Archives for September 2012

The 25th Through 28th Ways Rich People Think Differently

September 21, 2012

 

Don’t just laugh at this. Wear it to your next job interview if you want to avoid being average.

 

You’re not going to understand this unless you read Wednesday’s post.

Rich people know that if you have “something to fall back on”, you’ll fall back.

“Your dream is to perform on Broadway? Good for you. But finish that political science degree, so you’ll have something to fall back on.”

Not to delve into the semantics of this, but think about the expression “fall back”, and its antonym. You’re making allowances for your own eventual failure, or regression, and practically expecting it.

This doesn’t mean that rich people follow their dreams without thinking about worst-case scenarios. It means that rich people don’t even think in terms of “dream achievement” vs. “safe harbor”.

Making subsistence money is not hard to do. (Besides, in the estimation of noted average person Trent Hamm, making more than $25,000 a year barely makes you any happier at all.) But when you do so while in a fallback position, like when you’re using a teaching certificate that you never wanted in the first place, it paradoxically makes it harder to walk away and do something more ambitious. “I put all this time and effort into getting my teaching credential, I might as well use it. Even though I hate everything about the job. Although I suppose I could convince myself that I don’t.”

Finding your passion isn’t just self-help blather. It’s Ricardo’s Law of Comparative Advantage in action. Do what you’re good at, and not just you but the rest of society will benefit. Or just be miserable and do something you hate. What do we care? It’s your life, not ours.

 

Rich people could absolutely give a damn about being ostentatious. Average people want you to notice and thus validate them.

Jewelry? Seriously, what’s the point?

Rims? You can’t even admire them, because you’re inside the freaking car.

Bottle service? Okay, now you’re just screwing with us. You clearly hate money if you’re paying $300 to have a waitress come to your table and make drinks for you. 

What are you talking about? Rich people love to spend money on expensive things. You’re telling me rich people don’t own private jets, etc.? What about Donald Trump?

Slow down, average person.

First of all, Donald Trump isn’t a rich person so much as he is a guy who’s created a character of a rich person that he uses to great effect. The showiness is intrinsic to his celebrity, and frees him from the ignominy of being just another faceless New York real estate tycoon. The outrageous statements, the speculative presidential runs, even the hair: it’s all part of the act.

Take a more ordinary rich person, one of typical rich-person showiness. Warren Buffett doesn’t own a Bombardier Challenger 600 so he can be lavish. (That’s Floyd Mayweather’s thing, and God knows how badly that will end.) Warren Buffett’s time is worth a lot. He isn’t doing anybody any good, himself nor anyone else, by getting to Eppley Airfield 2 hours before a scheduled flight to Denver so he can stand in the TSA line removing his shoes and emptying his pockets while eating a Cinnabon. Better he get where he’s going as fast as possible, move some more assets to higher-valued uses as he does, and get back home. Buffett owning a jet is the equivalent of you owning a car. Or would you prefer taking a bus to work, moving only at the whim of the bus scheduler, and running your errands and going to your kids’ soccer practice without autonomy?

Rich people spend money with the end in mind. They spend for a tangible purpose that more often than not will pay dividends. It’s not “How much will this jet cost me?” It’s “How much will this jet enrich me?” When Warren Buffett and Charlie Munger fly out to Vegas to spend the night dancing and imbibing at Marquee, you can bet they go to the bar and order their own drinks like normal people like rich people.

 

Rich people see money as a vehicle, not a destination.

The standard axiom is to contrast “journey” with destination, but that doesn’t serve our purposes. Here’s the message of this entire series, reduced to a single example:

Average person:

Can I afford this vacation? I have $x in my savings account.

Rich person:

Can I afford this vacation? My monthly passive cash flow is $x beyond my living and other mandatory expenses.

 

We used x because the numbers themselves aren’t as important as the observations. In fact, the observations are even more important than whether the person in question can afford the vacation. The responsible average person, who determines that yes, she can, isn’t philosophically different than the irresponsible average person who just whips out her credit card and doesn’t think about how she’ll have to pay the minimum balance for the next 30 years. At best, an average person sees an indulgent expense as something to justify – a tradeoff. Enjoy it now, but it’ll cost you later.

A rich person sees an indulgent expense as something to pay for out of money coming in, rather than out of money sitting stagnant. Obviously, paying for a vacation requires anyone to economize a little. But a rich person thinks about how doing so will reduce his cash flow for a fixed period. An average person thinks about how doing so will reduce his net worth.

Cash flow and net worth. Both are important, but the former is a better indicator of what you can afford in the short term. A rich person wouldn’t take on a frivolous expense that would cut into net worth, or even think in terms of doing so. An average person either doesn’t think about cash flow, or doesn’t have large enough cash flow to warrant said expenses.

Some people read this and grasp it immediately, others don’t. Cash flow is just that, flow. Money coming in. Money goes out too, but the idea is for cash flow to be net positive. The cash flow becomes the more important measurement for determining your ability to buy things, mainly because net positive cash flow, by definition, will always increase your net worth. A rich person knows his net worth is increasing just by looking at his cash flow. He doesn’t even need to look at the net worth.

So a rich person looking to indulge himself doesn’t think about saving and scrimping for the indulgence. He thinks about that money coming out of cash flow instead, which will temporarily lower the flow. He doesn’t think “I’ll have to spend x% of my net worth on this vacation.” He thinks, “I’ll have to spend y days worth of cash flow on this vacation.” When he returns, and no longer has a vacation to pay for, the cash flow picks up where it left off. As if nothing ever happened. Meanwhile, the average person thinks about how to get back to his previous level of wealth.

 

Rich people aren’t waiting for Daddy to make things all better, average people are.

Finally, and excuse us for quoting ourselves, rich people buy assets and sell liabilities. Average people buy liabilities and sell (or at least, fail to buy) assets. They aren’t blowing hundreds a month on ways to deaden the pain of their unfulfilling lives, get their buzz on, buy Marlboro Lights by the carton because it saves money, I do it because it relaxes me or whatever. Instead, even spending that money on something as mundane as an increased 401(k) contribution will help free you from the miasma of averageness.

That’s the biggest difference between rich and average people, right there. It dwarfs most of the others, which are largely about thought rather than activity. Again, this stuff is unbelievably simple to comprehend, and not all that much harder to act upon. Amazingly, actually making up your mind to embrace it is the hardest part for most people.

 

Filed Under: Capitalism, Economics Tagged With: , , ,

The 22nd Through 24th Ways Rich People Think Differently

September 19, 2012

One downside to being rich is that you don’t get to decorate your cubicle in fun and exciting ways that highlight your personality.

 

Saw this on Yahoo! Finance. It’s a 21-point summary of a book titled How Rich People Think. The consensus seems to be that the book is mediocre, but the summary was solid. Points included stuff like

Average people live beyond their means. Rich people live below theirs.

Average people believe the markets are driven by logic and strategy. Rich people know they’re driven by emotion and greed.

Average people teach their children how to survive. Rich people teach their kids to get rich.

All of which are indubitable, and which inspired us to add to the list.

 

Rich people quantify, average people aren’t “all about numbers”.

You want to take the one most beneficial step towards improving your financial situation, regardless of how good or bad a place you’re in right now?

Figure out your net worth. Add up everything you own, even including your house if it makes you feel better. Don’t use the sale price, use the current value. Go to Zillow if you don’t know where to start. Don’t forget to subtract your mortgage balance. Oh, that makes it negative? Sorry about that.

Add your 401(k) or IRA balance. It’ll take you 10 minutes to figure this out. You should have an account number and a login somewhere. We’d tell you to subtract your credit card balances, but we’re assuming you’re not so dumb that you’re carrying any.

That’s your net worth. A rich person knows his or hers within a few percentage points, instead of dreading the bills that are going to come in tomorrow’s mail. Here’s one of the stupidest lines we’ve ever featured in our weekly Carnival of Wealth, which itself is often a paean to stupidity. This is verbatim from a submitter, plus the ((sic)):

The Debt

Erika Amex: $285.67
Citi Card: $2,128.41
Student Loan #1: $9,101.51
Student Loan #2: $11,432.70
Student Loan #3: $2,050.00

So apparently there is a third student loan (0% interest) that I completely forgot about it (sic) until I was sent a bill in the mail. Great.

Average people get willfully blindsided like this all the time. Rich people don’t “forgot about” $2,050 debts. They know what they owe, and when they’re supposed to pay it by.

Yeah, whatever. Rich people don’t have debts.

Which brings us to another point:

 

Rich people leverage, average people make do with what they’ve got.

Rich people have plenty of debts. To some extent the richer you are, the more you’ll borrow. If this sounds counterintuitive, you might be average.

Rich people borrow money, at known and stated interest rates, with the intention of earning returns that outpace what they’re borrowing said money at. The prospective dry cleaner who borrows $500,000 at 6% is now on the hook for $30,000 a year. But now he can buy machines and a storefront. He can sell his wares – or in this case, his services. He can take money from customers, who will pay that $30,000-a-year loan for him and do it gladly if he returns their clothes sufficiently gleaming. Maybe he’ll even be able to pay the loan back early, allowing himself to borrow even more, at lower rates, which he can then use to finance bigger operations with.

Or he could get a job working for someone else, and save as much of his pitiful salary as possible.

It’s like people who pride themselves on paying cash for a house, but don’t tell you how long it took them or where they were living in the meantime. If you have to save for 30 years to buy a house, 30 years during which you paid rent to some other homeowner, that’s hardly anything to be proud of.

Most rich people are not born that way. Really, they aren’t, despite what the more reactionary folks on the left side of the political spectrum believe. The Cox family heiresses are outnumbered by the successful entrepreneurs who understood this fundamental principle of leverage. Ultimately, that’s far more important than an inheritance.

 

Rich people learn from mistakes, average people dwell on them.  

Everybody fails. You’re probably somewhat familiar with the following story, but it illustrates the point:

Apple. The largest corporation in the world and one of its most respected. 5 short years after it went public, the board of directors tossed out the company’s primary founder and visionary. The board sided with the CEO whom Steve Jobs had hired, over Jobs.

12 years and 3 CEOs later, Jobs came back, and every home run since has been well-documented. Here’s what a rich person would have learned in that interim:

  • I can still create imaginative products, but I need to spend more judiciously.
  • Instead of suing my biggest competitor (Microsoft), maybe we can cooperate and both get even richer. Heck, I’d even be willing to sell them a non-voting chunk of the company.
  • Our designs are a little different than most. Let’s make them vastly different, and brand ourselves in a way that Dell or Hewlett-Packard can’t imagine.
  • We’ve got to stop cannibalizing our own products. In fact, what if we were to make minor changes to them on a regular basis, and sell them to the same people again and again?
  • Being a computer manufacturer is swell, if limiting. Why can’t we be a retail outlet? A phone company? A music store?

Here’s what an average person would have learned in the interim, if you’ll suspend disbelief for a second and assume that an average person could have built Apple in the first place:

  • This sucks. Ungrateful bastards.
  • Who are they to treat me like this?
  • Damn, I never should have created the Lisa. Damn. Damn. Damn.
  • I wonder if Microsoft would hire me. Maybe I could be a department head there. Gates will rub his hands with glee, but I really need a job.

Ways 25 through 27 on Friday.

Filed Under: Capitalism, Education, Entrepreneurship, Finance Tagged With: , , ,

Carnival of Wealth, Spay & Neuter Edition

September 17, 2012

 

Hopefully Fluffy remembered to wear loose-fitting sweat pants to the clinic

A little public service announcement, if you will:

Visited a remote small town (pop. ~40,000) this week, parked in a hotel parking lot right off the interstate, and saw a kitten hiding in the bushes. Walked to the nearby supermarket, bought some cat food, and returned to see 4 of the kitten’s friends and/or siblings. And an adult cat.

An employee at the adjacent restaurant explained that no, no one dumped a litter of kittens in the parking lot, thank God. The colony of cats had been there for at least a year, ridding the area of mice and surviving off restaurant scraps. (Although they ate the supermarket food at superfeline speed.) In fact, the colony was now in its 3rd generation.

It’s only going to get worse, as this town has no volunteer organization to trap, neuter and release feral cats. The town also has extremely cold winters. Outdoors is no place for a kitty.

Don’t be cheap, negligent, or somehow moronically sympathetic to the idea of your pet losing his or her sexual identity. (Yes, some humans are that clueless.) Get your cat fixed. Or your dog. Or your child, if your child has traits that aren’t worth passing on to any descendants. If everyone did this, within a few years there’d be no more unwanted pets or unwanted stupid people.

Okay. Big Carnival this week, no time to spare. The Carnival of Wealth, weekly roundup of personal finance blog posts, etc., etc. Let’s go:

Dave at 6400 Personal Finance is so on-the-nose, every time he submits, that we figured we’d do him the courtesy of not making him have to scour the CoW to see his post.

If you’re jealous of those with more money, don’t just sit there and complain. Do something to make more money yourself – spend less time drinking or smoking and socialising, and more time working.

No, we’re not quoting ourselves. We wouldn’t use the Commonwealth spelling of “socialising”, although the rest of it sounds like something we’d say. Or Dave would say. Or anyone with even the most basic understanding of how to get rich would say. But because an billionairess said it, some people have chosen to be offended by it. So we can add “being indignant” between drinking and smoking on the list of things you should spend less time doing if you want more money.

Dividend Growth Investor explains why he thinks dividends are more important than capital gains. He says that stocks with consistently growing dividends free you from having to pay attention to market swings. We’d argue that that can’t be true, given that the price of a stock is a far greater component of its value than is its dividend, but he still explains his point in the staggering detail we’ve come to expect from him.

Off-Road Finance presents a lucid explanation of quantitative easing  how the Federal Reserve is weakening our economy by incrementally lowering the value of each dollar as if by magic. God, this post is depressing. But necessary. Read it.

We think investing in real estate is one of the best ways imaginable to make money. It lets you leverage at a high level even if you’re a rank amateur, and both the real estate market and its secondary financing market are at historic nadirs. Free Money Finance thinks we’re crazy. Well, that’s not true. Then again, he might think we’re crazy, but if he does that assessment is irrespective of his submission.

His post is (partially) titled “Why You Should NOT Invest In Real Estate”. It’s really more of a reminder to anyone who thinks that there’s nothing more to it than buying a couple of houses and watching the money fall from the sky. This guest post written by someone named “Apex” is actually spot-on. You can make money in real estate, but it takes work and patience. (So do the smart thing, and buy lots and lots of lottery tickets instead!)

Our favorite new site logo of the week goes to the M.C. Escher-inspired use of negative space atop Financial Ramblings’ masthead. The author, Michael, just opened for business a week ago and so far has posted every single day, a schedule that will kill him. (Alas, he’s already repeating himself.) We loved part of his “About” page almost as much as we do his logo:

While many financial bloggers have built their sites on a foundation of personal struggles, I’m coming at things from a different angle. Yes, dramatic stories of debt and strife make for good reading, but I’ve always felt that you should seek out those who have tasted success and learn whatever you can from them.

He’s right except for one point. Stories of debt and strife make for horrible reading.

Our most shocking discovery of the week is that Paula Pant of Afford Anything (note the new absence of the hyphen, the story of which you can read about on her site) is a Burning Man attendee.

Dude, people don’t “attend” Burning Man. They participate.

Fine, Burning Man participant.

Actually, they prefer to be called “Burners”. 

Sorry. We’ll consult our Hippie-English/English-Hippie dictionary next time. Bottom line, if you can temporarily get the image of Miss Pant riding a recumbent bike past a giant tin sculpture of a gyroscope while wearing a leopard-print bustier and matching grass skirt out of your head*, she left home for 10 days and the world didn’t end. It could have ended, but she delegated stuff instead. You should have such foresight. Her time was, and is, more important to her than money. Beyond a certain level, of course.

Sometimes we award a citation for the infomercial that does the best job of masquerading as a blog post. This week, John Frainee at Christian PF inspired a new category: infomercial that doesn’t even try to be anything but. See if you can figure out what he’s selling.

 

 

Has Harry Campbell at Your PF Pro stolen our idea of stealing stock photos? This week, he explains why you need to rebalance your portfolio and how often to do so. (Harry? Bigger font.)

A new and exceedingly verbose submitter this week is Billy Murphy of Forever Joble$$ (too-cute-by-half dollar signs his.) Billy is a professional poker player and a figurative poker player, too, examining the “pot odds” of various business opportunities while the people around him fold and complain about the cards they’ve been dealt. To the jealous (see Dave’s leadoff post above), Billy is rubbing your faces in it with his stories. To anyone who wants to build wealth – Control their Cash, if you will – Billy’s progress should be inspiring. Once he gets a proofreader, he’ll be unstoppable.

Dave at Excess Return explains dividend reinvestment plans. Just what they sound like, you use your dividends to automatically buy more of the stock that got you the dividends in the first place. The trade-off is obvious – it’ll cost you a little diversity – but Dave argues that with the right stock, this deferred-gratification strategy is well worth it.

Ken Faulkenberry at AAAMP Blog returns with his 5 largest factors that help your portfolio grow. #1 through #4 might sound obvious, but he explains their relative merits. Also, #5 is one that most people overlook.

From Andrew at 101 Centavos, all about algae! The fantastic new ecologically friendly fuel that will commit petroleum and its distillates to the ash heap of history, right next to the charcoal.

Yeah, except algae is inefficient as a fuel and requires inputs that aren’t readily available. Also, no private company will bankroll it, at least not without government subsidies. That’s why not 1 but 2 federal cabinet departments (Agriculture and Energy) are propping up the algae industry. And you thought we had an economic system that approximated free enterprise. Please. That died with Calvin Coolidge.

Cameron Daniels at DQYDJ.net pokes fun at all the “personal finance” bloggers who do nothing but post regular updates on their student loan and credit card balances. His lambasting is reprehensible, and we won’t stand for it. Those poor people are just trying to make it, they’re supremely qualified and very intelligent, they just got in a little bit of trouble and shouldn’t have to spend decades being punished for it, to say nothing of being ridiculed on top of that, and…we probably should stop, otherwise we’ll scare any new Control Your Cash readers into thinking that we’re being anything but sarcastic. Anyhow, Cameron’s post is hilarious and the comment section even degenerates into a discussion about home construction techniques (including one thread from a woman who claims that not only are European houses constructed better than North American ones, but that her sister’s North American house collapsed 3 weeks after she bought it. We’re not sure which is the more fanciful tale.)

John Kiernan at Wallet Hub asks another of his depressing rhetorical questions to which the answer is usually “yes” followed by a sigh. Are We On The Verge Of Another Mortgage Disaster? This week, John hits on reverse mortgages. They’re bought primarily by stupid old people who don’t understand what they’re getting into. If wisdom comes with age, why are seniors always the ones getting taken advantage of by everyone from panhandlers to phishers to reverse mortgage salespeople?

Odysseas Papadimitriou at Wallet Blog (distant relation) discusses the impact food poisoning cases can have on the greater economy. But our takeaway line is his offhand comment that 240 people have been murdered in Chicago this year. On a completely unrelated note, Illinois is now the only state in the Union whose interpretation of the 2nd Amendment forbids citizens from defending themselves by carrying concealed weapons. A coincidence, we’re sure. Chicago itself has gun laws even more stringent than its state’s. Meanwhile, violent crime remains comparatively negligible in the parts of the country where people own the most guns (Alaska, Montana, Idaho, rural Nevada, the Dakotas, Utah, etc.) Another coincidence, doubtless.

If you’re worried about China soon having the largest economy in the world, what you’re saying is, “I’m an imbecile, and it never occurred to me that a country with quadruple the United States’ population should have a larger economy. Why, if that happens the average American will only be 4 times as rich as the average Chinese. How awful for us.” Liana Arnold at Card Hub (another distant relation) shows how with a burgeoning economy, the Chinese are also taking on our habit of overextension. BONUS: a picture of an actual Chinese person!

(The casual observer might think it’s a picture of Ms. Arnold. Actually it’s of the professor quoted in the post.)

Liana’s post contains one of our favorite lines, ever:

In China, you face criminal prosecution if you don’t square debts within three months of receiving your second past-due notification letter.

Please God, let that law be adopted in America. A side benefit to it would be the elimination of 99% of the blogs that Cameron at DQYDJ references above.

FICA! That mysterious acronym that appears on your every pay stub, by which the federal government confiscates your money before you even see it. You pay for Medicare, whether you’ll ever need it or not, and you pay for Social Security, even though it won’t exist by the time you’re old enough to qualify for it. (The road will end well before the can can be kicked that far.) That’s called living in a free society, if by “free” you mean “forcing you at gunpoint to contribute to the financial well-being of strangers, maybe even antagonists.”

Yes, that’s a diatribe but it’s going somewhere. Darwin’s Money speculates as to what FICA limits will be in the next couple of years: what percentage of your pay will go to fund FICA’s two components, and at what income level you’ll no longer have to pay additional Social Security taxes.

(And if you didn’t know, the Social Security tax is a regressive one. The more money you make, the lower the percentage of it you pay in Social Security taxes. Sound unfair? You don’t know the half of it. Read our book for the excruciating details, in the chapter that comes before the one about how to free yourself of this paycheck-to-paycheck nonsense once and for all.)

Glad you could make it. New content daily, new CoW weekly (hence its name), appearances on Investopedia irregularly. See ya.

*That’s what guys do at Burning Man, right? It’s probably safe to assume women do it too. 

Filed Under: Carnivals Tagged With:
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