You Can't Get Rich by Working

By Don Kuehn

I know you’ve said it a million times: “I didn’t go into education to get rich.” Well, you’re right. This is your wake-up call. That job you have—it won’t make you rich.

I don’t know what your idea of “rich” is. Obviously, it’s a relative term that’s different for each of us depending on our background and the lifestyle choices we make, but your job alone isn’t going to get you there.

As we come to the end of another publishing year, I wanted to end with a column that focuses on what it will take for you to become rich, or at least have enough money to live a comfortable lifestyle and meet the costs of the major goals in your life, including retirement. For some of you that means starting from scratch, with the basics. For others, it might mean doing more of the same, only better. Smarter.

I saved this topic until the end of the year because most of you will have several months between school terms to do a little study on your own and learn what it takes to build your future, to put your financial house in order and to launch a plan to become rich over the long term. Summer is the perfect time to make the life-altering changes that will lead you toward a comfortable retirement.

Consider this your homework for the summer. There may be a quiz later, so pay attention.

So, if you can’t get rich by working for a living, how do other people seem to have so much disposable wealth? What do those people building those great big houses do—sell drugs? How do you get from here to rich?

“You make money by already having money. Then you let your money cavort with other people’s money in an orgiastic frenzy of money-breeding,” said Joel Achenbach of the Washington Post, tongue-in-cheek, I think, but ringing with truth nonetheless.

That orgy occurs in the stock markets, those auctions of company ownership (shares) that go on every day and where little sums are multiplied into bigger and bigger amounts.

I don’t want this to sound too simple—there’s risk involved in stock (or equity) ownership—but to beat inflation and grow your savings, you just have to learn to invest for your future.

I have preached it here before: You may well spend as many years in retirement as you do in the workforce. That means the stash you build now will have to last a long, long time. Personally, I believe that Social Security will be around when those of us who are paying into it will need it. It may not be in exactly the same form as it is today, but there will be some level of old age assistance, dependent coverage and disability payments.

Most public employees will continue to have state or local defined-benefit pension plans to draw on. And although our local unions will have to defend occasional attacks on the security of those plans, I believe we will protect the retirement systems that public education employees are paying into.

There will be a growing awareness and dependence on supplemental retirement plans like 403(b) arrangements offered through local employers. By maxing-out participation in these plans, many teachers and other education workers will create a valuable cushion for their future.

But none of that is going to get you “rich.” That will take a little effort on your part—and time. Time is the secret ingredient in growing money. Mom was right: It doesn’t grow on trees, but it does grow in the stock market. There’s an old maxim that the best time to plant a tree is 20 years ago. The second best time is today. So let’s plant a money tree.

This won’t be a step-by-step formula because this is a column, not a book. But I think there are a few basic, fairly simple steps that just about everyone can follow to get started.

First, make a budget.

“Arrrrrrgh! A budget? I don’t want to make a budget, I’ll just get depressed.” Well, you have to take stock of the reality of what you have coming in and going out every month. You need to make decisions on how and where you can trim spending (if necessary) to create flexibility in your cash flow so you can start saving.

While you are online, go to my recent column entitled “Critical Mass…Critical Mess” and see what I mean. There I said:

Unfortunately, way too many Americans have reached "critical mess." They have fouled up their personal finances so badly that they lose hope. They feel frustrated that nothing they do will repair the damage, so they might as well just keep doing what they have been doing, running up balances on credit cards and making minimum payments.

Trouble is, once you get trapped into a card balance you can’t pay off every month, you fall further behind as you try to fund current living costs while adding finance charges to your remaining balance.

Despair won’t cure your ills. Discipline will.

Whether you are in debt, living on credit cards, or just plodding along at the break-even point each month, you have to establish discipline. A budget is the only way to know where you are headed. I could go through a litany of information about making a budget, but since you are here already, click on this link♦www.personalfinancebudgeting.com♦ and do a little research on your own. You’ll find financial and budget calculators to make the task a bit easier. You’ve come this far, don’t turn back now—the fun’s just beginning.

Once you have identified several places where you can trim back your spending, you can look at the whole of your financial situation. Are you carrying credit card debt that requires debt service (finance charges) every month? If so, that’s a good place to begin your new financial life. Use the money you identified in the budgeting phase to pay down debt. Most experts advocate paying off the highest interest credit card debt first; some preach paying off the smallest balance to create a sense of accomplishment.

It really doesn’t matter which strategy you use, do something! And resolve to hide those credit cards until you really need to use them. Paying cash is best. This discipline of saving money is a matter of making choices. Choosing things you really need, not things you really want.

Second on your to-do list is building an emergency fund equal to six months’ expenses. How do you know when the water heater will shoot craps, or the kids will need emergency medical treatment? What if the brakes go out in the family car, or an emergency requires travel out of town? That’s what an emergency fund is for.

You should stash the cash in a place where it can be retrieved without penalty, like a savings account, or better yet, in a money market account that pays a higher rate of interest and carries little risk. You’ll stay ahead of inflation, and the money will be there when you need it.

This is “saving” and it is different from “investing” because it is short-term and is intended for needs, not goals.

If you are not already participating in work-sponsored investment plans, like 403(b)s or, for those who might have them, 401(k)s, this is the time to contact your payroll department and get signed up. I don’t care if you only set aside $20 per pay period or a great deal more. Start.

The money is deducted from your salary before taxes, so that 20 bucks will go to work for you in its entirety. If you wanted to save the same $20 after taxes, you’d have to earn more than $30 (assuming a combined state and federal tax of 35 percent). Tax-free compounding of your investments and regular periodic additions to your account will make your balance grow faster than you might think.

If you are not already saving through a 403(b) plan, there are a lot of terms and concepts you’ll need to master. One good source of information is at www.403bwise.com. The site is well-written and is replete with hot links to other opinions and sources of information. Go to the box entitled “Wise moves” for the basics.

Sure, it will take some time to wade through this morass of information, but keep your eye on the goal of building retirement wealth. Just a word of caution here: I strongly urge you to avoid the trap of opening a 403(b) plan and sinking your money into an annuity—even though in some places they are still called TDAs (tax deferred annuities). An annuity in a plan like this is as helpful as an umbrella designed for indoor use. The fees and surrender charges can eat up valuable investment money and set your plan back instead of moving it forward.

Okay, now you have a budget, have identified sources of cash to use for your financial plan, have a six-month emergency fund and are set with your plan at work. The third task is to start learning as much as you can about the stock and bond markets.

There are loads of Web sites that can help you here. The Motley Fool is one that many people have heard of (www.motleyfool.com ). The advice is solid and there are areas within the site that will help the novice or the seasoned expert refine their knowledge of the investing industry.

The “Fools” (capital F) agree with the wisdom of starting your investment portfolio with no-load index mutual funds. These are mutual funds, or baskets of stocks, that can be bought without a sales commission (load) and track a well-known index like the Standard & Poors 500 Index (made up of the 500 largest companies in America).

The Fools (brothers Tom and David Gardner) share the philosophy I have: Make smart selections and “buy and hold” unless there is a good reason to change your strategy. Good reasons to change might include a life-altering event (like having children, becoming an empty nester, entering retirement, etc.) or a dramatic shift in the world economy.

If you go to the Fools’ Web site and click on the “Fool’s School” tab, you will find their 13 steps to investing, as well as helpful discussion boards to make you more comfortable with the notion that your money is going to be in that orgy of money-breeding I mentioned earlier.

There’s a lot to learn about investing. You have to have a feel for your own (and your partner’s) tolerance for risk (the chance that at any given time your investments may be worth less than they were last week).

As your assets grow—say, into the mid-five figures—you may want to diversify your assets from no-load index funds to no-load funds with specific goals or objectives (domestic versus foreign, large capitalization companies versus small caps, growth versus value selections, etc.) or to individual company stocks.

Since owning a stock is becoming an owner of a small piece of a company, the outlook for certain industries, the growth prospects within a sector and the trends in the economy might influence your choices. Your stock investment helps those companies grow, creates jobs, improves living standards for workers—and oh, by the way, makes money for you when those companies do well.

You will need to get a grip on asset allocation: how you spread your money between cash, stocks and bonds (either in funds or individual issues). Building a portfolio of investments means not putting all of those eggs in one basket.

But let’s not get too far ahead of ourselves. The point here is that you need to educate yourself about what your money is going to be doing, what the risks are and what the potential for growth is. You don’t need to learn everything at once, but over time you should build a working knowledge of how this investment thing works.

When I retired, one of my goals was not to have to spend my time studying the daily paper and making decisions about when, where or if I should be juggling money from one investment to another. I built a portfolio of low-cost (low management fee), no-load mutual funds that span a broad range of investment objectives and I really don’t worry too much about small changes in the economy.

A dip in the market here or there isn’t going to send me into a panic mode, looking for new places to hide my money from the trends that are sure to shake the markets from time to time. I don’t fret over tax implications or fear a course correction in the stock market. I can spend my time playing golf, enjoying my life and being nearly worry-free (as far as investments go).

And that’s the goal I have for each of you. That’s why I write this column. This is your money. Nothing focuses the mind quite like having your own money in the game. No one is going to watch over it as carefully as you; no one has as much at stake as you do to see to it that your money grows.

You’re not going to get rich working for a living. Few people do. You can get rich—or your version of it—by making smart money decisions, educating yourself about saving and investing, and overcoming inertia. You have a few months until I check back with you again. Don’t find yourself in the same place you are today.

If I ask you in the fall what you did on your summer vacation, I want you to be able to say: “I made a budget. I have a plan to get out of debt. I found places to cut my spending.”

If you don’t have an emergency fund, will you have started one? If you aren’t involved in your 403(b) or similar plan at work, will you be signed up? If you don’t have any investments, will you have studied up to be ready for the time when you have saved the minimum to open an account?

Get started. You can do this. I know you can.