As a young man in my 20s, I looked around my various workplaces and recognized two broad categories of co-workers.
One group had to be goaded to work. The other had to be reminded to stop.
(Most folks work to live. But some live to work.)
There are a lot more people in the first group, especially in jobs that are not particularly interesting or challenging.
As I got to know my colleagues better over the years, I also found there were two general approaches to saving.
Some, including quite a few high-income earners, spent everything they made.
Others, including quite a few modest-income earners, lived beneath their means and saved religiously.
As the years turned into decades, many men and women in the latter group became quite wealthy.
They are the ones Senators Bernie Sanders and Elizabeth Warren refer to as “the fortunate few” or “life’s lottery winners.”
(As if spending everything they earn is not a choice for most Americans but simply a matter of chance.)
When money compounds at a high rate for a long period of time, something amazing happens.
It turns into a bigger pile than you would imagine.
There’s a reason Albert Einstein called compounding the most powerful force in the universe.
To illustrate, imagine that a wealthy employer offered you an important job for one month and gave you a choice of compensation.
He would pay you $1,000 a day for 30 days.
Or he would pay you a penny the first day and twice as much every day thereafter until the end of the month.
In other words, you would receive $0.02 the second day, $0.04 the third day, and so on.
You would earn $1.27 the first week and receive a total of $163.83 by the end of the second week.
Most people instinctively say they would take the first offer, knowing they would earn $30,000.
But compounding makes the second offer far better. You would earn more than $10.7 million.
(If this sounds impossible, visit a compound interest calculator online.)
Now, here’s a news flash: You will never compound your money at a 100% rate. And especially not from one day to the next.
(On the positive side, your portfolio is probably worth a lot more than a penny.)
Yet compounding money at a much lower rate still turns it into a substantial sum over time.
It turns into so much, in fact, that many people who work hard, save regularly and invest smartly don’t realize what will ultimately happen.
They will die with an enormous amount of their wealth unspent.
Shrouds don’t have pockets. Hearses don’t have luggage racks.
You know that you can’t take it with you. You understand that – despite bumper stickers to the contrary – he who dies with the most toys doesn’t win.
So what is going on here?
Many investors don’t realize that as their health inevitably begins to decline, their wants and needs will decline as well.
Yet their life savings will keep compounding.
In other words, they are not spending enough – or giving away enough – while they are young enough to enjoy it.
This is something I’ve been thinking about a lot since I read Die With Zero by Bill Perkins, a successful hedge fund manager and tournament poker player.
Perkins makes a provocative argument.
He insists that rather than accumulating more and more wealth to enjoy during your so-called golden years, you should maximize your spending now while you’re healthy enough to create memories with the people you care about most.
This strategy is not for everyone, obviously.
Folks who have saved too little – or generated low returns on their investments – need to keep working, saving and investing to attain greater financial independence.
However, I know plenty of people who have done an excellent job of saving and investing yet developed a mindset along the way that prevents them from enjoying it.
For example, it makes perfect sense during the long wealth accumulation phase of life to keep a sharp eye on spending… to reinvest interest, dividends and capital gains… and to never touch principal unless there is a financial necessity.
But this is not the best mindset during the decumulation phase of life, when you have enough. Or more than enough.
No one knows how long they will live or at what rate their money will grow or what their total expenses will be, of course.
So isn’t it risky – or downright foolish – to spend down what you’ve accumulated over a lifetime?
There are good ways to estimate how long you’ll live and how much you’ll need so that you can enjoy what you’ve accumulated – not just your heirs.
And, in my next column, I’ll explain what’s required.