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T-Matt
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First off, I would like to thank all of you who have chosen to open this thread and acquire some valuable information. I want to be upfront and let you know that my wealth building principles aren't a get rich quick scheme, but are based on estate building principles. Here are the first principles of wealth building or what I will commonly refer to as the Financial Foundation.
1) Protection- If you are not properly protected why would you even begin to think about investments? You have to PLAN for the worst case scenario. If you have $100,000 in liabilities and only $50,000 in protection and you pass away you are passing on $50,000 in debt. What good did you just do for your family? What legacy did you just leave behind? You'll buy home owner's insurance on your house, car insurance on your car, even a damn warranty on a TV, but you won't buy insurance on your LIFE?!??!
You might ask how much protection you need. Well, a good place to start is 10 times your income. If you are the major bread winner in your family and you pass away, you want your family to live the same lifestyle they were living while you were alive.
2) Debt Management - After you have obtained proper protection you will want to reduce your debt as much as possible. You have to understand that there is good debt and bad debt. Mortgage is a good debt, but credit cards, car loans, and various other installments are bad debts.
Rich people are borrowers, don't ever forget that. In fact, I want to repeat that again, RICH PEOPLE ARE BORROWERS!! You just have to have solid credit so you can borrow a lot of money for as little interest as possible and turn around and make a higher rate of return.
3) Emergency Funds - After you have obtained your proper protection and reduced debt, then you have to build up Emergency Funds. A solid figure to start with is 3 times your monthly expenses. It's hard to plan for an emergency or disaster, but it's quite realistic that most people are 3 months away from bankruptcy.
4) Investment- AFter you have taken care of the above 3 principles, THEN you worry about investments. Most people try to make a rate of return before they take care of the rest of their financial foundation. This is a recipe for disaster. If you build it right, you will succeed. If you can afford to lose money on your investment, then you are doing the right thing. Most people can't afford to lose money and they pull out money and move it around. Solid investments are long-term.
The X Curve Concept
The X Curve is the beginning of a solid financial education. The X curve states that you should aim to decrease your responsibility as you get older and increase your wealth. It sounds simple however, but not using the above formula, most people never make it to a more secure financial situation. They worry about investments too much and don't protect themselves and they just keep digging themselves out of the hole.
When you are younger you have a lot of responsibility. YOu get out of school and you buy a car and house and have kids (hell, kids cost on the average of $250,000/child these days) but most people don't have the protection to protect all this debt. They gamble with their futures by hoping nothing happens. You have to have the protection for your liabilities. As you get older and pay down your liabilities you may decrease your insurance.
Most people know how to work for money, but don't know how to make money work for them.
The Rule of 72
The Rule of 72 is simply the compound interest rule. Simply stated, this rule is to take the number 72 and divide it by the interest rate and the remainder is the amount of years it takes for your money to double. Here's an example.
Let's say you put $10,000 in a CD at the bank. The bank will essentially 'guarantee' you a 4% rate of return. (Now, I challenge you to find the word 'guarantee' in writing. You won't because it's not guaranteed. I'll show you how they can guarantee it essentially.) So, you take 72 and divide by 4 and the is 18. So, it is going to take you 18 years for your money to double. Now, it is very safe to say that the bank is going to make 12% rate of return, on average, off your money. Right? How is this? Well, as soon as you put that $10k in a CD they send you Pre-Approval letters saying you've been pre-approved for a student loan, car loan, mortgage, equity line of credit, credit cards, you name it. Hell, they're even going to set up your escrow account and make money on that. So, you take 72 divided by 12 and you get 6. So, it takes the bank 6 years to double your money for you.
Let's take a closer look at this..
..............................4% ..................... 12%
30 years old ...........$10,000 ............... $10,000
.
.
.
48 years old ............$20,000 ................ $80,000
.
.
.
66 years old ...........$40,000 ................. $640,000
LOOK AT THAT.. That chart right there is powerful. That is basically sayiing the bank is giving you $40,000 and they are walking away with a $600,000 net. Now you see why everytime you drive by Bank of America their lights are on? Yeah, they don't have a problem paying their power bills, YOUR MONEY is working for THEM!!!
The Solution
1) Reduce Debt - When I say reduce debt I am speaking in simple terms here. I am saying that we increase your monthly cash flow as much as possible. Any installment payments, any bills are reduced as much as possible. Debt Consolidation is the key. If you have a $1200/month mortgage payment, a $500/month car payment and $400/month in credit cards, you have a total monthly debt of $2100. Your house is worth $300,000 and you only owe $120,000. Well, your house is going to appreciate in value whether you pay down the principle or not. What you want to do here is refinance your house and get the lowest payment possible. You can refinance into an Option Arm and have a $200,000 loan for nearly $650/month. By refinancing you just saved yourself $1500/month!!!!!!!
2) Pay Yourself First - Once you have reduced your monthly debt and you have this extra $1500/month you have to have the discipline to pay yourself first. Use the Rule of 72 and figure out how much money it's going to take you to obtain the amount of money you'll need to retire and live the lifestyle you want to live. We all know how to pay our bills but very few of us know how to pay ourselves.
3) Make More Money - Whether you need to be ambitious or pick up another job or learn how to make your money work for you, you need to make more money as you get older.
4) Build Up Equity - Once you have taken care of 1-3 you want to begin building equity and not accumulating more liabilities. You need to either personally assess your financial situation every 6 months or sit down with an estate planner to do so. If you're not building equity and you continue to build more liabilities, you aren't making any progress.
5) Preserve Estate - Once you have mastered 1-4 then you can focus on Preserving your Estate through life insurance and trusts. Estate taxes are a killer, if you don't follow the formula of this thread, you will have just lived your entire life and accomplished nothing.
Protection builds wealth.
T-Matt
1) Protection- If you are not properly protected why would you even begin to think about investments? You have to PLAN for the worst case scenario. If you have $100,000 in liabilities and only $50,000 in protection and you pass away you are passing on $50,000 in debt. What good did you just do for your family? What legacy did you just leave behind? You'll buy home owner's insurance on your house, car insurance on your car, even a damn warranty on a TV, but you won't buy insurance on your LIFE?!??!
You might ask how much protection you need. Well, a good place to start is 10 times your income. If you are the major bread winner in your family and you pass away, you want your family to live the same lifestyle they were living while you were alive.
2) Debt Management - After you have obtained proper protection you will want to reduce your debt as much as possible. You have to understand that there is good debt and bad debt. Mortgage is a good debt, but credit cards, car loans, and various other installments are bad debts.
Rich people are borrowers, don't ever forget that. In fact, I want to repeat that again, RICH PEOPLE ARE BORROWERS!! You just have to have solid credit so you can borrow a lot of money for as little interest as possible and turn around and make a higher rate of return.
3) Emergency Funds - After you have obtained your proper protection and reduced debt, then you have to build up Emergency Funds. A solid figure to start with is 3 times your monthly expenses. It's hard to plan for an emergency or disaster, but it's quite realistic that most people are 3 months away from bankruptcy.
4) Investment- AFter you have taken care of the above 3 principles, THEN you worry about investments. Most people try to make a rate of return before they take care of the rest of their financial foundation. This is a recipe for disaster. If you build it right, you will succeed. If you can afford to lose money on your investment, then you are doing the right thing. Most people can't afford to lose money and they pull out money and move it around. Solid investments are long-term.
The X Curve Concept
The X Curve is the beginning of a solid financial education. The X curve states that you should aim to decrease your responsibility as you get older and increase your wealth. It sounds simple however, but not using the above formula, most people never make it to a more secure financial situation. They worry about investments too much and don't protect themselves and they just keep digging themselves out of the hole.
When you are younger you have a lot of responsibility. YOu get out of school and you buy a car and house and have kids (hell, kids cost on the average of $250,000/child these days) but most people don't have the protection to protect all this debt. They gamble with their futures by hoping nothing happens. You have to have the protection for your liabilities. As you get older and pay down your liabilities you may decrease your insurance.
Most people know how to work for money, but don't know how to make money work for them.
The Rule of 72
The Rule of 72 is simply the compound interest rule. Simply stated, this rule is to take the number 72 and divide it by the interest rate and the remainder is the amount of years it takes for your money to double. Here's an example.
Let's say you put $10,000 in a CD at the bank. The bank will essentially 'guarantee' you a 4% rate of return. (Now, I challenge you to find the word 'guarantee' in writing. You won't because it's not guaranteed. I'll show you how they can guarantee it essentially.) So, you take 72 and divide by 4 and the is 18. So, it is going to take you 18 years for your money to double. Now, it is very safe to say that the bank is going to make 12% rate of return, on average, off your money. Right? How is this? Well, as soon as you put that $10k in a CD they send you Pre-Approval letters saying you've been pre-approved for a student loan, car loan, mortgage, equity line of credit, credit cards, you name it. Hell, they're even going to set up your escrow account and make money on that. So, you take 72 divided by 12 and you get 6. So, it takes the bank 6 years to double your money for you.
Let's take a closer look at this..
..............................4% ..................... 12%
30 years old ...........$10,000 ............... $10,000
.
.
.
48 years old ............$20,000 ................ $80,000
.
.
.
66 years old ...........$40,000 ................. $640,000
LOOK AT THAT.. That chart right there is powerful. That is basically sayiing the bank is giving you $40,000 and they are walking away with a $600,000 net. Now you see why everytime you drive by Bank of America their lights are on? Yeah, they don't have a problem paying their power bills, YOUR MONEY is working for THEM!!!
The Solution
1) Reduce Debt - When I say reduce debt I am speaking in simple terms here. I am saying that we increase your monthly cash flow as much as possible. Any installment payments, any bills are reduced as much as possible. Debt Consolidation is the key. If you have a $1200/month mortgage payment, a $500/month car payment and $400/month in credit cards, you have a total monthly debt of $2100. Your house is worth $300,000 and you only owe $120,000. Well, your house is going to appreciate in value whether you pay down the principle or not. What you want to do here is refinance your house and get the lowest payment possible. You can refinance into an Option Arm and have a $200,000 loan for nearly $650/month. By refinancing you just saved yourself $1500/month!!!!!!!
2) Pay Yourself First - Once you have reduced your monthly debt and you have this extra $1500/month you have to have the discipline to pay yourself first. Use the Rule of 72 and figure out how much money it's going to take you to obtain the amount of money you'll need to retire and live the lifestyle you want to live. We all know how to pay our bills but very few of us know how to pay ourselves.
3) Make More Money - Whether you need to be ambitious or pick up another job or learn how to make your money work for you, you need to make more money as you get older.
4) Build Up Equity - Once you have taken care of 1-3 you want to begin building equity and not accumulating more liabilities. You need to either personally assess your financial situation every 6 months or sit down with an estate planner to do so. If you're not building equity and you continue to build more liabilities, you aren't making any progress.
5) Preserve Estate - Once you have mastered 1-4 then you can focus on Preserving your Estate through life insurance and trusts. Estate taxes are a killer, if you don't follow the formula of this thread, you will have just lived your entire life and accomplished nothing.
Protection builds wealth.
T-Matt
