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Monthly Archives: April 2011

how not to be Rich

The question I get more than any other I can think of is usually ” If you know so much about money, why aren’t you rich?”

Well for one, I didn’t learn about money until I was older. Starting late means finishing late, kind of obvious right? That doesn’t mean im not on my way there does it?

Another much more important question though, is one I will pose to you instead.

What does it mean to be rich?

Take a minute to think about it. I’m sure the majority of people won’t think about it at all, they just yell out some obscene amount of money and think they are smart. They ain’t. Money is not now, nor has it ever been the defining factor in being rich. Think I’m wrong? That means you have no idea what money is or how it works.

OK smarty pants. You win the lottery tomorrow and make millions on a lump sum payment. You think you’ll be set for life and you will invest wisely and all is good and right with the world.    Good luck my man, you’ll need it.  A ludicrous amount of lotto winners go broke after they win.

As another example I have but three words. M. C. Hammer.

It’s called lifestyle inflation. When people get more money they find more ways to spend it. You buy a nicer house, nicer car more attractive spouse etc..  Guess what genius, all of those nicer things you bought, have much bigger costs associated with them. The house costs more in taxes, more to heat and more to fill with stuff. The car as well as the house now have a much bigger Insurance bill. Think you can buy a Ferrari and NOT get a speeding ticket or 10?  Then you have to account for your free time. You have plenty of time AND money, that means all the things you never got to do (because they were cost prohibitive) are a daily option to fill your long and empty days. Starting to get it?

So, how do I define being Rich?

It’s a very tricky and complicated question for being so small. To me being Rich is more about happiness. Its freedom. And in my personal case it’s never having to work again. Notice I said not having to work and not not working, big difference.

Let’s compare two made up people and see how we feel about this.

Paul makes  $80,000 a year working six ten hour days a week or 60 hours. He has a nice house that costs him 3k a month in mortgage, taxes and insurance costs (36k /yr).  His new Porsche costs him $450 a month and another $400 for insurance . That’s $950 /mo(11.4k/yr).  Working as much as he does, he needs and deserves to have fun. Going to the club once a week runs him $200 a month (2.4k/yr). Lunch at work is 7 bucks a day times 6 days or $42 a week(2.1k/yr).  His Cable package with the movie channels and internet speed booster runs him $200 / mo(2.4k/yr). Estimated costs for credit card debts included as an average well add 3k/yr.

Not counting the unexpected costs like emergencies, gifts, trips and dozens of other expenses we all go through, his lifestyle costs him $57,300 per year on average. His income is $80,000, so its all good? Hardly. He sits at a taxable rate of 25%, so he only takes home $60,000/yr. Now you see why the other debts are there, all the things he didn’t and couldn’t account for get charged when he runs out of cash. He builds debt a little faster than income and over time gets screwed.

That right there is a typical income earner in the United states.

Ramon Earns $40,000 per year working his own business for  five four hour days or 20 hours per week.  He lives in a small house with a smaller mortgage because he saved a made a larger down payment. With all included he spends $1500/mo(18k/yr). His reliable Mazda that he purchased 2 years USED has no monthly payment and a low insurance cost of $150/mo (1.8k/yr). Ramon likes fun as well. He buys a bottle of wine and watches Netflix with friends at home each week at a cost of  $35/mo (420./yr).  He packs lunch for his 5 shifts a week and it costs an extra $15/wk in groceries (720./yr). He has basic cable only and a base internet package which runs $100/mo (1.2k/yr). He has no credit card payments, because he pays everything with cash or doesn’t buy it at all.

Ramons yearly expenses, with the same assumptions as Paul in place are $22,140. His income after taxes at the same tax rate is $30,000 leaving a difference of over $7,000, of which he invests $4,000 a year and earns a larger income over longer periods of time.

Before taxes are removed from their pay, Paul makes (80k/3000hrs=)$26.66 / hr at work.   Ramon on the other hand makes(40k/1000hrs=)$40.00 per hour. Paul has very little money at the end of each week and has to continue to increase his output at work,  extra hours, more projects, maybe a second job at some point. Ramon on the other hand, works less, is better compensated for his time and has money left over to invest and further secure his future.

Who would you consider richer? I’d rather be Ramon right about now. Which brings me to my real point. To be rich, you have to be smart with your money. You have to make better decisions than Paul and think about your future self having to pay for your financial weakness and stupidity. Financial IQ, a concept put forth by Robert Kiyosaki, is more important than anything else you can ever improve.

If you want to be rich, you have to learn. You have to sacrifice. You have to work hard. You have to live like no one else. Do you want to work way too long and hard for a silly amount of money? Or would you rather adjust your lifestyle, increase your worth and spend more time with family and friends?

Take some time now and think it out, I ask you again,  What does it mean to be Rich?    No, really……. and post it below.