Engineering financial success is the best way to get rich. Millennials need to learn this formula. The problem is that it runs dangerously juxtaposed to the ingrained social values of consumption and hyper spending. Raised in a world where having the latest phone, car, or clothes is the proverbial choice, it comes as no surprise that savings and delayed gratification are becoming extinct concepts. And why have it any other way? Millennials were raised during a time when having the latest and greatest toys and taking expense vacations was normal. But times have changed. The key to getting financial ahead is to realize that, as a generation, Millennials are economically behind their parents. So how do you catch up? The answer is by what I like to call – socioeconomic downsizing.
Millionaires through this blog have spouted tidbits of wisdom on how to save, where to spend, how to invest, and the freedom in financial savings. The quickest way to get rich, as Chris Sacca shared earlier, is to live well below your means. This choice, to actively live below your purchasing power, or to socioeconomically downsize, is the key to getting rich.
By definition, socioeconomically downsizing is the active choice to live one or more rungs lower on the economic ladder than your current incomes allows. Let’s look at an example. Jane and Bob, a happily married couple from Dallas, Texas, each earn $50,000. With a combined total household income of $100,000, they are in the top 28% of household incomes. They have two choices, to live high on the hog and spend like they are making $100,000 a year (which they are) or they can choose to socioeconomically downsize and only live on $50,000, or just Jane’s salary. With this choice comes a major lifestyle change in the amount they can spend on rent, food, transportation, and fun. This choice to downsize completely changes their day-to-day life.
Instead of living in the nicest part of town, paying a monthly rent of $1,100 (or roughly 20% of the monthly take home pay) the couple will now pay $580 – if they choose to downsize. Instead of spending $600 per month on new cars, Jane and Bob will now pay $200 a month – if they choose to downsize. Instead of taking two ski vacations this year, they will stay in town and enjoy a staycation – if they choose to downsize.
So why would anyone choose this masochistic path?
Because this choice will allow Bob to save roughly $30,000 per year (his after-tax income). Over time this will allow the couple to accumulate roughly $150,000 in savings in just over five years. Now instead of living “within their means” for five years, with the conscious choice to economically downsize, they will have accumulated 1.5X their household income in savings. Put another way, Jane and Bob have saved more in 5 years than the average 50-year-old.
Once the initial curtailment of spending is engrained into their daily habits, Jane and Bob will become remarkably acclimated. And as the savings for retirement, a rainy day fund, and an emergency fund are accumulated, Jane and Bob can start the process of looking for their dream house, a new car, or start savings for their future child’s college tuition. They have already put in the sacrifice early to accumulate their base savings quickly and can take enjoyment in watching their investments grow for the rest of their lives. For them, the hard part will already be over. Of course, all of these wonderful results only come about if they choose to downsize.
Be Jane and Bob. Socioeconomic downsizing is the quickest way to get rich and ensure the future you want. Fight the urge to spend and downsize your tastes for now so that in the future you can do as you please.