How do, ant lovers? Remember when I was talking about building wealth, and how I said to, you know, get a job, and some other stuff? I do. I remember promising myself, surreptitiously, “Someday, I’ll write a second part to that series about building wealth like the proverbial ant written about in ancient scrolls in the middle east.” That was a golden day. And a daring vow.
And now that promise I made to myself is coming to pass. Thanks for always making good on your word, me.
Well, most of the time.
Well, THIS time.
So! Y’all ready for a good old fashioned finance lesson? I’m jonesing for one myself. Can’t WAIT for one:
Let’s say there are 2 ants, both out working hard like diligent anthropomorphic students of King Solomon. But these ants AREN’T doing the same thing with what their hard work produces! And THAT’s where things get WILD:
Ant #1 (let’s call him Cornelius) gathers bits of leaves and such, and he puts them in a pile outside of ye’ old anthill.
Ant #2 (Woodrow) does the same day labor, but he’s found a repository for his tidbits! Every day Woodrow has a deal with the Beetles – they add seven leaf bits to his pile for every hundred he drops off. Why would they do this for Woodrow? BeCAUSE, Dopey: The Beetles are lending Phil’s foraged forest fortunes out, and making money off of them in so doing, so they’re more than happy to share their profits with Woodrow. Cornelius and Woodrow do the same amount of work for the same wages, but after 20 years (these ants are really into intermittent fasting and longevity trends) Woodrow, who is earning a return on his pile, has 4,387 leaf bits! Cornelius only has 2,000 leaf bits.
Who’s the drip NOW, Cornelius? Yeah, that’s what I thought.
Now which ant’s progeny (as some ants may have up to, oh, A HUNDRED AND FIFTY MILLION BABIES over a lifetime) do you think is better set up for college and a new home when they get married? DUH IT’S WOODROW’S, bros. You NOSE it. (So many weddings. So. Very. Many.)
Consider Woodrow’s ways, gentlemen… for he understands compound interest.
Well that’s the FULL story behind Proverbs 6:8. Last time I talked about the importance of working hard (i.e. working that JORB) “while it’s summer”. That’s good and important, but if you do follow that advice, something crazy is going to happen to you: you’re going to earn some money, either as an employee or working for yourself.
That is significant. Celebrate with white corn tortilla chips.
At that point of making the monies, you, my friend, are only halfway done with the task of storing up provisions. The second half of this equation is: put that earned money you’ve been paid in a place where it can grow, because (like we also covered last episode) you’re going to be working for a good long while. And it really matters where money sits, when it sits for a good long while.
How’s about an example? [I’ll talk in human money terms instead of leaf bits this time.]
What if, starting at age 25, could save $100 per month for 10 years, and then you were completely finished saving until you retired at age 65.
OR
You could wait to start saving a hundred bucks per month until you were 35, and then keep saving 100 bucks per month every month until you turn 65.
Let’s say you can earn 10% returns on your money either way because we all like nice round numbers.
That’s TEN YEARS of saving early vs. THIRTY YEARS of saving later. Dig me? Mmkay:
If you were the guy who saved early and stopped, you’d have $357,433 at retirement. The late-saving method would leave you with only $226,048… even though you spent an extra 20 years saving!!
When it comes to building wealth…
budgeting is critical…
hard work and wise choices are key…
but there is no variable that can increase your financial assets with as much force as…
TIME.
Sweet nectar of TIME!
Lest you think this only applies to the technical world of stocks and bonds, where you might expect to earn a 7-8% return over long periods of time, let’s talk about the effect of time on another kind of asset: say… rental properties?
- How about rental properties? For most major metropolitan areas, you will need to take a 30 year mortgage out on a property to make it cash flow. And even if you happen to live in a place where this isn’t true, you’ll soon find that the wise use of debt can turbocharge your returns when it comes to real estate investing. Well, those homes that are slowly building your family’s wealth as you pay down the mortgage don’t make you much richer for quite a while after you’ve started operating them as rentals. Perhaps you buy a house and take a $250,000 mortgage. If you grab a 4.5% interest rate, did you know that you still owe more than $200,000 after 10 years of making payments on that home? Factoring in a 2-3% annual gain in the home’s value and the occasional dud tenant who steals your fridge and vanishes after skipping a few months’ rent (yep, I’ve been a landlord), real estate is also a slow grind that pays dividends to the man who invests early and enjoys the impact on time on his investment. 30 years in, when those properties are paid off and fully rented, you’re sitting on some serious assets! (I am open to a “sitting on your big fat assets” joke here, if that’s where you want to go in your mind.)
“Well”, you say with that same smug and smarmy voice that Woodrow often adopts (“pfft… WOODROW”), “I don’t buy stocks and I don’t own rental homes. And you know why? Because I’m too busy setting up businesses for my family. Online businesses! With almost no overhead! So I guess I NAILED IT.”
Whoa, sheesh brah. Tamp down that spirit. Okay, let’s DO talk about investing your money in a family business. As I see it, there are a few types of business ventures that guys in my circles get excited about:
- The Trade: These guys have acquired a skill and they’re ready to sell their time. Maybe it’s general contracting, or plumbing, web design or SEO optimization consulting. Whatever. They’ve mostly worked for others and see that the boss is billing a whole lot more for their time than they see on their own paychecks. So, they strike out on their own. They either work their fannies off for a period of years to develop a reliable base of clients, or they’re constantly stressed about the source of their next meal. The ones who are successful, much like our real estate and stock investor above, put in YEARS of TIME to create the goodwill now powering their business that makes the naive onlooker say things like “being a plumber is a better option than going to college”. The ones who aren’t successful usually jumped in with too small a timeframe in mind, and had to try and skip the building phase to make a quick buck. This will be true for every business type, but desperately needing money today is not a recipe for business success. Pro tip, there.
- The Startup: You’ve created an amazing social network for dogs and you can’t wait to pitch your new concept to all the happening venture capitalists that Silicon Valley has to offer. Once funded, you’re ready to lease office space and you’ve already picked out the ping pong table where your developers will piss away half of the hours you’re paying them for so that they’ll make your unicorn come to life. Stories like Instagram and Uber have you dreaming that your idea can become the Next Big Thing (oh, my dear brothers, how I wish nobody ever fancied being the NBT!), but I must remind you that the big venture capital funds – the guys who are the best at picking winners and coaching them to success – plan on one out of ten to even be profitable. And they invest in (on average) TWO out of every HUNDRED companies that they look into. (These odds are… Not Great. 1 in 500 so far… and that’s of people who have an idea, get it off the ground, and put something together to pitch…) Further, if you do manage to drum up some investment, even if it’s only from your friends and family, you can bet that your investors will want to see your own neck on the line in the form of… your life savings. So despite its ability to turn a dweeb into the CEO of Facebook (and hey, that really did happen), the Startup Path is possibly the least secure road to building wealth. We can even make the statement that it’s NOT a ‘plan’; it’s a lark and a dream and a wish that almost never comes true. (And for those rare lotto winners who DO make it through the gauntlet, almost all of them can point to a serious investment of TIME and money and effort as the key ingredients to success, NOT their whiz-bang idea. Those, I’m sad to report, are everywhere. Killer ideas are a dime a dozen.)
- The Side Hustler: This guy works his job but he’s sure that the real money is going to rain down on his family when his SIDE HUSTLE (or productive hobby?) takes off. I’m not talking about the noble father who takes an Uber shift during lean times to cover the electricity bill. (All hail that dude!) I’m talking about the short attention span serial side hustler who likes to hop from one hobby hustle to another, pretending that they’re real businesses when they have yet to generate a month’s rent. This guy usually ends up learning a whole lot of useful things (how to throw an axe! How to sew shoes!), but until he commits (much like the startup wisher above) and puts his neck on the line and goes all out after a proven idea… he’s mostly just pretending (like pretending that an electronic keyboard would work more than about 90 seconds in the pouring rain). You see, building a successful business takes sustained effort over long periods of time – and most of us just can’t swing that with the leftovers after working a job, parenting children and leading families.
Before you get too wound up about my seeming like a big negative pile of poo-poo re: business ownership (I do have to admit, I DO seem to have a bit of an attitude today…), let me provide some personal context:
In the past two years I have:
- Jettisoned a very high paying job to start a business which, like all new businesses, began by making zero dollars.
- Helped lead a startup that raised $40M of venture capital investment – so I’m all for startups, and I’m all for entrepreneurship at any level!
- Grown a side-hustle that eventually became my full-time job, which is very similar to a trade in that plenty of folks, like me, are out there hanging a shingle as financial planners.
So I am NOT opposed to business ownership–perish the thought!–and I do believe it to be one of the best tools for building wealth. I am, however, here to tell you that whichever path you take (and they’re all very viable for the right situation), you need to be thinking like the ant in this arena too. Many of the loudest voices in our culture want to paint a picture of business ownership like it’s just a matter of scraping together 6 months of hustle and grit, and then it’s a rainbow of cash and personal freedom. You know what makes for a much firmer foundation when you’re setting off to start a business? It’s that stuff you were socking away early on while you worked and earned (you know–savings$$$). You starting a business with a solid business plan and two years’ worth of living expenses in the bank will terrify your competitors far more than any degree of hustle or clever social marketing that you might come up with. That’s real.
If you save early and often, and take cues from Woodrow the Ant, you can build a runway for all kinds of endeavors. Those endeavors should help you jump your family to the next level of economic freedom and influence, whether it’s a business or investments.
But my boy, if you try to skip the earlier stage of faithful work (and the spending, saving, and giving that goes with it), your time in the next level will be short lived. You will be like Mercury, flying too close to the sun, with wings of wax.
Like I said, I like to think of all these things as compounding interest. You hope to compound your diligence with more diligence, saving with more saving, and work with more work. YES, this may mean that you’re stuck in a job you don’t love right for a little longer… but you find a way to work your budget so that you can stick (take a deep breath) THE FULL $19,000 LIMIT into your employer’s 401(k) plan. Or you may be working towards starting a business venture, so you place money in safe, short term investments like CDs and money market funds while simultaneously opting to drive cheap cars and live in a lesser apartment – because you know that TIME is more important than just about anything when it comes to achieving your financial goals. Etc. You get the idea: don’t bail out from the faithfulness you’ve begun to pursue a short-term fantasy.
Whatever it is that you’ve got your eyes set on, here’s me encouraging you to play for the win and sacrifice now, like Woodrow, so that you might end up putting them dollars to work in service of your vision, your family and your King, post haste!
*Mark Parrett is one of the founders of Abraham’s Wallet. When not blogging for you here, he’s raising a family in Salt Lake City, UT and working as a financial planner at Outpost Advisors.
