Your Income: It’s Just The Beginning

It has been said that your income is the greatest wealth building tool available to you, but having a tool and correctly employing it are two different things. There is another saying that reflects most people’s realities. When all you have is a hammer, every problem looks like a nail. Having an income is only half of the process. You have to know how to use it in order to benefit from it. Many believe that an income is meant to be spent and if that is your belief, you have the wrong perspective. One of the best questions I’ve been asked while mentoring those who are seeking financial stability is the following.

What is the key to unlocking the power of my income to build wealth?

The average income in America is somewhere between $48,000 to $53,000 a year (depending on which survey you are using). It is becoming increasingly harder to raise a family on this amount, let alone build wealth. This is why most families resort to both parents working. The dynamics of society have changed drastically since the time of a single bread winner and two parent families.

However, there are some common factors associated with unlocking the power of your income to build wealth. Certainly a single person without children has an advantage. The single person only has to focus on a couple of items. First, control the amount of money he or she spends on consumer products, services, and experiences. Also, don’t use credit to artificially inflate his or her income. This creates debt and introduces the main culprit responsible for diminishing the ability to build wealth. 

The final step for the single person is to save like mad. A single person, appropriately managing his or her money, should be able to save at least a third of his or her income.

For the couple with children, the task becomes a little more complicated. This is because in the process of raising a family, there are expenses that seem to come out of nowhere such as a sick child, school related expenses, and falling into the trap of keeping up with the Jones. Therefore, the first practice a couple needs to concentrate on is to live well below their means. If you have a dual income, live of the greater and bank the lesser. This is a strategy my wife and I used for several years. If the greater income is not enough, only supplement the greater with the lesser to the extent needed to meet your current requirements.

The second practice is the same as the single person, get out of and stay out of debt. Debt is not your friend. Don’t become too friendly with easy credit and don’t fall for the realtor’s assessment of what you can afford. When purchasing a house, the lender and the realtor are looking at two sides of the same coin: interest and commission. That is not to say that there are not good lenders and realtors out there, but you have to know that, in the end, both are working for themselves while working for you. Just because you qualify for a $400,000 house doesn’t mean you have to buy a $400,000 house.

This leads to the next principle, limit your exposure to risk. Do your due diligence in whatever direction you choose to invest your money. Don’t take someone’s word for it. Whether you are talking to a realtor/lender, a financial planner, or an insurance salesman, make sure you hire a competent professional. And that professional’s first priority should be you. I strongly recommend you share your goals with the professional and hold him or her accountable to helping you achieve your goals even when your goals conflict with his or hers.

Most financial planning is influenced by behavior. Therefore, you must learn to say no to yourself and your family. But don’t just say no. Learn to work through the process of making a purchase. Discuss the advantages and disadvantages of saying yes and no. Measure and discuss the opportunity costs. Teaching your children how to make an adult decision will not only help you unlock the power of your income, but it will also position your children for success with money when they begin to make financial decisions.

The single most troubling problem today concerning money management is that there isn’t any! The “I want it all and I want it now” mentality speaks of the instant gratification generation we have become. There are pockets of those who have learned and practiced good financial behaviors, but for a vast majority, managing money is not a strength.

The best way to unlock the power of your income is to lock up the power that spending your income has over you.  You cannot spend you way to wealth. In my book Simple Wealth Building Strategies I provide you with eleven different strategies that collectively help you systematically build wealth. Sometimes taking what someone else has done successfully and adapting it to your situation is the best way to develop your own strategy. Therefore, taking a look at my book might encourage you to develop and implement your own successful wealth building strategy.

Is It A Blip Or A Trend?

These words were made famous in a commercial for the Washington Post featuring Craig "the Chief" Berube and Kevin "the Killer" Kaminski. The commercial shows these two Washington Capital hockey players, known for their physical play, discussing crime in America as an analogy for hockey.

Berube: Criminologist ponder national crime rates. Crime rates are down across the board, some dramatically and the question has become: Is this a blip or a trend?

Kaminski: Well, Bennet’s column said that crime in America presented statistics that conclude the more aggressive incarcerations and stricter sentencing appear to be turning around an archaic penal system.

Berube: Well, I say don’t do the crime if you can’t do the time.

Craig Berube askes the quintessential question of any analyst. Is this a blip or a trend? This is a great question to ask yourself when following an individual stock or the market as a whole. For instance, falling interest rates are a trend. Since 2007, the FRB (Federal Reserve Board) has been dropping interest rates in an attempt to stimulate economic activity and jump start the economy. Although this practice artificially propped up the economy and the stock market for that matter, there will come a day, and probably soon, when rates will rise and the market will make a major correction. Now, are the rate hikes a blip or a trend? Is the coming correction a blip or a trend? Two great questions to ask yourself going forward.

My bet is that the market correction we are headed for will be a trend. I believe this trend will continue for a longer period of time if the current political party losses control of the White House. I tend to think that the FRB is keeping the rates low for two reasons. First, the economy is not doing as well as the current administration wants you to believe and second, it is propping up not just the economy, but also the Democratic candidate’s chances to win in November. I believe if the 

Republican candidate wins in November you will see a series of rate hikes beginning in December.

Only a few times in the past have I moved to a majority cash position in any of my accounts. However, based on the political winds and the continued reluctance of the FRB to slowly introduce rate hikes, I believe that the next eighteen months will be more volatile than it has been. I also believe that if you move to cash now, there will be some fantastic bargains in the weeks and months to come. 

Often times it is the average investor who misses out on these bargains because, by the time Wall 

Street has made its moves the little guy is reacting to the market correction. Unfortunately, this leaves the little guy in no position to take advantage of the bargains created in a down market.

Blips are nice, but very hard to time. Trends will hurt you if you are fully invested. However, they create some of the best opportunities for bargain hunters who position themselves to jump at the opportune time. In my book, Simple Wealth Building Strategies, I devote an entire chapter to this concept of positioning. Blips and trends have a way of providing opportunity, but I believe that you have a part to play in the process. There are three ways opportunity is created. Opportunity comes from a change in the environment (for you), a change in your actions (by you), or a change in you (of you).

Opportunity is created for you when situations outside of your control present a favorable environment in which you can build wealth. Market blips create micro-opportunities such as a rise in stock prices due to favorable news or a drop in stock prices due to unfavorable news. I have bought into stock splits, mergers, conversions, and special dividend announcements. I have also bought into market adjustments such as the reaction to the Brexit vote. More often than not, these are quick blips which can pay big bonuses. Buying into opportunities that are created for you can be difficult because you have to constantly look for and research the details. But there are other ways opportunity is created.

Market trends create macro-opportunities such as the geo-political events that traumatized Europe during the financial crisis in Greece. Long term problems in foreign countries can have a suffocating effect on our markets, but domestic events can also open up the window of opportunity. Consider the effects of Y2K, 9-11, or the housing bubble popping. All domestic, all devastating to the market and all producing great opportunity for those who were positioned to pounce. All of these external events that provided the average investor with the opportunity to get some bargains.

Opportunity is also created by you when you take specific purposeful actions that produce a favorable environment for building wealth. This is the one where most people struggle because changing a poor financial behavior is hard. Having the cash available to take advantage of opportunity is, in and of itself, creating opportunity. To have the cash to make a move, one needs to preserve as much operating capital as possible. This means living paycheck to paycheck is not a good wealth building strategy. Changing that behavior alone can drastically change the opportunity you create for yourself.

Living on a budget, having an emergency fund, and preserving as much wealth as possible by using tax-favored accounts can go a long way in creating opportunity. However, the average person can struggle with getting even one of these right. That is why I wrote Simple Wealth Building Strategies. I walk you through a logical implementation of strategies that will strengthen your ability to build wealth and create opportunity for yourself.

Finally, opportunity is created of you when the depth and width and breadth of your character produces a favorable environment for building wealth. Others are more willing to share information with someone they trust, respect, and with whom they have a relationship. Your character produces opportunity and the lack thereof reduces it. Be the kind of person that abides by the rules, carries him or herself well, and speaks intelligently and thoughtfully about the more difficult issues facing our world today. Don’t be proud, don’t be haughty, and don’t be unwilling to help others even when there is nothing in it for you. You don’t want to be known as a blip; you want to be known as a trend and a trend setter.

Blips, trends, and opportunity are cousins. They play together. If you can learn how to read the market, you can position yourself to capitalize on blips and trends. I, personally, have begun to move towards cash in hand. I believe that once the election is over, the FRB will begin the process of raising interest rates. I expect to see a full percent by EOY 2017. They will most likely start with a quarter percent in December, followed by another quarter percent within six months and, if the economy can adsorb that, a half point by the end of 2017. It depends on the reaction of the economy, but I can see the FRB doing this especially if the Republican candidate wins. After all, the current Chairperson was a Democratic appointee.

DISCLAIMER: Opinions and statements made in this column are not meant to be used as financial planning advice. Also confer with your financial planner before making decisions about your investment. The author is not responsible for any decisions made by others based on the opinions and statements made in this column.

Social Insecurity – A Government Slush Fund, Not A Retirement Plan

Generations have become dependent upon a government program that offered a safety net following the Great Depression. Never again would hard working Americans ever have to worry about having enough in retirement. The problem is Government couldn’t keep its grubby little hands out of the Social Security cookie jar. If I could change one thing about how Americans can build wealth for retirement, I would provide all the opportunity to invest their portion of the SSDI tax into personal retirement accounts that are tax favored. The contributions can be written off and the growth is not taxable, ever. Then questions like this would never have to be asked again.

Knowing that I will have social security in retirement, why should I focus so much on building wealth?

Let me start by saying that it is not my intension to offend anyone with my answer, but I am labile to ruffle a few feathers here. There are those who call social security an entitlement program and there are those who vehemently argue that they paid into it so it is not an entitlement – it is a right. I do not want to get into the middle of that argument, so let me just say that both sides are technically correct. It is both an entitlement program and a right. Why do I say that? Because there are programs within the program that are paid out to those who have never contributed. 

It helps to know exactly what programs fall under the title of Social Security. There are Social Insurance Programs such as Old-Age, Survivors, and Disability Insurance (OASDI), but there is also Unemployment Insurance, Workers' Compensation Insurance and Temporary Disability Insurance. All of these are part of the Social Security insurance program.

There are Health Insurance and Health Services programs such as Medicare and Medicaid. There are Programs for Specific Groups such as Veterans' Benefits, Government Employee Retirement Systems, and Railroad Retirement Benefits. Then there are the Assistance Programs such as Supplemental Security Income, Temporary Assistance for Needy Families, Food and Nutrition Assistance, Housing Assistance, Low-Income Home Energy Assistance, General Assistance, and Earned Income Tax Credit.

Social Security is an umbrella term used to describe a number of programs that, in some cases, give back to those from whom it was taken, and in other cases, give to those who have not contributed. In either case, no one has ever told me that they became wealthy because of their social security check. Your goal for retirement should be that Social Security is a bonus you receive at the beginning of every month for being a productive member of society. The core of your retirement plan should be the wealth you’ve built, not the scraps the government provides.

Let’s face it, Social Security is a full blown Ponzi scheme. I am just calling it what it is. The structure of the plan is a redistribution philosophy: take from those who worked hard their whole life with a promise of “security” in later years and distribute it to those who are able to work, but don’t. For those who have worked hard, the return on investment is much smaller than it would have been if the money was invested in a tax-favored account.

If anything, Social Security is quickly becoming a Social Lack-of-Security program. At the time it was created it might have looked promising. As often is the case with politicians though, they used a crisis (the market crash in 1929 and difficult economic times) to take advantage of the people and they didn’t look far enough down the road to see the complications and residual effects of mismanagement and changing demographics.

Social Security is nothing more than the current wage earners paying for the retirement of past wage earners and others who may need social assistance. The money contributed (actually stolen) from past wage earners has been used by the government for its intended purpose, but also for extras beyond its original intent. The lock box has become a slush fund for government pet projects and programs designed to keep the people dependent.

Certainly, past wage earners contributed, but with the average life expectancy increasing and the assets being used for benefits that were not part of the original program, the system is, for all intent and purposes, broken. Just as the antiquated pension system eventually succumbed to the pressures of an ever increasing retired population, the social security system will too, succumb. If you are not currently receiving social security, plan on never receiving it and take responsibility for your own retirement.

Having the mentality that Social Security is not a retirement plan makes it easier to accept when the government begins to reduce the payout because it does not have the money to meet its obligations. The Social Security system is a dependency system and a dependency system always reduces your standard of living. I know this response is not the most uplifting, but it is honest. If you have dreams you want to live out in retirement, don’t plan on doing it with government assistance. For those who still have time, use Social Security as a bonus plan and not a primary source of retirement resources.