Illustration by Tim Bower
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Start Late, Finish Rich
By David Bach, September & October 2005
Five steps you can take today to ensure your financial future—even if you haven’t yet saved a dime
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I had just finished giving a money seminar in Washington, D.C., when a woman
in the audience raised her hand. "David," she said, "I'm 52
years old and I've done everything wrong. I'm working 45 hours a week
just to make ends meet and I've got literally nothing in savings. Last year
I met with a financial adviser who told me I needed to be saving $2,700 a month
in order to retire. Considering that after taxes I take home only about $3,500,
his plan was ridiculous. When I asked him what I should do, he responded,
'Don't shoot the messenger.' I left the office so discouraged and
mad at myself that I've done absolutely nothing. Can you help?"
My question to the woman, whose name was Harriet, was simple: "Can you
save $10 a day and start to forgive yourself for what you haven't
done?" Harriet smiled and nodded, and together we created a plan to get
her back on track. Let's take a look at what she did—and what you can
do, starting today, that will give you some peace of mind about your financial
future.
1. Break Out of "If-Only Land"
You can't move forward when you're stuck in a world of regrets.
It's what I call if-only land. If only I had started saving
earlier.… Well, you didn't. Or maybe you did, but something happened
that threw you off track. Life works like that. The past is over, so stop
looking back and start focusing on what you're going to do now.
• Action Step The fastest way to get over something is to get it down
on paper. Take out a pad and make a list of your if onlys. You might write:
"If only I had bought Dell stock the day I bought my first Dell
computer.…" or "If only I had signed up for my 401(k) plan
when my company first offered it.…" You get the idea. Once
you've got a nice long list, tear it up and throw it away. Have a goodbye
party for your if onlys. This may sound silly, but trust me: nothing moves you
forward faster than letting go of the past, and this exercise can really help
you do that. The bottom line is that you deserve to give yourself a break,
learn from your mistakes, and be ready to live differently—starting
today.
2. Find Your Double-Latte Factor
My secret for saving is called The Latte
Factor, and it's the simple idea that we all have more money than we
think, but we spend it on small things—like fancy coffee, bottled water,
you name it. If you spend $5 a day on coffee and a bagel, that's nearly
$2,000 a year—money that could be helping you catch up on your savings.
Harriet, for example, learned that if she and her husband each saved $10 a day
starting at age 52 and invested it in mutual funds that gave them an average
rate of return of 8 percent—not unreasonable if you diversify your
portfolio and invest for the long term—then by age 70 they'd have
$294,449 in savings. If their companies matched 50 percent, which they did,
through their 401(k) plans, that pot of gold could grow to $441,673—not
bad for a late starter.
Okay, so you've got your Latte Factor. Now let's look at your
Double-Latte Factor. That's the amount you can save by cutting back on your
monthly expenses. Take your cell phone bill. Do you regularly exceed your
allotted minutes and end up paying a premium for the extra time? Read your next
cell phone bill closely; chances are there are now better deals being offered
that provide more monthly minutes at less cost. Or how about your gym
membership? Sure, there's a penalty for getting out early, but if you never
go to the gym anyway, you're better off paying the penalty than shelling
out $60 a month for the next 18 months. The key here is that you don't have
to give up all your luxuries; you just have to cut back on them.
• Action Step Track your expenses for a day. Click here for a free work
sheet (note: PDF file). Take the form with you everywhere you go and write down every penny
you spend. Can you bring your lunch to work instead of buying it every day? Can
you consolidate your errands to save on gas? (See "Easy Ways to Save $10 a
Day.")
Now make a list of all your monthly expenses. Look for at least three things
you can cut back on. If it's your cable plan that could be adjusted to save
you some money, pick up the phone right now and call your provider. Or perhaps
your local Internet provider is offering better rates than when you first
signed up. You won't know until you call.
If you need a little extra incentive to help you make sacrifices, use the Latte
Factor calculator to see how much saving a few dollars a day can transform
your future. For instance, take that $5 you're going to save by not buying
a coffee and bagel every day before work. If you invested that $25 a week,
again assuming an 8 percent average annual investment return, after one year
you'd have $1,404, after five years you'd have $8,236, and after 10
years you'd have $20,339—at which point you have my blessing to go
out and splurge on a Starbucks venti Frappuccino. But only one.
3. Shed Your Debt—Now
Unfortunately, many of you who are starting late aren't just starting
from zero. You're starting from less than zero. Except for your mortgage,
which is tax-deductible, debt is bad. Get rid of it!
A year ago a woman I know named Margaret had more than $10,000 in credit
card debt. Margaret was paying the minimums due on her cards—about $250 a
month—but her cards were charging her an average of 20 percent interest.
At that rate, it would have taken her nearly 30 years to get out of debt. With
a few phone calls—and a commitment to stop using her cards—Margaret
was completely debt-free within a year.
Here's how she did it. She first called her credit card companies to
renegotiate the rates. Then she resolved to pay an extra $10 a day toward her
credit card debt. This was money she "found" by figuring out her
Latte Factor. Finally, she canceled a few of her Double-Latte Factor
expenses—her movie channels, video membership—and put that money
toward her debt. Your finances may differ, but you can model her plan.
• Action Step Pull out your last credit card statement and find out
what your interest rate is. Then find out what the competition is offering.
Keep your junk mail for a week and actually read the credit card offers you
get. Most are offering zero percent rates for up to nine months. You can also
check for great deals on consumer websites such as www.lowermybills.com and www.bankrate.com. Then call your credit card
company and ask to speak with a supervisor. Share with him or her that
you'd like to close your account unless the company can make you a better
offer. You've got nothing to lose, so be bold and honest. Share the best
competitor's offer and ask the company to match it.
Related Resources from FinishRich.com
The Latte Factor and the Latte Factor Calculator
The Latte Factor Challenge Worksheet (note: PDF file)
If you do make the switch to a low-interest-rate card, read the fine print
closely. Some cards will increase your interest rate to 19.99 percent with one
late payment and up to 29 percent with two late payments. And when the nine
months are up, your rate can shoot up even higher. So avoid these cards unless
you are sure you will be able to pay down your debt significantly before the
introductory offer expires.
Finally, cut up your credit cards, hiding just one in a hard-to-get-to place
for an emergency, and start paying with cash. You'd be surprised how much
fun it can be watching the balance-due amount go down on your credit card
bills.
4. Pay Yourself First
Most self-made millionaires make a decision at a young age to "pay
themselves first." Paying yourself first means that the first person who
gets paid when you earn a dollar—even before Uncle Sam—is you. The
only legal way to do that is to use a tax-deductible retirement account like a
401(k) plan, SEP IRA, or deductible IRA.
If you're working part-time or consulting, you can still pay yourself
first by having automatic withdrawals taken from your check and put directly
into an IRA. The magic formula, whether you earn minimum wage or $100 an hour,
is to save at least one hour a day of your income. A great goal for late
starters is two hours a day of income.
• Action Step If you don't already have a retirement account, set
up a meeting with the benefits person at your company. If your company
doesn't offer a 401(k) plan, you can open an IRA or SEP IRA at a bank,
brokerage firm, or online. Start with a site like www.vanguard.com or www.ingdirect.com. While you're there, find
out about automatic-payroll-deduction plans that divert money from your
checking or savings accounts into mutual funds or retirement accounts. It
won't be pretax, but you'll get the advantage of dollar-cost averaging:
by investing the same amount each month, you buy more when prices are low and
less when they are high.
5. Turn Your Hobby Into Cash
According to the Bureau of Labor Statistics, there are more than 6 million
self-employed people working from home in the U.S. Many of these entrepreneurs
are people over the age of 50 who have started a part-time business. A
home-based business can mean working as a consultant for your old company or
creating a part-time business on the side. And with the Internet—in
particular, online auction sites like eBay—it's getting easier to
start a business with little or no money.
• Action Step Take a look around your house and consider getting rid
of the belongings that you don't want or need. You don't even have to
put them on eBay yourself because now there are companies that will do all the
legwork for you. (Go to www.creativeauction.com or www.auctionitforyouonline.com.) Mind
you, these companies do charge a flat fee or take a percentage of your profits,
but they do all the hard work—the listing, the auctioning, the shipping.
If you're curious about eBay, go to www.ebay.com and poke around on the message boards to
see if it might be something you're interested in.
If you have a business idea of your own, go to the websites of the Small Business Administration or the Service Corps of Retired Executives for free
information that can help you make your dream a reality.
When I heard from Harriet a year after meeting her, she said, "David, I
can't tell you how much better I feel now that I know I'm doing
something positive about my financial future. I have more confidence, I'm
less worried, and in truth, I'm sleeping better." Harriet learned
something surprising about finishing rich: it's ultimately not about the
money; it's about the feeling of freedom that comes from knowing you're
in control of your destiny. And it's never too late to start.
David Bach is the author ofStart Late, Finish Rich(Broadway Books, 2005). The Latte Factor is a
registered trademark of Finish Rich Inc.
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