they don’t have time. Don’t blindly abdicate your life savings to a money manager. They don’t always put your interest ahead of theirs.

You can invest passively by maxing out your 401k. After age 50 you can make “catch up” contributions. Compounding really works in your favor when you start young.

Earn more – save more. While there is truth in the old saying, earn more, spend more, don’t forget the goal. Enjoy the fruits of your labor, but increase your “pay yourself first” amounts; there will still be some left over for fun.

A personal note here. When you pay something off, you don’t have to go buy something else because you can afford the payments.

The consumer electronics industry has brainwashed much of the public into believing they have to have the newest hottest technology. I needed a new screen protector for my phone and asked the salesman what I would get if I upgraded. He said he’d make me a great deal, quoting the monthly payment. I asked how much the phone cost – “$1,400.” A few more camera pixels and bragging rights didn’t cut it, I spent $29 bucks on the screen protector.

Factor in taxes & inflation. It’s more than just taking all the legal deductions you are entitled to.

Look hard at the income portion, particularly investment income.

Are you better off with an investment grade bond that pays 5% interest or a solid stock that pays 5% in dividends? Stocks might increase in value helping to offset inflation where the bond coupon is fixed.

Interest income is generally taxed at your normal tax rate. Nerdwallet.com tells us a married couple filing jointly with taxable income from $89,451 to $190,750 is in the 22% bracket.

Receiving “Qualified dividends,” that same couple’s dividend income would be taxed at 15%. In 2023, if they earn less than $89,250, they pay zero taxes on their dividends.

Check with your licensed professional, some investments may provide the same gross income, but their after-tax income will be lower.

More personal thoughts….

I wish I’d met Tim Plaehn, and his Dividend Hunter philosophy 30 years ago. He recommends good-paying dividend stocks and reinvesting dividends.

For working people feeling they don’t have time for this, I recommend finding good dividend stocks, and using their broker’s automatic reinvestment program. Passive income and compounding become automatic. A few years ago I started the process. In two cases, my share count is already up 10%.

WORRIED ABOUT INFLATION? 2023 is shaping up to be the most expensive year ever. The Fed’s response is too little, too late and prices continue to soar! How do investors protect the value of their nest egg? How do retirees pay their skyrocketing living costs? Luckily there’s a proven way for you to stay ahead of inflation, just like 20,000+ investors are doing right now… Here’s how you can be one of them. Click HERE for more information.

As I approached retirement, near the end of the Bush II administration, a friend suggested rolling my retirement plan into a self-directed Roth IRA. Yes, I had to pay a lot in taxes, but once in a Roth, I could earn all I want without required minimum distributions or additional income taxes. With government debt going through the roof, who knows what the personal income tax rates will be for those withdrawing money from their 401k in the future? I no longer have to worry about it.

Work together with your spouse. I saved the best for last. Changing your mindset was the key. I was lucky, Jo and I were on the same page. We work as a team and have enjoyed a good lifestyle along the way.

We’ve seen cases where both partners don’t work together, creating real problems; particularly as you get older. Sadly, some seniors are working into their 80s to pick up the slack.

I’m required to add, I am not licensed or qualified to give personal, individual investment advice. While these ideas worked well for me, I suggest you work with a licensed professional to determine what is best for you.

It’s never to late to start, despite ridiculous government spending and high inflation, financial independence is the goal. Forget the past, you can’t change it, but you can change your future – positively. It took me 50 years to start figuring it out; it can be done. You don’t have to live from paycheck to paycheck forever!

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On The Lighter Side

Last week I finished my radiation for the cancer spot in my lung. The five heavier doses went much better than the 35 required last year. Some fatigue, naps are always good, but I am already feeling better. It will take a few months for things to settle before we can do a scan to be sure it got the job done. Doctors all are optimistic.

I found myself reminiscing as we move to Super Bowl Sunday. Philadelphia versus Kansas City…a big MEH – whatever…. Remember when the country came to a halt, as everyone watched the game? Super Bowl parties were a big thing.

A friend worked at a sewer treatment plant and told me that, all over the country, they would know when there was a time out, as thousands of people would flush the toilets all at once.

Maybe it’s me, but I just don’t feel the fervor like it used to be. I’m sure the hometown fans would disagree.

Quote of the week…

This quote is almost 100 years old; not much has changed.

What is a boy?

“You can absolutely rely on a boy if you know what to expect.

A boy is Nature’s answer to false belief that there is no such thing as perpetual motion. A boy can run like a deer, swim like a fish, climb like a squirrel, balk like a mule, bellow like a bull, eat like a pig, or act like a jackass, according to climatic conditions.

The world is so full of boys that it’s impossible to touch off a fire cracker, strike up a band, or pitch a ball without collecting a thousand of them.

Boys are not ornamental; they’re useful. If it were not for boys, the newspapers would go undelivered and unread and a hundred thousand picture shows would go bankrupt.

The boy is a natural spectator; he watches parades, fires, fights, football games, automobiles and planes with equal fervor. However, he will not watch a clock. A boy is a piece of skin stretched over an appetite. However, he eats only when he’s awake.

Boys imitate their dads in spite of all efforts to teach them good manners.

Boys are very durable.

A boy, if not washed too often and if kept in a cool quiet place after each accident, will survive broken bones, hornets nests, swimming holes and five helpings of pie.

Boys love to trade things. They’ll trade fish hooks, marbles, broken knives and snakes for anything that is priceless or worthless.” — Herbert Hoover

And Finally…

I’ll finish with a couple of my own:

An old man is a boy disguised as a shar pei.

You will find a great collection of boys bidding at an antique auto auction.

 

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

 

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