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By Steve Davis
It is a fact that it is hard to break out of the middle class and become wealthy. There are many obstacles that must be overcome. The good news is that most of these obstacles can be easily overcome through education. Not formal education, high school, or college, but from self-education.
I was born and raised middle class. The strategies that the middle-class implement were engrained in my head.
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The strategy was to do well in high school, go to college, get a job, scrimp, and save in an IRA or 401k, work for 45 years, retire, and live off of your savings. This was the map I was given. I bet that map sounds familiar to you, doesn’t it? All middle-class people are given this map. The problem is the map doesn’t work. Ninety-five percent of Americans fail to retire by age 65 using this map. The average savings for a 65-year-old is less than $200,000. No one can retire with that amount of money.
What opened my eyes was after working for the same company 70 hours a week, for 5 years straight, I won a national sales contest. They sent me to Hawaii for a week. When I got back, they cut my pay by $20,000 a year. This woke me up that the map was wrong. I had to do something different. I began self-educating. I bought every book and tape program off late-night TV on real estate investing. Within 2 months I was making more money than at my job. I quit the 70 hours a week immediately. It saved my marriage by the way.
Here are six things that I learned that keep the middle-class, middle-class.
Number 1:
Thinking you can cheap your way through life and save enough to retire.
People cut coupons, conserve water and electricity. They drive across town to save a dollar on tomatoes. They think they can be cheap and save their way to retirement. This is just not true. You may be able to save a few hundred dollars a month being cheap, but think about it, can you live off a couple of hundred dollars a month in retirement?
Let’s do the math. Let’s say you work from age 20 to 65 (45 years). You make an average of $100,000 a year. Less at the beginning, more toward the end of your career. That is $4.5 million over the 45 years.
Let’s say your average expenses were $5000 a month. That is everything from food to mortgage.
How much could you save?
Income: $4.5 million
Taxes: @23% $1 million
Expenses: $5000 a month $2.7 million
Max Savings: $800,000
Using the 4% rule that would give you about $32,000 a year in retirement plus your social security which would be around $2000 a month. That would give you less than $5000 a month in retirement. You would have no money for romance, travel, or anything fun. This would be a horrible retirement by any definition.
It is nearly impossible to save your way to retirement. The numbers just don’t work. What you need to understand is that you don’t have an expense problem, you have an income problem. You just don’t make enough money.
Put the coupons down and read a book on how to make more money. That is why I started investing in real estate. I realized the system was flawed. I focused not on saving money but making more money. That is what is effective.
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Number 2:
Thinking a job is there to build wealth.
The middle class think that a job is a way to build wealth. It is not. They think they are going to climb the corporate ladder to success. This success story is so rare, it is not even worth mentioning. Waiting for people to die, get old, retire, or get fired so you can move up is futile and ineffective.
Why do people think they can do this? Because when someone does do it, they publicize it as the norm.
I used to look up to Jack Welch of GE. I wanted to be like him. The press promoted him and bragged about his $100 plus million paychecks. They did not let you know that he had 150,000 employees that were just barely surviving.
This is much like the casinos that when someone wins $1 million, they promote it all over the place not mentioning the other 10,000 people that were losing money at the exact same time in the exact same casino.
Plus, imagine playing Monopoly and just circling the board and collecting your $200 paycheck every time you passed go. Would you ever win the game? No. To win the game, you can’t just depend on a paycheck. You must buy income-producing assets such as rail roads, utilities, and real estate. It is the same in real life.
Number 3:
Thinking high school and college teach you about building wealth.
The sad truth is neither high school nor college teach you anything about building wealth. They teach you how to get a job and nothing more. That is what they were designed to do.
You are responsible for your financial education. Jim Rohn put it this way. “Formal education will make you a living, self-education will make you a fortune.”
Seventy percent of Americans never read a non-fiction book after high school or college. This is a huge mistake. They think they know everything, and they end up broke at 65.
You must read, listen, and attend seminars and workshops if you are going to learn the rules of money and wealth.
Number 4:
They waste massive amounts of money trying to impress others.
The “keeping up with the Joneses’” costs the middle-class billions a year. Constantly upgrading their clothes, watches, cars, and homes to impress people who don’t even care.
Remember this point: “Dance like no one is watching. They aren’t.” This is very true. They just don’t care. They have their own lives and problems to worry about. They don’t care what kind of car you drive or where you live. Stop trying to impress others. It is a waste of time and money.
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Number 5:
Buying toys first and assets second.
The middle-class has it backwards. The say this to themselves. “I will buy all the things I want first, and then I will start saving and investing.” It doesn’t work. By the time they buy the clothes, watches, cars, and houses, they are living paycheck to paycheck. There is no money left over to save and invest.
The people who end up wealthy buy assets first, and with the profit from these assets, they buy the toys.
I have never made a payment on my boat, Ferrari, or beach house. My assets pay for them.
Number 6:
They fall victim to lifestyle creep.
Do you remember in your 20s and 30s when you made very little money and lived paycheck to paycheck? Of course. You didn’t make much money, so it makes sense.
However, it is 20 years later, and you are making 3 times as much but you are still living paycheck to paycheck. Where did that other money go? Lifestyle creep.
When you got your first raise, you decided to buy your first home and took on a mortgage way higher than your apartment rent.
You got your second raise and now you needed a nicer car. Maybe a BMW.
You got your third raise and now your kids are not in the right school district, so you must buy a more expensive home in a nicer subdivision.
Are you starting to see what’s happening? Every time you get more money, you are spending it to improve your lifestyle leaving you continually living paycheck to paycheck.
These 6 things combine to keep the middle-class middle-class. It is a sad situation but can be solved fairly easily by stopping the madness.
Be aware, I did every one of these things at one time or another and I turned my life around very quickly by stopping. You can too.
Steve Davis,
Total Wealth Academy CEO and Lead Consultant
Host of the TWA Real Estate Investor Radio Show
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