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Can Living Below Your Means Really Pay Off?

Seth Jentner06/25/2013

I am often asked, “What does it take to become financially independent?”

Working with people over the last three decades to help them obtain and maintain financial independence, I have observed characteristics that the overwhelming majority of the financially independent have in common.

-  Those that are not retired work more than 40 hours per week.
-  They work in businesses that would be considered by many as dull or ordinary:  engineers, contractors, farmers, small-business owners, physicians, corporate executives, accountants and teachers.
-  Most are first-generation affluent, meaning they have received little or no inheritance.
-  They live below their means:  They don’t wear expensive clothing. They drive cars that are two to six years old. They are not over-extended with debt.
-  Those who are working save 10% or more of their household income in retirement plans and other investments.
-  Those who are retired generally withdraw 4% or less from their investment portfolio each year to supplement their Social Security and pension income.
-  All have stock, bond and mutual fund investments. Once they invest their money, they rarely sell.

For most of the financially independent I have worked with, it is not that they inherited money. It is not that they won the lottery. It is not that they struck it rich in a great investment opportunity. It is not that they necessarily had high incomes.

Instead, they choose to live within their means and do not allow merchants, advertising agencies or credit companies to over-extend their spending to enjoy life today at the expense of tomorrow. They build wealth over many years, employing the principal of deferred gratification.

Albert Einstein was asked what he thought was the greatest of mankind's discoveries. Amazingly, he did not mention a mechanical device or scientific theory. His answer:  compound interest. He called it the eighth wonder of the world.

Whether it be a family, a business or a nation, acquiring too much debt and paying too much interest will prevent you from achieving financial independence. Living within your means and investing something out of every paycheck for the future will enable you to use compound interest to your advantage.

So here’s the answer:

  1. Reduce your debt. Unpaid debt is like compound interest in reverse.
  2. Pay yourself first … and reap the power of the eighth wonder of the world. Save a part of everything you earn and invest it. Save at least 10% of what you earn.
  3. Finally, don’t gamble on your investments.  Instead, get professional help to invest in a low-cost, risk-appropriate, globally diversified portfolio of index funds and institutional asset-class funds.

For more insight, listen to Jentner Wealth Management’s weekly podcast by clicking here. Or download Jentner’s newest white papers on The Four Cornerstones of Prudent Investing and The Active Versus Passive Investing Debate.