Unfortunately, not everyone can get rich even by my relative standard. You can make all the right decisions, all the right moves, and all the right investments but still fail to become even modestly rich. That’s not to say that it’s all luck, but it’s true that luck matters. In many ways, as I said in the conclusion of Confessions of a Street Addict, my first book, it is better to be lucky than good. On some level, trying to create prosperity for yourself and your family is still subject to chance. You can improve your odds dramatically or sabotage them, depending on your approach to money and your actions, but there is still a totally random, unfair element in the process of getting rich that may someday thwart even the best-laid plans.
If I can’t guarantee that taking my advice will make you rich, you probably want to know what else I’m bringing to the table. Everyone wants certainties beyond the knowledge, disciplines, practices, and habits that increase their likelihood of becoming extraordinarily rich. Everyone worries about money, rich and poor alike, and we worry because of uncertainty. You picked up this book and now you want to know that if you follow my suggestions, you’re not going to end up destitute. The earlier you start building your wealth, which means first gathering money and then using it to create more money through various investments and tax-favored savings plans, the easier it will be for you to get what you want. But even if you don’t start actively planning your prosperity until your 50s or 60s, there are many things you can do to ensure financial security for the rest of your life. Getting rich, whether you stay that way or not, is terrific, but it’s a secondary goal. What most of us really want is to be able to stop worrying about money, to stop living in fear of impending financial disaster and start living in comfort. Anyone can build enough wealth to sustain a relatively carefree lifestyle. You might not be able to retire early, but you won’t need to fear ending up in the poorhouse. Building wealth is generally either presented as appallingly simple, even easy, or as an endeavor so complex that you should give up or get a professional advisor. The truth is that although each of the steps toward building lasting wealth can appear easy to take, there are a whole host of factors that most people who write about long-term financial planning do not discuss at all. That, I believe, is why people fail. You don’t have to be talented or even intelligent; you just need the right combination of knowledge and discipline, along with the right perspective. When this stuff seems complicated and difficult, it’s because many financial professionals have it in their best interest to keep regular people uneducated about money; that way, you still need an advisor. Anyone who has ever watched Mad Money knows I genuinely believe that the industry that spawned me is not helpful, because it if were, it would teach you to do it all on your own and not need the help of the so-called professionals. They want you addicted; I want to break the addiction. Once I lay out the right perspective, everything complex and odd should fit into a larger pattern and be easy for you to understand.
There’s really no excuse for not taking all the necessary steps to modest prosperity, once you know what they are. I’m here to teach you those steps. I know you probably feel you’re getting squeezed financially, but everyone feels that way. Heck, I lived in my car at one point in my life—talk about squeeze. But if you play your economic cards right, which I’m about to teach you to do, you’ll eventually stop feeling squeezed, and if you preserve your wealth, the feeling will never come back. You’ll have the potential to become truly rich, and no matter what, you can rest easy in the knowledge that you’ll be building self-sustaining wealth, the kind that lasts for generations.
People always say money can’t buy happiness, but I’ve never found that argument compelling. Money can buy peace of mind; it can take care of you and your loved ones, and to a certain extent, money means freedom. If you take a long enough view and do the work, you’ll be able to set yourself up for a lifetime of prosperity, at the very least!
The First Step Is the Same for Everyone
It really doesn’t matter what your goals are. If you want more money, the first step is always the same: you need to save. For many people, even the most assiduous of savers, hearing that is like being reminded you’ve got a checkup with your dentist, or even a root canal. I know. There’s no topic more boring on its face than saving money. It’s worse than boring; the way most people write or talk about saving, any kind of advice on the subject is totally useless. Everyone knows they’re supposed to save. It’s always the first piece of financial advice anyone ever hears. Here I come, beating you over the head with something you’ve already been told close to a million times. Saving is smart, and you should do as much of it as possible. All the boring old reasons that your parents probably gave you to save, even if they themselves were big spenders, are completely true. They’re also completely irrelevant.
I don’t want to harp on this theme, because too many people are excessively shrill about it, but most people in America have a problem with saving money. We all know it’s “the right thing to do.” We all know it’s necessary if we want to do anything, from buying a home to retiring. Saving is what you’re supposed to do. Why even discuss it, right? Well, the problem is that even though we all know we should save, that doesn’t mean all of us actually do it. I’ve never really had this problem personally. In fact, I was still saving money back when I was living out of the rear seat of my Ford Fairmont. That’s not because I was enlightened or good with money or even responsible; tell me how someone responsible winds up living in his car. I saved back then because I was brainwashed. I thought of saving before paying insurance, although I did get the windfall of not having to plunk down cash for a homeowner’s policy! I don’t mean “brainwashing” necessarily in a bad way. Being brainwashed about saving money turned out great for me, and as it happened, I did all the right things, but only eventually for the right reasons. I put away that $1,000 a year that I mentioned earlier, and the results from compounding from 1977 were spectacular. I invested with the legendary mutual fund manager Peter Lynch, whose books I still reread when I feel I have lost my way or when I have a cold streak picking stocks for my charitable trust, the only investment I am allowed to have, given my show’s power to influence stocks. Although I’ve never had much trouble saving money, I’ve seen plenty of friends and family members go through tremendous difficulties because they cannot save money. The fact is, people who don’t save are the majority. I don’t think you can go two or three days without seeing some article bemoaning the fact that irresponsible people are piling up enormous amounts of credit card debt or just not saving any money. We have trouble saving. Even those of us who are diligent about it could generally do better.
The usual diagnosis when someone has trouble saving money is a bad case of irresponsibility. America has a negative savings rate right now, meaning that collectively we spend more than we earn. Everyone’s eager to explain this fact as the result of some moral or cultural failing, compounded by the ease of obtaining cheap credit through credit card companies that demand high interest. Notice I didn’t use the term “Shylock”; I’ve grown more statesmanlike since my first book! The rap on Americans? That we’re too decadent, we’re too taken in by consumer culture, we all spend too much on flashy items to keep up with our neighbors, or we’re too easily influenced by advertisements. I don’t buy it. Not for a Wall Street second.
We have a problem saving money for one reason, and it’s got nothing to do with character: we think about saving money the wrong way. If you can’t save money, or can’t save as much as you hope to, or even if you save but find the whole exercise boring, you’re not approaching things the right way. That’s not your fault. We don’t teach financial literacy—though with the work I am doing at TheStreet.com University, an educational section of TheStreet.com, the website I founded, I am sure trying to get you there, no matter who you are or how little you have. It’s financial literacy, being facile with the basics that I know cold, that gives us a pretty old-fashioned idea of what the process of saving actually
entails.
A lot of people are under the false impression that saving money is about self-denial and self-restraint. We think that the goal of saving, the act of saving, is to put your money in a lockbox and leave it to gather dust and interest for the next thirty years. There’s nothing wrong with putting some of your money in a savings account. If you want to save by opening up a money market bank account and letting compound interest do the heavy lifting for you, I’m all for it. (A money market account is an account that is as good as cash but typically offers you slightly more interest than a bank savings account. Don’t sneer at its potential, though, to add up to a lot more savings over time than money left in a lower-paying bank account, which many less savvy people insist on doing.) My point is that saving is not about giving up on choices, which is what most of us assume when we forgo buying something in order to save money. It’s about opening new avenues to wealth. If you consider saving just another dull hardship, you need to be reeducated. So let’s start from the ground up.
When you save money, you’re giving yourself the one tool you need to actively pursue your dreams. Think of saving as equipping yourself for the lifelong march to prosperity. You don’t save to deny yourself options in the present in order to increase them in the future, even though on the surface that sounds pretty logical and true. You save in order to take an energetic hand in building your own wealth, not so that you can put your money aside to pick up interest every year and compound over a couple of decades, at which point you finally pull out your money, untouched for all this time, and pay for retirement. Anyone who thinks that way is going to have a really difficult time saving.
We tend to think of saving money as a passive process. It doesn’t have to be that way. For anyone who truly wants to build long-term wealth, saving is all about activity. So you cannot think of money saved as something static. The cash you put aside every month is going to see more action than every last penny you spend. Our goal is to make our money work for us, but we should never make the mistake of believing that our money will work for nothing. You’re going to have to put in some effort managing your money. But that very fact makes it easier, not harder, to save. Why should something that takes effort—saving in order to actively manage your money—be more attractive than something effortless, such as saving in order to deposit your money in a money market or savings account and forgetting about it for years?
There’s one part of the conventional take on saving money that I absolutely agree with: the best reason to save is that doing so opens up new possibilities. When most people say something like that, they mean new possibilities ten or twenty years down the line. Not me. I know that when you save money you create opportunities for yourself right now, opportunities to take control of your financial future and start building more wealth. Saving is the foundation and the cornerstone of working your way to wealth, but if you approach it as a passive process, you’re going to end up waiting much longer for your riches. That’s if you don’t break down and start spending every penny you earn because you just can’t take the responsible self-sacrifice anymore.
Saving is the basis on which every other aspect of building lasting wealth rests. You cannot invest if you have no savings. That seals the deal for me, and it should seal the deal for you too, because investing, even if not in stocks, is critical to your ability to accomplish any of your long-term financial goals. It is essential for your retirement, but that’s a long way off for some of you, and you shouldn’t have to defer your gratification from saving and investing for decades. If you save and invest, you will be taking control of a large part of your future, and the younger you start, the better. You will be able to do things that you couldn’t have done before for the sole reason that you can afford to. I’m not saying that everyone who uses his or her money to make even more money should then spend it all on a good time. But if you don’t reward yourself for your wins, it’s possible you’ll give up on saving, and thus give up on everything you might want to do with money.
Sure, there are other reasons to save. It’s good to have something put away for emergencies, it’s good not to be buried under a mountain of credit card debt, and it’s good to have some financial flexibility. But the problem with these reasons is that they value saving money as its own goal. Saving makes everything else possible, so don’t think of it as an end in itself. It’s the first step in a long process of wealth-building, a process we’ve only just begun.
2
HOW TO STOP YOURSELF FROM BECOMING POOR
You want to get rich. Well, before you can do that you have to make sure you’re not becoming poor instead. Saving is important: it’s the first step that builds the capital you’ll need to invest. But saving means nothing if your habits are leading you closer and closer to poverty. You don’t need yet another harangue about the value and necessity of personal responsibility, so forget all of that. Remember, I’ve been poor, though I didn’t start out poor. Many people are born into poverty and have to struggle every inch of the way out of it; they have it much worse than I did, no question. My point is merely that I’m someone who got poor, and though I’d never say I did it to myself—the jerk who broke into my home and stole everything was solely responsible—if I’d been a little bit more careful, maybe he wouldn’t have been able to grab my checks, making it impossible for me to pay the rent. Obviously, there are some things that can’t be avoided, though if you’ve locked your doors and gotten an alarm system, burglary may not be one of them. But there are plenty of small things within our control that, when added together, can mean the difference between wealth and poverty. It’s the little stuff on a day-to-day basis that really breaks most people. Every time you make a decision about money, you’re probably not thinking about what it will mean twenty years down the line. That’s just insane, right? Most of the time you buy something, anything, why would you even think about what that purchase will mean in six months? Well actually, there are a lot of good reasons to do so.
When people talk about budgeting, controlling spending—all of those responsible personal finance habits—it’s usually to encourage you to save money. You know why I want you to save: so you can build capital. That’s not why I want you to budget. It’s not why I want you to get yourself out of credit card debt. Forget saving for the moment. Think fear. Spending less money will mean that you save more, but saving is about getting rich. Decreasing the amount of cash you liberate from the chains of your wallet is about averting poverty. Saving and not spending are similar, but they’re not quite the same. You can be growing your capital at a fabulous rate; let’s say you’re up 24 percent every year with the money you’ve invested. That’s the same return I generated back at my hedge fund, and it was considered top-notch performance. You could have that same performance, but as long as you’re hemorrhaging money in other parts of your life, it’s not going to matter one bit. It’s not uncommon to run into people who are great at growing their capital but not so great at keeping it when they go shopping. That’s why this book is about getting rich and staying rich.
When you think of some slick Wall Street money manager bringing in millions every year, a master of the universe type—not like any of my friends on the Street, who are all great, down-to-earth guys—do you picture a person who doesn’t like to spend money? Do you think the incredibly rich are cheap guys? Of course not: they love to flaunt their wealth. This is one of the great differences between those who merely get rich and those who stay rich.
I cannot stress enough how important it is to differentiate between saving and not spending. Yes, when you balance your checkbook, they both amount to the same thing, but when it comes to the behaviors that should drive both of them, there’s a world of difference. If you’re the kind of person who always has trouble making ends meet and never seems to know where all that money you made disappeared to, it’s time for you to embrace fear. No one should have to live in terror of going broke, but a certain amount of fear is healthy. Many people forget that be
cause the modern world is so terrific. In America today, the poor are more likely to suffer from obesity than starvation. Think about that. At any other time in history this would’ve been impossible. We no longer have to struggle to survive, and in a way that makes us complacent.
You don’t want to have to live without the things you truly need, and while it’s not likely you’ll ever be truly impoverished, if you’re not careful, you might end up having to forgo medical care or your heating bill for a month, and nobody should have to be in that position. So let me tell you how to avoid becoming poor.
You absolutely must create a budget for yearly, monthly, and even daily expenses. But you can’t create that budget in the vacuum of just one year; it has to be in the context of your entire life. You can be totally responsible and more than able to make ends meet, but as long as you’re planning to stay afloat only for the short term, thinking that the rest of your life will take care of itself, you could still be in trouble.
You must have health insurance. That’s not optional, and I don’t care if your employer doesn’t provide it for you. Medical expenses are the number one cause of bankruptcy. The only thing worse than being sick is being sick and broke.
Jim Cramer's Stay Mad for Life Page 3
