UAWs

Time, Energy, and Money

by mike on July 27, 2010

Time.  Energy.  Money. How do you spend these three things?  It will often tell you a little about yourself.  Think for a moment what it is you spend time and energy doing.  Is it at your job?  Is it doing church activities?  Is it with your family?  Whatever it is you spend a large majority of your time and energy on will tell you what it is you value.  The same can be said about money.  Do you spend a large amount of money on yourself?  Do you spend a large amount of money on luxury items?   Do you spend a large amount of money giving to your church and other causes?   These are all important questions to ask yourself.  The authors of “The Millionaire Next Door” explored how the average millionaire spends their time, energy, and money.

First, the authors split people into two groups.  The first group are people who do an excellent job of accumulating wealth given their income.  They call these people prodigious accumulators of wealth, or PAWs.  The second group are people who do a poor job of accumulating wealth given their income.  The authors refer to these people as under accumulators of wealth, or UAWs.  There is a huge difference in how PAWs and UAWs spend their time, energy and money.  The best word to describe PAWs is efficient.  They don’t mess around.  They are very purposeful about their use of time, energy, and money.   The authors use two different doctors that they had interviewed for the book to contrast PAWs and UAWs.  They call the PAW Dr. North and the UAW Dr. South.  Let’s take a look at the difference between the two.

Both Dr. North and Dr. South earn about $700,000 per year.  Physicians, in general, earn four times the average income.  But, they are specialists and are very good at what they do.  They both are in their fifties and have kids that are adults.  Physicians are less likely than the average person to be PAWs.  There are many reasons for this.  There is an expected expensive lifestyle for a doctor.  They are expected to live in a big house, drive nice cars, etc.  Also, they start earning their income much later than most people and have often accumulated tons of debt from their schooling.  Starting to invest early and limiting debt are important factors in building wealth, so doctors are often at a disadvantage.  Doctors are also more giving than the average person.   They give to worthy causes at a higher rate and they are much more likely to help a family member financially.  Finally, they often spend an average of ten hours of day with their patients, so they do not have time to spend on wealth building.  All of these factors set up the average physician to be an under accumulator of wealth, especially given their income.

Dr. North is not the average physician.   Dr. South is.  Dr. North invests 40% of his income every year.  He and his wife are meticulous budgeters (yes, even making $700,000 a year!), living on 1/3 of their annual income.  Dr. South and his wife live on credit, spending as if they make twice the amount of money they do.  What about you?  Do you live above your means, relying on credit cards and other debt tools to finance your lifestyle?  Or do you budget and live on less than you make?

The Souths operate independently of each other.  She buys clothes (over $30,000 a year!), groceries, etc without consulting anyone.  He does his thing, she does hers.  He has his credit cards, she has hers.  They generally have no idea what the other is doing.  The Norths talk to each other about their spending habits.  They live on a budget.  They have 1 shared credit card where all the charges appear on one bill.  They have one checking account, which is exactly what I recommend to my clients.  The two of you became one when you got married, so there is no reason to have separate accounts.  Not only is it a good idea philosophically and spiritually, it just makes sense.  It is easy to get sloppy and out of control if you both are doing your own thing, not paying attention to what the other is doing.  She may be spending $600 clothes shopping with their daughter, while he runs to Home Depot for $600 worth of tools and supplies.  They just spent $1,200 and neither spouse discussed it with the other.  Does that sound like a good plan to you?

Car shopping is another interesting thing to look at.  Dr. South will spend over 60 hours studying, negotiating, etc. to buy a $65,000 Porsche.  Keep in mind, the Porsche will go down in value.  He will spend very little time on investments.  The investments are what could make him a PAW.  North takes just a few hours to purchase his vehicle: he buys a 3 year old really nice car for $35,000.  He keeps cars forever, so the time spent per year on vehicle purchase is much less than an hour.  South likes to buy a new car every year or two at 60 hours!  Which do you think is the better use of time and energy?

Finally, Dr. North’s adult children are self sufficient because they were used to a lifestyle 1/3 of what their parents actually made.  Dr. South’s adult children use a large portion of his income to support their lifestyle.  People whose adult children are UAW’s are much less likely to accumulate wealth.  My guess is that Dr. South’s children were never told no.  They got whatever they wanted, whenever they wanted.  I have a feeling Dr. North’s children did not always get what they wanted.  But, they got the best thing of all: discipline.   What effect does all of this have on net worth?  Dr. North’s net worth: $7.5 million.  Dr. South’s net worth: $400,000

To summarize, let’s take a look at some interesting facts about millionaires, especially those who are prodigious accumulators of wealth (better than expected given their income).

·        UAW’s spend more time worrying about the future, PAW’s go and make a plan and execute for their future.

·        There is an inverse relationship between the time spent purchasing luxury items such as clothes and cars versus time spent planning one’s financial future.

·        PAW’s spend double the time planning investments.  This is the case for middle income earners (around $50,000 per year) as well.  They are much more likely than UAW’s in this income range to be self-employed which gives them the opportunity to spend time doing investment planning.

·        Among high income earners (over $100,000) there’s a negative correlation between education and wealth.  The higher the degree, the more likely for higher domestic overhead due to having to portray a certain level of success for clients/patients

Bottom line, you can always spend more than you make.  The key is to purposely spend your time, energy, and money.  Make a plan and execute it.  If you just wander through life, you will always be wondering what happened.

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