The Third Pig

http://www.brickfinancial.com/thethirdpig/archive/2011/01/mattress_money_or_millionaire_1.html

Posted by Ben Taylor on January 28, 2011 01:23 PM

source: amisable quintero

One financial tenet I try to follow on my personal quest to become wealthy is to “do what money does.” What that means to me is to follow and mimic the behaviors, as best as I can decipher them, of people who have become wealthy themselves. Overwhelmingly, the research shows people who are wealthy or likely to become wealthy to be very economical with the dollars they’ve earned – read frugal.

According to Thomas Stanley, in his book Stop Acting Rich, the wealthy and those who are likely to become so spend very few of their dollars on “the impediments to building wealth: income taxes, homes, clothing and accessories, motor vehicles, interest or personal loans, club dues and vacations”, wine and spirits, and entertainment. They also do not practice what Stanley calls “economic outpatient care” which is financially supporting other able bodied adults which includes, children, parents, girlfriends, long lost cousins and war buddies down on their luck. In other words, they make junior get his own place after college on his own dime.

The wealthy and those that are likely to be do however allocate a large portion of their money to the “foundation stones of accumulating wealth, including investments, pension or annuity contributions, and fees for professional advice and asset-management services.” Millionaires are also typically generous with allocating money to their grandchildren’s education, charities meaningful to them and on events that enhance the time they spend with loved ones. It is not until after they’ve put themselves on stable financial ground that they begin to spend on “the frivolities of life.”

The above shopping lists of items of where the wealthy do and do not spend their money puts in perspective the “wealth mindset”. The wealthy are not penny-pinchers or Scrooges. They are not penny wise and pound foolish. They are not risk averse but know how to take prudent risks. In fact, millionaires spend heavily on things that return monetary value to them and avoid spending on things that do not.

This includes investments. Two years ago, when the economic sky was falling, most of America took whatever money they had in the stock market and put it into cash. Or worse, they spent their money on personal items – “the frivolities of life”. In other words, most people put their money under the proverbial mattress. However, this is not what people who possess this wealth mindset did. In fact one of the wealthiest in the world, Warren Buffet, told us what we should do with our investments in a New York Times Op-Ed piece in October 2008: (Continue reading more)

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

Since the stock market bottom in February of 2009, Brick Financial Management, LLC, clients enjoyed 47.5% annualized return. On the other hand, if you had your money in cash, you got 1.2% annualized. Unfortunately, inflation averaged 2.1% over that period. Cash holders got a NEGATIVE 0.9% over the last 2 years after inflation is considered. The chart below compares our Core Model Portfolio to cash (represented by 10 Year Treasury Notes). Click here or the chart for a larger image.

source: Brick Financial Management, LLC, Foliofn

The bottom line: do not reinvent the wheel. The path to wealth has been laid by many. It is not appearing on American Idol and it is not spending rich before you are rich. It is living a lifestyle that allows you to allocate your earned dollars most effectively to things that return monetary value. Putting money under a mattress is not one of them. Investing in stocks is.

Disclosure.