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The Four Obstacles to Building Wealth
from the book 'The Truth About Money' by Ric Edelman

As you begin trying to accumulate wealth, you will encounter four major obstacles. The first is the most deadly, but if you think it is the economy or taxes, you are wrong. Your biggest enemy, as I can attest from having worked with thousands of people just like you, is yourself. Without question, procrastination is the most common cause of financial failure.

To understand this, consider the story of Jack and Jill. You know Jack fell down the hill, but you did not know that he suffered head injuries. As a result, Jack decided not to go to college. Instead, at age 18, he got a job, enabling him to contribute $3,000 to his IRA each year. After eight years, he stopped, having invested a total of $24,000.

Meanwhile, his sister Jill, inspired by Jacks accident, went to medical school. At age 26, she began her practice and started contributing $3,000 to her IRA. And she did so for 40 years, from age 26 to 65. She invested a total of $120,000 and she put her money into the same investment as her brother Jack. Thus, Jill started investing the same year Jack stopped, and she saved for 40 years compared to just eight years for her brother.

By age 65, whose IRA account do you think was worth more money?

Assuming Jack and Jill each earned a 10% return, Jill accumulated $1,324,778, but Jack collected $1,552,739 - $227,961 more than his sister!

While Jack had invested only $24,000 to Jill's $120,000, his money earned

interest for eight years longer than his sister. It was not the money that made him successful - it was the time value of money. Jack did not procrastinate, and by investing sooner than Jill, his account grew larger.

I have heard the complaint that procrastination does not belong at the top of my "Enemies of Money" list. There must be other, more serious causes for financial failure, right?



Obstacle One - Procrastination

I cannot stress enough the need for you to get started right now. Procrastination says you will do it tomorrow. It is easy to see why you put planning off until later: After all, who has time? You have got lots of deadlines and you do not need another one. You have got to get to work on time, get your kid to soccer practice and prepare for out-of-towners who will be visiting you this weekend. With todayi s deadlines, you do not have time to work on something whose effects will not be felt for 20 years. But that is okay because you are young and you will still have plenty of time later! Right?


Maybe this is why so few of my firm's clients are under 30. It just seems that young people do not want to talk about something 40 years away: They are more concerned about this weekends party!

In fact, I have heard all the excuses: If you are in your 20s, you figure you have got 40 years to deal with it, so you will put it off until you are in your 30s...

...but by then, you have got a new house, new spouse, and new kids - and you are spending money like never before. Who can think about saving at a time like this? You will deal with it later, after things settle down in your 40s...

...when indeed you are making more money than ever, but now you find that your older children are entering college. On top of that, your income growth is not as rapid as it used to be. No problem, you say, because by the time you hit your 50s, you think your major expenses will be behind you...

...only to discover that your younger kids are entering college and the older ones are starting to get married (with you footing all these bills) and maybe the graduates need help buying a house, too. Your parents probably need some help as well, because they are getting up in years. And you cannot remember the last time you got a promotion; after all, you have moved up so high in the company that the only way you will get promoted is for somebody to retire or die. You are also finding that the cost of living has never been higher, so planning for retirement will just have to wait a bit longer...

...and when you hit 65, you lament your anemic savings and wish you had started 40 years ago.

I see this all the time.

If there is only one thing in this entire book that you need to take on faith, it is this: There is never an ideal time for planning, and while you can always find a reason to put it off, do not. Do it now. Procrastination will cause you financial ruin more effectively, more completely, than the worst advice a crooked broker could ever give you.

The Cost of Procrastination
There is, in fact, a specific cost to procrastination. If you are 20 years old and you want to raise $100,000 by age 65, you need to invest only $1,372 today (ignoring taxes for the moment and assuming a 10% annual return).

But a 50-year-old would need to invest nearly $24,000 to obtain that same $100,000. This is the cost of procrastination. As you can see, it is not money that makes people financially successful, it is time.

The cost of procrastination can be shown just as easily for those who save monthly: Our 20-year-old would need to save less than $10 a month, but the 50-year-old would need to save $239 a month. You tell me: Who has an easier task?

Why $1,200 = $37,125

A lot of folks reading this will concede that starting young has its advantages. But I am plenty young, you might be thinking, so I will just start next year. After all, next year, I will still be young enough, but I will be making more money, and it will be easier for me to start. After all, what difference can one year make?

A big difference.

If a 30-year-old saves $100 a month until age 65, earning 10% per year, the resulting account would be worth $379,664.

But if this person waited just one year, beginning her savings at 31 instead of 30, her account at age 65 would be worth only $342,539.

Thus, the cost of not saving $100 a month for just one year is $37,125. Can you really afford to blow thirty-seven grand?

Do not procrastinate. Start now.

Out the Door by Twenty-Four

Like so many other things in life, procrastination is a learned art. As with most basic attitudes, we learn about this one from our parents.

A listener, Bob, once called my radio show. Age 23, he asked, "Ric, what should I do with my money? I have $24,000 and no debt. " I was impressed. Most of the 20-somethings I know are broke and have lots of credit cards. Bob said the bulk of his money was an inheritance and it was just sitting in his bank account.

I asked him about his monthly expenses, expecting Bob's reply to be in the range of $1,000 to $3,000; such an amount would be typical for folks in their 20s. To my surprise, he said, "Oh, I spend about two hundred dollars a month." Then the truth came out. Bob, 23 and a college graduate, lives at home.

Upon graduation, he became an official member of The Boomerang Generation. Mom and Dad shipped him off to college at age 18, paid the bill, and prepared to celebrate the fact that their child-rearing and child-supporting days were over.

But when Bob graduated, he did not move on with his life. Instead, he moved back. Bob once again lives with his parents, at their expense, and his total monthly spending of $200 goes to whatever he wants - parties, hanging out with friends, movies, eating out with the guys, weight-lifting at the club, and other activities of the financially secure.

Bob is able to participate in these avocations, of course, because "someone else" does his laundry, cooks his meals, and pays for the home he lives in.

Occupationally speaking, Bob is in a rut. Upon graduation, he missed the career track: Unable to get the job of his choice, he chose not to work at all. I asked, "When are you going to move out?" He said, I am in no hurry."

I can see his point. Why should he move to a 700-square-foot, three-room apartment that costs $1,200 per month (plus utilities, Internet and telephone)? He would have to buy furniture and a TV, drag his laundry to the Laundromat, shop for his own groceries, and cook his own meals.

Why should Bob do that, when he can live in a 3,000-square-foot, multi-level single family home on a quarter-acre lot in the suburbs, where somebody else takes care of his laundry, does the food shopping, and prepares dinner nightly?

Let us face it, Bob's got a great thing going here, and the operative initials are

Bob can come and go as he pleases, has no bills to pay, and if something goes wrong, the landlord takes care of it, spelled D-A-D.

This is an issue of "tough love". Without exception, all my clients who have kids love them dearly, and they would do anything for them - but enough is enough. Parents must recognize that at 23, these "kids" are adults - and they need to act like it. Parents are not doing their children any favors by coddling and protecting them against the cold, cruel realities of life.

In Bob's case, Mom and Dad need to charge him rent, just like any other landlord. They need to collect an amount equal to (a) what Bob would pay elsewhere, or (b) what Mom and Dad would charge if Bob were a stranger.

If they were to charge $1,200 a month, two things would happen: Bob would get a job to pay for it, and he would move out. Both are exactly what Bob needs to do if he has to develop and thrive in our society.

And to all you Moms and Dads who hate the thought of collecting rent from your own children, here is a neat trick: Collect the rent and invest it for your son or daughter without telling them. When they finally move out (we hope, one day, they will), you can give them the money as a moving-out gift, allowing them to use the money you have saved for them to help them get settled in a new home.

Do not get me wrong. I do not have a problem with kids living at home; it can be a smart financial move - for kids trying to save money. Rather, my problem is with kids who live at home as freeloaders - and there is a big difference between the two.

Take the example of Mike, one of my clients. He is 26 and, like Bob, lives at his parents' home. He did not go to college, but he is been working since he was 16. Mom and Dad have always covered his expenses because Mike has always had a job and he contributes to running the household (doing chores, cooking, cleaning, and shopping). He is diligent, conscientious, and - most important - Mike is good at saving money.

In fact, he is really good at saving money: Mike has $60,000, which he saved on his own - no gifts or inheritances. He is accumulated his money throughout the 10 years he is worked.

And that is why Mom and Dad have no problem with him living at home for free: They know that rather than forcing Mike to pay rent to them or some other landlord, he has paying himself. So when he does decide to move out, he can afford to buy a place, not just rent it. Besides, like most suburbanites, Mom and Dad can afford to have Mike live in the house and they love to have him around, so it is a great deal for everybody.

The Bobs of our nation won't be 20-something forever and if they do not learn to pay their way now, if they do not start preparing to do so, they never will. Are you prepared to support your kids for your entire life?

Give your kids a push. Do not let them procrastinate. It could be the best thing you ever do for them.

Obstacle Two - Spending Habits

Again, the problem is you, not the economy or world politics!

To see what I mean, look at the Newmans, married, with a combined annual income of $60,000. They felt they did not spend extravagantly, but they were nonetheless concerned that they could not seem to save any money. "We do not drive fancy cars or take big vacations and our kids do not have the latest Reeboks", they told me. "But we cannot seem to get ahead".

Needless to say, the Newmans did not know where their money was going, so my firm helped them figure it out. The Newmans commuted to work separately and here is what we found:

When they each got to the office, each would buy a newspaper for fifty cents, coffee ($1.25), and a doughnut ($1.00). In a mid-afternoon break, the would buy a candy bar ($.75). Without knowing the other was also doing this, each was spending $3.50 a day, for a daily total of $7.00.

With 20 working days per month, they were spending $140 per month, or $1,680 a year.

And guess what happens to the money you earn before you receive it? It gets taxed. In other words, the Newmans had to earn $2,400 in order to net the $1,680 that they frittered away on candy and soda. Then they came to us saying, "We cannot seem to save any money".

Where Does My Money Go?
Have you ever withdrawn $50 from an automatic teller machine, yet find your wallet or purse empty just a few days later?

Have you ever asked yourself, "Where does all my money go?" Like the Newmans, you probably are piddling it away. You have no idea you are doing it, because if you did know, you would stop instantly, for there is not a rational human being in the world who would tolerate such nonsense.

But we all piddle money away because we do not pay attention. The Newmans were spending 3% of their annual income on... nothing! To avoid this problem, you have got to look at your spending habits, for that is where you will find the key to your financial future.

Obstacle Three - Inflation

The most onerous of money's enemies, inflation is perhaps the best illustration of how The Rules of Money Have Changed.

Over the past 25 years, inflation averaged 4.4% per year, according to Ibbotson Associates. At that rate, a 50-year-old earning $50,000 a year, who plans to retire at 65 on that same income, will need a net worth of $1.7 million - and his income in his first year of retirement needs to be $95,000.

Indeed, to look into the future, you need not 20/20 vision but an inflation-adjusted 50/50 vision!

In fact, 4.4% annual inflation means $1,000 will be worth less than two-thirds as much in 10 years. Put another way, you will need $1,538 in 10 years to buy what $1,000 buys today. Are you old enough to remember when President Nixon announced a 90-day wage and price freeze? Inflation was rampant and nobody could stop it - not Congress, the Federal Reserve Board, the President's Council of Economic Advisors, the banks, or Wall Street.

Nixon and the nation panicked. Convinced that inflation was going to cause an economic calamity worse than the Great Depression, the President stopped inflation artificially. For 90 days, nobody was permitted to raise salaries or prices. And the strategy worked - until the 91st day, anyway.

When President Nixon established his freeze in 1971, the inflation rate was just four percent. If that were the case 10 years later, Jimmy Carter would have been re-elected! By the time Jimmy left office in 1980, inflation was 13% and banks were offering 15% CDs.

But you did not buy those CDs, because you were convinced that next month, CD rates would be 16% and you did not want to be stuck with "only" 15%! So you kept your money in daily accounts. You rode the interest wave up and right back down again!

Inflation - even very low inflation - once panicked our nation, but no longer. How can that be? The reason is the frog.

Yes, the frog.

The Boiling Frog Syndrome
If you throw a frog into a pot of boiling water, he will jump out. But if you place a frog into a pot of lukewarm water and slowly turn up the heat, it will boil to death.

And so it is with inflation. We have grown accustomed to inflation over the past 25 years, but that does not mean we do not continue to be hurt by its effect. We are hurt even at "low" rates of inflation.

Obstacle Four - Taxes

We all love to hate taxes.

According to the Tax Foundation, Tax Freedom Day is April 19, meaning that every dollar you earn for the first four months of the year goes to taxes. Put another way, you work nearly three hours of each workday just to pay taxes. No wonder we find it difficult to save money!

The amazing thing is that everybody thinks taxes are a natural part of life. Have we all forgotten why we revolted against England?

Our federal income tax was not even created until 1913 - and it took a constitutional amendment to do it. And when the tax was established, it was quite low: There was no tax on the first $20,000 of income and only a 1% tax on income between $20,000 and $50,000 - and $20,000 was a lot of income in 1913!

You can guess what the politicians said back then, too. "Don't worry, I will bet they claimed, "tax rates will never rise!"

It's the Boiling Frog Syndrome all over again.



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