9. TMND : OUR FRIEND THE UAW

 The Millionaire Next Door (TMND)

OUR FRIEND THE UAW (Under Accumulator of Wealth)

What motivates Theodore “Teddy” J. Friend? Why does he work so hard? Why is he driven to earn so much money? Why does he spend so much? Teddy will tell you it’s because he’s competitive. But so are almost all top-producing sales professionals. His competitiveness is not the most important reason for his behavior.

When Teddy was growing up, his family was among the poorest in a blue-collar community. His family’s small home was built from used lumber and similar discarded materials. Until Teddy was a freshman in high school, his father cut Teddy’s hair, which did save money, although, according to Teddy, most people could tell that his “head was worked on by an amateur.”

The public high school he attended attracted students from a wide variety of socioeconomic backgrounds. Many were from upscale homes. “Rich kids” were there in large enough numbers to fill the high school’s parking lot with their nice cars. These cars always amazed Mr. Friend. Throughout high school his family owned one automobile. It was a well-used Ford that his dad had bought when it was ten years old.

During his high school years, Mr. Friend made a promise to himself that someday he would be a lot better off than his parents. “Better off” in his mind meant having a nice home in an upscale neighborhood, fine clothes for everyone in his family, classy cars, club memberships, and items purchased in the best stores. Mr. Friend realized that “better off” could be achieved by finding a high- paying position and working very hard.

Never did Mr. Friend equate “better off” with accumulating wealth. Again, being “better off” meant displaying one’s high income via the conspicuous display of high-status artifacts. Teddy never gave much thought to the benefits of building an investment portfolio. To him, a high income was the way to overcome a feeling of social inferiority. A high income was the product of hard work. “Income in the form of capital gains” were foreign words to him.

Mr. Friend’s father and mother were dysfunctional when it came to putting money away for a rainy day. Their financial plan was very simple: They spent when they had money. They stopped spending when they ran short of money. If they needed something, such as a washing machine or a new roof, they saved for it. But they also bought many items with installment loans. They never owned any stocks or bonds.

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   him to work harder and more aggressively. To him, a big home is a reminder of a big mortgage and the need to perform at a high level.

Mr. Friend is not a big spender across all categories of products and services. Ask him how much money he allocates for financial advice. In this category he is very price-sensitive. For example, his choice of an accountant was based almost exclusively on the accountant’s fees, not on his quality. Mr. Friend has always believed that the quality of service that accountants deliver is about the same; only their fees are different. That’s why he picked an accountant who has low fees. In sharp contrast, most wealthy people feel that you get what you pay for in the realm of financial advice.

Mr. Friend spends a considerable amount of time working. Still, he constantly worries that he will lose his so-called competitive edge. He is concerned that his need to outperform the rich kids, the college graduates, will wane someday. Mr. Friend constantly reminds himself about his humble background and lack of that all-important college degree. He constantly punishes himself psychologically. In his eyes he is inferior in pedigree to those very confident college graduates against whom he competes. He often wonders how they can be so content, given their less-than-exceptional performance in the workplace.

Mr. Friend never really enjoys his life. He owns a lot of upscale things, yet he works so hard and for so many hours during a typical day that he has no time to enjoy them. He has no time for his family, either. He leaves his house each day before dawn and rarely returns home in time for dinner.

Would you like to be Mr. Friend? His lifestyle is appealing to many people. But if these people really understood Mr. Friend’s inner workings, they might evaluate him differently. Mr. Friend is possessed by possessions. He works for things. His motivation and his thoughts are focused on the symbols of economic success. He constantly needs to convince others of this success. Unhappily, he has never convinced himself. In essence, he works, he earns, and he sacrifices to impress others.

These factors underlie the thought processes of many under accumulators of wealth. More often than not, UAWs allow “significant others” to determine their financial lifestyle. Interestingly, these “significant others,” or reference groups, turn out to be more imagined than real. Are you motivated by “significant others”? Perhaps you should consider a different approach to life. Perhaps you should reorient yourself.

Are all high-income people who came from humble beginnings destined to become UAWs? Will they all turn out to follow the ways of Mr. Friend? Absolutely not. There is a fundamental reason beyond Mr. Friend’s perceived social and educational deficiencies that explains why he became a UAW: His parents taught him the ways of the UAW. In spite of their modest income, his parents were not frugal. They spent nearly all their income. They were professionals in expending resources. Any pending increase in income was immediately earmarked for consumption. Even anticipated income tax refunds were allocated for consumption—long before the checks were received. Their consumer behavior had an impact on their son. They constantly sent him a message:

One earns to spend. When you need to spend more, you need to earn more.

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LIFE AMONG FRIENDS

How did Mr. Friend’s parents spend their money? He told us that throughout their marriage they ate a lot, smoked a lot, drank a lot, and shopped a lot. Their household was always overloaded with food. They stockpiled snack foods, prime meats, cold cuts, ice creams, and other desserts. Even breakfast was a feast. Bacon, sausage, home fries, eggs, English muffins, and Danish pastries were basics in the morning. Steaks and roasts were the preferred dinner offerings. The Friends never skipped a meal. Neighbors and relatives were frequent guests at the “Friends’ Restaurant,” as they referred to their home. Mr. Friend’s parents, between them, smoked about three packs of cigarettes a day. During a normal week they consumed two cases of beer. On holidays, consumption of food, tobacco, and alcohol greatly increased.

Shopping and consuming were the Friends’ main hobbies. More often than not, they shopped for fun, not necessity. On most Saturdays they would shop from the early morning until mid-afternoon. First they shopped for food. Then they spent countless hours shopping in discount stores. Mr. Friend pointed out that “most of the stuff they bought was junk.”

His mother was an especially aggressive discount store shopper. She had a strong proclivity for purchasing large quantities of throw rugs, ashtrays, malted milk balls, caramel corn, towels of every color and style, casual shoes, wooden bowls, and cooking utensils. Many of these items were stockpiled, sometimes for years, before they were used. His father was also a recreational shopper. He spent hours each Saturday shopping for tools and hardware. In most cases, these items were rarely, if ever, used.

Clearly, Mr. Friend’s parents were UAWS. He was well trained. But today he generates a much higher income than his parents ever earned. Why is he still a UAW? This income, in itself, is a result of parental guidance. His dad often told him to seek a job with high-income potential. To do so would enable Mr. Friend to buy the finer things in life. His father’s message was clear: To purchase a fine home, luxury automobiles, and expensive clothing, one has to earn a large income. 

Mr. Friend found that several areas of the sales profession had excellent income-producing opportunities. He would have to earn big to spend big. No mention was ever made of the value of putting money aside for investing. Income was designed to be spent. Credit was used heavily for major purchases.

Mr. Friend and his parents have never appreciated the benefits of accumulating wealth via investing. Mr. Friend told us repeatedly that “it’s hopeless.” He just does not have any money to invest! How is it that someone with an income six times the average for American households has no money to invest? Mr. Friend spends more annually for his children’s private school and college tuition than the average household earns in a year. He has an inventory of automobiles that is valued in excess of $130,000. He pays more than $12,000 each year for property taxes. His total annual mortgage payments are in excess of $30,000. Several of his suits cost $1,200 each.

But his insensitivity to the benefits of investing go beyond his need to consume. His parents had no understanding or appreciation of invested dollars. Nor does he. And his parents passed this lack of wisdom on to him.

Mr. Friend argues that his parents were people of modest means, people with no money to invest. Let’s examine this perception. His parents smoked three packs of cigarettes each day. How many packs did they consume during their adult lifetimes? There are 365 days in a year. So they consumed approximately 1,095 packs per year. They smoked for approximately forty-six years. So in forty-six years, they smoked 50,370 packs of cigarettes. How much did the couple pay for these cigarettes? Approximately $33,190—more than the purchase price of their home! They never considered how much it cost to purchase cigarettes. They viewed such purchases as small expenses. But small expenses become big expenses over time. Small amounts invested periodically also become large investments over time.

What if the Friends had invested their cigarette money in the stock market (index fund) during their lifetimes? How much would it have been worth? Nearly $100,000. And what if they had used their cigarette money to purchase shares in a tobacco company? What if they had purchased, reinvested all dividends, and never sold shares in Philip Morris instead of smoking Philip Morris products for forty-six years? At the end of forty-six years, the couple would have had a tobacco portfolio worth over $2 million. But the couple, like their son, never imagined that “small change” could be transformed into significant wealth.

This change in behavior alone would have placed the Friends in the millionaire category. They would have been members of the PAW group, too, given their modest income. Perhaps they would have lived differently if someone had educated them about the mathematics of wealth appreciation.  

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No one told them about this phenomenon. So it is not surprising that they failed to educate their son about the benefits of investing. But they did tell him not to smoke. His dad told him, “Don’t ever put the first cigarette in your mouth. I’m hooked. There is nothing I can do to quit.” His son followed this advice.

KICKING THE UAW HABIT

How long will Mr. Friend be able to fund his lifestyle? What if he were to stop working today? How long could he live off his current level of wealth? Only for about a year! No wonder he works so hard. Given his current circumstances, Mr. Friend will never be able to retire in comfort. In spite of being nearly fifty years of age, he has yet to figure this out for himself. But all is not hopeless. Mr. Friend can still become an accumulator of wealth.

We find that it is often useful for UAWs to be told the naked truth: “Friend, you’re worth less than one-half of the expected amount for those in your incomelage group “ Such news can spur on UAWs who are competitive. How do they respond when told that their net worth places them in the bottom quartile for all people with similar income and age characteristics? Some are incredulous. Many want to change but are uncertain how to transform themselves. How can someone change when they have more than twenty years’ experience as a UAW?

First, they must really want to change. Second, they will likely need some professional help. Ideally, they need to find a certified public accountant who provides financial planning. A professional of this type should have considerable experience and success with transforming UAWSs. That is, they should have a strong track record in helping the Mr. Friends of the world become more PAW-like.

In extreme cases, a CPA/financial planner actually takes control of his client’s purchasing behavior. He first audits the client’s consumption habits over the past two years. He categorizes and tabulates each element. Then the accountant consults with the client. The client is put into a “cold turkey” cutback program, meaning that all elements of consumption are reduced by a minimum of 15 percent for the next year or two. Additional cutbacks follow. In some situations, the accountant/financial planner even keeps his client’s checkbooks, writes all the checks, and pays all the bills. Cold turkey is not easy for most UAWs. But sometimes it’s the only way to solve the problem.

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