One of my favorite movies is the 80's cult-classic about high school wrestling, “Vision Quest.” In one of my favorite scenes from this film, the main character Louden Swain, played by the amazing Matthew Modine, is seeing his friend Elmo, played brilliantly by the late J.C. Quinn, right before Louden's climactic final match. Louden is shocked to see that Elmo has taken the night off from work to attend the match. Louden, perhaps feeling a bit of nerves as the reality of the event is finally upon him, tries to convince Elmo to not go to the match. This results in the following dialogue ensuing:
Louden Swain: “It's not that big a deal, Elmo. I mean, it's six lousy minutes on the mat, if that.”
To which Elmo responds, “It ain't the six minutes...it's what happens in that six minutes.”
Now is the time when you think to yourself, "Why in the heck am I reading an investing blog from a guy who quotes high school wrestling movies from the 80's filled with big hair, acid wash jeans, and songs from the pop group Berlin?!"
My answer is that I have no clue 😉 However, I do know that this quote came to mind recently after reading an article on building wealth.
Don’t Skip the Starbucks
The article in question entitled, "Self Made Millionaire: Forget Skipping Starbucks, Here are 5 Real Ways to Get Rich, was written by the brilliant Grant Cardone and has been circulating around the internet. The article discusses how skipping the $5 Starbucks latte is a waste of time in terms of building wealth. It further states that the way to become wealthy is by improving yourself, increasing your ability to earn a higher income, and investing the proceeds. I agree with 95% of the article. I think that Mr. Cardone's message on increasing your skills, increasing your net worth and investing is awesome.
The part that I respectfully disagree with is the idea that skipping the latte every day is a waste of time as it will not make you wealthy. While it is true that the $5 will not make or break you, skipping the latte is still imperative to wealth building for four main reasons:
- The discipline of frugality and increasing net worth are often correlated, and are not mutually exclusive as Mr. Cardone suggests.
- Earning a high income without the discipline of being able to control spending is a recipe for disaster.
- Financial Freedom is achieved faster with minimal expenses.
- The $5 a day can add up over time.
1. The Discipline of Frugality & the Discipline to Increase Net Worth Are Strongly Related
Let's talk about the first point. The late and great Jim Rohn once said that the definition of success was "a few simple disciplines practiced everyday." Success is not a Herculean effort that you do one time, rather it is accomplished little by little, and sometimes by steps that are seemingly insignificant at the time. I agree with Mr. Rohn, and I would argue that the quality of being disciplined with spending and the ability to create wealth are anything but mutually exclusive, despite Mr. Cardone's suggestion of the opposite. In fact, where you find one it is not uncommon to find the other.
People who look for opportunities to save appreciate the value of the dollar and oftentimes are also disciplined in looking to improve themselves, their skills, and their earning ability. To further quote Jim Rohn, “All disciplines affect each other.” Meaning that when one discipline improves, another discipline will likely improve as well. So, if someone is careless with their spending habits, it is not likely that they are going to have the discipline to acquire the skills to significantly increase their net worth.
There are many real life examples of extremely wealthy people who have saved/are saving small amounts of money at every opportunity. For example,
- Mark Cuban ate mustard and ketchup sandwiches when he was starting out.
- Warren Buffett buys used cars that are damaged by hail as they are a better bargain than new cars.
- Ingvar Kamprad, the founder of IKEA, passes up the private jet to fly coach on commercial airlines.
Mind you, the acts of eating mustard & ketchup sandwiches, buying hail damaged cars, or flying coach, in and of themselves, did not make the above-mentioned people wealthy. However, all of these actions require a discipline and mentality to sacrifice pleasure today for riches tomorrow, and this frugal mentality did help to propel them to wealth. Not coincidentally, the above-mentioned people had the discipline to improve their skills to increase their earning abilities and accumulate large net worths as well.
In addition, the correlation between saving and accumulating net worth is further supported by the book, "The Millionaire Next Door." This book consists of extensive data describing America's wealthiest 1%. The findings of the study found that the wealthiest 1% of Americans were not frivolous spenders, but were the exact opposite, they were great savers. The sentiment of the book can be summed up by the author, Thomas J. Stanley, who said, "The foundation of wealth accumulation is defense." To become part of the wealthiest 1%, it is imperative to be be frugal at every turn.
2. Lots of Cash Without the Discipline is Trouble
If you are still not convinced that frugality is essential to building wealth (and just as importantly, keeping it), I would recommend that you look at the other side of the coin. People who often come into large amounts of cash, whether through a windfall or an extremely high paying job without first acquiring discipline with finances, are notorious for losing their money. This occurs in many avenues in our society, for example:
- 70% of lottery winners lose their wealth in a few years and 1/3 declare bankruptcy.
- 70% of inheritances are completely spent by the 2nd generation and 90% by the 3rd.
- People who acquire high paying jobs without first getting financial discipline often lose their wealth. A perfect example are professional athletes, for which a documentary entitled "Broke" was recently made discussing this issue.
People often believe that earning a huge income is what makes people wealthy, but that is not necessarily true. In fact, Thomas Anderson further stated in "The Millionaire Next Door" that it is common to be a high income earner, but still have a low net worth. He called these people "Under Accumulators of Wealth" (or UAWs). He discussed that a large reason for these high income earners to be UAWs was because of their frivolous spending habits. Accordingly, one's spending habits are critical to determining whether they can get (or keep) the money that they earn.
3. Financial Freedom is Easier with Lower Monthly Expenses
The definition of financial freedom is passive cash flow from assets greater than monthly expenses. To be financially free means that one does not have to rely on a job to fund their lifestyle. Rather, they get to live life as they like.
It is imperative to know that this is a two way street. To be financially free one needs to: (1) increase income from assets, while (2) cut expenses. The more that one is able to cut expenses, the less passive income from assets is needed, which ultimately means that one can become financially free faster, it is that simple. Since we all have to start somewhere with cutting expenses, what better place to start than in the simple $5/day habit?
4. $5 Can Add Up
Now, onto my final point of the $5 adding up over time. While $5, in and of itself, is not a huge chunk of money, $5 saved everyday and invested can become a huge amount of money. This principle was first shared with me by my mentor Gary Johnston and was explained exceptionally well in the book "The Compound Effect" by Darren Hardy.
Here I will show an example explaining this concept. What if our friend Marta, decided to skip the Starbucks. Marta saved $5/day that she would have spent on her latte and instead she invested the proceeds at 15% (I know what you are thinking, "15% is impossible." It is not, but that discussion is for another time) for 30 years, what would she have? Below is the answer:
Answer: Here are the numbers to enter into your HP10bii Financial Calculator (if you don't have a financial calculator, no problem, simply follow along for the answer)
N (number of months) = 360 (360 months in 30 years)
I/YR (interest rate/year) = 15 (the interest rate that the money will be earning)
PV (present value) = 0 (in this example, we are assuming that Marta is starting with nothing)
PMT (monthly payments) = (150) (she is saving $5/day and there are 30 days in a month, making it $150. Note that this is entered in as a negative as Marta loses access to the cash while it is earning interest)
FV (future value) = ??? (this is what we are solving, as we want to know how much Marta will have at the end of 30 years)
After entering in the numbers above, Marta will have $1,038,491.94 in 30 years from skipping the latte and investing that money at 15%. Not too shabby!
In closing, the act of saving money is essential to building wealth. Not only can a little money add up to big profits down the road, but more importantly, the discipline of frugality will help people keep what they have, and in some cases, give them the discipline to learn the skills need to increase their earnings and net worth as well, all of which are needed on the journey to financial freedom.
Ultimately, this discipline can be had by anyone and opportunities to practice it are all around, whether it is delaying the purchase of the dream car, brown bagging lunch, or simply skipping the $5 latte. That discipline of being able to sacrifice pleasure today, however small, for a bigger payout down the road, is absolutely essential to accumulating (and keeping) wealth.
Coming back to our friend Elmo from Vision Quest, I think that if Louden told him, "It's not that big a deal, Elmo. I mean, it's a $5 latte, if that." Elmo would respond, "It ain't the $5 latte, it's what happens to you when you skip that $5 latte.”