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Old 05-27-2005, 01:55 PM   #1  
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Default Get rich slowly ...

A great post from www.foldedspace.org. This guy reads a bundle of financial books and gives his lowdown:

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26 April 2005 — Get Rich Slowly! (43)

Today's entry is long and boring. It's all about the keys to wealth, prosperity, and happiness. Over the past few months, I've read over a dozen books on personal finance. Recurring themes have become evident.

These books have embarrassingly bad titles, seemingly designed to appeal to the get-rich-quick crowd: The Richest Man in Babylon, Your Money or Your Life, Rich Dad Poor Dad, Think and Grow Rich, Wealth Without Risk, Creating Wealth, etc.

Some of the books out there — most of them? — really are as bad as their titles. Others, however, offer outstanding, practical advice. The best books seem to have the same goal in mind: not wealth, not riches, but financial independence. According to Your Money or Your Life, which I consider the very best of the financial books I've read, "financial independence is the experience of having enough — and then some". More practically, financial independence occurs when your investment income meets or exceeds your monthly expenses. Financial independence is linked to psychological freedom.

How is financial independence achieved? Again, the best books all basically agree. (To some of you, this will be common sense, stuff you've known all your life. To others, like me, this kind of thinking is a sort of revelation.)

Here, then, is my personal summary of the collected wisdom found in these books.

Step One: Prepare the Foundation
The first step is to lay a foundation upon which the secure home of financial independence can be built. To prepare to build wealth, one must first eliminate debt, reduce spending, and increase earnings.

There are many ways to approach debt elimination; the key is to use the one that actually works for you. All the books agree on this: cut up your credit cards. Get rid of them. There is no compelling reason to keep them. Next, pay off your debts. All of them. For years, I tried the oft-touted method whereby you first pay off your highest-interest debt. This never worked for me, because my highest interest debt was also my largest debt, and psychologically I just never seemed to make any progress. What worked for me was the "debt snowball", as defined in Total Money Makeover. I eliminated my debt by paying off the obligation with the smallest balance first. Then I took the amount that would have been applied to that debt each month and used it to pay off the second-smallest balance. When that was finished, I went to the next, etc. It only took me four months to pay off my debts this way. I was dumbfounded. I'd struggled with this for a decade, and I solved the problem in four months? Good grief.

The next step in preparing the foundation is to reduce spending. First, track your expenditures for a month. Or two. Or three. (Many people — including myself — use Quicken; it's quick and easy.) After you've accumulated enough data, analyze your spending patterns. Are you spending a lot on shoes? Books? Alcohol? Dining out? Try to find expenses you can eliminate or reduce. I cut my comic book spending by a huge amount. Many of the personal finance books encourage you to reduce your auto and homeowner insurance coverage to save money. This is also the point at which some books encourage you to adopt a budget. (I tend to think a budget is unnecessary if you remain aware of your current financial situation.) (Note: it's in this step that I should note that all of the books I've read advise against purchasing a new car; all encourage you to purchase late-model used cars.)

The final phase in laying the foundation is to increase your income. Not all of the books mention this, and I happen to think it's optional. However, there are a couple of authors who are quite vocal that this is an important step on the road to financial independence. How do you increase your income? Become better educated so that your job skills are more marketable. Work harder, and smarter, at your current job so that you qualify for raises and promotions. Change careers. Find a way to make a hobby profitable. Or, as more than one book suggests, work two jobs.

I can testify first-hand that by following these three steps, you can lay a solid foundation for future financial independence. I've only recently finished my foundation, and am amazed at the amount of money I'm suddenly able to save each month. Amazed. And that means I'm now ready for...

Step Two: Build the Framework
The second step toward financial independence is to construct the framework upon which future wealth can be built: establish an emergency fund, maximize your retirement investments, and begin acquiring income-producing assets. This is what I'm preparing to do. (I've already done one part, but only by happy coincidence.)

Every book I've read stresses that the most important part of the framework, the first part that must be completed, is the establishment of an emergency fund. This emergency fund ought to contain enough money to support you for three to six months in case you find yourself without an income. I have a very hard time grasping this concept, admitting its usefulness. All of the books stress it. Kris, who is always right, insists that it is important. Yet I want to skip this and go to other, more exciting steps. However, having seen the results after "laying my foundation", I'm willing to suspend my disbelief and just do it. I'll build the emergency fund.

Next, the books encourage you to maximize your retirement accounts. If you have a retirement account through work, contribute as much as you possibly can, as soon as you can. Establish a personal IRA outside of work, and every year contribute the maximum amount. I already do this, at least in part. Custom Box has a retirement plan, but not one to which the employees can contribute. The company itself contributes approximately ten percent of each employees' annual salary to a stock plan. One of my goals for when the bathroom is finished is to get a Roth IRA set up.

The final step in building a framework for financial independence is to invest in income-producing assets. For some reason, I'd totally missed this recurring theme until this weekend; on Paul C.'s recommendation, I read Rich Dad, Poor Dad, a book that's almost solely about this particular portion of the framework. Beyond your retirement investments, the collected financial wisdom is that you ought to participate in further investments, specifically in income-producing assets. For different people, this means different things. Maybe it means bonds, maybe it means stocks, maybe it means investment properties. It does not mean things like cars, or collectibles (coins, comic books, baseball cards), or expensive furniture. These things may be assets of a sort, but they are not income-producing assets.

Step Three: Finish Construction
After you've laid the foundation to financial independence, and after you've built the framework, you must then spend years (decades!) finishing construction. All that's required during this time is patience and discipline. Resist temptation. Do not accrue debt. Acquire income-producing assets; avoid non-income producing assets. Faithfully contribute to your retirement plans and your IRAs. Wait.

Step Four: Move Into the House
Some years later, you will wake to find that your financial house is in order. It's finished. It's ready for you to move in. How do you know when this is the case? Financial independence is achieved when your investment income equals or exceeds your monthly needs. If the total of your house payment and living expenses is $1000 per month, then you are financially independent when your investment income reaches $1000 per month. Achieving this takes time. It's a slow, gradual process, but every book emphasizes that it's not only possible, it's inevitable if these steps are followed.

That's it. That's the combined wisdom of more than a dozen financial self-help books. I haven't fleshed out the final two steps as much as the first two simply because I haven't reached those steps yet. There are scores of books on how to best approach each step (even each substep!). I'm sure to obsess over each one in turn.
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Old 05-27-2005, 01:56 PM   #2  
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Default Part II

There seems to be only one major point on which these books disagree. Some argue that your home should be considered your most important investment, that you should carry a thirty-year mortgage and not attempt to accelerate payments. Others declare that a home should be considered a liability, the same as a car or a credit card. (The latter admit that a home will appreciate in value, but they note — rightly so — that a home is a cash drain, not a source of income.) All of the books, with one exception, encourage readers to only purchase modest homes; they smash the commonly held belief that you ought to "buy as much house as you can afford". Instead, these books say you should only buy as much house as you actually need.

A lot of these books are easy to summarize. Their content lends itself to bullet points. For example:

The Total Money Makeover by Dave Ramsey. This book was the first I read. I want to re-read it. It features lots of practical advice, including the concept of the "debt snowball" I mentioned earlier. Here are Ramsey's steps to a "total money makeover":
Step #1: Save $1000 as an emergency fund.
Step #2: Pay off debts, starting with the smallest first (ignore interest rates).
Step #3: Increase the emergency fund so that it will cover three to six months of expenses.
Step #4: Invest 15% of income in growth-stock mutual funds.
Step #5: Pay off the mortgage.
Step #6: Build wealth.
(I've left out a "Save money for college" step because it doesn't apply to me.)

Your Money or Your Life by Joe Dominguez and Vicki Robin is, as I mentioned, the cream of the crop of these financial books. It's advice is sound. This is an especially great book for those seeking simplicity. It lends itself less to bullet points than some of the others, but I've made an attempt to enumerate the steps it advocates for financial independence:
Step #1: Determine how much money you've earned in your life. Next, determine your net worth. Compare and contrast the two.
Step #2: Establish the actual cost — in time and money — required to maintain your job. From this derive your actual hourly wage.
Step #3: Keep track of every cent that enters or leaves your possession.
Step #4: Determine which items are actually worth the money you spend on them.
Step #5: Graph your total monthly income and your total monthly expenses.
Step #6: Minimize spending through conscious decisions.
Step #7: Maximize income by doing something you love.
Step #8: Accumulate capital. Track its growth.
Step #9: Invest this capital so that it provides long-term income.

The Richest Man in Babylon by George S. Clason is an aging chestnut. It's a classic in the field. Many later financial books are based on Clason's advice, which is framed in King James-style English rules:
Rule #1: Start Thy Purse Fattening — save 10% of everything you earn
Rule #2: Control Thy Expenditures — create a budget to live within your means
Rule #3: Make Thy Gold Multiply — invest the savings from rule one
Rule #4: Guard Thy Treasures From Loss — invest only where the principal is safe
Rule #5: Make of Thy Dwelling a Profitable Investment — own your home
Rule #6: Insure a Future Income — plan for retirement
Rule #7: Increase Thy Ability to Earn — become better educated, more skilled; respect yourself


7 Money Mantras for a Richer Life by Michelle Singletary is a recent all-purpose financial book. I was ready to dismiss it for the absolute stupidity of mantra number one (stupidity in its phrasing, not in its advice), but after reading the book, I have to admit its advice is solid. It features:
Mantra #1: "If it's on your ass, it's not an asset." If you can wear it, it's not an investment. Also, something is riding your ass (such as a high house payment), it's not an asset.
Mantra #2: "Is this a need or a want?" This is a question Kris has been trying to get me to ask myself for years.
Mantra #3: "Sweat the small stuff." Do worry about the small expenses; they add up.
Mantra #4: "Cash is better than credit." There is almost no reason to carry a credit card.
Mantra #5: "Keep it simple." With money, avoid anything that seems complicated. If you don't understand it, avoid it. You'll probably lose money.
Mantra #6: "Priorities lead to prosperity." Determine what's important to you, and pursue that with your time and money.
Mantra #7: "Enough is enough." Don't overconsume. Recognize when you have fulfilled your needs and your wants.


Ordinary People, Extraordinary Wealth by Ric Edelman is rather a unique book. It features advice distilled from surveying 5000 people of moderate wealth. Each chapter relates a secret for obtaining financial security. At the end of the each chapter, there are excerpts from the surveys featuring anecdotes and advice from the respondents.
Secret #1: Carry a mortgage even if you can afford to pay it off. — This flies in the face of every other financial book I've read, and I do not subscribe to the idea. I'm willing to be that the people surveyed carry a mortgage out of habit, not because they think it's smart.
Secret #2: Don't diversify the money you put into your employer retirement plan; instead, put all your contributions into stock mutual funds — I'm okay with this. It may not be appropriate for someone close to retirement, but for younger people, this seems like sound advice.
Secret #3: Make many small investments rather than a few large investments. — The key is to make investing a habit, and to invest the money when you have it.
Secret #4: Rarely move from one investment to another. — Market timing is not something to be treated lightly; it's not easy for a casual investor. Buy and hold.
Secret #5: Don't measure success against the Dow or the S&P 500. — Understand what you own and why you own it; don't compare it to market indicators.
Secret #6: Don't spend a lot of time paying bills and fretting about personal finances. Don't bother budgeting. — Many books encourage a budget, though I've not adopted one. And my success these past few months has come precisely because I have fretted about my personal finances. Maybe this advice is true for the long run, but I'm not sure it's applicable to somebody just starting to lay the foundation of financial independence.
Secret #7: Involve your children in family finances. — This is another piece of advice that all of the books offer. I haven't mentioned it because it's not appropriate to me, and doesn't actually fit my metaphor.
Secret #8: Pay attention to the media, particularly financial news. — This seems to go against secret #6, but whatever. I'm not willing to devote a lot of time to reading financial news, but it can be fun from time-to-time.
The rest of this book contains three wonderful chapters entitled: "The Biggest Mistake I Ever Made", "The Smartest Thing I Ever Did", and "My Advice to You". The common threads? Far and away, the number one thing these people recommend is to start investing as soon as possible. As much as possible. (They also recommend getting a financial adviser, something I've avoided until now.)

I was going to include a point-by-point summary of Rich Dad, Poor Dad by Robert T. Kiyosaki, but when I went to write it up, I couldn't put Kiyosaki's advice into words. I re-read a chapter. Everything seemed generalized. I did a google search, and found that not everyone agrees with the author. I, too, found the book amorphous and vague, full of outlandish claims. I thought it contained some kernels of wisdom, though, and so I've taken some of its advice, albeit with a grain of salt. I've incorporated advice from Rich Dad, Poor Dad in my general summary at the beginning of this entry, but I cannot recommend the book.

Other books that I plan to read soon include: The Millionaire Next Door by Stanley and Danko, Wealth Without Risk by Charles Givens, and Creating Wealth by Robert Allen.
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Old 08-14-2006, 05:06 AM   #3  
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Good stuff. Thanks for taking the time to share that info.
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Old 09-23-2006, 09:38 PM   #4  
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A nice read. Thanks.
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Old 09-24-2006, 11:41 AM   #5  
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Thank you for all the advice. There are a few points I definitely agree with, like, "is this a need or want?". I think everyone struggles with that. I think people need to get rid of things like cable and cell phones. Cell phones are everywhere if you ever need to make a phone call. You hardly ever find yourself actually needing one. You don't miss what you've never had is something that people need to think about. Virgins don't miss sex. People who've always had the basic channels don't miss cable, and people who have never had cell phones don't miss those. That ends up saving you at least 100 dollars a year. For 40 years? It builds up.
Also, I don't think turning to a financial advisor is nessecary. That's just like people who pay the money to go to a gym when all they have to do is exercise on their own. It's just an avoidable expense if you take the time to go through your own finances, which you seem to be doing quite well, considering all the books you've read on the subject.
Another thing I agree with is taking a percentage of your income to save every month. 10% was mentioned in The Richest Man in Babylon. I think you could probably manage to save more than that, depending on how many children you have. I save the majority of what I make, most of the time 80%, but I don't have kids or an expensive house. I don't buy junk food either, and sometimes it is difficult, but it can be done. Apparently a kid costs 250,000 dollars by the age of 18.
Also, as I mentioned in another thread, paying with cash really is the best route, because once you've spent all of that, you may want to turn to your credit card and end up spending much more than you would have originally. The only problem with that is that credit cards are a good way to build credit, so if you can manage to budget and use a credit card, great, but I have not personally found that to be an easy task.
And my grandpa was raving about Rich Dad, Poor Dad. He loved it, but I'll recommend your books to him, since they sound better. His main point about that book, though, is that it is better to be on the employer end than the employee end because you have complete control over your schedule, how much you make, and how much your employees make. He owns a real-estate company, so he definitely agrees with Kiyosaki, and highly recommended that book to me. Anyway thanks again, it was nice of you to take the time to give us point-by-point summaries of the books.
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Old 09-26-2006, 03:09 PM   #6  
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Default money.......

great info.

I often wonder if I would've been able to apply these principles when I was younger.

basically.. I have never had any excess money until now. (6yrs after graduating college). All my excess funds went into a/c rentals and instruction,etc.

while, it only takes a few dollars a day to invest for your future, I don't think I had the right mindset when I was younger. (If I saved 10% of my "flight costs" .... it would be around 4-6k. Enough to start a Vanguard IRA at an early age, but even with 6 yrs of compounding.... I'm didn't lose too much ground.

If you can just live beneath your means and invest the rest....... you don't need a 100k job to retire early. (unless you live in CA...... or have 10 kids.... or alimony.....etc....etc....!!!)

-any other advice for a young whipper snapper.... starting to prepare for retirement.

Thanks,

500and2
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Old 10-11-2006, 11:10 AM   #7  
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Great thread SWAjet! Thanks for taking the time to share. There's some great stuff there.

My impending departure from the USAF is making me reevaluate my spending habits, so I might be picking up some of those books for a few pointers.

Thanks again.

P
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Old 10-22-2006, 01:42 PM   #8  
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Another good book is "The Millionaire Next Door" by Thomas Stanley and William Danko. This book had a profound effect on how I handle my finances.
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Old 11-13-2006, 04:42 PM   #9  
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Longest post ever... but full of good info! Thanks!
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Old 11-13-2006, 04:45 PM   #10  
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Another good read is "Richest Man in Babylon" http://www.amazon.com/gp/product/pro...283155&s=books

Good read about finances, and how the same principles from wayyy back still apply today.
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