The Debt Millionaire
Page 2
This method of investing, focusing on moving to the “Receiving” side, is what’s called
“The WealthQ Method.” Most people and investors are focusing on higher returns and
“making more money”. The WealthQ Method is a completely different, and I believe
better, approach as you will soon find out. It is based on, and intended to move you to
the right side of the WealthQ equation and make the system work for you instead of
against you. Using the WealthQ Method you will end up investing in relatively safer assets
than the people on the left side. You will have more liquidity (more capital in the bank),
and build your net-worth faster than the people on the left side! On the right side the
system works in your favor!
Throughout this book I intend to help you learn the WealthQ Method and how to move
to the right side.
I like the following analogy.
Let’s say you are flying an airplane (going through life) trying to get to your destination
(your financial goals). Your airspeed is 200 miles per hour (you are investing as best you
were taught) but there is a headwind (a force working against you) of 175 miles per hour.
Your situation is such you will make only slow headway toward your destination (25 miles
per hour in our example). Depending on the distance you need to travel and the time you
have to travel, you may never reach you goal. This is a perfect example of being on the
left side of the WealthQ with the headwinds (forces) working against you.
Now let’s say you are flying an airplane (going through life) trying to get to your
destination (your financial goals). Your airspeed is 200 miles per hour but you
intelligently planned your flight path (learned all you could about moving to the right side
of the WealthQ) and now as you fly along you have a tailwind (a force working for you) of
175 miles per hour. Your situation is such that you will make steady headway toward
your destination. Because you understand how the plane and the tailwind (the force)
work together you are in control. You can fly at 375 miles per hour or you can control and
monitor your flight speed and time to reach your destination at a reasonable, safe (low
risk and volatility), and controlled speed. This is why you want a tailwind, and exactly
why you want the system working FOR you and not against you.
Headwinds and tailwinds (forces) are always there. They are a fact of nature. In the
WealthQ the forces are always there. They are a result of how the system was built. Your
ability to achieve your life’s financial goals will be greatly enhanced by your learning,
understanding and then applying the investment techniques necessary to have the forces
in the WealthQ working to your advantage. Learn how to find that tailwind.
People and investors on the left side are trying really hard just to increase their
returns, but they are still flying against the headwinds (the forces in the system). Their financial advisors give them advice attempting to make slightly better returns, but again,
it doesn’t change the fact they are still flying against those headwinds. Continuing to fly
against those winds is not the answer. To succeed financially requires a complete change
of perspective. Moving to the right side of the WealthQ equation and positioning yourself
to allow the forces to work for you is key to your success.
Once you shift to the “Receiving” side of the WealthQ you have the tailwind on your
side. The forces on the right side help you build wealth automatically. You are not
working as hard, and wealth is building much easier.
The first step to recognize is this: To build wealth automatically, you have to learn how
to switch to the right or “Receiving” side. It is just too difficult to build wealth from the left or “Paying” side!
The WealthQ Method is not about increasing returns or buying bigger assets, it is a
complete change in perspective!
The WealthQ Method is not about increasing returns or buying bigger assets, it
is a complete change in perspective! It’s about making the system work for
you.
In fact, most investors and advisors are so focused on returns they are completely
missing the big picture. They are stuck on the “Paying” side and believe it’s all about
returns. They completely miss how people on the right side might have capital sitting in
their checking account and be increasing their wealth more than their counterparts
invested in various instruments on the “Paying” side.
This book will remove for you a lot of the “noise” out there about investing. It will help
you understand what you need to do, and more importantly, how you need to THINK to
be positioned like those already on the right side of the equation.
Keep reading.
It’s time to make the system work FOR you and not AGAINST you like everyone else.
* * *
I looked up at Emile. He had just scribbled a whole bunch of things on this napkin, and
I knew immediately I was hearing something special, but I had a million questions.
The expensive pen in his hand was clearly “experienced” from writing many of Emile’s
powerful concepts and ideas on paper.
I looked over to my mentor and then Emile the grandson.
They were all smiling.
I smiled. “This is great. In fact, it is amazing. But how do we shift over to the right side
of the Wealth Equation?” I asked.
Emile flipped over the page to a new blank one, placed his pen on it, leaned back in
his chair, and asked me a question.
Chapter Summary
· Understanding the Wealth Equation, known simply as WealthQ is the first step to
building your wealth on auto-pilot.
· The second step is to understand that you need to move over to the “Receiving” side
of the WealthQ.
· By moving over, you allow the four main forces of inflation, interest, taxes and
opportunity cost to work for you instead of against you. There are actually more forces,
but we only focus on these four in this book.
· The WealthQ Method is not about increasing returns or buying bigger assets, it is
about a complete change in perspective on wealth building. It is about making the
financial system work for you.
Chapter Three
The Traditional Method of Investing Doesn’t Work!
“Tell me what you were taught in school and what you learned from books about
building wealth?” asked Emile as he crossed his arms. There was a serious look on his
face.
“Ummm. I’m not sure what you mean, but basically I was taught to save a certain
amount of money every month and put it into a savings account. Then I should just let
compounding take its course. That is wealth building in a nutshell, it is what it is” I said
unsure of what he was really asking.
“Precisely. What else?”
“Be debt free and avoid any and all debt whatsoever.”
“That’s exactly true. That’s what the majority teaches and unfortunately what the
majority learns” he replied.
“Focus on getting a good return” I continued.
“Yep” he interrupted, “Now, before I go through how to move over to the right side of
the Wealth Equation, there is a critical foundation piece you need to understand. In your
mind I want you to turn over everything yo
u have been told or read about wealth
building. Flip it on its head and then you will be able to build wealth!” he continued.
“What do you mean?” I asked.
Emile then went on to completely turn everything I believed about building wealth on
its head. And my mentor who sat next to me could only smile because he already
understood.
* * *
The title of this chapter is a very bold one. But sadly, it’s true, and it’s true for most
people. The traditional method of investing doesn’t work. Most people work hard all their
lives and use the traditional methods of investing their hard-earned money but never
become wealthy because of their limited knowledge! Unfortunately, they will blame
themselves thinking they didn’t work hard enough or save enough, how sad!
The truth is they just lacked the information in this book!
Before I continue, I want you to know my assumptions about the people reading this
book. These are the people I am trying to educate:
· I’m talking about people who are trying to build wealth from their INVESTMENTS,
and not those trying to build wealth from entrepreneurship or an extremely high
salary.
· I’m talking about people who invest the way many “experts” out there recommend, i.e. investing in the stock market, buying bonds, loading up their 401K, and buying
real estate without using leverage.
· I’m talking about people who have been conditioned that any form of debt is bad.
Let’s see if we can benefit from a walk down memory lane. In planning to grow your
wealth there are multiple factors, variables, influences, and alternatives you need to
understand and consider. Following are 9 considerations:
1: Cash
Let’s start our journey with a fixed sum of money, say $10,000 in CASH.
You know the $10,000 won’t build wealth sitting there in cash under your mattress.
You need to make it work for you.
You decide to consider investing it.
2: The Compounding Environment
Let’s review a lesson we all were taught many years ago in a class called mathematics.
Your teacher shared this wonderful strategy about COMPOUNDING.
She said if you place your money in a compounding account, it will grow to a gazillion
dollars after a gazillion years. You were so excited, you wanted that gazillion dollars.
In fact, your teacher shared that Albert Einstein once said “compound interest is the
most powerful force in the universe”. Now you knew how you would become rich!
She went on to ask this question to drive home the point:
“If I were to offer you one penny that I will double every day for thirty days or offer to
give you $100,000 today, which would you choose?”
I remember we all guessed $100,000 just to find out we were wrong. She said a penny
doubled every-day for thirty days would yield $5,368,709.12!
Wow! We were all astonished with our eyes bulging out!
But we weren’t told about taxes at that time. So let’s add taxes.
3: Tax Environment
Let’s run the above penny doubling scenario in 3 different tax environments:
· Tax-Free Compounding Growth
· Tax-Deferred Compounding Growth
· Taxable Compounding Growth
Table 5: Tax-Free Growth for Penny Doubled Example
Table 6: Tax-Deferred Growth for Penny Doubled Example
Table 7: Taxable Compounding Growth for Penny Doubled Example
Here are the results:
· Tax-Free Compounding Growth:
o Penny turns into $5,368,709.12.
· Tax-Deferred Compounding Growth:
o Penny turns into $3,758,096.38 (assuming 30% bracket).
· Taxable Compounding Growth:
o Penny turns into $48,196.86 (assuming 30% bracket).
Whoa! Wait a minute! That $100,000 suddenly became attractive when compared to
the last example!
You can clearly see how important understanding the tax environment is.
You decide to invest and use one of the tax-advantaged environments (tax-free or tax-
deferred).
You are excited about having this “greatest force” working for you in the right tax
environment.
After a few years, you review your growth, and realize something is off. You are not
where you wanted and needed to be financially. What is going on?
Upon further investigation, you realize that you were being charged “low” fees that
were connected to your investment.
4: Fees
“But the fees are low” you might think.
Let’s look into an interview on PBS (public television) with John Bogle, the founder of
Vanguard, one of the world’s largest mutual fund organizations. John Bogle is one of the
most respected names on Wall Street. (Refer to Resources page for the link to the
interview.)
That interview opened my eyes.
It’s sad that most people work a lifetime and invest their money into investments like
mutual funds only to find out at their retirement date that they have been “had”… while
the whole time, people like John Bogle had been warning them about what was
happening! Not benefitting from the available information is typical of the people on the
“Paying” side of the WealthQ.
But now, back to John Bogle’s interview.
In the interview, Mr. Bogle was asked “So if my investment in your fund does your
average, what percentage of my net growth is going to fees in a 401(k) plan?”
To which Mr. Bogle replied:
“Well, it’s awesome. Let me give you a little longer-term example. The example I use
in my book is an individual who is 20 years old today starting to accumulate for
retirement. That person has about 45 years to go before retirement -- 20 to 65 -- and
then, if you believe the actuarial tables, another 20 years to go before death mercifully
brings his or her life to a close. So that’s 65 years of investing. If that individual invests $1,000 at the beginning of that time and earns 8%, their $1,000 will grow in that 65-year
period to around $140,000.
Now, the financial system -- the mutual fund system in this case—will take about two
and one half percentage points out of that return, so you will have a gross return of 8%,
a net return of 5.5%, and your $1,000 will grow to approximately $30,000. One hundred
ten thousand dollars goes to the financial system and $30,000 to you, the investor. Think about that. That means the financial system put up zero percent of the capital and took
zero percent of the risk and got almost 80% of the return, and you, the investor in this
long time period, an investment lifetime, put up 100 percent of the capital, took 100% of
the risk, and got only a little bit over 20% of the return. That is a financial system that is failing investors because of those costs of financial advice and brokerage, some hidden,
some out in plain sight that investors face today. So the system has to be fixed.”
“Why didn’t I know about this years ago?” You are thinking to yourself.
Do you have any idea how much of an impact your fees have on your investments?
So you decide to rework your investments to have minimal fees.
You will now be on your way you think.
But you would be wrong. The GREATEST FORCES would still be working against you.
Then comes inflation…
5: Inflation
Inflation? What
does inflation have to do with your investments?
Besides, inflation is low. How does it affect you?
You say to yourself; “I am debt-free, own my assets free-and-clear, and my returns are
good. I am being told I shouldn’t worry about inflation—by those experts on TV”.
Think again…not worrying about inflation turns out to be your biggest threat: your loss
of purchasing power.
According to FOOL.COM, a well-respected website for stock news and analysis, “Put
simply, inflation slowly but surely saps the value of your hard-earned money. Even at a
relatively low 3% inflation rate, prices double roughly every 25 years. Moreover,
depending on your individual needs, your personal inflation rate might be much higher
than the official Consumer Price Index. For instance, many retirees have argued that the
CPI doesn’t reflect their particular spending patterns, making it necessary to determine
their own price-increase exposure and make arrangements accordingly.
The steady erosion of purchasing power is the biggest reason why investing too
conservatively can be problematic. If you keep money in a savings account right now, you
guarantee that your account balance will never go down. But earning just a fraction of a
percent in interest, you’ll never keep up with even the low inflation rate that we’ve
enjoyed lately”
So what is the inflation rate? You just might want to take a look at ShadowStats.com.
You also just might want to be seated when you do.
According to ShadowStats.com, inflation is closer to 10% than the 3% that the
government states. That’s because the Consumer Price Index or CPI (the index that measures inflation) was updated during the President Carter and President Clinton years,
and energy (gas) and food were removed from the CPI, which in turn lowered the
inflation rate. In plain English, they removed the food and gas we need to survive from
the calculation for inflation! Huh? Yep, it’s true.
Fortunately, ShadowStats.com keeps track of inflation using the old calculation.
So if inflation is indeed closer to 10%, and inflation compounds. What does that mean
to you?
Simple.
Your investment of $10,000 has to return 10% after taxes and after fees, every single
year, just to maintain its purchasing power, and your investment has to be growing in a