Tuesday, October 23, 2007

Habitually Automatic

First off, congrats to everyone who owns Apple stock. I wish I had more shares because today was a big day. I imagine it is only the first of many to come, so if you don't have any, look for dips and jump on in.

In some reading I did today, Get Rich Slowly did a review of The Automatic Millionaire ( link for the review). The review was excellent and the book seems to have a lot of good concepts. I think there are a few factors that are also important in the quest to becoming wealthy that were not mentioned though, so I'd like to build further.

What really matters? Four Points that really matter towards building wealth:

Point 1 - Your Net

First of all, it seems The Automatic Millionaire hits dead on with spending habits. What you do with your after tax money is extremely important. Of course you need to spend it to survive, but how and what you spend it on will determine, very clearly, your future. I like to think of it like every dollar you make, net (or after tax), is your employee. If you don't manage your employees well, the business that is your financial future will not continue to grow and may even go bankrupt. So setting up automatic deposits and planning for your retirement should be the first step. As they say, spend less than you earn, save up and start building wealth.

Point 2 - ROI

In line with this, the next point is what return on investment you are getting. Basically, measuring how well your employees are performing for you. If you read The Little Book that Beats the Market, it discusses how to determine a base line for your ROI. Basically, you can get a 6% ROI with little to no risk if you buy US Treasury Bills that are backed by the stability of the US government, or something to that effect. So if you aren't getting at least 6%, then you should change what you are doing.

The stock market indexes average about 11-12% over the course of their history, so with a little knowledge and a little risk, along with a long enough investment horizon, you can easilly get a better return than a lot of high fee mutual funds or leaving your money in a Money Market account will get you. But you should be able to get an even better return than that.

Point 3 - Your Time

The best and worst part of the stock market, is that you are not in control of your return once you've bought your stocks. For most people, this is good enough and they are content with leaving their future in the hands of other people that they believe are more competent than themselves. The rest of us are hungry to get even better returns. That's how point three comes in.

What better can you invest in than yourself? How you spend your free time will also determine your future. If you read my blog, you can see that I'm trying to build a business in my spare time. That's because I know that eventually I will start to create revenue with the skills and knowledge base, as well as connections, that I am building. Everyone who went through college and got a degree has already seen this process work. Putting the time in to study and learn is what got you the job that pays your bills and gives you the foundations for wealth already. Why stop there? Why not keep educating yourself towards the goal of being the guy at the top of a company directed towards your own interests? The only difference between the employee and the boss is the amount of time they've put into something and their persistence towards continuing to learn.

So just like your money being your employee and working for you, if you make your time work for you now, it will pay off in abundance later. I've said it before, but the one main commonality between the richest Americans is that they all started a business or own a business. The potential is there for everyone, it's just a matter of taking action. Your time can have exponential gains for you just like your money.

Point 4 - Multiple Streams of Income

The final point is the end result of all the previous. By making your money work for you, you start to develop a stream of income that is not reliant on your efforts but only your direction. As this grows, so do good habits and your knowledge and ability. As time is going by anyway, if you use your time and energy to build a business, eventually you will get to the point where you can hire people and promote yourself up the ladder. Eventually, you will promote yourself all the way up to a primary stock holder and not have to be actively involved in operations anymore. That frees you up to start again, setting up more and more streams of income. As you do it, it gets easier and easier and your have more and more time and freedom. This is why you hear the phrase, "the rich get richer", because as wealth grows it becomes easier for it to continue to grow. At the end, you're doing very little work but making more money than just your time and labor would ever be able to make alone.

Habitual Millionaire

If you're young enough, it's likely that changing a few spending habits and removing temptation by automating where your money goes will eventually make you a millionaire. In doing only this though, you are giving up your time. If you follow the rest of the points, both your time and your money will grow exponentially and you will reach your goals much faster. So while I definitely agree with taking the first step, I also suggest not making it the only one you take. The first step is always the hardest, so if you're going to take it, be aware that you're already well on your way.

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