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CHAPTER 3: FINANCIAL PRINCIPLES -
Part 2 This is Part 2 and the continuation of Chapter 3: FINANCIAL PRINCIPLES - Part 1 Big People do Big Things I have heard people say that people who want to be rich and wealthy are greedy people with large egos. While this may be true in some cases, I don’t think that there are any shortages of poor or middle-class people with large egos. The question behind this is, “Why accomplish something beyond your own survival?” These people cannot understand that “making a living” isn’t all that difficult. Nearly anyone can get a job to make a living and get by … it takes something more within to achieve more outwardly. I also hear from people that they would be satisfied if they could make enough money or have enough wealth to simply support themselves. The problem I see with that kind of thinking is that those are the same people who don’t provide much to society. They are not the great movers and shakers of our world. I will admit from personal experience that it does take a larger than normal ego to really want to grow big. But on the other hand, that part of the ego both serves and hinders me. My ego serves me in that it allows me to reach further and beyond what I might normally do to simply be comfortable. Yet, it hurts me in that sometimes it makes me a bit arrogant and self-righteous … or that I think I know more than I truly do. As a whole I do acknowledge that ego allows me and others to achieve goals greater than ourselves. But there are also many people whom we respect in the business world that have even larger egos. I have not yet met any of the following individuals on a personal level to give a first-hand account of what kind of people they are. However, I will leave it up to you if these people had big egos. And in doing so, did the world benefit for having what they created? Can you possibly imagine: _
Walt Disney World without Walt Disney? The list is virtually endless. For me, regardless of whom those people are or what they were truly like, the world has benefited greatly because of the “bigness” of these people. They achieved great and dreams … and yes … big enough egos to believe they could achieve such things. Please understand that I am not making it wrong for people who prefer to live a more humble and conservative lifestyle. However, the truth of the matter is that the scope of influence for most average people is fairly small and limited. Even if they want to make a bigger contribution to the world and serve more people, they are unable to do so … not because of their skills or abilities - but because of the mental limitations they have imposed on themselves in their minds and lifestyle. It does not upset me that people would prefer to live a smaller scope of lifestyle where they simply provide for their family. We should be so lucky to have even more people. There are so many deadbeats in the world. What upsets me is when those people automatically pass judgment on others who strive to be greater than themselves … simply to justify their own smallness and limited scope. The fact is when you stay small; you can only help so many people in society. When you become larger, your scope of influence is greater and you can potentially affect more change. My goal is to help make more positive changes in the world. Part of that strategy was for me to take the time to write this book, and then personally publish it to get it out into the world at large. I would even venture to say that many people who choose to stay small and only worry about making enough for themselves are sometimes more selfish than the wealthy people who provide opportunities to others, pay more taxes, give to charities, and change the communities and lifestyles of others. Wealthy people take on a greater sense of responsibility. So which do you want to be? Would you prefer to simply make enough so you can support yourself? Or would you like a shot to step up to a larger scope and make a difference on a grander scale? It is up to you. The Truth About Credit Cards Credit cards seem to get a bad rap in the public media. You constantly see books and so-called experts publicly bashing credit cards: how bad they are, how dangerous they are, and so on. True … there are credit cards that have the fine print where they hide high interest rates loaded with hidden fees and annual costs. However, there are also many cards that do not have any of this. The so-called “experts” blame the credit card companies for offering their cards to potential customers to abuse. They claim high-risk people are “not qualified” to have credit cards so they shouldn’t get them. That may be so, but it is not the “experts” that are taking the financial risk to offer the cards to new customers. The credit companies are. Last time I checked, I didn’t see any of those experts offering anything but their criticism. This is like saying that chocolate companies should stop selling their candy bars where overweight people shop because they are at a high risk of buying more chocolate in order to become even more overweight! Recently, there was a court case where someone tried to sue McDonald’s … claiming that it was their fault that he was obese. Apparently, he went to McDonald’s everyday to eat and he became obese over several years of eating there. I thought to myself, “What idiot doesn’t know that McDonald’s serves fast food that is fattening? And did McDonalds hold a gun to this guy and say ‘Buy our food or else!’? Were there no other restaurants to eat at? I think not. In any case, I digress. This type of attitude takes the responsibility off of the person truly responsible: the consumer - or more appropriately - the spender. There is nothing inherently wrong or evil about credit cards. The credit card is a financial tool used to convey payments in a manner much like checks, money orders, cashiers checks, and debit cards. It is true that there are many financially irresponsible people, and perhaps they are truly unable to control their buying habits. However, the fault lays with the user of the credit card … not the credit card companies. There needs to be more of an emphasis on educating people on how to better use their credit cards, control their spending habits, as well as in dealing with the underlying emotions and motivations of buying and spending. I have been an active user of credit cards since I was nineteen. I love my credit cards! Even though I have been a user of credit cards for most of my life, I don’t generally carry a balance. The times I carried credit balances have been times when I needed it - such as when unexpected expenses came up and they needed to be taken cared of. Credit cards have always been a helpful financial instrument for me. But then again, I had at a young age realized that financial power comes with financial responsibility. I have often used credit cards to fund entrepreneurial ventures that no bank would even bother to look at much less approve a loan for. Sure … I admit that I have lost money on those ventures, but I have also made money with them. Often, I would simply use my credit cards to buy office supplies, computer equipment, software, educational materials, business travel, seminars … things to that effect. What people fail to realize is that there are times when it’s better to pay interest now rather than to let time pass. For example, a seminar taken this year is often more valuable to me than one taken next year. Is the interest I pay for that one year worth having the information one year sooner? Often, if it is unavoidable, I will commit earlier. No one would ever argue against the idea that it’s better to learn how to add and subtract numbers while you are in elementary school rather than in high school. The reason being has to do with the cost of staying ignorant for a short time versus a long time. There often is a negative ripple effect for delayed knowledge. As an entrepreneur, I respect credit cards and value them greatly. People are running around saying that using credit cards is bad, and that all interest you pay on credit cards is likewise bad. This is because most people buy consumer “junk” that has little value thirty days after it leaves the store. I don’t make these kinds of generalizations regarding my finances. I make finer, more personal distinctions for myself. If I go out and eat at an expensive restaurant and charge it to my credit card, I know I have very little to show for it when the monthly statement comes in. However, if I buy a new color printer for my computer system, there is a good chance it will continue to provide ongoing value. It isn’t the credit card; it is what you use it for. I know what is required and what the costs are for charging on credit cards, as well as all the possible consequences. I have learned to be a responsible and knowledgeable user. People who know me will agree that I am fairly generous with myself when it comes to self-improvement or business-related expenses. The reason I am so generous is because more often than not, I don’t buy impulsively. I evaluate the money I am going to spend versus what I can get out of it. To me, it is an investment. And if it is something that I have determined as mandatory, I then see if the interest I have to pay is worth getting it today versus waiting until I have all the money. It is all a matter of return on my investment. Instead of teaching people how to think about and evaluate what they buy, many people simply say that credit cards are bad. I think that is an overly simplistic judgment and a very limiting point of view … especially when it can be a great source of entrepreneurial money. The fact of the matter is the major companies use debt to finance their growth and success; they know it is a form of leverage. If they borrow money at 10%, they know it is their job to generate 20% or more. Don’t get me wrong. I do believe that there is a point of having too much debt. This is called overleveraging. If you eat too much ice cream, you can become obese. But does that automatically make eating ice cream bad? No! The fault lies with the person who is doing the eating. There is this never-ending cycle that I see some people go through: people have poor spending habits. They spend poorly, regret it, and spend months or years paying off a debt that gives them very little benefit. Instead of taking on the responsibility themselves, they put the entire blame on the credit card company. As I said, I have not carried credit card balances for most of my life. And the times in which I have carried credit balances, it has mostly been for business-related expenses or unexpected personal expenses. As an entrepreneur and investor, financing is crucial. And unless you have become well established, financing can be quite the challenge. So, if I cannot formally obtain financing from banks or investors, then I am required to finance it myself. When I left the corporate world, I had only a little bit of money saved up. But I did not let that stop me from leaving … partially because I understood the power of financing and credit cards. I didn’t have all the equipment and credentials I needed to become a successful freelance technology instructor. Some of the things I needed included a notebook computer, additional desktop computers, software, supplies, as well as attending seminars and conventions. I felt quite confident that I would be successful, but I would be required to ramp up. Ultimately, I was faced with the “chicken or the egg syndrome.” I didn’t have all the required money to ramp up and be successful. And without being ramped up, I couldn’t make the money to pay all the startup costs. Because leaving the corporate world required some contrarian’s thinking on my part, I surmised that I would have to find a way to make things happen to get ramped up. As it turned out, I managed to barter my services by offering my time to perform pro bono work. However, I also didn’t hesitate to spend, get into debt, and pay the interest … because the spending I made would ultimately make me money. Yet, I was getting into debt by investing in my business and myself … not junk that sat in the closet. As a result of my decisions, I became fully ramped up within a year. And when I did, it was only a matter of months before I paid off the underlying debt. I did most of this with credit cards. Now, most people will say that this was risky. What if I didn’t make it? I admit that there is always the possibility of failure, but the bottom line is people who don’t make the leap lose anyway. They are trapped in a job with limited income and limited time. They then spend money by charging their purchases to their credit cards. In turn, these purchases don’t make them any money, and they ultimately spend most of their lives repeating this vicious cycle.
At this point, you should realize (as I had years ago) that the road to personal freedom is very possible. You do not need to be rich to create perpetual wealth and live a life of personal freedom. There are fundamentally two ways of creating perpetual wealth: _
Increase income layers. We seem to live in a culture of great extremes in the United States. We see a life of extravagance and excess on our televisions and movie screens on one end … while on the other end we see a world of scarcity and desperation on the streets of our slums and ghettos. In the realms of the middle-class, there are people who believe they need to work harder and demand more raises to better their lifestyles. Then there are also those people who believe they should start cutting coupons and bottom-feed (acquire things very cheap or free). I am a first-generation Chinese-American. As such, I have plenty of exposure to Asian cultures … which place a strong emphasis on frugality. People who come from Asian cultures tend to first look at cutting back on their expenses … with some to an extreme amount. Subconsciously, the thought is that money is scarce … so the first thought is to simply cut back. I have no problems with people cutting back expenses; except for those people who do it to extremes. I do believe that there is a point of diminishing effect in the continual emphasis on cutting expenses. The situation is not helped when so much financial advice today revolves around the mentality of clipping coupons or buying at the flea market. However, people who live in extravagance they can’t afford could learn and adopt a few good habits from frugal people. For most people, I do believe that there is room for paring down expense layers. In today’s society, we have so many things taken for granted as necessities in our lives. It could be the weekend dinners, the annual vacation, the third telephone line, the second computer, the second television, the third VCR, the third cell phone, the third car for the teenage child, the Christmas gifts, the magazine subscriptions, and so on. These are often absorbed into our credit cards … when actually they should only be short-term expense blocks. But unfortunately many people convert those short-term expense blocks into long-term expense layers – such as when they use a home equity loan (long-term expense layers) to payoff (replace) their credit card debts (short-term expense blocks). It is not my place to tell people what their standard of living should be; it is a very personal choice. However, there generally is a financial price to pay for choosing a higher standard of living versus a lower standard of living in the early stages of creating wealth. This price can be seen by how high your expense layers are as compared to how much progress you have to make in creating the offsetting income layers. For some people, I believe that this would be a monumental task. It can be done, but it would require more time and effort to create income layers to match the higher levels of the expense layers. Conversely, I also realize that there are negative consequences by living too low a living standard from the extreme cutting back of costs. There are consequences that go beyond the simplistic expense layer model I have described and shown you in this book. For example, not having a car in New York City is fundamentally different than not having a car in Atlanta. Not having a car in New York City will probably save you money, minimize expenses … and not to mention the aggravation of parking. You can eliminate that expense layer easily in New York City. However, you will still have a transportation expense layer because of bus, subway, and taxi fares. Yet, while not having a car in Atlanta may help minimize expenses, you would also eliminate your source of income by not being able to get to work in a timely manner. Anyone who has been in Atlanta realizes that having a car is almost a necessity of life there. There are some considerations that we must make for ourselves and the area in which we live. How about people who try to save money by not using the air-conditioner in the summer heat of the South or the heating furnace in the deep winter cold in the North? Every year there are news reports of people who have died in the summer heat or the deep winter cold. I think that most of us will agree that saving in these areas is not the way to go … especially when it can potentially be life threatening. Here is another example: A family of four living in San Francisco will probably have a difficult time trimming expenses if their expense levels are already at $4,000 per month. It is very difficult to minimize expenses when you are already at rock-bottom expense levels for the area you live in. I see too many supposed “financial experts” giving generalized advice without making distinctions for different circumstances and environments. Because people blindingly believe so-called “financial experts” when they say that everyone must save money and minimize expenses, they don’t realize that they are sometimes beating their heads against a brick wall. There is a point of diminishing effect in the strategy of only minimizing expenses. At some point, you will have cut back all you can before winding up living in the streets. Sometimes the personal energy required to shave off that last $10 per month is simply not worth it. When you have hit the point of diminishing returns of minimizing expenses, there is only way to start focusing: the income and leverage side. Each time I quit cold turkey, plummeting to a zero income, I always knew going in that I would have unavoidable expenses. No matter how much I saved and cut back, I would still have a certain amount of expenses, such as my car, insurance, food, housing, and so forth. I knew that after a certain point in looking at my budget there was only so much money I could save and expenses I could cut. Any more thought and effort in cutting expenses was largely going to be a waste of my time and energy. There are some people that look day in and day out to reduce expenses that virtually cannot be reduced. They persist in being cheap, clipping coupons, buying at flea markets, and engaging in activities that use $20 worth of their time to save $5. That makes no sense to me at all. Bottom line: Once expense levels have been minimized, all efforts should be shifted towards creating and generating income. Small companies have become great companies by focusing on growing business and revenues. Ordinary people become wealthy by focusing on growing their business and income … not solely on minimizing expenses and saving money. For the people who have too many goodies in your house … and you know who you are! You are the people who have all kinds of sports equipment or memorabilia lying around unused. You are the people who have the unneeded extra cars, boats, big-screen televisions, closets stuffed only with designer clothing, and are members of all the “cool” clubs. You can probably work on reducing expense layers. You need to start focusing inwards, getting things under control, and STOP worrying about keeping up with the “cool people” or latest fads. Once you do that, you can once again focus outwards … but this time around you will be looking for opportunities to create income layers instead of getting the latest gizmos and gadgets. For the people who already are frugal … likewise you all know who you are. You are the people who only buy generic brands, use candles for light, have little furniture, no food in the refrigerator, and will not read any books that you can’t get from the library. You probably don’t need to devote any more time in reducing expense layers. You need to start focusing your thinking outwards to create income layers … instead of inwards on expenses. It is the best way out to personal freedom. Take my word for it. Saving Money The term “save money” brings two different meanings to my mind: 1.
Reducing expenses. We discussed the diminishing effect of reducing expenses in the previous section. In short-term money saving, you might accumulate money from your disposable income or tax refund, and then use it as a down payment for a new car, house, or investment property. In long-term money saving, you may be accumulating money for retirement. I am a proponent for short-term savings, where you save up for specific needs. Saving up for a small down payment to buy a new car is probably a good use of money … especially if your old car is in disrepair or requires excessive maintenance. Saving up a down payment to buy a house where you will live for more than five years is also probably a good idea. Saving up for a down-payment to buy an income-producing investment property is a great idea … IF you know what to buy. I am not a big supporter for long-term savings … especially as a plan for retirement. It is simply just too slow and impractical a practice for most people. I wonder how many people in their 50’s and older are still thinking that they will save up enough money to provide them with twenty years-worth of future living expenses? I have heard over the years that people should save three to six month’s worth of income before you change jobs. This old idea obviously has not been updated for the 21st century. Nowadays, many of the job changes are involuntary, sudden, and without warning. Also, exactly how long does it take to save just one month’s income for reserves? Most people probably use most of their one-month’s income just for living expenses. How much could possibly be left? Will it take two, four, or six months to save up one month’s worth of reserves? I am willing to bet that taking six months to save a month’s income is quite optimistic. In my own life, I found that it actually takes many months to save just one month of income. The problem with trying to save six months of income is that it requires much more than six months saving it! It could take years to save that much … if at all! If I were to follow the old, tired advice, I would still be working to save it instead of being personally free to further increase my wealth. For me, it is a terrible plan and just plain bad advice to give people. Hoarding Money The whole premise of saving money year after year is really the act of hoarding money for yourself year after year … never to be released again until that magical time of retirement or dire emergencies in your life. Saving money is also based not only on the premise that money is scarce, but also that it must be hoarded year after year so that you can survive in your older years. Furthermore, it is also assumed that in order for you to have money, you must first “own” the money. I have discovered that money is quite plentiful. The more skilled I am in tapping into money; raising, managing, and investing it, the more money comes to me. It allows me the freedom to enjoy writing, teaching, speaking, and traveling. I get the time to study, learn, and be with abundant and like-minded people, who give me counsel, ideas, and knowledge to be even more effective. I now create wealth and money for myself because I know how to manage and direct the flow of money, with tangible and intangible resources. In economics, this is called capital management. The reality is that the greatest wealth in the world has never been based on the premise of solely saving money. Wealth has been created by either investing money or spending money to create value. In any profession or industry, people or companies built their wealth and fortune by investing or spending their money on employees, real estate, equipment, marketing, research, development, and so on. They made their fortunes by using money and resources to create value for their customers. They were rewarded by the gifts of ongoing patronage, subscriptions, fees, etc. … which in turn increased their wealth. They then took that wealth and repeated or expanded upon the cycle in order to create larger businesses and investments. Now, I want to point out that I am not endorsing the idea of spending or investing money recklessly. I am not saying that you shouldn’t save money in order to invest in or start a business. I am also not saying that you shouldn’t save some money for “rainy days.” What I am saying is that using the sole strategy of “saving money” to create wealth and retirement fundamentally goes against the nature of money; which is to be harnessed … not hoarded. For most people, saving is too slow and too ineffective a strategy to make any kind of difference in their lives. In my opinion, it is the road to mediocrity and averageness. You might be able to support yourself when you retire, but you will likely have to live a life of frugality based on limited income. You will have provided employment to no one, given little to few charities, and provided little impact to the world around you because you hoarded money. Freedom Without Riches Some time ago, I chose to attend different events that literally took me cross-country; from Atlanta, to Phoenix, then Austin, and finally New York City … all within a three-week time frame. It was an exhausting three weeks of primarily living in hotels. However, I did stop at home in between trips for a day or two to get a change of clothes and rest before having to leave again. While I was on the road, I simply checked in on the Internet periodically to monitor my business activities and finances. During the quiet moments of my travel, I realized how fortunate I was to be able to get away for three straight weeks to enjoy the events I attended. I met and socialized with interesting and like-minded people, whereas most other people had to go to work at a job they didn’t like and exhausted them. Conceptually, I knew I had made into reality the fact that I didn’t have to be rich to have monetary freedom. Part of that monetary freedom was having the peace of mind in knowing that I could continue to be away while the money would also continue to come in. As long as I continued to effectively manage and nurture my assets, the money will continue to come. Now there may be some cynics who will say that I still work, and if I stopped working that my money would eventually stop coming in. I admit that this is partially correct. But again they probably have Lottery Winners Syndrome where they expect to get something by putting in virtually nothing. In my personal life, I tend to stay up late at night and I get up late in the morning. When I wake up, I do things I have to do … but I don’t consider a lot of it “work” because I do not dislike what I do. Furthermore, many other things don’t require a lot of my time and effort. In fact, if I wanted to rest on my laurels, I could live a semi-retired and conservative lifestyle “working” only ten hours a week. The more effective, efficient, and experienced I am, the less time and effort I have to put in to create the same or greater results. No matter how efficient an employee is and no matter how many technical advances in automation or computers, the amount of time an employee puts in will always matter. Their productivity will go up, but they still have to work fulltime and as such, they will never gain much time freedom. And remember: without time freedom, it is very difficult to achieve personal freedom … to become wealthy and live the life you want. I strive at all times to be a better thinker, planner, and manager … not a better laborer. A better manager and thinker gets more done in less time. A better laborer gets more done in the same amount of time. There is a huge difference there! “Income based on assets set you free. Income based on labor keep you imprisoned.” The Value of Money is Relative When I decided to create my own monetary freedom, I had to come to terms with the realization that if I decided to quit my current lifestyle, where I no longer had an income, I would become reliant on the odd jobs, credit lines, and credit cards I had. Although I knew that there would be many opportunities to create income layers and build up my business, I would also have to take care of my immediate needs; namely continue making rent payments, pay utilities, putting gas in my car, buying groceries, and also have funds to still buy books, courses, attend events, office supplies, and other business-related expenses. Additionally, I knew that real estate was essential to my strategy; therefore I had to allocate some resources to acquire real estate. I had to seriously challenge my core beliefs and assumptions. The dilemma was that my personal financing sources were limited. I did not believe that my personal financing sources should be substantial enough to last me five years or more, but I did want it to last as long as possible. I only needed it to last long enough so that I was no longer drawing from it. I have known about the cost of living since I was eighteen years old. For example, the cost of living in San Francisco or New York City would be much higher than that found in Atlanta … even though each one are considered to be a major city. Also, because I wanted to conduct business and buy real estate, I knew that the price and demand for real estate within those areas would be prohibitive … and would be a significant barrier of entry if I had lived and did business in those places. With these observations, I realized that although the American dollar was accepted in all fifty states, the weight of money varied greatly from state to state … even from city to city within a state. So if I had $20,000 in financing lined up, it could last a year in a smaller town in Alabama or Georgia versus lasting only three months in California. Furthermore, if I had $5,000 to put towards real estate, it would be considered a great joke in high-appreciating areas of the country … whereas it would otherwise be considered as a significant down-payment towards an investment house in a small Georgia city or town. The weight of the American dollar is relative to the area in which you live, invest, and do business. I realized that if I wanted to magnify the power of my funds, I would have to move to an area where $1,000 got me a whole a lot more. The Tides of Money One of the things I have learned about wealth are the “tides of money” … money flows in, and then money flows out - and usually in unequal amounts. This is what I refer to as the Tides of Money. I have noticed many people don’t like change … especially in their financial status. I hear people say that they want a steady job with a steady income. It is more important for most people to have a steady income rather than have a higher income. In economics, we learned that a business cycle consists of recessions and depressions, expansion and prosperity. Likewise, on a smaller level, entrepreneurs and investors have to be aware and prepare for the tides of money that will inevitably occur. Since the movement of money is normal and expected, there will be times when money is plentiful and other times when money is tight. People who believe money should always flow inwards will be ill-prepared for economic downturns and financial setbacks. Also, people who believe that money is always tight will not be prepared for sudden growth and unexpected business opportunities. In conventional terms, managing the tides of money is called cash flow management. The term “tides of money” is much more appropriate because the term liquidity is often used in financial management. Liquidity implies that money ebbs and flows. It is your ability to manage these money tides that determine whether you are to be successful long-term. How well you steer that sailboat through those ebbing and flowing tides will ultimately determine whether your boat will sink or float.
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