|
04.08
Who Want$
to Be a Millionaire?
By Paul B. Crilly
In June 1995, Osceola McCarty, a
washerwoman from Mississippi, donated $150,000
— 60 percent of her life savings — to the
University of Southern Mississippi for student
scholarships [1]. This was extraordinary, since
Ms. McCarty hardly finished sixth grade. She
cleaned clothes using only a pot and scrub
board, and she never had the proverbial rich
uncle. Her secret? Hard work, diligent saving,
frugality and living within her means. If Ms.
McCarty can accumulate this amount of money,
surely an engineering graduate should be able to
do at least as well.
Five years ago, I wrote an
article on how to become a millionaire by
age 62 [2]. I received some criticism, including comments such as “a million
dollars isn’t much money anymore,” or “you’ve
stated the obvious.” True, but, at retirement I
would rather have accumulated a million dollars
than be like the average retiree who has $4,000
in credit card debt, a $44,000 mortgage [3], and
is dependent on the generosity of his or her
employer’s retirement plan and/or social
security, or worse yet, is hoping for a big
inheritance. It seems to me that a net worth of
a million dollars accumulated by diligent, but
reasonable saving, is better than a negative
$44,000.
If you followed my advice five
years ago and stashed away $3,000/year in one of
the more plain vanilla mutual funds, your
investment would have grown at an annualized
rate of 10 percent and you would have $18,315 —
a gain of $3,315 above your initial investment.
This tidy sum can pay lots of bills should your
employer ask you to find another opportunity.
Note also, a negative net worth is not just a
problem for low-wage earners. According to the
Federal Reserve, in the last 20 years, the top
20 percent of income earners have managed to
increase their debt as a percentage of
disposable income from 62 percent to over 100
percent [3]. So let’s revisit this topic.
First, let’s review what I said
in my first article — you must save and invest
early while you have the means, flexibility and
relatively few commitments. If you save
$3000/year from age 22 to 32 in a mutual fund,
by age 62, your investment should grow to
$834,000. If you continue saving from age 32 to
62, you will have accumulated $1.3 million.
Again, for an engineer whose starting salary is
usually over $50,000, $3000/year or $250/month
represents six percent of your salary. But wait
— if you go with a tax-deductable individual
retirement account (IRA) or 401K, your cost will
be only $213/month (assuming a 15 percent
marginal tax bracket), and since many employers
provide a 1/3 match, your contribution may only
be $141/month. For those in the lower tax
brackets, a non-tax-deductible ROTH IRA may be a
better deal.
To give you a sense of what $141
is, let’s consider what a young adult will spend
each month. Keeping a compact car full of gas is
$150, weekly dinner for two at a decent
restaurant is $400, cell phone/cable TV/internet
is $100, a fast food lunch is $160, and car
payments for a used compact car are at least
$300. Surely one or some of these expenses could
be reduced to enable a $213/$141 contribution to
an IRA or 401K. Again, on the first day of your
first job, have the money deducted from your
paycheck so you will never miss it. You will be
pleasantly surprised five years later when you
get a monthly statement showing your accumulated
worth.
Second, let’s compare the
lifestyle of a 2008 graduate to that of a 1988
graduate. Today’s generation has recurring
monthly expenses that are keeping many from
owning a house, accumulating monetary wealth,
and may explain why so many are in the subprime
mortgage mess we are constantly hearing about in
the news. A young person today expects to have a
cell phone, cable TV, home internet access,
subscription to a computer software or music
upgrade, and a host of other goodies that hardly
existed 10 to 20 years ago. These recurring
monthly expenses will sap one’s ability to save
and provide for a dignified future and keep one
in perpetual slavery to these “material
conveniences.” Today’s business model is based
on you purchasing a service subscription such as
software updates, a cell phone or music. Once
you start your “subscription,” then the business
has you hooked for the rest of your life.
Instead, why not pay yourself first and reduce
or defer these other expenses? Do you really
need an extravagant cell phone plan, when all
you need is the ability to contact someone in an
emergency? People like Ms. McCarty and the
high-net worth people described in Stanley and
Danko’s book, The Millionaire Next Door
[4], became wealthy by avoiding some of these
pesky expenses and high-maintenance lifestyle
choices.
Third, even if you are on the
fast track to becoming a high-level executive,
you should have something on the side that you
can fall back on if your employer decides to
downsize or outsource your work. You should gain
career skills in addition to engineering so that
you can keep your job with your present employer
by performing a different function or be able to
find another job. This sideline could turn into
a second career. Let me cite some examples. When
working for industry, some of my colleagues
and I taught evening classes in computer
programming at a local community college. Eventually,
some became full-time professors at
universities or community colleges, or took
advantage of state licensing programs and taught
in the public schools. Similarly, the teaching
experience may open up doors within your
company, such as becoming a trainer, should your
engineering job disappear or your interests
change.
Engineers or scientists with
B.S. degrees are qualified to take the U.S.
Patent and Trademark Office (PTO) bar exam to
become patent agents. The PTO provides materials
to prepare for the exam, or you can take a short
exam preparation course. As long as no conflict
of interest exists, and if your employer allows
for this practice, you can engage in part-time
work as a patent agent or possibly transfer to
your company’s intellectual property division.
Similar examples include taking and passing the
professional engineering exam so that you can
hang up your own shingle or work for someone
else that needs a licensed engineer. Another
possibility is to develop your skills as an
expert witness in product liability cases, or
engage in some other type of consulting
business. These situations not only provide an
extra source of income, but open up new
opportunities. Hobbies and community volunteer
service can often turn into a career change.
However, don’t forget to follow the ethical
requirements of your profession and make sure
your present employer approves of you
participating in these activities. If you do
engage in outside work, you may also need to
consider liability insurance.
My favorite story is about a
35-year-old professor who was often chided by
his friends for driving a 15-year-old economy
car, while they were driving newer, fancier
cars. He looked them in the eye and asked, “Is
your mortgage paid off?” “Of course not,” they
said. He replied “Mine is and it’s because I
don’t buy a new car every two years!”
I can personally relate to Ms.
McCarty's frugality and generosity. In the
1930s, my grandmother, who was widowed and had
to support a young child (my father), lost all
that she had in the depression. But, her
frugality and hard work enabled her to not only
send my father to a good out-of-state
engineering college, but also help me pay for
graduate school.
References
[1] S. Wertz, “Oseola McCarty
Donates $150,000 to Southern Miss,” University
of Southern Mississippi News Release, [online],
(26 June 2005), Available
www.usm.edu/pr/oola1.htm.
[2] P. Crilly, “Who Wants to be
a Millionaire,” IEEE-USA Today’s Engineer,
[online], (October 2003), Available
www.todaysengineer.org/2003/Oct/millionaire.asp.
[3] J. Hilsenrath and M.
Higgins, “Forever Indebted: Consumer Borrowing
Reaches Record Levels, and Even The Wealthy Are
Struggling,” Wall Street Journal Classroom
Edition, [online], (November 2002),
Available
http://wsjclassroomedition.com/archive/02nov/ECON4.htm.
[4] T.J. Stanley and W.D. Danko,
The Millionaire Next Door, Pocket
Publisher, 1998.
Paul B. Crilly is an
associate professor of electrical engineering
and computer science at the University of
Tennessee. He worked as a development engineer
in private industry for 11 years and served as
an IEEE Congressional Fellow.
Comments may
be submitted to todaysengineer@ieee.org. Opinions expressed are the
author's.
|
E-mail
this page to a friend
