The following are both true statements:
• You should save until it hurts.
• Money is meant to be enjoyed.
A couple of weeks ago I read “The Millionaire Next Door.” And I got frustrated with it after about 45 pages.
Story after story of people wearing awful suits, driving s---box cars, and living in 1,200-square-foot houses, with multiple seven-figure bank accounts.
Of course, those people are rare.
Read: The first step in making money: You have to really want it
More common are people with expensive suits, expensive cars and giant houses — crushed by hundreds of thousands of dollars in debt, and with no savings.
You do not want to be either of these people.
Category 1: the miserSaving money and living below your means is good. It’s especially good early in life when you can tolerate cheap clothes, cheap food and cheap apartments.
Live below your means: Save money, pay down debt, invest and build wealth. I do not have a problem with someone under the age of 45 living below their means.
I do have a problem with someone over the age of 45, who has accumulated lots of wealth, living below their means.
“The Millionaire Next Door” is full of stories of people who live like they are poor, even though they are actually rich. These are people who are close to or in retirement.
It is not an issue of financial security — they have plenty of money. Spending it would simply give them no pleasure. They just like to watch the number in the bank account get bigger.
I have a moral problem with that.
If you earn money, you had better enjoy it. Maybe not when you are 35, or even 45. But at least by the time you are 55, you had better be enjoying it. It’s the product of all the work and good risk-taking you have done over the course of your life.
Not many people will openly admit this: Money allows me to buy material things, which give me pleasure.
What the authors of “The Millionaire Next Door” don’t get, is that a suit is not a suit. The cheap ones are not the same as the expensive ones.
I have a few people give me grief about my shirts, which are not cheap. They say I could buy $29 shirts at Charles Tyrwhitt. Admittedly, Charles Tyrwhitt makes decent shirts, but ... I like my shirts. They give me pleasure. They are better than Charles Tyrwhitt. They look better, too. And they last forever.
And optimally, that is how it is meant to work. You’re supposed to be thrifty early in life, accumulating assets, and then not thrifty later in life, decumulating assets.
The problem is, most people can only do one or the other. Born a miser, always a miser. Or, you could be the opposite — a high roller.
Deep down, in many ways, I am still a miser. It pains me to pay for dry-cleaning — I did all my own ironing for years after college. To this day, I have never paid for a shoe shine.
Category 2: the high rollerSome people are the opposite of misers.
My wife and I went to Safeway in our 20s and bought all generic-brand stuff. Lots of people don’t do it that way. They go to Whole Foods.
There is a big difference between a Safeway grocery bill and a Whole Foods grocery bill. The difference could make a couple of hundred bucks a week.
Is there a quality difference between generic brands at Safeway and the stuff at Whole Foods? Of course. Is it worth $10,000 a year? Your call.
What really needs to be taught to these people is austerity. It’s the idea that you can make do with less. But this idea is inexplicable to high rollers. They would rather spend the rest of their lives trying to earn more money so they don’t have to undergo austerity.
The problem is that when high rollers earn more money, their spending increases too. It leaves them no better off than they were before. And once you expand your spending, austerity is hard.
Increasing your standard of living is easy. Decreasing it is one of the hardest things to do.
As much as I deplore “The Millionaire Next Door,” I have to concede there is some wisdom in the book. The little things add up. The example people typically use is skipping the venti caramel macchiato at Starbucks every day, which saves you 6 bucks. Multiply that by 252 work days, and that’s real money. It adds up.
I should also point out that if you have seven figures in the bank, you can have the venti caramel macchiato if you want. You’ve earned it.
It’s a balanceMy solution is twofold:
1. Implement austerity while you’re young and building wealth, and for the love of God, spend your money once you’ve accumulated it.
2. Remember that it’s a balance. Being cheap affects relationships. People remember that stuff.
You know how every once in a while, you hear these stories about some 90-year-old lady who dies and leaves $7 million to a cat shelter? And nobody realized she was sitting on 7 million bucks?
I have mixed feelings about those stories.
I’m happy, of course, that she saved 7 million bucks (and I’m happy for the cats), but I’m bummed when I think of all the things she could have done to enjoy herself, but didn’t.
Save money, but don’t save it without a purpose. As Saul Bloom famously said in “Ocean’s Twelve”:
“I want the last check I write … to bounce.”
Jared Dillian is a former Lehman Brothers head of ETF trading. In a special report, he writes about how to properly position your portfolio for what he says is an upcoming stock market crash.
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