Friday, March 15, 2013

Different Types of People

One of the most powerful books in terms of influence on my life was The Millionaire Next Door. In that book it hammered home some key points that I never forgot. Most millionaires are business owners. They don't work for 'the man' in other words. Also, most millionaires live fairly frugal lives when compared to those you see living out in Hollywood and appear regularly on television. Most millionaires drive mass produced cars, shop at JC Penney and wear a simple Timex.

I have seen a statistic many times over the years that shocks me everytime I hear it. Take any 100 people from a population and 1 of them will be rich in their lifetime. Four more will be financially independent in their lifetimes. Ninety-five of those people will reach retirement and be unable to self-substain the lifestyle of which they were unaccustomed. This blows my mind. So many people I know simply plan on living off their social security check or perhaps a small pension for the remainder of their lives instead of taking their new found time and doing all those things that they never had time for while working.

So like I alluded to in the last post, I decided that wasn't going to be me at an early age. Unfortunately for me, I didn't have any plan on how to accomplish being wealthy or at least financially independent other than saving lots of my paycheck and investing it. Fortunately for me, although I may not have invested it as wisely as I could or should have, I was still far better off than those who didn't save anything. This brings me to the point of this post and a fundamental thing emphasized by Bogleheads. There are three types of people financially speaking and I fortunately fall into the right category.

Borrowers - This group of people never save. They live for today. Borrowers will live in large houses, drive new cars, wear the latest fashions and never pay cash for anything. Instead, they financed their house for little or nothing down, lease or make payments on their cards and pay the minimum every month on their credit card debt. They likely have taken a home equity loan so that they could purchase even more stuff that they couldn't afford on their credit cards. They have built what they have on a house of cards.

Consumers - These people are more responsible than the borrowers but still don't save anything. They don't accumulate large credit card debt and even pay it off promptly every month. However every month, the look at their paychecks and they spend every penny on what they can afford. They find themselves lots of time not paying cash for large purchases but asking a key question, what can I afford. They have lots of debt payments going out each month taking up large portions of their paychecks so that they can drive their cars and watch their large screen televisions at night. They have heard about things like 401k's and Roth IRA's but are willing to pass them up and the 'free money' benefits because there are two many things that they need to buy still.

Keepers - As you can probably guess, this is the group I fall into. We are people who max out 401k's and Roth IRA's religiously and learn to live with what we have left. Although they often have debt, they believe debt is never good and strive to get out of debt. They forgo the larger house for a smaller one that fits better in their budget. They drive older or cheaper cars than their neighbors preferring cash over style. They have credit cards and use them just as often but only as a convenience and pay them off promptly every month. They have the same income as the Borrowers and Consumers but are statistically more likely to retire early and with money to meet or exceed their currently lifestyle. They aren't paupers. They wear nice clothes, eat at nice restaurants and take nice vacations. They spend all their money just like the Borrowers and Consumers. But they spend it all after they have maxed out their retirement accounts.

Most of my friends fall into the Consumer category for some reason. I know lots of Borrowers but because their lifestyle is so different than mine, I don't often find them falling in the friends list. But I know lots of Consumers because they are the biggest group of people. Most of them put enough money into a 401k plan to get the 'free money' in the form of employer match but they don't seem to realize that they didn't start early enough and the bare minimum is nowhere near enough to substain their lifestyle upon retirement. They work until 65 years of age when they can get their social security and pension, quickly blow through their savings in their 401k plan and then spend the rest of their life sitting at home watching television and eating out at the local restaurant on Friday evenings. I do have a few friends who are Keepers like me and we often spend time talking about ways to save money but the majority of our time is spent talking about retiring as early as possible and living a lifestyle that we currently are or even perhaps better than we are for the rest of our hopefully long lives. If our lives are short, then perhaps our children will use the money to get a leg up in life.

Now after only 13 years of socking away money, I know that I have enough money to life my current lifestyle after I reach 65 years of age at the current value of my investments. Fortunately those investments still have 25 more years to mature and grow meaning I will be able to live an even better lifestyle or withdraw some of the money early to retire before 65 years of age. So I still plan on being a Keeper for the foreseeable future and moving that date even closer to my current age. My time of living for today is drawing ever nearer!


JaneofVirginia said...

I am a keeper. However, I have known many relatives and people who were keepers, and did not enjoy any of their savings. They died passing this wealth on to people who were less frugal in their own attitudes. I am a keeper, but after my youngest son died, I realized that the journey of life is short, and that a balance must be reached, so now I am a moderate keeper. I spent some as it benefits others and provides memories for our family, and I save some. I actually don't think I will live as long as most of my relatives.

Vince said...

The problem is if everyone did as you do you'd kill the economy stone dead.
As to the why we are like that comes down to defined benefit pensions of the civil service and municipal employees which were the norm about 50 years ago where the people working today are paying the pension of the retired. If you had to buy the pension it would cost into the millions

Ed said...

Jane - If you forced me to classify myself within the Keeper category, I would say I am a moderate too. I like to eat out at some nice restaurants from time to time and I am definitely okay with spending more money buying something that is quality than buying something cheap and disposable. I also go on vacations. But before I do all that, I always "pay" myself first and avoid debt. My plan is certainly to spend most of my saved wealth before I die doing all those things that I wanted to do but didn't want the financial uncertainty by doing it now. First on the list is probably a very fast and very powerful sports car of some sort.

Vince - I disagree that it would kill the economy stone dead. Keepers still spend money on food, vehicles, houses, clothes, services, etc. It is just that we perhaps don't spend as much on classical luxury items in our younger years. However, once Keepers reach retirement, they now have more money to spend than the other two types of people in their retirement so I think they at that point would balance the system back out or even push more money into the economy than there is today with our nation's negative savings rate.

Vince said...

Yeah, you'd think. But that isn't how it works.
There was a time not long ago that most women didn't work outside the home. Then the cost of a house was two and a half times the household income. It is still 2 and 1/2 times household income but now it requires two incomes.
Working your method that extra income would've been sensibly invested and the status quo continued. But what occurred was within a couple of years in the 70's the inflation caused a flight of liquid into safe solid investments. Silver, gold and housing doubled then tripled.

Ed said...

Vince - I think your example reaffirms what I am saying. Back in the 70's when most women didn't work and one salary could afford a house, most people were Keepers and we had a very positive savings rate in this country. These days our savings rate is negative and most people are Consumers and thus the reason it requires two salaries. I bought my first house on my salary along and made it work quite nicely. Are second house is on my wife's salary alone now that I am without a job and we are still able to get along fine. I think the only reason I can say this is because we are Keepers.

Murf said...

In this age of unemployment, I don't think those categories quite apply or perhaps there should be a fourth for people who would like to save but can't due to their current jobless situation.

warren said...

Time to have a big party! But don't dip into the stash! We are a mix of some sort...we save but not at max rates...but not minimal either. I can't imagine blowing it all every time though! Yikes

Ed said...

Murf - There are situations that happen in life that change things but I think those are all temporary. If your mindset it a Keeper, Consumer, or Borrower, it will always be that way before and after the temporary situation has ended.

Warren - Oh I could imagine living high on the hog and spending all my paycheck every week. But eventually I'm sure reality would set in and my Keeper tendencies would kick back in. I blame that on my parents who are Keepers to an extreme. I'm genetically predisposed to be a Keeper.

Vince said...

I'm not so certain about your divisions. On the surface they seem fairly logical but it rather misses how society is constructed. If you take that surplus is what you are investing and lets face it it is. Then those without surplus won't have retirement investments. But most people try to buy a house to offset this, forgetting that everyone is in the same boat, ergo the ever further reach to the south. By the time I reach retirement age the limit of the snowbirds should be well into Peru on your side and since South Africa was a destination for the last 50 years and the Cape Verde are being settled for the last ten years I don't know which direction they'll go over here.