Becoming a millionaire is easy, I tell my eldest daughter. Just save 10% of what you earn. Nothing more, nothing less. But 10% of every single thing you earn, ever. Sounds so so easy, and it is when you’re young, but at our age it’s a little tougher.
I’m thinking about this 10% rule for two reasons. The first because the Journey Skills theme this week is job skills. Sam spoke on the podcast about interview techniques and how to get a job. Therefore, it seemed natural that we should say at least one thing about what everyone should do once they get a job, regardless of needs.
The second reason is a little closer to home. My eldest daughter has just got a part-time job at a burger chain and is about to enjoy the thrill of receiving her first wage packet. At the moment she is habit-less with wages she has worked for. We had a lengthy chat in the car, during a long drive, about this 10% rule.
I quoted from The Richest Man in Babylon, the book from which this idea springs (though I’m sure this advice has been around for many centuries). It’s the story of a man who started as a poor slave only to then become the richest man in Babylon. He followed many wise rules and has a guiding philosophy about money, with ideas that I hope my daughter will adopt. But on this day I concentrated on one concept, one core idea.
Pay yourself first.
Pay yourself before you pay your bills, before you spend on food and shopping, before you spend on entertainment. Love yourself enough always to pay yourself first.
That doesn’t mean she should leave her bills unpaid. It simply means she should plan, before she gets her wages, to give herself 10% towards her long term future. Of course she should pay anything she owes to people – that goes without saying – but it’s about putting herself on an equal footing with everyone else.
I have to admit my first explanation wasn’t as successful as I’d hoped. An example of my own stupidity was called for. When I first left school, back in the 80s, I got a job as an office junior at a holiday company in the accounts office.
My first boss had made a small fortune in commodities, then lost it all, and ended up as an over-qualified supervisor in my accounts office. During my year with him he became a sort of mentor to me. He shared many of his mistakes and offered some good advice. He spoke about this 10% rule, and confided that he hadn’t followed it, which was why he was where he was. Now I know I should have listened to him.
At 16, though, with no responsibilities and no real costs of living except (poor) fashion, there was a need for wheels and going out. 10% should and would have been very easy for me. In fact, at that time, I could have saved more. But I never got into the habit, never did it week in week out so that it became a habit.
When we get older, and kids come along, and bills and the rent/mortgage takes a huge slice of our income, saving 10% becomes a harder discipline unless it’s an ingrained habit. It takes real
commitment. I know because I started this too many years after I first heard about it. And so when I explained these life-cycles to my daughter she seemed to understand more readily than I did when I was her age. But her burning question was still how will saving 10% make such a difference?
The answer is Compound interest. That wasn’t the answer she wanted to hear. It was then she began to think I might never see this money again. ‘So when do I spend it?’ she asked.
‘You don’t,’ I replied. ‘You need to leave it to grow until the day you’re wealthy enough to be able to spend it if you want to, but not because you need to. Not before.’
A moment of silence followed. What was almost a yes I will save that from each of my pay-packets was beginning to turn to a no.
‘The point is,’ I added, trying to recover, ‘if you can do it now, and always do it, then one day you will be wealthy. You won’t have to work until you’re seventy unless you actually want to. You will have real financial freedom one day, and not be reliant on a job you don’t like or live in a place you don’t want to. You will have the freedom to choose.’
The idea of freedom she likes. After quite a bit more talking we got there. She is ambitious. She does want to live a good life. I think she is genuinely committed to saving her 10% – at least she said she was. And I believe her.
But it’s not the amount that is important so much as the discipline it creates. Once she has this discipline then it can be used to help her develop skills in controlling of her spending, and her budgeting, and her planning on how to invest her money. From this all else follows. Compound interest is the mechanics of being a millionaire; discipline to save is the mind-set, the attitude, to becoming a millionaire. It cannot be bought. It has to be developed. If she just sticks to this one simple, basic little rule, she will have freedom that financial security brings. It won’t guarantee her happiness but it will give her choice.
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