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Beyond Paycheck to Paycheck presents financial planning education

Beyond Paycheck to Paycheck

A Conversation About Income, Wealth, and the Steps in Between
By Michael B. Rubin

Wachtel & Martin LLC

Copyright © 2007 Michael B. Rubin
All rights reserved.
ISBN: 978-0-9787927-8-7


Chapter 1. The Basics: Tell Your Money to Go to work
Chapter 2. Don't Be Cheap, Be Fiscally Responsible
Chapter 3. Debt Sucks (Your Money Away)
Chapter 4. Taxes on Your Taxes Are Taxing (Yet Real)
Chapter 5. Use Protection: Insurance
Chapter 6. Take Advantage of Your Benefits (or You're Being Kind of Dumb)
Chapter 7. Ira Roth Is Not Your Congressman--Do-It-Yourself Retirement Planning
Chapter 8. Maximize Your (Investing) Performance
Chapter 9. Death Happens: Estate Planning
Chapter 10. Take This Book and Use It!
Amazingly Comprehensive Glossary of (Mostly) Important Terms

Excerpt One

The Basics: Tell Your Money to Go to Work

"The beginnings of all things are small." --Cicero


Money is amazing. Look at any dollar bill. It's lightweight, rips easily, and flies away in a slight breeze. Yet you can go to any convenience store, hand a cashier this green piece of paper and walk out with a bag of chips. The cashier might even smile as you leave. To me, that's astounding.

Simply put, money has value because you can buy things with it. Depending on how much of it you have in your wallet, your money can buy you a steak dinner at a fancy restaurant or a side order of fries at a diner.

Money can sit in your wallet, desk drawer, pocket, or be buried in your couch. Money in these places is your cash on hand because that's where it is. You can access it and spend it, instantly. (Admittedly, it may be harder to access the cash buried in your couch, but you get the idea.) Because cash on hand is not invested, you can spend it now.

You: How do I get money?

Gary: I can get you some. If you give me $1,000 now, I guarantee you $5,000 in five years.

Some words to the wise: Always be wary of what people guarantee. If an offer seems too good to be true, it usually is. There's no such thing as a sure investment that will quintuple your money in five years. Furthermore, never write a check to an advisor. Write it to the nationally known name of the brokerage house or mutual fund the advisor works with. Your name should be on the brokerage house's account statements, not the advisor's alone.

Of course, you'd like to know the best way to accumulate more money. One way is to follow comic Steve Martin's savvy advice for becoming a millionaire: "First, get a million dollars." More realistic methods to acquire money include gifts (most people get gifts, large or small, from time to time), inheritances (for some people), and winning the lottery (for one in a zillion, yet this long shot gets the most press. Unfortunately, many people spend too much money trying to achieve instant wealth through this method.). But gifts, inheritances, and the lottery are far less likely sources for your acquiring money than by working for it. That conclusion may seem boring and even uninspiring, but the earnings you receive by working are truly the most important source.

If you start making $30,000 annually at age 22 and receive a 3 percent raise each year, by your early sixties you will have earned more than $2.3 million over your career. When you work at a job, you can expect to get paid for your efforts, or at least your time served. This compensation for your work is your income and is a major source of money for nearly everyone.

You: Let me rephrase. How do I get a lot of money other than by working?

Ahh. Well, nearly everyone needs a paycheck to first acquire money. It is how you treat the money you earn that determines whether you struggle from paycheck to paycheck or ultimately move beyond.

The real answer to your question is to create wealth. Many eye-opening examples of how to create wealth appear throughout this book. None are more important than this first one:


Wake up! If your eyes are reading but your brain isn't paying attention, this is one section that can change your life.

What you will learn in this section changed my life. I was fortunate to have been taught at a young age the lesson I am about to share with you. Few people ever learn this lesson. Of those who do, most learn it so late in life that the biggest advantages the opportunity provides have already passed.

Ever hear the phrase "I will gladly pay you Tuesday for a hamburger today"? This was the trademark phrase of the legendary character Wimpy from the Popeye comic strip and television cartoons. That phrase may have been your first introduction to a key financial planning concept.

Wimpy, who could pack 'em away, negotiated for food. Rather than pay for the hamburger when he received (and ate) it, he offered payment next Tuesday. Of course, Tuesday never seemed to arrive. I can't remember Wimpy ever paying for a hamburger. That gimmick may be a big part of the humor for a five-year-old, but the financial lesson, admittedly unintended, is far deeper.

Even though Tuesday comes each week in the real world, it's nevertheless a good financial strategy to pay in the future for something you receivetoday. Similarly, it is better to receive money today instead of receiving the same amount in the future.

Let's say I offer you the following two choices:

1. you receive one dollar today, or

2. you receive one dollar tomorrow.

Which choice do you prefer?

You: It doesn't matter to me. It's already 9 PM and I'm not going out anymore tonight. Whatever. You pick.

Although there's neither much money at stake nor a long time to wait in this scenario, the smarter move is to choose to receive the dollar today. After all, you can spend the dollar today instead of waiting for a day. If you're a saver, you can put the dollar in the bank today and earn interest for an additional day.

Since you don't care that much for either of those choices, try this scenario:

1. you receive $1,000 today, or

2. you receive $1,000 in three years.

You: Now we're talking. I'm free in an hour. Where should we meet?

I thought that thousand bucks would sound pretty good right now. Take an extreme example:

1. you receive $1 million today, or

2. you receive $1 million in 30 years.

You: Do I even need to answer?

No. Now the choice is obvious--you'd be a fool to turn down the million dollars today.

As you can see, the more money involved and the longer the delay to receive it, the more difficult waiting becomes. Because money is worth more today than in the future (known as the time value of money), you always prefer receiving money sooner. Said another way, a dollar will be worth less in the future. It actually loses value over time.

You: Why is my money worth less in the future than it is worth today?

One reason is inflation. Inflation is the overall trend of rising prices over time. Most items rise in price. Inflation has historically averaged about 3 to 4 percent each year. You might not notice the small yearly increases, but over many years these increases have a tremendous effect.

Remember when Manhattan was purchased for $24?

You: Um, I'm pretty sure that happened way before I was born.

Hey, you're pretty sharp over there. Indeed, that sale did happen a long time ago; 1626 to be precise. Still, 24 bucks doesn't sound like very much, does it? But assuming 4 percent annual inflation over 381 years, $24 in 1626 is worth roughly $74 million in 2007! So you would have definitely preferred to receive $24 in 1626 instead of receiving $24 in 2007.

Another reason to prefer a dollar today rather than a dollar in the future is what you can do with the dollar you have in the interim--you can invest it.

Imagine two young women, Jessica and Grace. Both are 30 years old, earn the same income, and live in neighboring apartments. If it helps you to see them as remarkably similar, yes, they have the same hairstyle.

Grace receives a gift of $1,000 on January 1, 2007 and Jessica receives the same $1,000 gift ten years later, on January 1, 2017. Each earns an 8 percent interest rate on her $1,000.

Look at the following tables, which highlight the impact of receiving the same gift at different times.

What stands out? Perhaps most striking is the amount of money Grace will have accumulated by the time Jessica receives her $1,000 in 2017. Grace's original $1,000 will grow to $2,159. Think about it. That $2,159 figure is more than double what she started with just ten years earlier! Meanwhile, Jessica has only $1,000 at the beginning of 2017 because, after all, that is when she receives it.

Now look at the year 2042, when Grace and Jessica turn 65 and (we'll assume) retire. Grace's original $1,000 has been invested for 35 years compared to 25 years for Jessica's money. While both will have been saving a long time, look at the difference in the value of the original $1,000. Jessica's money will grow to nearly $7,000 over those 25 years. But Grace, due solely to her ten-year head start, will have more than double Jessica's total--a shade under $15,000!

You: Why does this happen? How can two people each receive exactly $1,000, earn an identical interest rate, and end up with such different amounts of money? Is there more going on here than Grace's head start?

No, there are no games. The numbers work out this way because of the miracle of compounding interest. This miracle is a key factor behind the time value of money.

You: A miracle? C'mon. The Red Sox beating the Yankees in 2004 was a miracle. TiVo is a miracle. I don't even know what compounding interest is--how could it be a miracle?

Compounding interest occurs when your money makes money for you. For example, in 2007 Grace earns $80 in interest (calculated as 8 percent or 0.08 x $1,000). The following year she starts with $1,000 plus the $80 of interest earned in 2007. As a result, she earns $86.40 (calculated as 8 percent or 0.08 x $1,080) rather than the $80 earned the year before. The additional $6.40 is a result of the miracle of compounding interest.

You: Big deal. I can barely rent a movie for $6.40.

You're right, it isn't a big deal. Not in the short-term, anyway.

You: So why are we talking about this?

Since short-term decisions have long-term implications, you must simultaneously consider both. It is your actions in the short term that create your reality in the long term.

For example, observe the enormous long-term impact of the miracle of compounding interest in the table below:


Although Grace's original $1,000 earns $80 every year, the total interest she earns increases dramatically. In 2042, she earns $1,183 in interest! That year alone, her interest income is more than her original $1,000 deposit!

You: You've got to be kidding! That is a miracle. Who cares about the Red Sox? Forget TiVo.

Easy does it--I live in New England. But I'm glad you see how powerful compounding interest can be. Have you ever heard the phrase "It takes money to make money"?

You: You bet. Remember, I asked you how to get more money without working.

Compounding interest is a great example of money making money--and it sure beats working. How hard will Grace have to work for the $1,183 of interest she earns in 2042?

You: She doesn't have to work at all for that money.

That's right. Grace's success comes from only two steps and neither one involves going to work. First, she can't spend the original $1,000--she must save it. Second, she must leave the interest earned each year in the account. This allows her money to make more money.

You: Okay, I get it. When I receive $1,000, I should save it and forget I have it. If I leave it alone long enough, I can wind up with big bucks.

You got it.

You: That still leaves one problem, though.

And what is that?

You: I don't have $1,000.

I figured that, and I bet one of the reasons you don't have $1,000 is you didn't know the true implications of saving money at your age. Perhaps your parents told you "saving is important," but before you read this section did you truly understand why it was so important?

You: I guess not.

Of course not--nobody explained this to you, so how could you know? But that just changed. See what awareness of this miracle can do for you? It provides the motivation to save. The strategies for doing so are in Chapter 2.

Look, the lesson here is not to emulate Wimpy by buying hamburgers at McDonald's and bargain with the cashier as if you're haggling over jewelry in Cancún on spring break. Rather, find a way to save that $1,000--or whatever amount you can manage to save--sooner rather than later. One thousand dollars a year is less than three bucks a day.


Allow me to beat what should already be a dead horse but is likely not. Let's understand the implications of adopting a successful savings strategy relatively early in life.

It's time to meet Ben and Henry. They're good friends (some think they must be related) and each will turn 21 in 2008 and begin working full-time. While they earn the same salary, they are quite different with respect to their saving habits:


* Ben gets his act together quickly and manages to put $1,000 in his
savings account by the end of 2008. He makes saving a priority
and continues to save $1,000 each year for ten years ($10,000 in
total). After making a $1,000 savings deposit at the end of 2017,
he skips the New Year's Eve parties and instead goes to a local
park and shouts "I have enough!" four times: once facing North,
once South, once East, and once West. Then, in a quieter reflective
voice, he vows to neither add nor remove any money from his
account until he retires.

* Compared to Ben, Henry is neither as committed at age 21 nor
as whimsical 10 years later. Henry doesn't save a dime during his
first ten working years. "Easy come, easy go" is his mantra. But
exactly one year after Ben's "moment" in the park, Henry decides
to get on the "saving thing." From that point forward, he saves
$1,000 a year, and he does so for 35 consecutive years until retirement.
He never misses a single year and saves a total of $35,000.

* The interest rate on each of their savings accounts is identical:
8 percent every year.

It's now the end of 2052, so both Ben and Henry are 65 years old. Who do you think has more money? Keep in mind Henry saved a total of $35,000 (35 years of $1,000 per year) and Ben saved a total of only $10,000 (ten years of $1,000 per year).

Am I reading your mind? Is the logical side of your brain saying:

"C'mon man. Henry saved over three times what Ben did. Ben didn't have a higher interest rate. Henry has to end up with more money. You can't flake out at age 30 and wind up ahead at the end. There's no way Ben has more, given how much more money Henry saved."

And the cynical side of your brain is saying:

"Look--this guy's trying to prove a point. Why create an example in which the expected and logical answer--Henry having more money--is correct? I guess Ben winds up with a little more money somehow."

Here's what happens.

1. In 2052, Ben has more money than Henry.

2. The totals are not even close!

Ben saved less than a third of what Henry saved, yet has 24 percent more than Henry. Let that sink in for a minute. Ben has 24 percent more money available for his retirement though he saved less than one-third the amount Henry saved--and for one simple reason: Ben started sooner.

Here's a snapshot of how their respective savings grow over time:


The miracle of compounding interest is a critical phenomenon to embrace. Now armed with an understanding of the miracle and an appreciation for its benefits, you need to take this knowledge to heart by changing some behaviors. First, you need to start saving right away.

You: But I'm only ...

Perhaps. But you will never be further from retiring than you are right now. By delaying saving, you choose to waste the opportunity that the miracle of compounding interest provides you. Procrastination has implications. Negative implications.

Another thing: What would the result be if Ben had not had his epiphany in the park? If he kept on saving? Let's look at Lauren, a good friend of Ben and Henry. Like Ben, she started saving at age 21 but kept right on. She saved $1,000 a year for 45 years. Here are the results of Lauren's financial actions:


The difference is stunning, isn't it? By saving just $1,000 a year, Lauren has over $385,000! Since saving $1,000 per year is only $3 per day--it isachievable. Imagine what her total would look like if she'd been able to save just slightly more, say $5 per day. Or $10!

You can retire wealthier by saving a little now than by saving nothing now and saving much more later. Use this miracle, this open secret, as motivation to get going sooner.


Excerpted from Beyond Paycheck to Paycheck by Michael B. Rubin Copyright © 2007 by Michael B. Rubin. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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