The Assassin of Wealth

Pull up a chair, friend, and let me draw on the back of our virtual napkin.  Since this is a blog about money, we’d better dive right in to the good stuff, right?  Consider something for me:  Lebron James if rich.  But, the guy who writes Lebron James’ paycheck is probably wealthy.  Who would you rather be?

Notice, I have absolutely no idea who “the guy who writes Lebron James’ paycheck” is.

Wealth is easily one of the most misunderstood topics in personal finance because most people invest more time analyzing their underpants than analyzing their default accounting decisions.  Just so you know, you’re constantly making accounting decisions even if you’re perhaps only dimly aware of it.

The Whole of Accounting in 2 Paragraphs:

I’m going to throw it atcha:  Assets = Liabilities + Stockholder’s Equity.  That’s right, I went there.  Master this basic concept and keep it always present in your mind, and you’ll be on your way toward building real wealth.  (And to think, the average salary of a CPA is in the $60k – $85k neighborhood.  You’re welcome.)

In our equation, we’ll use “stockholder’s equity” as a synonym for wealth — for now.  Since Assets – Liabilities = Wealth (please don’t notify the GAAP police), there are two very basic methods to achieving financial independence:

  1. Maximize Assets
  2. Minimize Liabilities

But, wait — not so fast.  Fist we have to deconstruct what both of these things really mean, and not what you necessarily think they mean.  The term “asset” is generally used incorrectly when speaking to amateurs and even many professional money managers.  Assets are a very narrow class of finance, in fact.

What are assets?

Investopedia.com defines it like this:

In personal finance, current assets are all assets that a person can readily convert to cash to pay outstanding debts and cover liabilities without having to sell fixed assets.

Read more: http://www.investopedia.com/terms/c/currentassets.asp#ixzz2JOYx0mKp

Blah, blah, blah.  I’ll say that assets are something that repeatedly put cheddar in your back pocket — without you being there.  So, by either definition – is your car an asset?  No.

Is a motorcycle an asset?  No.

Is your home of residence an asset?  No’

Is your JOB an asset?  Absolutely not.

We could keep going, but do you get the picture?  What most people as well as most BANKS consider assets on your personal balance sheet or statement of net worth are not really assets!  The reason a bank would call your home is an asset, is because it’s something that puts cheddar in THEIR back pocket.

Securitizing a piece of property with the intent to collect interest is a fantastic way to generate wealth, so long as you’re the one doing the collecting.  Bottom line:  don’t let it happen to you!

Here’s a big, bold statement that many people either forget, don’t understand, or don’t want to understand.  Are you ready?

SECRET #3:  INCOME IS NOT AN ASSET!

Income is something that you use to pay expenses in the pursuit of maximizing asset growth, but very few items are true assets.  Here are a few:

  1. stocks
  2. bonds
  3. income producing real estate
  4. real estate investment trust
  5. personal, profitable business
  6. receivables

What are liabilities?

Most likely, you’re much more well-versed in the topic of liabilities because Americans LOOOOOVE them some liabilities.  Back to our buddies at Investopedia:

Essentially, these are bills that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets in order to pay their current liabilities.

Read more: http://www.investopedia.com/terms/c/currentliabilities.asp#ixzz2JOhszhjU

I’ll call a liability anything that costs you money.  This is not to say that there is no value in the expenditure — there are many things that must be purchased in order to function within a modern economy.  However, I’ll submit that we are generally addicted to liabilities that make absolutely no sense and have absolutely no hope of returning let alone retaining a single dime.

And why not?  Liabilities are very easy to understand (sign here….).  There are countless ways to spend your precious income, yet virtually no outlets to appreciate the impact magnitude of wasting your money.  This is a consumption based economy.  Yeah – surprise.  What you choose to consume will either nourish you or make you sick and poor.  This is the spectrum of our daily decision-making.

Temptation and Distraction are the Assasins of Wealth

Temptation and Distraction are everywhere.  Just today, I have already passed on 6 opportunties to spend money, and I have a very structured lifestyle that is engineered to avoid temptation and distraction.  The way I see it is that we can either choose the long, boring route of methodically devising a strategy and accumulating assets that lead to financial independence… OR, we can start practicing our free throws, hoping to land a NBA contract.

Truth is, you don’t need this lesson.  You already know all this, right?  What you need is perhaps a compelling reason to maximize your wealth creation or a nice, wholesome kick in the ass.

I can do both.

 

How I Put my Productivity on Hyper-drive with a $3 tool

You have a goal clearly defined, a task list, and limited time.  Never happens, right?

Here’s how to bust a cap in your task list’s ass:

1.  Egg Timer:  Get one of those cheap, wind-up egg timers (should cost about $3).  You will need to hear the not-so-subtle tick tock, tick tock in between songs.  Wind it to the amount of time you have dedicated to completing your task and display it somewhere you can glance at it.  This is the equivalent of feeding your productive wiring a bit of crack.  I recommend dividing your productive time into 15-minute intervals.

2.  Graph Paper:  For a mid-size goal, say “produce $25,000 in extra income within 12 months” divide your graph cells by the amount of time you’ll need to dedicate.  I’d give this one 500 hours.  Count out your 20 x 25 grid.  For every hour you dedicate you’ll get the satisfaction of making a large “X” in one of the cells.  You’ll know exactly how much time you’ve spent doing dedicated work by the egg timer.  For a lighter weight goal, say “finish writing my term paper” adjust your grid down to maybe 10 hours.  Use the graph paper to attach notes or capture significant items needed to chart your course.

3.  Music:  This is all you, my friend.  I pick the type of music I’d like to run to, but maybe you’ll do better with something soothing.  I find that looping Golden Earring’s “Twilight Zone” makes me feel like I can mule kick procrastination in the balls.  This is up to you.

You cannot fake productivity.  If you try, you will waste 500 hours trying to figure out how to do it the easy way.  There is no easy way, so don’t even attempt it.  Achieving anything worthwhile takes a tremendous amount of discipline, failure, and plain ol’ work.

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Cars, Carbon, and the Debt Fueled Crisis

Pull up a chair, Friends.  I’m about to tell you about my fascination with automobiles – particularly big, muscle-bound machines that claim more cylinders than miles per gallon.  Vrooooom!!!!  Whooooosh!!!  What’s that sound?  That’s the sound of you getting poor!  Beep Beep.

Of course, now that I finally wised up and figured out that those cars were sucking the life out of my finances, I own a very wimpy and respectable 2003 Honda Hybrid.  It is so fabulously anonymous that I sometimes put my key in the wrong Anonymobile.  My awesome boyfriend refers to it as “The Corolla” even though it’s not a Toyota, and it’s definitely NOT a Corolla.  Yeah — it has no personality.

But, here’s the thing:  That little guy is getting up to 52 mpg when I drive it just right.  Compared with my grandma’s truck that used to shoot a 6 foot flame out of the 4-barrel Holley whenever I hit the gas, I’ll take it.

Today I saw a late model Jeep rolling down the road with huge, knobby tires ala Mad Max.  It looked cool as hell, but stupid as hell too.  I guess I’m getting old because all I could see was a rolling price tag…

That Jeep must’ve cost close to $40,000.  The tires were at least $500 apiece.  The lift might have been $2000.

Now, Friends — I grew up in the great state of California where nobody in his right mind would take an expensive machine like this anywhere offroad.  If you showed up deep down a logging road with that thing, you’d mostly see some advanced pointing and laughing.  I had to wonder if that thing will EVER even be placed into 4WD while commuting home 22 miles everyday!

I’m the last to begrudge a beautiful machine.  I have a deep and sincere love/hate relationship with advanced engineering such as this.  I love it because it still represents a piece of American open-road, adrenaline filled freedom fantasy for me.  I hate it because the reality is completely different as you inch around everywhere in the United States at 45 mph.

The fact that a working class hero could even roll one of these beasts is a testament to just how much wealth the average American yields.

But, wait.  Is it wealth?  Or, more likely — is it debt?  And, is the debt considered leverage or just an advanced form of free-range slavery?  Is this Jeep on our list of productive assets?  Unless you’re selling these to a long line of suckers, then — NO.  Unless this bad boy is putting American Cash Dollars into your hind pocket, it’s a non-starter.

Even my ultra dorky Dorkusmobile Honda is a severe liability.  But, that’s the thing with liabilities… As we continue our journey, we’ll learn how to minimize the liabilities and wring the living crap out of our assets.  We’ll strategically place our dollar soldiers on the field to win and not to get mopped up by emotional non-investments.

If you’re wealthy as hell — then, by all means, rock the Jeep or whatever.  But, judging from the statistics on American and their wealth, I’m guessing the vast majority of high-end vehicle owners are in debt up to their occipital regions.

 

8 Amazing Ways to Mess up your Finances

 

Yeah, yeah… it’s tough out there, but there’s lots of times we’re not making it easier on ourselves by making some rookie errors.  Here’s some things to consider NOT doing: 

1.  Don’t check your credit score.  Less than half of Americans don’t know their credit score which means that it’s either because they are not living in the modern financial world, or they believe that Denial isn’t just a River in Egypt.  Get it?  Denial… The Nile.  Oh, whatever.  Bottom line is that checking your credit score is sort of like stepping on a scale if you know you need to lose weight.  The more information you have, the sooner you can do the work to fix it.

2.  Let the Universe take care of you.  I call this the “zen method of personal finance” because these are the people who typically believe that things happen for a reason, that there’s always something to be learned (without really learning it), and that the Universe will provide.  The Universe will not provide – you will, so get to work, you filthy hippy.  And, take a shower for God’s sake!

3.  Choose the wrong partner.  Your maritial status and stability is a strong indicator of long-term success, and divorce or separation can be absolutely devastating to your financial independence.  You need to talk about money with any prospective partner and form a plan.  According to The Millionaire Next Door, a strong indicator of wealthy people is that typically one spouse plays exceptional offense, and one plays exceptional defense.  It can be difficult to do both really well.

4.  Set it on autopilot.  Autopilot is great.  It lets a machine handle all the mundane crap that can distract you from more important stuff.  The problem is complacency or trusting a flawed model.  You need to make periodic checks to your system and ensure that there are no errors being committed on autopilot.  Think of it this way – do you want autopilot to engage multiple hostile enemy planes?  If your answer is “yes,” please form a fist now and smack yourself in the face.  Thank you.

5.  Not set it on autopilot.  The business of You is the same as any business — there is revenue, expenses, assets, and liabilities to address.  Sucessful business is a system that can be operated by the dumbest person you know, which is typically you.  Now add lack of sleep, terrible doubt, and unforseen circumstances that will inevitably arrive, and your autopilot system will save your ass while you can scramble to either threats or opportunities.  Your autopilot system is going to get you 80% of the way there so long as you regularly reference #4.

6.  Invest without homework.  This is a close cousin to the Zen Method of Finance.  Here’s a red flag… if you “feel” like something is a good investment, stop what you’re doing and open a freakin’ spreadsheet.  You should not be feeling anything except the sensational joy of flipping the double rods to The Great American Waste of Time (most jobs) at the end of your accelerated journey through the Financial Forest of Doom.  In short, if you feel like you don’t know what you’re doing, you don’t know what you’re doing, and you need to spend 80 more hours crunching numbers until you vomit.  Then proceed.

7.  Don’t pay yourself first.  In my book (yes, there’s a book), this is the most powerful tool in the financial freedom fighter handbook.  It goes something like this:  do your homework, figure out exactly what you need to do to achieve financial freedom given your income and time horizon, pay yourself first.  Then – repeat.  There will always be dozens of methods to waste money, and if you’re not disciplined the best thing in the world is to keep your money away from You.  I keep my most liquid accounts as close to zero as possible because it forces me to be constantly aware of what’s going on.  As soon as dollar soldiers enlist – send them to battle immediately.

8.  Pay the wrong debt.  Paying debt and being debt-free is an awesome feeling, but you also need to take some investment risk in order to grow which generally means using leverage in the most meaningful way.  The only time it’s okay to borrow money is if doing so will achieve a pre-determined financial goal.  By the way, going on vacation with a credit card is not a financial goal.  Sorry.  Many people like to pay the lowest debt balance first, but the most savings/return is realized when you pay the highest interest first.  Sure, if you’ve got piddly (technical term) debt balances, go ahead and clean them up, but the biggest impact will be to reduce and eliminate your highest interest debt.  All other debt should be constantly subject to very best refinancing terms in order to boost your cashflow and keep your money soldiers engaged and attacking.