Take a moment and read this story I found on the Bogleheads forum. It is absolutely excellent. It is from user “sperry8”:
My quick story…
Grew up in an upper middle class neighborhood spoiled by a well to do father who gave me more than I needed. He went bankrupt when I was in an expensive University he was paying for, that I chose. I was 18 and didn’t understand. I stayed in that same University using my credit cards to pay for it and all my expenses. Ran up almost $35,000 in debt (yes, they actually gave a college kid with no history a plethora of credit). Finally at $35k, they wouldn’t give me any more. So I moved home to a local city college. Got 2 night jobs, bartending and valet parking cars for the local Jewish center, where I was embarrassed to park the cars of all my friends and families and accept $1 tips that I sorely needed. On weekends I would go to baseball card shows and sell my collection for whatever I could get. I also moved back in with the parents, where I paid 1/2 the rent to help them out. And I swore I’d never depend on anyone for money again.
I finished school. Paid the minimums on my credit cards while I did (about $600 per mo if memory serves) and took a job after work that paid $20,000 per year. Kept working my way up the ladder… promoted to $24k, then to $40k, then to $54k (couldn’t believe it!), then to $75k… where I finally realized that even at these “high” salaries, I’d never become financially free. The only way to do that was to own something. So I moved West to San Francisco and got a job at a dot com in the early days. The days when Netscape was the #1 browser. It was owned by a large publicly traded firm. I had some shares, but they ended up worthless. However, I was recruited to a 2nd dot com. It was already up and running and had investors and revenue but was private. It sold for $35 million. I owned some stock and got $35,000. I bought a much needed new car. I then went to my 3rd dot com. But this time I went to one that was just starting. It was me and 3 others when it started. Eventually we sold it sold for 9 figures. I got 7 figures. I was 36. I retired at 38.
My advice to your children? Finish University. It doesn’t matter what degree you get. But finish. Then get some work experience and network. Meet as many people as you can – and gain valuable experience while doing it. But quickly – and I mean before 30, go work for yourself. It doesn’t have to be a dot com. I don’t care if you fail. I don’t care if you fail again. But keep taking chances. Sell everything. Get night jobs. But do it. Because unless you have amazing financial skills where you can work at a PE firm or similar, or you’re a doctor, dentist or tradesman with serious skills, you won’t make enough to get riches in the short term working for others. Plus, you’ll have more fun doing it for yourself. Do not work for a corporation. Do not settle for less than you’re worth. Do not buy frivolous things until you’ve met your financial goals. Write down your #. Do not change it. When you hit your #, get out. Life is short. Enjoy it. I have riches now. They provide me freedom but not happiness. They provide me choices but not love. Don’t chase an ever rising #. Don’t hide from life. Don’t hide from yourself. Walk your path. Don’t be afraid where it leads. Just go. If you knew where it lead, you’d be bored and wouldn’t walk it.
Guess what everyone else who got 7 or even some who got 8 figures from the sale are doing now? Every single one of them is still working. And not short days either. Working long hours. They are all married with children. Life is passing them by because they don’t know what else to do. And they are unwilling to sit with themselves til they figure it out. Don’t let life pass you by. Money is the tool, not you. Live, love, laugh, be kind, be patient, be compassionate, and be generous with your time. You won’t regret any of those things when your time is up. Promise. You will regret working away your life. Promise. So be quick about your own rags to riches story if that is what you seek.
I love this story, because it addresses one of the risks associated with accumulating wealth on an average salary. If you make over $250,000+ per year, it is easy to get rich if that is your priority (sure, there are some things you can do to make it harder for yourself to build wealth, such as living in New York, having a bunch of kids and sending them all to private schools, etc.), but for the most part, you can have your cake and eat it too if you go through your life earning a high income because you can indulge in luxuries now and still set aside $25,000-$50,000 per year in investments without sacrificing much in terms of quality of life.
The question becomes more intriguing if you are making $40,000-$65,000 per year, and you desire wealth but you don’t want to “hide from life” by saying “no” to good life experiences because you need to save money. If you make $50,000 per year and want to save $15,000 per year, you are probably going to have to sacrifice something now in order to have a better life for yourself in the future.
But simultaneously, there is a trap you want to avoid: you don’t want to go through your 20s, 30s, 40s, and 50s saying “no” to interesting experiences only to find yourself loaded for a narrow band of time (say, age 65 until death) in which you are financially successful but your body is not in the same condition to appreciate the wealth had you spent the money earlier. As the saying goes, there is no virtue in being the wealthiest man in the cemetery, and you don’t want to live your life in such a way that you gave up your healthy years so that you could have money in your declining years.
How do you balance the interests to have wealth in the future with the interest to live in a way that, if you got struck by a bus in ten years, you wouldn’t feel that you “wasted” your life saving, only to die before your ship came in.
This is a difficult dilemma, and I don’t pretend to have all the answers, but here is how I would think about the problem.
The first thing I would keep in mind is this: reaching goals is always a function of math. Money makes people weird, but at the end of the day, everything comes down to how much you have to save, how long you can set aside the money for, and the kind of returns you can get on that money. You can learn more about making your dreams come true by playing with a calculator for ten minutes than reading every article in Kiplinger Magazine titled, “Are You Ready For Retirement?”
To resolve the dilemma between satisfying my current self and my future self, I would use this guiding principle: I would much rather deal with deep, short-term sacrifice than a sacrifice that is prolonged but only moderate in nature. Likewise, I would like to create some kind of “safeguard” that would ensure that I was taking steps to enjoy life now (readers of financial websites are unique in that you represent the very small subset of America that actually runs the risk of delaying gratification too much).
With those principles in mind, here is what I would do: I would dedicate a five-year span of my life to attempting to amass $25,000-$50,000 in high-quality energy MLPS and REITs, with the express intent to use those dividends/distributions to live in the here and now.
Now is not an optimal time to begin this strategy because low interest rates have caused many energy MLPs and REITs to become overvalued, but that does not mean that you can’t start saving up now so that you can deploy the capital in two, three, four years when the opportunity presents itself.
If you have a $40,000 portfolio spread out into sixteen blocks of $2,500 investments in energy MLPs and REITS, you ought to be able to get an 8% yield from those securities (once they cease becoming overvalued). That would give you $3,200 per year in income. I would use that money to buy tickets to Cardinals baseball games, Springsteen tickets, dates, whatever.
By the way, if energy MLPs or REITs aren’t your thing, you can always stick with more classical choices like BP and Royal Dutch Shell. If that means $2,000 in annual income across this mini-portfolio instead of $3,200, so be it—be happy to take less yield if it means that you are sticking within your circle of competence and buying things that you understand.
The point is to remember that money is just a tool that can affect your standard of living both now and in the future. If you spend some years saving big time so that you can create a mini-fund dedicated to using the dividends for expenditures now, then you can mitigate the risk of “hiding from life.” You don’t want to build up wealth for its own sake—it should have an ultimate end purpose. If you set up an account with the purpose of using the dividends in the here and now, your present life might become more enjoyable, and counterintuitively, it might be easier to increase your savings rate once you start tangibly benefitting from the notion that living off of dividends is fun.