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A wit once remarked that the secret to avoiding poverty in America is to abide by three don’ts.
- Don’t drop out of high school.
- Don’t have kids unless you’re married.
- Don’t be allergic to work—always be gainfully employed, regardless of how humbling that may be at times.
Brilliant. I defy anyone to unearth a guy or gal who has diligently abided by the above three don’ts and is living on skid row.
But what if you want more out of life than just avoiding poverty? What if you want a solid middle-class life? What if you want to build wealth?
Sadly, the above three don’ts won’t cut it. They’re a great strategy for avoiding poverty, and they’re a great base for taking your finances to the next level. But by themselves, they’ll leave you poorly equipped to build wealth. You’ll need a few more don’ts.
What I want to do now is start a series that builds on the above don’ts. These are the extra don’ts you have to abide by if you want to build wealth. And the first extra don’t in The Groovy Don’ts of Building Wealth is don’t rent your job.
Don’t Rent Your Job
Okay, what the hell do I mean by, “don’t rent your job?” Never sign up for a temporary gig?
Not exactly. To show what I mean, consider the primary argument homeownership advocates use against the notion of renting: Renters aren’t building equity. They’re throwing their hard-earned money down the drain.
Now I’m not saying that the equity argument is a slam dunk. Between 1928 and 2013, the typical American home returned 3.7 percent annually. During that same period, stocks returned 9.5 annually. But there are occasions where home prices spike dramatically. I, for instance, bought a one-bedroom condo in Long Beach, New York, for $70,000 in 1998. I sold it eight years later for $340,000. The price of that condo rose roughly 22 percent annually during my ownership stint. So real estate can be a spectacular “investment” at times.
But even if homeownership turns out to be a mediocre “investment,” you still walk away with some equity. And that’s a nice perk. No landlord is going to hand you a check for tens of thousands of dollars when your lease is up.
So how does one “own” one’s job rather than rent it? Simple. If your employer has a 401k or 403b plan, enroll in it and use a portion of every paycheck you receive to buy shares in one of the plan’s stock mutual funds. And if your employer doesn’t have a 401k or 403b plan, open an IRA with a brokerage firm such as Vanguard and use a portion of every paycheck you receive to buy shares in one of its family of stock mutual funds.
Contributing to a retirement plan, whether it’s work- or DIY-based, is analogous to making a mortgage payment. You’re building equity. If you’re not contributing to a retirement plan, you’re renting your job.
How Much Should Your “Mortgage Payment” Be?
Owning your job rather than renting it is going to cost money. That “mortgage payment” won’t be free. My suggestion is that you invest the monthly amount necessary to have a quarter of a million dollars in your retirement plan by the time you reach 65. What this amount will be is obviously dependent on your age (see the table below). Let’s suppose for argument’s sake that you’re 25 and you make $30,000 a year. To have a million dollars by the time you’re 65, you’ll need to invest $444 per month. To have a quarter of million dollars, you’ll need to invest $111 per month or 4.4 percent of your gross paycheck.
Is a quarter of a million dollars enough to have a zippity-f*cking-doo-dah retirement? Hell no. But it’s infinitely better than having jack sh*t in the bank when 65 comes a-knocking. And that’s what you’ll have—jack sh*t—if you spend your whole working life renting your job.
| Age | ||||||||
|---|---|---|---|---|---|---|---|---|
| 20 | 25 | 30 | 35 | 40 | 45 | 50 | 55 | |
| Monthly Savings in Order to Have $1 Million by Age 65 (courtesy of Money Magazine) | $306 | $444 | $645 | $942 | $1,396 | $2,126 | $3,406 | $6,055 |
Final Thoughts
Okay, groovy freedomist, what say you? Is my notion of “owning” your job and building equity a worthwhile contribution to the financial independence movement? Or is my admonition to not “rent” your job a trivial twist on the attitudes one must have to build wealth? Let me know what you think when you get a chance. Peace.
Oh, Just One More Thing
In honor of my Great-Uncle Phil, I decided to paint the American flag on the side of the Groovy Ranch garage. Seventy-five years ago, he was a paratrooper at D-Day. He was 18 years old, and his country gave him a parachute and a rifle and asked him to liberate Europe. When I was 18 years old, my country gave me a university system with dirt-cheap tuition and asked me to hone my mind for the betterment of society. But unlike my Great-Uncle Phil, I failed miserably to make my country proud. The only thing I honed in college was my thirst for cheap beer and the only thing I liberated in college was my capacity for making excuses and being a lazy sh*t.
The funny thing is that I don’t think my Great-Uncle Phil and his Band of Brothers would have had it any other way. They braved German and Japanese bombs and bullets so future Americans would have the luxury of being a**holes in their youth.
Thank you, Great-Uncle Phil. And thank you to all the soldiers and sailors of WWII. With each passing year, I have a greater appreciation for how truly heroic and selfless you guys were.
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