rich people

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: Buffett, good advice, rich people, think differently

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: Apple, Jobs, leverage, rich people

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**