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: , , , , ,

Make more, pay less

June 15, 2011

Look closely - especially if you're at work - and you can actually see her soul leaving her body.

Dissatisfied in your job? Here’s the time-tested solution: tough it out, be thankful you have one, and come in next weekend just to emphasize the latter point.

Or you can tell The Man which orifice he can shove his company picnic and break-room coffee into, and go out on your own. Incorporate.

There are several volumes’ worth of reasons to do this. We can’t go into all of them now, but one of the best-kept secrets of incorporating is the regressive Social Security tax.

You might not be familiar with the concept of a regressive tax, but it’s easy to grasp. There are 3 species of tax:

-A proportional tax is one levied at a fixed rate. Sales tax, for instance. If your jurisdiction charges 7% sales tax, then any item subject to the tax costs 7% more than the list price whether the item goes for $1 or $100,000.

-A progressive tax means the higher the base amount, the higher the rate. Income tax in the United States (and most everywhere else, as far as we know) is an example.

That leaves the rarest bird in the aviary, regressive taxes.

You mean there are taxes where the greater the amount subject to the tax, the less you pay? That’s absurd. And illegal, right?

It’s cute that you think that. Not only do regressive taxes exist, they’re authorized by the same federal government that you entrust to have your best interests at heart. To fund the 2 biggest and least tenable programs in its tentacles – Social Security and Medicare.

Out of all the confusing, capricious, seemingly arbitrary taxes we pay, Social Security and Medicare taxes might be the most senseless.

The federal tax collectors (sorry, we don’t know most of their names, but Doug Shulman is the Internal Revenue Commissioner) take about 15.3% of your salary in the form of Social Security and Medicare “contributions”. Collectively, these are dubbed FICA – after the Federal Insurance Contributions Act. Remember, Social Security was invented because federal officials of a bygone generation decided that Americans were too stupid to save for retirement. Therefore it would take a benevolent government populated by financial geniuses to make those critical investment decisions for our grandparents, our parents, you, me, and our descendants. Medicare is essentially the same thing, but earmarked for a different purpose.

If you never look at anything but the net pay amount on your paychecks, take some time to read the other numbers. Just once. That 15.3% breaks down like this:

-6.2% employee’s Social Security taxes
-1.45% employee’s Medicare taxes
-6.2% employer’s Social Security taxes
-1.45% employer’s Medicare taxes.

Hopefully this is obvious, but you’re wrong if you think your employer pays its share of these taxes as a necessary cost of keeping so wonderful a worker as you on the payroll. She doesn’t pay these taxes, she merely collects them. You pay them. Your employer factors these taxes into your salary when she hires you. If your employer wasn’t required to pour 7.65% of your income into the subterranean trench that is the federal government, she wouldn’t. Instead, she’d much rather attract you and other employees with wage levels that are 7.65% higher than what you think you’re currently making.

How is this regressive? Sounds proportional to me.

The Social Security portion of your FICA taxes is capped once your annual income exceeds $106,800. You pay the 2.9% in Medicare taxes no matter how much you make, but the Social Security portion can’t go above $13,243.20. (Half of that levied directly on you, the other half levied on you via your employer.)

So the higher your salary – past $106,800, anyway – the smaller the proportion of it you pay in Social Security taxes. On the one hand, this gives you incentive to work hard and earn money. On the other, it’s the kind of inequality that French revolutionaries chopped off people’s heads for.

If you’re an independent businessperson, and you structure as an S corporation or a limited liability company, you can run around the system instead of through it. Incorporate, and you can pay out part of your company’s profits to yourself as salary while paying out the remainder as dividends. The former is subject to FICA, the latter isn’t.

What’s the downside?

You’d be surrendering the “certainty” of a regular, constant paycheck. As if there exists an employer who could guarantee such a thing in perpetuity anyway.

Still, it sounds promising. So why doesn’t everyone do this?

The usual reasons: fear of the unknown, lack of faith in themselves, etc. The same negative thinking that’s been holding most human ingenuity back since we figured out fire and the wheel.

Note: Some people blather that sales taxes aren’t proportional because the less you earn, the higher a ratio of your income you pay in sales taxes.
First off, sales taxes aren’t levied on income, they’re levied on sales. See “income tax”, above. Second, there’s no way around this. Unless you think state legislatures and municipal governments should mandate that merchants ask people how much money they make before determining how much tax to collect.

**This article is featured in the Carnival of Wealth #43**

Filed Under: Entrepreneurship, Finance, Healthy Living, Personal Finance Tagged With: , , , , ,

In college? Switch majors. TODAY.

May 23, 2011

 

Did she major in a) philosophy, b) drama, or c) applied mathematics?

Problem: a college’s engineering students have futuristic ideas, but no clue how to monetize them. That same college’s business students have grand capitalistic designs, but nothing to market.

You can probably figure out the solution.

We’ve said repeatedly at Control Your Cash that formal higher “education” isn’t an absolute good. And we’ll continue to put the word “education” in quotes if people are going to classify Montclair State’s “How to Watch Television” as no less worthwhile than MIT’s Atomistic Modeling and Simulation of Materials and Structures. (No dismissive quotes required for that course description.)

State legislators and impressionable parents throughout the country transfer far too much taxpayer money into the pockets of directionless adolescents looking for a place to drink, protest and sleep late while deferring productivity. The tangibly beneficial college and university courses continue to get outnumbered by dross like everything listed here.

And then there’s the Cambridge of the Mojave, the University of Nevada-Las Vegas.
Indulge us with some time for a little local content.

To most people who think about this kind of thing, UNLV is a punchline – a basketball factory, a commuter school for unambitious commuters, the kind of institution that’s emblematic of the same faux learning that we’ve spent the last few paragraphs deriding and whose only redeeming feature is its world-renowned hotel management school.

Not quite. UNLV is also home to a groundbreaking program that should revolutionize post-secondary education: a partnership between the two most crucial schools at the college, engineering and business. (UNLV doesn’t teach medicine.)

(Note: Control Your Cash co-founder Betty is also a co-founder of UNLV’s Center for Entrepreneurship, known colloquially as the “E-Center”. Betty attended Northern Arizona University for one semester, realized her fortune lay elsewhere, and sought and achieved it. With no student loans to worry about paying off. Years later, she realized that the common financial sense she implemented in her own life barely existed in academia. But rather than dismiss the typical university education as largely pointless, she committed resources to finding a way to make it meaningful.)

The UNLV engineering/business partnership began as the fusion of two separate but easily unifiable ideas. Since 2000, the curriculum requires senior engineering students to form small teams and enter a design competition. Simply put, the teams have to invent something practical. And their brainchildren have been not just feasible, but inspiring: a cane that uses sonar (for blind people), motorcycle headlights that see around corners, etc.

A few hundred yards away, business students were doing something similar: creating plans and projections for potential businesses. The last couple of years your humble bloggers have had the pleasure of serving as judges for the business students’ contest, and we’ve seen some impressive proposals. They include the group that was going to import and distribute a revolutionary weatherproofing compound from South Korea, and the “micro-farmer” team who wanted to grow vegetables on abandoned urban lots. Some of the other ideas were less marketable than they were creative, still others were quite the opposite. But the very act of conceiving and developing these ideas did and will do far more good for the world than the nearby English class looking for meaning in the short stories of Jack Kerouac.

The trouble was that none of the engineering projects ever got off the ground. (Figuratively speaking, particularly in the case of the dolly that lifts 300-pound payloads 3 feet in the air.) Meanwhile the business projects, while some of them had potential, weren’t exactly recalibrating the boundaries of human endeavor.

So the deans of the departments got together and meted out a little interdiscipline. For full credit, the engineering students had to partner with the business students (and vice versa) to develop a viable plan. For the engineers, it meant developing an appreciation for normally mundane tasks like securing warehouses, filing paperwork, and learning how to market. For the aspiring MBAs, it meant gathering the requisite technical knowledge about how moneymaking gadgets make money. (Dr. Andrew Hardin, director of the Center for Entrepreneurship, got the inspiration for this from a similar program at Washington State University.)

You need both the yin and the yang. This is just one of countless examples, but there’s a $500 Universal Corporation all-in-one remote control at Control Your Cash headquarters that contains 43 buttons and 6 screens, most of which never get used. The device is supposed to control the TV, the DVD player, the satellite radio, the AM/FM, the CD players, the iPod and probably one or two other things. Three years in we still haven’t mastered this leviathan of overengineering, because we can’t be bothered to spend the necessary couple of days decoding its indecipherable user’s manual. Seriously, we don’t need 80 equalization pre-settings (“Classical”, “Bass Reducer”, “Sports”) for the tuner. We’re not Jimmy Iovine.

A competent business management team would have simplified the remote while maintaining its primary selling feature – the ability to control every electronic component in the house. The team would have hired an erudite technical writer to translate the instructions into something a layperson will want to comprehend, and packaged the remote as something more necessity than luxury. We can only wonder what engineering breakthroughs never make it to market, for lack of marketing.

When teachers’ unions in your state complain that you need to fork over more tax money for education, ask them if and how they’re prepping kids for crucial programs like UNLV’s engineering/business partnership. And making a legitimate difference in the world, not a theoretical one.

TONIGHT, the winners of the 2011 competition do a dress rehearsal for the forthcoming tri-state competition. If you’re in the neighborhood, swing by and see how the future doesn’t merely appear.

**This article is featured in the Totally Money Carnival #21-Memorial Day Edition**

**This popular post is also featured in The Carnival of Wealth #42**

Filed Under: Education, Entrepreneurship, Making Smart Choices, Net Worth, Personal Finance Tagged With: , , , , , , ,
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