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.

 Assetis 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