Nothing is Guaranteed

NOTE: There is no guarantee if you invest through the years that you have more, or even as much as you invested, but it is more likely you will have more assets to help finance your post-work years than if you don’t invest at all.

Financial Intelligence

It’s been said that what you don’t know, can hurt you.

In a world where having personal financial resources (i.e.: MONEY) can often mean the difference between having an option to live life as YOU choose, or having to live under the daily control of others, it can be essential to understand the basic underlying concepts of what you need to do to become financially self-supporting without work income, and how those basic concepts intersect with your daily life.

Americans today are taught many ways to MAKE money, but few have been taught how to make that money work for them. Yet this is the real secret to wealth, for at some time in life, the stream of income from working will most likely end, and without money working for you by that time, you will likely need to depend on family, friends, charity or government assistance to survive.

The lack of REAL understanding of some basic principles I feel are essential to accumulating the finances resources to live life as you wish, whether or not you CHOOSE to work for pay, is what has lead me to write this book.

I was at a meeting the other night with a group of people supporting an organization whose mission is to help women become successful entrepreneurs, and when asked what I hoped to offer this group, I said it was my passion for financial literacy.

Because one of their goals was to not just help their clients become financially literate, but to become fluent, they had decided to change the terminology to financial fluency.

Feeling bad about correcting me in front of the group, the president of the organization came over to apologize, and while I told her there was no need, it got me thinking.

This is the result: our goal should not be just financial literacy, or financial fluency, but financial INTELLIGENCE - that the clients of this organization (and hopefully the readers of this book) gain the kind of knowledge (think of the CIA gaining intelligence about enemies of America) that will enable them to understand not just how to save money or invest, but to truly understand what it will take for them to protect their future from dependence on government, charity, or their children to maintain not just a bare existence if they are not working, but a truly enjoyable and comfortable work-optional life.

I think the first place to start is to understand how intelligence about a couple simple but critical concepts can affect a person’s future financial wellbeing. I call them the 3 BASIC QUESTIONS.

I actually came to seek these questions, and their significance, in 2010 when I read an article in the December 6, 2010 issue of Brevard Business News, a local weekly business paper.

The headline of the story by Patricia Sabatini of Scripps Howard Service was Couples’ math skills add up to more wealth, Rand Corp. study finds.

Personally, I think a far better title would have been 1.5 MILLION REASONS YOU SHOULD BE INTERESTED IN UNDERSTANDING THE MATH OF FINANCE. Regardless, it got MY attention.

The article referenced a study by researchers at the Rand Corp. which found when spouses correctly answered 3 math questions, family wealth averaged $1.7 million, versus $200,000 when neither spouse answered any of the 3 questions correctly.

That was a difference of $1.5 MILLION. Since that was a rather large difference, it sparked my curiosity.

That article did not provide the three actual questions, or where they could be found, but with such a huge difference in wealth, I started searching via Google to find them, and once I figured out what to search for, found they are available in a variety of places on the internet.

And the hunt was definitely worth it when I realized that things I had taken for granted for years as common knowledge (like The Rule of 72), were actually not that well understood by many others, even many with advanced college degrees.

The group in the study - participants in the Health and Retirement Study –were a nationally representative sample of Americans over 50 years of age. For the 2004 study, a special module developed by two professors, Annamaria Lusardi and Olivia S. Mitchell, was created dealing with retirement planning, testing the understanding of what the professors called financial numeracy.

The results were reported in a paper they co-authored in 2006 titled Financial Literacy and Planning: Implications for Retirement Wellbeing. (Lusardi, Annamaria and Olivia S. Mitchell (2015). "Financial Literacy and Economic Outcomes: Evidence and Policy Implications. Journal of Retirement Economics. 3(1): 107-114. Available at Pension Research Council)

Meanwhile, I want to share with you the 3 questions that were included in their module and added to the study (answers provided below):

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much would you have in the account if you left the money to grow: more than $102, exactly $102, less than $102?

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than what you could buy today with the money in this account?

3. Do you think that the following statement is true or false? Buying a single company stock usually provides a safer return than a stock mutual fund.

The first question tests your understanding of the concept of compound interest. The second question tests your understanding of the concept of inflation, and the third tests your understanding of some investing basics.

I’ve shared these questions with dozens of friends, fellow business owners, clients and even politicians. Some look at me and say you’re kidding because they find the questions so easy, but others just look at me with a lost look on their face. For some of the latter group, if they really think about it, they can figure it out, but others finally admit they have no idea, or just guess and hope they are right.

The reason I bring this up is that the minute I start talking about numbers, or show someone one of my charts, many will say I just don’t understand math, or that’s too hard to understand.

You only need to review the results of that survey – that those who could answer the three questions correctly had an average net worth of $1.5 MILLION MORE than those who could not to see why understanding those basic math concepts could be worth the time to learn.

This book can only offer you the tools to build wealth. It cannot force you to learn to understand how to use them or force you to IMPLEMENT what you learn.

Again, the CHOICE, is yours.

Don’t let lack of knowledge be an obstacle on your path to wealth.

Answers to the 3 questions:

1. More than $102

2. Less than what you could buy today

3. False

My Own Story

While I was blessed with wonderful parents and a wonderful childhood, I’ve lived a pretty average life.

Financially, I’ve mostly been on my own since I was 19 when dad and I disagreed on where I would go to college when they moved to another state my junior year and I went were I chose, but at my own expense.

When I got divorced in 1987, my investments were worth about $70,000. Between then and 1999 when I started writing this book I made a LOT of financial mistakes. My 50 shares of Microsoft I sold in 1986 for around $5,000 would be around 14,000 shares today worth over $800,000. I loaned (and lost) $30,000 to a friend who turned out to be a fraud. I was in bad relationships that harmed my income.

Still, by 1999 when I started putting together ideas for a book, my investment portfolio (thanks to a really good stock market) was worth almost $1,000,000, and in spite of terrorist’s attacks in 2001, the financial scandals of 2002-2003, and the financial crisis of 2008, as of June 18, 2015, my investment portfolio exceeded $3 million.

I owe much of that to my parents. While they didn’t give me money, that taught us to save, and invest. I recall a joy-filled childhood. Most of our vacations were spent in tents instead of hotel rooms. We went to parks and beaches instead of Disneyland. I’m sure we went out to dinner but the only memory I have of that is of a place called Horn and Hardart where we could choose our food from these little glass windows.

The main thing I remember is being loved, but also disciplined, and I believe a large part of who I am as a financial advisor, as well as what I’ve accumulated in personal wealth, is due to something my dad said to me when I was a 19 year old.

At the time, he was an executive at one of the largest companies in town. His peers were buying THEIR children cars, so one day driving to work with him during summer break, I had asked him when he was going to buy me a car. More than 40 years later, his response is fresh in my mind:

Just because I earn the money doesn’t mean YOU get to spend it.

While I admit at the time I didn’t appreciate that particular lesson, and called him names, said he didn’t love me, that he was selfish, and so on. Through the years, particularly since becoming a financial professional advising others, I share that story with friends and clients because I’m confident that had he given in to my whining, I would not be in the financial position I am today.

And that was only one of dad’s lessons (see chapter titled Teach Your Children Well). Even though I worked during the summer to help pay for college, as long as dad was subsidizing my college costs, I had to account for every penny I spent. But thanks to dad, I learned early in life that when it came to money, choices often had to be made between what I wanted now, and what I might want in the future.

In my early 30’s I quit a job to work on commission as a stock broker, with my mom for many years asking when I was going to get a real job.

Until the past five years or so, my income was relatively moderate, but what I did do through all the years is save, and invest, and suffer through a lot of bad investment decisions.

I believe a key advantage I had in accumulating wealth was an understanding of the power of compounding, a love of investing and understanding that accumulating wealth – for most people – can be accomplished by investing modest amounts of their income, year after year, throughout a typical working career.

I started on the path to being a middle age millionaire when I made a crucial observation: while I was trading this stock for that – usually selling just before what I sold went up and what I bought went down and making very little forward (financial) progress, my clients were investing on a systematic basis, leaving their investments alone, and most importantly, were making money.

I share my story because I feel it is VITALLY IMPORTANT for you to understand one simple fact - I am really no different than you. I did not start a high-flying internet company, I did not inherit the money, I didn’t win the lottery or any other lucky windfall. I had problems just like you. I made investment mistakes just like most people.

And what I believe, from personal experience, is that if you truly want to be a millionaire, barring some major health issues and expenses, the only obstacle is likely to be you, and what you do with your time, and the money you earn throughout your life. The past is a great teacher, but don’t let it be your master. The reality is we remember the past through our own filter. Change that filter and the past could look totally different.

The key question is: Are you willing to make the sometimes difficult choices needed to create the wealth needed to be truly independent?

Note to Readers

A KEY ASSUMPTION OF THIS BOOK is that you desire to reach a point in life when young enough to enjoy it to have enough PERSONAL financial resources to maintain your desired lifestyle whether or not you work for pay.

This book has been almost three decades in the making, and as pension plans are closed and retirees increasingly become responsible for providing for their retirement years, I thought it might be a good time to share ideas developed through those thirty years.

Through the years, I’ve found in spite of a variety of books, magazines and TV shows about finance, it appears little progress has been made in Americans being more financially able to support themselves if they lost their job.

As I turned 65, and knew I had enough money to retire comfortably, I decided this was going to be my year to write a book to share what I have learned (and applied) over the past 30 plus years that enabled me, as well as many of my clients, to be able to live an enjoyable, fulfilling, work-optional life, in hopes it could help others do the same.

I realized that in many personal finance books I had read through the years, I hadn’t found one that provided the math to do critical personal finance calculations. In other words, they didn’t provide easy to use tools to help their readers calculate how much they would need to be able to afford their desired retirement or other financial goals.

This book is a compilation of various ideas, thoughts and tools I used to help myself and clients through the years and have not found in other personal finance books or magazines. Because some of the information from years ago is still relevant, you will find some information is based on articles I read in the 1980s or 1990s. They are included (with current information when I could) because I think they provide valuable perspective. For example, while the stock market (using the S&P 500 index) increased from 138 in January 1983 to 1258 by December 2010, an almost 1,000% increase during which there were 7 significant drops in that market according to a chart from Reuters.com, the median net worth of U.S. households in 1983 (adjusted for inflation) was $88,000. But in 2010 had dropped, to $77,300.

I believe failure to accumulate wealth at a time anyone with wages could have invested in an IRA – often getting a tax deduction as well – had less to do with lack of income, and more to do with lack of knowledge. This book seeks to provide both knowledge, tools, and ideas for those who want to not just have more money, but know how much is needed financially to live a truly enjoyable, fulfilling, work only-by-choice life for the remainder of their lives (while they are still young enough to really enjoy those