From My Work-in-Progress Basket

Net Investible Wealth

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Saturday, April 21, 2018

 

Delray Beach, FL – Principles of Wealth: #14 of 61

Income is an important factor in the acquisition of wealth, but it is not a measure of it. Nor are expensive possessions. The only measure of financial wealth is net investible worth.

It had a pool in the back and automatic doors on the garage in front. It was the nicest house I had ever lived in and our first home. Three bedrooms. Two baths. Friendly neighborhood. $170,000.

“Do you think I’m being foolish?” I asked. “Spending so much on a home?”

Eddie looked at me as if I was crazy. “Your income last year was more than double the cost of the house,” he said. “And your income this year is higher still.”

“So?”

“I close hundreds of houses a year in this area,” he said. About a third of them are for homes that cost more than a half a million. And they are bought by doctors and lawyers that make no more than you do.

“So?”

“They drive Mercedes. You drive Hondas. They drink Dom Perignon. You drink Proseco. They all look rich, but most of them are in debt. They spend their money faster than they make it.”

“So?”

“How much did you have in savings last year?”

“About $175,000.”

“And this year?”
“About $250,000.”

“That’s what I thought. You are worried about buying a home that cost you about six or seven months of salary. That alone tells me you are an extremely conservative spender.

“More importantly, you’ve made this promise to yourself to increase not only your income but your savings every year. And you’ve been doing that for years.

The doctors and lawyers I know are spending two to five times their yearly salaries on their houses. These guys have great incomes but they also have great debt. Debt that is often greater than their assets. They are buying prestige and keeping their fingers crossed that their financial situation will always be strong. They have zero savings and no net worth.”

“That net worth thing. It’s always troubled me. How can I count my house or my cars? I’m always going to need them. I don’t want to be forced to sell them.”

“Okay, then don’t count them. Count only the net worth you have after subtracting them. Call it something…”

Years later, when I wrote about it, I called it net investible wealth.

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Miscellaneous Essays

Wealth Building for Beginners (Even if You Are Not Young Anymore)*

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3.-Your Invitation to the “$150,000 Club”

In the last installment https://www.markford.net/wealth-building-for-beginners-even-if-you-are-not-young-anymore-2 of this series, I told you how I got started on my own wealth-building journey. I hope it amused you. Looking back at it now, I can see that the ratio I kept between foolish and sound habits was about 2 to 1. But that was enough. I hope it comforts you to know that you can do most things wrong (as perhaps your parents and teachers always reminded you was your habit) and still become as wealthy as you need to be!

The second thing I did was to introduce you to a very simple and crazily powerful wealth secret that most high earners never follow: As your income increases (and it will!), you must resist the urge to ratchet up your spending accordingly.

And thirdly, I shared with you one of the most important insights about wealth that I ever learned. Luckily for me, I learned it when I was still relatively young. (In my early thirties.)

That insight was this: You need a lot less than you probably think to live a rich life: A lot less wealth. And also a lot less yearly income to acquire that wealth.

As for income… If you can get your income above $150,000 a year and simultaneously curb your enthusiasm for expensive toys, your chances of one day retiring wealthy are about 99.9 percent.

As for how much “money” you’ll need to sock away… A very rough number would be about 12 to 15 times the amount of money you’d need right now to lead a rich life.

If you can get your income up to $150,000 or beyond (and as I will show you that is quite easy to do if you are willing to put in the right sort of time) and if you can save 20 percent to 30 percent of that (which is very possible if you manage your finances as I’ll suggest), you will arrive one day at a net worth of between $3 million and $30 million.

And that – if you know how to spend your money – will be enough to provide a great, rich life for you and your family.

Before we move forward on that, you have to answer one question…

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From My Work-in-Progress Basket

One Thing & Another

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Word for the Wise

 Pinguid (PING-wid) – fat and oily. Here’s a lovely sentence from The Bunsby Papers by John Brougham that includes it alliteratively: “Peter was pinguid, plump, and plethoric – she was thin to attenuation.”

Did You Know… ?

If you add up all the numbers from 1 to 100 consecutively, the total is 5050. Keep that in mind. You never know when it will come up in conversation.

 

From My “Work-in-Progress” Basket

Principles of Wealth: #5 of 61

Wealth and income inequality are realities that exist in every economy – even those committed in principle to the distribution of wealth.

Many people today, believing that equality is an intrinsic and achievable good, seek to flatten financial inequalities through government programs and social action. A smaller group, sympathetic to the notion of equality but less trusting of governmental solutions, seek to create substantial personal wealth and then distribute some of that to others. Still others are dubious that financial inequality is intrinsically good and practically achievable. And a final group is sure that equality is intrinsically bad and can only be partially achieved and that only by severe repression.

My view is that human nature is innately opposed to equality. You can, by force, make a community financially equal for a moment in time. But an hour later, individuals within that community will get to work recreating inequality. Some will seek to have more. Some will be satisfied with what they have. And some will seek to have less.

This is the fundamental reason why history has shown us that the goal of achieving financial equality has never been achieved or even attempted.

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