Dear daughter,
Recently, I finished a project that involved several people.
At the end of this project, I was invited to a social gathering to celebrate the success that we had in the project.
In this meeting, I meet new people. Very nice people by the way. They had different backgrounds: a salesperson, another worked in a non-profit institution, and another one is a teacher. And there were a few more who had different professions.
We were in a very nice place, having a few drinks, and the use of cell phones was not allowed. A great decision!
Sometimes, in social gatherings, people are busy with their cell phones instead of enjoying the moment with their friends. So, this was great!
At a certain point, someone asked a question related to money: what will you do if you had enough money?
As you can imagine, each of us answered something different. However, all of us mentioned that we will want to have this social encounter, even if we all the money we need.
That was probably because all of us were enjoying the moment, talking to each other, laughing, and having a nice drink.
And because of this topic of conversation, one girl mentioned that when she gets money, she “closes her eyes” and spends it. Because she doesn’t know what will happen tomorrow.
Humm, at this point I had to say what I think about this topic. But, I know how sensitive people are when talking about money and life decisions, so I had to think about how I start saying what I think about the topic.
I remembered at the time, a book I read that teaches you must first seek to understand and then be understood.
So, I started by asking why do you say you don’t what will happen tomorrow?
“No one knows what will happen tomorrow,” she replied.
“Can you elaborate more?”
“We are alive today, but tomorrow anything can happen. Imagine I save a lot of money and I cannot enjoy it later.”
She was obviously referring to the possibility that she might not be alive tomorrow.
“What if you live 80 years and when you retire you don’t have money, nothing to live from,” I asked.
She was quiet for a moment. I took the opportunity to reinforce the thought that she was having.
“It is similar to health insurance. When you buy a health insurance product, you are not planning to get sick, you are buying security.”
“It is better if you don’t have to use it. But if you need it, it is there.”
Something similar happens with life savings or investing for retirement. You should “forget” that you are investing or saving, and you might not be able to enjoy it.
The way I think here, is that if I need it, I’ll have it. That gives me freedom of choice and keeps me stress-free.
Now the whole group was paying so much attention, that I have to say: “Ok, I’ll stop now, I’m a teacher but this is a social gathering, not a class. I just give a long explanation because I was asked to”.
“It is not a problem,” they said. It is an interesting topic.
At this point, everyone in the group was so focused on the conversation. I stop talking because I didn’t want the meeting to be about what I had to say.
“But we have so many expenses, mortgages, loans, things that we need. How can we think about savings or investing for the future?”
Because of this, I said, you need it more. Usually, the people who earn less are the ones that need more discipline regarding their finances.
Did you hear that rich people are stingy?
“Yes they are,” a girl replied.
It might be true, but most of them aren’t. What they are is disciplined people. And because of that discipline is that they are rich, and they keep rich.
“Did you hear about someone that won the lottery and 1 year later is poor again? Or a successful sports start that gets rich and later loses all the money?” I asked.
“Yes, the stories are out there,” someone said.
“The reason why that happen is that they were not disciplined,” I said.
“How can we be disciplined?”
“The first step is to have a budget and stick to it”. If it is not in your budget don’t do it. Your budget should discipline you, on living under your means or living with less money than you make.
Secondly, you should pay yourself first, and then pay anybody else.
Because you have a budget, you know exactly what you need to pay your expenses. So, the difference on what you make less your budget, you pay it to yourself. That money is not to buy things. That money is to invest in your future.
If you do that on regular basis, you can be a millionaire after a certain time, depending on how much you invest and the return on the investment.
“How so,” a girl asked.
Let me give you an example.
“How old are you?”
“23,” she replied.
If you retire at 60, you still have 37 years left. Let’s say you save 5000 dollars this year and you invest that amount at the beginning of next year, and you get a 10% average return of investment during the 36 years you will be working.
If you do that, by the time you retire you can have 153 563 dollars. Only from those 5000 dollars, without adding anything else.
Now, will you be able to spare 300 dollars per month?
“Probably, if we budget it,” a girl said.
Great! You are understanding now the power of budgeting.
Let’s say that you add the 300 dollars to that investment every single month. If you do that, you will end up with 1,231,419.90 dollars, a millionaire!
And because of this, they were now paying even more attention.
But if it is that easy, to become a millionaire, why most people don’t do it?
Because people want to become rich quickly, they don’t want to wait, they don’t have the discipline, to do the same boring thing for a long period.
As one of you said, “if I get money, I close my eyes and spend it on what I like”. That is what we call immediate gratification. And that is what most people do.
But when you understand the numbers, you see the benefit of delaying gratification, so later you can enjoy more, especially the freedom.
Finally, they mentioned they were very grateful for the insights I gave them.
Then, I told them, they can do more calculations according to their own current situation.
Search on google for “compound interest calculators”, and you can enter your own numbers there and see how your financial future can be if you are disciplined enough to save and invest regularly.
Another tip I want to give you is to calculate how much interest you must pay when you have a mortgage, and how much of that interest you can save if you make small extra payments regularly. But that is a topic for another day.
“It seems that in every social encounter I have, I can see how the herd mentality works,” I thought.
Now, let’s change the topic and enjoy our drinks
Love you, Dad.