Large animals have been increasingly linked to personal finances. First, there was the “800 pound gorilla in the room” television advertisement for annuities. In addition, there is the book The Elephant in the Room, another metaphor for things that are staring us in the face but are often very uncomfortable to talk about. Unlike the insurance company ad, where the “gorilla” is a metaphor for the need to make retirement income last a lifetime, the “elephant” is a metaphor for personal behaviors that can help people achieve financial success.
The Elephant in the Room is short (142 pages) and uses a “story within a story” format similar to The Wealthy Barber. In this case, the person with financial smarts is seventy-something Katherine, aunt of the main character, Michael, a financially stressed father of two preschoolers and husband of Jennifer.
The focus of the book’s nine chapters is personal qualities associated with financial success: attitude, knowledge, financial beliefs, values, goals, patience, discipline, and planning. Below are some key take-home messages from Katherine’s weekly lessons:
• Building wealth is more than making money. It’s about working for things that make life gratifying and creating a healthy and well-balanced lifestyle.
• The single greatest thing that determines an individual’s financial success is personal behavior.
• Three key variables impact wealth accumulation: time, rate of return, and the amount invested. Time has the greatest impact on the outcome of investments.
• Workers can’t afford not to earn the full 401(k) plan match from their employer. “That’s free money your company is willing to contribute, and you’re leaving it on the table,” notes the author, Ed Baker.
• “Becoming a millionaire” isn’t a bad goal, but investors need to think about the values behind it. Goals feel right when they reflect realistic things that people value in life.
• Two key wealth-building behaviors require patience and discipline. The first is “paying yourself first,” by setting aside money immediately from each paycheck, and the second is spending less than you earn.
• Financial success requires discipline to live within your means and pay yourself first, commitment to your financial goals, knowledge of your values, and development of an efficient financial plan.
• A financial plan is useless unless it is followed and updated as life circumstances change.
Living frugally has helped many people accumulate wealth and eventually accumulate $1 million or more. In another book, “The Millionaire Next Door,” co-authors Stanley and Danko found that many millionaires were not interested in a lifestyle of consumption and high-status items. Instead, they tend to plan their spending and follow a “pay yourself first” strategy of regular savings deposits. They are also goal-oriented, maximize tax breaks, and have relatively low expenses for housing.
Also in this book is a formula for readers to determine whether they’re considered “wealthy” for their particular age and income level. Simply multiply your age by pre-tax (gross) income from all sources except an inheritance. Then divide by 10. The resulting number is what your net worth (assets minus debts) should be. For example, a 35 year old with a $40,000 income should have a net worth of at least $140,000 (35 x $40,000 = $1,400,000 divided by 10 = $140,000).
