Accumulating Wealth And Becoming A Millionaire


cjcampbell
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Okay, you have a budget. You have saved a year's worth of income. Now what?

Do you know that you probably know several millionaires? There are probably some in your ward -- but you would never know it to look at the clothes they wear, the car they drive, or the house they live in. They might live right next door to you and you would never guess that they do not have a house payment, or a car payment, or worry about losing their job, or worries about inflation or taxes. In fact, most of their income might come not from their job, but from their investments -- what is called 'unearned' income (which is pretty funny, really -- you have to work hard to get 'unearned' income). In fact, if they have a fancy car, fancy clothes, go out a lot, and have a high lifestyle, you can just about guarantee that your neighbors are not millionaires. They are probably spending more than they should.

Okay, some principles:

1) Married couples have an easier time accumulating wealth than single people. There are several reasons for this, but in the main you will find that people who are wealthy have been married to one person their whole life. I remember the advice an old flight instructor used to give his students who were going on to the airlines. "Do not buy a house for more than one woman." I realize that there are circumstances where divorce is the only answer, but remember that you cannot avoid the consequences of divorce even if it is not your fault. One of the chief consequences of divorce is poverty.

2) Higher rates of return mean higher risk. There are no exceptions. That is how the financial market works. If someone is telling you that an investment will bring a high rate of return at little risk, they are wrong. There is no such thing. Consider investing in commodities, for example. Investments there can bring a very high rate of return. You are also betting that you know more about commodities than R.J. Reynolds or General Mills. Right. You are not going to beat those guys at their own game. You would be better off playing the slots at Las Vegas -- at least it would be more entertaining while you gave your money away. The same goes for people who ask you to 'invest' in their business ventures. The reason they want your money is because the bank won't give them any. High risk. The bank probably could afford to lose it more than you can, too, and it is too risky for them. Definitely too risky for you. If someone is offering you the opportunity of a lifetime, you can be sure that lots of other people who are more experienced and smarter than you have already turned it down. Think about it. The very wealthy have access to all kinds of information that you do not. They are first on everybody's mailing list, too. If they didn't want it, if they thought it was too risky for their portfolio, if they thought the return was not high enough -- why on earth would you think it is a good idea for you?

3) It is easier to reduce expenses than increase your salary. The reason for this is that you have to earn $2 for every 1$ in spending power. Half of whatever you earn is taken away in taxes and 'benefits' that someone sold to your boss. Those 'benefits' rarely benefit you; certainly they do not do much to reduce your expenses. Furthermore, buying on credit roughly doubles the cost of anything you buy. Buy a $20,000 car on credit and you will have to earn $80,000 to pay it off. Was that car really worth $75,000 more than a $5,000 used car you could have paid cash for?

4) Unearned income -- income from investments -- is safer and easier to maintain than earned income. You could be fired and lose your salary. You could get sick and lose your salary. But you will keep getting your unearned income even if you are fired or disabled. Plus, unearned income is usually taxed less than earned income. Remember, you do not have to pay Social Security on unearned income. For most people, Social Security, not Federal Income Tax, is the by far the biggest tax they pay. Yet guess which one they pay the most attention to? Try to reach a point where unearned income is at least equal to your earned income. This should take about 20 years of saving.

5) Don't micromanage your savings and investments. The stock market goes up and down. Big whoop. Sometimes it even crashes. It always comes back. Maybe it takes a few years, but it always comes back. Selling your stocks because you think they are about to go down usually costs you more in capital gains taxes than you would lose in a major crash. Selling your stocks after they have gone down in value is just stupid. The only time to do that is if the company is really going to go out of business. And then it is too late. So stay diversified and ignore whatever the stock market is doing. If your stock has gone up and you don't want it any more, consider giving it to the Church to pay your tithing. You don't have to pay taxes on the capital gain and you get to deduct the full market value! The Church will sell it immediately, of course, but that is not your concern. The Church does not have to pay taxes on it. And you are paying your tithing with unearned income, instead of earned income, so it actually costs you less effort.

6) Do not ever, ever, EVER relax your vigilance against unnecessary expenses.

Personally, if I had, say, $100,000 to invest, it would be put in relatively safe mutual fund. Then I would forget about it.

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Thanks for sharing that! I remember seeing a show years ago that pointed out that most millionaires became that way by being really frugal, driving old cars and that sort of thing. I also heard that most people who win the lottery blow the money really quickly and get themselves into financial trouble. No matter what your situation is, it's good to budget. :)

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Something that helped us get out of debt was using the income tax refund to pay down the principle of the house. Another was to keep a car until it became unreliable but after it was paid off we kept making the car payment into a savings account. We used this saving account as a down payment to buy a new car when the old one bit the dust. Eventually we had enough in the car account to pay cash for the last few cars. The money we've saved in interest on the house and cars is amazing.

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Thanks for sharing that! I remember seeing a show years ago that pointed out that most millionaires became that way by being really frugal, driving old cars and that sort of thing. I also heard that most people who win the lottery blow the money really quickly and get themselves into financial trouble. No matter what your situation is, it's good to budget. :)

It is not just that they save money on cars by driving less expensive cars. Consider a guy who sells mobile homes for a living. Perhaps he owns a mobile home park somewhere. He has a lot where people come and look at the mobile homes he sells. Now, if these people come and see a brand new BMW 750is parked in front of the office, what are they going to think? How much will they pay for a mobile home? If they come and see a beat-up old pickup truck in front of the office, what will they think? What kind of a deal would they think they are getting on a mobile home? Do you think you are getting a better deal from the guy who drives a BMW or the one who drives a pick-up truck? What about a contractor? He owns his own construction company. What kind of car should he drive? Do you think he will get better deals from his subcontractors if he drives a BMW or if he drives a used Suburban? How aggressive will his employees be in asking for wage increases or advances? How do his clothes affect the way his subs, employees, and customers deal with him? So you see, sometimes the old cars and inexpensive clothes are a costume -- a uniform that has a definite effect on your bottom line. Maybe at home he has a nice car which he drives to church, but when he is on the job he would not be caught dead looking too prosperous.

This goes for many lines of business. People who operate a laundry or a convenience store (two of the fastest ways to build wealth that I know of) are expected to look and act a certain way. No one shops at a convenience store that looks like it would be at home on Rodeo Drive -- unless it is a convenience store for the very rich.

Now, you expect your attorney to look prosperous. No one wants a loser attorney. So he has to dress the part from the very beginning. This is a big handicap that some professional people have to overcome to achieve success -- they often start out living beyond their means simply in order to attract business.

There are several reasons lottery winners seldom keep their money for very long. One is they simply did not earn it, so they have no concept of its real value. This is true of inherited wealth as well. In fact, it may be doing your children a terrible disservice to leave them a lot of money. Another reason lottery winners don't keep their money is that they are stupid. They were stupid enough to buy a lottery ticket in the first place. They were also greedy and dishonest enough to try to get something for nothing. Their personalities do not change just because they won. They remain stupid, greedy, and dishonest -- the perfect target for every con man and salesman in the country. But the main reason they do not keep their money for very long is they are poorly equipped and educated in the tools of maintaining wealth. This is true of all the newly rich. When I was growing up, I knew one man who had been a multimillionaire seven different times. And between each time he was bankrupt. He knew how to make money. He did not know how to manage or keep it. I believe that everyone would benefit enormously from taking some basic accounting classes in college. This is not just because I am a retired CPA and like that stuff. I don't, really. It is because I think that a knowledge of accounting is a fundamental life skill, like the things you learn in health class.

The thing is, in order to acquire a fortune you have to be able to take some risk. You really stick your neck out when you start a business, for example. That requires an entirely different sort of personality than managing and keeping a fortune. You have to become more risk-averse. People do this somewhat naturally as they age, but you have to be prepared to start learning some new tricks fast if you become wealthy at a young age. An aging businessman with retirement looming at him has a little different perspective on his wealth (and life in general) than a kid fresh out of college. Of course, Col. Sanders took his first Social Security check and bought a pressure cooker. He opened a restaurant and called it Kentucky Fried Chicken. So I guess it is never really too late. And I cannot help it -- I keep thinking about various ideas.

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Okay, you have a budget. You have saved a year's worth of income. Now what?

Do you know that you probably know several millionaires? There are probably some in your ward -- but you would never know it to look at the clothes they wear, the car they drive, or the house they live in. They might live right next door to you and you would never guess that they do not have a house payment, or a car payment, or worry about losing their job, or worries about inflation or taxes. In fact, most of their income might come not from their job, but from their investments -- what is called 'unearned' income (which is pretty funny, really -- you have to work hard to get 'unearned' income). In fact, if they have a fancy car, fancy clothes, go out a lot, and have a high lifestyle, you can just about guarantee that your neighbors are not millionaires. They are probably spending more than they should.

Okay, some principles:

1) Married couples have an easier time accumulating wealth than single people. There are several reasons for this, but in the main you will find that people who are wealthy have been married to one person their whole life. I remember the advice an old flight instructor used to give his students who were going on to the airlines. "Do not buy a house for more than one woman." I realize that there are circumstances where divorce is the only answer, but remember that you cannot avoid the consequences of divorce even if it is not your fault. One of the chief consequences of divorce is poverty.

2) Higher rates of return mean higher risk. There are no exceptions. That is how the financial market works. If someone is telling you that an investment will bring a high rate of return at little risk, they are wrong. There is no such thing. Consider investing in commodities, for example. Investments there can bring a very high rate of return. You are also betting that you know more about commodities than R.J. Reynolds or General Mills. Right. You are not going to beat those guys at their own game. You would be better off playing the slots at Las Vegas -- at least it would be more entertaining while you gave your money away. The same goes for people who ask you to 'invest' in their business ventures. The reason they want your money is because the bank won't give them any. High risk. The bank probably could afford to lose it more than you can, too, and it is too risky for them. Definitely too risky for you. If someone is offering you the opportunity of a lifetime, you can be sure that lots of other people who are more experienced and smarter than you have already turned it down. Think about it. The very wealthy have access to all kinds of information that you do not. They are first on everybody's mailing list, too. If they didn't want it, if they thought it was too risky for their portfolio, if they thought the return was not high enough -- why on earth would you think it is a good idea for you?

3) It is easier to reduce expenses than increase your salary. The reason for this is that you have to earn $2 for every 1$ in spending power. Half of whatever you earn is taken away in taxes and 'benefits' that someone sold to your boss. Those 'benefits' rarely benefit you; certainly they do not do much to reduce your expenses. Furthermore, buying on credit roughly doubles the cost of anything you buy. Buy a $20,000 car on credit and you will have to earn $80,000 to pay it off. Was that car really worth $75,000 more than a $5,000 used car you could have paid cash for?

4) Unearned income -- income from investments -- is safer and easier to maintain than earned income. You could be fired and lose your salary. You could get sick and lose your salary. But you will keep getting your unearned income even if you are fired or disabled. Plus, unearned income is usually taxed less than earned income. Remember, you do not have to pay Social Security on unearned income. For most people, Social Security, not Federal Income Tax, is the by far the biggest tax they pay. Yet guess which one they pay the most attention to? Try to reach a point where unearned income is at least equal to your earned income. This should take about 20 years of saving.

5) Don't micromanage your savings and investments. The stock market goes up and down. Big whoop. Sometimes it even crashes. It always comes back. Maybe it takes a few years, but it always comes back. Selling your stocks because you think they are about to go down usually costs you more in capital gains taxes than you would lose in a major crash. Selling your stocks after they have gone down in value is just stupid. The only time to do that is if the company is really going to go out of business. And then it is too late. So stay diversified and ignore whatever the stock market is doing. If your stock has gone up and you don't want it any more, consider giving it to the Church to pay your tithing. You don't have to pay taxes on the capital gain and you get to deduct the full market value! The Church will sell it immediately, of course, but that is not your concern. The Church does not have to pay taxes on it. And you are paying your tithing with unearned income, instead of earned income, so it actually costs you less effort.

6) Do not ever, ever, EVER relax your vigilance against unnecessary expenses.

Personally, if I had, say, $100,000 to invest, it would be put in relatively safe mutual fund. Then I would forget about it.

I.ve got more than any millonair could ever have, {My family}. unless that millionair was a worthy L.D.S.

:mellow:

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  • 1 month later...

Now, free advice is often worth about what you pay for it. But here, tucked away on in this board, is some of the most relevant and practical advice you'll find anywhere. I see someone dismissing it out of hand because it is temporal in nature, and this is an message board is focused on spiritual things. Let me remind everyone about the emphasis our leaders have placed on "getting our financial houses in order". We even have a website specifically dedicated to temporal things.

A few of my favorite parts of cjcampbell's post:

remember that you cannot avoid the consequences of divorce even if it is not your fault. One of the chief consequences of divorce is poverty.

Man, wouldn't it be great if people truly understood and accepted that? When warring couples one-up each other into a divorce, one thing they're doing is ensuring each other's financial struggles for decades.

Buy a $20,000 car on credit and you will have to earn $80,000 to pay it off. Was that car really worth $75,000 more than a $5,000 used car you could have paid cash for?

It truly is a pity more people don't understand this. Yes, this is what is happening. Yes, this is how much cars cost for most people. Yes, you probably are one of these people.

Try to reach a point where unearned income is at least equal to your earned income. This should take about 20 years of saving.

Oh no! It requires patience and the torturous pain of not having things now? Forget it! :lol:

Question for cjcampbell - if your financial investments are producing an income, isn't it true that they've pretty much stopped growing? I mean, you can either reinvest your dividends or get them paid out, you can't have both, right? In other words, my $10K in stocks can either spit out a monthly dividend, and be worth $11K in 10 years, or no dividends and be worth $20K later - isn't that about right?

5) Don't micromanage your savings and investments. The stock market goes up and down. Big whoop. Sometimes it even crashes. It always comes back. Maybe it takes a few years, but it always comes back. Selling your stocks because you think they are about to go down usually costs you more in capital gains taxes than you would lose in a major crash.

And when it comes right down to it, you don't have the faintest dang clue what the market is going to do next.

Story from the guy who taught my statistics class: He had his students running their own stock by flipping coins, adding value for heads, removing it for tails. At the end of the test, each student had their own year's worth of stock price returns. Some had lost everything, some were 10X the original price, most were in the middle. Anyway, the teacher had these papers on his desk, when his stock buddies came to visit. They were looking through the papers, and asked him what they were. He enjoyed a good joke, and said he was having his finance students analyze various stocks for recurring patterns. His buddies got very excited about 3 or 4 of the papers - they could see the pattern! They knew what these stocks were going to do next, based on what had just happened! They asked, then begged him to let them know which companies were being tracked, so they could run out and invest. They initially refused to believe that the stock results were actually created by students flipping coins.

Learn this: Anyone that believes past results indicate future results, is also refusing to believe it.

Great thread!

LM

(drives a 95 honda with 250,000+ miles on it)

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Thanks, you've given me some ideas on long term goals. My main goal right now is to kill the last of my education debt and plan to have it dead by February (by pouring every spare cent I have at it). I made a resolution to keep living like a college student until the debt I got was gone. Then start socking away money for a house in a few years.

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  • 3 weeks later...

Thanks, you've given me some ideas on long term goals. My main goal right now is to kill the last of my education debt and plan to have it dead by February (by pouring every spare cent I have at it). I made a resolution to keep living like a college student until the debt I got was gone. Then start socking away money for a house in a few years.

If I knew then what I know now, I would've started saving as a teenager for a house. I never expected it to be this hard. Good luck with getting rid of the last of your student debt. Being debt free is a wonderful feeling. I miss it. :)

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I just realized this month what a savings it is to have food storage. Because we have at least 2 of everything that we normally use in food storage (except fresh produce) we are in a position to NOT buy anything unless it's on sale. Then we stock up so we have enough until it goes on sale again.

I know this saves us money but I have no idea how much.

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  • 2 weeks later...

I just realized this month what a savings it is to have food storage. Because we have at least 2 of everything that we normally use in food storage (except fresh produce) we are in a position to NOT buy anything unless it's on sale. Then we stock up so we have enough until it goes on sale again.

I know this saves us money but I have no idea how much.

Good thinking! I know, I look at how everything has gone up in price and I wish I had bought 10 of everything that was on sale. Did you know you can freeze tomatoes whole? A friend of mine has a garden and she uses frozen tomatoes to make sauce in the winter and uses fresh tomatoes in the summer. This saves her a lot of money. You can also dice onions and freeze them, so when you see them on sale, dice a bunch and stick them in the freezer. That is, if you have the freezer space. I don't. When we have a garage, we will probably get an extra freezer so we can take advantage of sales more.

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