Most people believe the key to
wealth is a high-paying job. Yes, it's
easier to amass assets if you have
more money coming in each
month, but the true secret to
increasing your net worth is to
spend less than you make. It is a
cliche; but it is the fundamental,
absolute, non-negotiable reality of
money. To escape this trap, you
need to understand that income is
not wealth.
What is wealth? My personal
definition: Wealth is the part of
your net worth ( assets minus
liabilities) that generates capital
gains, income, and dividends
without your labor. If you are a
Doctor or Lawyer, you need to put
in long hours after years of
specialty training and higher
education to get a paycheck. On
the other hand, if you have a
portfolio of private businesses, car
washes, parking garages, stocks,
bonds, mutual funds, real estate,
patents, trademarks, and other
cash generators, you could sit by
the pool. The real value, of course,
is that you could maintain your
lifestyle even if you were disabled
or unable to continue working at
your primary occupation. Better
yet, unlike a salaried employee,
wealth can't fire you - you have to
squander it. It's far easier to lose a
job that wipe out a well-constructed
portfolio.
The level of your wealth should be
measured by the length of time
you could maintain your standard
of living without an additional
paycheck. In other words, if you
had to stop working right now, how
long could you keep up your
purchasing pattern for cars,
clothing, music lessons, college
tuition, video games, etc.? The
average person isn't educated in
this truth, which is why the more
and more they earn, they are left
wondering why financial
independence and security
continue to allude them, always
seemingly just out of grasp.
The only way to take advantage of
investment opportunities is to have
the money to invest. The reality of
successful investing is that there is
a certain point where you reach
critical mass and the returns
generated on your assets can
change your life; e.g., earning a
10% return on $10,000 is only
going to net you $1,000 before
taxes - hardly earth shattering, but
the same return on a $1,000,000
portfolio is $100,000, which has far
utility despite requiring the same
effort and research.
Amassing wealth and becoming
financially independent is a slow
process that takes time. You do
small things every day such as cut
your expenses, generate extra
income, and put the money into
brokerage and tax-deferred
retirement accounts. With time, it
begins to amount to something. As
each new opportunity appears, you
can react on a larger scale than
your previous investments. That's
called compounding. It's when the
interest, dividends, and capital
gains your money has earned
begin to generate their own
interest, dividends, and capital
gains, and on and on in a virtuous
cycle. It's how $10,000 can grow to
$2,890,000 over 50 years at 12%.
Commentator Larry Kudlow
pointed out one of the great truths
years ago when he said that profits
are nothing more than margins
times revenue. The profoundness
of that statement is sometimes lost
by its simplicity. The only way you
can have more money left over at
the end of the month is to either
increase revenue (your paycheck,
business sales, billable hours, or
whatever it is that provides funds
to cover your bills) or decrease
costs. That's it. Write it down. Frame
it. It's that remarkable. Your choices
are to increase revenue, cut costs,
or both.
Billionaire investor Charlie Munger
has remarked that entrepreneurs
can thrive if they specialize in an
overlooked economic niche, much
like animals in nature. Often, these
niches are extremely lucrative but
not likely to win you friends at
cocktail parties. Don't believe me?
Quick! Conjure up images of a
multi-millionaire. What do you see?
High-tech 20-somethings on a
yacht? Molecular biologists?
Although there are a few, most of
the big money is in industries such
as waste management (garbage),
pizza, clothing stores, trailer parks,
candles, and shipping.
Consider the case of Sam Walton.
He built a tiny dime store from the
corner of Arkansas into the biggest
retailer in the world, amassing a
family fortune of more than $125
billion. There's nothing sexy about
selling fifty-cent flip-flops and
bottles of cheap cologne in small
towns but Walton was on a mission
to bring affordable goods to
everyday Americans. He was a
man possessed with vision. He built
his company one store at a time -
one might even say one checkout
at a time - with no fanfare or red
carpet walks.
Business owners represent a
disproportionately large segment
of the millionaire population. It's
hard to believe, but there's a good
chance that the biggest hardware
store owner or plumber in your
town has a net worth many times
that of you highest paid doctor.
Part of the reason is a concept
we've discussed called capitalized
earnings. Another is something Dr.
Stanley mentioned in his book.
Doctors are pressured to buy status
symbols to convince their patients
they are successful. Not the
plumber. He can put more money
into his retirement accounts. Over
decades, the result is millions in
additional wealth for the guy who
unclogged toilets instead of
arteries. That's not something you
learn about in school.
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