Wealth is What You Save, Not What You Spend

I have a whole category here at Free Money Finance called spend less than you earn. A few of my favorite posts from this category include:

• Even the Rich Need to Spend Less than They Earn

• It's Not What You Make, It's What You Spend, Part 437

• How You Can Become Wealthy

So when I saw this piece, I had to run it. The article has been provided to Free Money Finance courtesy of Marotta Asset Management. Here goes:

Several months ago my tennis shoes breaking. There were holes in the top of each toe and the soles had come loose in front so that they flapped. They were ready to be thrown out. I repaired them with duct tape.

I learned this technique from my college age nephew Daniel who repaired a pair of sandals with duct tape. When Daniel started paying for his own clothes he discovered that some of the most interesting and unique attire in Charlottesville could be found at the Salvation Army.

As Daniel says, “The vast majority of the things we spend our money on are unnecessary. Do you really need that new shirt? Do you really that new pair of shoes? Most of the time, the answer is no. The things we already have will easily suffice. The key to saving money is to only spend it on the things that are truly necessary. Never be too proud duct tape your old shoes and wear a pair of jeans with a hole in the knee. When it comes to finances, pride is foolishness.”

Daniel is on his way to being a wealthy man. Wealth is what you save, not what you spend.

Over a thousand millionaires were interviewed and two books (“The Millionaire Next Door” by Thomas J. Stanley and William D. Danko and “The Millionaire Mind” by Thomas J. Stanley) published the findings with some surprising results. 

The real lifestyles of the rich in Charlottesville would get very low television ratings. The rich are frugal to the point of being miserly in their spending, but they are also willing to take risks by investing their wealth in the markets, their businesses, and themselves. Their wealth is generated by what they save, multiplied by the magic of compounded investment return.

But their magic is first and foremost in how not to spend money.

They don’t buy expensive shoes or designer suits. They take their lunch in a brown paper bag. They enjoy activities that are free. They clip grocery coupons. They fly the red-eye stand-by. They don’t flush every time. They buy a used car. They live in a modest house. They repair their shoes with duct tape.

You wouldn’t know they were millionaires unless you looked at their investment portfolio.

Millionaires save at least 15 percent of what they earn - often more. They live well below their means, and they would describe themselves as frugal.

Want to know how to be a millionaire in just 20 years? Save $1,100 a month and invest it in the stock market averaging 11.5%. Saving $1,100 a month is our recommended 15% minimum if your income is $88,000 a year.

Lower income families will require a greater percentage or longer saving and investing to become a millionaire. For as little as $56.43 a month from age 20 to 65 your saving and investing will also grow to a million dollar portfolio.

Consider two people buying new tennis shoes. One person decides to “live rich” and buys a new pair of shoes each year for $50. The second person decides to “be rich” and repairs their shoes with duck tape. This frugal investor makes his shoes last two years and invests the $50 savings every two years in stocks earning 11.5%. Within six years, the frugal investor’s $150 savings has grown to $220 and is earning enough to buy him a $50 pair of shoes every two years. Within nine years his $250 savings has grown to $440 and is earning enough for him to “live rich” and buy a new pair of $50 shoes every year. After 28 years, the frugal investor’s $700 savings has grown to $28,000. His investment is earning enough to buy him a new pair of shoes every month. If he remains frugal for 46 years, his $1,200 savings will grow to $50,000 earning $480 per month. $50,000 just by lengthening how long you make a $50 pair of shoes last!

Many people mistakenly believe that their financial well-being is outside of their control. It isn't. Repair, make do or do without! Your financial future is made is every day's decisions to spend money or save and invest.

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As you might imagine, he's singing my song. ;-)

There's one quote in the piece that they have highlighted and set apart from the rest of the article -- and I wanted to be sure and emphasize it again:

The real lifestyles of the rich in Charlottesville would get very low television ratings. The rich are frugal to the point of being miserly in their spending, but they are also willing to take risks by investing their wealth in the markets, their businesses, and themselves. Their wealth is generated by what they save, multiplied by the magic of compounded investment return.

Great, great, great advice (and article). It's the philosophy that I've used to successfully grow my net worth and the one I recommend in all my articles here at Free Money Finance.

Comments

[WTJ]

often the urge to buy controls the mind of people, there's not much 'urge to save'.. hehe.. money do buy moment of happiness..

[MyFinanceForum.com]

If anyone has read "The Millionaire Mind", this should sound familliar. Wealthy people save and live conservatively. I think this is why so many "stars" go on the become broke - they live a lifestyle they are expected to have, even when they don't have the money to maintain that lifestyle.

[Bri]

It's always good advice to spend less than you earn, but I find the shoe advice terrible. Athletic shoes take a huge beating and should be replaced frequently. Wearing worn out or ill-fitting shoes can lead to serious problems with the feet, ankles, knees, and eventually back. If you run or play tennis 3+ days a week, you should replace your shoes every 3-6 months. It's for your health. So $50 is not a little price to pay for avoiding knee replacement surgery in 10 years.

[moneymonk]

I cannot have said it better "Wealth is What You Save, Not What You Spend"

Just investing and saving your money , you are already on the right path. I think what gets us in trouble is DEBT.

"Repair, make do or do without! " I agree we have to delay our gratification as much as possible

[robert t]

living below your means is not really living. You have only one life. Enjoy it as much as you can but just becareful and be smart in your spending. Shop for bargains; I say if you want and enjoy having that new pair of shoes than go for it. That new pair of shoe, provided it is bought it at a bargain price, may even make your life happier; If you are happy, than that can have a positive outlook on your health, emotion, and relationship. With that said, you are living. you are happy; You brought value to your life. rober t.

[robert t]

living below your means is not really living. You have only one life. Enjoy it as much as you can but just becareful and be smart in your spending. Shop for bargains; I say if you want and enjoy having that new pair of shoes than go for it. That new pair of shoe, provided it is bought it at a bargain price, may even make your life happier; If you are happy, than that can have a positive outlook on your health, emotion, and relationship. With that said, you are living. you are happy; You brought value to your life. rober t.

[bill]

I've done well in recent years and tried to save as much as I can and have found than the peace of mind my nest egg has given me is far greater than anything I can buy with it.

[Charlie]

I've just turned 24 and have only just learnt the meaning of being frugal. Instead of renting a nice flat and partying every weekend like most other people my age, I have moved back home and paid off all of my student debt in under two years. With the money I save buy not owning a car, making my own sandwiches for lunch and not taking a holiday abroad every year, I have built up savings of £4000 since November (and I am not on a great salary). Without the student debt, I can now put away at least £500 a month into a tax free savings account. Even with the currently terrible interests rates, I am earning money back each month.