The Second Tier of Building Wealth

The second tier of building wealth is learning how to have your money make money. If you don't know how to earn money, you won't have any money anyway, which is why the first tier is so important.

Managing Your Money

The first part of this tier is learning how to manage your money. Rather than flying by the seat of your pants, it is important to have a game plan and set goals. Learning how to make a budget and having the discipline to stick to that budget are key.

"A penny saved is a penny earned."

"Those who make 4 dollars and spend 3 will always be better off than those who make 5 dollars and spend 6." - me

“Most people don’t receive a formal education about financial matters, but it’s an important life skill.” - http://www.northbaybiz.com/General_Articles/General_Articles/Amazing_Savers.php

Avoiding Debt

Debt is a cancer. Debt is a disease. It affects stress, health and relationships. On the national scale, we are about 70 trillion in debt, if we include future debts such as Social Security and Medicare (http://www.truthin2008.org/"http://www.truthin2008.org/). On the individual level, "Credit card debt is the third largest source of household indebtedness, averaging $15,587 per indebted household as of June 2012" (http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/). While some people believe debt increases productivity, I think we should be attacking the statistics above head on.

People often get upset when taxes are raised, yet will gladly pay a 3% tax to use their credit cards. Of course credit card companies are smart so they charge businesses and people think they are not being charged if they pay off their credit cards on time. Even worse, people don't pay their credit cards off each month which leads to 10%-25% in additional fees.

A quick side note. There are arguments that businesses should have debt because they leverage money and increase investor returns. I absolutely believe in the power of leveraging money, but that is another blog posting.

Create an Emergency Fund

Everyone should have 3 to 6 months of living expenses saved up for emergencies. I have heard it quoted that for every $10,000 in your annual salary, it may take a month to find that pay in a job, if you were to lose your job. That is, to find a 100K job, if that is your salary, it might take 10 months to find that job. In addition to losing your job, you may have to replace your car or take care of another emergency.

If you do not have an emergency fund and have credit card debt, I would advocate eliminating your credit card debt and building an emergency fund at the same time. An emergency fund can be placed in a checking, savings, money market account or certificate of deposit. This purpose of this fund is not to make money, but be liquid, meaning that you have access to the fund within a week's time frame.

Playing the Money Game

Once you have followed the above rules, you will be able to start playing the money game. You will become a lender and not a borrower. That's right, I said you be the bank. Rather than give the money to the bank, find out where the bank is investing the money you are giving it. I think that its very sad that we have become a society where we go to the bank to get loans, rather than visiting that rich uncle. What has happened to the strength of an individual's word? Why not register a promissary note which is based on a mere handshake?

Besides, the emergency fund and the 529 plans for college savings accounts, you should have a couple more buckets used to build your financial house. Diversification is an important word. For those who had all of their savings in mutual funds or stocks in their 401(k) plans in 2008, they may have had 50% of their estate taken out. On the other hand, suppose you had something like a 50% real estate, 25% stocks and 25% bonds. Now, imagine you lost 50% in stocks. This means you really only lost 12.5% of your estate.

Any well built financial house will include a diversified portfolio along with tax considerations. It will also include considerations on liquidity (like short or long term).

More importantly, realize that "No one will protect your money better than yourself." If your financial planner is not teaching you about money, they are not doing their job. A good financial planner will give you information and then let you make decisions about your money. They will not give you a single option and tell you that its the perfect plan, because no one can predict the future. Rather than pass the buck to your finanical planner, learn enough to be able to ask the right questions.

Most people who lost money in real estate, lost because they didn't know how to evaluate home prices or do other number crunching. This is true because over the past ten years while many were losing, those who knew were still making money. It is shocking to me that right after the sub prime mortgage crisis, people are still putting 3-5% down on homes and taking out a 30 year loan.

Most people who took a huge hit in stocks, also lost because they didn't know what they were investing in or how their investment worked. With the advancement of the internet, people can now invest in any publically traded company with the click of a button. They do not look at the investment, they just tell themselves, "Well, Apple is a great company with a great product." So, if someone told me that, I might respond, "If you had 1 trillion dollars, does that mean you would be willing to purchase Apple with that 1 trillion dollars?" It is shocking to me that right after the stock market crashes of 2001 and 2008 people continue handing their money off to someone who is making money whether they gain or lose money.

Whether in real estate or in the stock market, based on many people I have interviewed, I have found a huge difference between people who know how to have their money make money and people who don't. Those who do, often live by this phrase, "If the numbers work, I will do the deal. If they don't, I won't."

Support My Mission

1. You can support my mission by visiting http://www.izuservices.com and donating. A dollar lets me know you support my mission or like my posts. Thank you for those who have already donated.

2. Donate to SAGE via http://sagescholars.berkeley.edu/. The UC Berkeley SAGE (Student Achievement Guided by Experience) is a self-funded experiential leadership program that provides education, professional development, mentoring and internships to UC Berkeley students who come from poverty and low income backgrounds. I serve on the Leadership Council for SAGE and want to help raise money for their cause.

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