Why do some people become wealthy and othersstay broke? In many cases, it comes down to choices.
To see the impact choices can have on your life, let’s look at three fictional friends: Arthur, Brian and Charlie. They grew up together in families withthe same socioeconomic status. Now 35 years old and married, they all have average health, incomes and debt — but their financial outcomes won’t be the same.
Arthur
Arthur is happy with the status quo and doesn’t think anything needs to change in his life. He simply does what he’s always done.
He contributes3% to his 401(k),enough to get his employer match. He knows heshouldsave more, but figures he’ll do it when he makes more money.
He has student loan debt, a car payment, a mortgage and a credit card balance of about $5,000. He’s able to make these payments each month, so he’s not worried about the debt. He figures that if the bank is willing to loan him money, he’s in good shape financially.
Brian
Life is good in Brian’s world. Money is tight, but it’s all for the good of the family.
He just purchased a brand new TV, which his whole family loves. They watch iteach morning and eveningas they relax in theircomfy new recliners in their brand new house. (Brian believedthey needed more space for their growing family.) They also have a new car, new appliances and nice vacations each year.
His family has the usual debt load: student loans; a car payment; a new, bigger mortgage payment; and a credit card. He puts vacation expenses on hiscredit card, but always thinks he’ll pay them off in a month or two. He believes that it’s fiscally smart to charge purchases in orderto earn as many “free miles” as possible— and thatcarrying credit card debtimproveshis credit score.
Brian recently changed jobs. His 401(k) wasn’t doing very well, so he chosenot to contribute anything at his new job, even though his employer matches 3%. Instead, he cashed out his 401(k) to buy his new TV and furniture.
Charlie
Like Arthur and Brian, Charlie and his family have student loans, a car payment, a mortgage and a credit card. But it bothers Charlie. He feels like most of their income walks out the door in the form of debt payments, and he dreams of how his family will have more freedomwithoutdebt. To that end, he makessmall changes to strengthen theirfinancial foundation.
Charlie reads about gettingout of debt. He develops a plan to pay off all nonmortgage debt within three years and be100% debt-free, including the mortgage, within eight years. Heand his wife alsotrim their budget. For example, they stop going out to dinneronce a week, and Charlie starts bringing his lunch to work each day instead of buying it.
Healso puts in one or two hours each weeknight, after the kids are in bed, makingsome extra money.With theadditionalincome, Charlie opens a Roth IRA and automatically contributes just over $200 every other week so he canmax out it each year. This is on top of the 3% of his income that he saves in his 401(k), which his employer matches.
He chooses to fill his mind with positive and inspiring information and new ideas. He starts reading more and listening to instructional books and podcasts during his commute.
Charlie’s four simple choices —paying off debt, creating more income, contributing to a Roth IRA, and nurturing a positive outlook — may not be seem all that impressive, but they will dramatically affect the well-being of his family in the long run.
Six months later
Six months pass and the threefriends haven’t made much progress.
Arthur continues to plug along with nothing changing.
Brianstill loves his new TV and is planning the next family vacation in Hawaii — they deserve a treat!He hasn’tpaid off the last vacation because his family wanted new granite countertops for their kitchen. And he still hasn’t signed up for his 401(k).
Charlie is keeping up with his lifestyle changes.
If you tallied up the three friends’ net worths and investment accounts, they’d look about the same as before. No one is significantly closer to financial freedom.
Three years later
After three years, the results of Arthur’s, Brian’s and Charlie’s choicesreally start to show.
Arthur is still average. He’s in no hurry to pay off his debt, but has accumulated about $10,000 in his 401(k). His net worth is around $0, where it’s been for years.
Brianlookslike he’s doingreallywell, but feels broke. His credit card is almost maxed out and he still hasn’t started contributing to his 401(k). The market has gone upduring the past few years, and he really wants to invest, but doesn’t feel like he can bring home any less money each month and still make ends meet.
And although they’re close to paying off one of their cars, Brian and his wife believetheyneeda new one. Their neighbors, the Joneses, just got a new, top-of-the-line SUV, which makes Brian’s car look like scrap metal.
Their debt now totals more than the value of what they own, which means they have anegativenet worth. Brian is moving backward financially: He owes more money than he did three years ago and because he’s not investing in his 401(k), he hasn’t been taking advantage of compound growth.
Charlie, on the other hand, is off to a fabulous start. Like Arthur, he’s accumulated about $10,000 in his 401(k). He also hasclose to $18,000 in his Roth IRA due to stock marketgrowth.
Best of all, Charlie’s family just paid off the last of their nonmortgage debt. They’re on target to pay off their mortgage in five years, and theirnet worth is now around $100,000.
Falling behind
We all know people who fit in these three categories. There’sAverage Arthur, who never can get ahead but isn’t taking any action to change his situation.
Broke Brian is a little harder to spot because heappearsto be doing so well, but he’snever satisfied with what he already has. His financial issues become apparent only when he gets his car repossessed or has to file for bankruptcy.
Champion Charlie might be the most difficult to detectbecause he’s not flashy and doesn’t need to impress anyone. His main goal is financial freedom to create a better life for himself and his family. He hopesto move in a positive direction by acting on a fewsimple choices.
If Arthur and Brian don’t start to make better choices — even small changes — they won’t be able to achieve financialfreedom. And if we were to check back in another three years, they would be even further behind.
One decision at a time
What these fictional characters remind us is that wealth is built one decision at a time — and the only person who can make those decisions is you. You might have an advisor or financial mentor who pushes you and acts as your accountability partner, but it’s up to you to lead your own journey.
Sam Farringtonis a fee-only financial planner and founder ofSound Mind Financial Planningin Omaha, Nebraska. Learn more about Sam on NerdWallet’s Ask an Advisor. This article first appeared at NerdWallet.
