07 Jan 2007, Posted by Lance in General, No Comments.

Finances Part II: The Not So Secret – LBYM

The One (Not So) Secret of Legacy Wealth

Wealth can be attained be anyone at any income level using
four magic letters LBYM. LBYM stands for
Living Below Your Means. It is the one
principle that everyone must learn to become financial independent and
wealthy. It also relieves financial
stress and puts us back in control of our finances.

Now, it is very easy to read this and you have probably even
heard this before, yet most Americans simply do not master this first step to
wealth. I have never met anyone who is
wealthy who has not mastered this principle and because I am such a
financial genius, it took me 5 years to learn this principle and instill it in
my family!!! Talk about hard headed?

Let me simplify this principle for you. LBYM simply means that you are saving money
every month and increasing this savings yearly. You are living on less than you make and investing and saving the
difference. This is how all wealth
creation begins.

Why does everyone not practice this principle? I believe it comes down to priorities and the
lies we believe. You have to make it a
priority to become wealthy and master your finances. In a moment, I will share with you some statistics
(for all you analytical types) of how this breaks down but from all the data here is
the bottom line:

Those who
made it a priority to save, built wealth, regardless of their income level,
individual circumstances or choice of investments.

Here are some key findings:

There’s a huge variation in wealth at every income level. Many low-income families have almost nothing. But the same is true of many high-income families.
Income alone doesn’t explain wealth disparities. Some of the lowest-earning households had managed to accumulate significant wealth.
In fact, income differences explain just 5% of the wealth dispersion the
researchers found.
What the researchers called “chance events” — inheritances, medical bills,
marital status, and number of children — explained about 4% of the
dispersion.
Investment choices explained about 8% of the variations.
In other words, the vast majority of the differences in wealth had nothing to do with income, chance events or investment choices.
What did explain most of the differences in wealth? Venti and Wise concluded it was this: How much the families chose to save. Those who made it a priority to save built wealth, regardless of their income level,
individual circumstances or choice of investments.

Here it is again…

Those who
made it a priority to save, built wealth, regardless of their income level,
individual circumstances or choice of investments.

Crazy? Making
it a priority to build wealth is 80% of the battle.

“80% of Success if showing
up.” - Woody Allen

So we now know that simply making finances and wealth a priority is half
the battle, what is the other half?

We need to
stop believing the lies.

Hollywood, The Dot Com Craze, The
Media and even Financial Advisors have been selling us a lie. The lie is that when you’re wealthy, you
drive a Mercedes SL600, you live in a $5M Mansion, you only buy Gucci, Prada
and Armani and if it’s practical and cheap, you don’t want it.

We buy into this lie and try to look the part, try to live up with the
Jones. We spend our hard earned money on
the one thing that will never help us become wealthy…liabilities.

Not only do we spend our hard earned money on crap but we also use our
credit and buy more crap to get us deeper in debt. Here are some debt facts:

More than a third — 36% of those who owe more than $10,000 on their cards have household incomes under $50,000, according to the VIP Forum analysis.
13% who owe that much have household incomes under $30,000.
The percentage of disposable income used to pay debts is still near record highs.
The median value of total outstanding debt owed by households rose 9.6% between 1998 and 2001.
Bankruptcies set another record in 2003, with 1.6 million personal filings, the American Bankruptcy Institute reports.

More…

· Sixty-two percent
of Americans report that they are saving and/or investing. However, more than
40 percent of all Americans save less
than 5 percent of their annual household income. Sixteen percent save
between 5 and 10 percent. Only nine percent save more than 20 percent of their
annual income (Jean Chatzky, You Don’t Have to Be Rich,
2003).

· The
average personal savings rate is now less than 2% of income, and the
average household has a net worth of just $264,000 at retirement, not including
home equity (Money, December 2004, pg. 94).

So what are we doing? We are taking our hard earned money and buying new cars, boats, jet
skis, snowmobiles, charging vacations on credit, financing Christmas, getting
the latest gadgets, hooking up 141 channels of cable, eating out everyday and
buying Starbucks every morning at $4 a pop instead of making wealth a priority and
saving money first.

Have you ever looked at those pictures of wealthy people you
see on the walls of old estates? They
decided to make building wealth a priority; they built a financial legacy that influenced
many future generations.

So what are we doing for our future generations? What will our great, great, great
grandchildren say about our legacy?

Again, financial wealth is not the only aspect of a legacy
and it is certainly not the most important but, it is a factor and needs to be
addressed. Ignorance is not an
excuse.

If everyone was given a financial report card on our net
worth, what would our grade be?

Take all your assets (investments, retirement, and cash) and
subtract your liabilities (mortgage, debt, loans) and see what your grade might
be?

A = Net Worth of $2 Million or more

B = Net Worth of $1 – 2 Million

C = Net Worth of
$500,000 – $999,999

D = Net Worth of $100,000 – $499,999

F = Net Worth of $ Negative – $99,999

Using this grading scale and statistics, a majority of us
are getting D’s and F’s?

Statistics show the average American spends 120% of their
annual income. That means all their
income plus 20% using credit and debt.

Okay so what do we do instead?

You put your money in the one area that has
made all the wealth in the history of our world, from J. D. Rockefeller to Bill
Gates to Warren Buffet. This one area to
put your money creates wealth for you. Assets

The reason we don’t now of this great secret is because they
don’t teach it in school and unless you’ve made it priority to find out, it
remains elusive to us. First, some
simple definitions.

Liability – is anything that depreciates
and/or takes money out of your pocket sometimes reoccurring monthly.

Asset – is anything that appreciates in value or puts money back into your
pocket hopefully on a reoccurring basis.

In his best selling books “The Millionaire Next Door” and
“The Millionaire Mind” Dr. Thomas Stanley does research on America’s wealthy households. He found that there are two types of wealthy
people.

Income Statement Wealth and Balance Sheet Wealth

Income Statement Wealth is people who have
large incomes but spend a majority of their incomes on liabilities. They
have big houses, nice cars and look wealthy but have no real wealth because
their money is in depreciating liabilities. They are tied to their incomes (jobs) to
maintain their income level.

Balance Sheet Wealth are people who don’t
necessarily look wealthy, they have modest houses and modest cars yet they have
most of their money in appreciating assets and our normally financial independent,
meaning if they quit their jobs, they would be able to live off their assets
and in most cases make more money.

Now please understand this, there are some people who are so
frugal that they do not spend money on anything, they deny themselves of simple
pleasures and rewards and make it their life’s work to be stingy, miserly
people. This is not the lifestyle I am
talking about. I am talking about
reducing unnecessary costs, lowering liability debt and redirecting that money
into assets that will put money back in your pocket.

Like I said, it is easy to read but much harder to “get off
the liability wagon” and put this into effect. It took me 5 years of reading, struggling and failing a few times to
finally learn this principle. Hopefully
you are much smarter than me and will chose to draw a line in your checkbook
and stop these habits.

For some help in this area and to go into much greater
detail I recommend the following books:

The
Four Laws of Debt Free Prosperity – This is the first book on finance that
I read and lead me on this journey to creating wealth.

Your
Money or Your Life: Transforming Your Relationship with Money and Achieving
Financial Independence – This is the “financial bible” on frugality and
LBYM. I have heard countless accounts of
this book turning peoples spending habit around.

A Quick Recap of what we need to do to LBYM:

Make it a priority to master your money and create wealth. This is the first step in setting an example for your children, then teaching this process to them. It also relieves financial stress on your marriage and starts the process towards your children’s financial legacy.

Reduce spending and liability debt. Stop living the lie of income statement wealth. This sometimes takes a little pressure from God and others to get us to do. It takes a level of maturity on our part as well. It was hard for me at first to see friends driving BMW’s they financed on credit and other friend’s spending money on liabilities. I would be lying if I told you I didn’t slip back to my old habits a few times when I first started. The books listed will give you a more in
depth game plan of how to make this step easier and automatic.

The third step once you’ve reduced spending is to start Paying Yourself First. This is a simple beginner principle to get you to save 10% (for starters) every month. The idea is to set up an automatic withdrawal from your paycheck of 10% and have that money transferred to a savings account. This forces you to live on the 90% that is left over. As you progress, I will show you how to start saving more and more. I am currently saving around 30% of my monthly income and to be honest, there is plenty left for extras and entertainment. It is all in the
mindset.

So your next question is going to be “Where do I put this
10% of my income?” This we will answer
in future posts and I will take you through the simple savings account to very
complex investment choices.

First we crawl, then walk, then run and finally soar. Until next time, God Bless.

-Esse Quam Videri-

"The only thing that stands
between a man and what he wants from life is often merely the will to try it
and the faith to believe that it is possible."

- R. M. DeVos

Some additional links for statistics:

Debt Statistics – http://www.mdmproofing.com/iym/hfstats.shtml

Here is some
scientific information on this subject from Money Central