Many people believe that creating wealth enough to provide them with real financial security is an impossible task. It is little wonder that so many hold this view when books like Kimberly Palmer’s 2010 book, Generation Earn, tell people they should save a full one-third of their income in their twenties, thirties and forties for any chance at a secure future.
With mortgage payments, auto loans, consumer debts and just simple living expenses competing for every dollar earned, it just isn’t realistic to believe that people can devote a third of their income to saving.
The truth is that saving less, far less than a third can be more than enough to put Americans on a firm financial footing and to provide a stress-free financial future.
Realistic Wealth Building Program
In 1926, a classic personal finance book, The Richest Man in Babylon, by George S. Clason was first published. The book offers seven timeless principles of creating wealth that form a much more realistic wealth building system than those espoused by financial experts and pundits today. Methods that worked in Clason’s day are the same that work today.
Clason’s recommendation was that people should save ten percent of their income rather than a third and that amount would be more than adequate for putting them on the path to financial prosperity. “Pay yourself first” is a phrase so old and so oft repeated that it has become something of cliché yet that doesn’t negate the truth embodied in it.
How to Save Ten Percent of Income
Too many Americans have adopted the habit of spending 110-percent or more of their income and accumulating mountains of debt instead of learning to save ten percent and living on the remaining ninety. Saving ten percent is the foundational principle in a sensible approach to creating wealth. It is neither difficult to do nor does it require adopting a Draconian-style existence.
The simplest and most effective way is putting a ten percent savings plan on automatic pilot. This can be accomplished either by setting up a payroll deduction or automatic monthly transfer from checking to savings. Most people find that in short order they don’t even miss the ten percent removed from the spending pool.
Ways to Make Money on Savings
Saving ten percent is a great first step in wealth building, but that, according to Clason must be followed up with putting that money to work so that it grows. There are literally an almost infinite number of ways to invest money these days running a gamut from ultra-conservative to extremely risky.
One could simply deposit the ten percent savings in a bank savings account. The advantage in doing so is of course safety but the disadvantage is anemic returns. Striking a balance between risk and reward is the way to grow savings towards a secure financial future.
Another classic personal finance book, The Wealthy Barber, written by David Chilton and published in 1991, offers some solid advice on where to invest the ten percent to achieve growth with modest risk. The mythical barber in Chilton’s book, recommends putting the money to work in a global-type mutual fund.
A mutual fund is a professional managed pool of money invested in securities like stocks and bonds. Most people simply don’t have the time or knowledge to make money investing in individual stocks on their own and that’s why having the services of a professional money manager can be advantageous. Global funds are funds that invest not only in U.S. securities but in those from firms abroad. This increases safety through diversity since fund performance is not dictated solely by the conditions present in a single economy.
The Math behind Wealth Creation
The proof of the effectiveness of any wealth creation strategy is in performance. According to a press release issued September 16, 2010 by the U.S. Census Bureau, the median household income in the United States in 2009 was $49,777. That works out to about $4,148 each month.
Using ten percent of that monthly figure and the projected rate of return of 10.5% on stock market investments found at the My Financial Awareness website, here are the amounts of wealth that could be created over three different time periods;
20 years – $336,197
30 years – $894,475
40 years – $2,857,575
Clearly a person who starts saving ten percent at age 25 has an advantage. They can expect to amass close to $3 million by age 65. Yet even a person who delays starting a ten percent savings program until age 45 would have a respectable amount of wealth exceeding a quarter million dollars. The lesson is that it is never too late to start creating real wealth and it can be done by saving and investing a mere ten percent of monthly earnings.
Palmer, Kimberly. Generation Earn: the Young Professional’s Guide to Spending, Investing, and Giving Back. Berkeley, CA.: Ten Speed, 2010. Print.
Clason, George S. The Richest Man in Babylon. New York: Signet Classic, 2004. Print.
Chilton, David. The Wealthy Barber: Everyone’s Common-sense Guide to Becoming Financially Independent. Rocklin, CA: Prima Pub., 1991. Print.
“Myths.” My Financial Awareness. Web. 03 Nov. 2010.
“Newsroom: Income & Wealth: Income, Poverty and Health Insurance Coverage in the United States: 2009.” Census Bureau Home Page. Web. 03 Nov. 2010.