Generational Wealth Tycoon

Part 3: Providing the Image Without Investing the Money - The 'Smart and Inexpensive' Options

2013-06-03T21:30:00.000-07:00

Posted by Steve McLain, the main author of Generational Wealth Tycoon.

We began our series with Part 1: Providing the Image Without Investing the Money, followed it up with Part 2: Providing the Image Without Investing the Money - The 'Free' Tools, and now this is Part 3, where we take a serious look at the ways to make that impression required by your status without going broke.

The Car
There is no better better investment when you need consistent, reliable transportation to and from work than a good car.

There is no worse investment when you need consistent, reliable transportation to and from work than a new car.

What? That's right, for so many reasons, a new car is the worst thing you can do to sabotage your prospects of future financial wealth. The keyword here is "new". A new car, on average, loses 20% of its value when you drive it off the lot. It then continues to depreciate. The worst part? You probably went into debt to buy it, which means that you have an asset that cannot pay for itself if you encounter an emergency situation.

Some basic logic on car purchases: If Loan Amount > Car Value, then Loan - Car Value = Wasted Money.

Beyond saying that you should always buy used, I'll go on to say that I think taking a loan in the first place is a mistake. A loan traps you, especially when the asset it paid for is worth less than the loan balance.

I recently discovered Dave Ramsey and have been reading his book The Total Money Makeover. Wow, he has some great insights into human psychology and our relationship with debt. He believes in living debt free, because our income is our greatest asset when it come to generating wealth.

Dave Ramsey's view on car purchases is one of his most radical departures from traditional American thinking. He recommends that you never go into debt to buy a car again. He identifies the car payment as one of the biggest drains on a family's ability to save and generate wealth.

What should you do then? Save your money and buy it cash, sell the car that's attached to a payment (if you can pay off the loan amount), or pay off your current car loan. If you saved, you can usually buy something that works for about $2,000, continue to save, then sell it and buy another car down the line that better fits your desired lifestyle.

That's a big deal, especially when you have to present an image. I recognize that this image is often required of you, but I recently also made a discovery: if you keep your older car clean, keep it maintained, and are creative with vehicle choice, you might not have to upgrade to something beyond your means. FYI, you should never upgrade to something beyond your means anyway.

Never spend your money before you have it. -Thomas Jefferson

I drove a nice car into work every day until we had our daughter. When that happened, my wife and I swapped cars and I'm now driving a 2004 Toyota Corolla. It's not a bad looking car, but it does sport a few dents and scratches. Luckily, if I'm visiting a client, I can expense a rental for a day. Even if you can't expense it, however, the cost of a rental once in a while is considerably less expensive than buying a new car.

Clothing
Clothing is a pretty flexible area to gain massive savings. If you're up for putting in the work, you can score pretty big.

The clearance rack typically has clothing that might be flawed, or simply isn't in season anymore. Buying a jacket at the start of summer is a good investment when it's marked down 50% or more. Look for outlets, look for sales, and avoid impulse buying. Check out this article for more insights: How to Be Stylish Without Spending a Lot of Money.

Taking time to buy is critical and only buying what you need is even more important. I use my smart phone to scan a bar code and do comparison shopping at the store. I feel a little uncomfortable doing it because I'm afraid of being discovered shopping at another store...while in a store. However, it makes you into an informed buyer, on the spot. You could be saving or getting a deal, but you can't possibly know the going rate on everything, so if you have the tool, use it.

Money in the bank is like toothpaste in the tube. Easy to take out, hard to put back. -Earl Wilson

Restaurants
I used to go out to lunch just about everyday. I know, it's insane, but I did. I didn't have to do this, and I found that most times when I thought I had to, I actually didn't. I used to believe that relationships were fostered over lunch and that frequency of lunches helped that. It's not true. I've set boundaries and that's uncomfortable at first, but once people see what you're doing, they might just jump onto the band wagon with you and realize their own savings. My friend Sam has applauded my efforts and now spends lunch with me in the break room discussing money management techniques. It's a lot of fun and we feel good for saving our money together. That's friendship!

I don't recommend outlawing all eating out. There are times when it's nice to have the freedom to forfeit dinner when you're too exhausted to deal with it. Pay for service and enjoy it.

For those times when you have to go out, look for the deals on the menu, or look for restaurants with a more authentic feel (if you think the person you're with will enjoy that), because the smaller, hole-in-the-wall restaurants typically serve less expensive food and it often has a very good taste. Don't pay for the prime location and decor of the more expensive restaurants.

I pity the fool! -Mr. T =)

Lifestyle
With everything, to achieve a lower cost of living, you have to apply yourself to being diligent and sometimes creative. There is usually always a way to save more money than you'd otherwise spend. It just takes some personal discipline and training to get yourself into new, money-saving habits. That's the point.

Do you have a trick for saving money that you'd like to share? Let me know in the comments!

Part 2: Providing the Image Without Investing the Money - The 'Free' Tools

2013-01-16T12:33:00.000-08:00

We began our series with Part 1: Providing the Image Without Investing the Money. This is Part 2, where we take a look at the cheapest methods of looking the part.

Stand up straight. Brush your teeth and floss. Tuck your shirt in. Get your sleep. Speak up so people can hear you. Sit still and quit fidgeting. Iron your clothes.

Does all that sound familiar? Like, things your mother used to tell you when you were young? Your mom was right. These words of advice, by you applying them, can help you build an image of stability, attractiveness, and confidence. Those are typical for a reason--they work. Children who obey these simple instructions have a much better chance at being successful in life than children who do not. If you don't believe me, do a search on Google for interviewing effectively. Look up something on delivering effective speeches. Notice the common threads--your appearance is very important, and your ability to project confidence is not just about the words you say, but everything about you.

These are, most often, controllable aspects for you. Let's take a look at each one.

Stand up straight
If you want to appear confident, you can help yourself a lot by maintaining good posture. You need not be stiff, but keep your head raised, eyes level, shoulders back (just slightly), and your back straight. Suck in that belly if you can. I once heard that keeping a good posture is an effective mini work-out, aiding with burning calories--so there's even more benefit.

Brush your teeth and floss
Taking good care of your teeth goes a long way beyond saving you on dental bills. If you have an impressive smile, you feel more confident. It's worth investing in teeth whitening toothpastes and, in some cases, a whitening kit, to bring your teeth to a subtly vibrant white. Grey, yellow, or brown teeth occur naturally, over time. I drink coffee--that stains my teeth. To counteract this, I brush with a whitening toothpaste.

Tuck your shirt in
Having an untucked shirt just looks sloppy. If you want someone to judge you negatively at first sight, leave your shirt out. Yes, it is a style to wear your shirt like this, but don't trick yourself into believing that it's socially acceptable to everyone in the business world. It's not. It's one of those things you do when you're the cool executive that's bucking the system. Hear that? Bucking the system...the one that you're trying to be a part of--the one that gives you a paycheck. Yeah. That system.

Get your sleep
When you're tired from staying up too late, you develop bags under your eyes, it's harder to keep good posture, it's more difficult to concentrate and stay focused, and other people notice. What's worse, according to the Sleep Foundation (sleepfoundation.org), lack of sleep can impact you in the following ways:

Increased risk of motor vehicle accidents
Increase in body mass index – a greater likelihood of obesity due to an increased appetite caused by sleep deprivation
Increased risk of diabetes and heart problems
Increased risk for psychiatric conditions including depression and substance abuse
Decreased ability to pay attention, react to signals or remember new information

Do you want to make an impression by remembering the names of the people you met with today? Are you concerned about your weight gain? Do you want to live long enough to enjoy your wealth? Then get your sleep.

Speak up
Knowing how to speak so you're heard is a gift for some and a practiced ability of others. If you're like me, you find that you get drowned out when you speak normally in the midst of a big group, out at a lunch meeting in a loud restaurant. Dropping an octave (if you're a dude, and not so it's creepy), projecting, avoiding words like "uh", "like", and "um", and good enunciation are key factors when speaking to be heard. Maybe you could even try a British accent.
The University of Michigan conducted a study that's pretty interesting here: Want to Be Heard? Try Changing the Way You Talk

Don't underestimate learning from the internet. There are lots of self-improvement techniques to take yourself to the next level of success.

Fidgeting
Fidgeting, doodling, foot tapping, etc. are said to have benefits. It burns calories, it helps you focus, it makes you look funny sometimes--all great benefits, but my own views on it are what you'll read here. Fidgeting is fine until you're in the company of someone that you must impress. Exercise control over yourself to demonstrate that you're unshakable. Fidgeting is associated with being nervous, so when you remain completely still, save for intentional movements, you are showing that you are confident. It's a small trick, but it works for me.

Iron your clothes
Keeping your clothing clean, choosing the shirt without stains, and keeping all your clothes wrinkle-free is very critical to maintaining the image you're after. If you're in wrinkled clothes, you appear sloppy and lazy. Those negative descriptions can't be written off as a style choice--it's just bad.

Other human beings make hundreds of little judgments about you--most of them subconsciously. When you remove all the little elements that can detract from you negatively, you significantly level the playing field. You can now feel more confident because you appear as though you ought to be. These are the free ways to make yourself look more successful, more confident, and more like you have it all together.

In Part 3, we'll continue to discuss additional ways of having the image without paying all the money.

Part 1: Providing the Image Without Investing the Money

2013-01-09T21:00:00.000-08:00

I buy expensive suits. They just look cheap on me. - Warren Buffett

Let's face it, you sometimes need to spend a little to get more. That fact is, when you're trying to get that job or make that impression, or when your job requires it, you have to find the money to make yourself appear as you want or need to appear. You need your appearance to fit your goals. It might be your car, your watch, your house, or even your acquaintances that must change.

It goes without saying, but I'll mention that same old truth that we're all familiar with: your expenses scale with your income.

Somehow, we always find a way to spend whatever extra we get. People have discussed this phenomenon with their friends, with their family, and with their lending institutions and nobody seems to be able to identify exactly what the reason is, aside from pointing out that our appetite for more is equal to some exponent of what we earn. Ah, the American dream.

For me, after my promotion to management, I spent more on clothing, my car, and even on decorating my office to better reflect the position I came to occupy. I began to adjust my personal view of myself based on what was expected for someone in my place. I had to look like someone who would hold my position.

Imagine this scenario:

You are waiting to go to lunch with Joe, a representative from a company with whom you are considering doing business. When Joe arrives at your facility, he comes in wearing casual attire, fit for a new grad kid working at one of those kick-back-not-serious-but-innovate places. He shows you to his ride, a 1989 Ford Escort with a faded, and peeling, paint job, a few dents that represent a quarky history, lending to the car's own personal character.

When you get into the car, a pine-scented air freshener makes a poor attempt at masking the smell of old cheeseburger mixed with pizza. Once in the car, you try to buckle, but the seat buckle is broken and has been since somewhere around 1995. The car barely starts, and a pitiful squeal from a lose belt interrupts your stunned silence.

To your amazement, the car makes it to the restaurant chosen by Joe. The restaurant, however, is a Del Taco. He treats you to a taco, a soda, and some fries--because he had a coupon.

After the meeting is over, he drops you off at your office. He spoke well enough, and he helped you understand his product, but you can't help but feel distracted by all the cheapness, am I right?

In the above scenario, our friend has gained a promotion that puts him in front of a prospective client. He has chosen to maintain his lifestyle in an attempt to save as much money as possible. Don't you respect him for that decision? Or do you think that his naive attempt to cling to his cheap way of living is a poor fit for the expectations placed upon him now that he has risen to such a visible and influential position? Aha, now you're conflicted, right?

I personally think that adjusting your appearance and portraying what is expected of you is imperative to added success. However, you can get caught in a trap of ever-increasing responsibility and time commitments, with an increasing paycheck, with equally paced expenses, and never win the rat race. The goal is to ascend beyond the equalized revenue-to-expense conundrum.

Back when I was working my way up, my boss and mentor, told me that I ought to take every raise I received and just have it automatically deposited into my 401k account. This way, since I was already acclimated to living according to my old salary, I'd be able to maintain my standard of living while saving for a fat retirement. This made a lot of sense, and I've been contributing a lot to my retirement based on that advice, but I certainly haven't sent everything there--for many reasons. I'm also guilty of scaling my life up as well.

That was good advice for raises, but it's harder to implement when you're going for a promotion or you've been promoted, or you're trying to sell your product, or impress a client. At this stage, you have to roll back on the saving throttle a bit and spend your money. It's challenging to think like this and not lose control. However, in the coming days, I'll share in the follow up installments to this article, how to get that edge and elevate the perception that others have of you--without breaking the bank.

Ask the readers: How do you avoid the dented Ford Escort while still building the kind of wealth you ought to be building with increased income?

Be sure to read Part 2 of Providing the Image Without Investing the Money.

Landlordship

2011-04-13T23:01:00.000-07:00

You've probably heard it said a million different ways that real estate investing is a legitimate path to real wealth. I happen to believe that. It's true and can be a huge winner with regard to generating vast sums of money, someday. That's right, it, like most other true pathways, is not an instant, get-rich-quick scheme. You must put in the time, expend the effort, and put up with the headaches to get to those bigger gains.

Yesterday I was talking to my dad about the frustrations I have with my renters. He began to delve into his oft repeated statements about how renting out a property is one of the messiest and most difficult things a person can do to themselves. He said that the trick would be to have other people manage it for me.

I would love to have somebody else do my dirty work in this arena. However, I replied to my dad by asking him, "If you just started your own restaurant, where would you be spending most of your time?" His response: "At the restaurant! Cooking and making sure it runs right." That was the answer I was looking for. Truly, it's your money, not someone else's, so nobody else is going to care as much as you do. In the beginning, the margins are too slim to rely on somebody else's ability to make it all work. The same goes for real estate investing and property management. Because I'm just starting, I need to be involved every step of the way.

The difficulties are different for a landlord than they are for a restaurant owner, or a retail store owner, or a repair shop owner. Difficulties, though, exist in every one of these endeavors. That's how it works. You cannot simply get rich without putting in the effort and time it takes to get there.

As a property manager for my rentals, I have to make all the calls, go collect the rent, and deal with laziness and late payments. This requires a certain degree of politeness while still remaining strong. My dad used to say, "Don't mistake kindness for weakness." I think that phrase rightly characterizes he and I both. We are exceedingly kind individuals, but that doesn't mean we can be taken advantage of over and over again. With my renters, I have to maintain a constant boundary while remaining kind in my dealings. This helps to ensure that the relationship doesn't sour and cause me to end up with a heavily damaged property once they move out, but I still get paid.

My goals are straightforward as a landlord: pay the houses off; create positive cash-flow (the amount of money being paid to me by my properties is greater than the money going out); eventually expanding to multi-unit properties (real estate investors refer to this as diversification); building a large asset base of properties with positive cash flow that can sustain continued growth as well as all expenses for my entire family. Finally, I need a solid network of individuals in all related areas that I can rely on to perform much of the management for me and to keep the empire growing.

As the scripture says in Proverbs 13, verse 22, "A good person leaves an inheritance for their children’s children, but a sinner’s wealth is stored up for the righteous." My goal is to generate enough assets that even if my children's children aren't prudent with their spending, the income will continue to flow in. The obstacles to such a goal are not a simple matter.

Aside from the irresponsible nature of my descendants that will inevitably occur, there is the obstacle of getting off the ground in the first place. See, not only am I poised to launch a huge wealth generator, but I'm also poised to fail. The housing market is bad right now, as is the rest of the economy. If I lose my job or my wife loses her job or some huge expense hits our family that we can't afford, I might have to fold and lose all I've worked to gain so far. That's not the end of the road, of course, but it is an extremely large setback that I'll never fully recover from.

Understand that as time marches forward, my window to generate exponential wealth diminishes. You've heard it said that investing $20 a week for fifty years with a modest 10% annual return will make a millionaire out of you, but that investing $20 a week late in life, even at a liberal 18-20% gain won't have near the same results. Similarly, the money I make now will weigh heavily on the money I have toward the end of my life. Whenever I waste money now or am forced to spend it on something that doesn't appreciate, I'm chipping away at my generational wealth. A big screen television, some furniture for that nice, big house, a new car, a fun trip, etc. etc. now, will impact directly on my final numbers later.

Ultimately, it's quality of life that you must evaluate and adjust for. As a landlord, much of my time is spent dealing with headaches; I lose time at home when I have to go collect the rent and I experience a high degree of stress as I'm contemplating eviction and the potential for destructive renters. With riches at the end of life being more of a priority, what sacrifices in the here and now am I willing to make? How much of a trade-off am I okay with to achieve these greater goals? I know that the quality of my son's childhood is very important, so I can't devote all my time to creating wealth for him later. What quality of life do I want to maintain now and what quality of life do I want to have at the end of my life?

Short-sightedness is a bad sickness in American culture. Most Americans today are heavily in debt, paying high interest loans, and suffering from a bad economy. For many, this is a hard time in their life, but most of these people aren't even thinking about retirement, let alone providing something for those that they'll someday leave behind. The quality of life that's bought with credit cards is not the quality of life that a family or an individual is supposed to have.

Here's what being a landlord, a business owner, or an investor means: you work hard and take your lumps, put in your time and brace for setbacks, and you get to that generational wealth at the end of the road. It's a sacrifice, and some are more willing than others to sacrifice. The road is hard, but the payoff at the end is worth it. Sacrificing all for the eventual payoff isn't the goal either, however. Balance is crucial.

Leave your children something and leave their children something as well. You will someday die and you'll be leaving everything behind. What will have been left? Debt and a disastrous financial situation or successful investments and fruitful assets? It's up to you.

So, is it worth it to be a landlord? I say yes. The road is tough right now, but it's that way no matter what you do. So, the goal now is to get through the hard times at the beginning. I'll someday stabilize, maintain positive cash-flow, and begin to roll the snowball of wealth forward.

Psychology of Advertisement: Are You Being Manipulated?

2011-01-05T20:24:00.000-08:00

Posted by Steve McLain, the main author of Generational Wealth Tycoon--a man dedicated to the enjoyment of a life well lived.

I have news for you, you're being manipulated.

Cognitive psychology is a seemingly strange area of study to have jumped right out of human science and into the commercial world. But advertisement is a psychological exercise at the highest levels, demanding a deep understanding of the human psyche in order to exploit it for financial gain.

Psychology allows one person to recognize the tells of another person to help at the negotiating table. Psychology assists investors with predicting the direction of stocks in the market (consumer confidence). It gives a person an edge when making friends; it is how detectives build criminal profiles and how interrogators gain more insight than what is actually said. Psychology is a tool we all use, to one degree or another, and a tool that is continually being used on us.

I think modern advertising is actually dangerous. It's often blatant and obnoxious, but then, the best advertisements are often subtle and nearly imperceptible because they are so interwoven into our lives. For instance, the simple placement of brand names on everything we or the people around us use are not obnoxious, they simply "are". We don't consciously notice the brands of those things we use, but we take cues. When I was young, I worked with guys that always used Craftsman tools. They would sometimes get a new tool and mention they'd gotten it at Sears. I never asked them about it, but I did take note somewhere in my subconscious and it resulted in my preference for the tool maker when buying my own--at Sears. I automatically had a higher opinion of the company because I respected the men I worked with. I realized this after I'd bought my tools.

Back to my earlier statement that advertising is dangerous: I say this because it's hard to take a drive without seeing hundreds of advertisements everywhere you go. It's difficult to turn on the television and not hear advertisements in the background. The reason seeing or hearing these things can be dangerous is because they implant a sense of need in your mind. Simply being aware of the things that are out there, i.e. a simple food processor that "most other people" have that makes food preparation so much easier. Or, how about being aware of that way cool iPod that your friends all have--which means you also need to use iTunes and you'll need earbud accessories and a cover to protect the device... Or, you are made aware of the "need" for a cell phone with an internet connection and unlimited texting. Or, you realize you can't possibly take your kid anywhere unless you have a DVD player in your car (okay...this may be true).

Advertisement has become so good that our culture has bent to accommodate increased spending as income increases. For instance, you never see a high-level business man in a movie that is wearing a cheap suit, he's wearing an expensive, thousand dollar suit with costly shoes and a stinking silk tie. So, you get that promotion, but now you have to upgrade your wardrobe. How about that car you drive? Of course, you know that form watching others, from watching the television shows, and from seeing the commercials that higher level managers drive the nice cars, so your low cost pinto needs to go in order to get that fancy new BMW to fit into the image of the executive. Granted, sometimes you need to buy a nice suit or look the part to be taken seriously, but take into consideration just how much it's going to cost versus the benefit. I may just write an article on providing the image without investing the money.

It almost doesn't matter what you do. As an American, you're going to think you need a lot more than you do. But when it comes to generating wealth, you kind of need to give up obtaining the "appearance" of wealth to have true wealth. If you buy into the higher lifestyle of an American, if you think you need things that you probably don't so you can make life easier or so you can look successful or so you can xyz...then you will likely never have enough money to obtain generational wealth.

Your interests should be to generate long lasting wealth so that you'll have "real" success. Train yourself to realize that it doesn't matter what others think of you (except, sometimes, when it comes to impressing superiors in order to maximize income at your job--and even then, it's a mathematical decision, not a given).

Your friends, your neighbor, and the occasional stranger might be impressed or envious for about a minute when they see you, but they quickly go back to being self-absorbed and interested in their own appearance to others. Don't fall into the trap of not realizing how little others care about what you have and how you look. Stop worrying about what they think and do the right thing for you and your family. To tell you the truth, people admire those that actually dedicate themselves to accomplishing a valuable goal. I admire writers that finally get published after working hard at it. I respect people who work to build their own business. I also sit in awe at the occasional person I meet who has altered his or her life, i.e. sacrificed, in order to save money and wisely invest it for long-term, future wealth.

You can do this too. Do some evaluating and really try to see what advertisements (manipulation) you've bought into. Then, after identifying your weaknesses, control them. Think about your goals. Are you striving to buy a new car or are you looking toward the future when you'll be able to live comfortably, seeing the world as you please, maybe even traveling in your own private jet?

Have you realized where you've been getting manipulated? Have you already sacrificed to generate real wealth? Let me know in the comments!

Kicking the Invincible Condition

2010-12-16T20:00:00.000-08:00

Posted by Steve McLain, the main author of Generational Wealth Tycoon--a man dedicated to the enjoyment of a life well lived.

Bad things happen. Someone close to you could die and you might just have to pay funeral costs; layoffs happen; your only transportation could break down; your investments might turn upside down; your home value might drop too low right when you need to sell it. Preparing for these obstacles is smart. Why?

Because things like these are inevitable. It's easy to think that no bad stuff will happen. This is why it's not uncommon for most people to ignore life insurance, safety nets, and long term investment strategies.

If you're on the road to financial freedom, then congratulations. If you've set your sights on hitting significant wealth milestones, then you and I have something in common. It's all great to shoot for these goals, but be mindful that fully investing yourself, leveraging your assets to their full potential, and/or not maintaining a significant savings for inevitable problems along the way is a bad idea.

When financial trouble comes your way, you'll either suddenly realize that you're not invincible or you'll have wisely set aside an emergency fund.

An emergency fund is a store of money that you've set aside and contributed to regularly so that you can respond to difficult financial trials as they come. The amount differs for everyone, but most say that your ultimate goal should be to put aside enough to cover costs for six months.

Six months of expenses may shock you, but you should only take into account those costs that are necessary. The cable bill, the data plan on your cell phone, and the World of Warcraft subscription are not necessary. You should exclude those from your six month savings goal. If you happen to hit hard times, like losing your job, you should quickly cut off all unnecessary expenses and try to minimize any spending that you can. If you can get that six month savings to last you six months, you're probably going to bridge the gap and get back on your feet.

Not having an emergency fund can result in terrible repercussions. For instance, missing your house payment will result in additional fees, setting you further back than before. Not being able to pay a car payment (if you took out a loan for a car) hurts your credit. Missing any payment results in late fees. Additional fees, damaged credit, and falling behind are all contributing ingredients to the recipe for disaster. That kind of setback really hurts any goal for financial freedom and generational wealth.

Make a goal to build an emergency fund. Sit down and determine what your fixed expenses are. List those expenses and then mark off any that can be cancelled if the need arises. Then, list off all your variable expenses like electricity, water, food, and gas. Try to arrive at a reasonable average and add those expenses to the fixed expenses. Now, add in a buffer of around 5% and make that your final goal.

You may find that your goal is ridiculously high. You might be discouraged that you'll never hit that magic six month total. If you can't see yourself hitting such a far off goal, then you need to play the psychological game: set a realistic goal so you'll have the satisfaction of achieving it. Then, once you've achieved that goal, set another, realistic goal. You can do this with percentages of your total amount. Instead of six months of savings, go with two months of savings or about 30% of your goal. Maybe you can only swing 20% of your goal. Whatever it is, make something that you can obtain that gets you on the right track.

At the moment that your paycheck is deposited into your account, have an automatic transfer set up to move a specified amount of money to a savings account. Any savings account that gives you easy access when you need it will do. Just do it and make sure you stick to it.

By transferring money the moment it comes in, it won't sit in your account, asking to be spent, but leaving it somewhere accessible will ensure that you aren't reluctant to use it when an emergency comes along. Down the line, when something actually does happen, you'll be grateful that you planned to weather the storm. Storms happen and the sooner you realize that, the better off you'll be.

How do you manage your emergency fund? Thinking about getting started with your emergency fund? Have additional thoughts and insights? Let me know in the comments.

Images provided by Idea go / FreeDigitalPhotos.net

Limitations: Why You Shouldn't Jump Into Active Investing

2010-12-14T22:13:00.000-08:00

Posted by Steve McLain, the main author of Generational Wealth Tycoon--a man dedicated to the enjoyment of a life well lived.

I was pretty sure that, in order to be financially on top of things, I'd need to be a stock investor. I believed that I would need to take what money I had in savings and invest in stocks like AAPL (Apple), GOOG (Google), and NAT (Nordic American Tanker). Doing the "investor thing" always seemed like some distant goal to me though and each time I thought about doing it, I decided that I just couldn't make up even the cost to do a single trade ($7).

I was talking to my friends Tim and Sam today over lunch about investing. We started by talking about index funds and ETFs, which are solid investments that automatically result in diversification as well as get you the lowest maintenance fees available for your broker-managed accounts, i.e. retirement accounts. Tim was diving into an argument that was centered around smart investing and how choosing the right buys and sells has put him at 50% gains for the year. He told me that index funds and ETFs could never come close with their puny 11-12% annual gains.

I had to admit that his reasoning and results seemed compelling, but the conversation morphed because I was trying to identify how I could make similar gains by investing. The light went on for me in the conversation: if a trade is $7, a $700 trade would automatically put me down 2%. This means that, since I'd have to pay $7 to buy and then $7 to sell, that I'd have to make a minimum of $14.01 to make a profit. I've already lost significantly by the time I've bought those stocks.

See, I have just a little money that I'm investing. To become diversified, I need tens of thousands of dollars. If I make an investment in one stock at $10,000, a $14 trading fee doesn't amount to as much, but then all my eggs are in one basket. Diversifying by investing in ten different stocks puts me at $140 for trading. I've already lost about 1.4%, so I'm hoping to make up the difference across my portfolio. Now, imagine that I buy and sell pretty frequently. Each time I do this, I'm chipping away at my percentage gain and each percentage point that I steal is one that I have to make up. If I buy and sell 20 times with my $10,000 and my gains are 15% (just barely above the passive index funds), that means that I've spent $280 and I've actually had to make closer to 18% to cover those fees. I'm cutting myself down with fees. My best bet is to be a passive investor with such a little sum of money.

So, this led me to the understanding that, when you have less than $10,000 to invest you ought to just put your money into a savings account that bears a tidy little bit of interest. That interest is guaranteed and it keeps your money liquid. The worst thing about stock investing is having to sell because you need your money.

Save up that money and pay down high interest debt. The math shows that, to be an active trader, the fees add up to several percentage points and, therefore, even medium interest debt becomes a more viable target for your financial attention.

Contribute to your 401k, to your IRA, and to your Roth IRA while you build your wealth for the eventual investing endeavor. Those accounts are not a waste (unless your 401k does not have matching by your employer in which case contributing to a 401k is not better than paying off debt many times).

You can contribute up to $5,000 a year to your IRA. Depending on your income, 100% of that $5,000 is a tax write off. Some employers will allow pre-tax dollars to go to an IRA, but if that's not an option, you can write it off when you pay your taxes. Check out what the IRS has to say about IRAs.

All this to say that I've decided against investing actively until I've maxed my retirement contributions, paid off all the higher interest debt I owe (no credit cards for me--just a car loan and some student loans), and have a solid safety net of funds that are liquid. Active investing, while a fun topic of study, is not yet obtainable for me.

Are you an investor? Do you disagree with my conclusions? Provide me with some feedback in the comments section!

Images provided by Idea go / FreeDigitalPhotos.net

Some of My Story

2010-12-08T22:56:00.000-08:00

Posted by Steve McLain, the main author of Generational Wealth Tycoon--a man dedicated to the enjoyment of a life well lived.

I've been married since 2002 to the love of my life, Maggie. She and I started out with a small inheritance, money in the savings account that we had stored up, and a wedding paid for by her parents. All that is to say that when we were first married, we started out with several thousand dollars as a safety net and no credit card debt.

My first home away from my parents was with my wife, in a one bedroom apartment for something like $650 per month. I was making under $13 an hour, but with a fair amount of overtime, employed by the City. She was attending school full time and had just gotten a job as a teacher at a nearby private school that paid $18k per year. We were nineteen. This was the beginning for us.

We bought two couches, a coffee table, and two end tables for five hundred dollars, a dining room table for a couple hundred, and the rest was all hand-me-downs. Maggie drove the Acura Integra that she'd been given by her parents and I drove a little Mazda pickup truck that I'd bought for $1,500 several months before.

Water was paid for, air conditioning a little 700 square foot apartment was nothing, and we enjoyed our dial-up internet through the use of a free Juno account.

Life was good. We had everything we needed. It was enough to think about--even overwhelming at times--when I took in our finances. Keeping track of our expenses quickly proved tedious as we both would make purchases and find it difficult to balance a check book between two people. Neither of us really spent that much, so we just relied on the transaction history online as a means of tracking expenses.

During our first year, my dad urged me to buy a house. Granted, it would have been difficult to do because we had no credit history. As it was, when we finally bought our house a year after getting married, we had to take out an FHA loan and suffer a slightly higher interest rate because of a lack of depth. My dad's urging was based on his knowledge of the benefit of owning instead of renting. The market was low; it was more of a buyer's market. We waited to buy a house because we just wanted to get into a better financial situation, build our credit history, and give ourselves a better feeling of security.

The deciding factor was the lease renewal. The monthly rent was going up to $750 per month and it seemed ridiculous to pay that much when we could easily own a house for not much more. Having just changed jobs and gone up to nearly $15 an hour, we took the plunge and began searching for a house.

After realizing that our first real estate agent was not meeting our needs, we went with a close friend who helped us find a nice place. It was a 3 bedroom, 2 bath, 1,440 square foot house built in 1972, but it was beautiful. It was just above what we were pre-qualified for. We went back to the loan broker and he said that we could do it, so we committed to filling out more paperwork than a human being should ever have to fill out.

In May of 2003, we had our first house. I was suddenly introduced to the joys of home ownership, in which fixing broken things is a common occurrence, mowing the lawn was now my responsibility, and whatever was wrong was now my problem--not the landlord's.

We replaced plumbing, we replaced our furnace which had not been sized properly for the house, we fixed the ceiling where leaks had ravaged it, and we found and fixed lots more as we found it or it found us.

After several years in the house, the property value had gone up ridiculously high. Following the advice of a good friend, I opened a home equity line of credit to the tune of almost twice my mortgage balance. We used some of that to pay for improvements on the house--like tile in the kitchen and new siding on the outside of the house. However, that same friend had convinced me that the true path to success was to buy a second house and to begin renting the old one.

I'll take a moment to describe my friend. He was what could be considered a high-rolling, on-fire investor. He and his nephew had made several property investments in the San Francisco area and were regularly dealing with huge sums of money. The monthly costs to maintenance their loans were over $10,000. Both of these guys seemed like gods to me. I marveled at them and admired them. Maggie and I went up to San Francisco and saw the kind of work they were doing--buying ancient buildings, renovating them, and then selling them for huge profits. They'd had some success, but immediately dumped it all back in to generate more wealth. They had everything leveraged so that they could maximize their gains on the house's dime. It seemed ludicrous at the time, but brilliant anyway. I was young, mesmerized, and excited. I needed to get in on this.

Around the same time, I was reading a book entitled The Millionaire Real Estate Investor by Gary Keller. I still recommend this book after having learned the lessons I have. His method is right on and he doesn't hide the ugly truths about this particular path to wealth. Even after reading the wisdom of this book, though, I was still caught up in the dream that my friend and his nephew were living.

We eventually found a house that we liked and decided to buy it. The plan was to use our HELOC for the down payment and then to move out of our old house, rent it, and move into the new one. Everything was moving along at a quick pace, the inspection had gone well, and Escrow was underway.

I had a bad feeling though. For one thing, the Realtor we'd been dealing with had applied too much pressure and I couldn't shake the feeling that I was caving to his urging more than making a smart decision. He'd come to us based on a recommendation from a big investor, so I didn't know what I was getting into. I also had an inkling that the overinflated market wasn't right. To top it all off, there was a high Mello-Rroose Tax that sent me over the edge. Forsaking the money we'd used for the inspection and opening of Escrow, we backed out of the deal. I had a difficult conversation with my Realtor in which he tried very hard to bully me back into the deal, but I nervously stood my ground and won the fight.

Literally a month later we started seeing the housing boom implode. The market crashed and the house we'd been looking at was suddenly worth a fraction of what we would have paid. We had signed an exclusivity contract with the stupid Realtor, so we waited until it had expired and then went with a friend to capitalize on the now falling market.

It was during this time that my friend and his nephew sold off one of their properties. They immediately rolled over most of their money but had tens of thousands of dollars left over that needed a shelter before capital gains taxes hit. We talked about it and decided that we'd all go into a one-third-each partnership on a house. We'd put renters into it instead of having one of us live in it since it was a three-way financial arrangement.

We quickly found a property we liked and made the deal. We bought a 2,400 square foot, 3 bedroom, 3 bath house that had dropped in value by about 30%. Before Escrow closed, we had a renter lined up. When Escrow closed, we cleaned, fixed a few things, and let the renters come in.

Unfortunately, the payment, without taxes and insurance impounded, was high and the rent we were getting only covered about 90% of it. I'd violated a basic tenet of The Millionaire Real Estate Investor rulebook. I had done a deal that resulted in the math being wrong. I had not determined what rent we would be able to get for the house and so we were left with negative cash flow.

Split into thirds, the payment wasn't that bad and to have a long term investment being mostly paid for by renters was cool. It was the property taxes and insurance, though, that hit us hard. It also didn't help that the hot investments my friends had in San Francisco had started to cool--the stuff they had for sale wasn't moving. This led to their continued requirement to pay massive maintenance fees on their interest-only loans. I started to see the wisdom of putting twenty percent down and of buying into something that you can reasonably maintain on your own. These guys had purchased ticking time bombs and time was running out.

The market continued to drop after this and the value on the house finally bottomed out to around $100,000 less than what we paid for it. That's terrible, but it doesn't bother me too much. As long as renters are paying the lion's share of it, I'm not overly concerned. What did concern me was when our renters left. This began the period of several months without somebody else to bear the burden of the payment. Luckily, we had savings--as is always the case--and we were able to pay for the costs. My friends too eventually paid their share, though it hurt them immensely to do so.

Finally, we had gone around three months without renters, but we had made our fixes to the house, cleaned it up, and put a rent sign in the yard. It wasn't more than a couple of weeks before I showed the house to a family that loved it. They were renting the following month and have been for the past year and a half or two. Still, the rent is the same as before, but that was about all I could get.

Until very recently, that was the only thing I could look at as an investment for my family. It wasn't a very good investment, but it was something. I'd learned lessons, I will eventually pay it off, and I will eventually recover from the mistakes I made. I was wrong, though, about that house being the only investment I had made. We'd also bought our house. That was an investment too, and it's value hadn't dropped too dramatically below what we owed. We were happy in our home and even added a new member to the family on October 5, 2009. My son Caleb was born and we had medical bills up the wazoo, but he was worth it. We brought him home to our first house where we had so many memories and so much love.

Tragedy hit our family the day after Christmas of 2009. My wife's parents were hit head on by a driver trying to pass recklessly on a two lane highway while on their way to church. My father-in-law was killed and my mother-in-law was hospitalized and almost died as well. We spent the next several weeks nearly living at the hospital. After a long time, my mother-in-law regained consciousness, moved on to a rehabilitation facility, and was finally released to go home.

In April, my mother-in-law had finally begun walking again and was released to start driving again. Her first time back on the same highway, on her way to our house, she and my niece were t-boned by a negligent driver in a big truck. My niece was okay, but my mother-in-law was again air lifted to the nearest trauma center.

After this accident, we all jointly made the decision that we would purchase a new house with the life insurance money she had received from my father-in-law's policy. The house title would have her name, Maggie's name, and my name on it. We would then enter into an agreement with my mother-in-law to pay her back a loan in the amount of two-thirds of the price of the home.

In August, we bought our new home for a steal. It was a short sale and it is now worth slightly more than we paid for it according to Zillow.com. We moved to a nice, convenient area that is about fifteen minutes closer to my work. That helps a little with gas.

This left us with the other investment I just mentioned: our first house. It was sad to leave it behind. There were great memories there and we definitely weren't ready to leave it behind, but life changes and necessity pushes you into new adventures. So, we were left with a vacant house.

The payment on that house, with impounded taxes and insurance and PMI, is still pretty cheap. We rented it for about $70 a month more than what we pay. This is positive cash flow! A positive cash flow of $70 monthly isn't much, but it's significantly more than we've ever gotten before. Now we're in a position that I can look at with some pride. I am upholding the rules I wanted to abide by in the first place and I'm not losing anything. The best thing about it? We are the only ones entitled to the equity in that house. We don't have partners there!

Our income has gone way up and come way down (Maggie now works half time as a public school teacher teaching second grade). That income, though, is much higher than it was way back when we first started our life together in that little apartment. Higher income leads to more options and freedom to carry out financial goals, so I can't say I'm displeased at all. I can, however, look back at when I felt overwhelmed by my simple financial situation during those first days and have a little laugh at what I would have thought about my current finances. If I thought things were confusing then, I wouldn't have believed what I have to deal with now!

That is some about me. I didn't handle my investments perfectly, but I made them and I'm seeing them through. I plan to someday tip the scales and make our net worth go positive. Each successive house we buy is another chance to get the math right and to build our wealth. With luck, we'll eventually break into multi-unit properties and diversify a little. The goal is to get to the point where we've paid our properties off and we have monthly, residual income that is consistent and reliable. That income level needs to be significant. We need to hit something in the million dollar a year range for residual income to be able to pass on generational wealth that matters.

As I continue with this blog, I'll post more about how to get to these goals. I'll share strategies that others have shared with me, concepts that I've applied, and any other specific elements that can contribute to success in wealth building that I come by. Stay tuned for more.

Thanks for reading my financial thoughts.

Images provided by Idea go / FreeDigitalPhotos.net

Introduction to the Tycoon

2010-12-07T23:15:00.000-08:00

Posted as the first blog post at Generational Wealth Tycoon by Steve McLain, the main author of the blog--a man dedicated to the enjoyment of a life well lived.

My mom and dad weren't rich people to start with and, even though they've had wealth at different times during their life, they still aren't rich today. My parents are "rich in life" or view money as "a means to provide happiness, not the source of happiness". I can grasp that kind of thinking and admire and respect it. I look at my parents and think back on all the good times we had because they weren't reluctant to use their money to do things where others would have stored it away and deprived themselves of the immediate satisfaction that they could have had.

Time steals away opportunities. With three kids that were each growing up faster than they could have imagined, the chance to do meaningful things in life was fleeting. So my parents took the money they had made and, instead of buying stocks, real estate, or some other investment, they invested in us kids to form lasting, meaningful memories. My dad truly held this philosophy and knew exactly what he was doing. It was no mistake that he didn't value money as much as what joy it could bring.

In my dad's mind, he worked enough that he could make ends meet. The rest of the time was spent enjoying life. He could have worked more, brought in more money, and tried to grow his small business into a large business, but he instead stopped when his cup was full and didn't go on to try for more.

I had a good childhood. My dad and mom taught me a lot of things about what's truly important in this world. If you can't enjoy life because of something you're doing, then reevaluate whatever it is you're doing and change it to enjoy life. Life, with all its complexity, purposes, and meaning is inevitably short.

Now, I'm almost thirty, I have started my own family and now recognize how fast life travels when you're watching your children grow up before your eyes, and I'm doing some serious evaluation about finances. I'm still watching and learning from my parents. I read about money constantly, I converse with friends about investments, and I sit and listen to my pastor tell me that Jesus spoke about money more than any other subject during his ministry. I'm impressed with the message that money is continually important to making this life enjoyable.

Besides feeling the ticking clock of my own life, I see that my parents' life has not gone quite as they might have hoped. They recently hit hard times, like most people in America, and have lost their house. My dad's business shriveled until he couldn't stand sitting idly anymore. He finally took his chances without it and it blew away the moment the next breeze came. He bought an RV, fixed it up, sold as many personal possessions as he could, threw the rest in storage, and left to travel the country with my mom. Right now, they're doing whatever work they can find easily to generate some survival money.

As I said, I'm still learning from my parents. My observation is that they've hit difficult times and must somehow find a financial answer to their uncertain future. I'm not naive--I know for a fact that this life always turns in unexpected directions and that many of those surprises are not welcome. For instance, my mom and dad started working a seasonal job to generate income to sustain their standard of living. In the midst of working, my dad twisted his knee and couldn't go on working for several days. This took him out of action and stopped a planned chunk of money from flowing.

I can anticipate that my dad will get better and he'll eventually be back in action. However, as he and my mom get older, we can all expect them to start slowing down--to begin having health problems as they approach the end of their lives. Yes, it's sad and terrible to think of, but it's the one thing that every human being has in common: we all die. Therefore, it's terrible, but realistic and essential to think about.

If my mom or dad has a health problem that requires hospitalization, their plan for minimalist existence and small expenses is out the window. Now, there are medical bills that will damn them fiscally for the foreseeable future. How can a person expect to lift themselves out of debt incurred by a failing body when he cannot rely on that body to make him money any longer? It is grasping at wind. Futile, in the end.

It is then that my parents will need to turn to others for help--no matter how ashamed they may feel, it is a part of life to once again descend into being dependent--only this time, it's without the promise of future independence and exciting freedom (in this life anyway). Some are gifted with a quick and sweet release from this life, but many are not so lucky--many must cope with the reality of relying on others for financial needs and even physical needs.

My dad used to tell me that his retirement plan was his kids. His kids would grow up, get good educations, become successful, and then support him. He was always saying it as a joke, but there was truth in what he said. My dad invested by taking care of his kids. He wanted the best life he could give us. He took great pains to make sure we had all the opportunities he didn't, he made sure we were provided with whatever cool stuff he could give us in exchange for pulling good grades, and he always bragged on our achievements. He did this because he was proud of us and loved us--not because he actually was planning on losing his independence someday and being forced to rely on his kids for his care.

My dad didn't spare anything for himself in the end. He doesn't have a 401k, he never contributed to a pension, and he never made his money work for him. He always worked for his money and his money evaporated like some immaterial substance. Now, even though he hasn't truly met with it yet, he is heading down a path that will take him to a financial vacuum in his final years. Unless something occurs to fill that vacuum, he and my mom will be left with nothing when the need comes.

As I mentioned, my dad's investment was made in his kids. Out of the three of us, the odds were good that one of us would become successful enough to support him and my mom in their old age. I'm fairly sure he never dreamed of making this bet, but it exists nonetheless. We kids are my dad's diversified retirement plan--whether he knows it or not.

This is all to say that I have a personal goal, set in place by my own will, to generate enough wealth that I can not only sustain a high standard of living for my family and me, but also to generate enough that I can support my parents. My financial goal is to become a multi-millionaire at as young an age as possible.

In generation to generation, I believe there should be advancement. I believe that my dad's generation provided its kids with a foundation that began where they left off. Their kids could then go on to build a foundation for their kids and so on. Each successive foundation of advancement should progressively elevate the successive generation to new heights and achievements. This is not the case in reality. Most people fail to provide a foundation for their kids or the kids who were provided a foundation reject it and start over. But for me, I believe I am standing on a firm foundation from my parents and that I can make a better foundation for my kids.

Generational wealth is my goal, in which each generation is provided with the tools and foundation to build greater wealth. My parents gave me a set of priorities, an ethic for education and work, and a foundation to spring from. My goal is to envelop them in my success, to build a great and enjoyable life for me and my family, and to put in place a solid foundation for my children to continue building what I and my parents began.

I will be chronicling my progress toward these goals here. I'll meet with difficulties, I will find success, and I'll share the challenges I've already encountered. The road is rocky and difficult when rising to meet obstacles and enforcing self-discipline. Generating long-lasting wealth is not easy (if it were, everyone would do it). And making a difference in this tiny vapor of a life is particularly skill intensive. However, with all that I have learned, all that I will learn, and all the help of friends, family, and my God, I can do these things. Heck, if God wills it, I can do all things.

This is the Generational Wealth Tycoon blog. This is where I will confide in you and share with you whatever wisdom I can glean about financial wealth building and maybe even a little about life's lessons. Join me and we'll help each other to achieve great things in this life. Thanks for reading my financial thoughts.