I just got home yesterday after spending a week with my parents, who've retired in Kenya. I'm pleased to report that they're doing well at ages 84 and 85. They're still recovering from their two-week trip to Europe, most of which was spent driving ambulances from Frankfurt, Germany to Kyiv, Ukraine, as I covered in three recent e-mails.
(And special thanks to the many readers who inquired about my father, who was in the hospital for 10 days in January after contracting African tick bite fever. We were able to diagnose it with the help of Google Gemini, as I discussed in my January 23 e-mail.)
During my visit, I put together an Excel spreadsheet for my parents that captures all of their assets and income – which is a good idea for everyone to do. So today, I wanted to share some of the valuable financial (and life) lessons that emerged from this process...
Most importantly, their financial situation is very strong, with substantial assets and healthy income streams from Social Security and annuities they purchased. So they'll have no financial worries the rest of their lives.
They've achieved this despite never earning high salaries, nor did they inherit a meaningful amount of money or strike it rich with any investments.
No, they achieved financial security the old-fashioned way: slowly and steadily.
The keys to their success can be broken down into three categories: income, expenses, and investments (which you can also read about in my book, The Art of Playing Defense: How to Get Ahead by Not Falling Behind)...
Income
My parents both held steady jobs for almost their entire lives, and neither was ever involuntary unemployed.
Like I mentioned, they never earned high salaries. They met and married as teachers in the Peace Corps in 1962 and have worked for schools and other educational nonprofits their entire careers. But two incomes – even modest ones – add up over nearly half a century...
Plus, they didn't get divorced, which can be financially devastating (in addition to often being an emotional disaster for everyone involved).
Expenses
The single most important thing you can do to build your wealth is to live beneath your means – which is exactly what my parents did. Every year, they were net savers. No matter what their after-tax income was, they spent less than that.
The key is to develop good financial habits. A 1996 book called The Millionaire Next Door: The Surprising Secrets of America's Wealthy shaped my thinking on this topic...
The authors refuted many misconceptions about financial success – chiefly the idea that to become wealthy, you have to inherit money or have a high-paying job like a Wall Street banker, celebrity, or professional athlete.
But, in a fascinating finding, it turned out that income level was only moderately predictive of whether someone would become a millionaire. More important was whether they lived beneath their means, year in and year out.
In their survey of millionaires, one of the questions was, "Is your spouse more frugal than you are?" And the factor that most closely correlated to whether someone was a millionaire was if they answered "yes."
Doctors, on average, earn quite a bit more than teachers. Yet, relative to their income, they're less likely to become millionaires because they tend to spend their high incomes on big houses in upscale neighborhoods, new cars, country club memberships, fancy vacations, private schools, and so forth.
Meanwhile, teachers are far more likely to become millionaires than their incomes would predict because they tend to live frugally. And my parents are perfect examples – they can squeeze a dollar until it screams...
Growing up, we almost never went out to eat. My mom clipped dozens of coupons from the circular in the Sunday paper and bought most of our clothes at secondhand stores (a habit that persists to this day). She still tells my sister and me that our costly educations were funded by her thriftiness.
We never had a new car. My dad is a good mechanic, so we always bought 10-year-old cars that he would nurse along for years. In the 1980s, we had a beaten-up 1960s vintage Mercedes. Its heater had stopped working long ago, so in the winter we all bundled up in our down jackets and used de-icer spray on the inside of the windows.
Our economy and financial system are incredibly predatory in many ways. They make it easy to spend, luring people into living above their means, including taking on debt. It's imperative that you resist this siren song. No matter what your income, figure out a way to live within it.
Investments
Once you have a solid income (ideally, two incomes) and have developed good financial habits, you should be able to save money every year.
Next, you'll need to invest these savings wisely. The good news is that it's not hard...
First, max out your retirement plan(s), like an individual retirement account ("IRA") or 401(k), especially if your employer will match at least some portion of it. This is free, tax-deferred money – take it!
These savings are especially valuable because you won't have to pay taxes on your realized gains each year. The difference over time is enormous. And because there's a penalty for taking the money out early, you're less likely to do something stupid with it.
Ideally, you should set up automatic withholding from your paycheck into your IRA or other retirement fund. This makes it easier to save because you never see the money. Then you can set up a plan that automatically invests your money in an S&P 500 Index fund.
Finally – and this is key – don't look at it! Just let it build, year after year, decade after decade. Whatever you do, don't panic during times of market turmoil and sell. Just about everybody who does this sells at exactly the wrong time (for example, in March 2009 or 2020).
Consider the extreme case of my sister... She had a retirement account at her old employer, then switched jobs – and forgot about it! Years later, she remembered it and discovered hundreds of thousands of dollars in her account because she'd done everything right up front. Her employer automatically withdrew the maximum retirement contribution from her paycheck and invested all of it in an S&P 500 Index fund.
When my parents moved to Africa 30 years ago, first to Ethiopia and then to Kenya nine years later, I took charge of their financial affairs. Thanks to all their good financial habits, they'd built up a nest egg of around $800,000.
However, they were much too conservative in how they'd invested it. They were still in their mid-50s and would likely work another 15 years. But their savings were mostly in cash and bonds – an allocation more appropriate for 80-year-olds.
So I put a third of their savings into my hedge fund and another third into an index fund, such that two-thirds of their savings were in stocks.
It was the right call. Three decades later, their net worth is multiples of what it once was.
Tomorrow I'll take a deeper dive into my parents' investments, the changes I've recommended, and some life advice I shared with them. Stay tuned...
Best regards,
Whitney
P.S. On the flip side of all this, I've known people who spent their whole lives building up their savings only to lose it all in some crazy, half-baked scheme. Millions of people are ensnared in these traps every year...
Today, I see this exact scenario unfolding with SpaceX. I believe it's shaping up to be one of the most overhyped, overvalued IPOs of all time... foisted by Wall Street insiders onto regular retail investors who don't know any better. In fact, it reminds me of something I lived through 25 years ago that destroyed a lot of ordinary folks.
But this moment is also creating a chance for massive potential gains – without touching SpaceX's stock. To get all the details, click here.
P.P.S. I welcome your feedback – send me an e-mail by clicking here.