Saving Money and Investing When You are Young

There are countless articles talking about saving and investing on the internet.  Rather than talking about how to make a lot of money, most articles focus on saving and investing.  Thomas Stanley, the author of The Millionaire Next Door, referred to this dynamic as playing offense or defense.  In this context, playing defense is saving money and investing when you are young.  The more you can sock away, the greater amount of money you will have.  When you look around the internet, some interesting examples pop up.

Profiles of Great Defensive Players

One of the more recent and high profile examples of great defensive play was the janitor Ronald Read.  When Read was in his thirties, he started investing in the stock market.  A few years ago, he died with an $8 million dollar fortune.  With the rise of a lot of commentary about social mobility in the US, quite a few people were questioning how someone making near minimum wage died in the 1%.  The answer is that he played great defense, and practiced the strategies espoused by Warren Buffett.  Rather than buying new cars, he drove his old one to add money to his compounding machine.  Rather than flitting through the hot new stocks, he bought and held blue chip stocks through the decades.  In many ways, he was an extreme example of the typical millionaire according the Thomas Stanley.

If you want to look at the truly bizarre, a can collector named Curt Degerman built a million dollar fortune collecting cans.  Wearing old and worn out clothing, and eating leftovers from restaurants, is not what I would recommend to become wealthy.  For this guy though… well goldmines show up unexpectedly don’t they?

A couple days ago, another interesting example came up.  The New York Times profiled the story of a secretary who invested in the stock tips she got at work. The secretary’s name and story, Sylvia Bloom, follow a pattern that is more common than realized in America.  Someone finds a job, and lives below their means.  By saving and investing the surplus over the course of decades, the end result is a fortune worth millions.  Many of these secret millionaires will also end up donating a significant part of their wealth to charity.  Sylvia Bloom was no exception.  A large part of her multimillion fortune is going to charity.

 What the Great Defensive Players have in Common and Tying it to Investing when you are Young

Everyone of those secret millionaires became wealthy in large part due to playing great defense.  If you are part of the large segment of America making less than $80,000 a year, this is your road to riches.  Every other finance article you read for your situation will be focused on this.  There is no secret sauce, no hidden agenda, nothing.  It is all about how much cash you save on your take home pay.

How you do this is detailed in plenty of places on the internet, and in countless books.  A lot of the people who become millionaires playing great defense are also great coupon clippers.  An example from my life is that I bought a lot of high end scuba diving gear last year.  By waiting for the store’s end of year sale and the small business discount after black Friday, I was able to save about 50% on my gear.  Had I used the credit card Upromise program with accompanying card, it would have been closer to 60%.  In total, I saved several thousand dollars.  Where it gets interesting is when you look at what that money does when it’s invested.  If I get the stock market’s 10% rate of return over the next 40 years, the three thousand dollars I saved will have turned into $135,777.  Consider that for a second.  That one move I made saving money on a great hobby will have given me enough money to match what many Americans will take a lifetime to save.  While they are running on the treadmill at work, I will be scuba diving in exotic locations watching a small investment grow over my life.  That is what playing great defense does.  It allows you to enjoy life while ensuring you have financial independence later.  The only cost is that you need to have a little patience, and sacrifice immediate gratification.  In the grand scheme of things, couponing is not a huge tragedy.

Combining high saving rates, investing, and long periods of time can turn small incomes into great fortunes over a lifetime.  If you find a way to cut $250 a month off of your expenses; be it car, groceries, student loans, entertainment, or rent, you hold a key to wealth.  Saving $3000 a year, and investing it in a company like the Walt Disney Company, over the course of 40 years turns into $1,745,478.  The key of course is finding out how to save that kind of money.

Some Ideas for Methods of Saving Money

I mentioned the Upromise program already which is a great way to save money to cut down your student loans.  If you want to save money here are some ideas for different situations:

  • Mortgage Credit Certificates can save you $2000 a year on your first mortgage
  • Individual Development Accounts are a super saver account that can save you a ton of money with their 3 or 4-1 matches
  • Here is a great list of ideas to save money on rent
  • Study the opportunities the company you work for offers.  Some offer scholarships, while others give discounts on their stock
  • Some professions such as nurses or teachers have special offers available to them due to supply and demand…
  • Look through the FHA website… I know, I know.  Nobody’s idea of a good time, but there are some great deals there
  • There are even creative ways to take advantage of economies of scale to get cheaper prices when shopping for food

In America, there are plenty of things that I haven’t mentioned that you can use.  Taking that money that you save with these deals, and investing when you are young can turn you into a multimillionaire though.  A few hundred bucks a month saved in your twenties can turn into some fun times later.  There is nothing wrong buying fancy scarves or video game packages, but everything comes with a cost.  That cost is what your money could have become had you invested it.  Investing when you are young can turn thousands of dollars into millions if you are diligent and work hard.  This comes down to knowing what you want in life.¹

If what you want is to drive Lamborghinis, travel to Fiji, or go on year long excursions to Asia, you will have to sacrifice.  Like Ronald Read driving an old vehicle, clipping coupons, and saving about 30% of his money, life can eventually give you what you give up today.  Whether it does or not is dependent on whether you have the courage to do what is necessary.  There is no eleventh commandment saying that a low income means you can’t get rich.  All you have to do is decide.

¹  While there are exceptions to this such as sudden health emergencies, society has enacted certain methods to protect retirement investing.  As a general guideline, the assets in your 401k and IRA are protected during bankruptcy.  This is why it is so important to protect your investments in those accounts.  To be absolutely clear though, I am not a lawyer, and you should consult with one before declaring bankruptcy to discuss your options.