Personal Finance 101 for Freelance Writers

by Robert W. Bly

My father once told me, “Money is not important, as long as you’re happy.” But I disagree. Copywriter Ted Nicholas, writing in his Direct Marketing Success Letter, (April 23, 1997, page 2), says: “The happiest possible life ideally rests on a balance between four elements: health, career, personal relationships, and money.” I share Ted’s view.

The most important piece of advice I can give to writer as far as investing and money is concerned is: Start early. In fact start now. Don’t wait.

No matter what your vocation, investing and saving should be everyone’s “second career.” The longer you wait to begin your second career as an investor and saver, the more difficult it will be to achieve your financial goals and retire in relative comfort and wealth.

Why is getting an early start so important? Compound interest. Investments earn annual returns ranging from 1 percent to 25 percent and sometimes much more. Naturally, the longer you hold an investment and it earns a return, the more its value increases.

But thanks to compound interest, the increase in value is not merely linear; it’s almost exponential. Therefore, when you start early, your investments will grow in value much more spectacularly than someone who gets a late start. In his book Money Doesn’t Grow on Trees (Cumberland House), investment counselor Mark Dutton says, “Compound interest is the eighth wonder of the world.”

For instance, Merrill Lynch says that a person who puts $2,000 a year in an IRA starting at age 18 will retire with more than double the savings of a person who starts only ten years later, at age 28.

Wayne Kolb, my accountant, had an even more dramatic example in his Tax Planning newsletter (June, 1995). Let’s say an 18-year-old invests $2,000 annually in an IRA through age 25, with an annual return average of 10 percent, and then stops. By age 65, his IRA will be worth more than $1 million! Not a bad return for a $16,000 investment.

By comparison, if a person waits until age 25 to start an IRA, as I did, he or she will need to invest $2,000 a year until retirement to have $1 million. Two thousand dollars a year for 40 years, from age 25 to 65, is $80,000 — meaning the person who started his IRA 7 years later, at age 25 instead of 18, had to put in five times the investment of the person who started earlier.

But whatever your age when you read this, if you haven’t started investing in earnest, the best advice I can give is: do so now. Not in a week, but now. An example from Prudential Securities dramatizes this point: If you open an IRA at age 50, and contribute $2,000 a year earning 8% compounded monthly, at age 65 your IRA will be worth $54,300.

Had you opened the same IRA when you were 25, and put in the same amount of money annually earning the same rate of return, at age 65 your IRA would be worth more than half a million dollars — almost ten times as much.

Be a saver. Invest. Americans are notoriously behind the rest of the world when it comes to accruing wealth. The average American family saves only 5 percent of their earnings each year, compared with nearly 10 percent in the U.K. and almost 13 percent in Sweden.

Before you spend your paycheck, invest at least 10 percent of it. My habit is to invest in increments of $10,000: Once I have an extra $10,000 in my bank account, beyond the balance I need to maintain to pay bills and living expenses, I invest it, whether in a mutual fund, bond, or stock. I advise you to do the same.

In addition to investing more, spend less. Lower your expenses. Do not throw money away. Combine abundance with thrift. When my net worth reached a million dollars in my late 30s, I was driving an 11-year-old Chevrolet Chevette, for which I had paid $6,500 in 1984.

Likewise, we live in a modest three-bedroom colonial in a middle-class town. Could we afford a grander house in a snootier town? Yes. But I’d rather have money in the bank than a huge mortgage payment to make every month. Our house isn’t showy, but it is comfortable, and we don’t need more.

There’s an old saying: “Money isn’t everything in business; it isn’t the sole factor defining success; but it is how people keep score.” Throughout your life, you will often ask yourself, “Am I successful?” The search for a meaningful answer can be difficult and frustrating. Many of us spend our lives in search of that answer.

At least the money portion can be measured. Don’t sacrifice your life for money. Don’t put it so far ahead of the other elements of your life — family, friends, health, career, accomplishment, personal fulfillment — that these other elements go largely unfulfilled.

But do make the accumulation of wealth a priority in your life. When you have enough money that you can describe yourself as “comfortable,” that’s indeed how you feel: more secure, more content, less worried, proud of what you have accomplished, and more comfortable with who, what, and where you are in life. This I can attest to from personal experience.

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