Tag Archives: building wealth

Huge Difference Between Millionaire and Billionaire

Would you like to build up a million-dollar nest egg by the time you retire? For middle-class earners, that goal is challenging but possible if you start at age 25 and save $1750 a month. Many married couples could do this by maxing out their 401(k) contributions. Or you could take the route that many people follow and build a small business into a million-dollar asset.

What if you want to accumulate a billion-dollar nest egg instead? Starting at the same age of 25, you would need to save $21 million a year. Good luck with getting any employer match on that.

There’s a vast difference between a million and a billion. It’s completely misleading when activists, politicians, and the media refer glibly to “millionaires and billionaires” as if the two are almost interchangeable. Someone with a net worth of one million dollars isn’t even close to being in the same category as someone worth one billion.

Here are a few more examples to clarify the difference:

• One million seconds from now is about 11 and a half days away. One billion seconds from now is about 31 and a half years in the future.

• A million hours ago was 114 years in the past, early in the 20th century; our ancestors were using electricity and telephones. A billion hours ago was over 114,155 years in the past; our ancestors had evolved into Homo sapiens but were still using primitive stone tools.

• Put one million ants on one side of a scale and a female Asian elephant on the other side. The million ants, at around six pounds, would hardly register against the elephant’s three tons. Put a billion ants on the scale, however, and they would balance or even outweigh the elephant.

• One million pennies stacked on top of each other would make a tower nearly a mile high. One billion pennies stacked on top of each other would make a tower almost 870 miles high.

• If you earned $45,000 a year and stashed it all under your mattress, you’d have one million dollars at the end of 22 years. To accumulate one billion dollars at that same rate, you’d need the help of your many-times-great grandchildren, because it would take 22,000 years.

In today’s world, being a millionaire represents financial security, not vast wealth. At a withdrawal rate of 3%—the amount most experts consider sustainable—an investment portfolio of one million dollars will provide an income of $30,000 a year. Combined with Social Security, that would be enough to live comfortably but not lavishly in retirement.

Three percent of one billion dollars, on the other hand, will furnish an income of $30 million a year; definitely private jet and gated estate territory.

If millions and billions aren’t challenging enough, here’s a quick look at trillions. One trillion is a million millions, or a thousand billions. It would take one thousand elephants to balance the weight of one trillion ants. Astronomers estimate the number of stars in our Milky Way galaxy between 100 billion and 400 billion; not even close to a trillion. No wonder it’s so hard for most of us to wrap our minds around information like, “The current US national debt is more than 18 trillion dollars.”

Becoming a millionaire? It’s not only achievable, but wise if you want financial security in old age. Becoming a billionaire? You’d better plan to invent something amazing, write several dozen international best-sellers, or build an incredibly successful business. Becoming a trillionaire? Don’t waste your time thinking about it. For good reason, the word isn’t even in the dictionary.

Passive Investing: Lower Costs, Lower Risk, Better Returns

“Buy low and sell high.” That was my simple approach when I was a smart young investment advisor. I poured over a company’s balance sheet, earnings statements, and forecasted returns. Then I bought those companies that were bargains and waited for my gains to roll in. More times than not, they did—eventually.

The problem came with the “not” and “eventually.” A majority of my picks did go up in value, but the minority that were “nots” still lost enough to have a negative impact on my bottom line. Even more frustrating, some of my “nots” turned into gains “eventually” after I sold them.

My investment returns were similar to findings from Dalbar, Inc., a financial services research firm. Dalbar’s studies have shown that average active investors barely beat inflation over the long term. They significantly underperform investors who put their money in an index fund of stocks and leave it alone.

So much for my early investment brilliance. Continue reading

Spenders, Savers, and Successful Savers

Are you a spender or a saver?

According to Scarborough, a market research firm, only 9% of adults in the U.S. label themselves as spenders. This is the percentage who “mostly agree” with the statement, “I am a spender rather than a saver.” On the opposite side, 29% “mostly disagree” with the statement and are considered savers. Presumably, the 62% in between consider themselves to have well-balanced financial habits that include both spending and saving.

Given these numbers, it would seem that most of the adults in this country ought to have healthy savings accounts. Unfortunately, that’s not the case.

According to a report released in March 2013 by the Employee Benefit Research Institute, 57% of U.S. workers have less than $25,000 in total household investments and savings, not including the value of their homes. The Social Security Administration’s current figures show 34% of American workers have no savings set aside specifically for retirement.

Something doesn’t quite add up. Either a lot of Americans aren’t willing to admit that they are spenders, a lot of Americans are so poor that they can’t afford to save, or a lot of Americans are delusional.

Or maybe a lot of us just have different definitions of “saving.” Here are a few money habits that might encourage people to think of themselves as savers, but that don’t necessarily add up to being successful savers:

1. Buying things on sale. Waiting for discounts on items you need and want is a wise and standard practice for frugal shoppers. But you aren’t a saver if you buy bargains that you don’t need, might not even really want, or can’t afford. Maybe that $150 pair of shoes is half price. Yet if they will just sit in your closet, you haven’t saved $75. You’ve spent $75.

2. Having money in the bank. Yes, putting money into a savings account is the first place to start saving and a great habit to teach your kids. But once you have accumulated an emergency fund, keeping your money in the bank isn’t a good savings habit. Over time, savings accounts and CD’s don’t pay enough to keep pace with inflation. Money in the bank may be safe, but it isn’t really an investment because it isn’t growing. Mutual funds that include a well-diversified range of investments are far better places for your long-term retirement savings.

3. Not spending anything. There are times when choosing not to spend money now will only cost you more money later. Failing to maintain your car or do home repairs are two common non-spending habits that may seem like saving but actually turn into spending.

4. Saving for someone else. The time-tested advice to “pay yourself first” usually means taking money off the top for savings before you spend anything. Yet this has another application, as well. Make saving and investing for your own retirement your first priority. It needs to come ahead of saving for your kids’ college educations, weddings, or first homes. This may seem selfish or greedy, but in fact it’s the opposite. When you provide for your own financial well-being in retirement, your kids won’t end up having to help pay your bills.

When we’re asked to label ourselves, it’s normal to tend to choose answers that fit the way we would like to think of ourselves. I’m sure most of us would prefer to think of ourselves as savers rather than spenders. But if we really want to become successful savers, we can’t settle for the money habits we wish we had. We need to look at the money habits we actually practice.

Finding the Right Path to Wealth

After three decades as a financial planner, working with successful wealth-builders, you’d think I would have a clear idea of the right path for creating wealth.

Instead, what I’ve learned is that there is no such thing. Here are just a few of the paths that aren’t the sure routes to wealth they might seem to be:

1. Education and career choices. Going into a field like law or medicine might seem to guarantee financial success. Not necessarily. I’ve seen many physicians, for example, who have accumulated significant wealth. I’ve seen just as many who live paycheck to paycheck.

2. High earnings. Again, this isn’t the reliable predictor of wealth it would seem to be. Continue reading

The Art of Getting Value

People who successfully build wealth have one trait in common: they understand the art of frugality.

These unassuming millionaires know how to live on much less than they make, and they know how to save money. But those behaviors alone aren’t enough. Not spending money today does not always result in having more money tomorrow.

Frugality for its own sake can result in doing without things that matter to you, failing to take care of basic needs like your health, and living with a sense of deprivation. It can also lead to spending more money, not less, in the long run.

Frugality for the sake of enhancing your life, on the other hand, features an eye for value. Most people who build wealth are masters at the art of getting value.

Continue reading