Fifty years ago, in 1965, I was just 16 years old. Ah yes, the 1960’s! It’s remembered for quite a few things, isn’t it? Baby boomers were just first coming of age back then, but of course there were also things like the Beatles and the British musical invasion, Motown, man landing on the moon, the assassination of JFK, the Vietnam War and of course, who will ever forget Woodstock!
They say “if you can remember the 60’s then you weren’t really there”, but I am here to tell you I was there and it was a wonderful yet tumultuous time in America. I thought, for this post, we should look back at that time and use it as information that can help us plan for the future. Sort of where we were, where we are, where we’re going, put in the context of financial independence. It’s not really that complicated. We can adjust for inflation and compare it all so that we can see how things have changed. Or have they really? And one more, thing. I’m going to ask and try to answer a very important question:
Does knowing the financial past help us change our financial future?
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Inflation has risen at the average rate of 4.2% per year since 1965 (50 years). That means the value of what you could buy for $1.00 back in 1965 will now cost you $7.53 in today’s money, or 753% more (despite what the federal government says about current inflation rates). Let’s take a quick look at the cost of some common things then and now:
|Item||1965 $||2015 $||% Difference|
|Bread (20 oz loaf)||0.10||1.99||+503%|
|Compact car (new)||1,976||14,250||+746%|
|Airfare NYC to LA (round trip)||290||400||+138%|
|Household income (annual)||7,704||52,345||+679%|
As you can see, many things are way up in comparative dollars, and some are less. There is much discussion about raising the federal minimum wage in 2015. Back in 1965, it was $1.25 per hour, or about $50/week for a full time, 40 hr/week job. Today it’s $7.25 per hour. That’s an increase of only 580% in the last 50 years, way below the inflation rate.
Looking back, I can draw a few conclusions. It’s obvious that inflation has to be a factor we consider when we plan our future expenses and retirement. Financial independence has to outstrip the inflation rate by a serious amount if it’s going to come to you before your full retirement age (now 66 or 67 plus, depending on the year you were born).
But not everything goes up in real dollars. The major category I discovered was technology-related items such as computers and TVs. They may start at high prices, but in a relatively short period of time, they come down dramatically as economy of scale kicks in and millions of users buy these products (smartphones are another good example).
On the flip side, natural phenomena has had a big impact on prices over the past 50 years. Climate change, the fossil fuel increase in usage and decrease in supply (until a recent blip occurred in both categories), has made the demand higher and the prices shoot up for food, water, and fuel. To complicate things even further is the tremendous worldwide population growth. Take a look at these numbers:
|2065 (projected)||10.5 Billion|
What this tells me is that these shortages we’re experiencing now will drive the costs even higher above the average inflation rate for many years to come unless some game-changing technological solutions are implemented. I’m not optimistic about that at all.
On the other side of the balance sheet, we have income, which as you can see has not kept pace with most expenses. Amazingly, my income grew historically to a level that I would have only dreamed about back in 1965. But yet, being honest, it didn’t mean I was ever wealthy or financially independent. If you had said to me at age 16 that I would earn $40-50,000 at some point in my life, I would have thought I’d have it made. Not true, and looking back now I know exactly why it didn’t happen that way. I’m not complaining; no one knows what the future really holds. But there are some things you can do, armed with the knowledge of the past, to start the ball rolling toward financial independence.
How to Become Financially Independent
Now that I know the past, how can I change the future?
1. High-paying jobs do not guarantee that you’ll be financially independent
Real wealth and financial independence come when you no longer need a paycheck each week to manage your life. If it were true that only a big paycheck meant a lifetime of financial security, you wouldn’t read about celebrities going bankrupt after their fame wears off or after they fail to adjust to a lifestyle that allows them to live well the rest of their lives. The best way to make sure that you will have enough money to live comfortably when you retire is to diversify your income (including passive sources), manage your expenses, and use the surplus you currently earn to invest in your future needs. That takes time to work.
Use your income surplus and/or increased earnings to invest in vehicles like your 401k, Roth IRA, interest-yielding ventures like municipal bonds, stocks that yield dividends, capital gains, etc. A $10,000 investment in the stock market back in 1965 would be worth approximately a million dollars today with the growth of the market over 50 years.
|Year||Dow Jones Industrial Average|
3. Manage your taxes
Tax laws were simpler back in 1965, but now you may need to do a lot more research or consult a tax advisor. A tax advisor will show you the best legal ways to keep the most of your income. Tax rates may go up or down, but it’s a fact that large wage earners are taxed at the highest rates, and you can have a real effect on retaining more when you know and understand how the tax system works.
4. Controlling your own time is the real measure of wealth
Working because you want to and not because you have to…that’s real wealth. The nature of our work has changed in many ways. Historically work was more physical and less mental, but the shift toward knowledge and creativity based careers often means a longer workweek but with more flexibility (such as location independence). Through these changes we’ve seen the emergence of early retirement and second careers that are choices rather than necessities.
5. The school you attend and grades you receive do not insure financial independence
Hard work (and smart work) and good work ethics count more than any factor in building wealth and financial independence. There are so many millionaires and billionaires that never went to college showing that there doesn’t need to be a correlation between school/grades and wealth. It sounds counter-intuitive to the historical perspective, but with the rise of entrepreneurship, you really become the driver on the road to wealth.
6. Your spouse or significant other has a dramatic effect on your path to financial independence
The 60’s saw the entrance of many women into the workforce, but it was still common for them to be homemakers in one-income families. Nowadays, the women may out-earn the men in their relationships, or the man may be the stay-at-home parent. Couples can be true partners when it comes to finances, so finding a teammate that supports your lifestyle choices and habits is key to harmonious relationships and financial progress.
7. Finding your “niche” in life can be very lucrative
Sam Walton made his millions by doing a simple thing, bringing great values to everyday Americans. Simple is the key. Find something that people want and need and you’ll be on your way. You don’t have to be an entrepreneur to become financially independent, but it helps to treat your career like a business and find the right opportunities for yourself.
Your niche may not be the most glamorous one but it can still be the most beneficial one. For example, a doctor may spend a great deal of money on his education to acquire remarkable credentials. He may try to impress with an expensive lifestyle as part of his status in the community and to believe he’s a success. On the other hand, your local plumber may have attended a modest trade school. He just needs to be reliable and a hard worker to impress. He still earns a handsome income, but his lifestyle may be better suited to plan and invest for financial independence.
Looking at history gives you an opportunity to learn some of the constants and trends that have been around during the past 50 years. However, no one really knows what the next 50 years will be like and the effects that technology and the environment will have on your pursuit of financial independence. What you can do is pursue a life and vocation that allows you a balance between work, family, and happiness while still enabling you to obtain the wealth and freedom you desire. That’s the real challenge ahead of you.
So what are you planning to do to be ready for the upcoming decades? Retirement has a way of sneaking up on you and you really need to prepare yourself as early as possible. If financial independence is what you seek, your mission starts yesterday! Whether you are 16 or 66, where are you heading tomorrow?