‘If You’re So Danged Smart, Why Ain’t You Rich?’

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June 1996
Vol 19 No 10

When I was a kid, the above question, a hold-over from the ‘30s depression, was written on one of my paper route customer’s walls. Would the slogan apply to you today? Do you find yourself mystified by the fact that, despite all your education gleaned from seminars, books, tapes you’ve ingested; and techniques you’ve mastered for discounting mortgages or negotiating shrewd purchases, or running a business, or investing, you still don’t seem to be getting ahead?

You aren’t alone! One of the great paradoxes I find is that, in the midst of the sophistication of our computer age, many otherwise successful people don’t know how to manage their personal finances. They can’t balance a check book. Or do their own income taxes or even know what bracket they’re in. figuring out the interest being charged on revolving credit accounts is beyond them. We seem to be living in an age of financial idiot savings who know how to make money, but don’t know how to save or spend it wisely once they get their hands on it.

The reason so many people are smart but not rich is because they don’t apply the same concentration and care when spending their money as they did in acquiring it. That’s like trying to fill a bucket with a hole in the bottom. Oh, you might open the tap a little wider (make more money) and temporarily fill it up, but as soon as you stop adding water, it will still all run out before it does you much good. Last month we devoted most of the newsletter to the subject of debt. This month, let’s see if we can’t find ways to plug some of the holes in our financial bucket so that we can be both smart and rich – and more financially secure.

Being ‘smart’ about spending money is the key to being able to save it. Saving money is essential to building capital. Capital is the engine that runs the money machine. It all starts with the cultivation of an attitude concerning what money really represents. We all know that it’s a means for storing profits. In the form of currency or credit, it’s a medium of exchange. But it’s much more than that. Money, considered by many to be the root of all evil, is also the root of just about everything else too. Stick with me on this; if you spend one third of your waking hours finding ways to acquire money, then can’t you rationalize that the money you have represents one third of your life? Thus, if you waste money, you’re wasting all that portion of your life that you devoted to making it in the first place?
Let’s take this metaphor a little further. When you are prudent about saving and investing your money, can’t you then use it to also buy time? Most people do this by buying labor/time-saving equipment such as computers and machines, or by renting the time of others and employing them to do things which would consume their time. That seems a fair exchange, because it enables vendees to transfer some of their stored time and effort (profits) to vendors of labor, or of equipment. The vendors, in turn, store up and spend their profits in the same way. Thus, the cycle repeats and repeats. Eventually, everyone in the chain of productivity benefits.

If you buy the above premise, then, the key to becoming rich as well as smart lies in being able to generate profit, then, knowing how to conserve and spend the income you’ve realized. Being able to plug the leaks in the financial bucket probably has more to do with a person’s becoming financially secure than the actual production of the income in the first place. Conversely, cavalier consumption of income and savings deprives each dollar spent of any chance to ever create a profit.

CHEAPLY-NESS IS NEXT TO GODLY-NESS . . .

Every year or so, the newspapers carry accounts of some elderly person who lived like a pauper, but at whose demise, was discovered to have amassed a secret fortune even though lifetime earnings were meager. One such fellow a few years ago gave several million dollars to a college even though he’d always been a low-paid employee at UPS. His financial secret was to put every dime he could into UPS’ stock purchase plan. Most the articles about these people (usually written by a low-level newspaper staffer who probably doesn’t have the foggiest notion about building or using capital himself) generally denigrates these people as being social and financial oddities. The lesson is often missed. It’s not what was spent, but what was saved, invested, and allowed to compound that enabled them to pile up wealth. Stated simply, what you don’t spend can build a fortune over time.

That’s only part of the story. Ultimately, money all gets spent. The only thing you can control is (1) when, (2) where, (3) why, (4) for what, (5) how (and how much), and (6) by whom. Let’s begin with some basics. Saving money doesn’t mean that you have to become a miser (but it couldn’t hurt). It does mean that you’ve got to take charge of, and manage, the above six control points. They say that you can never be too rich or too thin. Instilling financial discipline is like going on a diet. Nobody likes it. Everyone should do it. Lots of people start. Few stay on it. As a result, everyone feels a little guilty about not being more diligent in sticking to it, but, we all forgive each other for our weaknesses.

You can test this just by listening to the way people talk about excess weight or lack of money. Most of them don’t want to restrict their consumption of either food or money enough to await the obvious benefits. We’re either not future-oriented, or just don’t want the benefits badly enough to sacrifice immediate gratification. That’s all well and good so long as the money is still pouring into the bucket, but, unless you’ve been exploring the back-side of the moon, you’re aware that the playing field is changing. No longer is your income secure whether from your retirement plan, employment, Social Security, or some public spending program. Times, they are achanging. We’re all going to have to change with them.

We’re approaching the 11th hour of the time when government at all levels is either going to be too broke to fund the citizens’ financial security, or are going to siphon funds from retirement plans, investments and savings in order to maintain public welfare programs. So, regardless, of whether you’re in ‘fat city’ at the top of the financial heap, or just beginning to set something aside for the future, now’s the time to really get serious about going on a financial diet – and keeping on it. I’ve done about all I can to instill greed and fear into you in this letter. Now, you’ve got to motivate yourself. Let’s start with some easy steps.

The first thing you’ll need is a financial plan which aims at the far horizon, but which focuses on your next payday. Here’s an example: Suppose, in today’s dollars, you estimate that you’ll need $50,000 per year. Assume that you can invest for a 10% yield. Then you’ll need to accumulate $500,000 before you can start consuming the income your investments generate. Next, calculate how much you must put aside each month to accumulate the $500,000 within the number of years until retirement. Suppose your family’s combined annual after-tax earnings were to be $50,000 out of which you could squeeze 10% in savings – $5000 per year. Let’s say that you could find a way to invest this for 10% after tax earnings. It would take you 26 years to acquire $500,000. That’s pretty discouraging, isn’t it?

Here’s a tip: The more you spend of your earnings today, the less you’ll be able to put aside – and the longer you’ll have to work and save before you’ll be financially independent. On the other hand, the less you spend, the less you’ll need for retirement. Spending less, you’ll be able to set aside more, sooner. Thus, you’ll attain financial independence in a lot fewer years. The next time you consider buying an expensive new toy, think of the number of years you could gain on your retirement plan by investing the money and foregoing the unneeded expense. You may have to choose between current lifestyle and future financial survival.

FINANCIAL SACRIFICE IS LIKE TAKING OFF A BANDAID . . .

Think back to when you’ve had to remove a strip of adhesive tape. It’s going to sting a little no matter what you do. You can inch it off slowly and hurt a little for a longer time. Or you might snatch it off in a single jerk. This will hurt more, but for a shorter time. Financial sacrifice boils down to a similar choice: (a) Either institute a rigorous bare-bones budget, and pile up money quickly, or, (b) be a little less dedicated to sacrificing and saving, and stay on your financial starvation plan longer while enjoying more creature comforts.

There are two ways to shorten the arduous ‘budget’ years. You can either earn more than you spend, or spend less than you earn. In order to earn more, you’ll have to find additional sources of income. Bar none, generating profits from buying and selling products or services piles up money faster than working for wages. Optioning houses, then selling them can pile up money faster with less capital invested than virtually else I’ve experienced. There is always going to be a hole in your bucket that you’re going to have to contend with: INCOME TAXES. The more you make, the more taxes you’ll pay, and the longer it will take to build your retirement fund. Taxes create financial inefficiencies which will require special skill and sophisticated techniques to mitigate. Try to avoid them.

Spending less, rather than earning more is the rational choice that many people make to increase after-tax net worth – especially if for valid reasons they just can’t fit in another job. Economizing on lifestyle costs through prudent budgeting can be done in the comfort of your own home, with the expenditure of only a few hours a week simply by becoming money-wise about the things you buy, and how much and when you pay for what you receive. Buying only what you need, and being a smart shopper can work miracles when it comes to implementing a financial plan. Like Jimmy Napier once said, ‘If you don’t actually need something, don’t go to the mall.’ I might add, that if you’re going to go to the mall, only go on sale days.

 

THE HIGHEST COST ITEMS OFFER THE HIGHEST POTENTIAL SAVINGS . . .

1.    Interest: I know someone who’s covered with credit card debt, but who doesn’t know how much interest she’s paying on her unpaid balance. She’s never applied for another credit card which would charge a lower rate of interest. She could reduce her interest payments by using a lower cost card to pay off her current account. This could save her thousands of dollars, enabling her to pay her cards off faster. Few people realize that minimum ATM charges can add up to a lot more than it would cost to simply withdraw the money inside the bank.

Additional thousands of dollars in interest could be saved by mortgagors who take the time to either renegotiate or refinance their mortgages to obtain lower rates. A 2% lower rate on a $100,000 loan can amount to $166.67 per month reduction in payments. That difference could be used to retire the loan many years sooner, or to invest in higher yielding investments. I’ve repeatedly discussed the tremendous benefits of negotiating zero interest rate owner carry-back financing when buying investment houses. Buying for cash when you can afford it, or using lay-away rather than installment debt to make major purchases, or for gifts, can save a bundle.

 

2.    Medical Expenses: Whether paid by Medicare, Medicaid, Medigap, commercial insurance plans, or out of private funds; the costs of medical care will continue to rise. The onslaught of HMOs and other group treatment plans will make establishing a long term relationship with a physician more difficult, so individuals are going to have to take on more of the responsibility for avoiding and treating ailments. Prevention works best. If you don’t get sick, you don’t have to pay for treatments.

The first line of defense against illness lies in nutrition. Reasonable exercise and a balanced diet, buttressed by vitamins can give your body the resources to fight off diseases. Regular medical check-ups will help you treat problems before they become serious. Another step along this path is to cultivate a personal relationship with a good Pharmacist who can direct you to low cost ethical generic medicine rather than the expensive brands that might be prescribed.

Don’t be afraid to shop the costs, and to try to keep treatment as much as possible on an ‘out-patient’ basis. There’s no reason why you can’t get ‘estimates’ from your Doctor or from the hospital. If you enter a hospital, see how much of your own equipment (TV, cellular phone, snacks, aspirins etc.) you can provide yourself to reduce costs. Get up and get out as quickly as possible, even if it entails temporarily hiring someone to assist you while you convalesce at home.

When you get your medical bills, check them carefully to assure that there aren’t a lot of extra charges added. Hospitals are notorious for over-billing, but they’re also susceptible accepting zero-interest installment payments over a long period, based upon a verbal agreement rather than on a legally enforceable promissory note. Don’t let them talk you into signing a note or mortgaging your home. This will leave the door open to negotiate a discount on the tab for cash.

3.    Buying a vehicle: With vehicles, retail value lies in the eyes of the beholder. I recently priced a new 1996 Ford. Its ‘sticker price’ was $27,000. After a lot of haggling, I got this down to $21,000. The same week, I could have bought a 1994 version of it with 43,000 miles on it for $11,500 or a 1993 with 28,000 miles on it for $9500. I wound up buying a 1992 for $5750. Take a quick look at the cost of depreciation between 1996 and 1992. It amounts to $317 per month extra for a new versus a low mileage used car. That’s over $10 per day plus operating expenses.

Over the next couple of years, I expect depreciation will cost about two thousand dollars. That’s about a quarter of the cost of buying a new model, even at the negotiated price of $21,000. But that’s not the real savings? Suppose I could invest the net cost differential of about $250 per month at 10% for 20 years until I needed the income for retirement? It would amount of $189,842. That’s a lot of money just to drive a shiny car. A family can save twice as much on two used cars.

4.    Education: Soon, a University degree is going to cost over $100,000 in many parts of the country. Multiply that by the number of kids you have, and you can see that something’s got to give. We’ve got to reevaluate the entire college experience to see what we get for what we pay. Did you know that some 20,000 scholarships go begging each year because people don’t apply for them? If you’ve got a truly gifted kid, it’s wasteful not to try to qualify for a full or partial scholarship so long as the needed education is obtained. Many communities offer 2-year degrees, plus, entrée into State schools for the final 4-year degree. There may not be as many frat parties or football games, but, by using State schools and junior colleges, college education’s for all the kids becomes possible without breaking the parents.

Of course, the tuition is only part of the cost of college. When college is in a different locale; expenses, food and lodging can become a significant cost factor. These can be offset if you lease/Option a house near the campus for you kids to use while away at college. Part of the weaning process might include their learning how to shop for and zap a microwave meal and becoming accustomed to paying their own utilities. The next part of the process is to let them learn how to rent up the premises to other kids for enough money to make the payments, and to pay expenses. When they graduate, they’ll have learned and practiced a lot of economic principles that their professors may not have yet learned, including the folly of extending rent credit to friends. As compensation to them for missing all those coed dorm frolics, let them close on the Option to help them get jump-started on the road to financial freedom. One 28 year old retiree I know started this way.

Copyright Sunjon Trust  All Rights Reserved
Quotation not permitted. Material may not be reproduced in whole or in part in any form whatsoever.
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