Brad Wardell's views about technology, politics, religion, world affairs, and all sorts of politically incorrect topics.
It's just easier to be a failure
Published on November 4, 2007 By Draginol In Politics

Over the years I've gotten to see first hand how people make decisions that make them financially successful or financial basket cases.

The sad thing is, it's not very hard to be financially successful. It takes no luck. It takes no particular skill. All it requires is a sense of DELAYED GRATIFICATION.  A sense that, sadly, most people don't have.

Becoming financially successful is the simple matter of building assets that appreciate in value over time at a greater rate than inflation.

That's it.

And yet most people don't do it.  Most people are consumers. They take their earnings and use all of it to consume things -- music, TVs, stereos, cell phones, video games, consoles, dinners out, lunches out, clothes, vacations, etc.

In a recent demographic study, most people defined as "poor" (family of 4, household income less than $30,000) owned at least 1 cell phone, owned a car, had a DVD player, had at least 2 televisions, had one computer game console (the study was a couple years ago so it doesn't say what console they had). And near majorities had a computer, had an Internet connection.

In other words, the poor are generally consumers. What they make they spend on consumables. 

I see it all the time first hand. People who make relatively little still manage to have new cell phones, iPods, nice clothes, a console, a better car than they really can afford, etc.

Companies can offer 401K plans, even with matching funding, and still most people won't make use of it.  They can't, they say, because they have debts.  But if one looks closely at those debts, you'll find an expensive hobby or expensive consumption of other kinds going on.

Consider this:

If someone at 25 puts in $2,000 a year into a matching 401K, by the time they hit 55, they will have about $600,000.

Even if the person only puts in $1,000 a year, a trivial amount (less than the average annual raise people get), they'd still have $300,000 or so at 55.

But people won't. Because they have no impulse control. No delayed gratification. They want stuff now...

..and many of them will bemoan the minority of people who do actually build assets and end up letting compounding interest make them financially successful.

One last thought to consider:

You have two young men, both are 25 years old and make say $45,000 a year. Not a bad amount of money.

Person A blows it all on going out to eat every night, having the latest greatest gadgets, etc.

Person B spends pretty good too but eats out a bit less, replaces his cell phone and computer once every other year, etc.  And instead puts in $3,000 into a matching 401K.

Time passes. Person A is 55 years old and has nothing to show for his consumption.  Person B has $900,000 in the bank! At 65, if he continues forward, he has $2.2 MILLION.

I try to hammer this home to as many people as possible.  Most people know they should be doing this but they don't.

That's why I ultimately say "oh boo hoo" when I hear people complain that there's a "shrinking" middle class. The answer is, yea, you have some people who invest (a small %) and most people who consume. And there's your single biggest difference.

 


Comments (Page 2)
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on Nov 05, 2007

Draginol,

Truth be told I largely agree with you on this topic. However, I think that the problem largely lies with a lack of proper education. Something that I believe should be part of the public school system are mandatory courses on basic financial principles, spanning several years. These are classes that need to be taught at the very least beginning in Junior High, if not earlier. And no, I'm not talking about the "how to balance a chequebook" portion of Home Ec or "life skills" or whatever they call that fluff-course where they also teach you to bake a cake. I trust you remember this part of public schooling as well, where they made you create a fake budget, and then the next week gave you an egg or bag of flour to take care of as a virtual child? Unfortunately that no longer cuts it in this day and age.

The school system needs comprehensive financial education that will teach kids the ins and outs of looking after yourself financially. I do agree that a lot of the problem lies with the need for instant gratification and some people truly are idiots, but I think the majority of people who find themselves in these situations didn't know any better. And yes, you're right that that's no excuse, but consider this:

Throwing someone into todays world with no real exposure or education in financing is like giving someone who's never driven the keys to a car. Yes, some people will intuitively pick up on it and you're right it's not that hard or demanding, but a lot of people will make bad decisions that they wouldn't have if only someone had sat them down and properly spelled out the consequences of such actions. For example, one of my friends continuosly finds himself in financial trouble. He's got a good job, decent pay but he's made bad decisions with his money and so his credit is in the hole. He was trying to buy a car but of course can not get normal financing because of his past- but the other day he was so ecstatic that finally his problems were solved. A local dealership put an add in the paper saying "No credit or bad credit, no problem!!" - they were offering car loans at 30 %!!!! provided of course that the purchaser give proof of income. If after the first year you make all your payments, then they cut the rate down to 25% for the remainder of the loan. The scary part is he thought this was a steal of a deal.

It's the same concept as the fellow who goes into the mortgage office, thumbs hooked in the belt-loops of his levis and says "I wanna house an'all do whatever' it takes!" To the mortgage broker, this person is wearing a sign on his back that says "please rape me", and rather than do the sane thing and turn him down or explain his position, the broker takes him to the cleaners.

You can tell almost immediately when you meet someone if they've had proper education in financing- this education can come from your parents, friends, and quite often is included as part of the curriculum at expensive private schools. And yes, it can often come from the school of hard knocks.

As pointed out in the article and following comments, people with proper understanding of financing usually wait until they are somewhat established before having a child barring any crimes of passion  and tend to have fewer children. People with a lack of understanding tend to be baby-making factories regardless of their economic situation, which tends to only compound the problem!! 

on Nov 05, 2007

Delayed gratification is one thing, but I don't really see the point in giving up everything now in the hope of living long enough to enjoy it later.

$2,000 a year is giving up everything now?

How about this: $1,000 a year starting when you're 25 will give you around $350,000 when you're 65.

That's less than twenty bucks a week.

Come on, that's hardly a sacrifice. 

And if you work at a company with matching 401K, they'll give you another $1k to match.

 

on Nov 05, 2007
Something that I believe should be part of the public school system are mandatory courses on basic financial principles, spanning several years.


Agreed, Arty. I have long contended that the average high school student doesn't need courses in calculus; they need courses in basic household finance. Now, a student on a college track is another issue entirely, but CORE courses should concentrate more on practical mathematics than theoretical.
on Nov 05, 2007
For example, one of my friends continuosly finds himself in financial trouble. He's got a good job, decent pay but he's made bad decisions with his money and so his credit is in the hole. He was trying to buy a car but of course can not get normal financing because of his past- but the other day he was so ecstatic that finally his problems were solved. A local dealership put an add in the paper saying "No credit or bad credit, no problem!!" - they were offering car loans at 30 %!!!! provided of course that the purchaser give proof of income. If after the first year you make all your payments, then they cut the rate down to 25% for the remainder of the loan. The scary part is he thought this was a steal of a deal.


Unfortunately, for many of us, a car is a necessity.

I have thought a practical approach would center around charging a higher interest rate, and holding the extra interest in escrow and refunding that balance when the account is paid in full if all payments are made on time. That would offset risk, yet at the same time teach the borrower something about the rewards of timely payment. But unfortunately these businesses (like the infamous payday loan places) are not there to help the poor, they are there to exploit them.
on Nov 05, 2007

Truth be told I largely agree with you on this topic. However, I think that the problem largely lies with a lack of proper education. Something that I believe should be part of the public school system are mandatory courses on basic financial principles, spanning several years.

It wouldn't do any good.  Look at this thread. You have plenty of people who know they should be doing this.

Schekker up there won't even set aside twenty bucks a week. People where I work certainly know too, they're educated. They just want their toys and other consumables right now and can't spare even a token amount.

So what happens is that many of these people will start to demand higher taxes on other people to pay for their lack of foresight.

They won't even go without a very modest amount of stuff early on in order to ensure that the last 30 years of their life are spent very comfortably.

Someone who is 25 today will probably live into their mid 90s at the very least.  Do they really plan to work from 65 to the day they day? Or is their plan to live off of whatever scraps of social security are left?

And people don't have to wait until they're "old" to benefit.  I'm 36 now, I started investing when I was 23. I have, purely through investments, doubled what I put in during that time. 

During a number of those years, my income was pretty low but I always invested very heavily.

Now, I'm 36 and I bought that cottage on the lake:

It will appreciate in value as well but I also was able to pay for it mostly with my returns on investment (I could have paid for it entirely with just returns on my investments but I didn't want to take too much out).

That's because in 13 years, what I put in doubled.

In the 90s, my average pay was not very high. So most of these investment years weren't where I was making "big bucks" personally.  I didn't even own a stereo until 2005.  But with just a little delayed gratification, even in 13 years I was able to see benefits.

In another 13 years, my investment will likely bring back a 5 to 1 return.

And in 13 years after that, it'll be 10 to 1.

Nothing is gauranteed. But these numbers I speak of have held pretty true for the past 50 years.

Consider this: Someone who puts away 20 bucks a week starting when they get out of college could celebrate their 40th birthday with a $30,000 cash return on their investments and still have all the money they invested in remain. I.e. $30,000 of "free" money.

on Nov 05, 2007
Glad I'm not at the starting gate yet. But when I hit 25 I'll probably have started retirement saving. If I haven't, it's because something has gone terribly wrong.
on Nov 05, 2007
He's got a good job, decent pay [...] The scary part is he thought this was a steal of a deal.
Which particular good job with decent pay is available to people who think 30% interest is a good deal?
on Nov 05, 2007

 

Someone who is 25 today will probably live into their mid 90s at the very least. Do they really plan to work from 65 to the day they day? Or is their plan to live off of whatever scraps of social security are left?

Personally I am banking on the nanotech industry to keep the average person alive at least a few centuries. I can't wait to get my eyes replaced with optical battle implants! Retirement won't be a problem because we'll have invented replicator technology like in Star Trek, we'll even have communicators (except you'll be charged through the nose to use'em by AT&T)

Consider this: Someone who puts away 20 bucks a week starting when they get out of college could celebrate their 40th birthday with a $30,000 cash return on their investments and still have all the money they invested in remain. I.e. $30,000 of "free" money.

Again, I agree. The problem is that although the basic concepts are very simple, in truth personal financing is a very intimidating, confusing topic for a lot of people. It's the same concept as someone who doesn't know a lot about auto-mechanics taking their car into the garage. They mean well, but don't know very much about what's going on under the hood- therefore allowing the mechanic to take them for a ride on prices if he so chooses (I think everyone has at least one story about things like this)

Most people do want to invest and have money for the future, but the topic is like an alternate universe where everything is mysterious and scary to these people- as soon as the alphabet soup starts it's like trying to decipher a long lost language! This is where education should come in to take away a lot of the confusion and myth and give people a basic run down on investment, interest rates and putting away money for the future. My problem is this- the average person has no real understanding of RRSP's, 401K plans and the like. This person could go into just about any place offering such plans and be convinced that that particular companies plan or option is the best for them- because they literally don't know any better! For a lot of people they end up going into a firm and saying "I want to invest money because I know I need future money, but I don't know anything about retirement plans OR the differences between the various options" This will make your banker rub his hands with glee to which he will assure you that you're in good hands, now start forking over your money!!!

Now, the scenario of getting ripped off doesn't happen all that often but it is one of the big fears people have about financing. They think "because I know absolutely nothing about the mechanics of financing, anyone who I go to with my money could very well lie to me, rip me off and I wouldn't even know it"

It's exactly this kind of fear that better education would help to strip away. As they say, knowledge is power.

 

 

on Nov 05, 2007

For me, I'm a bit split on the savings vs instant gratification.  It's entirely due to bad impulse control too, and I know that, so I have to do things that force me to not be able to overspend.  I got myself into a lot of trouble the first 3 years out of college, and I'm now about a year of lean-times from getting fully into the black.  Poor decisions, bad impulse control, and one case of "screw it, it'll hurt in the short term but help in the long term" (taking the job here and moving... super-expensive to do in the middle of summer).

But I've always done the 401k thing.  At my last job I built up a very healthy fund (contributed near 4k/yr) that I am now ready to roll out into a managed IRA which should give me much better returns.  I'm in the 401k here too and with the matching will have a decent fund from that in a few years too.

For me, I have to set the money aside for things before it ever even gets to my checking account.  It's a form of discipline I guess... At least I recognize my problem and am doing what I have to to fix things.

on Nov 06, 2007
Personally I am banking on the nanotech industry to keep the average person alive at least a few centuries. I can't wait to get my eyes replaced with optical battle implants!


You can have your battle implants, I'm going with the X-ray corneas. Just imagine how far plastic surgery technology is going to advance in the next century -- OMG. But seriously, one thing about saving money today is that the stuff you can buy with it in the future is going to be so much better than what you can spend it on today. Screw X-box, I'm saving up for a tasp. Link

I personally save a lot, but it doesn't make me feel "successful" as such. It just makes me feel secure, and virtuous. The really successful can spend and save at the same time. Security is the selling point, for me. What can you buy that makes you feel as good as not needing your next paycheck, not worrying about how to pay for a toothache, not having to stay at your job because you can't afford to quit?
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