A very small percentage of the people who retire remain financially independent for the remainder of their lives. What incredible odds against achieving true financial independence.
How is it possible that so many fail when we see so much apparent wealth around us?
One reason is all too simple. It matters little whether you make $50,000 a year or $250,000 a year if, at the end of that year, you’ve spent all that money and placed none of it in an area where it can accrue as future income. When your earnings cease due to older age, so will your lifestyle.
Consider two individuals who, at age 55, have seemingly identical lifestyles. Each lives in a 16-room house in the most desirable neighborhood in the city. Each person has two children who are attending private, well-respected universities, and both families own several expensive automobiles.
With all the apparent similarity, the difference is that one person is struggling each month to maintain his visible lifestyle. He has a negative cash flow and incurs more debt each month just to support his standard of living. The other person in this example supports his visible lifestyle with a solid, positive cash flow, and he is truly financially secure.
What caused this difference to occur between these two people? Let’s look back to 1985, when each person had just completed their chosen training and entered work. The first person used his new income to buy a new house and car.
In the next few years as his income increased, it allowed him to finance a boat and a more expensive car. This person continued each year to enjoy very healthy increases in income, and he used these increases to support higher and higher loan and mortgage payments to buy more expensive things. Finally, by today, the interest on the loans and income tax payments alone have overtaken his annual income.
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The other person developed a different pattern of lifestyle back in 1985. Instead of using all the newly generated first-year income purchasing material goods, this person began a disciplined investment program. The money not spent on new cars and clothes was then invested monthly. Each time this person realized a pay increase, he increased his lifestyle slightly and used the rest to increase his monthly investment amount. After several years, his first investments sold at a profit. He then took some of these profits to purchase a new home with furnishings. Each year thereafter, as his investments grew, he used part of the growth in improving his standard of living. In essence, he was buying the luxuries of life with his investment returns, not his current income.
Our friend’s investment pattern somewhat resembles the creation of a family. The original investments made from earnings are the parents. The ultimate profits are the children. This person only uses the children or grandchildren of the investment dollars to improve lifestyle.
As the children and grandchildren continue to reproduce, they create more and more offspring. As you can see, this individual’s lifestyle constantly improves, but at the same time so does his personal net worth. He keeps the original parents hard at work producing new offspring. In other words, this person still has a portion of every year’s income he ever earned actively producing results.
Meanwhile, the first person consumed each year’s income and has nothing left to look forward to – except tomorrow’s labor.
This illustration can give you significant insight into how true wealth is built in this country.