Summary
- Three important sources of wealth are Time, Energy, and Capital
- To be successful in life, one needs to capitalize on their use of time, energy, and capital
- Those who save a lot now and spend later have a higher probability of becoming financially independent and wealthy
Related Topics
- Saving the Next Generation from Financial Disaster
- Is Your Home An Investment or A Consumable?
- Importance of and How Much You Should Save
- When Should You Buy, Borrow, and/or Delay Purchases
Quotes
- “Someone is sitting in the shade today because someone planted a tree a long time ago. ”
- “Never depend on single income. Make investments to create a second source.” –Warren Buffett
Time, Energy, and Capital
A lot of people are asking how they can become rich quickly. They get this idea from TV ads and marketing campaigns that promise quick wealth over a period of months to a couple of years. The truth is, none of these schemes are realistic. Even, if you get married to a rich person or inherited your wealth, it does not guarantee that you will remain wealthy unless you learn the principles of creating and keeping your wealth.
From a historical basis or even contemporary ones, quick schemes never work. Consider the alchemists who tried to turn lead into gold. They never succeeded. Consider the top scientists who work on enhancing or modifying seeds. They still have to work and understand the fundamentals of plant life to create genetically modified seeds. In fact, it takes tremendous amount of investments to even come up with these modifications.
Similarly, accumulating wealth requires work, thinking (energy), and some or a lot of capital, and it takes time. One can shorten the process, but it does not happen overnight. I would like to share my views on how wealth is really created. It starts in the mind and by extension, behavior (habits and character).
Life Overview
Life is finite. For the sake of argument, let’s say that the typical lifespan is 75 years. Let’s also say that 35 years old is the prime age and after that, physical health starts to deteriorate. See the chart below.
With this understanding, you need to capitalize on the window of opportunity that will provide you with the best reward for your effort. In other words, optimize your usage of time. The question then becomes, when is the best time to work hard, save, invest as well as enjoy life?
I have my own thoughts which have worked well for me, but before I share mine, it’s important to understand the prevailing thoughts on living life: “Spend & Enjoy Life Now” and “Work Hard & Save Now.” Let’s examine the logic of both.
Spend & Enjoy Life Now
The “Spend & Enjoy Life Now” camp wants to savor life now or when they are young. For the sake of argument, from 18 yrs. old to 35 yrs. old. The question “why should I wait to enjoy life in the future when I am already too old to enjoy it?” is the underlying assumption.
The thought of sacrificing now to get something better in the future is not something many in this category view as worthwhile or perhaps does not even cross their minds. Some have the view that the future is always bright, so they enjoy the present as much as they could thinking that they can always catch up later.
Still, there are also others whose hearts want to be prudent now, but lack the will power to work hard and save while they are young. One way or another, the life and spending profile of this category is shown below.
The blue line in the chart reflects life and health. The orange line reflects their wealth accumulation which does not grow very much because they spend most of their money on expensive cars, frappuccinos, restaurants, etc. In addition, many life events happen when you are in your late 20s and early 30s (getting married, raising a family, others).
Accordingly, expenses go much higher while capital continues to go lower and hence is not enough to generate returns that could offset the additional expenditures. By the time they want to catch (or grow) up, it’s already too late. They have already used up their resources and time in unnecessary things leaving very little capital to grow with time.
Work Hard & Save Now
The “Work and Save Now” adherents view life as something to be enjoyed, but the fulfillment of that joy comes from hard work and diligence. These people believe that the best time to work hard and save is when you are still healthy, energetic, and when they still have time to let their money grow with time. The profile below depicts this category.
Same as above, the blue line reflects life and health. The orange line reflects their wealth accumulation which grows quite substantially before major life events. Hence, they build up their capital and establish multiple sources of income in the form of rental properties, dividend paying investments, online business, and others. The returns on these are then used to cover the additional expenses.
What this approach does is that it creates another entity (capital) that will work for you. Its earnings or returns go to you. With the help of this new entity, you essentially prolong your life (black dash line) by improving the quality of your life. Imagine that instead of flying economy class which is so hard on your back, you can now fly business class.
Outcomes
I have put in here a picture of the outcomes of the two camps. I hope the pictures are self-explanatory. The one on the left is the Spend & Enjoy Life now. The one on the right is Word Hard & Save Now.
Bottom line
The Spend & Enjoy Life Now are stuck in the rat race. It becomes really hard to get out of this unless your salary increases by a lot and you control your expenses.
The Work Hard & Save Now enjoys a fulfilling life.
Tale of Two people
Lou (not his real name) is my a 35 year old friend. Now, what is interesting about Lou and his wife is that they got married early. He was 22 and she was 21. They had their first child when he was 24. After graduation, he worked for a petrochemicals company while she stayed at home. They didn’t live in a fancy neighborhood as they wanted to keep their cost low. They lived frugally and saved as much as they could. He shared with me that over the 11 year period, their 401K and after tax savings is about ~$250,000. Now, I don’t know how much returns he gets, but let’s say that he gets 4% to 6% return annually. This amounts to $10,000 to $15,000 per year.
This amount could essentially cover one year’s worth of food ($10,000), gas ($2,000), and other expenses ($1,000 to $3,000). Lou has technically got out of the rat race and is using his money to work for him.
James (not his real name) is an acquaintance of mine. He started working for an Oil & Gas company after college as an engineer and started with a $60,000 per year in salary. He and his wife married when he was 31. He is now 43 years old. I don’t know all the details of their finances, but I know they struggle with managing their finances. At one conversation, he mentioned to me that he feels like their money goes in and out.
I hope this does not come as a criticism, but I can see why they struggle with their finances. They both drive luxury cars and own a 4,200 square feet home. They also have a boat. With the exception of the home (which in my view is really a liability), the cars and boat depreciate in value which makes getting ahead in life more challenging.
Now, generally, if you are not getting ahead financially, you are risking your future. What if there’s a market down turn and you lose your job. With low savings, you may not be able to cushion the setback. I hope this does not happen, but I am also realistic enough to acknowledge that events like unemployment, sickness, etc. happen in one’s lifetime.
Further Commentary
A friend of mine told me about the book The Millionaire Next Door. What is good about this book is that it is based on empirical data. He said that many of the things that were mentioned in the book are all about being prudent with one’s lifestyle: live within your means, save early and invest wisely, avoid buying status objects, and purchase used cars, buy what appreciates and sell what depreciates.
These millionaires live comfortable lives as they age as they are not subject to external influences. They control their lives.
Action
I would love to hear your thoughts on how to be successful in life.