Wednesday, April 12, 2006

How to Become Wealthy

There's a good article on entitled 'How to Become Wealthy: Nine Truths That Can Set You on the Path to Financial Freedom'.

#1 Change the Way You Think About Money - I totally agree with the notion that "each dollar you save is like an employee." Your goal is to make your employees work hard, and eventually you can live off the labor of your assets.
#2 Develop an Understanding of the Power of Small Amounts - Another good nugget of wisdom. As I mentioned in the past, I started investing $50 a month in a mutual fund at the age of 21 when I was only making $22,000 a year. David Bach refers to the concept of small amounts as your Latte Factor. Even little leaks in your financial bucket become huge problems over time. So start small but think big!
#3 With Each Dollar You Save, You Are Buying Yourself Freedom - This is a truth that my parents instilled in me from a very early age. Delayed gratification = freedom later in life. In my case, freedom to quit my job.
#4 You Are Responsible for Where You Are in Your Life - I agree wholeheartedly that "where you are right now is the sum total of the decisions you have made in the past." Some of my friends chose to go to a private institution for college and grad school. And now they're stuck with almost an overwhelming amount of school debt. Likewise, I have friends who eat out nearly every day, either lunch or dinner and sometimes both. And yet they complain that they don't have enough money to start investing or saving for a down payment on a home. These are all choices that people make in life. But the net effect is that they're constantly feeling strapped for cash.
#5 Instead of Buying the Product...Buy the Stock! - I remember reading about this concept in Peter Lynch's classic, One Up on Wall Street (or maybe it was Beating the Street) nearly 10 years ago. He encouraged investors to look to the mall for inspiration. In other words, if you notice that you or your friends buy a particular product or frequent a particular store, think about investing in that company.
#6 Study and Admire Success and Those Who Have Achieved It....Then Emulate It - This is good advice, but I tend to learn vicariously from other people's successes as well as their failures.
#7 Realize that More Money is Not the Answer - I've found this to be true in my own life. If you're faithful in the little things, you'll be faithful in the big things. Whether your making $22,000 a year or $100,000 a year, the same principles apply. That's why super star athletes who make millions of dollars each year wind up filing for bankruptcy after they 'retire'.
#8 Unless Your Parents Were Wealthy, Don't Do What They Did - I'm not sure I entirely agree with this one. My parents are not wealthy, and they certainly made their fair share of mistakes. But they also take me some really valuable lessons in terms of frugality and financial management. They did teach me to abhor debt and to save and invest.
#9 Don't Worry - This is the one that I have the most trouble with. I tend to be obsessed with the 'what ifs'. As I mentioned in the past, I'm constantly worried that I haven't saved enough to take care of my parents if they get sick and need long term care.


John OMM said...

Good article. I'm on board for items 1-4 and 6-9. I don't agree that buying stock of companies whose products you buy is an especially good thing to do though. Unless you're a particularly adept early adopter, you're likely to pay too dearly to purchase a hot stock that is fundamentally unsound as a longterm investment.

IRA said...

Hmmm...good point about early adopters in terms of technology stocks. But I was more thinking along the lines of Fortune 500 companies, like Disney. I would definitely keep those types of stocks for the long haul. As for retail stocks, I've noticed that most trends start on the east or west coast. By the time it hits the midwest, the stock is usually over priced.

John OMM said...
This comment has been removed by a blog administrator.
John OMM said...

I intended my caution to apply more broadly than to just technology stocks. For example, consider the stock you mentioned, Disney. Five years ago Disney was trading at $29, today it's trading at $28. Not exactly a good return on investment.

Extrapolating from one's own consumer behavior to make stock picks is risky business.

IRA said...

To clarify, I'm not advocating that people should buy a stock just because they like the company's product. It's just a good place to start in terms of researching companies. You still have to look at the fundamentals and buy at an attractive price. I have friends who bought stocks purely based on stock screens. When you ask them what the companies actually do, they have no clue. So, I think people should at least try to buy what they know. As for Disney, if you look 2 years back, it was trading at $23. If you look 3 years back, it was trading at $17. Look 10 years back, it was also trading at $17. But you're right. If I had gotten into Disney 5 years ago, I'd be disappointed right now. Fortunately, I didn't.