Acquiring Wealth – The Basics

by Jack Lee

My folks were as poor as they come when they first married, but they passed away well-to-do, having lived a full and secure life where money was never an issue. Now anyone can rise to their level of financial success, if they know the secret and they have the mental discipline to follow through. Learning how to get rich is as much “art” as it is “science” – but both are learnable.

THE PLAN: You must have a long range plan or goal. Where do you want to be in a year, 5 years, 10 years, 20 years? You need a plan and you need to meet your short term goals in order to meet those long term goals. This is management by objectives and it’s how the winners do it. Financial planners can be a big help, but only if they don’t have a conflict of interest in the sort of investments you make.

SAVING MONEY: You pay your bills and what’s left goes to things you need and a little fun money. Anything else can go to savings, right? WRONG!!! That’s not the way you save – the way you save is to pay yourself [first] and that money goes right into a savings account. You want to make that money as difficult to reach as possible.

As a rule most of us can afford to pay ourselves a minimum of 10% of our net income each pay day. If you can afford more, then by all means pay more, but be realistic. By paying yourself first you make your expenses fit what’s left. As this pay me first concept becomes a habit, pretty soon you won’t miss the money. It’s amazing how people can acclimate to reduced income if they are forced into it. If you try to save at the tail end of paying expenses somehow you wind up with too much month left at the end of the money. So always pay yourself first.
My father often said, “It’s not how much you make, it’s how much you can save that matters.”

SHOP SMART: Using grocery coupons and buying on sale items can greatly reduce that monthly grocery bill. Even a modest effort can save you 20% or more. I know one family that cut their grocery bill by 60% because they made an all out effort to use to use coupons and do price comparison shopping. Often times this price comparison led to buying generic brands, but that’s okay. Too often we consumers fail to realize how much we’re paying for a brand or that generic brands often contain the exact same ingredients as brand names, sometimes they come from the same assembly line, only the package is different. We recently did a side by side comparison of several brand name products verses generic and nobody could tell the difference, but your pocket book will!

BIG PURCHASES – Homes: Buying a home is without a doubt a great way to buy comfort and have a good investment at the same time. How to buy smart is a book unto itself, because there are so many ways to save when buying and so many ways you can be taken too! This area requires a great deal of study. However, for our purposes now, let me toss out just a few idea, and keep in mind this is coming from a former real estate agent and owner of over 40 properties.

Shop around for a lender, because lending fees and loan rates vary greatly. Get prequalified by the lender so you know your price range and when you find a good deal you can move on it quickly! Affordability – as a rule of thumb you divide your gross monthly income by 3, this becomes the maximum you want to consider as a house payment (lenders look at it like that too). Of course the larger the income the more this can be altered. Always pick fixed rates over adjustable unless you plan on moving within the next 3-4 years. Try to make your loan assumable by the next buyer because this helps you sell. Be prepared to put 20% down – this avoid extra costs of insuring your loan against default and have at least 3 months of payments in reserve in case of a cash flow interruption. Amortize at 30 years, but try and pay it off in 20 years. The savings will be enormous!

CARS: Buying a new car is generally a bad idea. It’s almost always better to buy a car two to three years old. The big hits on depreciation done and yet it’s still new enough to make a reliable vehicle. If you have a solid mechanical background or you have access to a good mechanic for advice, buying a car with a reconstructed title can save you thousands, but this only works if the car is sound. Keep in mind when you go to sell it you’re not going to get top dollar, but if you just want to run the wheels off it and dump it – who cares. What you have saved will more than make up for any discounted resale price.

CREDIT: Carrying a lot of credit cards is a real bad idea. Use one or two cards and establish a good history. Having extra cards and never using them can work against your credit score. Lender look at how many credit cards you are carrying and estimates their potential credit liability (card limits), your actual balance means nothing compared to potential liability. Make you debit card your most used credit card. Too often people get hooked into using a credit card that comes with a low teaser rate and then it rolls out to 18% or more in 6 months and you suddenly figure out you have a lot of liability! Debit cards are the way too go.

WORKING CAPITAL: This is your savings or investment money. And you NEVER, NEVER spend working capital on anything except business investments. Working capital is designed to boost your salary and in theory it works for you 24/7. This is money you CAN’T spend on bills on for fun things! It’s money you invest to make money and eventually if you do it right it could well pay you more than your regular job does!

Everyone has different areas of investment expertise (there’s so many ways to make money out here) and some are better at this than others. So, I’m not going to get into how you actually use your working capital, only that you must recognize what it’s for and heed this warning – never, ever spend your working capital outside investments. Average working capital investments should yield about 8-10% growth per year over a 5 year period. A little more can be achieved, but then the risks climb too and sometimes those risks are unacceptably high.

If you are looking at 50% or more return on investment, then you better look darn hard at what you are doing! This implies great risk – this is a red flag and the odds do not favor you. Keep in mind, more millionaires are made at 10% compounded per anum than any other way. Nuff said?

STOCKS: Novice investors should be in a mutual fund (to marginalize the risk) and follow it’s results on a quarterly basis. The younger you are the more risk you can take, so invest accordingly. Watching a stock or mutual fund on daily basis leads to emotional decisions and loss. This is why the pro’s say, do your homework on a stock or fund, then put your money in and let it ride for a year or more without paying much attention to the normal ups and downs, otherwise you will be tempted to act emotionally.

Dollar cost averaging is a reasonable way to invest in the market, but pick carefully base on your risk factors. Spread your investment money over at least 5-8 stocks and 2 or 3 sectors in order to minimize risk.

Generally, lower risk stocks are found on the NYSE, higher risk are on NASDAQ or on lesser exchanges down to the pink sheets. If it’s (stock) under $5 a share this could be a red flag, $5 bucks is my litmus test, beyond than they are called penny stocks and that means really high risk.

Try to pick stocks that are in trend, have a good equity and that still have a modest P/E ratio. RSI or volatility should be likewise modest. The P/S index can help you identify future earnings. Volume helps determine interest and liquidity. If you don’t know what these things mean – you should – find out before you spend one dime in the market!

EDUCATION: It doesn’t matter if this in your chosen career or in your investments, the more you know the more successful you are likely to be…period. Learning is a lifelong endeavor too. I can’t stress this part enough, when it comes to investments

knowledge is king

. The more you know – the better your results.

For more information click here. and Forbes Tips.