Posted: January 18th, 2012 | Author: Joe | Filed under: Tips | Tags: Building Wealth, Financial I.Q., Kiyosaki, Review, Tips | 6 Comments »
I just finished reading Robert Kiyosaki’s book, Rich Dad’s Increase Your Financial I.Q.: Get Smarter with Your Money and the one major takeaway is that too many people never realize their true financial potential because the get in their own way! Many people focus on earning more money when they should be focuses their time and energy on learning and increasing their money I.Q..
* Note: Kiyosaki discusses 5 aspects of Financial I.Q. in his book, but I’m just going to focus on this one, general concept here.
The learning discussed in the book is not a formal education. In fact, that’s one of the mistakes that many people make – amassing huge amounts of debt going to college in the hopes of “finding a good job” and their place on the financial treadmill, only for some it’s more like a hamster wheel.
So what does “focus on learning” mean if not the traditional, middle class mantra “go to college to get a good job”?
It means taking risks and chances while you’re young, and always learning from your mistakes as well as your successes. People come into money all the time, sometimes mass amounts of it only to lose it all later. Think of lottery winners, famous athletes and performing artists. Suddenly rich, then suddenly broke. Why? Because they didn’t increase their 2nd financial I.Q. after mastering the 1st. They simply did what they loved doing and fell into their riches, but never learned how to manage and protect their wealth.
The first two financial I.Q.’s in the book are :
- earning more money.
- learning how to protect that money.
In the example of the star athlete or lottery winner, they mastered I.Q. #1 but failed horribly at I.Q. #2 – protecting their money.
Protection can mean many different things, and is usually referred to as “security” by many people. They may want to be secure in the knowledge that their savings are safe from loss, or maybe they want to protect their savings and assets from legal action. Whatever meaning you take, once you’ve earned it you must get educated on how to keep it or risk losing it all.
But even losing it all isn’t the end.
There are many well known moguls, like Donald Trump, who have built vast financial empires and lost it all only to come roaring back again. Why? Because they learned from their experience and were not afraid to fail.
” Those who cannot remember the past are condemned to repeat it.”
-George Santayana
If you do not learn from your mistakes, you will keep making them and make little or no progress in life.
I’ve always thought it’s important to learn from your own mistakes, but it’s also important to learn from other people’s mistakes as well.
Here are a few resources to help boost your financial I.Q.:
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Posted: September 7th, 2011 | Author: Joe | Filed under: Debt, Tips | Tags: Building Wealth, debt and wealth, How To, Tips | 3 Comments »
Who are The Rich in America today?
Most of the wealthy in America are 1st generation wealthy, meaning they earned their wealth and didn’t inherit it. So who are The Rich? They are mostly entrepreneurs and small business owners.
According to Thomas Stanley and William Danko, “Wealth is what you accumulate, not what you spend.”
Stanley and Danko are the authors of the fascinating book, The Millionaire Next Door (Surprising Secrets of America’s Wealthy), and they’ve made a study over the years of the habits of the wealthy in America.
What they learned about America’s wealthy is summed up in this quote from the book:
“It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes, wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline.”
There are many lessons in this book, and that quote touches on a few of them. The most important lesson is that you don’t need to be born into the right circumstances to become wealthy. It sometimes takes luck, but mostly takes self discipline and perseverance. In short, stop finding excuses – you too can become rich!
I know, that probably sounds a bit like an infomercial for some get rich quick scheme, but it’s not. They never say you can do it over night or that its something you can do on the weekends in your spare time. Quite the contrary. It takes years of planning and discipline, but that’s not to say it takes as much as a career or full time job. You just need to have a plan and keep at it.
OK, enough cheerleading about how you can do it… let’s answer a basic question: What is wealth?
The definition of wealth.
Wealth can be defined in many different ways, but in its most common use it equates to a person’s net worth. That is, the value of everything a person owns, minus what a person owes.
That’s overly simplistic, but you get the idea. Having a fancy Mercedes Benz in the driveway doesn’t make you any more wealthy if you owe more on the loan than the car is worth… or if you’re leasing it and don’t actually own it at all. That’s because the car is a liability, not an asset. An asset is something that either puts money in your pocket, or can be sold to generate cash. A liability is something that costs you money.
But there’s a difference in assets too. Some are liquid, and some are not. Stocks for instance are generally more liquid than real estate, since you can sell a shares of a stock much easier than you can a house.
How the wealthy view (and use) money.
The wealthy get rich by maximizing their return on investment. They may still spend big bucks on discretionary items, but they view those purchases as investments, not mere expenses. They are more apt to maximize quality and value, regardless of price. But that’s not the same as buying expensive name-brand merchandise for the sake of owning expensive name-brand merchandise. This has especially been true of the rich during the recession.
There are definitely plenty of people with money who act rich, but when their finances are viewed more closely it’s clear that they are only suffering from Affluenza (The All-Consuming Epidemic).
Don’t be one of them.
The rich and debt.
You may think that the wealthy eschew debt and pay only in cash, but that turns out not to be the case entirely. Stanley and Danko found that most American millionaires tend to pay for large ticket items like cars, homes and boats with cash and to the extent that they use debt it is for investment purposes. This is likely a big difference between the middle class wage earner and the millionaire, but if the wage earner can get to a point where he can buy those big ticket items without debt, then he’s well on the road to a more financially free lifestyle if not the road to riches.
Tips for increasing your wealth.
OK, enough about how we’re different from the rich. Here’s how to become more like them financially:
- Don’t look to debt to fund your lifestyle – this includes getting a college degree. Going $30,000 into debt for a degree and getting a job with an income ceiling of $30,000 probably isn’t worth it in the long run.
- Have cash on hand to cover your unexpected expenses (emergency fund).
- Live below your means – spend less than you earn and avoid Lifestyle Creep !
- Plan – plan for today, tomorrow and 30 years after retirement.
- Diversify – invest in mutual funds and bonds, not just cash. Add exposure to commodities and real estate.
- Don’t use credit for purchasing – unless you can (and do!) pay off the balance each month!
If I had to distill the lessons learned in The Millionaire Next Door into one simple concept it would be this:
Break out of the debt cycle; plan, save and work to avoid going into debt for any reason.
If you master that, you’ll have the tools and resources on hand to accumulate wealth instead of payments.
Source
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Posted: February 26th, 2010 | Author: Joe | Filed under: Investing, Saving | Tags: Building Wealth, Investing, Saving | 2 Comments »
I recently got a question in an email and thought I’d make it a post, since it’s a pretty general question and suits this blog topic well.
Here’s the question:
I have a couple thousand dollars saved up, but it’s just sitting in a bank account right now not earning very much. I see a lot of sites like yours recommending ING high yield savings, but that yield is only 1.15%. I’m wondering what will give me the best return on my savings for both the long and short term?
-John.
Well, there is no single answer. There’s nothing that will give you the most return both short and long term. If there was, all other investments would be rendered useless. In fact, return is based on risk, and since not all places to put your money carry the same risk, not all places offer the same reward.
In general, the highest return for the long term is stocks, followed by bonds, followed by CDs and bank savings accounts. But I think John is asking the wrong question, or maybe he’s just skipping ahead. What John really needs to ask himself is: How much risk can I take?
Anyone can find a chart or set of data to show that one savings vehicle or investment class beats another over some given period of time. But what does that really tell you?
For example, stocks lost value over the last 5 years while gold almost tripled. But that doesn’t mean you should put your savings in gold alone. Gold did almost nothing for the 20 between 1981-2001.
The best place to put your savings is determined by the amount of risk you can take, and that is largely dependent upon when you need the money.
If you’re saving for retirement and that’s 20 years or more away, then a mix of stocks and bonds is probably best since they provide the greatest average growth over that time period and can usually out pace inflation. But stocks are risky, as we’ve seen during the 2008-2009 crash. Cash and gold were about the only things that didn’t lose value.
But you wouldn’t want to keep your retirement savings in cash because over 20 years, you’d likely lose money to inflation and end up with less real value than you could have.
But that’s savings, not growth.
If you’re saving money for retirement or college and that event is 15 years or more away, stocks and bonds are the way to go because you need your money to grow over that time, and savings accounts won’t get the job done.
If you’re saving for a down payment on a house, or a new car then you’re better off with a high yield savings account or CDs. You’re giving up growth and accepting a lower return because you’re saving your money for a specific near term goal.
In the long run, growth is more important than preservation of capital (savings). But when your goals switch from long to short term then preservation is key.
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Posted: December 19th, 2009 | Author: Joe | Filed under: Debt, Reviews | Tags: Building Wealth, Debt, Rich, Thomas J. Stanley, Wealth | 2 Comments »
I just read an interesting interview with Thomas J. Stanley, Ph.D from bankrate.com, and I thought I share some of the highlights with you.
The interview is based around Dr. Stanley’s new book Stop Acting Rich: …And Start Living Like A Real Millionaire
, and he discusses some more commonalities between the rich and how it sets them apart from the rest of the population.
Here are some of the interesting points Dr. Stanley raised in the interview.
1. The rich are very frugal.
Many of “the rich” had parents that were not only frugal, but well disciplined. This makes a lot of sense since discipline is required to succeed in anything at life, aside from simply getting lucky like winning the lottery.
2. Most millionaires today came from middle-class backgrounds.
They don’t come from affluent families, and they didn’t inherit their wealth. In fact, Dr. Stanley’s research shows that most came from comfortable, middle class families. They say they never felt embarrassed by their home or where they lived growing up. But they did have that uniquely American socioeconomic mobility that allows not only opportunity to become wealthy, but the siren call to hyper consume.
3. Resisting the call.
The nut of the interview, if not the book itself, is that the rich eschew conspicuous consumption. While they grew up in an environment that lends itself to consumption of luxury goods and “prestige products”, the rich simply didn’t partake. Instead, they simple live below their income.
4. Occupation matters.
What you do apparently matters more than simply determining your income. Many of today’s rich spend their time pursuing careers that have little to do with accumulating wealth. Contrary to populist screeds in much of the media today, the rich are not wall street bankers, investors or lawyers, but rather educators, engineers, business owners and retail store managers who “have a tendency to live below their means and to be quite efficient in transforming their income into wealth.”
5. Home is where you hang your hat, not an investment.
Most of the rich today don’t live in million dollar homes. In fact, there are 1,138,070 millionaire households who live in homes valued at less than $300,000, while only 403,211 who live in homes valued at $1 million or more.
6. Just who are “The top 1%”
The top 1% makes for a nice sound byte during political campaigns, but just who does that include? Stanley refers to the top 1% as “The glittering rich.” This demographic has an income of at least 7 figures and a net worth of 8 figures or more. They are extremely rich, and as Dr Stanley’s name for them suggests, they spend like it too.
Interestingly, even the “glittering rich” spend below their means. Of course, this might be because their means are so ridiculously large they have a hard time living outside those means. But, that doesn’t stop suddenly rich celebrities and lottery winners who blow through 7 figures in a matter of months, so I guess the moral is that if you earn it, you’re more likely to keep it.
7. Meet the income statement affluent.
Beside the glittering rich, Stanley profiles what he calls the “income statement affluent.” This demographic is made up of people with high incomes, but relatively low level net worth. They’re not as effective at transforming their income into wealth. This category includes a lot of physicians, attorneys and executives. The income statement affluent tend to be driven toward hyper consumption and the need to show off their high social status.
8. Meet the balance sheet affluent.
The balance sheet affluent have more modest incomes, but relatively large net worth. Stanley found that farmers are in large concentration in the balance sheet affluent. Other members of this group include educators, engineers, and small businesses owners. The balance sheet affluent are very effective at transforming their incomes into wealth – they accumulate assets while others accumulate liabilities.
9. Meet the aspirationals.
I couldn’t say it better myself, so here’s a direct quote from the interview regarding “aspirationals”:
“in sheer numbers, the largest consumer segment for pricey cars, vodkas and homes is not the millionaire population, it is the aspirationals. These are people who think they are acting rich via their adoption of prestige brands, but in most cases they are only acting like each other.”
They take their cues from Hollywood and the advertising industry. The problem is that most aspirationals know few, if any, really wealthy to emulate.”
10. How to become the frugal rich.
It should come as no surprise, certainly at this point, that the single biggest factor to becoming rich in America is to live below your means. Here is the minimal target savings rate for a typical family by age, According to Dr. Stanley:
- 30′s – 5% of their annual income
- 40′s – 10% of their annual income
- 50′s – 20% of their annual income
Sadly, most Americans are far below these figures. Probably because most are aspirationals?
Part of living below your means is owning a home you can afford. Beside the monetary reward to doing so, there’s a psychological benefit to owning an affordable home – “a highly significant correlation between satisfaction in life and living in a home and neighborhood which are easily affordable.”
Stanley’s rule of thumb for house price is that it should be less than 3 times your total household realized income, also never take a mortgage that’s more than 2 times your total household annual income.
Those would have seemed like laughable rules a few years ago, but they’re sounding much more sensible these days even if you aren’t trying to become a millionaire.
You can read the full interview with Thomas J. Stanley here.
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