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Recently I've been re-reading David Bach's, "Smart Couples Finish Rich" and find it to be every bit as good today as when it came out in 2001. A few things have changed but overall it is still very topical and relevant. Instead of formally reviewing it, I thought I'd take a closer look at some of his ideas in what will be a series of short posts, of which this one will be the first.
Myth No. 1 – If we love each other, we won't fight about money
I hope no one who is a grown up actually thinks this is true. Love and money don't really have anything to do with each other. You can have all the love in the world for someone but if you have different ideas about how to handle money, you will fight about it. If you value money differently you will have problems. If you spend money differently, you will have problems. If you don't understand and accommodate each other's feelings about money you will have problems. As the divorce rate shows, love actually doesn't conquer all.
Myth No. 2 – It takes money to make money
Thanks to the magic of compound interest, you can take very little money, stash it away in an interest bearing vehicle and, over time, make a great deal of money. Believing in this myth will give you a very defeatist attitude about saving. To illustrate the power of compound interest, take a look at the following chart showing daily, monthly and yearly investments suggested in order to build a million dollars at 12% by age 65:
Starting Age | Daily Savings | Monthly Savings | Yearly Savings |
20 | $2 | $61 | $730 |
25 | $3.57 | $109 | $1304 |
30 | $6.35 | $193 | $2317 |
35 | $11.35 | $345 | $4144 |
40 | $20.55 | $625 | $7500 |
45 | $38.02 | $1157 | $13879 |
50 | $73.49 | $2235 | $26,824 |
55 | $156.12 | $4749 | $56,984 |
While the figures for starting at 50 or 55 are a bit daunting, the rest are bordering on that latté factor, for which David Bach is famous. Let's face it, twenty dollars a day is that coffee and a muffin at Starbucks and lunch out. Another way to look at it, $20 a day at 10% interest will get you a million dollars in 27 years. That's not actually all that long and twenty dollars a day can be pretty painless if you think about your spending. Since we're talking about couples; that's only $10 a day each! I realize the market has tanked but 10-12% interest is historically a pretty reasonable rate of return.
"Most people overestimate what they can do financially in a year and underestimate what they can achieve financially over a few decades."
Myth No. 3 – If we don't talk about money, everything will work out okay.
How? According to the American Association of Retired Persons, only one in five baby boomers has more than $25,000 in assets. That's a pretty scary statistic. How did that happen? Up until recently the economy was booming. Clearly too much spending and not enough saving was going on. The only way to get your financial house in order is talk with your partner about money. A lot of people grew up with the idea that talking about money was taboo. Parents did not talk to each other about money and they certainly did not talk about money with their children. That has got to change. Smart couples talk about money all the time. Couples who make a financial plan and work together to achieve it will be happier. It is terribly important to talk with your partner and find out how they feel about money. The idea is not to blame and chastise but to examine where you are financially and where you would like to be.
What about you? Any myths about money that you have debunked? Are you and your partner working as a team to reach your financial goals? How did you get started?
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8 comments:
This is not a myth but just a comment. When it comes to me and my girlfriend I feel like I have to babysit her with her money. She makes decent money but she can not go a week without shopping or eating out. It absolutely annoys someone like me that saves their money seriously.
Wow, Studenomics, sounds like you two need to have a serious conversation! Does she appreciate your babysitting?
The inflation adjusted annualized rate of return for the S&P 500 over the last hundred years is six percent.
@Mercer - you are absolutely right but inflation relates to how far your money will go, not how much you have. According to the National Center for Policy Analysis the stock market's worst average annual real rate of return for 65 consecutive years was 8.5 percent. So, Bach's example, which is reflective of savings, not spending power, is valid and clearly shows the power of compound interest. Thanks for your comment!
Am newly married and one of the precious lessons i learned during our first year is that money problems don't go away by staying mum. we have to talk about it and it does take a lot of practice. but we are doing very well i think, as we slowly learn to talk about money matters and make some small changes along the way. Thanks for your post.
Good for you, Abby Villa, for making yourself talk about a difficult subject. Not only will it make things run more smoothly, I think it makes you feel more like a team. Good luck, you are off to a great start! Thanks for stopping by and thanks for your comment!
We are completely different when it comes to money, but over the year my wife and I have always communicated any major money decisions and generally reached a consensus on the issues that matter.
Communication is definitely the secret, Andy. Sounds like you two have that all figured out! Good luck! Thanks for stopping by and thanks for the comment!
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