Personal Finance

The Wealthy Really Are Better Than You

September 9, 2011

Better than you. Better-looking, too, if you're Henry Waxman.

Sooner or later, every website with a passing interest in personal finance posts some version of “The X Habits of Wealthy People”. You know how these lists are going to end before they start. Yeah, rich folks spend less than they earn and don’t drive ostentatious cars. Great, what else you got?

First, that’s not even true. Just because Warren Buffett inexplicably lives in a 53-year old house doesn’t mean that Larry Ellison or Paul Allen does. Despite what you’ve been told, frugality is only a tiny part of this. (But frugality is also the easiest personal finance subtopic to write about, which is why right now some idiot personal finance blogger is crafting a post on how you can save .1¢ per wipe if you buy toilet paper by the ton.)

A note on frugality: when I was 14, my best friend’s father was a successful eyeglass salesman. Regional sales manager, or something. Knowing I’d be entering the workforce soon, and wondering what I’d have to do to beat out the other applicants for that first coveted busboy position, I asked him what he looked for when hiring. His answer?

“Big spenders. I want a guy who orders the lobster and the most expensive bottle of wine, who wears Harry Rosen suits and drives a BMW.”

Why?

“Because he’ll be motivated. He’s got bills to pay and a lifestyle to maintain, so he has to make his quotas whether he wants to or not.”

There are plenty of people who spend less than they earn and who drive Ford Tauri. The vast majority of them aren’t rich.

If you’re not rich, and see no prospects of ever becoming rich, it’s not because you aren’t working hard enough. This should be obvious. Even if you cut out early every afternoon and only work 35 hours a week, how many hours a week do you think the world’s hardest-working rich person is putting in? 350? 35,000? No, clearly the relationship between hours put in and rewards achieved is not a direct one. Or at least not a linear one.
Here’s what rich people do that really does distinguish them from ordinary folk. These are easy to adopt, and don’t even require you to sacrifice that much in the short term, if at all. You just need to think differently.

1. They understand leverage. And its offspring, passive income. There’s an entire generation of financially responsible but unimaginative people who blame the Great Depression for their failure to lead dynamic lives, and who took the mantra “neither a borrower nor a lender be” as Scripture. (It’s actually Shakespeare. Hamlet.) Fortunately, those people are dying off.

Spend money to make money. And borrow it, too. You borrow money to leverage your existing assets. You don’t borrow money to finance a vacation. A 6% commercial bank loan to purchase an office building, whose offices you then lease out to tenants, who make rent payments to you that a) you use to cover your mortgage payments and b) write off your taxes, while you keep the difference, is money well borrowed. An unimaginative frugal person who doesn’t know any better sees that original bank loan as a sleeping tiger. A rich person sees it as the first step to a sustained cash flow.

2. Rich people aren’t “being lived”. As opposed to living. No wealthy person beseeches anyone for a raise. Or does the prep work, explaining his worth to the company and why he’s entitled to more. Being rich starts with the self-determination, as counterintuitive and pollyanaish as that sounds.

The thing is, you probably know this instinctively. Who’s more likely to get rich:

a) The college-educated junior account coordinator who stays late and delivers her sales reports to the boss a day early, hoping to get noticed to the point where she can become an account executive one day and do more of the same, or
b) The immigrant with a shaky command of English who borrows from his cousin to open a falafel stand?

The first couple of years, their incomes might not differ by much. The immigrant might even work longer hours. But his success is contingent on him, and no one else. So is his failure, if any. No one can promote him, but no one can fire him. The point isn’t that all immigrant food vendors get rich. The point is that by living self-determined lives, they’re in a better position to create wealth than the junior account coordinator who’s waiting for the person above her to transfer/get fired/have a baby.

If a rich person wants more money, he creates it. By soliciting another client. By creating and promoting another product. By using another passive income stream. Not by hoping to catch the boss during one of his rare generous moods.

3. They care about output, not input. See our prior post about this.

It doesn’t matter how many hours you worked, it matter how many widgets you created. In fact, it doesn’t even matter how many widgets you created, it matters how much revenue they brought in. And even that is less important than how much profit they generated. (And if you don’t understand the difference between revenue and profit, buy the freaking book already.)

Or take the office building example from above. Once you get enough good tenants in there to fill it, the money starts flowing in with marginal effort. If Tim Cook flies to Helsinki for a ski trip next week instead of going to work, a few thousand iPads are still going to be sold. But the employee who relies on income for sustenance has to apply himself for every dollar. Which brings us to:

4. Wealth ≠ income. Not even close. There’s a reason why the ultra-rich usually keep quiet when Congress discusses raising tax rates on high-income people. Because confiscating more and more of a hard-working person’s income has little bearing on a rich person’s ability to build wealth. Capital gains, IRA proceeds, investment appreciation…whatever its name, money that they don’t directly work for is what separates the rich from the never-will-be.

5. Dust yourself off. Even if you don’t pick up as many clients as you like, or go half a day without having to open the register, a wealthy-person-in-training has a permanent internal motivator; memories of how badly life sucked taking orders at the old job.

6. (Of course) Buy assets, sell liabilities. Put $150 a month in an IRA, or put it in cigarettes by the carton?

**Best Article of the Week in the 121st Edition of the Best of Money Carnival**

Filed Under: Entrepreneurship, Finance, Investments, Making Smart Choices, Personal Finance Tagged With: Entrepreneurship, Investing, leverage, murdoch, poor people, rich people

Peer accolades!

September 1, 2011

We don’t usually post on Thursdays. Then again, we don’t usually get nominated for intangible awards on Wednesdays, either. Yes, 2011 could mark the year in which we finally walk home with a coveted Plutus Award. Flexo, the guy behind Consumerism Commentary, (or his nominating committee) has selected us as one of 5 finalists in the category of Most Controversial Personal Finance Blog. Which is kind of like nominating Danica Patrick as one of the 5 hottest IndyCar drivers.

Should we be flattered? Well, considering that that series of disjointed thoughts masquerading as a website called The Simple Dollar won Best Personal Finance Blog (Single Author) last year, we’ll take solace by parroting the standard line about how it’s an honor just to be nominated. Apparently you’ll be able to vote on this soon, so we’ll keep you posted. Also, please vote for Miranda Marquit for Best Blog Contributor. It’s the least you can do after Hank the Dwarf got cheated out of People Magazine’s Sexiest Man Alive honors.

AVENGE ME

Filed Under: Personal Finance

Control Everything But Your Cash

August 24, 2011

We're running out of metaphors

There’s an argument for being contrarian, and a solid one. A true contrarian would have emerged from the recent housing crisis not only unscathed, but rich. In its simplest incarnation, contrarianism means exactly what it sounds like: buy when everyone else is selling, and vice versa.

The reason this doesn’t work when you follow it to the letter is that it means you would have sold Google stock when the rest of the world was pushing it up from $100 to $579; and you would have bought GM stock when everyone else was jumping off, anywhere from $72 down to its eventual delisting. Over the course of the stock market’s history, you would have lost money.

A popular hypothesis is that of the “permanent bull market”, which states that any downturn in the market, however long, is but temporary. Accounting for inflation, the Dow is well ahead of where it was when it started and it always will be over any given period if you just wait long enough. Therefore, just wait long enough.

The problem is that humans have life expectancies on the order of only a few boom-and-bust cycles. Generalities don’t really help when formulating an investment strategy. Yes, you can figure out which stocks to buy by analyzing fundamentals – in fact, we recommend it because we can get you started for a mere $3.50 – but even that implies that there’s a future worth investing in.

Not to go completely nihilistic on you, but ask yourself the following questions. Seriously. Don’t just read them, think about the answers.

Is there a particular number the Dow could rise to that would give you confidence in the American economy?
If so, what’s that number?
When do you realistically think we’ll get there?
(And did you factor in inflation?)

I recently asked the president of a publicly traded foreign company this very set of questions. Conducted orally, so he couldn’t see which one was coming next. Here were his answers:

Yes
13,000
(hesitating) 2013? Maybe 2014.
(more hesitation)

Crossing your fingers and trying to convince yourself that things can only get better is better than being pessimistic, it would seem, but eventually you have to start quantifying things and weighing your situation against inflexible time horizons. Us each getting a year older every 12 months is the only constant. What the economy does is, of course, variable.

The following are not opinions:

America’s credit rating now at its lowest level ever, on par with Belgium’s.

If the Greek or Irish economy tanks, the damage can be somewhat contained. Not so for the country with by far the world’s largest GDP.

With a few notable exceptions, no member of either party in the United States government’s legislative or executive branches is remotely serious about reducing its size (and therefore reducing the size of its current and future obligations.)

Those same government functionaries have all but stated that their goal is to eliminate risk, which is a functional impossibility. Of course, the buzzwords they use are far more benign (“keep Americans in their homes”, “make the rich pay their fair share”, “put America back to work” et al.)

People are at least finally learning how to save.
(Ha! Just kidding. It’s true that that’s not an opinion, but it is a falsehood. People are borrowing more than they have in years.)

——–

The consensus opinion among the populace seems to be to wait and see. But an enterprising contrarian can’t decide to simply do the opposite of nothing.

At Control Your Cash we try to keep away from giving specific investment advice. Not because we’re not professionals, but because our M.O. has always been to teach people to fish. That being said, it’s time to champion hard assets.

Real estate is finite. With a growing population, it would seem that real estate’s value will always increase in the broadest of terms. (People need to live and conduct business somewhere.) Gold and other precious metals are finite, at least until alchemy makes a comeback.

“But technically, everything is finite”, you argue. Which would be true if we’re restricting our discussion to the tangible. But there is literally no limit to the money a worrisome government can create. If you don’t believe that, or think it’s an overreaction, go ask a Zimbabwean. Or a Weimar-era German, if there are any left.

Inflation isn’t just a devaluing of the currency. It’s a way to punish the poor at the expense of the rich (because rich people, almost by definition, keep a smaller ratio of their wealth in cash than poor people do. Rich folks can buy assets and hold onto them. Those whose wealth consists primarily of cash aren’t just too tempted to spend it, they’re too subject to the machinations of a market that conducts business in weakening dollars.)

Sooner or later, a government with overwhelming obligations and too many creditors will have no choice but to employ the nuclear option: if you owe lots of dollars, it makes sense to make each dollar you owe worth less. If you can do it, that is. You can’t. Governments can. And shortly, will.

**This article is featured in the Yakezie Carnival-September 11th, 10th Anniversary Edition**