The Talk - Part 3

Financial Intelligence – There is no secret to becoming wealthy and there is no magic to it either. However, there is a trillion-dollar industry focused on convincing us otherwise.  The financial industry wants your money to invest so that they can charge fees for below average results.  Below describes the impact of fees on a simple investment:

Imagine that you are 21 years old and decide to begin investing for your future (Congratulations!).  You invest $10,000.  Your friend makes the same decision and invests $10,000.  You and your friend enjoy a 6% return on this $10K investment for the next 25 years (all or any dividends reinvested).  Your friend ends up with $16,000 but you end up with $33,000.  What is the difference?  The difference is that your friend paid 2% in fees each year and you paid no fees.  Investing with just a 2% yearly fee wipes out 40% of your investment value over 25 years.  I had no idea about fees when I started out but now know how insidious they are in destroying future wealth.  Fees are termites to your portfolio.

Many years ago, I read a book called “Rich Dad Poor Dad” by Robert Kiyosaki.  The book opened my eyes to the difference between salary and cash flow.  Our ability to build wealth and minimize financial stress will be directly proportional to the amount of discipline we are willing to accept (call it delayed gratification).  It takes money to build cash flow because you need money to invest.  Investments build wealth, not a salary.  The salary is the beginning of your investment if you choose to invest versus spend.  Set aside a significant portion of your income for investment by having your bank automatically draft it.  Live below your means and eventually you will have significant means.  Here are some investment options:

1. Business ownership – This is the number one way to generate wealth, hands down. This is also assuming the business you own is profitable.  Owning a business, large or small is an education in financial management.  You will learn to be prudent, especially when payroll is coming due and you realize others are counting on you.  There are low barriers to entry into business ownership so always learn it is within reach. Fair warning, it is stressful and requires focused effort to get it right. Today, there are many resources available to help you grow and learn.  Remember business is about serving customers and adding value.  My experience has been that when it is only about money business is miserable because there is never enough money.  Business ownership is not for everyone, but it is the fastest way to financial freedom. When you get it right, it is always satisfying to know that your financial destiny is in your hands versus the hands of others.
2. Equity – If you don’t have the stomach for direct business ownership, then buying stocks is another way to invest in business. If you have made it this far in your education, you know about stocks.  The stock market is crawling with “help”.  This help is a wolf in sheep’s clothing backed by some of the best marketing and convincing stories about their products. Remember that they are focused on extracting fees from you for the privilege of using their below-average system or service.  Actively managed mutual funds underperform the market 82.2% of the time over a 15-year period. These actively traded funds charge significantly higher fees than a market Index Fund.  The Index Fund is essentially a portfolio of stocks directly correlated to a stock index like the S&P 500 or the Dow Jones.  Index Funds take little to no effort to manage so they don’t charge as many fees.  Simple as that.  Financial advisors receive fees from your investment regardless of their success in growing your money.  In other words, if your portfolio grows they take fees and your portfolio shrinks they take fees.  Earlier we saw how fees affect your investments long-term.  Equities are a great way to build wealth but be aware that there is an entire industry focused on extracting fees from your precious retirement fund.  I realize that my position on this subject will not be popular with my investment banking friends but the data clearly shows that Index Funds are an excellent investment strategy for us average investors with lower fees.  The equivalent return with lower fees is smart investing.
3. Real estate – I begin with a word of caution, as with equities there is an entire industry built on extracting fees from real estate investors.  The industry would have us all believe it is a sure thing.  There is no sure thing as we saw in 2009.  Many people use their house like a piggy bank and fill it full of IOU’s in the form of home equity loans.  Owning a home to live in is not a great investment, but we need a place to live so why not own it!  Real estate investment is investing in cash flow.  Cash allows you to make additional Investments (assuming you are disciplined enough to save and reinvest).  Real estate can be a great way to build wealth but before you buy real estate you must study real estate.  The library and Amazon are filled with books on investing in real estate.  There are many tax benefits to investing in real estate, as well as, the potential for appreciation and cash flow.  It is important to treat it just like any other investment and monitor actual expenses. This article is not meant to provide a comprehensive strategy to investing but to identify the most common methods for building wealth.

Financial Freedom can be built with any one or all of these methods.  Personally, I have chosen all 3 because of the lessons I learned in Rich Dad Poor Dad.  In the past I have lost thousands of dollars investing (more like speculating) because I did not do my homework before jumping in.  Don’t be like me.  Do the work to understand what you are getting into and if it sounds too good to be true, it probably is too good to be true.  Always proceed with skepticism and remember that nobody cares more about your money than you do and if that is not the case you won’t have much of it to invest.

Mastering these five areas (in Parts 1, 2, and 3 of this article) will help you live a life worth living.  It does not mean you won’t have hardships and need to make sacrifices from time to time but based on my experience those that master these five areas are more in control of their destiny.

Understand people and develop emotional intelligence to foster more meaningful relationships.  Delayed gratification will ensure deep appreciation for your accomplishments and the accomplishments of others.  Personal growth is a key to long-term and sustained success.  Develop and cultivate a growth mindset.  If you lose your health you lose everything.  Stay focused on the three aspects of healthy living: mind, body, and nutrition.  If you did a stellar job on the first four, you will have the means to invest.  Study investing to ensure you understand the risks and the rewards of your strategy.

The key to mastering each of these skills is to first take responsibility for your future.  Taking responsibility will be your most difficult challenge because our society today is hyper-focused on making everyone out to be the victim.  The media and the government benefit from our dependence.  The media benefits financially and bureaucrats benefit from our votes.  I don’t know a single person that is living their best life and is also a victim.  The two are mutually exclusive.  People that are the victim live bitter and skeptical lives.  They frequently seek validation by denigrating others.  It is truly a sad existence.  Victims can be wealthy or poor because it isn’t about economics.  Living a life worth living is largely about contribution.  In order for us to contribute at the highest level we will need to master five skills.  Mastering starts with responsibility for yourself. These skills can’t be learned for you.  Master them and you will truly be in control of your destiny. Focus on giving more than you get and all aspects of your life will grow beyond your wildest expectations.  There are no shortcuts but building these skills can help you live a more fulfilled and meaningful life.