The Huge Difference Between Spending a Lot and Being Wealthy

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
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A GOBankingRates survey reveals that 34% of American adults have nothing saved for retirement.

Zero. Nada. Zilch.

Some of these people save nothing because they earn too little to save. They deserve our compassion.

But tens of millions of Americans aren’t saving anything for another reason entirely.

A couple of years ago, I was invited to do a segment about saving and investing on Fox TV in Tampa. Near the end, the interviewer suddenly popped this question: “What do you say to those viewers out there who say they just can’t save anything?”

I told the moderator that, in my opinion, too many people save nothing because they’re spending money they don’t have on things they don’t need to impress people they don’t like.

I realize that when you’re young and starting out in life, saving may not be a priority. Or even possible. When you get older, you may have kids or elderly parents to support. Saving can be tough then, too.

But most of us could get by - by hook or by crook - on at least 10% less than what we’re living on today. If we pay ourselves that 10% first, it will make a world of difference 10, 20 or 30 years down the road.

Of course, it’s not hard times or poverty that keeps most Americans from saving what they should. It’s lack of discipline, something that used to be a specialty of mine.

Thirty years ago, I started as a stockbroker at a local firm. It turned out I was good at it - and soon became the firm’s top producer.

Before I knew it I had a spanking-new lakefront house, a ski boat, a Jaguar XJ6 and all the other toys.

When my friends came over for parties - which were frequent - most of them assumed I was rich. I was nothing of the sort.

Wealth is not the same thing as income. If you earn a lot of money and blow it every year, you’re not rich. You’re just living high.

Wealth is what you accumulate, not what you earn. And it certainly can’t be measured by what you spend.

Save $500 a month, compound it at a reasonable 10% a year and you’ll have over a million dollars in less than 30 years. Can’t save that much? Just $250 a month turns into a half-million over the same period.

That beats the heck out of depending on Uncle Sam or your relatives.

It’s really about balance. You can’t be happy - now or in retirement - living like a miser. The trick is to find a balance between saving and spending. Each day there are choices you can make that will help you - or hinder you - on your way to financial independence.

If you’re looking for a bit of inspiration, consider Billy and Akaisha Kaderli. The Kaderlis live in an active adult community in Mesa, Arizona, even though they didn’t meet the community’s minimum age requirements when they joined. The couple ditched the rat race when they were 38 years old.

When they first retired, the Kaderlis sold their home and simply explored the world, traveling between the Caribbean island of Nevis, Venezuela, Mexico and Thailand.

Most folks would say they were living the dream... playing golf, traveling the world and socializing with friends whenever they wanted. How did they do it? Not by striking it rich, but by being frugal.

The Kaderlis decided financial freedom was a lot more important than accumulating more stuff. According to Akaisha, “Every time I looked at a latte or a new pair of shoes, I decided I didn’t need them. If you’re clear about what you want, it becomes easier. You can either buy this or be days closer to your goal.”

Contrast this point of view with the materialistic mindset of many Americans, who often find themselves stuck on what psychologists call “the hedonic treadmill.” Instead of thinking about financial freedom, they’re obsessed with thoughts of a bigger house, a fancier car, the best new restaurants and, of course, a high-definition, 60-inch, flat-panel TV.

If you want to enjoy a comfortable or early retirement, the key is to earn as much as you can, spend prudently and religiously save the difference.

Unlike the performance of the stock market, saving is something that is under your control. Moreover, it’s guaranteed to make a significant impact on your net worth. And - trust me - it’s a whole lot safer than attempting something heroic with your investments.

In short, a successful investment program begins with disciplined saving. It remains one of the safest, easiest and most effective ways to boost the value of your portfolio.

Good investing,

Alex

Thoughts on this article? Leave a comment below.

An Investment in Frugal Living

Alex is a big advocate of living below your means. And he also recommends a well-known discount retailer to Oxford Communiqué subscribers.

That retailer is TJX Companies (NYSE: TJX), owner of T.J. Maxx, Marshall’s and Sierra Trading Post. Here’s Alex checking on the pick back in June...

Based in Framingham, Massachusetts, TJX is the world’s leading off-price retailer. It owns the T.J. Maxx, Marshalls and HomeGoods chains, as well as the fast-growing online retailer Sierra Trading Post.

The specialty of T.J. Maxx and Marshalls is first-quality, in-season, name-brand fashion apparel and accessories. (The HomeGoods division offers an eclectic mix of home fashions from around the world.)

However, you need only look at the share prices of Macy’s (NYSE: M), Sears (Nasdaq: SHLD) and J.C. Penney (NYSE: JCP) to realize that this has not been a particularly auspicious time for brick-and-mortar retailers.

Almost all are getting steamrolled by Amazon, the e-commerce giant that is selling more and more for less and less... and shipping much of it for free.

Fortunately, TJX operates in a niche that allows it to avoid getting squashed.

It continually scours over 18,000 vendors and manufacturers in more than 100 countries, buying up excess merchandise at closeouts and offering it to customers at deep discounts to the sticker price.

Even if you visit outlet stores for Calvin Klein, Tommy Hilfiger, Guess or Under Armour - or Amazon’s website - you’ll find that prices are generally higher than the everyday prices at T.J. Maxx and Marshalls.

TJX is on a roll. It has outperformed the S&P 500 Retail Select Industry benchmark significantly over the last two years.

Unlike 90%-plus of brick-and-mortar retailers, sales at the company’s existing stores are still growing. (Even though liquidation sales at J.C. Penney, Sears, Payless ShoeSource and others have temporarily shifted traffic away from the off-price stores.)

According to FactSet, sales per square foot at TJX have risen for six years in a row.

Rivals are shuttering stores, but TJX plans to expand its store count from 3,812 to 5,600 over the next few years.

TJX sells at a substantial discount to the market’s P/E ratio of 25. Yet I estimate earnings per share will rise from $3.92 this fiscal year to nearly $4.70 next year.

- Samuel Taube with Alexander Green

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