Thursday, June 22, 2017

Work to learn not to earn

When I was a young man, the one thing my poor dad wanted for me was to get a high-paying job. To him, the path to success was to go to a good university, get your degree, find a high-paying job, and work your way up the corporate ladder.

I determined at a young age that wasn’t going to be my path. I wanted to be rich, and I knew that working as an employee, even with a high paying job, wouldn’t be the way to get rich. In fact, this is something most rich people already know (which is partly why they are rich).

Take, for instance, self-made real estate mogul Sidney Torres, who owns over $250 million in real estate. As he told CNBC when it comes to following your dreams, “Intern in the industry you want to be in. Don’t worry about what you’re getting paid.”

Robert Kiyosaki is a Japanese American investor and author of the popular book 'Rich Dad Poor Dad' where he wrote of his two dads. His rich dad taught him to think differently, inspired and helped him get rich on his own.

Tuesday, June 20, 2017

The Rich acquire a general set of skills

My poor dad said, “Job security is the most important thing.”

My rich dad said, “Learning is the most important thing.”

The fundamental difference between my poor dad’s philosophy and my rich dad's philosophy about work was one of specialization versus generalization.

My poor dad believed that the best thing to do was to become increasingly specialized in your work. He admitted that people were paid more for knowing more and more about less and less. This is why he was so proud to get his doctorate. Yet, he always struggled financially.

My rich dad believed that the best thing to do was to become a generalist and to know a little about a lot. He said the best thing to do was to work in many areas of a company and pick up skills rather than a profession. He knew the best way to get rich was to be able to lead specialists across a wide spectrum of departments in a company.

Robert Kiyosaki is a Japanese American investor and author of the popular book 'Rich Dad Poor Dad' where he wrote of his two dads. His rich dad taught him to think differently, inspired and helped him get rich on his own.

Thursday, June 15, 2017

Inflation and cheap money are hurting the young generation

In many ways, millennials are victims of a cruel combination: systemic debt and asset bubbles and an antiquated education on how money works.

Charles Hugh Smith published an important blog post at the end of May. In the post, he detailed how most consumer debt is not backed by physical assets but instead by the ability of the borrower to pay the debt.

In recent years, near-zero interest rates have led to continued expansion of consumer debt. In fact, it now sits at $12.73 trillion. That’s higher than it was during the third quarter of 2008, which was right when the financial world collapsed.

Of course, during this time income has not gone up. As Smith shows, inflation adjusted median household income has been flat since 1998, and those in the bottom 90% of earners have actually seen their incomes go down.

So, we continue to see increasing amounts of debt but no growth in income to service it. How does this continue? Again, artificially low interest rates from the central banks. This is what the banks wanted. It gives the appearance of growth without actually creating true growth.

The high cost of basic needs

In the meantime, as Smith points out, “state-protected cartels” have increased their prices to astronomical levels.

Two of the very basics needed for life: food and shelter have seen 50% inflation since 1996, while clothing has held steady at a little under 0%.

College tuition and textbooks are 200% more expensive. That’s astounding—and criminal.

For decades, the cardinal rule of success in the US was to go to college and get a good degree. This was the foundational step to then getting a high paying job, buying a house, and investing for retirement in a 401(k).

These are, of course, all old rules of money.

Buying into a lie

The millennial generation bought into this dream one hundred percent. That is why they are both the most educated generation and the worse off financially. In the time while they were getting their college education, the cost was inflating at astronomical levels while the cost of living was going up, employment was going down, and incomes were shrinking.

In the meantime, the cost of cheap consumer goods like TVs and smartphones plummeted, thanks to cheap overseas labor and production. The perfect storm happened. Millennials racked up both consumer debt thanks to cheap credit card rates and assumed their highly-inflated education costs would pay off in high paying jobs to cover the debt.

It is working out quite differently. The result, as USA Today reports, is that while 48% of millennials feel optimistic about their financial future, which is higher that both gen X (37%) and baby boomers (22%), they also have the highest levels of stress regarding their finances. They stress four hours on average per week about money, compared to two hours for gen X and one hour for baby boomers.

How Generation Z approaches money

Generation Z, the little brothers and sisters of the millennials have watched from the stands—and they want to do things different.

According to a new study by the Center for Generational Kinetics, the youngest generation coming into adulthood approaches money very differently that preceding generations.

For one, they “avoid debt like the plague.” When it comes to college, they’ve learned their lesson. Most seek education that won’t leave them in debt. Most plan to work while attending college to avoid debt and a quarter of them plan to use savings to pay the costs.

This debt avoidance also gives birth to a high value on saving. With many Gen Z folks still in their teens, 12% have already started saving for retirement and 35% say they will start in their twenties.

Perhaps most surprising is how Get Z plans to fund retirement: “At least 52% in the Center for Generational Kinetics study said they planned to pay for retirement with personal savings, 28% will continue to work and 26% will depend upon government assistance.”

So, while Gen Z is learning a valuable lesson about the old rules of money—that going to college isn’t a great investment—they are doubling down on two others: save money and stay out of debt. They are also buying into the myth that a job provides financial security.

Where to start

Still these are at least green shoots in the financial literacy landscape of America. If the monopoly that is higher education in this country is broken by a generation that refuses to play the game, that can force a lot of change that is positive.

For both the millennials and Generation Z, it’s not too late, but it starts with financial education and understanding how money works in today’s economy. 


Monday, June 12, 2017

Could eating less Avocado's make you richer ?

The so-called financial experts never cease to amaze. Not content with attacks on simple pleasures like the morning Starbuck’s run, the latest fad they have in their sights is the humble avocado.

“When I was trying to buy my first home, I wasn’t buying smashed avocado for $19 and four coffees at $4 each,” says Australian millionaire Tim Gurner. “We’re at a point now where the expectations of younger people are very, very high. They want to eat out every day, they want to travel to Europe every year. The people that own homes today worked very, very hard for it, saved every dollar, did everything they could to get up the property investment ladder.”

It’s a simple formula, in Gruner’s mind. Stop buying avocados, good coffee, and trips to Europe, and you can buy a house.

In reality, what he’s saying is stop spending and start saving.

How do millennials really spend their money?

Despite the fact that avocados are very good for you—and so probably worth spending a few extra dollars on—the reality is that reality doesn’t match Gurner’s criticisms.

As Mother Jones points out, Gurner’s “not literally complaining about avocados on toast, but about a cavalier attitude toward money in general.”

They go on to show that, as a generation, millennials spend 10% less of their total income than baby boomers did in the 1980s. What is more, they only spend 8.6% of their income on dining and entertainment, compared to 10.5 percent by the boomers in the 1980s.

“So what do millennials spend their money on each year?” asks Mother Jones. “They may have $3,000 more in disposable income than young families of the 80s and 90s, but they also spend:
    About $1,000 more on health care.
    About $1,500 more on pensions and Social Security.
    About $2,000 more on overall housing (rent, maintenance, utilities, etc.).
    About $700 more on education.”

Another recent study of financially-stressed Americans shows that those worried about their standard of living enjoy saving money (64%) over spending money (35%).

The problem with saving

So, in reality, millennials are more “responsible” with money than their preachy baby boomer counterparts and are saving in greater numbers even though life is much more expensive for them than it was for their parents.

And this is a problem.

As I’ve said over and over again, savers are losers in the new world economy. Just last month I wrote about Carl and Mindy, who saved over $1 million in four years in order to retire by age 42. I pointed out that their reliance on savings was fundamentally flawed…and could hurt them later in life:

While it is great for Carl and Mindy to retire today—and having $1 million in the bank is certainly better than most—their retirement plan is not future proof in my mind.

They use what is called the 4% rule, assuming if they take out 4% of their retirement money per year, they won’t run out.

Perhaps this makes sense for them now in their 40s while they are relatively young. But what will happen when they get older and require more medical attention? Or what if their property taxes go up significantly over the next twenty years? Or what if inflation continues to grow over the next forty to fifty years at 2% a year? Or what if they get tired of living so frugally after all?

Without significant income, they won’t be able to stay afloat. They may enjoy life at $30,000 a year right now, but it will not be sustainable for their entire retirement.

The idea that skimping on avocados and good coffee will secure your financial future is ludicrous.

Building your financial intelligence

The solution isn’t to stop spending on things you enjoy in order to save. The solution is to increase your financial education—and by extension, your income—so you can continue to eat your avocado toast while building true security for your financial future.

This starts with understanding the difference between an asset and a liability, as I wrote last year in my article “Dear Millennials, Experiences Are Still Liabilities”.

In “Rich Dad Poor Dad”, I took pains to simply define the difference between an asset and a liability. An asset is something that puts money in your pocket. A liability is something that takes money out.

For the baby boomer audience I was writing to, I dismantled one of their great myths that a house was an asset by showing through these simple definitions that a house takes money out of your pocket and is therefore a liability. Only if and when you sell it, if you’re lucky to have made money, will it become an asset. Many people who lived through the Great Recession and saw their property values drop significantly finally understood.

The lie that a house is an asset is alive and well today. That’s why people say you should give up on liability (avocados) so you can afford another liability (a house). The reality is that you need both food and shelter, but the way you approach your finances will determine the quality of both.

Rather than save, invest in cash-flowing assets, such as rental real estate, a business, or technical stock market investments.

Monday, June 5, 2017

Thriving vs Surviving - Increase your financial knowledge

Automobile Bubble ?

In 2007, it was houses. Today, it’s cars. The results could be the same.

Writing about what they call SubPrime 2.0, Phoenix Capital Research cites a Bloomberg article:
Santander Consumer USA Holdings Inc., one of the biggest subprime auto finance companies, verified income on just 8 percent of borrowers whose loans it recently bundled into $1 billion of bonds, according to Moody’s Investors Service.
The low level of due diligence on applicants compares with 64 percent for loans in a recent securitization sold by General Motors Financial Co.’s AmeriCredit unit. The lack of checks may be one factor in explaining higher loan losses experienced by Santander Consumer in bond deals that it has sold in recent years…
As they point out, this means that auto loans are a $1 trillion debt market, and lenders are severely negligent in checking the income of those who purchase cars. While Santander only checked 8% of applicant’s incomes, AmeriCredit—a much more respected lender—only checked 64%.

As Phoenix Capital Research writes, “So… two of the largest autoloan lenders basically were signing off on loans without proving the person even had a JOB either roughly half the time or roughly ALL the time.”

Why is this a problem?

You may be thinking that this might not be as big a problem as the housing subprime crisis from 2007-2009. After all, aren’t auto loans much smaller in amount that housing loans? Yes, but the problem is not the individual loan amounts. Rather it is the bundling of these loans into debt investment vehicles that large institutional investors put things like pension funds into.

Those loans that Santander only checked 8% of income on, did you catch that they were bundled into $1 billion of bonds?

We may very well be in the state where we transition from market euphoria to financial distress. This is earily familiar to the housing crash, when large institutional investors lost billions upon billions of dollars on supposedly safe bond investments…all because of the laziness—and euphoria—of loan processors who were more concerned with closing a loan than making the right loan.

Perhaps as you’re reading this, your heart just skipped a beat. For some of you it will be in fear. For others it will be with excitement.

Rich dad also said, “It is not possible to predict the markets, but it is important that we be prepared for whichever direction it decides to go.”

During the last subprime crisis, many people panicked. Some folks, tragically, ended their lives because their financial loses were so heavy. The result of this panic was that capital was withdrawn from the markets, and prices on cash-flowing assets tumbled.

Most people simple weren’t ready for such a steep dive in the financial markets. Rather than take what they perceived to be too big of a risk to invest, they rather held onto their money—the equivalent of putting it under a mattress and riding out the financial storm.

At the same time, Rich Dad Advisor Ken McElroy and I were excited. We partnered together to invest in multi-family housing, a.k.a., apartments, and the buying was good. In anticipation of a downturn, Ken and his partners had recently refinanced many of their previous projects, pulling out the equity tax-free while still having the operational income to cover their operational expenses and debt service.

As the market began to crash, the prices on multi-family housing began to drop as well. Prime assets that were not a good value just a year earlier were now looking like bargain bin specials. Ken and his team moved into action, searching and finding the best deals.

Ironically, many investors were not willing to give capital to the investments Ken and his team found. But there were a small number who saw the opportunity in front of them and decided to invest.

Today, all those investors are much richer…and those that skipped those investment opportunities are very regretful.

Back to basics

Ken and his team put into practice the adage, “Buy low and sell high.” Many of Ken’s investors have their money back, still have ownership in the properties and collect money each quarter—now an infinite return.

How did Ken and team pull this off? Like my rich dad encouraged many years ago, they were ready for whatever direction the market went.

This brings to mind a financial principle that sounds simple but takes a lifetime to master: You can make money in both up and down markets. In fact, just a couple years ago, I shared with you a five-point plan to make money in any market. It might be worth revisiting that post, but in short you must:

-    Know your position
-    Know how you’ll perform
-    Get educated
-    Slowly pare back your risk

If you’re one of those reading this with a heart-beat-skip of excitement, you know this is your time. If you’re feeling more panicky, it’s time to change your mindset. This is a time of opportunity. You just have to be prepared.

SubPrime 2.0 isn’t here yet. Maybe it will never be here…or maybe it will come like a thief in the night and catch many investors off-guard.

Regardless, now is the time to begin increasing your financial intelligence so that you can be prepared for whatever direction the markets take. It will be the difference between thriving and just surviving.