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Almost everyone remembers reading the children’s book “The Tortoise and the Hare” when they were younger. The moral of the story is a simple one: “slow and steady wins the race.” Most people would agree it is a good principle to live by — but few practice it. Too often in life we rush into situations or make decisions based on emotion or haste without looking at the details more closely or from another perspective.
The point: being the tortoise is not as boring as it seems, and fast money usually leaves even faster. Building wealth is a marathon, not a sprint. Yes, big breaks are possible, but for the average person with an average income, those opportunities are rare.
In today’s column, we explore what poor financial planning looks like and how to build wealth on an average income through the implementation of a budget and an investment plan.
In 2002, a garbage man named Michael Carroll from the United Kingdom (UK) won the £9.73 million UK National Lottery jackpot, about $15 million. Michael was only 19 years old when he won, and he lost all his winnings within less than a decade. He blew his money on a mansion where he threw wild parties with hundreds of guests. He reportedly hosted parties costing up to £50,000 a night while spending thousands on drugs and alcohol. Within a few short years he returned to his old job as a garbage man. This true story provides a cautionary tale of what can happen when someone without financial literacy suddenly receives a lot of wealth. It can be overwhelming to go from zero to hero, and many end up spending recklessly without any care for the future.
Now, it is good to be generous with your wealth when you are blessed with it, but there is a huge difference between being generous and being an ATM. Stories like Carroll’s remind us that those who do not know how to manage money properly often suffer in the long run.
Now, imagine if Mr. Carroll had made different choices after his newfound wealth. What would have happened if he invested a portion of his winnings, roughly £7 million, into a diversified investment account with a conservative estimated annual return of five percent? He would have earned £350,000 a year in interest. He would never have had to work again, and he still would have had millions from his original investment to enjoy and share.
When someone does not understand how to manage wealth, they often squander it. But those who do understand financial management can usually rebuild wealth even if they lose it, because they understand the process of creating and sustaining it.
Of course, the average person is not winning millions of dollars in the lottery. So how can the average Bahamian on an average income build wealth that changes not only their life but also the lives of future generations? Warren Buffett, regarded as one of the best investors of all time, once said: “Someone is sitting in the shade today because someone planted a tree a long time ago.” According to the Bahamas National Statistical Institute, the average household income in The Bahamas was around $50,000 in 2019. Given that this data is older, we can assume the average has since increased.
The first step in building wealth is creating a budget and sticking to it. Sit down and lay everything out clearly: your car note, mortgage, monthly bills, school fees, and every other expense. After figuring out how much you are currently paying each month, take a step back and objectively review these expenses. Ask yourself if each one is something you truly need. If you are spending hundreds of dollars a month on clothes, maybe you can cut back and put that money toward your mortgage or savings.
An important habit is to always pay yourself first by setting aside a percentage of your income each month to be saved or invested. Do this before you look at other expenses. For example, if you are saving 20 percent of your income, you must find a way to live off the remaining 80 percent. By cutting down your unnecessary expenses, you will realize that many of the things you thought you needed were not essential. That extra money can then be saved or invested.
It is also wise to set aside enough money to cover six months to a year of expenses in case you lose your job. Once you build up your emergency fund, you can start putting disposable income into an investment account. As little as $200 a month starting at age 30 can grow to around $320,000 by age 65 with a seven percent annual return. You might think you do not have enough money to start investing, but this is not true. You do not need thousands of dollars at once. Time in the market matters more than timing the market. Even small, consistent contributions grow significantly because of compound interest.
So do what you can — a couple hundred dollars a month, a Christmas bonus here or there; everything adds up and can be the difference between a life of constant money worries or financial freedom. Plant that “seed” and invest in your future so that you, and maybe even future generations, can prosper. Be money smart, be moneywise.
