As the wild 2016 winds to a close and the holiday season approaches, many of us start making plans and resolutions for the coming year. Rich Guys plan their agendas and workflow for maximum impact, and you should, too.
If you are one of the 45% of us who makes New Year’s resolutions, you know that money matters are almost always in the top 5 of our annual to-do list. You also know how hard it is to stay on track as the year unfolds. Part of this is our lack of dedication and our ability to be distracted, but part of it is we don’t make goals that are both specific and attainable.
Let’s resolve that 2017 will be different, at least where our money goals are concerned.
Here are 10 Money Resolutions you should make in 2017:
(Quick note: To give you a complete airing of all 10 items, this entry would be a small book. Fear not! Today I’m giving you just a primer – a warm up, if you will – and also a preview of what’s coming at TLRG over the next few weeks, as we tackle each of these in detail. Be sure to sign up for updates and I’ll let you know when each step’s details get posted.)
1) Create (and actually work) a written plan for the next 1, 5, and 10 years.
Rich Guys tend to be meticulous planners, so you need to learn to be, as well. Your plan for each should start with a written paragraph, or at least a few sentences, describing your life at that time, and how you see yourself financially different than you are today. Be specific. (This works really well for all areas of your life, such as health, family, spirituality, etc.)
Writing long-range plans can be a challenge, so start with Year One and work toward the others.
We’ll cover how to set goals like a Rich Guy in a post next week.
2) Treat your paycheck like corporate revenue.
One of the economic differences between W-2 employees and business owners (Rich Guys) is how they are taxed. This can create a lot of misplaced anger from people who do not understand the tax code and how it works to support business in our capitalist economy. They imagine a corporation isn’t paying its fair share (some do cheat, but that’s another story), but when businesses use deductions, depreciation, and other tax strategies to reduce their tax liability, what they are doing is not only perfectly valid, it’s actually the way our government wants them taxed, because lower corporate taxes are very, very good for workers.
There is a critical difference between how a business uses its income and how an individual does:
- In our tax code, a business earns its money, spends everything it can, and then gets taxed on what’s left.
- The Average Guy earns his or her money, gets taxed immediately on it, and then gets to spend what’s left.
In a nutshell, a corporation deducts from its income all the costs of being in business, including its savings (commonly called “retained earnings” on corporate income statements). Corporations also operate using a strict budget, to keep expenses in line. They maximize their tax deductions, eliminate time (and money) waste, and look everywhere for greater efficiency.
You need to do the same. Whether you work for someone else, or own your own business, you need to come at your paycheck with same the mentality of a corporation. Corporations exist to create profit for their owners. As the owner of your salary, you should be trying to do the same thing.
How does the Average Guy do that? By adopting the tactics of a corporation when dealing with your family’s budget.
(By the way, as an Average Guy striving to be come a Rich one, you too can benefit from and have a share of corporate profits. That’s what equity (stock) investing is all about.)
This is a complicated subject – one I’m sure this blog will return to often. Look for a much-expanded discussion of this in a couple of weeks.
3) Expect disaster. Yes, really.
They say 90% of the things we worry about never happen. I’m not sure if that’s true or not, but I do know that the moments in my life that were the most impactful were things I never in a million years imagined before they happened.
Awful things happen. That’s life. Floods, car accidents, fires, medical emergencies. But if they happen and you have no financial way to deal with it, a single moment in time can mean decades of financial ruin.
Even if it’s relatively small, like a blown engine in a car, without emergency savings, a setback can become exponentially worse. You either go further into debt, which makes the monthly budget even tighter as your monthly payments increase, or else you have to deplete long-term savings like an IRA or 401k, which can have significant tax consequences.
You should have a goal of always having 3 to 6 months’ worth of expenses (not necessarily your entire income) saved for emergencies. This is not a vacation or Christmas fund. This money is strictly for those “oh no” moments that life has a way of dropping on you on a Tuesday afternoon.
Also, Rich Guys buy insurance to pass the risk off to others if the damage from a disaster would be catastrophic. So should you. Whether it’s life, disability, business liability, or long-term care, don’t skimp on coverage if the consequences of not having it would be disastrous. (Don’t spend more than you have to for insurance, either. Shop around.)
4) Eliminate debt in a smart, sober, patient way.
“The rich rules over the poor, and the borrower becomes the lender’s slave.” – Proverbs 22:7
Debt is a serious concern in our world today. Not just consumer debt, either. Entire nations are at risk of insolvency because, as a species, we all want more than we have right now.
Make 2017 the year you really attack your debt and you commit not to go into any more of it. But do it in an orderly, organized way. Don’t put so much income on debt service that you aren’t able to establish an emergency fund and contribute to long-term savings. Just create an orderly plan to get you out of debt over a reasonable period of years.
(For Dave Ramsay fans, this is just one place where I differ significantly with his approach. I believe a basic financial plan is like a three-legged stool, and you must do three things at the same time: pay down debt, build emergency money, and invest long-term.)
So how do you eliminate debt? We’ll go into it in detail in a few weeks, but for now, here are a few key concepts:
- This may sound obvious, but the first step to eliminating your debt is to commit to not add any more to it. You will never get your debt under control if you don’t get off the treadmill of being a “good consumer”. End the tyranny of instant gratification in 2017. Tell yourself no.
- Overpay on only one debt at a time. Pay minimums on the others. Put all of your extra debt payment on just one account at a time.
- Once your first debt is paid off, take that debt’s minimum payment, plus your over-payment, and add it to the payment of the next debt on the list. You keep doing that as each debt gets paid off. You won’t see a change in your lifestyle for now, but you can pay off enormous amounts of debt in just a few years by keeping the total amount you pay toward debt the same until all of it is gone. This is called “debt acceleration” or “debt snowballing“.
- Prioritize your debt by interest rate and pay the highest interest rate items first. Those are usually unsecured credit cards and signature loans.
- There’s no “good” debt, but there is “smart” debt. Save your home mortgage and student loans for the last payoff, because you get to deduct the interest on those loans off your taxes.
Remember, you didn’t go into debt overnight and you won’t pay it off overnight. Give yourself the time you need to get it paid down realistically, while still being able to simultaneously add to an emergency fund and contributing to a retirement account. And again, we’ll discuss this in much more detail in about two weeks.
5) Invest your money like your entire future depends on it.
This blog will come back often to the specific topic of investing, because how we utilize money is the single biggest difference between the Rich and the Average. Average guys see money as a prize. Rich Guys see money as a resource.
As a financial advisor, one of the most important things I need to learn about each new client is your ability to emotionally and economically handle market volatility in your investments. Assessing your “risk tolerance” takes into account how much time you have before your money will be needed, if you have other sources in case of emergencies, and your psychological reaction to short-term market losses.
One of the striking differences between Rich Guys and Average Guys, in my experience, has been their ability to tolerate risk. Rich Guys understand that risk and reward are synonymous: the more you have of one, the more you have of the other (long-term), and vice-versa. Plus, like I said above, Rich Guys see money as a tool to be used, where the rest of us see money as a hard-fought prize.
So it’s common to see the Average Guy be far too conservative when he’s picking long-term investments, especially when he’s younger. Then, when he’s approaching 50 or 55 and realizes the money never grew, the panic sets in that he won’t have enough to retire, and starts making wildly aggressive gambles, to try to make up for lost time. You need to be the exact opposite.
I’m going to talk at great length about this subject in future posts, but for now, start getting the following ideas implemented as we go into 2017:
- Understand the Rule of 72. This is a simple financial concept that frankly ought to be taught in grade school, that explains very easily how amazingly powerful compound interest can be, and why earning as high an average return on your money over as long a period of time as possible, can make an Average Guy a multimillionaire. Mastering the Rule of 72 gives you a fighting chance to achieve wealth, even without a high income – if you start young.
- Until you are retired, a majority of your retirement savings should be in stocks. You can reduce your volatility somewhat by choosing funds that focus on dividend-paying, large company stocks, but you need to have a majority of your investments earning an average return as high about the rate of inflation as possible.
- Stop checking your accounts too often. And turn off the TV. Markets move up and down all day, every day, and market movements are actually based on emotional reaction to potential world events, most of which never actually pan out. Commit to a long-term view, take on as much risk as your age and liquidity needs can tolerate, and then get out of our money’s way.
6) Open a ROTH IRA. It’s the most useful account you’ll ever own.
Rich Guys seek ways to maximize the impact of their investments. One of the best for Regular Guys to do that, in my opinion, is with a ROTH IRA.
In traditional retirement accounts, you get to deduct your contributions now because you’ll pay taxes on them when you take them as income later on. A ROTH account is taxed backwards from traditional retirement accounts, and that has many advantages, especially if you’re 50 or younger.
ROTH account contributions can be withdrawn without tax or penalty at any time (because they were already taxed before they went in). The earnings are subject to taxes if you’re not yet 59 1/2. The good news is, you withdraw your contributions first and earnings last. So, you can withdraw 100% of what you put in over the years, tax-free.
This makes a ROTH a great place to save for some of the “might need it” expenses in life, like medical expenses, college savings, an emergency fund, etc. Your growth is tax-deferred, and if you end up not needing to use it, it’s there for you in retirement, tax free.
I’ve created a basic page of ROTH IRA information, and how it differs from a traditional IRA. (Full disclosure: it’s impartial info, but it’s from my financial firm, nVest Advisors.) Click here for a PDF you can download and keep.
7) Stop being a good consumer.
Excessive consumerism is one of the biggest causes of financial hardship for Average Guys. It’s not entirely your fault – our whole economic system is based on making a product, then selling it to earn money to buy someone else’s product, so that they can make money to buy yet another product. Our whole world is built on this maxim: Make stuff, sell stuff, buy stuff.
And we’re marketed to constantly, being told this product will make us feel happier, sexier, more important. We’re told this wonder product will make us skinny, that one will make our neighbors jealous, and that our lives just won’t feel complete without spending our money on even more “stuff”.
Remember number 5, above: Rich Guys see money as a tool. Average Guys see money as a prize. So companies make products they hope you’ll see as a prize (usually after you’re told it’s a prize), so that they can take your “tools” from you, and put them to work taking away more “tools” from others. This is fundamentally how the Rich grow richer while the poor grow poorer.
Getting off the consumerism “plantation” will take a while for most people, but there’s a refreshing shift toward minimalism happening in our society today that I think is a great thing. The less you spend on “stuff”, the more experiences you can have, the more charities you could help, and the more you can put your “tools” to good use.
Commit in 2017 to stop being a slave to status. Give up on the herd mentality, that if everyone else has one, I need it too. Make yourself wait 30 weeks on every major purchase, and see then if you still feel the same need for it. Step off the consumerism treadmill and start turning your dollars into employees, out working hard for your future.
8) Work every day to improve your earning (and life) potential.
You don’t need to go back to college to improve your knowledge and skill set in your chosen profession. It doesn’t take tens of thousands of dollars in student loans. It DOES, however, take an investment of time and commitment.
If you’re serious about growing your income, advancing in your career, or starting that business, you need to be constantly increasing your knowledge. The best advice I ever got on the subject came from one of my mentors at my first investment firm, who told me I should read two articles a day and one book a month on a subject pertaining to my new career. By the third year, he said, I’d have the equivalent knowledge and ability of an MBA.
Every day, you should dedicate a specific percentage of time – at least an hour – to self-improvement. If you’re smart, you can use that hour to accomplish a number of goals at the same time.
For instance, I’m a huge fan of audio books and podcasts as a way to broaden my knowledge and skill set, whether as a financial advisor, voice actor, or workout enthusiast. Whether I want to learn more about behavioral finance, or podcasting, or marketing, there are experts in the field who have gone through the effort to produce good content for us to learn from. For free. All I have to do is get it in my ears, which I choose to do while I work out. This lets me get some needed professional information while I exercise.
Yes, this is going to require you carve out some time. But like the old saying goes, nothing worthwhile is easy.
9) Outsource what you don’t want (or know how) to do yourself.
I’ve been able to change the oil in a car since my very first one, a 1972 Pontiac Ventura II. I still, on occasion, get under the hood of my own car, tinkering on my ’03 Jaguar or showing my son how to work on his first “beater”. But most of the time now, I outsource the mundane tasks like oil changes and tire rotation. Why? Two reasons: first, because I have more money now and don’t want to do those things anymore, and second, because my time is worth more money doing the job I’m skilled to do, and letting a good mechanic down the street do his.
When it comes to money matters like investing and financial planning, yes, you can do it yourself. But as an advisor, I know most people never get around to doing it themselves. Either the subject ends up being too overwhelming, or else it just flat-out doesn’t interest you. Yet it’s vitally important that issues like taxes, investment selection, estate planning, and insurance needs are accurately and completely addressed. Rich Guys don’t put off what’s burdensome or irritating when they know it needs to be done.
If you can’t afford the time or energy to do these tasks, that’s fine. But don’t overlook them or put them off any more. Act like a Rich Guy and outsource it. Often the savings in time and hassle more than pay for their expertise, and it may cost less than you expect.
10) Build at least one source of passive income in 2017.
Money comes into our lives in different ways. Active income streams to us as the product of our sweat, innovation, and sacrifice of time and talents. It is literally the exchange of a portion of your life for the means to acquire what is needed for survival and comfort. It’s the compensation for the activities that take up most of our waking hours (or else, it should be).
Passive income is money that comes from our indirect involvement in acquiring it, and Rich Guys maximize every opportunity to add passive income to their lives.
There are a lot of ways to start earning passive income. Find one you like and commit to starting and nurturing just one in 2017. It’ll change your life forever; the day you can live off passive income, and take your life back from the slavery of hand-to-mouth living.
Let’s get started together.
The next several weeks I will be expanding on each one of these 10 tasks in separate, in-depth articles. Make sure you subscribe to your mailing list to stay informed on when they post, and follow us on Facebook, Twitter, or Google +, for many more articles and updates.
My wish for you is that 2017 is the year you start reaching and achieving your dreams! Let’s start by learning together how to Think Like A Rich Guy.