Saving Your Way to Wealth.
SO YOU WANT TO BE A MILLIONAIRE? OF COURSE YOU DO. WHO doesn't? But let's face it, the chance of Regis Philbin handing you a check for answering some mundane questions or Ed McMahon showing up at your door is one in a million.
If you want to become a millionaire, you have to do it the old-fashioned way--you have to earn it. We aren't talking about how much money you make; the ability to accumulate wealth has little to do with the size of your paycheck. Whether you bring home $20,000 or $200,000 a year, only you can determine if you can sock away enough money to last a lifetime.
The good news is that the younger you are, the better your chances. Twenty-somethings take note: employing the first principle of BLACK ENTERPRISE'S Declaration of Financial Empowerment--to save and invest 10% to 15% of after-tax income--and letting the magic of compounding work for you can lay the foundation for serious wealth down the road.
That is exactly what Lorenzo Richardson has in mind. The 29-year-old accountant with Panasonic Corp. in Secaucus, New Jersey, attributes his stellar savings record--he has very little student-loan debt, adds an additional amount to his monthly mortgage payment and is socking away money for an early retirement--to the lessons learned from growing up on welfare. "We did what we had to do to make ends meet, like clip coupons, walk an extra mile or two to the store to get the best bargains," says Richardson, who is the oldest of a single-parent family of six.
At 17 he got his first part-time job at a consumer catalog showroom, where he made $3.75 an hour. With financial aid covering the majority of his college costs at St. Peters College, Jersey City, New Jersey, between 1988 and 1993 he accumulated $10,000 from part-time jobs, which he used as a down payment on a home in his native Jersey City. Of his current $38,000 salary from Panasonic, he contributes the maximum allowed--15%--to the company's 401(k) plan. He is also taking advantage of Panasonic's tuition reimbursement program to work toward an M.B.A. at St. Peters.
To help turn his dream of retiring early and running his own business into a reality, about a year ago Richardson joined RDS Investment Club. He began by contributing $25 a month, but increased it to $100 starting this year. As of November 1999, the club members enjoyed an annual compound return of 42% on their investments. On his own, Richardson is looking to buy shares in GE, Home Depot and Wal-Mart via those companies' dividend reinvestment plans (DRIPs).
Next on Richardson's agenda is getting his mother and younger brothers and sister into the habit of saving and investing. In fact, the family has agreed to give each other shares of stock instead of gifts for birthdays and Christmas.
More and more regular folks are proving that anyone, young or old, can accumulate wealth. In Simple Wisdom for Rich Living (Longstreet Press, $9.95), Oseola McCarty tells how she amassed more than $250,000 over her lifetime by faithfully saving the money she earned washing and ironing clothes for $1.50 to $10 a bundle. Then there's Mattel "Mat" Dawson, the 78-year-old rigger who runs a forklift for Ford Motor Co. He has given away more than $1 million to churches and colleges.
Younger generations are following in the tradition of these elders who believed that you saved for something and then bought it, rather than buying it and then paying it off (with interest) for the next 20 years. James and Loretta Zolliecoffer are part of this new generation. The couple have been saving and investing regularly since they first married 10 years ago. The newlyweds, then 25 years of age and fairly new to Los Angeles, had two priorities: to pay off $20,000 in credit card debt and student loans and buy a home.
"We got down to basics, the bare necessities," says James, a commercial director and video editor for Fox. "We cut back on everything from travel and entertainment to clothes and meals." The couple put 50% of their combined salaries--which equaled about $70,000 at the time--toward paying down debt, with a portion earmarked for saving. They spent only on basic living expenses, including rent on a modest one-bedroom apartment, and had no car note. Not only were they debt-free after 18 months, but they managed to set aside $30,000 for a down payment on a house.
"I was raised by my grandparents," says Loretta, who works as a business affairs manager for Team One Advertising. "My grandmother was from the old school. She stressed the importance of saving, tithing and buying your own home."
As the Zolliecoffers illustrate, the key to accumulating wealth is to use time to your advantage. "If you have only a small amount of money to invest and you are young, you have the ingredients essential to becoming financially independent," says Cheryl D. Broussard, financial advisor and author of the Black Woman's Guide to Financial Independence (Penguin USA, $15.95). Were you to invest roughly $100 a month starting today, you would amass $1 million in 45 years, assuming a return of 12%. (Over the past 20 years, the average annual rate for the S&P 500 stock index was 17.9%.)
Whether you want to work at home, retire early, start your own business or be financially secure, here's how to do it through a step-by-step, structured approach to saving and investing.
Take the Boy Scout motto to heart. Be prepared for the unexpected by building an emergency fund. Broussard says your first goal is to set aside enough money to cover three to six months' worth of living expenses.
Even though the Zolliecoffers contribute faithfully to their IRA and 401(k) accounts, they also set aside about $100 a month as part of their cash cache. The money is in a traditional savings account, earning a mere 4% interest. However, their retirement funds are invested in more aggressive vehicles earning a rate of return of more than 12%.
"If you are part of a dual-income couple, learn to live on one income," Broussard advises. "Try to live off one of your salaries and invest the other." By spending as if only one of you is employed, you won't get caught in a financial vise if you or your partner is downsized out of a job or decides to stay home and raise a family. Your safety net should also be woven with adequate life insurance, healthcare coverage and a will.
PAY YOURSELF FIRST
You have to develop a habit of saving. The earlier you start, the better, because you want to be able to take advantage of compound interest. As a little girl, in order to buy candy, McCarty started saving nickels, dimes and whatever change she made from running errands. As she got older, she set aside money from working in the family laundry business to cover her living expenses and put the rest--about $200 a month--into savings accounts. McCarty put into practice a valuable lesson. You can still save and still pay your bills.
The best way to do this is to make savings a part of your monthly expenditures, advises Broussard. (Of course, this is assuming you already have a monthly budget in place.) When you pay your bills on the first and the 15th of the month, write a check to yourself earmarked for savings. Even if it's only $10 a month, that's a start. The key is to stick with it.
LIVE WITHIN YOUR MEANS
"Champagne taste on a beer budget." Sound familiar? Too many folks form the habit of spending more than they bring home. From early in their working years they accumulate big debts from the purchase of material goods, or moving up to a bigger house or car as their careers advance.
McCarty, who never married or had children, epitomized "living within your means": around the time she retired, she received a small amount ($100) each month from a trust she had rolled her holdings into, plus $200 in Social Security benefits.
Most people think "when I save $20,000, I'm going to buy a new car or put a down payment on a second home," says Paul Laughlin, assistant vice president and trust officer at Trustmark National Bank in Hattiesburg, Mississippi, which managed McCarty's irrevocable management trust. "But [McCarty's] primary objective was financial security."
"The best way to build up substantial sums with limited discomfort is to have the money automatically deducted from each paycheck and funneled directly into savings and investments," says Broussard.
"I saved something out of every paycheck I got no matter how small it was," says Ford's Mat Dawson. "No matter how much you make or how little you make, you've got to save a percentage of that." After emigrating from Shreveport, Louisiana, to Detroit in 1939 to join his uncle at Ford, Dawson started saving $25 a week from the first paychecks he received as a press operator earning $1.25 an hour. As his salary grew, so did his weekly ante. Today, the skilled tradesman pulls down around $100,000 a year--from a base salary of $25.30 an hour plus overtime for working 12-hour days. More than 75% of that money goes toward his savings, with Dawson's monthly living expenses adding up to about $600.
Regular saving has other advantages as well. For example, a process called dollar-cost averaging lets you automatically transfer the same amount into your investments each month, guaranteeing that you will buy fewer shares when the price is high and more shares when the price is low.
USE DEBIT, NOT CREDIT, CARDS
The third principle of the Declaration of Financial Empowerment--to be a disciplined and knowledgeable consumer--means not sending every extra penny you earn to credit card companies. Typically, most folks have outstanding balances of more than $1,800 per account. The average card carries an interest rate of 18%. That amounts to $325 in interest a year on a typical balance. That's money that could be working for you in a savings account.
When the Zolliecoffers decided to pay off their debts, they made a list of all their creditors and balances due. "We began paying off the ones with the smallest balances, say $1,000," says Loretta, who was earning about $30,000 annually as an executive assistant for a startup money management firm at the time. "Every pay period we would pay them in one lump sum. If we couldn't pay it off all at once, as with the student loans, we determined how many months it would take to pay it off completely; we went from the least dollar amount to the maximum amount." (Financial experts usually recommend paying off your highest-interest-rate balances first.)
To reach their goal, the couple lived by an important rule. Always pay more than the minimum amount due. Say you owe $10,000 on a credit card, and the current interest rate on it is 17%. If you send in only the minimum due, you will end up spending $33,447 by the time you pay off your debt--50 years from now, according to Marc Eisenson, co-author of Slash Your Debt, Save Money and Secure Your Future (Good Advice Press, $10.95; www.good advicepress.com).
You no longer have the excuse that you need a credit card to rent a car or purchase goods online. A check-cashing debit card from a bank (imprinted with the Visa or Mastercard logo) will do the trick Merchants will honor these debit cards the same as a traditional Visa card. But instead of accruing a debt--and subsequently paying interest on it--the money is taken right out of your checking account.
GROW YOUR MONEY WITH EMPLOYER PLANS
When it comes to saving, the rule of thumb is to aim for 10% of your gross pay. The ideal way to accomplish this task is to participate in employer-sponsored savings plans, such as 401(k)s or 403(b)s. Folks who are not covered by a retirement plan at work can make deductible IRA contributions of up to $2,000 annually if their income is under $100,000.
An advantage of 401(k)s is that they enable you to invest automatically. The money is deducted from your pay before taxes and allocated among a variety of investment options. Besides the benefit of lowering your tax bill, most employers kick in as much as 50 cents for every dollar you put in. The maximum allowed each year is usually around 15% of your salary.
Combined, the Zolliecoffers are investing about 25% of their monthly gross salary. Between them, they earn a little more than $8,000 a month, with expenses adding up to about $3,100. Roughly 10% to 12% of James' income goes into mutual funds and his IRA account. Loretta contributes 12% of her salary, every other week, to her company's 401(k) plan, 3% of which is matched by the company. Recently, she started participating in the parent company's employee stock option plan.
INVEST IN THE STOCK MARKET
Historically, African Americans have balked at buying into the stock market, opting instead to stash their hard-earned cash in vehicles like bank savings accounts and certificates of deposit. In fact, studies show that African American professionals significantly lag behind their white counterparts when it comes to saving and investing a percentage of their income.
The one mistake that McCarty made was waiting until well after retirement age before diversifying her money into Treasuries, bonds and stocks. "Had she invested the money she put into savings accounts--or even part of it--[in] equities over the some-odd 75 years, we would be talking about millions of dollars instead of thousands," says Laughlin.
True enough, stocks have outperformed all other investments since 1926. Dawson is quick to boast that he made most of his money over the last 60 years in the stock market, through mutual funds and stocks other than those of his blue-chip employer, among them AT&T and Detroit Edison.
Don't just let your money sit in one type of savings or investment vehicle, cautions financial advisor Pierre Dunagan, managing partner of Dunagan, Robinson & Isbell Financial Services, a Chicago-based advisory firm. "Practice ... asset allocation, where you invest a percentage of your savings in cash, stocks and bonds [including mutual funds]."
The key to building a small fortune is applying the principles of saving, investing, credit-free spending, dollar-cost averaging and compound interest. McCarty herself once explained how to build wealth through saving. Simply put: "Every month, I'd save the same amount and put it away. I was consistent."
RELATED ARTICLE: THE LAST STEP: GIVE BACK
Once you've amassed a certain level of personal wealth, it's time to look outward: consider making charitable contributions to a church, civic group or philanthropic organization.
Oseola McCarty died last September of complications from liver cancer, but not before willing, through her irrevocable trust, a sizable chunk of her life savings--$150,000--to the University of Southern Mississippi, to which she had also made contributions during her lifetime. Her gift led the University Foundation to create a matching fund.
Over the past five years, Mat Dawson has also been making headlines. He gave $230,000 to the United Negro College Fund; $200,000 to Louisiana State University at Shreveport, his home town; and $450,000 to Wayne State University to establish the Mat Dawson Jr. Endowed Scholarship. This year, he plans to give away another $200,000 in scholarships in honor of his grandparents.
Whatever your gift, large or small, here are tips to maximize it:
* Check out the charity. For example, it should spend at least 60% of each dollar on good works, with the balance going to fund-raising and administration.
* Consult a charity watchdog organization. Such as the National Charities Information Bureau (212-929-6300; www.give.org). Its free Wise Giving Guide rates 355 charities, and an in depth report on a single charity is also free. Also see the Better Business Bureau's "Tips on Charitable Giving" at www.bbb.org/about/tipsgive.asp.
* Establish a fund in your name. Visit the Web site of the National Philanthropic Trust (www.nptrust.org) for information on setting up a donor-advised fund with an initial gift of at least $50,000.
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|Author:||BROWN, CAROLYN M.|
|Date:||Mar 1, 2000|
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