Nov 25

Check Your Financial Idle – Keep Committed Expenses Low

By NickNo Comments

In my last article, I introduced the concept of the financial speedometer to provide a simple framework on how to evaluate the extent of spending in your household.  To extend the analogy, so long as a car engine is running, a car will consume some power and fuel even when the car is not moving.  Some big and typically highly inefficient engines burn fuel at high rates even when idling.  This makes sense for a complicated machine like a semi tractor which is geared for towing and hauling very heavy loads up and down mountains.  For a semi, high power comes at a cost of lower efficiency, but it is a fair tradeoff, because that additional power can be brought to bear to pull the load in times of need. 

A high idle, however, is much less appropriate for a small economy car.  Unfortunately, too many households have the financial engine of an economy car that idles in the red.  When I say that a household budget is idling in the red, I mean that many families have arranged their financial affairs so that their committed expenses every month almost equal their entire income.  Through the choices they have made and circumstances they have endured, they have eroded almost all the financial operating room they have.  Unlike the semi which can draw upon additional power when needed, households idling red are unable to use their budget or discipline to change their financial situation. 

Many people overspend on clothes, entertainment and food.  In most cases, instilling fiscal discipline and refusing to spend opens up financial capacity that can very quickly help a family improve its position.  But a family that has overcommitted to rent/housing expenses, insurance, taxes, utilities, gym memberships, contractual obligations and most of all debt cannot simply choose to stop spending.  These expenses are commitments and breaking commitments carries much larger repercussions in practical, philosophical and often moral terms.   

Financial
Image by Brajeshwar via Flickr

I, therefore, advise people to carefully monitor what percentage of their spending is composed of committed expenses.  The percentage of income that is spent on committed expenses is called your financial idle.  I urge people to never allow your idle to exceed more than 55 to 60 percent of your take home pay, (45 to 50 percent if you have irregular income).   If, at any time, your financial idle exceeds 80 percent of your income, you are more likely than not, bankrupt.   Even if you can somehow stave off bankruptcy in the current arrangement, you will end up endlessly treading water with no hope of improving your situation.  To escape this exhausting physical and mental grind, you have only 2 options: upgrade your financial engine by seeking either more lucrative work or additional work, or you will need to make draconian cuts in your lifestyle when you do have opportunities to exit some expenses.  By draconian, I recall advising someone to move within a couple of blocks of work, sell the car and give up driving altogether.  Some folks have moved a family of four from a 3 bedroom house to a 2 bedroom apartment. 

Keep in mind the concept of financial idle.  It is one of the key concepts that will help you avoid ending up in a situation where the only escape is via the path of pain.  It’s best not to walk that road at all.

 

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Nov 23

Don’t Speed – The Financial Speedometer

By NickNo Comments

In 1995, Congress repealed the Emergency Highway Energy Conservation Act.  Prior to repeal, the law established a national speed limit of 55 mph and later 65 mph.    Repeal of the law allowed the individual states to establish their own speed limits as they had done prior to passing the Federal law.  In my home state of Illinois, the speed limit of most interstate highways is 65 miles per hour.  Historically, state speed limits had widely varying limits.  For example, prior to passing the law Rhode Island and New York for example limited speed to 50 mph.  Nevada and Montana had no posted speed limit on rural roads.  After the 1995 repeal of the Law, Montana again reverted to having no posted speed limit in daylight hours. 

The speed limit has been established for two major reasons energy usage and the likelihood of having an accident.  One of the greatest critiques of speed limit laws is that there is a low net reduction on fatalities and energy usage because of the huge amount of non-compliance.  I know many folks who have no trouble driving 85 mph on interstates.  The lure of time savings is much more attractive to them then the risk of accidents or increased fuel economy.  Some folks will reduce their speed during periods where they believe police are more likely to be monitoring roads.  Their fear of tickets pressures them to take things more slowly.  Each individual constantly makes decisions about what is the right amount of risk they are prepared to accept relative to the perceived gain the expect to receive.  We know, for example, that the likelihood of our receiving a ticket is much greater if we choose to drive 90 mph rather than 68 mph, when the speed limit is 65 mph.  From my perspective, it is much more a question of self-governance than any outside influence that encourages people to drive more slowly. 

There has always been a debate about how speed limits may have reduced roadway fatalities and conserved energy, but I believe there are lessons that can be drawn from applying an analogy to our financial lives.  

When it comes to money, many of us speed all the time.  I’d like to introduce to you the concept of the financial speedometer (or more accurately spend-o-meter).  Each month each of us earns and spends a certain amount of money.  When we divide one by the other, we realize what proportion of our earnings we spend every month.   If we make $4,000 (net income) and we spend $2,400, we are spending 60% of our income and we’re driving 60.  $3,000 during a month, we are spending 75% of our earnings and we are driving 75.  While if the speed limit is 65 mph you can reasonably expect not to receive a ticket when you are driving 60 mph, sooner or later you can expect to receive a ticket if you are always driving 75 mph, if for no other reason than the officer who pulls you over has had a bad day.   

The key learning here is every time you are financially speeding, you are running the risk of being ticketed.  Moreover, since tickets cost money, it is much more likely that you will need to speed more just to keep up.  If you are spending 80 percent of what you earn and, for example, your car breaks down, it is likely you will feel you have no other choice than to place the repair bill on your credit card.  Now you have to pay $50 more a month than you had been previously.  You now must drive 84 just to keep up.  If you never have an occasion to either increase your income or lower your expenses, it will only be a matter of time until you are exceeding 100 mph.  At this point, you are driving out of control and you are destined for a catastrophe. 

However, if you are driving at 60 mph and your car breaks down, after repairs you might have to drive 64 mph for a few months, but you have the capacity to pay down the bill faster and can quickly return to driving at a leisurely 60 mph.  Better yet, you may have the money in the bank needed to pay cash and never be forced to change your speed at all.

Another consideration is that of energy usage, if you are driving above 80 mph in your car, you must concentrate a great deal more, you have less margin for error, you must be more attentive to hazards ahead, the movement of other cars relative to your own, your adrenaline is pumping at a much greater rate.  When you finally reach your destination, you are exhausted because the physical toll of driving at this speed is so much greater. 

Drawing the analogy out, if you are financially driving your life greater than 80 mph, you are taking a huge physical toll on yourself.  You experience high stress, greater sleeplessness, more moodiness and your personal relationships suffer.  This is made all the worse because it is an experience from which you cannot escape.  There is no short term destination to reach.  You deal with this stress as long as you are moving that fast, which for many people is a period of years.  It leads to physical ailments, emotional trauma and depression and various forms of self destructive behavior.  The human body and mind is not designed to accept such physical exertion over the long term.  We see similar struggles from soldiers returning from a war zone. 

Finally, storms are going to happen.  When the storms come, it is suicidal to continue to drive at the same speeds you were driving in clear weather.  When heavy fog, hail and blizzards hit you while driving, you need to be able to reduce speed.  You will experience at least 1 major financial obstacle in 10 year period in addition to several small to moderate obstacles.  You will be laid off, have a major accident or illness.  The car will need to be replaced.  An investment will go bad.  When you have a setback, life cares little if you cannot afford to reduce your speed.  You will crash.

As a general rule, it has been my experience that for most families, who have regular income and expenses, a self-imposed family financial speed limit of 65, that is to spend no more than 65 percent of what you earn is a great value to achieve in the long term.  We call this the “Green Zone”, and is shown on the financial speedometer.  This will allow you keep you financial stress low, provide you great resources to plan for your future success and still allow you to have some enjoyment in your life. 

The zone on the financial speedometer between 65 and 80 is referred to as the “Yellow Zone”.  For short periods of time, if your speed moves between 65 and 80, though you have some increased risk, you can utilize this zone to both adjust to surprises and to take reasonable risks to get ahead.  When you have a financial setback, if you remain in the yellow zone, though you may have to tighten the belt a little, it is likely that you can work yourself out of the problem relatively quickly.  In addition, if you start in the green zone and you wish to take a risk, such as start a part time business and are in need of start-up capital, you have some capacity to move some of your earnings to subsidize the business until it gets off the ground.  The Yellow Zone is a tool which allows you manage risk over short periods.  Again, if you are driving 75 mph, eventually you will be pulled over.  In general, you should never be in the Yellow Zone more than a year, 6 months is even better. 

The Red Zone is located on the financial speedometer between 80 mph and 100 mph.  If you find yourself consistently spending more than 80 percent of your earnings in a month, you are probably steadily increasing your speed and you one step away from financial tragedy.  Above 80, you no longer have the capacity to work yourself out of the hole you’ve dug for yourself, or even if you do, the amount you have extra to clean up your mess is so small that you cannot gain traction.  Every small setback adds additional burdens to your financial engine.  Doctors appointments, replacing clothing, even basic cable television become luxuries.  Every dollar you spend for these items usually is placed on credit which steadily pushes you closer to 100 mph.  Financial stress skyrockets.  You begin to jeopardize basic needs.  You personally undergo psychological and physiological changes that reap havoc on your personal and interpersonal health.  It is an existence that tears you apart and one from which is not easily escaped.  If you find yourself in the Red Zone, must urgently get yourself out of it.  If you do not dramatically cut your expenses or increase your income, you are on the headed for financial death.

Once you reach 100 mph, every dollar you earn is being spent on supporting yourself and your family.  At this point, you financial life resembles much more of that of a serf in Feudal Europe than a member of a free society.  I call the zone above 100 mph the Black Zone as is symbolizes financial death.  If you have any savings, every day you live costs you some of it.  Every day you work, you do so not for yourself, but for others.  It is made all the worse by the fact that you have absolutely no capacity with which to change your situation.  If you ever find yourself in this situation, you are financially flat-lined.  It is possible that if you work quickly, deliberately and are willing to make huge sacrifices you can be brought back from the brink, but the odds are against you.  Those who are brought back suffer scars that are with you for years.  Those who die, suffer scars that stay with you forever—scars that stay on your soul and your heart and on any mortgage application you will ever file.  Bankruptcy is financial death; and in case you aren’t aware, death is something to be avoided.

To summarize here are the recommended ranges for financial speeds on your financial spend-o-meter.  As a caveat, if you are in a household with variable income, such as self employed individuals, I highly recommend a lower range of speeds for the Green and Yellow Zones.

            Zone                                                   Expense to Income Ratio

                                                Regular Income                                 Irregular Income

            Green Zone                0 to 65                                                0 to 55

            Yellow Zone                65 to 80                                              55 to 70

            Red Zone                   80 to 100                                            70 to 100

            Black Zone                 100+                                                   100+

 

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Nov 23

Managing Cash Flow

By NickNo Comments

I have always been interested in entrepreneurship.  In college, I took several courses that dealt with starting and running a business.  Though none of the material was exceptionally difficult, I was intimidated by assembling financial statements.  One would normally think that being an engineer and otherwise being very proficient in mathematics, this wouldn’t be difficult.  However, there is a world of difference between using math to solve an interesting problem and using math to keep a business solvent, feeding your family and keeping people employed. 

Like many people I was intimidated by assembling income statements and balance sheets and left the creation of these documents by other folks who were in traditional finance fields.  Looking back this is amazing since both income statements and balance sheets consist of nothing more than simple addition and subtraction.  The most difficult parts of preparing financial statements usually comes in the initial setup when you do not have a history that will guide you in making predictions moving forward.  Even in these instances, there are numerous ways one can estimate costs and incomes if one thinks things through.    I would have given myself a tremendous advantage earlier on had I chosen to apply myself more in facing my lack of confidence and learn it. 

Speaking plainly, you will never move forward financially until you learn to track your financials and make reasonable financial projections.  You need to learn to track your income and outflow so you can effectively manage the challenges of spending today and projections are needed to manage the challenges of spending in the future.

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Nov 15

Sir Issac Newton’s Other Discovery

By NickNo Comments

Most children are taught the story of Sir Issac Newton sitting under the apple tree and being struck in the head by a falling apple and how the falling apple prompted him to discover gravity.  However, what kids are not told is that same event prompted another Newton invention.  Gravity is the force that describes how things are pulled down toward the center of the earth.  In order to explain the concept of gravity and to make the new concept more useful, Newton invented a whole new branch of mathematics called calculus.  I have an engineer’s training and have taken more mathematics classes than the vast majority of the population.  Although teaching calculus to kids at an early age may be difficult, the basic concepts behind calculus are very simple, easy to illustrate and are vitally important in the teaching of financial education concepts.

Prior to the invention of calculus, it was very hard to make sense of many things in nature, because math was limited to snapshots.  Algebra, geometry and trigonometry only make sense for the given data at a certain time.  If you wanted to see how things behaved with time you needed to figure out the equation at a bunch of different points and draw the graph to see it.  Calculus allowed us to see how things are changing at a given instant.  It allowed us to see that if we are in our car and slam on the brakes, we can predict how far and how long it will take us to stop.  It allowed us to see if we are spending money at a given rate and earning money at a smaller rate, how long will it be until we run out of money.  These types of measurements weren’t easily performed prior to the invention of calculus.

When it comes to personal finance, each of us does calculus all the time, though we may not realize it. Calculus is used to measure the rate at which something is changing at that instant.  Week-to-week, month-to-month, we adults always work the Net Income equation to make choices.  Net income is simply total income minus expenses.    The bulk of financial education is geared toward increasing the rate of change of the net income equation.  When we work to be more frugal, we are making expenses smaller.  When we invest, take on additional jobs or get wage raises, we are making the gross income side bigger.  Both of these increase the rate at which the net income equation is changing.

Isaac Newton
Image via Wikipedia

By using the net income equation, we can make predictions about where we are going to be financially in the future.  When will I be able to afford that new item?  Will I have enough money to go buy groceries or go to the movies?  Will I be able to pay my tuition bill?  Will there be enough left over to continue to pay for other things?  These are the questions that one can reasonably answer through the help of calculus.

I find it unfortunate that teachers in schools often tell about the first discovery the Newton made that day, but so often neglect to mention the latter.  Kids need to know the concept behind calculus and rate of change at an early age.  It will help them throughout life.  If you think about it, you will find many ways to illustrate these concepts for your children in the car, on the playground and in the home.

This type of learning is important, because gravity tells us that, on earth, unless we do something about it, things fall. This applies to equally to checking account balances as it does to apples.

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Oct 26

Seven Financial Dwarfs – Are Your Kids Getting Off the Right Track?

By NickNo Comments

Although I wouldn’t characterize myself as necessarily religious, there are often a number of great lessons one can learn by looking to biblical wisdom.  The seven deadly sins tell us that many things that are inherently beneficial to our souls and spirits can rapidly degrade into destructive behavior if driven to excess.  Self confidence is good, but excessive pride is a detriment.  Slowing down to enjoy life is great at helping us to appreciate what we have and where we are, but sloth prevents us from moving forward.  Eastern religions also revere the concept of balance.

Much like the seven deadly sins, there are seven types of financial “people” which although based on a good foundation, will cripple your child if he or she relies too much on one type of character.  Like everything else, balance is the key.

Scroogy – Like Scrooge from A Christmas Carol, when these kids get their hands on a dollar, they tuck that dollar away.  They enjoy watching their hoard of gold grow.  Saving is a great skill to master, but Scroogy kids take saving to an unhealthy level.  Money is a tool.  If kids hoard their money, they are not developing the skills to manage it.  Money is a medium of exchange.  You can’t eat money.  Kids must learn to use money to fulfill their needs and to the extent practical their wants.

Spendy – Like all people, kids like stuff.  Our commercialized culture sends our kids messages on a continual basis that consumerism is the way to happiness.  Adults, with supposedly more refined critical thinking skills, often fall victim to the messages, so is it any wonder that our kids are often more susceptible.  Spenders believe that the stuff they have will bring them respect and acceptance from others.  These kids need to learn that stuff won’t bring them happiness and the good feeling they get from showing off something new will quickly fade.  Kids must learn what adults must learn if they ever want to get ahead. The race to keep up with the Jones’s is one that only produces losers.

Scrapy – Scrapy kids are ones that have taken the concept of frugality to an extreme and have crossed over to cheap.  They beat up vendors on price and they don’t like spending money at all.  Rather than go to the movies with friends, they’ll stay home and watch TV.  Frugality and bargain hunting are good skills to develop, but should not take a back seat to enjoying the zest of life.  These kids turn into adults that have a hard time indulging themselves in anything.  They lose out on opportunities to connect with others.  Finally, they have a hard time giving.

Wanty – All of us have wants.  One step on the road to maturity is the concept of delayed gratification.  Another is the realization that sometimes wants must go unfulfilled in life.  Asking for what you want is not necessarily a bad thing.  Desire is healthy, but that desire must be matched by a work ethic that will push our child to achieve those desires.  The sooner kids learn this, the better off they are going to be.

Givey – Some kids are just naturally generous.  They give away everything.  I, myself, gave away a bag full of matchbox cars to a friend down the street when I was about 5.  They know it intrinsically feels good to give and they know they get great messages of approval when they do so.  Generosity is noble, but generosity without a willingness to look after oneself through life actually promotes lower self esteem and an unhealthy level of altruism.  These people are ready made victims for con artists, moochers and abusive spouses.  When your children choose to give, make sure also to give them messages that promote self worth and how worthy they are to keep things too.

Whiny – Whiny kids have achieved success in nagging parents about things they want until the parents finally relent.  They are learning that “work” consists of scheming or begging others until someone else fulfill their needs and wants for them.  The epitome of the entitlement culture, these kids are on course to becoming passive souls clutching at victimization to explain their lack of success.

Trader – Kids are excellent negotiators.  Few parents have not had an experience where the reflect upon a conversation with their child and ask themselves “Why did I agree to that?”  It’s hard to say no to our kids and most kids know this.  Traders, however, take advantage of this excessively.  These kids learn that everything is negotiable, without regard to the merit of the idea.  Parents who tolerate their kids to be Traders run the risk of their kids becoming amoral – people who truly believe the ends justify the means.  Negotiation skills are important to develop, but kids who are used to always getting what they want through bargaining often end up without a moral code, because they’ve never had to fight for what they really wanted.

Conclusion

Take time to observe your kids.  Chances are your kids show signs of one of more of these characters.  Remember that balance is what to strive for.  Balance is what will help kids to become well rounded, mature kids with good notions about handling money, versus kids with significant financial blind spots and life-long money problems.

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Oct 12

We are the Choices We Make – Where am I Living?

By NickNo Comments

Some of you know of my recent move from the big city to the middle market of Omaha, Nebraska.  Personal changes and challenges aside, I was very surprised to see how much cheaper things were.  My wife went to the grocery store and we were delighted to find that a shopping cart full of groceries which would normally cost $160 to $170 where we lived recently only cost us $116.  On top of that the sales tax was only 14 cents.  We are very excited to know we can feed our family even better than before but still increase our savings.

One of the biggest choices one makes is where one makes a life.  I recall several years ago, I was urged to move to New York where my salary would be much higher for a similar job.  However, after quickly reviewing the cost of living comparison, it was clear that although I would be making a big mistake.  When the new opportunity came to me in Omaha, analysis of the cost of living showed that I would feel better off even though I wouldn’t be making as much as I would have been in other locales.

Too often we are lured irrationally by talk of better salaries.  But wealth is not built based solely upon what we earn.  Wealth is built based upon how much of that salary is ours to keep after paying everyone else.  For if we experience a 10% salary increase, but our expenses increase 15%, we have gone net negative 5%.  This is akin to someone buying the penthouse of a 15 story building for the view only to find that his building is surrounded by 20 story buildings.  How disappointing.

It costs a great deal to living “in the city” or even in their surrounding suburbs.  Keep this in mind as you evaluate opportunities.  Know that really, prices are generally correlated with how much money is available from buyers.  When an opportunity comes your way, always evaluate the new salary relative to the median salary in that area.  If the salary is at or below the median, you may need to closely watch your expenses and sacrifice some luxuries to get ahead.  However, if you find you are making significantly above the median salary, you may be surprised how comfortable your life can become financially.

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Oct 09

56,000 Broken Promises

By NickNo Comments

“Things fall apart.  The center cannot hold.”  ~ William Butler Yeats

The economic downturn of 2008 through 2010 hit many people hard.  I would like to share with you a story of one way I was hurt through the downturn.

I have worked closely with real estate investors since 2005.  One of the tools real estate investors use frequently is private money, where one investor or pool of investors lends to others for the purpose of acquiring or fix up a new property.  Instead of going to a bank, these private loans are very useful in jumping on opportunities quickly.  In 2006 and 2007, I made three such loans.  For two of these loans I took advances from credit lines to increase my gains to partially fund the loans.  The third loan came from my individual retirement account.  All told, I lent a total of $56,000 of my and other people’s money.  Each of these investments are no longer performing.  The interest in one loan was exchange for property interest which may never pay me back any part of my investment.  The second loan was put into a business property.  A few months after the loan was made, the business owner started having difficulty and eventually turned over operation of the business to our investment group.  Unfortunately, the owner had eroded much of the value of the business prior to turning it over.  The business no longer has the necessary earnings to make loan payments to me.  It is unknown when this investment may ever start paying dividends.  Today, I learned that my third loan will be lost when the investor declares bankruptcy.

In each of these cases, I had chosen to lend to individuals with great reputations and in deals which looked to be fantastic based on reasonable assumptions.  Unfortunately, this downturn has been exceptional.  Each of these individuals has been either ruined or are treading water.  Each individual has broken a promise to me.  I have lost over $56,000 in principal, several thousands of dollars more in lost interest, and have been left with over $30,000 in debts that became my responsibility.

I cannot blame the others for the debts I had to assume.  I knew the risks involved.  But I am a man who knows statistics.  What are the odds that all of the investments go belly up?  The problem is that when the world goes upside down, chances are, all of them will go belly up and they do.

An unpaid debt is a broken promise.  Whenever such a promise is broken it often leads to the breaking of further promises.  When the income that was promised to me did not pan out, I was no longer able to keep the promises I made.  I have to live with that.  For a person who values integrity, few things hurt more than breaking your word.  It caused me untold amounts of personal pain and problems in my personal relationships.

Learning the lessons of financial responsibility too late put me in a position that I felt I had to put myself in a vulnerable position in order for me to get out from the mountain of debt and obligation that I had built for myself.    My poor decisions early in life set me up for unjustified financial risk taking later in life.  It took losing everything to give me a chance to start over.  I will do it right this time.   I have dedicated myself to help others avoid the challenges I made for myself.  As you read and follow my comments, know that the comments have been fashioned by hard times and difficult experiences.

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Oct 03

Participating as a Voter is Financially Smart

By NickNo Comments
PASADENA, CA - MAY 19: A woman casts her ball...
Image by Getty Images via @daylife

Like it or not, our governments are in control of huge amounts of money, including a portion that, in theory, belongs to me.  Our leaders in our locality, state and Federal governments have leveraged themselves use of that money over a period of years.  Since the founding of the nation, there have always been people who have felt that tax rates are too high.  It seems that sentiment is only growing with time.

I don’t agree with many of the ways our government chooses to manage it’s financial affairs.  Among the ways I try to communicate that to my elected officials consists of voting.  The vote is one of the easiest and one of the most treasured political acts a citizen can make.  It requires a small investment in your time, yet our voter turnout is shockingly dismal.  It is even lower among young people.  If it is difficult to mobilize citizens to go to the polls, how can we expect to take on the more difficult work of solving the nation’s long ignored and festering problems?

Some people do not see voting as a financial issue.  But, most people do not realize that the total tax burden on individuals ranges from about 10 to 30% of income.  If you are spending 1 to 3 dollars of every 10 you earn on an item, wouldn’t you normally want to choose the one who is doing the spending?

Do the financially smart thing.  Get to the pools on November 2, 2010.

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Oct 02

Book Review: Rich Dad, Poor Dad

By NickNo Comments

For this review, I discuss another great book on financial education.  The first book Robert Kiyosaki wrote, Rich Dad, Poor Dad, presents simple, but powerful lessons on managing personal financial affairs using simple stories and easy to follow concepts.

Rich Dad Poor Dad: What the Rich Teach Their Kids About Money-That the Poor and the Middle Class Do Not!

This book does the wonderful task of explaining such dry accounting concepts of income statements and balance sheets in a very readable and understandable format.  It shows the cash flow patterns of poor people, middle class people and rich people.  It also shows how from a strictly financial standpoint that it is the middle class cash flow pattern that is the absolute worst one to have.

But more than the accounting concepts, it discusses that rich people just think differently about money, how to use it, the powers of it and virtues of it.  I have long observed that the United States is a country which craves success, but hates successful people.  Too often, I have seen people vilified whose only crime is that they worked hard and achieved success and wealth.  When I was younger, I, too, shared many of these opinions.

Granted, there are a few people, who act as leeches and make a living sucking the financial marrow out of the lives of others (pay day loan people and many sellers of financial product come to mind), but by and large, most people who have achieved wealth have done so through hard work and being of service to others.

One of the most powerful concepts is the fact that you will only earn so much by working for a paycheck.  It is possible to get rich working for others if you start early and manage your cash flow well.  However, if you open your own business on the side, the potential for reward is much higher as a business owner.  In addition, as an employee, you serve the employer in a designed role.  This means that, most likely, the role was not designed specifically for you and consequently, wasn’t designed to take advantage of your unique gifts and talents.  It is only when you have the opportunity to craft a role just for you, will you have the best opportunity for success.  Finally, when you work for a paycheck instead of profit and you can count on a safe and steady stream of income, you often subconsciously turn off part of your creative centers of your brain.  When your financial well-being is tied to generating new ideas, you will be surprised how much more you can dream up and give life to.  Unless you are trained to look for opportunities, you will pass them by.

The most vital learning to gain from this book is a realization that the employee mindset is a limiting one. The employee as is largely understood today is a relic from the industrial era and the factory culture.  Prior to the industrial era, money was generally earned by farmers and tradespeople buying and selling the fruits of their labor.  In effect, everyone was self-employed.  In the 1800’s and much of the 1900’s, roles were designed for people to act as cogs in the manufacturing process.  Tasks were developed by managers into established procedures and the last thing the managers wanted was for an employee to use their brains to redesign the system or dream up ways to change things.  In exchange for doing things exactly the way the managers told you to do them, the employee was paid a wage.  The belief in the infallibility of management decision making has thankfully gone away in most workplaces, modern management thinking is moving much more in the employee designed workplace that is paid based on performance and production.  But the factory/employee mindset is still alive and well.  It is very dangerous to have in economic climate of the 2000’s.  To remain competitive in a global economy, you need to be able to leverage the talents and creativity of your people and the employee mindset is a real obstacle businesses need to overcome.

By rejecting the employee mindset and adopting a self-employed mindset (even if you are an employee) you are not only going to distinguish yourself to your employer, you are also going to continue to exercise and grow your creative muscles and your ability to identify and capitalize on opportunities.

Rich Dad, Poor Dad is a great book that brings you several great lessons.

If I have inspired you to pick up Rich Dad, Poor Dad, I encourage you to click on the links in this post or on my page.  YouthFinancialEducation.com is not only a great place to learn how to succeed financially, it is also a place that I am constantly leveraging my creativity and skills to bring you value.  By clicking on links from here, you help reward me for bringing that value to you.

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Sep 30

The Myth of the Living Wage

By NickNo Comments

I think one of the worst lies a politician makes surrounds rhetoric regarding a “living wage”.  Invariably, some politician complains we need to do more for the poor and working class and increase the minimum wage so that they can be paid a living wage.  People who believe this aren’t paying attention or are extremely gullible.

I remember when I was working in 1994.  I remember that I used to get a McDonald’s combo for $3.25 when I was making a $4.25 minimum wage.  Now that minimum wage is about $6.25, a McDonald’s combo is about $5.50.  For those who didn’t catch that:

1994       $4.25 – $3.25 = 1 McDonald’s combo + $1.00 in my pocket

2010       $6.25 – $5.50 = 1 McDonald’s combo + $0.75 in my pocket

I recall when the minimum wage increased a couple of years ago. Prices jumped overnight.  One of the biggest secrets is that when businesses are staffed by minimum wage workers, prices are driven in large part by the minimum wage.  When the minimum wage increases, prices increase in lockstep.  Since poor and working class workers frequent more places staffed by minimum wage workers, they pay higher prices which usually at best means you keep the same amount of money.

However, the dark truth is that you don’t have the same amount of money, because the very politicians who promised a living wage are the ones who enact minimum wage increases without modifying tax structures.  Therefore, more and more poor and working class folks end up in higher tax brackets and consequently they pay more taxes.  The cynic in me believes that when politicians discuss “living wages”, they are seeking only to increase the amount of taxes they collect.

As further injury, minimum wage increases impact unemployment.  Suppose many customers think a McDonald’s combo is worth $3.25, but not worth $5.50.  When the price goes up, fewer people come to McDonalds, so fewer workers are needed and, consequently, more people are out of work.

Now, is it possible to feed a family on $6.25 an hour?  I would find it extremely difficult.  But the answer isn’t to have the government mandate a minimum wage.  It only hurts then ones who are supposed to be helped.  All of us need to find ways to serve others that qualify us to earn the standard of living we want.

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