Chapter 1 - Reality Check

Family Financial Planning

So much training goes into how to make a living. You go to school to become an engineer or a schoolteacher or a pilot. You learn how to create cash flow. You can become an accountant or get an MBA to become a manager of some large company’s money. They may be diligent in managing their career and that company’s money but they do some incredibly thoughtless things with their money. They focus so much on what they do creating income that they may have hundreds of thousands of dollars sitting in a checking account for years. I know of two examples of this exact oversight. Some executives will make 6 figure incomes but they don’t insist on a pension or have enough put away for a comfortable retirement when it is all over. There are those who are struggling to make ends meet but waste 10% to 50% of their incomes on frivolous things that hold no long term value. All groups can identify ways in which they just plain waste money and apply an inadequate amount of thought and planning to their own personal finances.

Don’t make excuses

This book is dedicated to helping people who are asking, “Why am I making enough money to have savings and build wealth but success is just not happening?” Look around you and you see evidence that it is not how much money you make but what you do with it once you have earned it. I worked in a union shop. Everyone knows what everyone else is making and everyone has a pretty similar wage and benefit package. Yet some of these equally paid workers live in the up-scale neighbourhoods and support a family while others struggle and are always short of money before payday even though they are on their own. Is it a magic formula? Are the wealthiest of the group just lucky and got all the breaks? Were they born with a silver spoon in their mouths? Do they have so much money that they can’t spend it all? Did they just inherit from a rich aunt? How many rationalizations have you heard on this theme? How many have you used? There is no doubt that people get good breaks and some people get bad breaks.

There are three points I want to make on the theme of excuse making. Number one is that most people have a nice mix of good and bad luck come their way and in most cases it pretty much balances out. You can surely think of instances of both measures of luck happening to you in your life. An instance of a chance happening can have both good and bad results. The result you focus on, the positive one or the negative one is the one that affects you most? It is about attitude and choice. Often I have found that my first perception of an incident is that it is a bad thing that has happened. However, as life plays out the event turns out to be a good thing. For most people there is a balance. I do not deny that some people, through abuse or mayhem, bad health or an act of God such as the Tsunami in East Asia suffer from an overwhelming case of chance destroying their lives. This book is not for them. Books of philosophy and healing and charity are for them and our empathy and compassion are for them. This book is for those who have the power to control their resources and who will choose to take a positive attitude about what comes to them as good or bad luck.

My second point on this theme is that most people can create good or bad luck for themselves. The best analogy I can think of for this is the sports analogy. I don’t think it matters what sport you follow, the team that works hard, plans thoroughly, and believes in themselves is the team that will get the big break. Why is that? A lot of it is that they have not given in to the bad breaks. A lot of it is that they know that life does offer up good breaks so you prepare for them. You structure your plan for when you do get that break so that it is not squandered. You structure your plan so that when you get bad breaks you minimize the damage. You make the best of your good luck and you minimize the effects of your bad luck. It is not magic. A lot of it is just recognizing and accepting what forces are at work and then adjusting how you manage yourself to accept the consequences of the natural spectrum of chance happenings.

My third point is that even if you accept and plan how to deal with chance happenings, you must execute your plan. It always means hard work and conscientious management of your resources. It means “Just Do It” to quote another jock standby phrase. Execution is everything. Making quick, sharp decisions to minimize damage when a situation becomes a financial liability is essential. Minimizing the damage is so important when bad luck happens or when you have made a mistake. A bad situation has the potential of undoing so much positive initiative and undoing ones confidence. Making the decision to sever a negative relationship or back out of money losing business associations should not be procrastinated. Deferring the cessation of a negative situation has the potential of being such a drain that it can take down everything positive that you have done. A great present day example is that the global banking industry knew that the subprime crisis and all of the ABCP in the system was toxic and dangerous years ago but the ignored it. Individuals allow the same thing to happen to them. Recognition of a problem is no go unless one initiates some corrective action. Similarly, when something good happens, execution to capitalize on ones good fortune is essential. Here we can go to the sports analogy. How much sports page copy has been filled with stories of the team that did or didn’t make the best of a golden opportunity? It’s the last second touchdown or the overtime goal makes sports page headlines. There is nothing that trumps a comeback story for the headline.

So don’t make phoney baloney excuses for financial shortcomings to yourself or anyone else. Everyone has access to the same toolbox. It is just a matter of using them.

New perspective

A book usually is full of personal anecdotes to illustrate points made. A recurring theme in my motivation for writing a book on personal finances is that it is hard to do because folks just won’t tell the truth about their personal finances. Maybe that is why nobody has written a book dealing with money at this level before. Nobody would give the author any personal anecdotes and any financial professional is sworn to tight client confidentiality laws. Imagine if you were used as an example of financial mismanagement. I don’t think many people can think of anything that would spark a stronger emotional reaction than having your complete financial situation made public. The juiciest family gossip is often the financial dirt on some family member. So I have tried to write this book with a psychological spin to make it not quite so personal while it does analyze the root of many money problems. This has the added effect of informing you that you are not alone. There are personality developments that you go through at certain ages and stages of your life. A huge part of your personality is reflected in your attitudes about your money. You can read situations as bad or good luck or you can try to understand them. You can learn what expectations are realistic and understand what goals you should set for yourself at certain ages and stages.

In my financial dealings, I feel I have tried to make every single mistake possible. I have lived the adage about “You learn from your mistakes so you have to make mistakes to learn”. I have done a lot of learning. Because I have done so much learning, I have also done a lot of reading, a lot of observing, a lot of talking and I have worked my ass off. At my peak I had three careers going and a family.

I learned that financial institutions and our robust economy have come to depend on people under managing their money. Economies of growth are about getting more and more dollars circulating faster and faster. That is the treadmill. You are on it. If you get off it or slow it down, is this necessarily a good thing for the society even if it might be good for you? Financial institutions create their income by picking your pocket every time you make a move. Service industries do everything for you so that you can rush around creating more economic activity. Consumerism is our culture. The focus of advertising is to get you to manage your life and your money so that you are a gerbil on a wheel. You must get off that wheel. Part of my experience was that at my lowest point, I cut my work activity by 50% and therefore reduced by income by 50%. I used my time to manage what I did have coming in better. I found that after 2 years I had more money that was mine at the end of the day despite making less gross income. Plus I had still had time left over that was mine. I learned the lesson of the adage that “Less is More”. You too can get off of the treadmill and THINK YOUR MONEY.

Of course money is not everything. However, it is a huge part of what we do and it is integrated with everything that we do. In our toolbox we have a form that identifies 7 areas of life to set goals in, Spiritual, Emotional, Financial, Career, Social, Physical and Family. You can see only 2 are money oriented but you know that for all of the others money does have an influence. Even in the spiritual life they have to pass around the collection plate. So when you manage your money properly, you will have a positive influence on your whole life. You increase your options in the other areas and allow your life to fill with the joys of a multi-faceted life. Within this perspective you can use the financial tools offered on the website to enhance your whole life. You can make your work and your money about you and your life. This is the first attitude that must change to give you your new perspective on your personal finances. Good Money management starts with the proper attitudes toward personal finances and this focus is the heart of what this author is trying to teach you.

Chapter 2 - How to Make Money

Ways to Make Money

To manage money first you have to make it. You have to create consistent cash flow. How you make it and how much you make depends on some very basic things. One is your attitude towards the source of your income. Do you love your work? Is it at the level of pleasant but I wouldn’t describe it as love? Is it at least tolerable? Or are you at the level that Karl Marx described as “trading work drudgery for money”? I do know that there are many out there that love work of any kind. Others, like Movie Stars are in a job that very few people would not love to do. I personally know a few people who love their work, its environment, and its opportunities and get a great deal of satisfaction from being in touch with the end product of their endeavours. The cynical view is “I thought I was looking for a career but found I was just looking for a salary”. No matter what the case is, you have to find an attitude that makes going to work and keeping your income sustainable.

Career

Some people have a career. They thrive and work long hours for modest pay but stay with it for the non-monetary rewards as well as the monetary ones. I never understood how much prestige had to do with this until later in life. By the position they are in, people have access to powerful resources that they could never afford access to. They are invited to social gatherings and parties where the other guests’ wealth, power, and position is so overwhelming that they will never be their peers, but there they are in the same room with them. The military is very good at offering this carrot and so is the public service. Military pilots are instilled with the knowledge that the taxpayer owns that multi-million dollar airplane that they are rocketing around in and that they are just along for the ride. They are constantly reminded that their plane can be taken away at any time should they lose respect for that fact. For some people this is a great life. They just have to come to earth to deal with what personal resources they do receive must be managed for the best long-term result for them selves. They must always be conscious that a pay package is not just the money involved but also the total package including benefits. Here again the military and public service are a great example of an organization that an employee can gain access to educational and retirement benefits that no other employer can possibly offer. These can be used to advance your career but also they can be used to advance your personal goals. The important thing is that there be a focus on and separation of personal financial goals from your career. They are two very distinct aspects of your life.

A Job

In a career you get paid for doing things that few people can do well but most would like to. Most jobs fall into the characterization of doing things for others that no one would do except if you were paid to do them. You find a nice workplace with a survivable work environment and try to last through whatever political and economic ups and downs transpire. You try to live a normal life and have a gentle retirement. The money you make is all directed at your personal finances. For this group, this is a huge advantage because you just need to keep that job and then focus your remaining energies on properly managing your personal finances.

A Business

You can always start your own business. You are your own boss and you get to manage your time. It is up to you. You can work those long hours and it is for your benefit rather than your efforts being capitalized on by the corporation. If you find a hot market niche, you make a ton of money.

In a best-case scenario, you can use the company to buy your cars, send you on vacations disguised as business seminars, or even buy your house. The tax advantages are there but they are there for a reason. The government uses this to track useful economic statistics to measure how well the economy is working. You employ people and take care of government-initiated programs. The employees pay income tax and other deductions which you as the employer are obliged to deduct and account for. In return for you doing all this work the government will give you the tax breaks. That way they keep you on the working treadmill. You get tied into the finance system. If you try to get out, you will see how they keep pulling you back in. It is a good life and you live off of the cash flow you are creating. To have you run this going concern of a successful business is important to the economy. Those who manage the economy have set it up so that it is hard for you to quit and rewarding for you to continue.

In a worst case, the business somehow loses track of such an obvious fact that to survive more money must flow in than out. The marketplace and products are constantly changing and your product may become obsolete. Businesses that have depth of assets and a solid customer base willing to buy their product can go bankrupt through mismanagement. There are garages full of great inventions that have million and billion dollar markets out there and they are gathering dust because those trying to bring them to production just do not know how to run a business. An unsuccessful business does not feed cash into the home budget. In some cases, it draws money from the personal budget to survive. There is not much point of being in business unless it is feeding cash into the personal budget.

Even when your business is successful, you must pull your personal finances away from the business and run them separately. Strategies for a successful business budget and a successful home budget are very similar but not exactly the same. They each have their own dynamics and goals and tax laws. It is important that you achieve separation of the two aspects of your life. Success in one facet of your life does not mean that the other facet will be successful. Separation means diversity and diversity means flexibility which leads to security in the long run.

Investments

Some but very few people are blessed with having cash flow provided by investments. One of the major themes of money is that it is simple. So it is with Investments. It just gets complicated when human behaviour is factored in. The most successful person to make money from investments is Warren Buffet CEO of Berkshire Hathaway. He is what is called a “value investor”. This is a concept that was originally laid out by a man named Benjamin Graham. Mr. Buffet has just continued to prove that this is an investment concept that is proven more and more with the test of time.

Mr. Buffet’s organization is noted for doing its “due diligence”. This term is a mainstay of successful investors. Mr. Buffet’s organization is noted for dealing in companies that do the down to earth business that builds an economy. They look for those that do it honestly and by hard work and by controlling costs. They do it with good book keeping and by making good deals. In short they do good business. Good business that follows the rules of money makes more money. Does this sound easier than it is? The short answer is yes. The long answer is in hundreds and thousands of financial statements. Many think that an investor’s life is one of leisure and lunches and golf course deals. To some extent it is, but nothing works without the grass roots work of “due diligence” and to be thorough, it takes a lot of time and a lot of very dry homework.

The majority of people view investments as a passive way to make money. By that I mean they figure that you hire someone to do it for you, and then you sit back and wait for the money to roll in. But things can change and Shit happens! There is no one who will look after your money like you will so you better be involved and become knowledgeable. Changes can be as big as war or acts of God on an apocalyptic scale. The media covers changes of government and the action of government because they make a lot of the rules written and unwritten that business has to operate within. This can add or reduce costs to business. Interest rates set by Central Banks seem like small amount because they are quarters of a percentage point but on a whole economy the addition or subtraction of this small percentage is huge. It affects every investment you may have. 2008 is the poster child year for the dangers of being an uninformed investor. We will return and expand on the theme of investments throughout this course because you have to learn how to protect the asset side of your balance sheet as soon as you build it.

So the conclusion is that to make investment income is work. You have to be awake and alert. Big banks and investment institutions make sure that they will survive first. Then, they will look out for you the client. The argument is there that if you don’t survive, they won’t survive. This is valid but it is the only reason they would look out for you. They are not as benevolent as they make themselves out to be in those mushy ads that they air on TV. Where there are millions of dollars of others people’s money, the temptation is overwhelming for some to abuse their position of trust. Fraud and theft can occur at all levels. Audits are done and security oversight agencies are set up. However, there is always someone or a group that will conspire to try to steal investors’ money. Once lost, to try and recoup your assets is a time consuming and resource consuming effort. It not only costs you money but takes away time from your productive efforts. The resultant judgement is usually pennies on the dollar. A recover percentage of 40% or higher is extraordinary.

The most dangerous of these covetous people are those closest to you. They are usually a relative. They have the power to know your finances and how to touch your emotions to let you give up control of them. You are a target because others know you have money and they cannot control themselves. They covet it. Those who covet it will manipulate, lie or just steal from those who have investments as they are viewed as people who will never miss the money.

So the challenge for you if you are relying on investment income is that you must find companies that do good business so that they have enough left over to create cash flow for the investor. Then you have to keep an eye on them. Once you receive dividends or interest income, you must then manage that properly. If you are in the position to make money from investments, you must move your inspiration to another level to make that money work hard. You must be aware of who you can trust as many covet your money and will do anything to get it. If it is mismanaged it will go away. You will miss it when you need it the most…in your old age.

Windfalls

The papers are filled with stories of lottery winners and their adventures. How many people are lured to Las Vegas or even their local casino with dreams that this is their lucky day? Another type of windfall is “the Inheritance” . The nickname for estate law is “greed law”. I have never seen anything that has the capacity to bare peoples’ souls like the illusion of the rich aunt or that “the old man saved his money in his mattress”. I think I could write a book just on stories of what has happened when someone has moved on to the next life and the survivors think that there is a fortune of this worlds’ goods left behind for them. I know just about every reader has at least one of these stories that just popped into your mind. I know I have about 5 racing through mine as I write this paragraph. This is the wildest and most exciting of the topics. However, the excitement is short lived unless you take your windfall and know that the rules of money apply to windfalls or they are lost almost as quickly as they are won. Some windfalls have greatly benefited the lives of the lucky souls who won them. Then there are those stories of greed, selfishness, foolishness, deprivation and just plain stupidity. I prefer and this book is about doing it right.

Money has a great responsibility attached to it. A large amount of money has a huge responsibility attached to it. A biblical parable comes to mind to illustrate this point. A man had 3 sons. He gave them each an equal amount of money and told them to work with and show him the results. The story goes that one of the sons panicked that the father would be angry with him if he lost the money so he buried it in a safe place. The second son invested the money in a secure investment that had a small return. The third son worked with the money to put people to work and created a successful enterprise. The father’s reaction to each son was very interesting and enlightening. He was very angry with the first son. He was angry that the son was so afraid and so lazy that he just hid the money. He was somewhat pleased with the second son for at least putting the money to work. He was greatly pleased with the third son for making the money work not just to create a profit but to allow other people to engage in work that would improve their lives as well. So this is why no matter how you make your money, it is very important to make it work. This always means work for you even in the case of a windfall. You are the new custodian of this money. By work I mean physical, mental and emotional work. Take care of your hard earned and your not so hard earned income. By making it work harder for you, you also make it work harder for others and the benefit reaches far beyond yourself. The joy and satisfaction are the non-monetary rewards for doing this on top of the monetary rewards that you will reap when you properly shoulder the responsibility.

Perks

Perks are a nice addition to your pay packet. One of the nicest things about them is that they are often in a form that is too complicated for the government to tax. They can take the form of a discount in merchandise bought at the store at which you are employed. This is a particularly nice perk for those who work part time in the retail industry. If you are working at something that gives you pleasure, you can increase your pleasure by investing or indulging in your favourite activity at a discount. Most if not all places of employment have some perk or have to compensate for the lack of one with a higher pay rate. Tips are one of the best perks. It is impossible for the taxman to know exactly what you get for tips because they depend a lot on how good you are at your job. Then you can spend that money on whatever you want. You still have the responsibility to manage this money properly and you must not forget that. It is not free money. It is part of your pay packet and should be viewed as such. To not responsibly take advantage of a perk is a personal finance crime. To not take advantage of a perk is like not picking up free money lying on the side of the road.

Diversify

How can I make this clear? DIVERSIFY…DIVERSIFY…DIVERSIFY!!!!!!!!!!!!!!!!!!!!!!

In this economic age when experts predict that the next generation of worker will have many careers, as in not just many jobs but many careers, the importance of staying diversified is extremely important. Whole industries can die with the rapid introduction of a new technology. A business or a product can become obsolete in a very short time. Companies change hands or have to reinvent themselves to stay in business. At the very least they move, sometimes to the other side of the planet. The concept of a JFL (job for life) is dead. More and more the individual is left to take care of himself. More and more countries that carry social programs and companies that carry benefits and pension plans cannot carry the cost and remain competitive. The pressure of global business competition leads to the pressure to cut costs, any costs.

This is not necessarily all negative. The old system let people slip into secure ruts and that is not what life is all about. This new world forces us all to wake up every day ready for the challenges of that day. One of those challenges will be to keep your cash in-flow steady in this new environment. To protect yourself you must diversify your income sources. Look for income from as many as possible of the 6 different sources outlined above. Even windfalls can be included. Education and training will be essential to keeping doors to opportunities open. Who doesn’t have a grandmother or mother who has told them “When a door closes a window opens”.

Diversity is a term strongly associated with proper management of investments. Your most important investment for you is in you. You are the source of all of your income so like other investments you may have; you have to stay up to date. You should be trained in more than one specific skill. Diversify your training. Some skills can be applied to many different careers or jobs. These are desirable. The most useful and diverse skill to build is to learn how to learn. Then you can adapt to any work and investment environment.

Chapter 3 - How Money Works

Money Management

Money on its own has a few simple rules that it works by. However it has a role in every aspect of our lives. Your life can be separated into 7 categories; Spiritual, Family, Emotional, Career, Finance, Social and Physical. You have needs and wants in each of the aspects of life. When you review it you cannot deny that money is important in achieving your desires in each of these facets. Even in the Spiritual aspect of humanity, the collection plate is very important in any religion.

The proper management of money helps you in each of these aspects of life. To get the most out of your money and life, you must understand how to set life goals and then you need to understand how money works. There is a simple chart (insert link to TYM life goals URL here) you can fill out to clarify what you want in the various aspects of your life. You cannot achieve what you want and what will make you happy until you identify what will make you happy. So think about it. I have found constantly through life that once I have identified what I want the opportunities to get what I want are constantly passing by. I would have ignored these opportunities if I had not established clarity in what I wanted. I certainly missed a lot before I started setting life goals.

The capacity to take advantage of the opportunities presented for happiness are often allowed or prohibited by whether you can manage the financial aspects of the opportunity. You cannot manage money unless you know the nature of the commodity. Most of its characteristics are rather simple and predictable. The problem is that most folks just do not know how it operates to make their life work for better or for worse. The challenge is to modify your money management behavior so that it is in sync with what makes money work for you rather than against you in your achievement of your life goals.

Awareness

You have a duty to yourself and those who are close to you manage your household income competently. You need to have a viable cash flow and know what your net worth is. You need to be aware of what they are and you have to motivate yourself to use the two basic tools of a Household budget and a Household balance sheet. Use them and use them properly. If you do not fill in your budget and balance sheet properly, the first person you are lying to or letting down is you. This is a very bad idea when you are the one trying to make good decisions.

You have a duty to know the glossary of personal finance. You need to know what an asset is and what a liability is. You need to know what net worth is and what exactly it means to you. If you do not understand these terms there get help.

You have to know that you are part of something much bigger than yourself. The global economy is here and it affects you. It is something that you have little control over but it does affect everything that you do. You have to be aware that you have some measure of control even in this environment. To make good decisions you have to understand some history, politics and some economics. If you do not read books and stay current in your knowledge of the world, you put yourself at a huge disadvantage. There are only so many hours in a day. I know you cannot do everything in this complex world. However, awareness is critical to your material success. Your material success helps you to be successful in the other areas of your life.

Do what you like to do and the money will come

Part of knowing yourself and your priorities is the knowledge of what you like to do. Some people it seems are blessed with a vision of what their life is about. Interviews of successful people often include a line like, “ever since I can remember I wanted to be in movies”. Some get into a sport and it never lets them go. They eat, sleep, drink and breathe it every moment of every day. Because they love what they do so much, they naturally excel at it and are willing to do whatever it takes to be successful at it. Others see themselves in a career as a policeman or a fireman and they do whatever they have to do to make that dream come true. It may not be huge income or fame but it means they will have steady cash flow to build wealth and security to enrich their lives.

The capacity to enjoy a job may come from the fact that a family may have a tradition in such a career. A family business is often passed from generation to generation. This may be due to liking what they do or the situation being so comfortable that it makes making income easy. Some love to be near their families. Others like to be in a certain environment. Some like a different schedules. There are day people and there are night people. There are people who will work outdoors in any kind of weather rather than be stuck indoors.

Money takes time to work. To give money time to work for you, you need to have a stable cash flow. To do this you have to be able to go to work consistently and have an attitude that makes people come back and want to work with you. If you like where you are and whom you are with and what you are doing, this is easy and sustainable. When people complain about their jobs, often they are confronted with the solution of, “Why don’t you quit and do something else so we don’t have to listen to your negative attitude?” It is a valid question.

If you are happy and constantly employed at what you like to do, you can take on a mortgage and loans that will help you build your life because your banker knows that you will able to pay him back. By being consistent you qualify for lower interest rates on your debt. You are able to build savings such as retirement plans where you are able to leave them and let the miracle of compound interest work for you. You are able to plan a budget and stick to it. You will have the consistent and constant cash flow to manage to execute all of these plans.

Know where your money comes from and where it goes to

In its simplest form Accountancy is keeping an accurate record of economic activity. By tracking money we can monitor and adjust our survival strategies within our lives. To make good decisions, you must always know the facts. You must know the facts of how much money you have coming in and how much money you have going out. You need to know who is paying you how much and when. You need to know how much tax you have to pay. You must know how much you need to spend on food, shelter and clothing each month. You need to have some money for some fun. You must account for religious tithing or however you put money back into your society. To have financial success, more money must come in than is going out.

You have to have a budget. It is important that your budget be a workable budget. If more money is going out than is coming in, you have to do something to make your budget balance. Either you have to find some way to get more money to come into the budget or you have to cut spending in the areas that you can control. Some people control their budget fanatically. You will usually find that these people are quite successful. At the other extreme there are those who know nothing of budgets or deny that they have anything to contribute to life. There are those who just can’t control themselves enough to build or stay within a budget. These are usually people who are constantly in a financial struggle to stay solvent. There is the dream of making more money than you can possibly spend. In all cases, you can always spend more than you earn.

I am not saying be a fanatic and account for every last penny. However the bare minimum is that you need to be prudent to the point that you have a very clear picture of whether you are saving cash or overspending and if you are gaining wealth or losing it on a daily, monthly and annual time frame.

Plan

I believe the human capacity to plan is a defining characteristic of humans. We can make very complex plans. We can construct these plans so that they evolve over time. There are construction plans and business plans and every other kind of plot and plan you can imagine.

So plan your life. You can make 1 year, 10 year and lifetime goals in each of the 7 facets of your life. It takes time to do it. It is a process so you do it over and over again. It is the same with your household finances. You have a reality budget and balance sheet and you have your forward looking budgets and balance sheets.

As you grow your plans will grow as well. You see new horizons when you have achieved goals that you have already set. There is the old saying “Life is what happens to you while you are in the midst of making plans”. Plans are adaptations to changes in your life. Your life plan, budgets and balance sheets can always be revised. There is something wrong if you are not revising them every few months or at least annually.

The Miracle of Compound Interest

When you save, each year you leave your savings in the instrument you have chosen, you get interest paid on the interest earned in that year and the years before. There are charts to show you how this works. There are special calculators to show you the power of compound interest. It is amazing to see and it is even more amazing to put it to work for you. What is amazing is how few people put this to work for them. This is the first wealth building instrument that you should use. It is just too simple and too effective to have any glamour attached to it. I think many people miss it for just that reason. It has no bragging rights. It doesn’t shine. The one thing about it is that you will not achieve financial security without using some form of it.

The combination of the miracle of compound interest and time is amazing. Just do the simple exercise of assuming that you will get a 4% return on your money for 25 years.

• 10 years: Get out your calculator and hit 1.04 times whatever you get from the previous multiplication and do that 10 times. The result should be 1.54 times the first result.
  
  
• 20 years: Do this 10 more time and you will find that the result is 2.37 times the amount you started with.
  
  
• 25 years: In the next 5 years after that you gain another 53% virtually the same result you had in the first 10 years.
  
  

So the first 10 years you gain 54%. In the second 10 years you gain 83%. In the final 25 years you gain another 53% for a total of 290% increase in value. And that is assuming only a 4 % increases compounded. Usually rates are much higher for long term investments.

This is without adding any money to the principle on an ongoing basis. The number one point here is to start savings and get to it early in life. You could flip burgers for a job and retire comfortably as long as you always saved a percentage of your income and locked it in a tax-protected instrument making compound interest. Instead of indulging the impatience of youth, get your youth to work for you. You will thank yourself when you want to be free of the yoke of a job and the economic subjectivity that it entails in your fifties and sixties. It is not exciting. It is showy though in that you are the person who gets to retire when you choose.

A mortgage compounds your savings in that with each payment, you pay interest on a smaller principal so you pay a larger amount against the total amount you owe with each payment. Equity in your home is like a savings account . The more you pay on the principal, the more savings you have. With each payment, you compound the amount of equity you put into your house with the next payment. A house is also interesting in that in most cases, the value of a house increases over time. This also compounds over time. When they say house prices increased by X% this year, they are just comparing it to last year. The house value for last year includes every value increase for all previous years. Therefore, your savings in the form of equity is compounded.

In the case of debt you see that compounding can be a double-edged sword. If you get into debt and do not even pay the interest on it, you are now paying out compound interest. If you get into debt and you have to use debt to pay off your debt the interest rates you pay on debt is very much higher than those paid on savings. So not only are your finances going the wrong way but also they are going there in a hurry.

So if you want money to work for you find some way to save money and have the interest on it compounded. Avoid debt that uses the same principle to bury you under a mountain of debt. Use the positive power of compound interest to help you work your personal finances to achieve your life goals instead of keeping you from them.

Things take time

Especially in the case of money, things take time. Mortgages are usually amortized over 20 to 30 years. New car loans are usually amortized over 5 years. New businesses are usually expected to take at least 2 years before they become profitable. Careers historically have been as long as 35 to 45 years. Life expectancy is 80 years and increasing so whatever you want to do, you have time to do it in. Use this fact to your advantage. A lot of financial plans have a starting point that is usually an investment decision followed by a long period of letting your money do the work for you. Money takes its time but it is very powerful over the long term.

The Grand Canyon is an image I have used to keep myself on course. It was created by the Colorado River working its way to the sea over millions of years. This natural wonder is an amazing example of what constant force over time can do.

Cash flow is like the flow of the water in the river. With consistency, things start to change slowly. It is hardly noticeable. However, over years and decades, the results are very measurable. You keep making more and more of an impact on that mortgage each year you pay it down until finally you get to celebrate that you are making your last payment. Over generations, some families have created wonders. Nature has its miracles like the Grand Canyon. Money and time have little miracles of their own.

Execute

In real estate location is everything. Until recently I always thought that timing was everything. Now I know that execution is everything. Every business is an example of success or failure at execution. Why are executive called executives? The boards of directors choose and review plans. Executives are in charge of executing the board of directors’ plans. Their performance is judged by how well they turn these plans into success.

So often we see youthful successes give way to some folly in mid life that undoes all the wealth and personal growth that a person has achieved to that point. So often, people will engage in highs and lows of success and failure over and over again. They have the capacity to execute but have some Achilles heal that takes them down. Some seem to be set for life and then take it all apart with some foolish act.

The effect of mistakes is to break up, halt or undo the power that time has on money. Mistakes usually mean that you have lost some money. This usually means that you have to take longer to pay off the house or that you have to use the savings that it took years to accumulate to pay for a costly mistake. You have taken two steps forward and one step back. Hopefully it is only one step back. Some mistakes take you right back to the beginning usually referred to as square one. The big penalty is that you have lost the time for the compound interest dynamic to work for you.

The dynamics are as varied as there are people. To execute for personal success is not a formula. It is impossible to make it simple. Part II of this book is an attempt to describe the positive and negative dynamics of creating your own financial security. A lot is what not to do. A lot is just common sense. How to make choices and how to make up for a bad choice is discussed. It is about helping you make the correct choices and then give you an arsenal of personal and financial tools and references to help you grow. You will need to constantly evaluate where you are in your life, where you are going and how you are going to get there. You will realize that it will never stop changing and you will never stop having to re-evaluate your life and your finances. You will learn how to review your own personal finances, make plans and then execute them with good judgment that you have learned from previous experiences.