For most of summer 2016 I was preparing for my move to NYC. Like any future New Yorker I was figuring out my living situation, researching gyms, and looking up brunch spots. In early July, my pops asked me if I had created a budget. Confidently, I replied yes. I then proceeded to get my laptop to show him that I’d been “Adulting”. After reading through my budget, a smile emerged from his face. Knowing my dad is never short of a sarcastic remark, I knew I was in for an “Adulting 101” lesson. He said, “I see you budgeted $1,200 for rent and $300 for savings.” I replied yes, feeling confident about my budget. He then went on to say, “So you’re okay with paying the rent man more than you pay yourself, 4x as much to be exact.” Well, talk about a gut check. I had never thought about savings that way. I mean, we’re taught if you save 10% of your income and pay no more than 1/3 of your monthly income in rent, you are in good shape. However, his comment made me realize how generous I planned on being with my money. My naiveness allowed me to be willing to give away over 90% of my income. In that moment I knew I had to make a change. I committed to two things: 1) Paying myself first and 2) Paying myself more than I pay in rent.
“Do not save what is left after spending, but spend what is left after saving.” –Warren Buffett
Saving money has always been a challenge for me despite my increase in income over the years. My mom would always encourage me to save and I’d tell her once I get a real job. She should have responded with the DJ Khaled ‘You played yourself’ meme, because I surely was. At the time I didn’t understand that saving is a habit. And like any good habit, it must be nurtured and developed to be executed. Robert Kiyosaki said, “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” In other words, a lack of money is not an acceptable excuse for not saving. It wouldn’t hurt me if I bought a few less drinks at happy hour or didn’t go shopping every other week. Over the years, hundreds of little decisions resulted in thousands of dollars being transferred from my account to someone else’s. Society says it okay because over-consumption is a part of the American culture. Yet, as history has shown time after time, the status quo is not always the better option.
“A fool and his money are soon parted.” – Thomas Tusser
- 62% of Americans have no emergency savings for things, such as an $1,000 emergency room visit or a $500 car repair
- 56.3% of people have less than $1,000 in their checking and savings accounts combined
- Around 29% of millennials — aged 18 to 34 said they have no money in their savings account
The Three Types of Savers
Checking Account #2 – Never Saving
During my 4 years of college, my savings account operated like a second checking account. I would put money into it only to slowly but surely transfer it back. Money did not last more than 3 months in my savings account. I often found myself spending before I even made anything. I would “borrow” money from my savings and promise to put it back once I got my next check, but it never made it back. Aside from not having the money to deal with an emergency, the biggest disadvantage of not having any savings is the missed opportunity. Warren Buffet said, “Be fearful when others are greedy and greedy when others are fearful.” History has proven to us that the greatest of opportunities arise during the worst of times. According to Forbes, between March 2009 and March 2014 the number of billionaires globally, more than doubled from 793 to 1,645. Some would argue that the rich took advantage of the poor during economic downturn. However, I would argue that some people just took advantage of a golden opportunity because they were “prepared”, had money saved. For example, in 2009, you could buy a house in the Midtown district of Detroit in the range of $75,000 to $100,000, but today they are selling for about $300,000. Image if you had a few thousand saved away, money you probably spent on shopping, excess rent, or going out, you could have bought a house in 2009 , sold it now and you would triple your investment, a 300% return. Moreover, by not saving financial independence is unattainable.
“Where words fail, music speaks.”- Hans Christian Andersen
Music so often reflects reality. To further illustrate the three types of savers, I selected a song that embodies each category. In Mo Money, J Cole says, “How mama gonna teach you how to save your money when she barely on the boat got stay afloat money.” This line showcases the role that our upbringing can play in our saving style. More importantly, it sheds light on the reality many Americans are currently facing, living paycheck to paycheck. This reality exists at all socioeconomic levels, and is often the result of low wages and/or excess spending. Furthermore, people in this category are affected the most during economic downturns, and crises that occur in their personal life because they have no cushion.
The Short Term Saver – Saving to Spend
Funnily I was better at keeping money in my account in high school, than I was in college. My commitment to being a “fly guy” led me to being a short term saver because my funds were limited. My sources of income were the $20 allowance my mom gave me every 2 weeks and the money I made from my side hustles (shoveling snow, cutting grass, washing cars, flipping merchandise, and a few other finesses). Although it was possible to be well dressed with these combined funds, I would have to save almost all of it. So I wouldn’t bring money to school to avoid the temptation of spending it on the vending machine, or giving it away to the many people who asked for a dollar every day. It worked—ask about me. Now you may be thinking this type of saver seems ideal because your spending isn’t reckless. Yes your spending is more in control, but the end result is the same—no money. After saving for a month or two, I would spend it all on some shoes or a new outfit.
- According to Facebook, 86 percent of millennials said they were actively saving — or trying to. But the responses to another survey suggest that this is often geared towards saving for a short-term goal (such as a holiday) rather than investing for the future.
- A survey from Eventbrite in 2014 found that 78%of millennials would prefer to spend their money on an “experience” — such as a holiday — over something more tangible that they could own.
No, I’m not saying don’t travel the world and enjoy life because travel is one of the most powerful education experiences. I personally, studied abroad for 4 months and it was truly a life altering experience. What I am saying is don’t blow your savings on these experiences. When you are thinking about spending your savings, remember the opportunity cost. If you saved $405 per month for 40 years and earned an average annual return of 7% you would have a million dollars.
In RGF Island, Fetty Wap lyrics, “my **** stack their money just to spend it…cause when you die you cannot take it with you,” perfectly illustrates the Short Term Saver. The first line addresses the practice of saving your money just to spend it. Individuals that are Short Term Savers save, save, save just to spend, spend, spend, whether it’s on a vacation, birthday party, etc. The second line addresses the mindset often attached to individuals in this category: YOLO. The desire to “experience life” makes spending your savings on pleasure/leisure acceptable.
The Uninterrupted Compounding Interest Saver – Saving to Build Wealth
After the conversation with my pops, I decided to move into this category and become a wealth building saver. This category has several components. The first is that your money grows uninterrupted, meaning you are not dipping your hand into your savings pot. The second component is allowing your money to compound or giving it time to grow. To accomplish this, I decided to use my Life Insurance Policy as my savings account and make myself the bank, making the third component: protection. Several factors contributed to me making this decision over some alternative.
Protect Nathan from Nathan: “For some people to save money they have to hide it, even from themselves.” –Ben Feldman. I lacked the discipline to have a legitimate savings account. The ability to access my money easily and quickly made it difficult to save. For example, last summer I put myself through a test. By the end of my internship I had saved a few thousand dollars so I decided to invest $600 of it in the stock market. Three months later I was left with only that $600. Having the money in my account made me feel like I was richer than I actually was because I subconsciously included it in my checking account balance. So when I went shopping or a family member asked for money, my answer was always yes because I thought I had funds, even though I really didn’t. When I put my money in the stock market it never crossed my mind to sell my shares in LinkedIn to buy a new suit or buy a ticket to NYC for my sister. Putting my money into my policy provides that same protect from myself that investing in the stock market did.
A return: "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." –Robert G. Allen. Savings accounts (Money Market Accounts, CD’s, & Savings Accounts - defined below) typically offer less than 2% in interest. Such a low interest rate creates two problems. The first is how long it takes money to double, Financial Institutions have long used the Rule of 72 to make that determination. Applying the Rule of 72 to a 1% interest rate means your money will double every 72 years. Let’s say you are 22 and you have 1,000 in your savings account, you won’t have 2,000 in your account until you’re 94.The second problem is inflation. On average inflation is about 2-3% each year which means you are losing money when you factor in inflation. Fortunately, my life insurance policy offers a return that is much greater than a savings accounts allowing my money to double a lot quicker and exceeds the average annual inflation.
Protection: “You shouldn’t own common stocks if a 50 per cent decrease in their value in a short period of time would cause you acute distress.” –Warren Buffet. Although the stock market is attractive, the downside of losing all or part of my savings is not worth the risk. Yes, I have money in the stock market but I wouldn’t use my savings to invest. Also, my policy’s downside protection provides comfort that if another financial crisis occurs, I will not lose money.
In Rich Forever, John Legend says, “Every day we sacrifice…so we could be standing here.” In these lines he describes the mindset of a Wealth Building Saver--the mindset that allowed him to get to the point of being rich forever. Willingness to sacrifice is at the heart of a Wealth Building Saver. You must be willing to forgo short-term satisfaction to achieve the long-term financial freedom that we all so greatly desire.
I decided to use my life insurance policy as my savings account because saving to me is more than just having enough money in my account to make a down payment for a house. Yes, it is important to me that my policy supports my ambitious saving goals and provides clarity on where I will be in 10 years. However, savings to me is really about creating opportunity for myself and the generations to come. My insurance policy creates opportunity for me because I can use it as collateral when seeking a loan as well borrow from it without having to pay taxes, interest, or any penalties. It creates opportunities for the next generation because when I pass away they will be left with Benefits and not Bills.
The greatest irony among most young professional is that although we often wish our parents were secure enough in their finances to afford us the opportunity to pursue our true passions and interest, whether it be (traveling, starting a business, etc), we are unwilling to make the sacrifices today that afford these opportunities for the next generation. We are so wrapped up in ourselves that we think very little of others and the future. Our desire for this luxury is embedded in our daily comments, “I need to marry rich, I need a sugar mama, I hate working, I need to win the lottery, etc). It’s not that we are lazy and are unwilling to work hard for the life we desire, however it is more so that we want to have the financial stability that provides us with the opportunity to make choices that align with our passion and interest and not our need to pay bills, student loans, etc.
The other day I came across an article on Master P and how he built a $250 million business empire off of a 10,000 Life Insurance Settlement. Some background on Master P, he had a basketball scholarship to the University of Houston however after a severe knee injury during his freshman year his NBA hoop dreams were crushed. That year he left Houston for a Jr college close to home where he took business classes. A few years he received a 10,000 life insurance settlement check becasue of the death of his grandfather. At 21, he used the $10,000 to open “No Limits Records and Tapes” which kick started his path to becoming a music mogul. I can’t say Master P wouldn’t be where he is right now without the $10,000 however, no one can argue that the $10,000 didn’t play a significant role. I image that his grandfather didn’t think that the $10,000 policy, which is small amount of coverage, would be worth millions and result in his family being uprooted from poverty. Now examine your own life, how would 10K, 100K or 1 million change your current situation? Maybe you would have pursued a different career path or started your own company.
In closing, I want to reassure you that I am all for living and experiencing life to the fullest. I just believe living life to the fullest and being a wealth building saver are not mutually exclusive although society may convince use otherwise. Many people associate living below their means with having a dry and boring life. We all have that friend that never wants to spend money on anything fun yet still complains about how they can’t afford anything. Focusing on what you can’t afford is a passive approach to life and your finances. To live and experience life to the fullest you must be active. Instead of telling yourself what you can’t afford you should be asking yourself what you need to do to afford it. These are two fundamentally different approaches the ones finances, the first is fixated on the problem while the second is fixated on the solution. You may be thinking that this isn’t applicable to you however I want to reassure you that it is possible you just must be active.