Over the weekend I was catching up with an old friend, Ricardo. We worked together at a large multinational Media and Entertainment Company about 15 years ago. We were both fresh into our careers at the time and both had similar career and wealth outlooks. We had both studied at reasonable universities, both been in the same global accounting firm for a few years and both performing well in our current jobs. We were both living comfortably on our paychecks and renting reasonable apartments, however neither of us had yet started saving or investing with any seriousness.
Today I could live off my investments, while he would be destitute if he lost his job.
What happened? Why did we turn out so differently? What difference does a decade and a half make? What did he do or rather what didn’t he do that put him in a financially insecure position and is it too late for him to turn the situation around?
We could look at a range of things to explain the difference and I will walk you through 4 of them, which are the most important. I will also explain how he can still turn the situation around and be in a similar position to my own in 15 years’ time.
This should help you understand the most powerful strategy in building Wealth: Think Long Term.
What a difference a decade makes!
1. Choose your present Lifestyle with the future in mind
When we worked together 15 year’s ago, Ricardo was making more money than me. He spoke multiple European languages and his audit experience was more closely matched to the Media and Entertainment Company we worked for.
He was also spending more money than I was.
Whereas I lived in a modest apartment about 25 minutes from the office and paid no more than 15% of my gross salary on rentals, Ricardo was renting a much bigger, modern apartment, a stone’s throw from the office and was thus spending over 30% of his gross salary on rental.
My apartment allowed me to have a few people over but wasn’t big enough for a large party. It was comfortable, except for some minor noise nuisances I could get my head around, and because I was paying relatively little money on it, I was able to often my first savings and investing account and start putting money aside.
Ricardo loved having people over and large parties and his apartment was perfect for that. I really enjoyed the parties he had. His apartment was in a beautiful building and he had a concierge who picked up his post and ensured the building was spotless. Ricardo often complained at the time that he wasn’t able to save anything and that he needed to get another job where he was paid more.
I was constantly telling him that he shouldn’t chase the money, that he needed to save and that he also needed to have a career strategy. I could tell then that those concepts were foreign to him.
2. Don’t only chase the money
I was the first to leave the company on my search for better career prospects. I had been offered a role in one of the company’s subsidiaries, a large music major, but this was the time of emerging technologies like Napster and I was skeptical of the company’s ability to innovate and accept change, so I decided to go with another company who seemed to have a better vision.
The starting salary on offer wasn’t a massive jump versus what I was making but I knew the role was an entry role and that I could do it blindfolded. I worked on the assumption, which later turned out to be correct, that if I over-performed, my career prospects and salary would grow at a fast pace.
Ricardo loved the flashiness of the music industry and didn’t agree that the prospects for people in finance and administration roles were limited. He accepted a finance director role out of the country and a big jump in salary.
When the company went into a restructuring a few year’s later, given the ravages of the growing online consumption of music and drop in CD sales, Ricardo found himself without a job and had to return to his family, as he had still not saved anything.
In the meantime, I had been promoted and my salary had jumped over 30%.
3. Stay consistent in your career goals
Since his redundancy, Ricardo has been through about 5 jobs on two different continents. He recently changed jobs again a few months ago and is now trying his hand at being an entrepreneur. As we were discussing it was as clear as it was 15 year’s ago that Ricardo is still not sure what he wants to do when he grows up.
I do recognize that this might be the case for lots of people and it is okay to change our minds. However, I do believe when it comes to wealth building that having a plan and being consistent with it has the edge.
Ricardo might hit it big with his new venture and I really hope he does, but he needs to stay with it and not change again in 2 years.
Five years after I started my new role, I was named Chief Financial Officer of the company and had risen 4 levels in the organization. My remuneration had grown exponentially. My lifestyle had grown but only marginally.
While the three elements above had contributed to a vastly different outcome for each of us when it comes to financial wealth, there is one further element that accounted for the most significant portion.
4. Invest for the long-term
When Ricardo and I worked together, I was obsessed with buying an apartment. Rental for me was a temporary thing. I had always felt that buying real estate would enable me to build up an asset base over a long period of time and also secure where I lived. I also always maintained that having real estate would force me to save more as it is less liquid, which meant I would have to anticipate further out to make sure it was secure.
I bought my first apartment before I changed jobs and before Ricardo went off overseas. When he was being made redundant, I bought my second one. And before I was named CFO of my company, I was on my fourth property. The last one was my primary residence and the other 3 had become rental properties.
I had the added benefit of having started to save early and hence I was able to put significant sums against the properties and thankfully they are all now debt free. The rental income alone is enough for me to be self-sufficient.
When I bought each property, I had in mind that I would hold them for at least 20 years before considering a sale and I am still sticking to that strategy.
The Power of Long Term Thinking
The last decade and a half has finally come and gone with incredible speed and it has afforded me a lot of wealth.
Could Ricard use the next 15 years to change his situation?
He could, and he should.
Ricardo, like me, is in his early forties and so could continue working for another 20 years. That’s more time than I’ve had to become financially self-sufficient. With carefully thought out investments, particularly in real estate (which is what his current entrepreneurial venture is involved in) Ricardo could find properties and manage them in a way where they pay for themselves in 15 years or under.
By starting with one or two, Ricardo could small, well placed properties, Ricardo could try his hand at this investment class and learn the dos and don’ts.
Ricardo should also start saving a part of his monthly salary. By putting aside a bit each month, no matter how small to start with, he could use the next 15 – 20 year’s to build up a nice sum of money. He could effectively use the power of compounding returns.
However, Ricardo needs to be aware of his lifestyle and the cost that his present lifestyle has on his future. He also needs to stick with his current venture as long as he can, assuming it is viable and makes him money. He can’t afford to stop and start on something new again.
If Ricardo sticks to some of these concepts, I’m confident he can build good wealth over the next decade and a half and hopefully put himself in a better, more secure financial situation.
If Ricardo remembers just one thing from our conversation, it needs to be that the most powerful strategy in building Wealth is Thinking Long Term.