How to get "rich" (financially, that is...)

[pochax]

Thought i would plagiarize this post that i read from someone i consider knowledgeable about personal finances. Admittedly there is no Christian content here other than what we would inject into it. Additional disclaimer, it is far more important to be spiritually rich than financially rich. Enjoy!:

1) Make a lot of money
a. Get well educated AND learn a trade/job skills/a profession that pays well. It is much easier to have a high net worth when you have a high income
b. Don’t stop learning when you leave formal schooling
c. Work hard
d. Be willing to take reasonable risks
e. Consider being an owner rather than an employee

2) Don’t spend a lot of money
a. Start saving early. Remember that every dollar you save in your twenties and thirties is 8 times as valuable as one saved in your fifties
b. Don’t be all hat and no cattle
c. Rent your lifestyle (Don’t buy a boat, a time-share, a second house, a plane etc) Keep your fixed expenses low so when hard times come you can cut your lifestyle back rapidly
d. Realize that buying a house or cars that are too expensive for you will likely keep you from getting rich. The big things matter most
e. Be prudently frugal and selectively extravagant. Be sure that you are spending your money on the things you value most
f. If you can’t afford to pay cash for it, you can’t afford it. The only exception is a house (because it will generally appreciate at just over the rate of inflation), where the rule is if you can’t afford to put 20% down and use a 15 year fixed mortgage you can’t afford it
g. Marry well, marry once, marry someone who shares the same thoughts, or with whom you can work out an acceptable compromise beforehand, on “The Big Four” (Money, Religion, Kids, and Sex) and STAY MARRIED
h. Credit cards aren’t for credit; if you have paid interest at a higher rate than 3% or paid a late or over-the-limit fee more than once you shouldn’t use a credit card

3) Make your money work as hard as you do
a. Read at least one good basic personal finance book, one good investing book, and one good behavioral finance book. Consider Personal Finance for Dummies , The Boglehead’s Guide to Investing, and Why Smart People Make Big Money Mistakes and How to Avoid Them.
b. Get the market return; use fixed asset-allocation, index mutual fund investing as your default strategy
c. Minimize taxes. Know the basics of the tax code, max out tax-advantaged savings accounts, and use them to your advantage
d. Keep investing expenses low
e. Understand basic financial calculations and lingo. Understand compound interest, the time value of money, financial risk, and the expected rate of return of various financial assets. Know how to use the excel functions-FV, XIRR, PMT, PPMT etc
f. Simplify your financial life. Put bills on automatic payment and investments on automatic withdrawal. Minimize the number of accounts you hold and the number of investments you have as much as possible
g. Understand why your savings rate matters a lot when you’re young and very little as your approach retirement. Understand why your investment return matters little when you’re young, more as you approach retirement, and a great deal during your first decade after retirement. Understand the concept of a safe withdrawal rate
h. See the end from the beginning. If you fail to plan you plan to fail. Have a written investment plan you can refer to when contemplating portfolio changes.

4) Don’t lose your money
a. Insure well against catastrophe-Life, Disability, Health, Liability, Property but self-insure whenever possible using a safe, liquid emergency fund (High benefits/limits but high deductibles/ waiting periods). Self-insure against medical expenses by maintaining a healthy lifestyle. After you retire, consider a single premium immediate annuity to insure against outliving your money and long-term care insurance to insure against having an extended period of dependence at the end of your life. Don’t mix insurance and investments. Cash-value (non-term) life insurance and variable annuities are generally products meant to be sold, not bought.
b. Get rich once, get rich slowly. Good investing is boring investing
c. Hire professionals to teach you, not just to “do it for you.” This includes accountants, estate attorneys, real estate professionals, and investment advisors. Be sure to bounce the advice you’ve received off someone with no conflict of interest in the transaction, realizing that no one cares about your financial success nearly as much as you do. If you are reasonably well-educated and interested, you can teach yourself to do your own taxes, sell your own house, and invest your own money

[bob]

pochax, that is actually a pretty good checklist for the new year...

[pochax]

Thanks Bob,
i actually would like to comment on a few things from the 2nd big bullet "Don't Spend a lot of money":

a. Start saving early. Remember that every dollar you save in your twenties and thirties is 8 times as valuable as one saved in your fifties

The beauty of compounding interest/gains is like old age. it's almost a certainty but we think it is so far off that we do not live and plan as if it is a certainty. It is also pretty invisible and unfathomable. Even when i plug the numbers into a calculator, it doesn't seem real to me. maybe i am too cynical that i could ever save that much or that the market will fulfill my expectations. either way, i am risking losing thousands upon thousands of dollars by NOT saving early (in 20s and 30s).

b. Don’t be all hat and no cattle

Pretty much says it - don't fulfill that need to keep up with the Joneses because the Joneses probably can't sustain that lifestyle either OR they can, and you don't make even half as much as they do, so why try?

c. Rent your lifestyle (Don’t buy a boat, a time-share, a second house, a plane etc) Keep your fixed expenses low so when hard times come you can cut your lifestyle back rapidly

This speaks to the need to be flexible when hard times come. If you are leveraged in debt for things that are passing fancies, hobbies, and depreciating assets, you are fixing your expenses and making no room to go down. Don't commit so much of your future income to things you are not even sure you are even going to like doing in 5+ years.

d. Realize that buying a house or cars that are too expensive for you will likely keep you from getting rich. The big things matter most

everyone talks about cutting back on the daily starbucks to save $3/day. what if i said you could save $100/day by buying the right house and car alone? big ticket items are where you will save the most.

e. Be prudently frugal and selectively extravagant. Be sure that you are spending your money on the things you value most

No one said you can't spend ANY of your money. but be selective. it is unlikely can have EVERY new gadget (iPad anyone?), go on 3 international vacations per year, buy that Armani suit, and pick up golf with new clubs and lessons and membership fees. but perhaps can you do one of them if you budget for it and you have really thought about how important it is to you and fits in with God's plan for your life. we are asked to be wise stewards of our money, not hoarding misers who save for the sake of saving.

f. If you can’t afford to pay cash for it, you can’t afford it. The only exception is a house (because it will generally appreciate at just over the rate of inflation), where the rule is if you can’t afford to put 20% down and use a 15 year fixed mortgage you can’t afford it

you can debate the numbers (why 15-year vs. 30-year?) but there is a reason there is a term "house-poor". this goes back to leveraging yourself to deeply that there is no room to cut back when times get tough. be wise.

g. Marry well, marry once, marry someone who shares the same thoughts, or with whom you can work out an acceptable compromise beforehand, on “The Big Four” (Money, Religion, Kids, and *****) and STAY MARRIED

this probably rings even more true for us as Christians who believe in the sanctity of marriage and the Biblical model of Christ being the bridegroom and the Church being the bride. Is it not amazing how well a good marriage integrates with being financially sound as well? Hmmm....not a coincidence, but more likely divine providence.

h. Credit cards aren’t for credit; if you have paid interest at a higher rate than 3% or paid a late or over-the-limit fee more than once you shouldn’t use a credit card

i would even argue if you pay over 0% interest or pay an annual fee. none of the rewards are worth it. they should rename credit cards, "spending account cards" but of course then credit card companies wouldn't make money off of us. as many would attest on this forum, if you can't control your spending with a credit card, don't use one (or even apply for one).

[cev2000]

There are a few things I think for me are wrong in this article. Here is just one of the ones that bother me the most....

c. Rent your lifestyle (Don’t buy a boat, a time-share, a second house, a plane etc)

Why would you want to rent? He says don't buy a second home rent one.... well if you like an area and visit there often why rent and throw your money away wouldn't it be a better investment to buy that second home? And a boat? I know lots of people that use their boats every weekend...how would renting one benefit them?

[pochax]

There are a few things I think for me are wrong in this article. Here is just one of the ones that bother me the most....

c. Rent your lifestyle (Don’t buy a boat, a time-share, a second house, a plane etc)

Why would you want to rent? He says don't buy a second home rent one.... well if you like an area and visit there often why rent and throw your money away wouldn't it be a better investment to buy that second home? And a boat? I know lots of people that use their boats every weekend...how would renting one benefit them?

Good point - cev. I think the point of the author is not to leverage yourself into one of these "lifestyle" items. i don't think he meant if you could buy it all in cash (without a loan/mortgage), then rent it. i think he meant that if you get yourself in a hole to by one of these types of items (the type of item you could and should cut back on when hard times hit), you are still stuck with the payments. So it should have read: Rent your lifestyle UNLESS you can afford to just buy it.

btw, what other problems with it do you have?