Even before Covid the news was stunning of just how fragile the average American’s finances are. When a government shutdown occurred in January 2019, one report said 78% of workers live paycheck to paycheck. That same report said 10% of Americans making over $100,000 were in similar shape.
How can 78% of Americans, living in the most prosperous nation in the world, be so close to financial ruin in a booming economy? Easy, really. Just ignore the iron laws of money and you can get yourself into all kinds of trouble no matter how much you make.
The good news, however, is almost anyone can follow these laws and grow prosperous. Here are the iron laws of money.
First, if you’ve never read The Richest Man in Babylon, I suggest you get a copy. If not for you, for your kids, or anyone who struggles with money. The great thing about this book is that it is not about budgets or complex math. It is a fictional account of events in the ancient city of Babylon.
My favorite excerpt is chapter 2. Here Arkad, the richest man in Babylon, recounts to his friends how he went from abject poverty to wealth. It’s a fun read, but I’ll cut to the chase.
The first lesson he learned was to pay himself first. Never having been disciplined in the past, it was hard. But he lived on 90% of whatever income he made. It became easier with practice. For the first time in his life, he began to accumulate savings.
Arkad then recounts how he took his first year of savings and gave it to a bricklayer to invest in jewelry. He lost it all, because what does a bricklayer know about jewelry? Nothing. So, the second lesson he learned was to invest his precious savings with people who knew what they were doing. Think index funds today.
And the third lesson Arkad learned, was to let his money compound. At first, he spent the investment gains. But he realized that money will compound if left untouched in a good investment.
The lessons are simple: pay yourself 10% or more before you pay anyone else, invest it wisely and let it compound. Simple and within the reach of almost everyone. It’s why it’s possible for almost anyone to grow wealthy in this country.
Second: “Get the goal post to stop moving.” In other words, you may set a financial or lifestyle goal for yourself at which time you say, “If I get to XXX, I will be forever satisfied and happy.”
And then you reach that goal, and guess what? The goal post is now fifty yards farther down the field because your lifestyle expectations grew faster than your money.
How do we know that’s true? Let’s look at our own country. America’s wealth has grown exponentially since the 1950’s. Many people yearn to go back to this era because it seemed prosperous and peaceful. But our expectations have grown more than the increase in wealth since the 1950’s. The result is that in spite of our increased wealth, 78% of us can’t miss a paycheck without turmoil.
Take a look at some facts. Median family income in 1955 was $29,000 adjusted for inflation. In 2018 it was $63,000. Inflation adjusted hourly wages today are nearly 50% higher than in 1955. Half of Americans didn’t have health insurance in 1955. The average home was a third smaller in 1955, with more occupants, than today’s homes. I could go on, but by almost any economic or health measure, we are way better off today than in the golden age of the 1950’s.
So why are we stretched so thin financially if we have made all this progress? Because we move the goal posts. We don’t compare ourselves to the house and car our parents owned in the 1950’s. We look at Mr. Jones next door and see he’s driving a new car and has added onto his house. If he can do that, then I deserve it too.
And, of course, politicians out of power assure us that things are very bad and we deserve better. Envy and covetousness of what others have are powerful forces that get us to move the goalpost, but not to get wealthy.
Contentment is the antidote to keeping the goal posts in place. Those who can stop the goal posts of expectations from moving will likely grow rich.
Third: “Don’t win too early.” We all dream once in a while about winning the lottery. And sometimes we reap an unexpected windfall. A company we work for may go public and if we are holding some stock, we immediately calculate the gain. But if so, I hope it’s not one that lets you retire at an early age. The danger of misery from quick riches might be higher than you think.
Take the story of Jack Whitaker, for example, winner of the largest American lottery in history. His take? $314 million. He took the $113 million after taxes option.
You want to guess how this story ends? Yes, you’re right, not well. Family tragedy, drugs, marital problems and gambling are part of the story.
Or a child services worker in Missouri who made this comment after splitting a $224 million lottery: “I had to endure the greed and the need that people have, trying to get you to release your money to them. That caused a lot of emotional pain. These are people who you’ve loved deep down, and they’re turning into vampires trying to suck the life out of me.”
We need the perspective of how much better our life will be, with all the trials and shortcomings, when we have the satisfaction of slowly building our wealth.
The allure and dangers of seeking quick riches is warned about all the way back in the Proverbs of the Bible: “Wealth from get-rich–quick schemes quickly disappears; wealth from hard work grows over time.” Proverbs 13:11
In other words, it’s not just the dangers of winning the big lottery, it’s having a heart chasing that dream that is the vice. Instead, the iron law of money says the best way to get rich is slowly.
So where did these “iron laws of money” come from? These are the ones your humble blogger invented for this post today. But they are rooted in financial reality. I’d love to know what other iron laws of money you might add to these. Let’s continue the conversation!
Joe Kesler
Excellent article…Proverbs is the instruction book for a life well lived.
I was driving my buddy’s ’65 Chevelle a while ago. With 400 hp under the hood it was a fun ride, even though the 8-track player wasn’t working. (For those of you who don’t know what an 8-track is, you can Google it. I’ll wait.)
That experience led me to think a little about cars and just how the goalposts have moved over the years. Would I trade my Nissan Murano (with satellite nav, airbags, air conditioning, and cupholders galore) for the Chevelle? Not really. The Chevelle handled like a brick, the seat belts were added well after it was built, and the front bench seat was better for making out than for lumbar support. The Murano is a much better vehicle for driving down the freeway at 75 MPH. But how much of the value of a new vehicle is really necessary, and how much of it is just shifted goalposts?
Consider the new Chevrolet Silverado 1500. A small pickup like this used to be an entry level vehicle that was often a more economical alternative to a passenger car. But I see that the base list price of a Silverado is now $30,000. For that you get a nice 1/2 ton pickup, sure. But it comes with a “7-inch touchscreen display with Apple CarPlay and Android Auto integration” as standard, although without power windows and door locks.
I suspect that most buyers will find few of these basic models are actually available on the lots without special ordering. Instead, they will have a chat with their friendly banker, content themselves with living on 99% of their income, and go for an upgrade – including such items as the “Custom Convenience and Infotainment package” with EZ Lift power lock and release tailgate, LED bed lighting, remote start, and more. More?… that would include the chrome bumpers and mirror caps, GM’s OnStar connected services, semi-automatic single-zone climate control, LED fog lights and taillights, keyless open and start, and rear-window defogger. Not to mention the 10-way power-adjust driver’s seat with memory setting, dual-zone climate control, leather interior, 8-inch touchscreen display, wireless Apple CarPlay/Android Auto, heated seats and steering wheel, a high-def rearview camera with hitch guidance, tilt and telescoping steering wheel, heated side mirrors, plus integrated trailer brake controller, 120-volt power outlets, automatic locking rear differential. (Are you still reading?)
And I haven’t even discussed the range of engine options – there seems to be 7 of them, up to the 6.2 liter V8 with 420 HP. Nor should we forget the Crew Cab option.
All this is not to criticize GM’s pickup truck offerings – the Silverado is clearly the Swiss Army Knife of pickups, and many (some?) of those options are essential to people planning to use them to earn a living.
I went through and picked some of the more popular options, looking for what I think is probably a mid range configuration in this day & age. The end result was a $52,000 vehicle, 73% higher than when we started. But have no fear – the upgrades qualify for a $3,000 discount (6%) after all that. So, now we’re pushing a year’s median family income for this truck.
Very few of those options actually make the thing go down the road much different from the base model. So just who is moving the goalposts here? Hint: GM is just finding a (felt) need and filling it.
Great post Steve! There are a lot of people moving those goal posts around besides us. Excellent example.
Good stuff, as always, Joe. As for “pay yourself first”, yes. My first job after college was as management trainee in a savings and loan association, making $110/week, about $85 in take home after deductions if memory serves correctly. But I put a small part of every paycheck into a savings account. You can do it; almost anyone can.
As for moving the goalposts, I saw a lot of that during my 40+ year career in residential mortgage lending. It was incredible to watch over the years as what was regarded as necessary continued to grow and grow. By the end of my career, I myself could barely afford most of the houses we were lending on, including some of the first time buyers! I saw homes where each child not only had their own bedroom but also their own bathroom. When I saw a two-story house with an elevator in it, I knew things were getting crazy (and the elevator was not for a disabled person).
Finally, as for “winning” too early, yup, I saw that, too. We gave a loan to a borrower who had a solid job with an upper 5-figure salary as base (and the job required lots of overtime as well), and who won the NJ lottery, which was paying him $35,000 annually for 20 years. So the verified income was easily enough to carry the mortgage on their brand new home. About five years later, the mortgage payments stopped and we had to foreclose and eventually take possession of the house. Turned out the husband was blowing all that money at the casinos in Atlantic City. To this day, I still remember the wife calling me the day we were to take possession of the house, telling me the keys were in the mailbox, and hanging up. One of the saddest phone calls.