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CHAPTER 1.3

TAP THE POWER: MAKE THE MOST IMPORTANT FINANCIAL DECISION OF YOUR LIFE

My wealth has come from a combination of living in America, some lucky genes, and compound interest.

—WARREN BUFFETT

Let’s kick it in gear now. It’s time to begin our journey by tapping the power that can create real wealth for anyone. It’s not some get-rich-quick scheme, and it’s not what most people think will make them financially free or wealthy. Most people are looking to make some “big score”—a financial windfall—and then they think they’ll be set.

But let’s face it, we’re not about to earn our way to wealth. That’s a mistake millions of Americans make. We think that if we work harder, smarter, longer, we’ll achieve our financial dreams, but our paycheck alone—no matter how big—isn’t the answer.

I was reminded of this fundamental truth on a recent visit with the noted economist Burton Malkiel, author of one of the classic books on finance, A Random Walk Down Wall Street. I went to see Malkiel in his office at Princeton University because I admired not just his track record but also his no-nonsense style. In his books and interviews, he comes across as a straight shooter—and the day I met him was no exception. I wanted to get his insights on some of the pitfalls facing people at all stages of their investment lives. After all, this was the guy who helped create and develop the concept of index funds—a way for the average investor to match, or mimic, the markets; a way that anyone, even with a small amount of money, can own a piece of the entire stock market and have true portfolio diversity instead of being stuck with the ability to buy only a small number of shares of stock in one or two companies. Today this category of investments accounts for over $7 trillion in assets! Of all the people I’d planned to interview for this book, he was one of the best-qualified to help me cut through the clutter and doublespeak of Wall Street and assess our current investment landscape.

What’s the biggest misstep most of us make right from the start? Malkiel didn’t even hesitate when I asked him. He said the majority of investors fail to take full advantage of the incredible power of compounding—the multiplying power of growth times growth.

Compound interest is such a powerful tool that Albert Einstein once called it the most important invention in all of human history. But if it’s so awesome, I wondered, why do so few of us take full advantage of it? To illustrate the exponential power of compounding, Malkiel shared with me the story of twin brothers William and James, with investment strategies that couldn’t have been more different. He gives this example in one of his books, so I was familiar with it, but to hear him tell it live was an incredible experience—a little like hearing an 81-year old Bruce Springsteen play an acoustic version of “Born to Run” in his living room. The story supposes that William and James have just turned 65—the traditional retirement age. William got a jump-start on his brother, opening a retirement account at the age of 20 and investing $4,000 annually for the next 20 years. At 40, he stopped funding the account but left the money to grow in a tax-free environment at the rate of 10% each year.

James didn’t start saving for retirement until the ripe old age of 40, just as his brother William stopped making his own contributions. Like his brother, James invested $4,000 annually, also with a 10% return, tax free, but he kept at it until he was 65—25 years in all.

In sum, William, the early starter, invested a total of $80,000 ($4,000 per year × 20 years at 10%), while James, the late bloomer, invested $100,000 ($4,000 per year × 25 years at 10%).

So which brother had more money in his account at the age of retirement?

I knew where Malkiel was going with this, but he told the story with such joy and passion that it’s like he was sharing it for the very first time. The answer, of course, was the brother who’d started sooner and invested the least money. How much more did he have in his account? Get this: 600% more!

Now, step back for a moment and put these numbers in context. If you’re a millennial, a Gen Xer, or even a baby boomer, pay close attention to this message—and know that this advice applies to you, no matter where you are on your personal timeline. If you’re 35 years old and you suddenly grasp the power of compounding, you’ll wish you got started on it at 25. If you’re 45, you’ll wish you were 35. If you’re in your 60s or 70s, you’ll think back to the pile of money you could have built and saved if only you’d gotten started on all that building and saving when you were in your 50s and 60s. And on and on.

In Malkiel’s example, it was William, the brother who’d gotten the early start and stopped saving before his brother had even begun, who ended up with almost $2.5 million. And it was James, who’d saved all the way until the age of 65, who had less than $400,000. That’s a gap of over $2 million! All because William was able to tap into the awesome power of compounding for an additional 20 years, giving him an insurmountable edge—and saddling him with the family dinner checks for the rest of his life.

The man on top of the mountain didn’t fall there.

—VINCE LOMBARDI

Not convinced that compound interest, over time, is the only sure way to grow your seed of money into the bumper crop of financial security you’ll need to meet your future needs? Malkiel shared another favorite story to bring home his point—and this one’s from our history books. When Benjamin Franklin died in 1790, he left about $1,000 each to the cities of Boston and Philadelphia. His bequests came with some strings attached: specifically, the money was to be invested and could not be touched for 100 years. At that point, each city could withdraw up to $500,000 for designated public works projects. Any remaining money in the account could not be touched for another 100 years. Finally, 200 years after Franklin’s death, a period of time that had seen stocks grow at an average compounded rate of 8%, each city would receive the balance—which in 1990 amounted to approximately $6.5 million. Imagine that $1,000 grows to $6.5 million, with no money added over all those years.

How did it grow? Through the power of compounding!

Yes, 200 years is a long, long time—but a 3,000% rate of return can be worth the wait.

Malkiel’s examples show us what we already know in our hearts to be true: that for most of us, our earned income will never bridge the gap between where we are and where we really want to be. Because earned income can never compare to the power of compounding!

Money is better than poverty, if only for financial reasons.

—WOODY ALLEN

Still think you can earn your way to financial freedom? Let’s take a quick look at how it’s worked out for some of the highest-paid people in the world: Legendary baseball pitcher Curt Schilling earned more than $100 million in an incredible career that included not one but two World Series championships for the Boston Red Sox. But then he poured his savings into a videogame startup that went bankrupt—and brought Schilling down with it. “I never believed that you could beat me,” Schilling told ESPN. “I lost.” Now he’s $50 million in debt.

Kim Basinger was one of the most sought-after actresses of her generation, torching the big screen with indelible roles in such films as 91/2 Weeks, Batman, and L.A. Confidential, which earned her an Academy Award as best supporting actress. At the height of her A-list popularity, she earned more than $10 million per picture—enough to spend $20 million to buy a whole town in Georgia.

Basinger ended up bankrupt.

Marvin Gaye, Willie Nelson, M.C. Hammer, Meat Loaf—they sold millions of albums and filled stadiums with adoring fans. Francis Ford Coppola? He packed theaters as the director of The Godfather, one of the greatest American films, which—at least for a while—held the all-time box office record with gross ticket sales of $129 million.

All had near-brushes with bankruptcy—Coppola, three times!

Even Michael Jackson, the “King of Pop,” who reportedly signed a recording contract worth almost $1 billion and sold more than 750 million records, was forced to the brink of bankruptcy in 2007, when he was unable to pay back a $25 million loan on his Neverland Ranch. Jackson spent money like he would never run out—until he finally did. At his death two years later, he reportedly owed more than $300 million.

Do you think any of these ultra-megastars imagined a day when the money would stop flowing? Do you think they even considered preparing for such a day?

Have you ever noticed that no matter how much you earn, you find a way to spend it? By these examples, it’s clear to see that you and I are not alone. We all seem to have a way of living up to our means—and some of us, I’m afraid, find a way to live beyond our means. We see this most of all in the stars who take the biggest falls—like the rich-beyond-their-dreams prizefighters who hit the canvas with a thud. Just look at the up-and-down-and-out career of former heavyweight champ Mike Tyson, who made more money in his time than any other boxer in history—nearly a half billion dollars—and went bankrupt.

But five-division world champion Floyd “Money” Mayweather Jr. is about to beat Iron Mike’s earning record. Like Tyson, Mayweather fought his way up from hardscrabble beginnings. In September 2013 he scored a guaranteed purse of $41.5 million for his bout against Saúl “Canelo” Álvarez—a record amount that grew to more than $80 million based on pay-per-view totals. And that was just for one fight! Before this giant payday, he’d already topped the Sports Illustrated “Fortunate 50” list ranking the richest athletes in the United States. I love Mayweather personally. He’s an extraordinarily gifted athlete—with a work ethic like few alive. He’s also incredibly generous with his friends. There is a lot to appreciate in this man! But Mayweather had fought his way to the top of this list before, only to lose his fortune to wild spending sprees and bad investments. He is reported to spend so recklessly, he’s known to carry around a backpack filled with $1 million in cash—just in case he needs to make an emergency donation to Louis Vuitton.

Like so many achievers, the champ is smart as a whip, and my hope is that he is following better investment practices today, but according to no less an authority on money than 50 Cent, Mayweather’s former business partner, the champ has no income outside of fighting. The rapper summed up the boxer’s financial strategy in plain terms: “It’s fight, get the money, spend the money, fight. Fight, get the money, spend the money, fight.” Sound like a ridiculous strategy? Unfortunately, we can all relate at some level. Work, get the money, spend the money, work—it’s the American way!

Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give.

—WILLIAM A. WARD

Here’s the $41.5 million question: If these individuals couldn’t build on their talents and blessings and earn their way to financial freedom, how can you expect to earn your way?

You can’t.

But what you can do is make a simple change in strategy and embrace a whole new mind-set. You have to take control and harness the exponential power of compounding. It will change your life! You have to move from just working for money to a world where money works for you.

It’s time to get off the sidelines and get into the game—because, ultimately, we must all become investors if we want to be financially free.

You’re already a financial trader. You might not think of it in just this way, but if you work for a living, you’re trading your time for money. Frankly, it’s just about the worst trade you can make. Why? You can always get more money, but you can’t get more time.

I don’t want to sound like one of those tearjerker MasterCard commercials, but we all know that life is made up of priceless moments. Moments that you’ll miss if you’re trading your time for money.

Sure, from time to time, we all need to miss a dance recital or a date night when duty calls, but our precious memories aren’t always there for the taking.

Miss too many of them, and you might start to wonder what it is you’re really working for, after all.

THE ULTIMATE ATM

So where do you go if you need money and you’re not a world champion fighter with a backpack of large bills? What kind of ATM do you need to complete that transaction?

Right now, I’m betting, the primary “money machine” in your life is you. You might have some investments, but let’s say you haven’t set them up with income in mind. If you stop working, the machine stops, the cash flow stops, your income stops—basically, your financial world comes to a grinding halt. It’s a zero-sum game, meaning that you get back just what you put into it.

Look at it this way: you’re an ATM of another kind—only in your case, the acronym might remind you of that lousy “time-for-money” trade. You’ve become an Anti–Time Machine. It might sound like the stuff of science fiction, but for many of you, it’s reality. You’ve set things up so that you give away what you value most (time) in exchange for what you need most (income)—and if you recognize yourself in this description, trust me, you’re getting the short end of the deal.

Are we clear on this? If you stop working, you stop making money. So let’s take you out of the equation and look for an alternative approach. Let’s build a money machine to take your place—and, let’s set it up in such a way that it makes money while you sleep. Think of it like a second business, with no employees, no payroll, no overhead. Its only “inventory” is the money you put into it. Its only product? A lifetime income stream that will never run dry—even if you live to be 100. Its mission? To provide a life of financial freedom for you and your family—or future family, if you don’t have one yet.

Sounds pretty great, doesn’t it? If you set up this metaphorical machine and maintain it properly, it will hold the power of a thousand generators. It will run around the clock, 365 days a year, with an extra day during leap years—and on the Fourth of July, too.

Take a look at the accompanying graphic, and you’ll get a better idea how it works.

As you can see, the “machine” can’t start working until you make the most important financial decision of your life. The decision? What portion of your paycheck you get to keep. How much will you pay yourself—off the top, before you spend a single dollar on your day-to-day living expenses? How much of your paycheck can you (or, more importantly, will you) leave untouched, no matter what else is going on in your life? I really want you to think about this number, because the rest of your life will be determined by your decision to keep a percentage of your income today in order to always have money for yourself in your future. The goal here is to enable you to step off the nine-to-five conveyor belt and walk the path to financial freedom. The way to start off on that path is to make this simple decision and begin to tap into the unmatched power of compounding. And the great thing about this decision is that you get to make it. You! No one else!

I can’t afford to waste my time making money.

—JEAN LOUIS AGASSIZ

Let’s spend some time on this idea, because the money you set aside for savings will become the core of your entire financial plan. Don’t even think of it as savings! I call it your Freedom Fund, because freedom is what it’s going to buy you, now and in the future. Understand, this money represents just a portion of what you earn. It’s for you and your family. Save a fixed percentage each pay period, and then invest it intelligently, and over time you’ll start living a life where your money works for you instead of you working for your money. And you don’t have to wait for the process to start working its magic.

You might say, “But Tony, where do I come up with the money to save? I’m already spending all the money I have.” We’ll talk about a simple yet extraordinary technique to make saving money painless. But in the meantime, let me remind you of my friend Angela, the one who realized she could drive a new car for half the money she was spending on her old car. Well, guess what she did with 50% of the money she was paying out? She put it toward her Freedom Fund—her investment for life. When we started, she thought she couldn’t save anything; the next thing you know she was saving 10%. Then she even added an additional 8% from her savings on the cost of the car for short-term goals as well! But she never touches the 10% of her income that is locked in for her future!

In the end, it doesn’t matter how much money you earn. As we have seen, if you don’t set aside some of it, you can lose it all. But here you won’t just set it aside stuffed under your mattress. You’ll accumulate it in an environment you feel certain is safe but still offers the opportunity for it to grow. You’ll invest it—and, if you follow the Money Power Principles covered in these pages, you’ll watch it grow to a kind of tipping point, where it can begin to generate enough in interest to provide the income you need for the rest of your life.

You might have heard some financial advisors call this pile of money a nest egg. It is a nest egg, but I call it your money machine because if you continue to feed it and manage it carefully, it will grow into a critical mass: a safe, secure pile of assets invested in a risk-protected, tax-efficient environment that earns enough money to meet your day-to-day expenses, your rainy-day emergency needs, and your sunset days of retirement spending.

Sound complicated? It’s actually pretty simple. Here’s an easy way to picture it: imagine a box you’ll fill with your investment savings. You’ll put money into it every pay period—a set percentage that you get to determine. Whatever that number is, you’ve got to stick to it. In good times and bad. No matter what. Why? Because the laws of compounding punish even one missed contribution. Don’t think of it in terms of what you can afford to set aside—that’s a sure way to sell yourself short. And don’t put yourself in a position where you can suspend (or even invade) your savings if your income slows to a trickle some months and money is tight.

What percentage works for you? Is it 10%? Or 15%? Maybe 20%? There’s no right answer here—only your answer. What does your gut tell you? What about your heart?

If you’re looking for guidance on this, experts say you should plan to save at least a minimum of 10% of your income, although in today’s economy many agree 15% is a far better number, especially if you’re over the age of 40. (You’ll find out why in section 3!) Can anybody remember when the times were not hard and money not scarce?

—RALPH WALDO EMERSON

By now you might be saying, “This all sounds great in theory, Tony, but I’m spread thin enough as it is! Every penny is accounted for.” And you wouldn’t be alone. Most people don’t think they can afford to save. But frankly, we can’t afford not to save. Believe me, all of us can find that extra money if we really have to have it right now for a real emergency! The problem is in coming up with money for our future selves, because our future selves just don’t seem real. Which is why it’s still so hard to save even when we know that saving can make the difference between retiring comfortably in our own homes or dying broke with a tiny bit of financial support from the government.

We’ve already learned how behavioral economists have studied the way we fool ourselves about money, and later in this chapter I’ll share some of the ways we can trick ourselves into doing the right thing automatically! But here’s the key to success: you have to make your savings automatic. As Burton Malkiel told me during our visit, “The best way to save is when you don’t see the money in the first place.” It’s true. Once you don’t even see that money coming in, you’ll be surprised how many ways you find to adjust your spending.

In a few moments I’ll show you some great, easy ways to automate your savings so that the money gets redirected before it even reaches your wallet or your checking account. But first, let’s look at some real examples of people living from paycheck to paycheck who managed to save and build real wealth even when the odds were against them.

DELIVERING MILLIONS

Theodore Johnson, whose first job was with the newly formed United Parcel Service in 1924, worked hard and moved his way up in the company. He never made more than $14,000 a year, but here’s the magic formula: he set aside 20% of every paycheck he received and every Christmas bonus, and put it into company stock. He had a number in his head, a percentage of income he believed he needed to save for his family—just as you will by the end of this chapter—and he committed to it.

Through stock splits and good old-fashioned patience, Theodore Johnson eventually saw the value of his UPS stock soar to over $70 million by the time he was 90 years old.

Pretty incredible, don’t you think? And the most incredible part is that he wasn’t a gifted athlete like Mike Tyson or a brilliant director like Francis Ford Coppola—or even a lofty corporate executive. He ran the personnel department. But he understood the power of compounding at such an early age that it made a profound impact in his life—and, as it turned out, in the lives of countless others. He had a family to support, and monthly expenses to meet, but to Theodore Johnson, no bill in his mailbox was more important than the promise of his future. He always paid his Freedom Fund first.

At the end of his life, Johnson was able to do some beautiful, meaningful things with all that money. He donated over $36 million to a variety of educational causes, including $3.6 million in grants to two schools for the deaf, because he’d been hard of hearing since the 1940s. He also set up a college scholarship fund at UPS for the children of employees.

—

Have you heard the story of Oseola McCarty from Hattiesburg, Mississippi—a hardworking woman with just a sixth-grade education who toiled for 75 years washing and ironing clothes? She lived simply and was always careful to set aside a portion of her earnings. “I put it in savings,” she explained of her investment philosophy. “I never would take any of it out. I just put it in. It just accumulated.” Oh, boy, did this woman’s money accumulate. At 87 years old, McCarty made national news when she donated $150,000 to the University of Southern Mississippi to start a scholarship fund. This woman didn’t have the compelling screen presence of a Kim Basinger or the distinctive musical talent of a Willie Nelson, but she worked hard and knew enough to see that her money worked hard, too.

“I want to help somebody’s child go to college,” she said—and she was able to do just that, on the back of her good diligence. There was even a little left over for a small luxury item: she bought an air conditioner for her house.

All the way at the other end of the spectrum, we see the rousing example of Sir John Templeton, one of my personal role models and one of the greatest investors of all time. I had the privilege of meeting John and interviewing him several times over the years, and I’m including our last interview in our “Billionaire’s Playbook.” Here’s a little background. He didn’t start out as “Sir John.” He came from humble beginnings in Tennessee. John had to drop out of college because he couldn’t afford the tuition, but even as a young man, he recognized the incremental power of compounded savings. He committed to setting aside 50% of what he earned, and then he took his savings and put it to work in a big way. He studied history and noticed a clear pattern. “Tony, you find the bargains at the point of maximum pessimism,” he told me. “There’s nothing—nothing—that will make the price of a share go down except the pressure of selling.” Think about it. When things are going well in the economy, you might get multiple offers on your house and you’ll hold out for the highest price. In bull markets, it’s hard for investors to get a good deal. Why? When things are going well, it’s human nature to think they’re going to continue going well forever! But when there’s a meltdown, people run for the hills. They’ll give away their homes, their stocks, their businesses for next to nothing. By going against the grain, John, a man who started with practically nothing, became a multibillionaire.

How did he do it? Just when Germany was invading Poland in 1939, plunging Europe into World War II and paralyzing the world with fear and despair, he scraped together $10,000 to invest in the New York stock market. He bought 100 shares of every company trading under $1, including those considered nearly bankrupt. But he knew what so many people forget: that night is not forever. Financial winter is a season, and it’s followed by spring.

After WWII ended in 1945, the US economy surged, and Templeton’s shares exploded into a multibillion-dollar portfolio! We saw the same kind of growth happen as the stock market soared from the lows of March 2009 to more than 142% growth by the end of 2013. But most people missed it. Why? When things are going down, we think they’re going to go down forever—pessimism takes over. I’ll show you in chapter 4.4, “Timing Is Everything?,” a system that can help you keep your head and continue to invest when everyone else is afraid. It’s in these short, volatile periods that astronomical returns really become available.

I took those insights to my Platinum Partners, an exclusive mastermind group I’d started to support my foundation, and shared with them some of the potential opportunities in front of them. Take the Las Vegas Sands Corp. listed on the New York Stock Exchange. On March 9, 2009, its stock price had dropped to $2.28 a share. And today it’s $67.41—a 3,000% return on your money!

That’s the power of learning to invest when everyone else is afraid.

So what can we learn from Sir John Templeton? It’s amazing what research, faith, and action can do if you don’t let everybody else’s fears paralyze you. This is a good lesson to remember if, as you’re reading these pages, we’re going through more tough financial times. History proves that those “down and scary times” are the times of greatest opportunities to invest and win.

He knew if he could set aside half of his meager earnings, he’d stake himself to where he could take full advantage of any investment opportunities. But even more important, he became one of the world’s leading philanthropists, and after he became a British citizen, the Queen of England knighted him for his efforts. Even in death, his legacy of giving continues: each year, the John Templeton Foundation gives away more money in grants “to advance human progress through breakthrough discoveries”—about $70 million—than the Nobel Prize Commission awards in a decade.

And what’s the great takeaway of Theodore Johnson’s story? You don’t have to be a financial genius to be financially free.

The lesson of Oseola McCarty’s life? Even a day laborer can pinch enough pennies to make a meaningful difference.

The lesson of these three wise investors? By committing to a simple but steady code of savings, by drawing down on your income each pay period and paying yourself first, there’s a way to tap the power of compound savings and let it take you to unimaginable heights.

The most difficult thing is the decision to act, the rest is merely tenacity.

–AMELIA EARHART

So how much will you commit to set aside? For Theodore Johnson, that number was 20%. For John Templeton, it was 50%. For Oseola McCarty, it was simply a case of penny wisdom: putting those pennies in an interest-bearing account and letting them grow.

What about you? Got a number in mind? Great! It’s time to decide, it’s time to commit. It’s time to take the first of the 7 Simple Steps to your Financial Freedom! The most important financial decision of your life needs to be made right now! It’s time for you to decide to become an investor, not just a consumer. To do this, you simply have to decide what percentage of your income you will set aside for you and your family and no one else.

Once again, this money is for you. For your family. For your future. It doesn’t go to the Gap or to Kate Spade. It doesn’t go to expensive restaurants or a new car to replace the one that’s still got 50,000 miles to go on the odometer. Try not to think of it in terms of the purchases you’re not making today. Focus instead on the returns you’ll reap tomorrow. Instead of going out for dinner with friends—at a cost, say, of $50—why not order in a couple pizzas and beers and split the cost among your group? Trade one good time for another, save yourself about $40 each time out, and you’ll be way ahead of the game.

What’s that, you say? Forty dollars doesn’t sound like much? Well, you’re right about that, but do this once a week, and put those savings to work, and you could take years off your retirement time horizon. Do the math: you’re not just saving $40 a week, but this one small shift in your spending can save you approximately $2,000 each year—and with what you now know, that $2,000 can help to harness the power of compounding and help you to realize big, big gains over time. How big? How about $500,000 big? That’s right: a half million dollars! How? If you had Benjamin Franklin’s advisors, they’d tell you to put your money in the market, and if you too generate an 8% compounded return over 40 years, that $40 weekly savings ($2,080 per year) will net you $581,944! More than enough to order an extra pizza—with everything on it!

Are you starting to see how the power of compounding can work for you, even with just a few small, consistent actions? And what if you found some more aggressive savings than $40 a week? Even $100 could mean a $1 million difference at the time you would need it most!

Remember, you can’t begin to tap into the awesome power of compounding until you commit to this all-important savings piece. After all, you can’t become an investor until you have something to invest! It’s basic: the foundation for creating wealth, the difference between being a wage earner and an investor, and it starts with setting aside a portion of your income that you lock away automatically and keep for yourself and your family.

So what will it be? 10%? 12%? 15%? 20%?

Find your threshold and circle it.

Highlight it.

Click on it.

Commit to it.

Make it happen.

And automate it!

How do you automate it? You can start by downloading our free app from www.tonyrobbins.com/masterthegame. It’s a great way to begin your journey by setting in place automatic reminders to capture your commitments and make sure you implement your new plan! If you haven’t done it yet, do it now! It will help guide you through the following easy steps: • If you get a regular paycheck, you’ll most likely be able to set up an automated plan with a call to the human resources department, instructing it to send a specific percentage of your paycheck—that you and you alone choose—directly to your retirement account.

• If you already have automatic deductions going into your 401(k), you can increase the amount to the percentage you’ve chosen. (And in the following sections of this book, I’ll show you how to make sure your retirement plan is set up in such a way that you can actually “win” this game, to make sure you’re not paying hidden fees and that your money is free to grow in a compounded environment—ideally, tax-deferred or tax free for maximum growth.) Got that taken care of? Outstanding!

• But what about if you’re self-employed, or if you own your own business or work on commission? No problem. Just set up an automatic transfer from your checking account.

What if you don’t have a retirement account—a place to put your dedicated savings? Simple: stop right now, jump online, and open up a savings or retirement account with a bank or financial institution. You can check out this link with lots of choices to help you locate one that’s a good fit for you (www.tdameritrade.com or www.schwab.com), or you can find one on our app. Or, if you’re feeling low-tech and looking to roll up your sleeves and get started in a hands-on way, simply walk down the street and visit your banker.

When’s a good time to get started on this? Would now be a good time?

Go ahead, I’ll wait . . .

If you don’t want to work, you have to work to earn enough money so that you won’t have to work.

—OGDEN NASH

Great, you’re back. You got it done. Congratulations! You’ve just made the most important financial decision of your life—the first of the 7 Simple Steps to Financial Freedom. Now you’re on your way to converting your dreams into reality.

In the pages ahead, I’ll share with you some of the safest, most certain strategies to grow your money—in a tax-advantaged way! But for now let’s just lock down this basic savings piece, because your financial future will flow from your ability to save systematically. Most of you probably know this, on some level. But if you know it, and you’re still not doing anything about it—well, then you just don’t know it. Contrary to popular wisdom, knowledge is not power—it’s potential power. Knowledge is not mastery. Execution is mastery. Execution will trump knowledge every day of the week.

I hate losing more than I even want to win.

—BRAD PITT as Oakland A’s general manager Billy Beane in Moneyball

What if, after everything you’ve just learned, you still haven’t taken that first step to set aside a percentage of your earnings to save for compounded interest? Is there something holding you back? What’s really going on? Could it be that you’re not systematically saving money because it feels like a sacrifice—a loss—instead of a gift to yourself today and in the future? In my search for answers, I met with Shlomo Benartzi of the UCLA Anderson School of Management. He said, “Tony, the problem is people feel like the future is not real. So it’s hard to save for the future.” Benartzi and his colleague, Nobel Prize winner Richard Thaler of the University of Chicago, came up with an amazing solution called Save More Tomorrow (SMarT) with a simple but powerful premise: if it hurts too much to save more money now—just wait until your next pay raise.

How did they come up with it? First, Shlomo told me, they had to address the challenge of immediate gratification, or what scientists call “present bias.” He gave me an example: when he asked a group of students whether they wanted a banana or some chocolate for a snack when they met again in two weeks, a full 75% said they wanted a banana. But two weeks later, with the choices in front of them, 80% picked the chocolate! “Self-control in the future is not a problem,” said Shlomo. It’s the same with saving, he told me. “We know we should be saving. We know we’ll do it next year. But today we go and spend.” As a species, we’re not only wired to choose today over tomorrow, but also we hate to feel like we’re losing out on something. To illustrate the point, Shlomo told me about a study in which monkeys—our not-so-distant cousins—were given an apple while scientists measured their physiological responses. Enormous excitement! Then another group of monkeys was given two apples. They also displayed enormous excitement. And then one change was made: the monkeys that were given two apples had one taken away from them. They still had one apple, but what do you think happened? You guessed it. They were angry as hell! (Scientifically speaking.) Think this happens with people, too? In fact, how often does this happen with the average person? We forget what we already have, don’t we? Remember this study when I tell you the story of a billionaire named Adolf Merckle in the next chapter. You’ll have a flash of insight.

The bottom line is, if we feel like we’re losing something, we avoid it; we won’t do it. That’s why so many people don’t save and invest. Saving sounds like you’re giving something up, you’re losing something today. But you’re not. It’s giving yourself a gift today of peace of mind, of certainty, of the large fortune in your future.

So how did Benartzi and Thaler get around these challenges? They came up with a simple system to make saving feel painless. It aligns with our natures. As Shlomo said in a TED Talk, “Save More Tomorrow invites employees to save more maybe next year—sometime in the future when we can imagine ourselves eating bananas, volunteering more in the community, exercising more, and doing all the right things on the planet.” Here’s how it works: you agree to automatically save a small amount of your salary—10%, 5%, or even as little as 3%. (This is a number so small you won’t even notice the difference!) Then you commit to saving more in the future—but only when you get an increase in pay. With each pay raise, the percentage saved would automatically get a little larger, but you wouldn’t feel it as a loss, because you never had it in the first place!

Benartzi and Thaler first tested the Save More Tomorrow plan almost 20 years ago at a company in the Midwest where the blue-collar workers said they couldn’t afford to squeeze another dime out of their paychecks. But the researchers persuaded them to let their employer automatically divert 3% of their salaries into a retirement account, and then add 3% more every time they got a pay raise. The results were amazing! After just five years and three pay raises, those employees who thought they couldn’t afford to save were setting aside just under a whopping 14% of their paychecks! And 65% of them were actually saving an average of 19% of their salaries.

When you get to 19%, you’re approaching the kinds of numbers that made Theodore Johnson, the UPS man, incredibly wealthy. It’s painless, and it works. It’s been proven time and again.

Let me show you the chart that Shlomo uses to illustrate the impact that each increase in savings will have on an employee’s lifestyle.

At 3%, there’s an image of a pair of sneakers—because that’s all you’ll be able to afford if you save only 3%! At 4%, there’s a bicycle. It goes all the way up to 14%, where there’s a luxury car and the clear message that life is great! That’s a big difference!

Now 60% of larger companies are offering plans like Save More Tomorrow. Find out if yours does, and if not, show this book to the HR department and see if you can get one put in place.

Of course, you’ll still need to go out and actually “earn” your raise—your boss isn’t likely to hand it to you just because you’ve asked nicely. But once you do, you’re free to earmark the full amount of the raise, or just a portion, depending on your circumstances. In some cases, if you work for a matching company, your employer will help to effectively double your contribution—and you’ll be well on your way soon enough. In fact, below is a link to an online Save More Tomorrow calculator that will allow you to see the impact on your own financial future: www.nytimes.com/interactive/2010/03/24/your-money/one-pct-more-calculator.html.

If your employer doesn’t offer the plan, you can set one up with America’s Best 401k, and many other 401(k) systems. You could start out with 5% (although I would encourage you to start with no less than 10%, if at all feasible) automatically going into your Freedom Fund, and then commit to 3% more every time you get a raise. Go online or make one phone call, and it will be happening for you. You could do this today and lock in your future in the most painless way possible. There’s no excuse for you not to do it! You can even go to our app, where we’ve prewritten an email that you can send to your boss or head of HR so you can put this process to work for you right away. How’s that for easy? Do it right now!

But what if you’re self-employed? What if you own your own business, and you feel like you need to put every cent into it? Believe me, you’ll find a way. What if there was a new tax that came out, and you had to pay 10% more, or even 15% more to the government? You’d hate it! You’d scream bloody murder! But you’d find a way to pay it. So think of this percentage as a tax you “get to pay”—because the money doesn’t go to Uncle Sam but to your family and future self! Or think of yourself as a vendor who’s got to be paid first. If it has to be done, you’ll do it. But in this case, it’s something you’re setting aside that is yours and your family’s to keep forever, right? And remember, you want to automate it. That’s the whole secret: earn more, spend less, and automate it.

LIKE LETTERS OF FIRE ACROSS THE SKY

As a young man, I came across George Samuel Clason’s classic 1926 book The Richest Man in Babylon, which offered commonsense financial advice told through ancient parables. I recommend it to everyone. Over the years, one passage has stayed with me: “ ‘A part of all I earn is mine to keep.’ Say it in the morning when you first arise. Say it at noon. Say it at night. Say it each hour of every day. Say it to yourself until the words stand out like letters of fire across the sky. Impress yourself with the idea. Fill yourself with the thought. Then take whatever portion seems wise. Let it be not less than one-tenth and lay it by. Arrange your other expenditures to do this if necessary. But lay that portion first.” No one would have remembered the Good Samaritan if he’d only had good intentions. He had money as well.

—MARGARET THATCHER

Lay that portion first, my friend. And then act on it! It doesn’t matter what the number is, just get started. Ideally, it shouldn’t be less than 10%. But as time goes by, make the number mean something.

THE NEXT STEP

Now that you’ve set up an automated investment plan—your Freedom Fund, your new money machine—there may be two questions burning in your mind: First, where do I put this money? And second, how much am I going to need to achieve financial security or freedom? We’re going to answer both of those questions clearly. And the answers are going to come from the best financial achievers in the world.

But first we need to understand what you’re really investing for. What’s behind your personal desire for financial freedom? And what does wealth really mean to you? What are you really after? So let’s take a quick moment to look at how you are going to master money.