By Kevin Jacobs, CFP®
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/
One of the greatest risks that I see in a lot of people’s financial portfolios is that they do not have enough cash. My business serves a wide range of individuals and families and I get to review their financial life from an objective perspective. I have found some couples, who even after the market downturn in the fall of 2008, still have not learned the value of having “ready cash” and “emergency cash.” I think some people believe that an “emergency” will not happen to them so why should they keep so much in cash. My job as a financial planner is to recommend to them what I believe is in their best interest.
I am not against investing and taking risk. However, I am against investing and taking risk before you are ready. I do not care how young you are; if you do not have proper cash set aside in the event of an emergency you should not be investing in the stock market.
In my recommendations to clients, I follow a few basic principles that I learned from Bert Whitehead, the founder of the Alliance of Cambridge Advisors. First, if you are a W-2 employee, you should keep a minimum of 10% of your income in a interest-bearing savings account. I call this the “ready cash” account. If you are self-employed or retired you will want to keep a larger percentage of your income in “ready cash.” Next, I recommend you keep 2 times your “ready cash” inside of your 401k or Traditional IRA* invested inside of a money market or government-backed fund. However, if 20% of your mortgage balance is higher then 2 times your “ready cash” then you will want to set aside that amount instead. I know this may seem like a lot of cash but the best feeling your financial plan can offer you is security and if you know you have proper amounts of cash in your portfolio then you have the freedom to take appropriate risk in other areas of your investment portfolio.
*I can hear it already. You might be asking why I recommend to keep emergency cash inside of a 401k or Traditional IRA. Well, let’s just save the answer to that question for a later blog entry.
March 30, 2010
March 25, 2010
Why Your Credit Score Is So Important
By Judy Stewart, CFP®, MBA, EA
Carlsbad, CA
http://www.stewartfinancial.com/
Your Credit Score is like your reputation, it follows you everywhere. Protect it as best as you can.
What Makes Up a Credit Score
A credit score takes into account a lot of different information from your credit report, but it’s not all treated equally. Some aspects of your credit history are more important than others and will weigh more heavily on your overall score. Your FICO score is essentially made up of the following:
· Payment History – 35%
· Total Amounts Owed – 30%
· Length of Credit History – 15%
· New Credit – 10%
· Type of Credit in Use – 10%
As you can see, the bulk of your credit score comes from your payment history and how much debt you actually have. Those two items account for 65% of your score. So, if you’re really looking to improve your credit score, these are the areas you’ll want to tackle first.
Why Your FICO Credit Score is Important
We’ve determined what makes up a credit score, but why is it so important? Your credit score will follow you for your entire life and if you are ever trying to borrow money, the lender is going to look at your credit score to determine whether or not to lend money to you. Need to buy a car? They will check your credit score. Looking for a mortgage? You can bet they are checking your credit score. In fact, even some employers are checking credit scores when hiring to possibly determine who would make a good employee.
Not only does your credit score determine whether or not you’ll receive financing, it also determines how much it will cost you to borrow that money. People with higher credit scores are deemed to be less of a risk and therefore will typically receive the lowest interest rates. Those with lower scores are viewed as more of a risk so the bank will offset that risk by lending you money at a higher interest rate. And when you’re talking about larger loans such as buying a vehicle or a home, just an extra interest rate point could add up to thousands, and even tens of thousands of dollars wasted on interest.
Carlsbad, CA
http://www.stewartfinancial.com/
Your Credit Score is like your reputation, it follows you everywhere. Protect it as best as you can.
What Makes Up a Credit Score
A credit score takes into account a lot of different information from your credit report, but it’s not all treated equally. Some aspects of your credit history are more important than others and will weigh more heavily on your overall score. Your FICO score is essentially made up of the following:
· Payment History – 35%
· Total Amounts Owed – 30%
· Length of Credit History – 15%
· New Credit – 10%
· Type of Credit in Use – 10%
As you can see, the bulk of your credit score comes from your payment history and how much debt you actually have. Those two items account for 65% of your score. So, if you’re really looking to improve your credit score, these are the areas you’ll want to tackle first.
Why Your FICO Credit Score is Important
We’ve determined what makes up a credit score, but why is it so important? Your credit score will follow you for your entire life and if you are ever trying to borrow money, the lender is going to look at your credit score to determine whether or not to lend money to you. Need to buy a car? They will check your credit score. Looking for a mortgage? You can bet they are checking your credit score. In fact, even some employers are checking credit scores when hiring to possibly determine who would make a good employee.
Not only does your credit score determine whether or not you’ll receive financing, it also determines how much it will cost you to borrow that money. People with higher credit scores are deemed to be less of a risk and therefore will typically receive the lowest interest rates. Those with lower scores are viewed as more of a risk so the bank will offset that risk by lending you money at a higher interest rate. And when you’re talking about larger loans such as buying a vehicle or a home, just an extra interest rate point could add up to thousands, and even tens of thousands of dollars wasted on interest.
March 20, 2010
The Best Financial Advisor
By Linda Leitz, CFP®, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/
There are some great checklists for choosing a financial advisor. The good ones include asking about education, professional credentials, how long they’ve been in the business, and what services they offer. But some of the most important information you’ll need isn’t on a checklist. And it’s very hard to find. You can’t ask it in a question and count on a reliable answer. Your gut or the financial planner’s other clients might be able to answer it. But some of these planners might not even have clients yet. So what is it?
Can you trust the planner?
Because if the answer to that question is “no”, don’t bother asking other questions.
I’m fortunate to have many trustworthy financial planning colleagues. One of them told a story recently that illustrates this. About five minutes before a client came in for an appointment, he found an error his staff had made in her account. It was – for him – a large error of about $10,000. So the first thing he did when she arrived was explain the mistake and write her a check that made her whole. That check pretty much cleaned out his firm’s operating account on that day. That was several years ago and the woman is still a client. He didn’t try to gloss over or hide his mistake. And she appreciated that people make mistakes, but the best people own up to them and deal with the consequences.
So trust your instincts when choosing a financial advisor. Technical knowledge and expertise are important. But honesty is priceless.
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/
There are some great checklists for choosing a financial advisor. The good ones include asking about education, professional credentials, how long they’ve been in the business, and what services they offer. But some of the most important information you’ll need isn’t on a checklist. And it’s very hard to find. You can’t ask it in a question and count on a reliable answer. Your gut or the financial planner’s other clients might be able to answer it. But some of these planners might not even have clients yet. So what is it?
Can you trust the planner?
Because if the answer to that question is “no”, don’t bother asking other questions.
I’m fortunate to have many trustworthy financial planning colleagues. One of them told a story recently that illustrates this. About five minutes before a client came in for an appointment, he found an error his staff had made in her account. It was – for him – a large error of about $10,000. So the first thing he did when she arrived was explain the mistake and write her a check that made her whole. That check pretty much cleaned out his firm’s operating account on that day. That was several years ago and the woman is still a client. He didn’t try to gloss over or hide his mistake. And she appreciated that people make mistakes, but the best people own up to them and deal with the consequences.
So trust your instincts when choosing a financial advisor. Technical knowledge and expertise are important. But honesty is priceless.
March 16, 2010
IRA to Roth Conversions in 2010
By Joe Alfonso, CFP®, ChFC
Santa Clara, CA
http://www.aegisadvisory.com/
As you probably already know, the tax law is changing in 2010 to remove the current restriction for making traditional IRA to Roth conversions. Currently, individuals with modified adjusted gross incomes in excess of $100,000 cannot do a conversion without incurring a 10% penalty if they are younger than 59 1/2 years old. Additionally, taxes are due in the year of conversion on any pretax savings and accumulated growth. In 2010, the income limitation is being removed allowing anyone to make a Roth conversion without incurring the 10% penalty. Taxes would still be due as before however there will be an option to pay these in equal installments over the two years following the year of conversion.
Already, financial product salespeople are touting the advantages of Roth conversions in anticipation of 2010 by emphasizing the tax advantages Roth IRAs have over traditional IRAs. Unlike withdrawals from traditional IRAs, Roth withdrawals in retirement are tax-free. Another key advantage of the Roth is that there is no requirement to begin taking withdrawals after one reaches the age of 70 and 1/2, as is the case with traditional IRAs. This "required minimum distribution" (RMD) feature of the traditional IRA forces taxpayers to make taxable withdrawals from their accounts regardless of actual income need. Roth IRAs do not require RMDs, thereby allowing the taxpayer the option of leaving assets in the Roth to potentially appreciate over a longer period of time.
Unfortunately, financial product salespeople often do a better job promoting the potential advantages of Roth conversions than they do the more important job of assessing whether a Roth conversion is appropriate for an individual client. The answer is not clear-cut by any means and a careful analysis must be performed to make an informed decision. Factors that must be considered are current and anticipated future income tax brackets, the source of assets available to pay the tax due on the conversion, and projected income needs in retirement. This is not a straightforward analysis. Additionally, there is the element of the unknown with regard to future tax law changes that further complicates matters.
In many cases, the result of a careful analysis will be that a partial conversion is the optimal course of action, both for empirical reasons as well as a hedge against future tax law changes. The ability of a client to pay the taxes due upon conversion may also weigh in favor of the partial conversion strategy.
Clearly, this is an area fraught with traps for the unwary and no one-size-fits-all solution exists. Advisors seeking to maximize the business opportunity presented by this tax law change while failing to properly assess the appropriateness of a Roth conversion on a case by case basis do their clients a disservice. Undoubtedly, a tax planning opportunity exists for some in 2010. Advisors who truly put their client's interests ahead of their own, however, need to be prepared to tell some of these clients that a Roth conversion is not appropriate in their particular case. Those of us who understand that providing good advice, and not selling products, is the best value we can offer clients will be more likely to engage in the thoughtful analysis required by the Roth conversion opportunity in 2010.
Santa Clara, CA
http://www.aegisadvisory.com/
As you probably already know, the tax law is changing in 2010 to remove the current restriction for making traditional IRA to Roth conversions. Currently, individuals with modified adjusted gross incomes in excess of $100,000 cannot do a conversion without incurring a 10% penalty if they are younger than 59 1/2 years old. Additionally, taxes are due in the year of conversion on any pretax savings and accumulated growth. In 2010, the income limitation is being removed allowing anyone to make a Roth conversion without incurring the 10% penalty. Taxes would still be due as before however there will be an option to pay these in equal installments over the two years following the year of conversion.
Already, financial product salespeople are touting the advantages of Roth conversions in anticipation of 2010 by emphasizing the tax advantages Roth IRAs have over traditional IRAs. Unlike withdrawals from traditional IRAs, Roth withdrawals in retirement are tax-free. Another key advantage of the Roth is that there is no requirement to begin taking withdrawals after one reaches the age of 70 and 1/2, as is the case with traditional IRAs. This "required minimum distribution" (RMD) feature of the traditional IRA forces taxpayers to make taxable withdrawals from their accounts regardless of actual income need. Roth IRAs do not require RMDs, thereby allowing the taxpayer the option of leaving assets in the Roth to potentially appreciate over a longer period of time.
Unfortunately, financial product salespeople often do a better job promoting the potential advantages of Roth conversions than they do the more important job of assessing whether a Roth conversion is appropriate for an individual client. The answer is not clear-cut by any means and a careful analysis must be performed to make an informed decision. Factors that must be considered are current and anticipated future income tax brackets, the source of assets available to pay the tax due on the conversion, and projected income needs in retirement. This is not a straightforward analysis. Additionally, there is the element of the unknown with regard to future tax law changes that further complicates matters.
In many cases, the result of a careful analysis will be that a partial conversion is the optimal course of action, both for empirical reasons as well as a hedge against future tax law changes. The ability of a client to pay the taxes due upon conversion may also weigh in favor of the partial conversion strategy.
Clearly, this is an area fraught with traps for the unwary and no one-size-fits-all solution exists. Advisors seeking to maximize the business opportunity presented by this tax law change while failing to properly assess the appropriateness of a Roth conversion on a case by case basis do their clients a disservice. Undoubtedly, a tax planning opportunity exists for some in 2010. Advisors who truly put their client's interests ahead of their own, however, need to be prepared to tell some of these clients that a Roth conversion is not appropriate in their particular case. Those of us who understand that providing good advice, and not selling products, is the best value we can offer clients will be more likely to engage in the thoughtful analysis required by the Roth conversion opportunity in 2010.
March 11, 2010
Are You Really Ready?
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
As we move deeper into tax season, I am seeing a trend in my office. I am finding more and more clients are waiting on tax documents, and the missing information is making everyone wait. It’s certainly not my clients’ fault.
Actually, the problem lies in a change in the law that will allow brokers and investment companies to send out 1099s a couple weeks later than usual. This means you may not receive all of your required tax documents until mid-to-late February. So, if you are still waiting, you are not alone.
It is extremely important that tax returns are completed fully. The last thing you want is to file a return and later find a nice little gift in your mailbox causing you to amend your return, which could result in penalties and fees.
What to do in the meantime?
If you are still waiting, the best thing you can do is to organize all your information. You might even ask your preparer if they would like to start your return and fill in the missing data later. The data in question is usually dividend, interest, and capital gain information. This is easy information to input into a return and does not require a lot of time. Your preparer can finish all but the missing data of your return, and, after the info arrives, the return can completed with a few clicks of the mouse. This tactic will keep you from being put at the end of the line.
I am a big proponent of communication between taxpayer and preparer. Preparers get very busy and stressed during this time of the year. The best way not to add to that stress is to communicate. Ask your preparer what you can do to make your tax preparation easier. Whether it be better organized data or letting them complete the bulk of you return until your remaining tax documents arrive, this allows the preparer to operate more efficiently…..which is certainly in your favor!
If you are not sure whether you have received all of your documents, simply wait a couple more weeks. Maybe you are waiting on a refund and are ready for the cash. Be patient, for it is more important to file an accurate return. In the meantime, speak with your preparer and determine your best plan of action.
Nashville, TN
http://www.vhfinancialmanagement.com/
As we move deeper into tax season, I am seeing a trend in my office. I am finding more and more clients are waiting on tax documents, and the missing information is making everyone wait. It’s certainly not my clients’ fault.
Actually, the problem lies in a change in the law that will allow brokers and investment companies to send out 1099s a couple weeks later than usual. This means you may not receive all of your required tax documents until mid-to-late February. So, if you are still waiting, you are not alone.
It is extremely important that tax returns are completed fully. The last thing you want is to file a return and later find a nice little gift in your mailbox causing you to amend your return, which could result in penalties and fees.
What to do in the meantime?
If you are still waiting, the best thing you can do is to organize all your information. You might even ask your preparer if they would like to start your return and fill in the missing data later. The data in question is usually dividend, interest, and capital gain information. This is easy information to input into a return and does not require a lot of time. Your preparer can finish all but the missing data of your return, and, after the info arrives, the return can completed with a few clicks of the mouse. This tactic will keep you from being put at the end of the line.
I am a big proponent of communication between taxpayer and preparer. Preparers get very busy and stressed during this time of the year. The best way not to add to that stress is to communicate. Ask your preparer what you can do to make your tax preparation easier. Whether it be better organized data or letting them complete the bulk of you return until your remaining tax documents arrive, this allows the preparer to operate more efficiently…..which is certainly in your favor!
If you are not sure whether you have received all of your documents, simply wait a couple more weeks. Maybe you are waiting on a refund and are ready for the cash. Be patient, for it is more important to file an accurate return. In the meantime, speak with your preparer and determine your best plan of action.
March 5, 2010
Debt Payoff Strategies
By Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/
Originally published 2/22/10 at FPA's All Things Financial Planning blog
One sign that the recession still isn’t behind us is the many who are still struggling with debt.
A recent study by TransUnion shows more people are choosing to pay back their credit cards, while at the same time delinquent on the mortgage, in order to maintain credit for living expenses. This is in contrast to behavior many experts would have expected — that secured debt would be a greater priority.
For many, it is a sad necessity. But, if you have some sort of financial footing with cash flow and are starting to tackle your debt, which should you pay first? Since not all debt is created equally, below are a few general guidelines:
Where to pay extra funds first?
This depends on a number of items, but in general, the numbers should stay the same, except the order of #3-6 which will depend heavily on the rates and loan balances.
If you have 25 percent or greater equity in the home and a low, locked-in mortgage, consider skipping the extra payments and go to the highest rate debt from #4-6, unless you have a variable rate mortgage.
Debt payment strategies
Strategies to paying off debt include the Dave Ramsey popularized debt snowball. The idea here is to take out low-balance bills first to gain small victories, eliminate a payment, and add those dollars from toward other debts.
Another strategy is to focus on anything with a higher rate, and also a variable rate first, as this will save you in interest costs over time.
Should I begin to save, or pay-off more debt?
Retirement savings (especially when you have an employer match), should be considered if you can be comfortable — meaning paying the minimum and then some — with your debt obligations. So long as you have a long-term outlook and growth strategy for your savings, manageable debt balances, and low, locked-in rates, consider tax-advantaged retirement saving alongside your debt payment strategy.
Franklin, MI
http://www.nfa1040.com/
Originally published 2/22/10 at FPA's All Things Financial Planning blog
One sign that the recession still isn’t behind us is the many who are still struggling with debt.
A recent study by TransUnion shows more people are choosing to pay back their credit cards, while at the same time delinquent on the mortgage, in order to maintain credit for living expenses. This is in contrast to behavior many experts would have expected — that secured debt would be a greater priority.
For many, it is a sad necessity. But, if you have some sort of financial footing with cash flow and are starting to tackle your debt, which should you pay first? Since not all debt is created equally, below are a few general guidelines:
- IRS, government, child support obligations. Don’t mess with the government. They can take your money, and more.
- Family loans. Personal loans and promises can destroy relationships. Make these a high priority item to repay.
- Mortgages. If you can help it, don’t lose your home. Unless the choice is food or the home, choose to place the mortgage high on your list.
- Car debt. You need your car. If you’re in trouble, consider downsizing options.
- Student loans. Though student loans are not discharged in bankruptcy, some loans can be deferred, or placed on lower payment schedules such as the Income Based Repayment plan.
- Credit card and other personal loan debt.
Where to pay extra funds first?
This depends on a number of items, but in general, the numbers should stay the same, except the order of #3-6 which will depend heavily on the rates and loan balances.
If you have 25 percent or greater equity in the home and a low, locked-in mortgage, consider skipping the extra payments and go to the highest rate debt from #4-6, unless you have a variable rate mortgage.
Debt payment strategies
Strategies to paying off debt include the Dave Ramsey popularized debt snowball. The idea here is to take out low-balance bills first to gain small victories, eliminate a payment, and add those dollars from toward other debts.
Another strategy is to focus on anything with a higher rate, and also a variable rate first, as this will save you in interest costs over time.
Should I begin to save, or pay-off more debt?
Retirement savings (especially when you have an employer match), should be considered if you can be comfortable — meaning paying the minimum and then some — with your debt obligations. So long as you have a long-term outlook and growth strategy for your savings, manageable debt balances, and low, locked-in rates, consider tax-advantaged retirement saving alongside your debt payment strategy.
March 1, 2010
How Do the Wealthy Get That Way?
By Bert Whitehead, MBA, JD
Franklin, MI
www.bertwhitehead.com
Unless you are in the wealth category of Bill Gates and Warren Buffet, you probably realize that many people are richer than you are. So how did they get that way?
• Did they have the advantage of a large inheritance?
• Was it because they were self employed?
• Could they have married into a wealthy family?
• Were they “penny pinchers” for their whole life?
• Did they have high I.Q.’s?
None of these reasons fully explain the ‘millionaire’ phenomenon. I have read the popular books on this topic (The Millionaire Next Door, The Automatic Millionaire, Rich Dad, Poor Dad, etc.) I have also reviewed academic studies on this topic. But most of my insights come from working with clients for over 30 years, many of whom did become millionaires. These are my observations and conclusions:
1. Wealthy people are made, not born. 80% of millionaires are the first generation of their family to become wealthy. Interestingly, most of the very wealthy families leave a major portion of their estates to charity. Children, who inherit significant wealth, without achieving it on their own, seldom manage money well. As one wealthy man told me, “If money comes too easily, it isn’t properly respected.” A large inheritance can often undermine the character of the recipient because they don’t need to focus on adding value to the world. This often happens when parents continue to support adult children.
2. Self-employed people are more likely to become wealthy. Overall 20% of our population is self-employed, while 75% of millionaires are self-employed. This high percentage is largely attributable to self-employed professionals like attorneys and physicians. The others, who are entrepreneurs, are as likely to go bankrupt as they are to become wealthy. Those entrepreneurs, who do accumulate wealth, as well as the professionals, have other attributes.
3. Most millionaires became wealthy because they picked a spouse who helped them realize a dream. Seldom do people become millionaires totally by themselves. On the contrary, one of the significant obstacles to accumulating wealth is choosing partners poorly, especially spouses. I call divorce “the process of mutual impoverishment.”
4. Some wealthy people are very frugal, even to the point of being penny pinchers. Popular writers often glorify this trait as the path to riches, urging readers to forego lattes, drive old cars, and to never move to better neighborhoods. While living within one’s means is critical, as discussed below, developing a penurious character is a form of financial dysfunction. Misers never know ‘how much is enough’ and develop an obsession to save more money. In my opinion this trait is a barrier to good socialization and prevents people from enjoying the wealth they do accumulate.
5. The people that I have seen become wealthy are smart – but not necessarily the kind of “smart” measured by an I.Q. test. They have come to recognize and appreciate their unique gifts and advantages, and use their abilities to create value for others. When a high I.Q. is coupled with an expectation that one deserves special treatment, it is a hindrance to achieving wealth.
How much does it take to be wealthy? I think that financial wealth is measured by a balance sheet listing assets vs. liabilities, rather then an income statement because it demonstrates the resources that can be put to work to create more money. Statistically only 3.5% of the 115 million households in this country have net assets of over $1 million. 98% of those have a net worth between $1 million and $10 million. The 2% who are ‘super-rich’ are not addressed in this blog.
I have noted two attributes which apply to most millionaires. The first is that they value education, and are generally well educated themselves. As my mother often said, “Investment in education is the best investment that can be made, because it can never be taken away from you!” Education is the strongest predictor of future earning capacity.
A high income alone doesn’t make someone a millionaire. There are many athletes, movie stars, gamblers (including lottery winners), and highly paid executives who never are able to accumulate wealth. The reason is that they keep ratcheting up their standard of living to keep up with their income. So when their income drops, they don’t have the financial resources to provide the cash flow to maintain their life style.
This doesn’t only apply to high income people; many low income people stay poor because they live beyond their means. I find that the easiest way to tell whether a new client is living within their means is to examine their credit card statements. If someone consistently carries a balance on their credit cards, they are living beyond their means.
Thus the second attribute of the wealthy is their ability to live within their means. This translates into a life-long habit of always saving at least 10% of their income. Even those who aren’t fortunate enough to have a good education can become financially independent if they consistently live within their means and save 10% of what they make starting at an early age.
It’s that simple: to help your children become wealthy, make sure they get as good an education as possible, and teach them to save a dime of every dollar that they earn starting with their first allowance!
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.
Franklin, MI
www.bertwhitehead.com
Unless you are in the wealth category of Bill Gates and Warren Buffet, you probably realize that many people are richer than you are. So how did they get that way?
• Did they have the advantage of a large inheritance?
• Was it because they were self employed?
• Could they have married into a wealthy family?
• Were they “penny pinchers” for their whole life?
• Did they have high I.Q.’s?
None of these reasons fully explain the ‘millionaire’ phenomenon. I have read the popular books on this topic (The Millionaire Next Door, The Automatic Millionaire, Rich Dad, Poor Dad, etc.) I have also reviewed academic studies on this topic. But most of my insights come from working with clients for over 30 years, many of whom did become millionaires. These are my observations and conclusions:
1. Wealthy people are made, not born. 80% of millionaires are the first generation of their family to become wealthy. Interestingly, most of the very wealthy families leave a major portion of their estates to charity. Children, who inherit significant wealth, without achieving it on their own, seldom manage money well. As one wealthy man told me, “If money comes too easily, it isn’t properly respected.” A large inheritance can often undermine the character of the recipient because they don’t need to focus on adding value to the world. This often happens when parents continue to support adult children.
2. Self-employed people are more likely to become wealthy. Overall 20% of our population is self-employed, while 75% of millionaires are self-employed. This high percentage is largely attributable to self-employed professionals like attorneys and physicians. The others, who are entrepreneurs, are as likely to go bankrupt as they are to become wealthy. Those entrepreneurs, who do accumulate wealth, as well as the professionals, have other attributes.
3. Most millionaires became wealthy because they picked a spouse who helped them realize a dream. Seldom do people become millionaires totally by themselves. On the contrary, one of the significant obstacles to accumulating wealth is choosing partners poorly, especially spouses. I call divorce “the process of mutual impoverishment.”
4. Some wealthy people are very frugal, even to the point of being penny pinchers. Popular writers often glorify this trait as the path to riches, urging readers to forego lattes, drive old cars, and to never move to better neighborhoods. While living within one’s means is critical, as discussed below, developing a penurious character is a form of financial dysfunction. Misers never know ‘how much is enough’ and develop an obsession to save more money. In my opinion this trait is a barrier to good socialization and prevents people from enjoying the wealth they do accumulate.
5. The people that I have seen become wealthy are smart – but not necessarily the kind of “smart” measured by an I.Q. test. They have come to recognize and appreciate their unique gifts and advantages, and use their abilities to create value for others. When a high I.Q. is coupled with an expectation that one deserves special treatment, it is a hindrance to achieving wealth.
How much does it take to be wealthy? I think that financial wealth is measured by a balance sheet listing assets vs. liabilities, rather then an income statement because it demonstrates the resources that can be put to work to create more money. Statistically only 3.5% of the 115 million households in this country have net assets of over $1 million. 98% of those have a net worth between $1 million and $10 million. The 2% who are ‘super-rich’ are not addressed in this blog.
I have noted two attributes which apply to most millionaires. The first is that they value education, and are generally well educated themselves. As my mother often said, “Investment in education is the best investment that can be made, because it can never be taken away from you!” Education is the strongest predictor of future earning capacity.
A high income alone doesn’t make someone a millionaire. There are many athletes, movie stars, gamblers (including lottery winners), and highly paid executives who never are able to accumulate wealth. The reason is that they keep ratcheting up their standard of living to keep up with their income. So when their income drops, they don’t have the financial resources to provide the cash flow to maintain their life style.
This doesn’t only apply to high income people; many low income people stay poor because they live beyond their means. I find that the easiest way to tell whether a new client is living within their means is to examine their credit card statements. If someone consistently carries a balance on their credit cards, they are living beyond their means.
Thus the second attribute of the wealthy is their ability to live within their means. This translates into a life-long habit of always saving at least 10% of their income. Even those who aren’t fortunate enough to have a good education can become financially independent if they consistently live within their means and save 10% of what they make starting at an early age.
It’s that simple: to help your children become wealthy, make sure they get as good an education as possible, and teach them to save a dime of every dollar that they earn starting with their first allowance!
I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY.
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