Take your cues from the rich
By John Cunniff, Associated Press, 07/08/98 23:53
NEW YORK (AP) - As always, there is much to be learned from the rich and the very rich and it is this: When you've satisfied your basic needs don't go looking for other things on which to spend your money.
Leave it alone. Let it grow. Let it pile up like the snow.
Learn the value of compounding, such as the fact that a 23 percent annualized gain - which is what Warren Buffett averages - will double your financial assets in about three years.
Buffett, America's second-richest person, lives well within his means, leaving his money invested to earn more. Sam Walton, founder of Wal-Mart, the world's biggest retailer, was the same way. And dozens like them.
The lesson, almost buried in this affluent economy, resurfaced recently when U.S. Trust released its annual survey of the very rich, a category limited to the top 1 percent of the wealthiest Americans.
Who are they? They have either an adjusted gross income of more than $225,000 a year or a net worth greater than $3 million. In many instances, of course, their incomes and assets are in multiples of those figures.
Aside from the fact that the very rich said they had benefited magnificently from the rising stock market, the most significant finding was that 42 percent of them left all their earnings undisturbed.
That is, they didn't withdraw any money for current living, in spite of the billions of stimuli directed their way by advertisers and life insurance agents and charitable foundations. They held tight.
It is easy for the rich not to spend their capital, simply because they have so much of it and more on the way as income. Forty-nine percent of them confessed there was ''nothing I want to buy right now.''
But the principle is the same: Live within or beneath your income, even if it is only to the minutest of degrees. Save $2 a week, if that's all you can, and you'll at least have something you wouldn't have had.
Unfortunately, recent figures show the biggest increases in credit-card debt are among the poor, major causes being the desire to keep up with the Joneses and the inability to resist enticements to spend.
The poor spend most of their money on necessities, of course, so they might be excused for their minor violations of the lesson. But most Americans are of the middle classes, able to save something.
Michael Leonetti, a financial planner, explains the benefits of so doing in an article for the American Association of Individual Investors Journal. How people spend is as important as how they invest, he says.
Perhaps, he continues, you think the difference between a fully equipped full-size car and a compact is about $10,000. Actually, he says, it can be and often is closer to a million dollars.
He explains: Borrowing $25,000 for a new car over four years will cost about $634 a month, while borrowing just $15,000 will cost only $381, a difference of $253 a month.
If you save the difference every month for 35 years, averaging 8 percent a year and never withdrawing a penny, the sum would swell to $580,352, or probably enough to live on for the rest of your life.
The lesson is clear: You cannot borrow in order to buy the lifestyle of the rich. If you want to live like the rich do as the rich do. Save.
|
