Saturday, October 8, 2016

5 Simple Rules to Becoming Wealthy

Decisions, decisions, decisions.  You make decisions every day.  When it comes to your money, you can make better decisions, but your problem is that you often don't...and that is why you're not wealthy.  And if you keep doing the same thing, you'll never make that leap to the next level.

Take my case, I've recently spent over $10,000 to remodel my master bedroom.  Sure, by doing much of it myself, I probably got well over dollar-for-dollar in terms of home equity appreciation.  Nonetheless, I violated a cardinal wealth building rule.  One I learned a long time ago yet fail to follow over and over, until posts like these, that kick my ass and reset my wealth building mode.  We all need a kick in the posterior to get ourselves in the right mindset:  There is an abundance of money on this planet and YOU deserve your share of it.

If you can stick to the following wealth accumulation rules more often than you cut your own legs off with poor money management decisions, you WILL be wealthy one day.

1.  Limit Your Liabilities.

Robert Kiyosaki shocked the middle-class when he placed a personal residence in the "liability" column.  A home is not an asset...unless you rent rooms and the rent from tenants pays for the mortgage and then some.  Otherwise, guess what?  It's a liability.  It's no surprise that in his best-selling book, Rich Dad Poor Dad, Kiyosaki describes his Rich Dad's home as old, with a creaky floor, and furniture out of an antiques catalog.  He did this to imprint in your mind that the path his Rich Dad took to build his empire did not involve remodeling every other year and competing with the neighbors for best looking interior!  Buying a home, a new car, a new television you don't need, a smart phone with more data than you can use, and so on, only does one thing...keeps you in the poor house.  So stop buying liabilities!     

2.  Learn Sales.

I learned a great lesson from Grant Cardone: Everyone is in sales!  Yes, even you.  Whether you are a lawyer, a teacher, a fire fighter, an engineer, whatever, you are in sales, selling and persuading others to agree with your ideas, suggestions, logic, etc.  More importantly is being sold on yourself.  If you are not sold on your wealth ambitions, you will never be wealthy.  To be wealthy you need to buy assets (rule number 3), and you can't do this unless you can persuade your boss for a raise, close others on more deals, convince others you are the best candidate for a promotion, and so on.

Whatever it is you are currently doing, there is a pathway that leads to more income.  You will need to up your salesmanship, whether you like it or not, if you aspire to be part of the wealthy class.  I made one critical mistake in my life, not realizing I needed to embrace sales strategy and technique as an erudition.  They don't teach it in school, and so it is up to you to learn how to "sell or be sold"--Cardone.

3.  Buy Assets

Anything can be an asset IF it puts money in your pocket at the end of the month.  Narrowly speaking, however, there are just three main classes of assets.  They are, Businesses, Real Estate, and Paper.  Most Americans buy paper assets, stocks, bonds, mutual funds, and ETFs.  They are the easiest assets to purchase.  What most Americans don't do is crossover.  They re-invest profits from paper assets back into buying more paper assets when they should be buying real estate.

My sole purpose for trading stocks is to raise enough money for my next out-of-state rental property.  The wealthy stay wealthy because they own real estate portfolios that deliver cashflow monthly, independent of how the stock market is doing.  But what's more, the wealthy stay wealthy because they pass on their real estate and businesses to their children!

My side businesses: this blog, freelance writing, e-book sales, have a similar purpose: to help me raise more money for another real estate purchase.  Businesses are the hardest assets to create and grow, or buy, simply because they take a huge cerebral toll on you.  But businesses also happen to be the best and fastest way to accumulate wealth, especially if your business is transferable and you can sell it to the next party for 3-5 times sales revenue.  The best aspect of owning a business is not just the potential to add to your income, rather it is that a business assists you in following our next rule, number 4.

4.  Limit Your Taxes

You are not a victim of the tax code!  You are merely in denial of it.  Your tax rate doesn't miraculously rise, nor does it miraculously fall.  In either case, it takes action on your part.  The way you keep increasing your rate is by becoming that consummate professional who defines his/her entire life by working for someone else and climbing the income ladder.  The way you lower your State (if any) and Fed tax rate is by taking advantage of the tax code and all possible deductions.  You can only reduce your taxes by running a business, investing, donating, or making less taxable income from your job.

Image result for the wealthy don't work for money

The wealthy do not work for money, money works for them.  So they are taxed at lower rates than the average American.  Warren Buffett admits his secretary is taxed at a higher rate than he is.  He feels guilty about it and now proposes that wealthy individuals agree to be taxed more.  But why should they?  This "pay your fair share" belief is a cop out for all highly taxed individuals who don't want to put forth the effort to follow rule number 3.  They'd rather work long careers, buying toys for themselves, and hoping they'll have enough for retirement.

I am proud to say that my effective tax rate last year was 13% State, and 11% Fed.  Compare that to the rate I would pay, 22% or more, if I didn't have assets (and a great Enrolled Agent) helping me come tax season.  Do yourself a huge favor this year and start a business, any business!

5.  Invest Using Leverage or OPM (Other People's Money)

Pop Quiz.  You have $100K.  Would you use it to finance purchase 4, $100K appraised rental properties by putting 20% down payment on each (leaving the last $20K to close on all four) or would you use it to outright buy one $90K appraised ($10K for closing) rental property and collect the entire rent amount sans a mortgage payment?  For the purpose of this example, lets also say that the rent collected from the four rentals financed equals the rent collected from the sole rental completely paid off.  What's the right move?

If you chose the path that has you worrying less about four tenants versus one, or four times the problems versus one, you are not understanding rule number 5 or rule number 4!  Using the bank's money is superior to using your own.  With four rentals, you'll have many more accumulated repairs and fees over the course of a year to use on your return as deductions from your rental income.  Do not let the fear of being a landlord hold you back from getting that first rental property (or second, third, etc.).  I happen to use property management and I'm still in the black at the end of each month.

Follow the five simple rules listed above and one day you will be wealthy, so long as you keep wanting it bad enough.  Never give up!  Until next time.

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