How My Parents Achieved Financial Security

Editor's note: You've probably heard "it takes money to make money." Our colleague Whitney Tilson disagrees. In this piece – originally published in a recent issue of his free e-letter, Whitney Tilson's Daily – he recalls how his parents were able to grow their savings carefully... and shares how an important step turned that savings into a comfortable retirement.

Many people believe that only the super wealthy can retire comfortably... But this simply isn't true.

I recently spent a week with my parents, who retired in Kenya after long careers in education.

During my visit, I put together an Excel spreadsheet for them that includes all of their assets and income – which is a good idea for everyone.

I want to share some of the valuable lessons that came out of this...

My parents' financial situation is very strong. Yet they never earned high salaries, inherited a lot of money, or struck 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...

Two Incomes Are Better Than One

My parents both held steady jobs for almost their entire lives. As I mentioned, though, they never earned high salaries.

They met and married as teachers in the Peace Corps in 1962 and worked for schools and other educational nonprofits their entire careers.

But two incomes – even modest ones – add up over nearly half a century. Consistency will work in your favor.

Find Ways to Save Money – And Avoid Debt

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.

You can do this too. 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.

Fascinatingly, at least at the time, income level was only moderately predictive of becoming a millionaire. More important was living beneath your means, year in and year out.

In their survey of millionaires, one question was, "Is your spouse more frugal than you are?" And the factor that most closely correlated with being a millionaire was answering "yes."

Doctors, on average, earn quite a bit more than teachers. Yet, relative to their income, they were less likely to become millionaires because they tended to spend their high incomes on big houses in upscale neighborhoods, new cars, and so forth.

Teachers, meanwhile, were far more likely to become millionaires than you would have expected because they tended to live frugally.

My parents are perfect examples. They can squeeze a dollar until it screams...

Growing up, my mom clipped dozens of coupons from the Sunday paper and bought most of our clothes secondhand (a habit that persists to this day). She still tells my sister and me that our costly educations were funded by her thriftiness.

And we never had a new car. My dad is a good mechanic, so he always bought 10-year-old cars that he would nurse along for years, getting every dime's worth out of them.

Our economy and financial system are incredibly predatory in many ways. They urge people to spend, luring them into living above their means and taking on debt.

Even if you think you have the extra cash – you must resist this siren song.

Grow Your Savings Through the Stock Market

Next, you'll need to invest these savings wisely. The good news is, it's not as hard as it seems...

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 incredible.

Ideally, you should set up automatic withholding from your paycheck into your IRA or other retirement fund. Then, you can set up a plan that automatically invests your money in an S&P 500 Index fund.

While we always recommend making and directing your own investments, it's good to have some amount of money that you never touch. And this is key... don't look at it! Just let it build, year after year, decade after decade.

And whatever you do, don't panic during times of market turmoil and sell. Just about everybody sells at exactly the wrong time (for example, in March 2009 or 2020).

Why Is It Important to Invest?

The investment step is crucial...

When my parents moved to Africa 30 years ago, 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, so that two-thirds of their savings were in stocks.

It was the right call. Three decades later, their net worth is multiples higher than it once was.

Everyone's situation is different. But my parents achieved financial security – without striking it rich. If you earn a steady income, live within your means, and make the right financial moves, you can, too.

Best regards,

Whitney Tilson

Editor's note: The bad news is, your retirement may not be as safe as you think... because a new financial rule just changed the game. If you have any money in index funds, mutual funds, or target-date funds, you could be left holding the bag for Wall Street insiders – starting with the overhyped SpaceX IPO.

Watch Whitney's Emergency Briefing on June 16 to find out exactly where to move your money.