Tuesday, October 19, 2010
Your Guide to Think Like the Rich
1. Pay Yourself First- The rich invest at least 20% of their pay. Set up automatic paycheck deductions to invest in your retirement. You are more likely to "stick" to it if you aren't required to write a check every month. Set up both a pre-tax investment plan such as a 401(k)/403(b)/traditional IRA and an after-tax plan such as a Roth IRA. By setting up both plans, you are taking advantage of both tax efficient vehicles.
2. Get the Max- Most employers will match your retirement contributions up to a certain dollar amount or percentage of your salary. This is free money and the rich don't turn down free money! Make sure to contribute enough money to get the maximum amount of free dough.
3. Avoid High Priced Consumer Items- I know... new cars, 60 inch flat screen televisions, 20 inch rims for your 1972 El Camino, and owning 5 gaming systems all seem like needs rather than wants. A little known secret about the rich is that they actually avoid consumer traps like those mentioned above. Instead, only purchase items that you need and don't go overboard. A good example is to purchase a 32 inch television instead of a 60 inch set. The rich are informed shoppers, they use price comparison sites (as was mentioned in 5 Money Saving Tips to Never Pay Full Retail ) and consumer rating groups such as Consumer Reports.
4. Use Leverage- You will not become rich without it! Leverage is using resources or tools to magnify results. We all have the same limitation in common...time. To my knowledge, no one has more than 24 hours in a day. The rich are able to focus their time and energy on the things that are important to them. This could be making money, spending time with their family, traveling, or a hobby. One example of how to leverage your time is to hire a landscaper (if you don't enjoy yard work of course). This may sound counter intuitive but if it saved you 4 hours per week, it could free up enough time in your hectic schedule to start an online business. In this example, you are leveraging your time to build long term wealth by using someone else's labor. Get the "Manage Your Time Now" course
Another Example of Leverage- If you had $100,000 in cash, you could purchase up to 5 houses valued at $100,000 each with 20% down payments on each ($20,000 x 5 = $100,000). You would be controlling $500,000 worth of real estate! If real estate values rise just 10%, you would gain $50,000 in equity ($500,000 x 10%). If you didn't use leverage and purchased just one house with cash for the full $100,000, a 10% increase in real estate values would only equate to a $10,000 gain in equity.
5. Own a Business- Being an employee is the toughest and least efficient way to become rich. A higher percentage of an employee's wages go to tax than a corporation or LLC's income. This is because corporations and LLC's pay taxes based on net income (income after all expenses). An employee or even self-employed person pays taxes based on their total income before expenses. Employees are also limited to their time that they can physically work. A business owner can use the resources of time and talent of other people (employees and contractors). This is yet another example of leverage that was covered in number 4.
6. Persistence is Key- One of my favorite quotes is by Michael Jordan. "I've missed more than 9000 shots in my career. I've lost almost 300 games. 26 times, I've been trusted to take the game winning shot and missed. I've failed over and over and over again in my life. And that is why I succeed."
Starting a business could be risky, but no risk=no reward. The rich take calculated risks and stay persistent and focused on their goal(s). Every failure is a learning opportunity and one step closer to ultimate success. You shouldn't think "road blocks" to your dreams, instead think "hurdles". Stay positive, persistent, and jump a little higher.
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