No to YOLO

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When asked to name the most powerful force on earth, Albert Einstein is reputed to have answered “compound interest”. In the Warren Buffett biography The Snowball, it states that Buffet looked at every dollar as $10 in the future; therefore, he wasn’t going to spend more than he needed to. What I have found out about international teachers is, that while highly educated, many of them either do not care about or do not understand the concept of compound interest.

One of the classes I taught while overseas was Business Management and one of the lessons I was tasked with teaching was on depreciation. I am quite interested in the concept of depreciation and was looking forward to teaching it, but I knew it was not going to be easy to make it a topic that my high school seniors would be eager to learn. So I did what any decent teacher tries to do: hook em’ — get them interested somehow. I decided as an introduction to depreciation I would first focus on appreciation. I started days before the actual lesson. I warned students not to miss next Monday because I would be teaching them how to become a millionaire by the time they were 40 years old.

Each class leading up to that Monday, I continued promoting the upcoming lesson. I told them that no other class, not Biology, Physics, English or Calculus would be able to teach them how to become a millionaire like I could. Some students commented that I was going to tell them to invent the next iPod or start up a social networking website, but I explained that every person in the class would be able to complete this feat no matter their interests or intellect. That Monday came and, even though the students were skeptical and probably less excited than I was, the class was full.  In the numerous classes I taught this lesson, there was never an absent student. Maybe the business teacher did know something.

We started by defining what a millionaire is:  a person with a net worth of $1,000,000, not someone who is driving a Bentley and wearing Prada. Once we agreed on the definition of a millionaire, the next step was to go to a website, a compound interest calculating website. I told them that the secret to becoming a millionaire was compound interest. At this point, their excitement, if indeed there had been any, lowered a bit as they realized that, yes, this was going to be a lesson after all.  However, they still participated, either because they did actually want to find out how to be a millionaire or perhaps just to humor me. So we looked at the compound interest website and discussed the calculator’s components:

  • Current Principal
  • Annual Addition
  • Years to Grow
  • Interest Rate

This was relatively easy for them to comprehend. Current Principal is how much money you are starting with. Annual Addition is how much money you add to the principal each year. Years to Grow is how long all monies will be invested and Interest Rate is the percentage return you could get on the money invested. I explained that in order to make everyone in the room a millionaire, we were going to have to agree on a few variables. One, they would start investing upon graduation from university at age twenty-two. Since they would be a millionaire at age forty, that meant their money would have eighteen year to grow.  So they typed in 18 for Years to Grow.

  • Current Principal
  • Annual Addition
  • Years to Grow     =   18
  • Interest Rate

Two, upon graduation students would start their investment venture with $20,000. Depending upon my teaching location this may have been a stretch, but I am an international teacher and most students come from wealthy families, especially in the Middle East. We decided that by counting on graduation gifts, savings, and other monetary gifts throughout their young lives, this figure was doable. Especially since they were seventeen and would have five years to plan for this. So they typed in $20,000 for Current Principal.

  • Current Principal  = $20,000
  • Annual Addition
  • Years to Grow     =  18
  • Interest Rate

Next, we decided on ‘Annual Addition’. At this point I gave them a bit of a lecture on how becoming a millionaire was not easy and would require sacrifice. I told them that they would need to put back around $500 a week to make this happen. I got some groans about how this would be too hard given the must haves they would encounter throughout the next eighteen years. You know, the necessities like new clothes, new cars and anything produced by Apple. I explained that it was doable if they tried, that most of them would go to fairly prestigious universities and would most likely earn well beyond $500 a week straight out of college. Not to mention that the annual addition was not adjusted to the increased income they would certainly enjoy in their thirties. So they typed in $26,000 for Annual Addition ($500 * 52 weeks).

  • Current Principal  = $20,000
  • Annual Addition   = $26,000
  • Years to Grow      =  18
  • Interest Rate

The final component to this millionaire mission was the Interest Rate. History shows that an investor who invests in the U.S. stock market for the long-term and in diversified holdings can expect an annual return of 7%. So we typed in 7% for Interest Rate.

  • Current Principal  = $20,000
  • Annual Addition   = $26,000
  • Years to Grow      =  18
  • Interest Rate        =  7%

Once they hit ‘calculate’, they saw that the future value, based on the numbers entered, would be $1,013,451. Voila, you’re a millionaire at age 40. To me, this is very exciting. Granted I have always liked playing with numbers, but when you start adjusting the variables, saving a bit more here, adding more years to grow there, what if we get 8% there, it can be pretty fun.

As I said, the point of discussing compound interest and appreciation was to get to the next part of the lesson which was depreciation and depreciation schedules. A depreciation schedule is simply a table that tells you how much your property goes down in value each year. It’s based on a percentage and many tax systems allow for depreciation of assets in order to get a fair value of the asset and allow an income tax deduction based on the expense of an asset depreciating. But before we could get to the concept of depreciation, the class inevitably debated the point of being a millionaire.

One student asked, “If you had to wait eighteen years, and sacrifice by saving a sizable portion of your early income, then what was the point?”. To many high school seniors the whole point of being a millionaire was to “live large”. If nobody knew you were a millionaire because you lived below your means, what was the point? Based on this predictable rationale of the teenager, I then realized that the high school senior and the international teacher had more in common than I initially thought. It’s the concept of front-end vs. back-end. To most high school kids, it’s all about the front-end. I want it now, I want to be seen in it now, living it now, wearing it now. Not only that, but I deserve it. This is certainly the mentality of the international teacher and their numerous costly expenditures. Why else would I be living overseas, doing without the comforts of home, going for long stretches without seeing loved ones and friends? I deserve to stay in a five-star resort, get weekly massages and employ someone else to clean my house and cook my meals. While we may expect this attitude from high school kids, it is interesting how this mentality prevails throughout a good part of the world from those people who “can afford it” and “deserve it”. The once-valued concept of delayed gratification is quite foreign in our day and age, be it teenagers, international teachers or the average American. This is primarily the cause of why so many American adults have nowhere near the required amount needed to retire. Retirement savings or lack thereof, in the U.S. has been called a crisis with many woefully lacking in retirement savings and other households having none at all. Granted many households cannot afford to put back money each month as they are struggling just to keep the lights on and put food on the table. But even for those families that can afford it, which I would argue is the majority, the thought of a new smartphone, flat screen TV or current model automobile is a much larger priority than investing for retirement. To these folks, there is nothing fun, trendy or glamorous about putting back money for retirement and it certainly does not warrant delayed gratification.

Fortunately for them, many can count on a bit of future back-end help, namely Social Security. Today, Social Security keeps many people over the age of 65 above the poverty level and, even though the average check is only $1,200 a month, this is money that many retirees would not have otherwise. And the good news is as long as you pay into the Social Security system, you can expect a check when you retire. How much is based on how much you have paid in and when you retire, but rest assured if you’re an American worker, you will get a check. Some critics may say that Social Security won’t be around when you are ready to retire, but this is rather simplistic. All in all, the program has been pretty successful and it would be difficult to imagine a time when the U.S. government would discontinue it and what they would say to all those who have been paying into it all their life. Even I can expect a check a sixty-five. Since I started my international teaching career later in life, I worked long enough and paid into Social Security enough to qualify me for $699 a month. Even that little bit of back-end safety net has a feeling of comfort to it.  By forcing you to put money away for the back-end in the form of taxes, Social Security allows you something to count on when your earning days are over. Can I live on $699 a month?  No, but it is something. More importantly, it gives me the reality check that I better have some other back-end plan up my sleeve.

For the international teacher, as soon as they start their international teaching career, they do not pay into Social Security because all that income earned overseas is not taxed in the U.S., another point that many see as a lucrative advantage to the profession. But this, in reality, limits their back-end benefits. Another form of back-end benefits is the 401K. A 401K is a type of retirement plan. It allows employees, employers, or both to contribute to the plan.  This is a great opportunity for the employee who works for a company that offers a 401K plan. If it is a matching plan, the employee invests a percentage of his pre-tax salary and the employer matches it. Surprisingly, not all employees take advantage of this opportunity, which demonstrates either a lack of understanding of the benefits of the 401K or an ignorance of the importance of back-end planning. However, even those who do take advantage of their 401K and as well as pay into Social Security may find their retirement account is less than what they will need to live comfortably into their golden years. This is why it is advisable to be proactive and put back as much as possible when you can.

If you are an educator in the U.S. public schools system, you may qualify for a pension – another type of retirement plan.  Pensions can be somewhat complicated, but basically if you work as a teacher for a set number of years, you will receive a monthly benefit payment upon retirement. Some pensions require teachers to contribute to the pension, while others do not. For the U.S. teacher, this is another form of back-end payment for those golden years. If you reach that set number of years, you can count on both Social Security benefits and your pension. Assuming both programs are around when you retire, this would allow for a reasonably comfortable existence.

What about the international teacher? If you work for one of the better schools, there most likely will be a retirement matching program by your employer–mine is currently 10%. But many international schools do not provide this benefit. And that is what they are, benefits. All retirement plans, be they pensions, 401K’s or basic retirement matching plans, are added benefits so employers can attract employees. However, unlike the 401K, most international school retirement matching programs do not invest in the stock market. They simply allow you to put back a percentage of your salary and the school matches this. That money then sits in a savings account, drawing minimal interest, until you cash out after 2, 3, or 5 years at which time that lump sum is deposited into your account and it is up to you what you choose to do with it. The problem with this is twofold.

1. It is not that much money. Let’s assume a couple both teaching internationally each have a salary of $50,000. Once we run the numbers we see that this couple would contribute $5,000 a year ($100,000 combined salary times 5%) and the school would match that, so a total savings of $10,000 a year. Not bad I guess. So if you work at a school five years (which is a long time internationally speaking) you would receive $50,000 when you leave the school.

2. Now comes the real problem with this scheme. Upon receiving that $50,000, how many couples will have the discipline to invest it? Since there is no way for the money to “roll over” like a traditional 401K plan (in other words the money is sent forward to your next employer’s retirement plan) and since there is no incentive to add more to the retirement contribution (since you’re only matched to a certain percentage), the average couple may not even perceive this $50,000 as retirement, or back-end if you will. If anything, there may be a temptation to spend at least part of this new found wealth, perhaps on one of those $8,000 vacations. Incidentally, that $8,000 holiday when adjusted by the compound interest calculator at 7% return for twenty years, is actually a $31,000 holiday. Touché Mr. Buffet.

So does this mean everyone, whether international teacher, western teacher or Warren Buffet should eat beans and never go on vacation? After all, what would the cost of that steak you’re having for dinner be compounded annually at 7% for thirty years? This is not the point. YOLO is not an adequate excuse to not plan for tomorrow. One of my motivations for writing this book was the fear I have for people who choose not to plan for retirement.  It may be true that for some people it is not a choice and they simply cannot afford to put back money for retirement, but for my colleagues the international teachers it is a choice. The income is there. Nevertheless, many choose to ignore it and simply spend carelessly as if retirement will magically be taken care of.  It reminds me a bit of the party going on as the Titanic began its descent into the abyss. Maybe that is a bit dramatic, but for many people their ship is either slowly sinking or not sailing as swiftly as it could if given a few simple actions.

–The Haggard

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