The One (Not So) Secret of Legacy Wealth
Wealth can be attained be anyone at any income level usingfour magic letters LBYM. LBYM stands forLiving Below Your Means. It is the oneprinciple that everyone must learn to become financial independent andwealthy. It also relieves financialstress and puts us back in control of our finances.
Now, it is very easy to read this and you have probably evenheard this before, yet most Americans simply do not master this first step towealth. I have never met anyone who iswealthy who has not mastered this principle and because I am such afinancial genius, it took me 5 years to learn this principle and instill it inmy family!!! Talk about hard headed?
Let me simplify this principle for you. LBYM simply means that you are saving moneyevery month and increasing this savings yearly. You are living on less than you make and investing and saving thedifference. This is how all wealthcreation begins.
Why does everyone not practice this principle? I believe it comes down to priorities and thelies we believe. You have to make it apriority to become wealthy and master your finances. In a moment, I will share with you some statistics(for all you analytical types) of how this breaks down but from all the data here isthe bottom line:
Those whomade it a priority to save, built wealth, regardless of their income level,individual circumstances or choice of investments.
Here are some key findings:
- There’s a huge variation in wealth at every income level. Many low-income families have almost nothing. But the same is true of many high-income families.
- Income alone doesn’t explain wealth disparities. Some of the lowest-earning households had managed to accumulate significant wealth.
- In fact, income differences explain just 5% of the wealth dispersion the researchers found.
- What the researchers called “chance events” -- inheritances, medical bills,marital status, and number of children -- explained about 4% of the dispersion.
- Investment choices explained about 8% of the variations.
- In other words, the vast majority of the differences in wealth had nothing to do with income, chance events or investment choices.
- What did explain most of the differences in wealth? Venti and Wise concluded it was this: How much the families chose to save. Those who made it a priority to save built wealth, regardless of their income level, individual circumstances or choice of investments.
Here it is again…
Those whomade it a priority to save, built wealth, regardless of their income level,individual circumstances or choice of investments.
Crazy? Makingit a priority to build wealth is 80% of the battle.
“80% of Success if showingup.” - Woody Allen
So we now know that simply making finances and wealth a priority is halfthe battle, what is the other half?
We need tostop believing the lies.
Hollywood, The Dot Com Craze, TheMedia and even Financial Advisors have been selling us a lie. The lie is that when you’re wealthy, youdrive a Mercedes SL600, you live in a $5M Mansion, you only buy Gucci, Pradaand Armani and if it’s practical and cheap, you don’t want it.
We buy into this lie and try to look the part, try to live up with theJones. We spend our hard earned money onthe one thing that will never help us become wealthy…liabilities.
Not only do we spend our hard earned money on crap but we also use ourcredit and buy more crap to get us deeper in debt. Here are some debt facts:
- More than a third -- 36% of those who owe more than $10,000 on their cards have household incomes under $50,000, according to the VIP Forum analysis.
- 13% who owe that much have household incomes under $30,000.
- The percentage of disposable income used to pay debts is still near record highs.
- The median value of total outstanding debt owed by households rose 9.6% between 1998 and 2001.
- Bankruptcies set another record in 2003, with 1.6 million personal filings, the American Bankruptcy Institute reports.
More…
· Sixty-two percentof Americans report that they are saving and/or investing. However, more than40 percent of all Americans save lessthan 5 percent of their annual household income. Sixteen percent savebetween 5 and 10 percent. Only nine percent save more than 20 percent of theirannual income (Jean Chatzky, You Don't Have to Be Rich,2003).
· Theaverage personal savings rate is now less than 2% of income, and theaverage household has a net worth of just $264,000 at retirement, not includinghome equity (Money, December 2004, pg. 94).
So what are we doing? We are taking our hard earned money and buying new cars, boats, jetskis, snowmobiles, charging vacations on credit, financing Christmas, gettingthe latest gadgets, hooking up 141 channels of cable, eating out everyday andbuying Starbucks every morning at $4 a pop instead of making wealth a priority andsaving money first.
Have you ever looked at those pictures of wealthy people yousee on the walls of old estates? Theydecided to make building wealth a priority; they built a financial legacy that influencedmany future generations.
So what are we doing for our future generations? What will our great, great, greatgrandchildren say about our legacy?
Again, financial wealth is not the only aspect of a legacyand it is certainly not the most important but, it is a factor and needs to beaddressed. Ignorance is not anexcuse.
If everyone was given a financial report card on our networth, what would our grade be?
Take all your assets (investments, retirement, and cash) andsubtract your liabilities (mortgage, debt, loans) and see what your grade mightbe?
A = Net Worth of $2 Million or more
B = Net Worth of $1 – 2 Million
C = Net Worth of$500,000 - $999,999
D = Net Worth of $100,000 - $499,999
F = Net Worth of $ Negative - $99,999
Using this grading scale and statistics, a majority of usare getting D’s and F’s?
Statistics show the average American spends 120% of theirannual income. That means all theirincome plus 20% using credit and debt.
Okay so what do we do instead?
You put your money in the one area that hasmade all the wealth in the history of our world, from J. D. Rockefeller to BillGates to Warren Buffet. This one area toput your money creates wealth for you. Assets
The reason we don’t now of this great secret is because theydon’t teach it in school and unless you’ve made it priority to find out, itremains elusive to us. First, somesimple definitions.
Liability – is anything that depreciatesand/or takes money out of your pocket sometimes reoccurring monthly.
Asset – is anything that appreciates in value or puts money back into yourpocket hopefully on a reoccurring basis.
In his best selling books “The Millionaire Next Door” and“The Millionaire Mind” Dr. Thomas Stanley does research on America’s wealthy households. He found that there are two types of wealthypeople.
Income Statement Wealth and Balance Sheet Wealth
Income Statement Wealth is people who havelarge incomes but spend a majority of their incomes on liabilities. Theyhave big houses, nice cars and look wealthy but have no real wealth becausetheir money is in depreciating liabilities. They are tied to their incomes (jobs) tomaintain their income level.
Balance Sheet Wealth are people who don’tnecessarily look wealthy, they have modest houses and modest cars yet they havemost of their money in appreciating assets and our normally financial independent,meaning if they quit their jobs, they would be able to live off their assetsand in most cases make more money.
Now please understand this, there are some people who are sofrugal that they do not spend money on anything, they deny themselves of simplepleasures and rewards and make it their life’s work to be stingy, miserlypeople. This is not the lifestyle I amtalking about. I am talking aboutreducing unnecessary costs, lowering liability debt and redirecting that moneyinto assets that will put money back in your pocket.
Like I said, it is easy to read but much harder to “get offthe liability wagon” and put this into effect. It took me 5 years of reading, struggling and failing a few times tofinally learn this principle. Hopefullyyou are much smarter than me and will chose to draw a line in your checkbookand stop these habits.
For some help in this area and to go into much greaterdetail I recommend the following books:
TheFour Laws of Debt Free Prosperity – This is the first book on finance thatI read and lead me on this journey to creating wealth.
YourMoney or Your Life: Transforming Your Relationship with Money and AchievingFinancial Independence – This is the “financial bible” on frugality andLBYM. I have heard countless accounts ofthis book turning peoples spending habit around.
A Quick Recap of what we need to do to LBYM:
Make it a priority to master your money and create wealth. This is the first step in setting an example for your children, then teaching this process to them. It also relieves financial stress on your marriage and starts the process towards your children’s financial legacy.
Reduce spending and liability debt. Stop living the lie of income statement wealth. This sometimes takes a little pressure from God and others to get us to do. It takes a level of maturity on our part as well. It was hard for me at first to see friends driving BMW’s they financed on credit and other friend’s spending money on liabilities. I would be lying if I told you I didn’t slip back to my old habits a few times when I first started. The books listed will give you a more in depth game plan of how to make this step easier and automatic.
The third step once you’ve reduced spending is to start Paying Yourself First. This is a simple beginner principle to get you to save 10% (for starters) every month. The idea is to set up an automatic withdrawal from your paycheck of 10% and have that money transferred to a savings account. This forces you to live on the 90% that is left over. As you progress, I will show you how to start saving more and more. I am currently saving around 30% of my monthly income and to be honest, there is plenty left for extras and entertainment. It is all in themindset.
So your next question is going to be “Where do I put this10% of my income?” This we will answerin future posts and I will take you through the simple savings account to verycomplex investment choices.
First we crawl, then walk, then run and finally soar. Until next time, God Bless.
-Esse Quam Videri-
"The only thing that standsbetween a man and what he wants from life is often merely the will to try itand the faith to believe that it is possible."
- R. M. DeVos
Some additional links for statistics:
Debt Statistics - http://www.mdmproofing.com/iym/hfstats.shtml
Here is somescientific information on this subject from Money Central