compounding manner!
Where can you find such an investment?
If you are not sure then maybe you should consider:
· Real Estate? No, you were told by the experts on TV that having a mortgage is bad.
· Stock Market? According to the Dalbar Study, the average investor had an average
return of just over 3% in the last 25 years. Dalbar Inc. is the nation’s leading
financial services, market research firm performing a variety of evaluations and
ratings of practices and communications. Dalbar Inc. is committed to raising the
standards of excellence in the financial services and healthcare industries. In other
words, they are the ones to listen to.
· Bonds? Not even close.
· Mutual Funds? What a joke!
So you speak to another expert about what to do and what he said brings up another
new variable to consider.
6: Opportunity Cost
This expert said that the largest cost for the average American is Opportunity Cost.
According to InvestorWords.com, Opportunity Cost is “The cost of passing up the next
best choice when making a decision. For example, if an asset such as capital is used for
one purpose, the opportunity cost is the value of the next best purpose that capital could
have been used for. Opportunity cost analysis is an important part of a company’s
decision-making processes, but is not treated as an actual cost in any financial
statement.”
When you “park” your money in an account that grows in a compounding manner, you
are losing the opportunity to make more money with that money. In fact, it is your
biggest cost, bigger than any other cost.
Imagine putting $250 per month in an account “because the experts on television
advised you to do that.” That money could have made you a lot more money if you had
used it right.
At this point, most people are puzzled.
What else can you do with it?
7: The Break-Even Return Equation
Here is a formula that makes all this real!
But, let’s recap where we are first.
We had $10,000 cash, we used compounding (the “greatest force in the universe”) on
it, and that wasn’t enough. We placed it in the right tax environment. That wasn’t
enough. We minimized fees. That wasn’t enough. We considered inflation. We realized
there is very little to nothing that can beat all the above including inflation. But even if
there is, it has to beat it every year consistently! Let’s go on.
This “Break-Even Return” is the return on investment you require to break even, before
taxes, before inflation and after fees just to maintain purchasing power!
Here is the actual formula to calculate the break-even return you need:
R = Effective Tax Rate (federal & state)
I = Inflation Rate
B = Break-Even Rate
B = I / (1—R)
Again, this calculation shows you what you need to make as a return on your
investment to break even before taxes, before inflation and after fees. This assumes the
investment also offers compounding growth!
Let’s plug in some numbers.
Let’s use 40% for an effective tax rate, which includes state and federal taxes. Let’s
use 10% for inflation (according to ShadowStats.com). If you don’t agree with 10% you
should consider that all experts predict that inflation WILL be going up given all the
money that is being printed right now.
B = I / (1—R)
B = 10% / (1—40%)
B = 16.67%
That means you need to receive a return of 16.67% from your investment to break
even. Remember, this is before taxes, before inflation and after fees. This also assumes
the investment offers compounding growth. Even more of a challenge this growth has to
be a consistent return every year.
All that just to break even! Not to increase your wealth!
This is pretty bad.
Hopefully, you are beginning to see that the traditional method of investing doesn’t
work!
So, how is anyone building wealth then?
8: Balanced Portfolio
After doing all the right things above, you are then advised to have a “balanced”
portfolio. A “balanced” portfolio you are told depends on many factors.
If your break-even rate was 16.67% as in our example, and you diversify half of your
portfolio into “safer” assets such as bonds yielding 2%, that means the other half of your
portfolio has to generate a crazy impossible return year after year in a compounding
manner just to break even, not to build any wealth!
Are you kidding me?
For that to happen, that means you have to invest in higher volatile (higher risk)
assets and pray you hit your numbers—just to break even!
It should be becoming abundantly clear that the traditional method of investing is
broken, but still very few experts will admit it!
At this point, you might be thinking “but inflation is not 10%” therefore your numbers
are off. I want you to consider two things. First, visit ShadowStats.com and do your own
research. If it makes you feel better go ahead and plug in 6% or 7% for inflation. The
numbers still don’t make sense. Furthermore, you need to calculate your “personal
inflation rate.” We each have our own personal inflation rate depending on the things we
purchase. Your personal inflation rate could differ dramatically from the national inflation
rate. Calculating this figure can be eye-opening—unless of course you ride your bicycle to
work and don’t need to buy gas, and fast for weeks at a time!
The traditional method of investing doesn’t work!
9: Financial Leverage
Finally, here it is, THE TRUTH: there is no way to build real wealth except to use
LEVERAGE. Without leverage, it is virtually impossible to build wealth. Most “experts” on TV tell you not to use leverage, yet the affluent tell us they cannot do without it. You can
see they are right. Their numbers prove it—and their wealth proves it as well.
Financial leverage can be good or it can be bad. It can work for you or it can destroy
you financially.
However, once you know how to use it properly and manage the risk, it can MOVE you
to the right side of the WealthQ.
The secret to moving to the “Receiving” side of the WealthQ is well-structured
leverage!
What does leverage do?
Used right, leverage can move you to the right side of the Wealth Equation. Leverage
allows you to position yourself on the receiving end of inflation. That means as inflation
rises, you benefit. And, as you will find out leverage also positions you on the receiving
end of interest and opportunity cost as well.
Leverage is to the wealthy as candy is to kids.
Here is an analogy I like for leverage.
Going back to our $10,000, instead of having just one $10,000 growing in a
compounding environment and in a tax-advantaged environment, you can first “replicate”
the $10,000 four times, and place each of those new $10,000 in a tax-advantaged
compounding environment. Now you are working with $50,000 to start. Of course these
amounts would be larger for the individuals that know how to use leverage effectively!
One of the keys to financial leverage is to have it structured cor
rectly. We will expand
on this later in the book.
This is not just any leverage. The key with this leverage is that it is correctly
structured leverage. “Correctly structured” includes both the terms and the
amount of leverage.
When used properly you should think of financial leverage, as a REPLICATING process.
Now, let’s put everything together.
We started with $10,000 cash. Now (using leverage) we will replicate it several times.
So we have expanded the $10,000 to $50,000 instantly in this example. No waiting for a
gazillion years! We now place each $10,000 into a compounding environment. We then
make sure we place each of those five $10,000 sets in a tax advantaged environment.
We make sure we minimize or eliminate fees. Then, because we are using leverage,
inflation works to our advantage, as we will discover later in the book. Each $10,000 can
return less than the 16.67% return we calculated earlier as “necessary”, but the sum of
all the $10,000 investments should easily beat that targeted return. Thus showing us we are actually building wealth.
In fact, as you will learn later in the book that $10,000 being used in this example can
be “replicated” a lot more than just 5 times!
The important point to understand is that it is the leverage that is the key to making
this work.
We like our new term for extremely successful investors who know how to use
leverage: DEBT MILLIONAIRES.
A “Debt Millionaire”…
· Is someone who knows how to MANAGE debt to move themselves closer to their
financial goals
· Uses debt STRATEGICALLY to build wealth
· Is one of the most sophisticated investors on the planet
· Is someone that understands that debt can destroy them if they don’t manage it
well
“Debt Millionaires” are the investors who know how to use debt strategically to
move to the “Receiving” side of the WealthQ. They understand “The WealthQ
Method” of investing.
As a reminder, most people follow the “experts” on television who are saying that debt
and leverage are bad. However, in this book, for you the reader we will continue talking
about debt and leverage. From here forward you will come to understand the importance
of using debt and learning about and using leverage.
The good news is, the best part of what you will learn has not yet been revealed! We
are just starting out.
* * *
I was intrigued by Emile’s information, but I was not convinced. I wanted more
information.
The waiter then interrupted us. “Gentlemen, are you ready to order?”
“The usual for me” said Emile as he looked at me “Remember this. No one in this
universe cares more about your finances than you. Take the time to learn about finance.
What I will share with you will change the way you look at investing forever.”
Chapter Summary
When investing there are multiple factors, variables, influences, and
alternatives to be considered. We looked at and discussed:
· 1: We started with some cash, then
· 2: We put it into a compounding environment, then
· 3: We made sure we placed everything in a tax-advantaged environment, then
· 4: We made sure we minimized or eliminated fees, then
· 5: We considered how inflation affects our investments, then
· 6: We made sure we considered the opportunity cost, then
· 7: We calculated the actual “Break Even Return” we need before taxes and inflation,
and after fees. The break-even return needed just to break even and not even build
wealth was high!, then
· 8: We added “balanced” portfolio. That translated to our having to invest in much
higher risk assets just to break even!, then
· 9: We learned how financial leverage will allow us to replicate the above several times to speed up our wealth, and in fact allow us to BECOME wealthy.
· The traditional method of investing doesn’t work!
· “Debt Millionaires” are the ones who know how to use debt strategically to move to
the “Receiving” side of WealthQ. They understand “The WealthQ Method” of investing.
· Use leverage properly and you can become a “Debt Millionaire.”
Chapter Four
Hacking the System
Emile grabbed his pen to write a note on his pad, but then he paused. He was deep in
thought. He was trying to say something.
I could tell he was being very patient with me trying to take me along on this journey
of moving me from the “Paying” side to the “Receiving” side.
“Before jumping into the details of the Wealth Equation, you need to understand the
big picture—the game of finance. You need to understand the game, and in doing so, you
will appreciate how to use the system and make it work for you…”
“Let’s consider a simple example George” he said as he moved pen to paper.
* * *
When playing the game of finance, you need to understand it well enough to be able
to find ways to win.
I occasionally use the term “hacking the game of finance” and I mean just that. I am
not talking about doing anything illegal but simply finding shortcuts to make the system
work for you instead of against you.
To “hack the game of finance”, you need three steps:
1. You need to understand who created the system, because there-in lies the biggest
clues. “They” have built the system to work for them. In this book the “They” we are
talking about are the global bankers.
2. You need to understand how the system works. We will not be doing that in this
book, but rather we will be giving you an indication of how the WealthQ was
discovered and why “The WealthQ Method” is so effective.
3. You need to recognize that many of our beliefs about money, investing and the
financial system were actually initiated by the ones that created the financial
system. They did this in order to make us function better inside their system.
Instructions and beliefs like “pick a 15-year mortgage over a 30-year mortgage”
actually benefit them and not us (refer to my book The Wealthy Code). It is
important that you question all your financial beliefs and what were the true
intentions behind those beliefs.
Once you have addressed and worked through these three steps, then the fun starts.
Remember, it’s a game that you play. With your new understanding of the answers to the
three steps many things are possible including playing the game to win.
In order to understand step 1 above, here is another analogy. As kids, we all played
with Legos. We all built homes and various other structures. We started with a green
base plate (now they have other colors) and used it as the foundation on which we built a
structure; let’s use a house as an example. Refer to the following diagram.
Figure 1: Investors focus on what’s on the base plate, but never think about the base
plate itself.
We were all focused on the house, how it looked, the garage with a car, the people
pieces etc. But what happened if we accidently dropped the base plate on the floor?
Everything on it, including the cars, the structures, and the people were all destroyed. But
when we were building the house
we never thought about that base plate, which was the
underlying foundation of everything.
Figure 2: The base plate represents the Monetary System upon which everything is built
on.
That is exactly what happens in real life. That base plate represents the monetary
system on which everything is built. Investors are so focused on their real estate, or their
businesses, or their investments, they take the base plate for granted, yet it is the
foundation underlying their investments. The more you know about how that foundation
is built, the better you can build on it. In fact, the base plate actually represents multiple
“layers”, the monetary system is one layer and the economy is a layer on top of the
monetary system.
Again, these multiple layers are beyond the scope of this book, but it is good for you to
know they are there. This book will focus on how to “build” your investments on the
monetary base. The WealthQ Method was built to work WITH the monetary system that
is the base. That is why it is so effective.
Here is a simple example to illustrate this.
You were always told the way you become rich is to save a certain amount of money
every month into an interest bearing account. For example, save $200 every month into a
savings account, and then use that money to purchase the saved for products and
services. You should never incur any debt whatsoever, and if you do have any debt, you
should pay it off!
The more you understand the financial system, the easier it is to analyze the
challenges with the above example. Our financial system is based on debt, and therefore inflation happens! Other things happen too.
The banks want your money, so they convince you to deposit it with them. You allow it
to sit there idle while it supposedly grows, meanwhile they are using your money to
skyrocket their own wealth. You even fell for the belief that compound interest in THEIR
bank was good. But let’s keep going with this example.
You are placing $200 per month into an account earning 1% to 3% depending on the
account (if you are lucky).
1. The measly little bit of interest you are earning on that account is being taxed. So
your return is much less than the stated interest amount. So taxes work to your
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