25 Years Of Teaching On Wealth
Wealth. Building it, growing it, protecting it, everything I learned has come from my experience with Fortune 500 companies.
It turns out Fortune 500 companies offer a pretty good model on wealth, after all it is the entire reason for their existence. No matter what product they sell or service they offer in the end it’s about building the firm’s wealth.
Conversely I’ll share what’s NOT a good example of how to build wealth – The Internet
The Internet Is Full Of Bad Examples
I want to ask a question: What do you think of these internet “Gurus” standing in front of Ferraris, and doing videos from inside private planes offering their “insights”, “secrets” and“revelations” on how to become insanely wealthy?
To me it seems like nothing more than a massive play trying to get people to spend money on something they’re selling with the subtle (or not so subtle) message that if you buy their product or program you’ll get rich and have your own airplane, Bentley, etc.
Worse, it sends a bad message about money => essentially spend everything to make yourself look like a player.
The worst part is that it compels a large part of the population to “finance” their way to the image they see in these internet ads- expensive cars, luxury homes and other amenities all paid for with debt. This in turn perpetuates a massive problem that we have in this country => financial mismanagement and the tendency to spend more than one earns on stuff they really don’t need.
How bad is this financial mismanagement problem?
Do you know the majority of Americans have NOTHING saved for retirement. Can you imagine retiring into poverty? It happens every day for millions of Americans.
Or even worse, most Americans can’t manage a financial crisis of $700. And let me tell you, that stuff happens all of the time (my dog just gave me a mid summer $700 surprise because he ate a mushroom in the yard that happened to be toxic…).
If you really want to know about Wealth – specifically how to acquire it and build it, let me share everything I’ve learned from the the Fortune 500 companies I’ve been a part of for the last 26 years.
Lesson #1: Wealthy, Successful Companies DO NOT spend all of their money
Over the years, I’ve invested in various public companies which means I actually own a part of the corporation (in the case of Apple I’m a really, really, really tiny owner).
I like to invest in organizations that pay dividends – a share of the company’s profits.
The dividend is usually a very small fraction of the share price. For example, one company I invest in has a share price of $50 but pays a dividend of $.25 per share.
So the logical question is: “If the company’s share price is $50 and they only pay out $.25, where’s the rest of the money going?
Well of course part of it goes to running the company; however, the rest become what is know as “retained earnings” – profits the company saves for important projects and opportunities down the line.
Successful companies know that the more money they hold on to, the greater their wealth will be. This in turn builds up their total value which makes their stock more desirable thus increasing the share price. Said another way, companies become more wealthy because they DO NOT spend everything they earn.
The principle of spending far less than you earn goes for people to. Some of the richest men in the world live far below their means.
Warren Buffet still lives in his original home in Omaha, Nebraska.
Those internet gurus can flash their Bentleys all they want, but none of them can come close to the wealth of “Sam Walton” who drove the same beat up pickup truck up until the day he died.
To be clear. I’m not saying you have to live this Spartan existence driving around in beat up cars and having your first house.
What I am saying is that truly wealthy people know the secret to building massive financial success is to not spend your money but to keep it and put it work.
Which brings me to the second thing I’ve learned:
#2 Invest What You Don’t Spend
A lot of people don’t know this but corporations only make a part of their money selling things or providing services.
The other way they make money is by investing. What do they invest in – everything: stocks, bonds, other companies, foreign currency, indexes, etc.
In fact major corporations have huge departments called corporate finance. One of the major jobs of the finance department is to analyze and invest in the markets.
The key here is that companies don’t just sit on their saved money. They take part of it and put it to work – earning more money.
Now here’s the thing-investing is a powerful wealth building strategy, but it’s a LONG TERM strategy. You must be willing to take a portion of your earnings and put it away for decades.
This is very difficult concept for most Americans who what to spend everything they have today to build the image of a life style. The tragic thing is that people who live this way miss out on one of the greatest financial benefits ever created – compound interest.
It has been said that Albert Einstein once referred to compound interest as the most powerful force in the universe.
For those that may be unfamiliar with the concept, compound interest is getting paid interest on top of the interest you earned from the previous period.
Think of it as a building: The foundation is your investment. The floors are what gets added every year in the way of interest. Each year a new floor gets added on top of the old one. Over the course of time the building (i.e. your wealth) rises to to incredible heights. It really is the gift that keeps on giving.
Now here’s the key: When looking to invest, don’t’ take any advice except from an expert.
I work with a well know publicly traded investment firm which is subject to strict rules and regulations.
Like anything else, the amount you invest should be a portion of your person “retained earnings”.
Which brings me to the last thing I’ve learned:
#3 Have a Budget
Let’s get this out of the way – budgets suck. They suck in a huge way. No one likes denying themselves of anything or the feeling of constraints.
That said, every successful major corporation lives and dies by budgets.
And here’s the thing, you NEVER over spend your budgets. I once overspent a budget by $500. My manager and the finance director told me that if it ever happened again I’d be out of a job.
Sound Harsh? Companies know that failure to properly manage a budget becomes a snowball rolling down hill getting worse and worse, ultimately threatening the existence of the organization.
So when you budget – build upward from the things you absolutely MUST spend on – mortgage, food, investments, utilities, etc
Find opportunities to be creative. For example, two years ago I cut the cable cord and bought an Apple TV (the price of which is less than one month of cable). I now only pay for the shows and movies I want resulting in a savings of over $150 per month.
I want to emphasize something – this isn’t about living on the bare minimum. It’s about freeing up cash flow to:
- Pay down debt
- Free up money to invest
- Build an emergency fund
- Save for your children’s college expenses
This is a hard transition, but moving from purchasing things on debt to purchasing things with cash is an incredibly satisfying and low stress existence. Here’s another benefit, no financial stress = marital bliss (money is the number one cause of divorce).
Now here’s the thing: You need to come up with repercussions for violating the budget; otherwise, you’ll get bored and fall off the program.
At work it’s easy – blow through your budget and you jeopardize your job. What’s the negative result of over spending on your personal budget? Make it good.
This Is About Freedom, Not Limits
I’ll say one last time – this is not about putting limits on your life. Rather, just the opposite – to release you from the stress associated with constant debt and financial short falls. To transform your life into not just looking like a player, but actually being one. What would it be like to bye the car of your dreams and use cash?
It can be done.