State of Mind

Psychology plays a role in making money and creating wealth.  Wealth is a state of mind is the concept that I first read about in Robert Allen’s Creating Wealth, published in 1983.

Nine years after receiving his MBA from Brigham Young University, Robert wrote the book that outlined the system he used to create a wealth “nest egg.”  Robert was one of the first to publish books on the no down payment methods for real estate and other high leverage real estate strategies.

While most of these techniques are high risk and some are outdated, the one thought that I remember from the book is that creating wealth is a state of mind.  Robert used the thought to outline that even if all of his personal wealth and income where gone, he would still be able to buy properties and create new wealth, because his knowledge, attitude, and belief.

Knowledge

The focus of knowledge is the core information you need to know.

1. The fundamentals of business, finance, marketing, accounting, and the like are all the starting piece of knowledge.
2. Industry specific knowledge is also important, whether you are in real estate, Internet business, retailing, etc. 
3. Personal knowledge like socializing and networking with friends, co-workers, associates, and partners.

You can have too much information, but you cannot know too much.

Attitude

A positive attitude is critical to any success.  A negative attitude can be the straw that breaks the camels back, while a positive attitude can be the force that propels you to soar to new heights.

Belief

Belief is directly influenced and related with your attitude.  Belief calms nerves and builds confidence.

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On Wednesday, I wrote about George S. Clason’s The Richest Man in Babylon.  The book is a succinct presentation of the philosophy of making money.  Inside the front cover, the author wrote a reasoned argument for how he was able to write parables of ancient Babylon and apply the principles of finance for the modern world.

From The Richest Man in Babylon:

“Ahead of you stretches your future, like a road leading into the distance.  Along that road are ambitions you wish to accomplish…desires you wish to gratify.
 “To bring your ambitions and desires to fulfillment, you must be successful with money.  Use the financial principles made clear in the pages that follow.  Let them guide you away from the stringency of a lean purse to that fuller, happier life a full purse makes possible.
 “Like the law of gravity, these laws of money are universal and unchanging.  May they prove to be for you, as they have proven to so many others, a sure key to a fat purse, larger bank balances and gratifying financial progress.”

George S. Clason’s Reason for Understanding the Laws of Money:

• “Money is the medium by which earthly success is measured.
• “Money makes possible the enjoyment of the best the earth affords.
• “Money is plentiful for those who understand the simple laws which govern its acquisition.
• “Money is governed today by the same laws which controlled it when prosperous men thronged the streets of Babylon, six thousand years ago.”

In the second chapter, the author wrote the seven cures for a lean purse.  The seven cures are seven steps for the acquisition of money – the best “How to make money” that everyone can follow.

The Seven Cures for a Lean Purse:

1. “Start thy purse to fattening” = get a job; start earning an income.

Any income is better than no income and you need to start to make money by earning some sort of income even if it may not be a lot.

2. “Control thy expenditures” = start and live on a budget.

The smaller the income, the more important it is to have a budget and control how much you spend and where you spend it.  Take a hint from someone like Donald Trump, who is worth billions; he still knows exactly how much it costs to merely power on his yacht - $5,000.

3. “Make thy gold multiply” = Save 10% and invest that savings so that it will earn interest.

This a compounding effect that is the cornerstone of making money – having your money work for you!  Your money can work for you by earning interest in a money market account, mutual fund, 401k, IRA, or some other interest earning, money management fund.

4. “Guard thy treasures from loss” = risk management and diversification.

Your bank should be able to connect you with a good financial planner (if not, you should find a new bank). The benefit of working with a financial planner is he or she will be able to assist you in defining your plans for investments that will protect your money against loss. Diversification is one of the more popular methods. If you lose money in one investment or one market, you can still come out ahead in the long term from your other investments. A good financial planner will be able to tell you more.

5. “Make of thy dwelling a profitable investment” = own, don’t rent.

Living expenses is a major expenditure, but that expanse can also be an investment.  A home, in the long-term, works to your benefit as the value of the home will increase with the rate of inflations adjusted for the marketplace.  Another cornerstone to making money is to turn your expenses into investments.

6. “Insure a future income” = plan for retirement.

We get old and have to face a period where, for most, the expenses of living outperform income earned.  Nearly everyone in this day and age understands the importance of planning for retirement.  The problem is that most people do not save enough over their lifetime.  Your bank should be able to connect you with a good financial planner (if not, you should find a new bank).  A good financial planner will help you set up an Individual Retirement Account (IRA) and accomplish step six.

7. “Increase thy ability to earn” = position yourself to get a better paying job.

We started these seven steps with starting a job, any job that you can get.  The job may not pay well, but it’s a start.  The next five steps positioned you for a lifetime of better money management and long-term money principles for a lifetime of making money.  The final step is to compound the effect of each of these by increasing what we started with, your income.

Education is a great investment

One of the best investments that anyone can make is on education.  Paying for college is expensive, but, for most, the return on investment is high.  A lawyer or a doctor may have to pay for seven or more years of college, but the end result is a large salary that allows most to pay off the student loans and still have money left over to live a nice lifestyle.

What everyone can do

While a college education may not be the best fit for everyone, you can still gain experience in a job, learn everything about the industry that you work in, demonstrate a strong work ethic, work towards a promotion (or multiple promotions) and earn a higher paycheck.  The higher paycheck results in steps 2-5 having a greater effect on your wealth.

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If I were restricted to suggesting merely one book about making money, I would be grit my teeth and complain that there are several valuable books, but then I would recommend this one: The Richest Man in Babylon by George S. Clason.

This is one book that everyone should read. I don’t mean merely those who want to make a lot of money or those who want to be wealthy. I mean everyone. I think this book should be required reading in our public schools. I think every student should be exposed to the articulate presentation of the fundamentals of finance that George Clason wrote in this book.

The book is a quick read at merely 144 pages, but the pages are packed with valuable nuggets. I have recommended this book to and have received feedback from several friends who were pleasantly surprised and started to think about and look at money with a different (better) perspective after reading this book. One friend said he wished he had read it twenty years ago and is having his children read it.

The book is writing in fictional short stories. Each story presents the knowledge of money through examples and explanations. The author has highlight key rules and points about money, making money, keeping money, and using money to make more money. These rules were true several thousand years ago; these rules are true today, and these rules will be true for the rest of time.

Who should read this book? Everyone! (and you can pick it up at Amazon for a very small investment.)

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The Differentiator: They have a plan.

Those who make a lot of money, versus those who do not make a lot of money, have a plan to make a lot of money.

1. They determine that they are going to make a lot of money.

If you do not make a determination, you will not accomplish anything.

2. They determine how and when they are going to make a lot of money.

There are methods of saving, investing, compounding interests, and wise spending that will allow anyone, irregardless of income to be better off financially.  Those who determine how to and the timeframe to make a lot more money, do make a lot more money.

3. They work towards making a lot of money.

Laziness accomplishes nothing good.  You become less energetic, less desiring to do anything; you will gain weight; over a lifetime you will have health problems that complex a happy and successful life; and you will die without accomplishment, notoriety, without leaving something better for your children and grandchildren, and without knowing what a better life is like.

Learn to love work and, then, learn to balance life and work.  And have a plan!

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Monday Money Management Tips 

Ah, a good Monday morning!  What better way to start the day than to think about better money management tips.  Every Monday, I write about money management tips and today’s tip is about focus.  Last Friday, I continued with the series “The Philosophy of Making Money” and the first two points are: 1. Determine what you want and desire and 2. Learn how to measure the accomplishment of your want and desire.

Today’s money management tip is going to concentrate on measuring your want and desire.  Since, I do not know, specifically, what your want and desire is; I am going to assume you want to improve your net worth.  With that in mind, I am going to show you a simple excel spreadsheet that you can create to measure your net worth.

A net worth spreadsheet was one of the first measurement devices that I started to use in order to keep track of where I was on my goals.  It is simple, but important and powerful.  It only takes a little bit of time, but the simple act of measuring your net worth has a residual effect on helping you reach your goals.

Creating a Net Worth Spreadsheet:

1. Lets you know the exact, current dollar amount.
2. Lets you know how far you are from your goal.
3. Keeps you focused on your goal.

So let’s get started.  First, we need to know the equation for measuring your net worth:

Assets – Debts = Net Worth

Your assets, what money you have; minus your debts, what money you owe to someone else, equals your net worth, the actual value of your money.

1. Create tables in an excel spreadsheet for all of your assets: the money you have in your bank accounts, the money you have in your retirement accounts, the equity you have in your home; you can even include the value of your car, but, remember, a car always costs and decreases in value, unlike a house.

2. Create tables for all of you debts: the money you owe on credit cards, how much is left on your mortgage, and how much is left on your student loan.  Any debts that you have should be listed here.

3. The final column is the total, the net worth, which we will create a function to calculate that for us.

4. You should highlight columns B3 through K3 and set the type as currency, so when you enter the amount, it will auto format the numbers as money.

5. We can create the function to calculate the Net Worth for us.
 A. Hightlight K3.
 B. On the top, select “Insert > Function.”
 C. Select, “Sum” and enter the values “B3:J3”

6. All you need to do is plug in the value of your assets and debts.  Remember that your debts are negative (-) numbers!

The value of this spreadsheet is when you complete this on a regular basis like once a week.  I, personally, keep track of my net worth every Sunday.  I add a new line with the current date and plug in the numbers and see how my spending versus my earning changes my net worth over time.  This simple act causes me to think about what I spend, because I see when my net worth decreases or increases.

You can pick up more powerful applications to complete this for you (Microsoft Money, Quicken, etc) or even create a more powerful spreadsheet, but the main point is to MEASURE your net worth on a REGULAR BASIS.

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Why do so many people focus on making money?  This may seem like there’s some obvious answer, but if you think about people’s actions about making money then you start to think differently about this question.  People are highly irrational when it comes to making money.  So many people will take dangerous jobs and work many long and stressful hours at work just to make some money, not even a lot of money.  The first thing that you need to do is determine your want and desire.

Want and Desire

1. Determine what you want and desire.

Do you want to just make money or do you want to enjoy how you are making money?   Hint: if you enjoy how you make money, you will work more, and better, at making money!  Many people who just want to make money will go after marginally better paying jobs with a great deal of sacrifice – don’t like what they do, may be stressful and dangerous, and may cost more in the end than the benefit of the extra pay.  Think about the miners in Utah right now.  They were doing a job that needs to be done and they are paid a little more than a median wage, but six miners have been trapped for twelve days and maybe dead or, at this point, barely alive.

2. Learn how to measure the accomplishment of your want and desire.

A great improvement about earning more money will come when you think about measuring that accomplishment.  Keep track of how much you make now.  Set a goal for how much you will make in five years and measure the progress.  A majority of those who make a lot more money have a career focus and measure their accomplishment.  They do not take a job that pays them more money.  They determine a career, which may have a not-so-great starting pay, but will increase exponentially over the time of the career.  The best example is the individual who starts as a college graduate professional for a corporation and sets a career path from entry management to top management; the increase in pay is compounded with top executives who earn four hundred percent more than a average employee; it’s like the steep incline of a bell curve where the rate of increase surpasses the rate of inflation – the best circumstance.

Learning Where to Spend

Once you have determined your want and desire and have set a goal of how to make money.  The most important step, after making money, is learning how to spend money.  Follow these five steps and you will do quite well:

1. Buy quality where you need it

When an item needs to be replaced on a periodic basis, the quality of the item plays a calculated role.  Better quality may mean a longer lasting and may present a better image.

2. Buy cheap where quality does not matter

If you have a suit jacket that costs $100, but will be worn out in six months versus a suit jack that costs $500, but will be worn out in a year.  It would be more economical, better spending, to buy two $100 suit jackets rather than one $500 suit jacket.  There’s an additional consideration of an expanding waste line also – will that jacket still fit you in a year (I’m thinking about going for run today, how about you? ).

3. Accumulate debt only where inflation works for you

Inflation is an important measure against the value of an item.  For example, inflation works against buying a new car, but works for buying a new house (assuming you don’t need one of the subprime mortgages that are adversely affecting the US stock market).

4. Accumulate debt when scarcity works for you

Even though, generally, inflation works against buying a car on debt, the scarcity of a classic or limited edition vehicle may produce a different result.  The good, recent example is the redesigned Ford Mustang in 2005 when the 2006 models came out; the value of the used 2005 models (in like new condition) were of greater value than the new 2005 models!

5. Strictly avoid debt when inflation works against you

When considering steps 3 and 4, you need to keep the mindset to strictly avoid debt when inflation works against you.  No matter how much money you make, if you spend money through debt on items where inflation works against you then time is your greatest enemy.  A basic principle in finance is that a dollar today is worth less than a dollar tomorrow for two reasons – inflation and loss opportunity (stay tuned to this series on the philosophy of making money for more on loss opportunity).

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Book Review: Investment Megatrends by Dr. Bob Froehlich

Wednesday is Make Money Book Reviews at MakeMoneyJot.com. Every week I review a book related to the topic of making money. Last week, I took a look at Hedgehogging. Today, it’s Investment Megatrends.

In Dr. Froehlich’s book, Investment Megatrends, you will learn about a consideration for investing that is one of the more secure predictions for long term investments, but is not commonly discussed for investments – the statistics of demographics.

We are all familiar with trends. Anyone who paid attention to the US stock market for the last couple of weeks would have noticed a disturbing downward trend, because of the real estate decline, which lead to declines in the subprime mortgage market, and which has lead to a larger scare because of how subprime mortgages are packaged and sold.

Megatrend for Investments 

A megatrend, a term coined by John Naisbitt, are large scale changes that effect the political, social, or economics forces for decades. The trends are large scale to the point of effecting nations, regions, continents, or the entire globe. These trends point toward the global shifts that will change the marketplaces for the next twenty years or more.

 According to Dr. Froehlich, the megatrends which are highly significant for investments are demographics, particularly three statistics:

1. Fertility
2. Mortality
3. Migration

Those three demographics produce a valuable picture about the health, wealth, lifespan, and population shifts of global regions which are valuable considerations for investors.

Analyzing Demographics 

To properly analyze the demographic data, Dr. Froehlich suggests four steps:

1. Focus on the extremes – where the statistics produce the greatest variances.
2. Cluster the data – combine the data in to logical groups and correlations.
3. Identify patterns – the indicators which predict future trends.
4. Draw comparisons – where one group of data relates with other groups of data.

Global Shifts 

In this book, Dr. Froehlich reveals four global shifts that produce significant investment opportunities to make money:

• Global Shift #1: The Ponce de Leon Effect: Focusing on the American Baby Boomers
• Global Shift #2: The Walls Keep on Tumbling Down: Focusing on Eastern European Workers
• Global Shift #3: The Rising Sun Is Clearly Setting: Focusing on the Aging Japanese Population
• Global Shift #4: Napoleon Was Right: Focusing on the Chinese Consumer Generation

You will have to read the book to learn more about these global shifts and how they will impact your portfolio. The considerations are significant and definitely impacting on a megatrend scale. Dr. Froehlich has completed all the work with the data necessary for you to benefit in your investment decisions. He even goes as far as laying out twenty stock picks which are best positioned to benefit from these global shifts.

This was a very interesting book to read and the information presented is quickly and easily digestible, so you will be able to benefit from Dr. Froelich expertise. I highly recommend that you consider these global shifts for your 401k and retirement funds. Of course, individual results may vary and I can not guarantee success; I can merely recommend it.

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The Audacity of Entrepreneurship

Being an entrepreneur takes a certain audacity - a willingness to not hold back and to charge forward toward a dream, a goal, and an ambition.  Some, however, do not trudge the path of entrepreneurship.  Some allow the risks to restrain their dreams.  Some allow fear to cripple their success.  To you, I offer the following quote as encouragement to deal with what may hold you down and to encourage you to give your ambitions the opportunity to succeed.

Quote from Elbert Hubbard:

“The greatest mistake you can make in life is to continually fear you will make one.”

The Worst Mistake an Entrepreneur can Make

There is certainly reason to fear mistakes if you are young, inexperienced, and have never before done what you are now planning to do, but the fear of making a mistake or the fear of failing are in itself, the worst mistake any entrepreneur can make.

Overcome the Fear

To overcome the fear, you must create a plan to succeed.  Write down the goal, determine and write down the steps required to achieve the goal, and conduct some research on how to perform each step, what obstacles may hinder the success, and then create a risk matrix to counter every hindrance.

Codify It

Codify it – the act of explicitly putting a plan onto paper of each and ever action that you need to take is the best way to counter the fears that may hinder you and the best way to guard against making a mistake.  Take some time and codify it.

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Every Monday is Money Management Tips day. 

The first day of every week, I present tips and suggestions for better money management.  Last week, I presented the Online Savings Account from HSBC where you can earn an impressive 5.05% on an account with the convenience of online banking, quickly available cash, and bank-to-bank transfers with ACH.

Today’s tip is targeted toward those who operate online a lot.

Anyone who is familiar with Paypal knows the site provides a great service to pay for items online without putting your financial information at risk.  You can now use Paypal and put your money in a money market account to earn a nice return on investment (ROI) - 5.03% (7-Day Average Yield as of 7/24/2007).

Paypal’s website listed three reasons to sign up:

• Immediate access: Get your money just as fast as with your PayPal account.
• No minimum investment: Invest as little as $1.00 USD in the Money Market Fund. You don’t have to worry about maintaining a certain balance.
• Managed by experts: PayPal’s Money Market Fund is managed by Barclays Global Investors, international experts who oversee over $1.50 USD trillion in global assets.

Now, you can use Paypal for online purchases and as an investment solution for short term cash equivalents!

Check it out: Paypal’s Money Market Account.

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Every Friday is special report day.  Each week, I am going to build on a topic to cover more detail and depth on the important details for making money.  This first special report series is about the philosophy of making money.

Before we start to address the philosophy of making money, let’s get the myths of making money out of the way.  Josh Hyatt, a senior writer for Money Magazine, wrote about the five myths of making money for CNN (check it out here).  I’ve added a sixth which is debatable, but I’m going to cover it anyway.

Myth 1: You’ve got to have incredible charisma

Jack Welch, in his book Winning, covered an understood reality that business, like life in general, is more successful for an extroverted person rather than an introverted person.  We all learned this in high school.

The fact of the matter is that no matter what your social nature is, it’s how you handle your responsibilities at work, how you respond to opportunities for advancement, and how you manage your money that contributes to your ability to make money.  If you are relying on leadership opportunities to improve your financial status, see 7 Steps to Lead without Inherent Talent.

Myth 2: You must be able to see into the future

This is only true if you are relying on winning the lottery or day trading.  While creating a foundation for innovation in business does rely on the knowledge of the business and the creativity of the people, some of the greatest innovators of our time, created the future and didn’t interpret it – Henry Ford, Sam Walton, and Steve Jobs for example.

For the rest of us, there are many articles written about sound business and investing principles to guard against NOT knowing the future.  One of the greatest investors and one of the world’s wealthiest, Warren Buffett follows the principles of Benjamin Graham for investing in a market place with extreme highs and lows.  Check out: How to Think Like Benjamin Graham and Invest Like Warren Buffett.

Myth 3: You’ve got to stick to your guns, no matter what

Thomas Edison said, “Genius is one percent inspiration, ninety-nine percent perspiration” and “I have not failed. I’ve just found 10,000 ways that won’t work.”  Keep perspective.  Albert Einstein defined insanity as, “doing the same thing over and over again and expecting different results.”

Sometimes, you have to learn from your mistakes.  Sometimes, you have to listen to other’s advice.  Don’t get discouraged; get encouraged when people give you feedback.

Myth 4: You need to take big risks

Some people enjoy playing high stakes.  For those, I’d recommend reading Playing the Highest Stakes in HedgeHogging.  For everyone else, I’d recommend following the advice of the world’s greatest investor, Warren Buffett, How to Think Like Benjamin Graham and Invest Like Warren Buffett.

Risk Management is a valued skill set for three reasons – you know how to mitigate risk, you know how to guard against risk, and when the worst happens, you are still traveling on the money making adventure.

Myth 5: You need a burning desire to get rich

It is certainly true that passion and desire drive the best to get better, but having a passion and desire to get rich is not going to get you very far.  Having a passion that you can make money from, that will take you places.

For most entrepreneurs, the desire is not about money.  The desire is for achievement.  Money is merely a way to keep score - an entrepreneur is achievement oriented.

Debatable Myth 6: You need money to make money

This tends to be true for most people who do make money – they had money to start with.  Even in Entrepreneur’s Hot 500 Fast-Growth Companies, 387 of them started with the savings and personal funds of the entrepreneurs themselves.

In this day and age, you can build a website and make money online with what you know and very little actual cost.  Other entrepreneurs are able to use other people’s money to make money – venture capitalist, angel investors, or loans and credit.

But, by large, if you have money and you manage the money well, you will make money.  If you do not have money, you need to learn more and be more reliant on what and who you know.

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