Sunday, February 12, 2012

Who Wants to be a Millionaire?

Our nation is obsessed with the word Millionaire.  Almost every one chases the promise and enough catch it that in droves we watch, listen, and follow after those who might show us the way.  The lotto is the most obvious of the quest where for supposedly $1 a life can be instantly changed.  For those who shun this approach as unreasonable odds there are countless books, speakers, and methods that promise if you just listen and do than YOU TOO CAN BECOME A MILLIONAIRE!

What if, when we became adults someone told us that they were handing over 1 million dollars to us.  How would that change our life and thinking?  What would change about our lifestyle, spending habits, goals, and giving?  There is one catch would not be given in a lump sum, it would be given in monthly payments.  These payments may be the same amount each month or may experience some up and down fluctuations.  But, we could rest assured that we would get our million or even more.

The truth is that for most of us it will or already has happened!  Does this surprise you? 

1 million divided by 40 years equals $25,000.  Federal guidelines tell us that is just slightly over poverty level.  We know that most people will make over that in their earning careers. 

Let me state it again just to make the point:  If you make an average of over $25,000 in your lifetime career you will have made more than $1 million dollars before you retire.  Shocking isn't it? 

So what is the problem then?  It has got to be not just what we make but how we spend.  We have missed or something has led us to miss something very basic that elementary math should teach us.  Before we just to the conclusion that A) Carol is crazy, or, B) That can't be right,  let's step back and try to figure out what is really going on here.

I admit, this is something I am just learning myself and didn't even begin to consider until I was well into the process of making my major life decisions.  Once these major steps have been taken one cannot easily wipe the slate clean and start over.  There are responsibilities to fulfill and mouths to feed so any adjustments must take these into consideration. 

For most people the three biggest expenses are:
1.  A roof over their heads.
2.  Transportation.
3.  Food.

Some would have to add medical problems to the list and this is the wild card of our time and I don't plan to deal with that one today except to say that back in the 70's many of us had excellent medical care at very affordable prices so what we are experiencing now is based on policy and business practices and not on necessity.

So lets imagine for a minute that we were 18 years old and were handed a lump sum check of 1 million dollars and we knew that it was our basis to last a lifetime.  What would we do?

1.  Put a down payment on a nice house. 

Screech!!!! Now mentally make any sounds that come to mind of putting the brakes on as fast as you can.  That is one of the biggest bear traps we get our foot into and why so many end up in more debt when they have money that when they don't.  It's the leverage game. 

Let's start over...

1.  In today's housing market there are many nice houses all over the country that can be purchased for under $150,000.  We are not talking fixers here except maybe some cosmetic stuff.  These homes are 3 and 4 bedrooms, 1 - 2 1/2 bath, garage, and nice yard.  That would be our first purchase.  If we were country minded we could head for the hills and get some acreage as well for the same price. That would leave us with $850,000.

Oops, no, even in my dreams Uncle Sam shows up to collect.  So, we divert here and pay our taxes.  This is a total guess but let's say 33% off the top or $330,000.

And, for the tithers or those who are committed to other charitable contributions that is another $100,000.  Some may choose to help pay off their parents mortgage or assist with medical bills. And, yes, this would have been the first step. For those opposed to tithing or other giving please note that the amount is FAR less than what the government requires. 

So, our new working total is:  $420,000.  It truly is shocking how fast money can go...

2.  Next, I would buy a good 3 year old used car with good gas mileage.  Why not new?  When the car is driven off the lot it immediately looses value.  Additionally, the insurance on a new car is much higher.  Let someone else cover that.  How much should we spend?  The most I have ever spent on a car is $5,000 but for our imaginary car let's go bigger and say $10,000 to $15,000.  Is that sufficient?  Since I'm riding the bus right now I'm not sure.  What about for the husband or wife?  Ahh...we are 18 so most would not have that expense.

So here we are 18 with a house and a car and at least $400,000 to last the remainder of our lives as a basis.  How much should we allow for monthly expenses of food, utilities, toys, etc?  Yes, it is at this point that many will blow the rest and then spend the remainder of their lives saying that 1 million dollars is just not enough to live off and we need government programs to help out. 

This is really where our creativity and temptations come in.  Do we put it in the bank, invest in the stock market, start a business, or what?  So many quality sales pitches and even government incentives to guide us to the path others want us to make to line their own pockets.  Maybe we should go to college to gain more skills.  Maybe we should dedicate our life to worthy causes and just take a small amount each month.  The answers will vary as much as the person answering but I encourage you to dream your dreams and write them down.

"But Carol, this is all so silly" you might think.  "I have a mortgage, 3 kids, and am 40 years old".  Well stick with me here if for no other reason but because it's a new idea and it is often the crazy ones that give us our own brilliant ones.  And, it is fun to think about.

Ok.  We each have $400,000 that must last us the rest of our life.  But we have a roof over our head, no mortgage, and can choose to either go to work or not.  The person who surprises me the most sometimes is myself.  I have done things that I did not even know were in me until I did them so I cannot say for sure but this is what I would hope I would do given the proposed scenario.

1.  Find a job or cause that I love and commit myself to it.  This might even be my own business and may require some start up funds but if so I would set a limit on the amount.  I am not 18, my kids are grown, I don't really want to go to college full time.  If additional funds were earned I would plan to live off those.
2.  Buy two investment properties with at least one being in a different part of the country.  The reason for the diversity would be because of the possibility of natural, social, or economic crisis.  Better not to have all ones eggs in the same basket.  At least one would be a residential property.  Remember, these would be paid fully in cash so all income would be a recovery of my initial investment and then income and appreciation.  The goal then would be an investment return and then cash income.  The second piece would be food or timber producing ideally in an area that may have future development.
3.  Buy gold or other precious metals.  Not while the price is so high but when the price goes lower.  The reason for this is not just for investment but because if I was 18 I would want the funds in a form that I would hope would be available in 40 years and some hedge against inflation. 

If I were to decide that I wanted to not work or invest the balance it would give $8,000 per year for the next 50 years.  This would be $666 per month and I automatically do not like that number so would not choose that option.  I would automatically go higher or lower.  In addition, all rental income would be going into our pockets along with other returns on investments if we have chosen wisely.

Back to reality.  Or at least an idealist version of what reality could be.

Recently I commented to a friend that a person could buy a home in cash by age 25.  She gives me no slack and practically scoffed at me and told me to prove it.  So I had to get out my calculator and see how close I could get.

My friend has two kids that were close to achieving the home ownership goal at a very young age. First, they worked every summer and banked their money. This started at age 12 in the blueberry fields and babysitting.  Later one became a cook, one a waitress - both got tips.
My son’s first job was the family landscaping business, then county landscaping, an ice cream store, then at the bank part time at age 16.  When he graduated he went full time at the bank as a personal banker which was 2 -3 levels above his entry level position.
We all know that cars and driving is the on the top 3 list of things teenagers think about – IF it cannot be avoided or delayed buy what you can with cash.  An older cheaper car is also less insurance.  One of my son’s was able to buy a dandy for $500 from a grandma who had given up driving.  When he wanted something new I bought it from him and drove it for years.
The financial goal would be $5,000 - $10,000 saved before getting out of high school.   The second key is to get a job at a good company when in high school so you can be ready upon graduation for good advancement.  Restaurants and fast food establishments are some of the most willing to hire young people and they provide valuable work experience in cashiering, cooking, and work ethics. Even if it is not a career plan they are stepping stones to goals.  Even if they were to stop right here and go no further in our scenario that would give a good downpayment on a home to a young couple who wanted to start out assuming they had each been as responsible with their time and money.  A modern day version of a hope chest.  For our purposes we'll build the next level.
After graduating from school they continued to live at home worked full time and were able to bank most of their money.  They should contribute to food and utilities and participate in household tasks. If $1,000 to $2,000 per month were saved from age 18 to 25 that would be $84,000 up to $164,000.  Can you even imagine walking out the door of your parents home with this much cash to get started?  Even if they wanted to accelerate the plan and leave at 21 the amount is significant.
When a sizable amount of cash is saved it's time to look for a place and preferably one where sweat equity reduces the price by at least 15% - 25% of comparable value.  Yard work, painting, and even tile or linoleum, etc. are things that most can accomplish with some instruction. A structural inspection will reveal any non- fixable or expensive stuff.
Yes, college delays the process but should end up with more skills translating into higher pay.
If one does not want to be this extreme they can modify the idea and have a substantial down payment to keep their payments low. The biggest cost of a house is not the sales price or principle, it is the interest, so the more that can be avoided the better.

I firmly believe that our national habit of boosting kids out of the home at age 18 has done them and their children a grave disservice.  Most are unprepared physically, mentally, emotionally, or financially for our sink or swim method of parenting.  If they are ready or no longer willing to be a productive member on the family then by all means but as a desired parenting strategy the only thing we are teaching them is to live paycheck to paycheck and try to raise a family with never enough.  Even those who seem to be succeeding are often so far in debt that the cycle is almost impossible to break.

National Implications

Think for a minute about how the entire fabric of our national economy would change if we all actually owned our own homes instead of having a monthly mortgage payment or housing expense.

Would mothers of babies still have to work or could they raise their own children?

Would father's feel the pressure of unending bills and need to numb it with football games where someone actually wins at the end of the game?

Or, could they actually just enjoy it and feel good about their lives, accomplishments, and happy families.  Would men be so quick to jump ship when they knew a baby was on the way or would they be able to have the confidence that they could handle it without women bickering in their ears about "mo money" with babies crying in the background?

Most of us missed the boat of being able to pay for our homes in cash up front like the above scenario but we can help our kids to do things differently.  We can also start were we are right now and set some goals and take some actions to get ourselves out of this mess that we have allowed ourselves to get into.

For the record, this is not what I did.  I left home with no money, got married, got a job, had a child, and did the whole common credit as you go always wondering why it was taking so long to quit living pay check to pay check.  If I had not worked at a bank or taken accounting I might still not know what a balance sheet even was.


I hope that you won't dismiss this as just another blog post for I know that what I am sharing is dynamite.  If we could really GET IT, myself included, it would explode the economic crisis to it's core and we could rebuild our nation with the strength and integrity that those who have gone before us worked so hard to achieve.  So please, think about it, talk about it, pray about it, and pass it on.  One family at a time.  That is how we must change and recover.

I am a firm believer that the 30 year fixed mortgage is a good and wonderful thing to help the American people keep a roof over the heads of their families.  It is the product that hopefully will provide a low enough payment to give stability for the ups and downs we all go through.  BUT, that should be our safety net not our goal.  If we start wherever we are at and begin to despise the fact that we are in debt and do those things to minimize, get rid of, or pay it off we will be money ahead.

Young love and starting from scratch can be a beautiful thing as a couple builds their life together.  I was married at 17 and don't know that my hopes and feelings have been as pure and powerful since.  But as parents it is our job to prepare our children to be ready for all that is coming their way and that includes the need to have a roof over one's head and food on the table and of course to share love with another whether it comes at 17, 27, or a lifetime of singleness.

Maybe we need to be reminded that we are MILLIONAIRES.  Now how are we going to manage these vast resources we have to produce a gain and not bury them in a hole to rot or waste them in uninformed or shortsighted thinking.


Practical Parsimony said...

I abhor hearing parents say that they have told the children they each must leave home at eighteen. I try to talk sense into the ones I hear. But, this kind of mentality leads to early marriage and children born out of wedlock. My son lived at home with his father after he grew weary of fraternity living. He lived at home after he got his first job teaching.

Then, when he had a substantial down payment, he bought a home. He married when he was 37 to a teacher who was 27. THEN, he made babies. If he had been forced out of his father's house to fend for himself, he would never have what he has today and be so secure financially.

Kris @ Everyday Tips said...

Part of the problem is that people want to be millionaires yet still maintain a certain lifestyle. Take myself for instance. I would have a lot more money had I stayed home and gone to college. However, I would have traded my sanity for money, and that just isn't worth it. I had a lot of student loan debt, but it was totally worth it.

However, our economic ills go way beyond that. If people were only 'wasting' their money by going away to college, we would be all set. It is the new car out of college (or high school), the huge mortgage that should have never been approved, etc.

Great post.

Carol Schultz said...

Thank you both for the comments. It was a fun post to write. What I hoped to get across is preparation is the key. It's not so much what age a person marries at or what career goals they hope to achieve it is being prepared to pursue them.