MONEY Master the Game: 7 Simple Steps to Financial Freedom (10 page)

What do you need to see it through? What works best for you? Let’s create a simple plan together now. Some of you might sit down and read the whole book over a long weekend—and if you do, then you’re as crazy and as obsessed as I am, a brother or sister on the path! If you don’t have a weekend to spare, consider taking a chapter a day or a section a week. Immerse yourself a little bit at a time for a few weeks and you’ll get it done. Whatever it takes.

This is a journey of a lifetime, a journey worth mastering! If you’re with me, let the journey begin!

CHAPTER 1.3

TAP THE POWER: MAKE THE MOST IMPORTANT
FINANCIAL
DECISION OF YOUR LIFE

My wealth has come from a combination of living in America, some lucky genes, and compound interest.

—WARREN BUFFETT

Let’s kick it in gear now. It’s time to begin our journey by tapping the power that can create real wealth for anyone. It’s not some get-rich-quick scheme, and it’s not what most people think will make them financially free or wealthy. Most people are looking to make some “big score”—a financial windfall—and then they think they’ll be set.

But let’s face it, we’re not about to
earn
our way to wealth. That’s a mistake millions of Americans make. We think that if we work harder, smarter, longer, we’ll achieve our financial dreams, but our paycheck alone—no matter how big—isn’t the answer.

I was reminded of this fundamental truth on a recent visit with the noted economist Burton Malkiel, author of one of the classic books on finance,
A Random Walk Down Wall Street.
I went to see Malkiel in his office at Princeton University because I admired not just his track record but also his no-nonsense style. In his books and interviews, he comes across as a straight shooter—and the day I met him was no exception. I wanted to get his insights on some of the pitfalls facing people at
all
stages of their investment lives. After all, this was the guy who helped create and develop the concept of index funds—a way for the average investor to match, or mimic, the markets; a way that anyone, even with a small amount of money, can own a piece of the entire stock market and have true portfolio diversity instead of being stuck with the ability to buy only a small number of shares of
stock in one or two companies. Today this category of investments accounts for over
$7 trillion
in assets! Of all the people I’d planned to interview for this book, he was one of the best-qualified to help me cut through the clutter and doublespeak of Wall Street and assess our current investment landscape.

What’s the biggest misstep most of us make right from the start? Malkiel didn’t even hesitate when I asked him. He said the majority of investors fail to take full advantage of the incredible power of compounding—the multiplying power of growth times growth.

Compound interest is such a powerful tool that Albert Einstein once called it the most important invention in all of human history.
But if it’s so awesome, I wondered, why do so few of us take full advantage of it? To illustrate the exponential power of compounding, Malkiel shared with me the story of twin brothers William and James, with investment strategies that couldn’t have been more different. He gives this example in one of his books, so I was familiar with it, but to hear him tell it
live
was an incredible experience—a little like hearing an 81-year old Bruce Springsteen play an acoustic version of “Born to Run” in his living room. The story supposes that William and James have just turned 65—the traditional retirement age. William got a jump-start on his brother, opening a retirement account at the age of 20 and investing $4,000 annually for the next 20 years. At 40, he stopped funding the account but left the money to grow in a tax-free environment at the rate of 10% each year.

James didn’t start saving for retirement until the ripe old age of 40, just as his brother William stopped making his own contributions. Like his brother, James invested $4,000 annually, also with a 10% return, tax free, but he kept at it until he was 65—25 years in all.

In sum, William, the early starter, invested a total of $80,000 ($4,000 per year
×
20 years at 10%), while James, the late bloomer, invested $100,000 ($4,000 per year
×
25 years at 10%).

So which brother had more money in his account at the age of retirement?

I knew where Malkiel was going with this, but he told the story with such joy and passion that it’s like he was sharing it for the very first time. The
answer, of course, was
the brother who’d started sooner and invested the least money.
How much more did he have in his account? Get this:
600% more!

Now, step back for a moment and put these numbers in context. If you’re a millennial, a Gen Xer, or even a baby boomer, pay close attention to this message—and know that this advice applies to you, no matter where you are on your personal timeline. If you’re 35 years old and you suddenly grasp the power of compounding, you’ll wish you got started on it at 25. If you’re 45, you’ll wish you were 35. If you’re in your 60s or 70s, you’ll think back to the pile of money you could have built and saved if only you’d gotten started on all that building and saving when you were in your 50s and 60s. And on and on.

In Malkiel’s example, it was
William, the brother who’d gotten the early start and stopped saving before his brother had even begun, who ended up with almost $2.5 million.
And it was
James, who’d saved all the way until the age of 65, who had less than $400,000. That’s a gap of over $2 million!
All because William was able to tap into the awesome power of compounding for an additional 20 years, giving him an insurmountable edge—and saddling him with the family dinner checks for the rest of his life.

The man on top of the mountain didn’t fall there.

—VINCE LOMBARDI

Not convinced that compound interest, over time, is the only sure way to grow your
seed of money
into the
bumper crop of financial security
you’ll need to meet your future needs? Malkiel shared another favorite story to bring home his point—and this one’s from our history books. When Benjamin Franklin died in 1790, he left about
$1,000
each to the cities of Boston and Philadelphia. His bequests came with some strings attached: specifically, the money was to be invested and could not be touched for 100 years. At that point, each city could withdraw up to $500,000 for designated public works projects. Any remaining money in the account could not be touched for another 100 years. Finally, 200 years after Franklin’s death,
a period of time that had seen stocks grow at an average compounded rate of 8%,
each
city would receive the balance—which in
1990 amounted to approximately $6.5 million.
Imagine that $1,000 grows to $6.5 million, with no money added over all those years.

How did it grow? Through the power of compounding!

Yes, 200 years is a long, long time—but
a 3,000% rate of return
can be worth the wait.

Malkiel’s examples show us what we already know in our hearts to be true: that for most of us,
our earned income will never bridge the gap between where we are and where we really want to be.
Because earned income can never compare to the power of compounding!

Money is better than poverty, if only for financial reasons.

—WOODY ALLEN

Still think you can earn your way to financial freedom? Let’s take a quick look at how it’s worked out for some of the highest-paid people in the world:

Legendary baseball pitcher Curt Schilling earned more than $100 million in an incredible career that included not one but two World Series championships for the Boston Red Sox. But then he poured his savings into a videogame startup that went bankrupt—and brought Schilling down with it. “I never believed that you could beat me,” Schilling told ESPN. “I lost.”

Now he’s $50 million in debt.

Kim Basinger was one of the most sought-after actresses of her generation, torching the big screen with indelible roles in such films as
9
¹
/
₂
Weeks, Batman,
and
L.A. Confidential,
which earned her an Academy Award as best supporting actress. At the height of her A-list popularity, she earned more than $10 million per picture—enough to spend $20 million to buy a whole town in Georgia.

Basinger ended up bankrupt.

Marvin Gaye, Willie Nelson, M.C. Hammer, Meat Loaf—they sold millions of albums and filled stadiums with adoring fans. Francis Ford Coppola? He packed theaters as the director of
The Godfather,
one of the
greatest American films, which—at least for a while—held the all-time box office record with gross ticket sales of $129 million.

All had near-brushes with bankruptcy—Coppola, three times!

Even Michael Jackson, the “King of Pop,” who reportedly signed a recording contract worth almost $1 billion and sold more than 750 million records, was forced to the brink of bankruptcy in 2007, when he was unable to pay back a $25 million loan on his Neverland Ranch.
Jackson spent money like he would never run out—until he finally did.
At his death two years later, he reportedly owed more than $300 million.

Do you think any of these ultra-megastars imagined a day when the money would stop flowing? Do you think they even
considered
preparing for such a day?

Have you ever noticed that no matter how much you earn, you find a way to spend it?
By these examples, it’s clear to see that you and I are not alone. We all seem to have a way of living up to our means—and some of us, I’m afraid, find a way to live
beyond
our means. We see this most of all in the stars who take the biggest falls—like the rich-beyond-their-dreams prizefighters who hit the canvas with a thud. Just look at the up-and-down-and-out career of
former heavyweight champ Mike Tyson, who made more money in his time than any other boxer in history—nearly a half billion dollars—and went bankrupt.

But five-division world champion Floyd “Money” Mayweather Jr. is about to beat Iron Mike’s earning record. Like Tyson, Mayweather fought his way up from hardscrabble beginnings. In September 2013 he scored a guaranteed purse of $41.5 million for his bout against Saúl “Canelo” Álvarez—a record amount that grew to more than $80 million based on pay-per-view totals. And that was just for one fight! Before this giant payday, he’d already topped the
Sports Illustrated
“Fortunate 50” list ranking the richest athletes in the United States. I love Mayweather personally. He’s an extraordinarily gifted athlete—with a work ethic like few alive. He’s also incredibly generous with his friends. There is a lot to appreciate in this man! But Mayweather had fought his way to the top of this list before, only to lose his fortune to wild spending sprees and bad investments. He is reported to spend so recklessly, he’s known to carry around a backpack filled with
$1 million in cash—just in case he needs to make an emergency donation to Louis Vuitton.

Like so many achievers, the champ is smart as a whip, and my hope is that he is following better investment practices today, but according to no less an authority on money than 50 Cent, Mayweather’s former business partner, the champ has no income outside of fighting. The rapper summed up the boxer’s financial strategy in plain terms: “It’s fight, get the money, spend the money, fight. Fight, get the money, spend the money, fight.”

Sound like a ridiculous strategy? Unfortunately, we can all relate at some level.
Work, get the money, spend the money, work
—it’s the American way!

Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give.

—WILLIAM A. WARD

Here’s the $41.5 million question: If these individuals couldn’t build on their talents and blessings and
earn their way to financial freedom,
how can
you
expect to earn your way?

You can’t.

But what you
can
do is make a simple change in strategy and embrace a whole new mind-set. You have to take control and harness the exponential power of compounding. It will change your life!
You have to move from just working for money to a world where money works for you.

It’s time to get off the sidelines and get into the game—because, ultimately, we must all become investors if we want to be financially free.

You’re already a financial trader. You might not think of it in just this way, but if you work for a living, you’re trading your time for money. Frankly, it’s just about
the worst trade you can make.
Why? You can always get more money, but you can’t get more time.

I don’t want to sound like one of those tearjerker MasterCard commercials, but we all know that life is made up of priceless moments. Moments that you’ll miss if you’re trading your time for money.

Sure, from time to time, we all need to miss a dance recital or a date
night when duty calls, but our precious memories aren’t always there for the taking.

Miss too many of them, and you might start to wonder what it is you’re
really
working for, after all.

THE ULTIMATE ATM

So where do you go if you need money and you’re not a world champion fighter with a backpack of large bills? What kind of ATM do you need to complete
that
transaction?