“Offense sells tickets, but defense wins championships.” — Bear Bryant
I was stuck. The process of getting on a budget was tougher than I expected. We’d already tightened up the easy stuff, but there still wasn’t enough money being set aside for investing. It was hard to find something to eliminate that wouldn’t hurt. This was our life, after all. Several times I had set the budget aside in defeat. Maybe it would be more productive to focus on figuring out how to make more money.
I looked up at the game that was underway on TV. Sports broadcasters were always saying that “defense wins championships.” I wondered whether the analogy applied to managing finances.
Was it even true?
The Best Defense
The belief that “defense wins championships” is an almost universal law in the world of sports. Yet in a 2012 article on freakonomics.com, authors Tobias J. Moskowitz and L. Jon Wertheim debunk this myth as it applies to the National Football League (NFL). In their analysis, the authors found no direct correlation between having a strong defense and winning NFL championships.
What they found instead was that winners tended to be either good at both offense and defense — or exceptional at one or the other.
It turns out that the same is true when it comes to managing your money.
The Game of Money
In the classic book The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, authors Thomas J. Stanley and William D. Danko draw the parallel between household finances and the two sides of a sports team.
Related: A Whopping 62% of Americans Have Less than $1,000 in Savings. Really?!
“Offense,” according to the authors, is defined as the ability to make money. High-income individuals and owners of profitable businesses would be examples of people achieving on offense.
“Defense” is all about how money is managed at home. This includes the use of a household budget, taking the time to plan investments and major purchases, the ability to live on less than the household income, fighting “hyperconsumption,” and the ability to set aside a portion of that household income for investment.
The book builds the case for the “defense wins” theory. Based on decades of research into the wealthy in America, the authors state that:
“…being a well-educated high-income earner does not automatically translate into financial independence. It takes planning and sacrificing” (Stanley 67).
In the preface to the 2010 edition of the book, co-author Thomas J. Stanley goes on to say that:
“Most Americans have no idea about the true inner workings of a wealthy household. The advertising industry and Hollywood have done a wonderful job conditioning us to believe that wealth and hyperconsumption go hand in hand. Yet, as I have said many times, the large majority of the rich live well below their means” (xiv).
I can tell you from first-hand experience that it’s not just Americans who don’t understand this.
The Financial Championship
What is the financial equivalent of winning the championship? Stanley and Danko suggest financial independence is the goal of personal finance. But what is it? Entrepreneur and motivational speaker Jim Rohn defines it like this:
“Financial independence is the ability to live from the income of your own personal resources.”
Financial independence is not about greed. It is about achieving financial security through the responsible management of the money that you earn. People earn money every day, but most people don’t know what to do with it.
What Do You Need to Be Financially Independent?
According to Rohn’s definition, you need the income or return on your investments (ROI) to be greater than your cost of living. We can translate this into a net worth target. If you assume a 5% net ROI after all expenses, then you can generate $50,000 of income for every $1 million in assets. So, if you want to live on $100,000 per year, then you need about $2 million in assets.
You can use a different ROI percentage for your own calculations if you are certain of the kind of results you can get. But be careful: Relying on, say, a 12% return every year invested in the stock market is unreliable due to market fluctuations. What happens when the market drops? Since 1970, the S&P 500 index has had a negative return 11 times and less than 5% return a total of 18 times. You can’t eat a negative return. Instead, your nest egg and all future income will be greatly reduced.
So, let’s just say that you want to retire on $1 million. According to the 2013 Survey of Consumer Finances, achieving a net worth of $1 million would, in fact, put you in the top 10% of U.S. households. A net worth of $2 million would put you in the top 5%.
Clearly, achieving financial independence is a major achievement.
What is Your Team’s Strength?
Right now, are you good at offense, defense, or both? Perhaps neither?
According to U.S. Census Bureau figures for 2014, if your household is earning $85,000 or more, then you’re in the top 30% of household incomes in America. If this is the case, then it’s safe to say that offense is something that you’re doing relatively well when compared to the majority of households. A household income of $160,000 would put you in the top 10% of U.S. households. Yet this doesn’t translate directly to financial independence. Less than 10% of households had achieved that $1 million net worth mark in the 2013 study. Stanley and Danko would appear to be correct.
Maybe you’re playing even better offense than this. In The Millionaire Next Door, the authors concede that this might be enough:
“Another minority, accounting for fewer than 20 percent of millionaires, typically earn such high incomes that to some extent they can eat their income and still have a seven-figure net worth. In other words, their extraordinarily good offense compensates for a lack of defense” (41).
Does this describe your household? If so, then this article might not be for you. On the other hand, even a little bit of financial defense could ensure that major changes in your circumstances don’t derail your lifestyle.
If not, then you probably need to play some defense.
Let’s assume that right now, your household is under-performing on both offense and defense. Where should you focus your efforts?
Run the Numbers
To answer this, let’s look at some very simple numbers.
Let’s say your current household income is $55,000, which puts you right at about the 50th percentile for household incomes in America. If you aren’t investing any money, then in 40 years, you will have nothing. That much is clear. If you increase your household income to $85,000, putting you just within that top 30%, and continue to invest nothing, you will still have nothing. So much for offense.
Now let’s say that you’re earning that $55,000 and focusing on living within your means. You set aside 10% of your net income for investment. This means that you’ll invest about $4,695.25 each year. Let’s assume a modest return of 5%. After 40 years, you would end up with a nest egg of about $567,185.14. You wouldn’t be a millionaire, but you would have some options. Still, you don’t just want to have a good season — you want a shot at the championship.
Let’s say that you manage to increase your household income to $85,000 to be in that top 30%. You increase your lifestyle some to match your new situation, but still manage to put away 10% of your take-home pay, or about $6,945.25 per year. After 40 years, you would end up with a nest egg of about $838,984.63. That’s better, right?
But wait. What if you kept your income the same, at $55,000. But you tighten your belt a little further, saving an additional 5% of your take-home pay. Now you are investing 15%, or $7,042.88. How much will you have after 40 years? Would you believe $850,778.31?
What do you think would be easier: Reducing your expenses by 5% or increasing your income by about 55%?
A Winning Game Plan
The secret, of course, is to do both.
Using the examples above, if you increase your household income to $85,000 per year and set aside 15%, you will end up with $1,258,477.55.
Start by gaining control of your money. Play good defense. Then look for ways to increase your income. Play good offense.
You want to sell tickets and win championships.
Before you know it, you’ll be on your way to financial independence.
That’s a winning game plan.
What’s your take on this — do you focus on offense, defense, or both when it comes to finances?
Let me know your thoughts with a comment!