Questions and Answers

If you approach getting rich with the notion that there is some magic formula, concept, or piece of information that is going to make it happen, you need to ask your yourself this question – if that is so, then why isn't everyone rich?

This book exemplifies the problem with the wealth industry today and why this site was created. So many of the current "wealth gurus" sell books and seminars on the idea that if they just read the book or go to the seminar, they will find some magical insight that will make them rich with little work and no risk. In fact, the phrase "cash machine" comes from wealth guru Loral Langemeier. Most of these gurus are experts more on sales and motivational techniques rather than finance and economics. They just don't tell you the truth about what it really takes to get rich.

However, the question deserves an answer. If you really want to make a lot of money, become a doctor. About the highest paid occupation in the United States is that of cardiologist or neurosurgeon, with an annual salary of about $600,000 per year. That is, the highest paid occupation when the uncertainty of achieving that occupation is considered. Other occupations, such as athlete, movie star, or Fortune 500 CEO command higher salaries, but achieving those occupations requires a certain amount of luck and very rare talent. While becoming a highly skilled surgical specialist also requires talent, it is not so rare, and the bigger requirement is the fortitude to commit to the training.

If that answer is not to your liking, then consider these alternatives:

A. You are already a cash machine in that you probably make more and have a higher standard of living that most people in the world.

B. What it takes is risk. The relationship between risk and wealth is a concept described in various articles on this site.

I don't think much of that technique.  What do you if, before you reach your target, the company reports worse than expected earnings, or even fraudulent accounting?  What if you get to that price target, and the company looks like an even more compelling buy than it was initially?  For an investment with no transaction costs (the commissions, taxes, and accounting costs of buying and selling), you own the investment because, based on your available information, that is the best investment at that time for your desired return and level of risk.  If the information changes, you switch the what is then the best investment at that time.  You judge the quality of an investment by your estimated return on the investment and your estimated level of risk.  A particular price target at some unknown date in the future is not a proper estimate of a company's risk and return.

That is for an investment with no transaction costs to buy or sell.  Publicly traded stocks are the most liquid investment you can get, but this do have small transaction costs in the form of commissions, taxes, and the effort you take to track the purchases and sales.  So own the best stocks at any point in time, but keep transaction costs in mind.  Finally, if you find yourself switching in and out of stocks excessively (more than ninety days), you are probably not doing an effective analysis of the stock.  Day trading doesn't work and information about most companies does not typically change that quickly.

By not investing in the stock market.  Understand this:  There is no investment which cannot lose value.

If you invest in the stock market, stocks can go down.  Any stock can go to zero, if for no other reason than for the revelation of accounting fraud.

There is only one investment that is considered free of risk.  That is U.S. Treasury Bonds (or T-bills).  When you buy treasury bonds, you are loaning money to the U.S. government.  When people talk of the U.S. government debt, that is all money owed to owners of treasury bonds.  While other countries, and even U.S. State and local governments finance debt with bonds, U.S. Treasury bonds are considered risk free because the U.S. Government is the most financial secure in the world and it always repays its debt.  In theory, if a government could not pay the debt of the bonds, it could just print more money, which causes inflation, which destroys the value of the bond investment anyway.

Even cash is not risk free.  With cash, there is always a risk of inflation, or that the cash will be destroyed.  While a ten dollar bill is worth ten dollars no matter what the inflation rate is, that ten dollars can lose value due to inflation.

So why invest in the stock market at all?  Because while there is risk, there is always the potential of greater return.  All other things being equal, any investment with greater risk should have a greater potential return.  Over the long term, the stock market is definitely a better investment.

For the financially disciplined investor, the numbers show that it is best to invest money in the markets before paying off a home mortgage. But is it wise to borrow against your home mortgage to get money to invest in the markets?

Borrowing against your home mortgage to invest in the markets is really the same as deferring paying off the mortgage to invest in the markets. They are just on different sides of the transaction. In the first instance, we already made the house payment. We are simply borrowing that payment back from the mortgage company so that we can invest it. The end result of both scenarios is that we owe money on a home mortgage and we have money invested in the markets. However, there are a few details to consider:

1. Borrowing against your home may have a higher interest rate than the original mortgage. The difference may be enough that, when all other factors are considered, it is not worth it.

2. One must resist the urge to spend the borrowed money. All of it must be invested.

3. Even the most financial astute investors can get emotional about money. While deferring payment on a mortgage to invest the money seems, reasonable, for most investors, borrowing money against their home in order to invest it, just doesn't feel right.

Whether to pay off the house or not is about managing risk. Even though the numbers in the long term indicate that the house should not be paid off and instead money should be invested, that doesn't make that the right decision for every ones' risk profile. Making the right decision is about understanding the details, controlling your spending, and being able to sleep at night. If borrowing worries you too much, then it isn't worth the trouble - even when the numbers show it to be the correct decision,

No.  Nor should you have a deadline for any investment.  An investment should be made because it is the best investment for your financial goals at that particular time.  Trying to predict what the best investment is in the future would be like, well… predicting the future.  If you say "I am going to buy real-estate within the next six month," what does that get you.  If you find the right real-estate investment within six months, make the investment.  But if you didn't, does that mean you should make the wrong investment in six months just because that is your deadline?

You start with any investment when you understand the investment sufficiently to know that it is the best investment available from available alternatives for the financial goals you are trying to achieve.  How do you know when that is?

First, lets separate out the real-estate that you live in from the real-estate investments that are made purely for financial gains.  You invest in real-estate to live in when you are ready to buy a house to live in – simple enough, right?  When most people buy a house to live in, they think of their lifestyle first and the investment value second.  This makes sense as you are going to live in the house every day, but the investment value matters only when you sell it.

Now for real-estate as an investment.  You need to understand why you are choosing real-estate over other investments that are available to you.  Because it is the thing everyone is doing, or because you saw it on TV, or even because you like browsing home improvements stores and picking out plumbing and tile, doesn't mean that it is the time to invest.  The time to invest is when you think you can do it better than everyone else out there.  To paraphrase an old saying, if you don't know who the sucker is in a real-estate deal, you're it.

It is a myth that renting is automatically a bad financial decision for housing.  Remember that a home – whether bought or rented is primarily a place to live.  Once you ask this question, you are now thinking of your home as an investment, and therefore the question must be answered in comparison to other financial investments you could make.  In other words, if you didn't buy your house, what other investments are available and are they better or worse for you than buying your house.

Renting has two distinct advantages.  First, renting is a shorter time commitment than buying a house.  If you expect to be moving within a year or two, (some financial experts would even say five years) then renting may be a wise alternative.  If you consider your home to be an investment, then you have to think of it as being illiquid – that is it can not be sold quickly or easily, although this depends on market conditions – and you may have to take a steep discount to sell your house quickly.  At the time of writing in August 2007, there is a lot of that going on.

The second advantage involves cash flow.  Generally, renting (particularly when renting an apartment vs. buying a house or condominium) requires less cash flow.  Rent is cheaper than a mortgage payment.  Furnishings, utilities, taxes, and insurance can all be cheaper as well.  If you have a job which provides uncertain income (which you may have if you are trying to get rich), then renting may be the better alternative. 

So if you rent and have lower living expenses, you can invest the extra cash in other investments such as the stock market.  When deciding what to do, you will want to compare a potential house as an investment to other potential investments.

Understand that many other people will be in the same situation.  So it may look that way now, but just like any business, colleges and universities can not price themselves out of the market, especially if all they are offering is a liberal arts degree of questionable value.  I am sure that when I went to college, my parents thought it was outrageously expensive, but I still got by as a poor student delivering pizzas or working part time just like everyone else.

Saving for a child's college tuition is the same as saving for anything else.  It takes knowledge of investment opportunities and financial discipline.  Generally, your time horizon is going to be long so general stock market investments, such as a broad market mutual fund, or even something riskier such as a technology fund, provide appropriate risk and return.  But nothing riskier.  Saving for college isn't like saving for retirement.  Losing your retirement money in bad investments is a serious problem.  Losing college fund money in bad investments isn't the end of the world and won't preclude your child from getting a good education.

Some states may have various tax incentives or savings plans for a child's education.  Take advantage of them if you wish, but watch out for plans that lock you into a particular school.  There isn't necessarily anything wrong with that, but just be aware of the restrictions.  Also, watch out for tax savings.  Any tax benefit can be repealed at any time in the future and government has a tendency to not let people get away with tax breaks for very long.  Finally, make sure you understand what happens to the money if your child does not go to college.

When the time comes to picking schools and majors, explain to your child that this education is an investment in their future.  Guide your child to majors and schools that will provide them with a career potential worthy of the investment.  If they want to study philosophy, explain that they can do so in their spare time once they get a good job.

In this question, replace the work entrepreneur with any other occupation – actor, salesman, surgeon, lawyer, or even wealth guru.  Are people born or made for any occupation?  Certainly, some people are born with talents that enable them to succeed n particular occupations.  On top of that, training can enhance those skill sets.  Some people are born entrepreneurs.  They know that it is what they want to do.  Some of those people are successful at it, and some persist in spite of failure because they can't stand the alternative – that is working for someone else.  However, just as with any occupation, anyone can be trained in business and entrepreneurship.  Some will take to the training and some will not.

Although there are many successful entrepreneurs who lack formal business training (Bill Gates for one), I recommend it if the option is available.  You are only going to get a few chances at success in the high stakes world of entrepreneurship, mistakes can cost you big – more than the cost of a college education.  If formal business training is not an option, then books, books, and more books – and of course this web site!

I have said that making a living as an entrepreneur is like making a living as a rock star.  You don't do it for the money, you do it for the lifestyle, and if you get rich in the process, so much the better.  People become entrepreneurs because that is what they want.  If you wanted it, you wouldn’t ask the question.  Most people prefer the steady security and consistent income of a job of limited responsibilities.  Only you know if you prefers the highs and lows that come with the life as an entrepreneur.  You may also decide that it is right for one time in your life but not another.  The best entrepreneurs make the worst parents.

Besides the passion, there are a two more things you will need.

First, you need an idea.  Most entrepreneurs I know continuously have multiple ideas flowing through their heads – and some are even viable as businesses!  What separates successful entrepreneurs from failures is knowing which idea to pick.  Entrepreneurs have a reputation for operating on instinct rather than analysis, but after a few failures, you may decide that analysis isn't so bad.  Every new business has an element of risk, but do your homework, or even write a business plan to avoid an impetuous, life-changing mistake.

Second, you need a sufficient education in business.  That may or may not mean business school (although I recommend it).  But you probably get only one or two shots at success.  Don't let lack of some simple piece of knowledge cost you the opportunity of a lifetime.

The problem is that you are comparing your incomes from the job and the business at their current point in time.  The most important rule of finance is that the value of an investment is the present value of future cash flows discounted at a rate of return appropriate for the risk of those cash flows occurring.  What that means is both your job and your business will generate cash for you in the future at different levels of risk.  Your job pays more now and is steady.  While your business pays less today, it has the potential to pay much more in the future.  You need to estimate the present value of those cash flows, and then compare to determine which is best.  In finance, this is called an net present value (NPV) calculation.

OK, so the math is complicated and your estimates of what the business will make will be wrong – that is the problem with NPV.  But here is the bigger point.  All of business is making decisions about the best option for today versus the best option for the future.  If you can't get past this first decision, stay with the job.  Running a business, the decisions only get more difficult.

First, you need to prepare for the owning the business.  There are certain things you need to do whether you are currently an employee or even just a college student or a bum on the street.  You need an idea.  You need to know what kind of business it is going to be.  You need to do an analysis to convince yourself and potential investors that the business will be profitable.  Basically, you are going to have to write a business plan.  That is something that you can do in your spare time.

Second, if there are going to be partners, you need to put together the partnership agreements and understand how the partnership is going to work.  Even if you are on your own, this is the time to form a corporation and set up the bank accounts.

You may also need money to live on.  There are basically two situations that can happen when someone leaves employment to start a business.  They could have potential customers and contracts already lined up to start generating revenue right away.  This often happens if your current employment leads to the new business or takes you to your first customers.  Alternatively, you may have to survive for awhile with no income while the business picks up steam.  In this case, you will need substantial savings.

Finally, when everything is in place, you are ready to jump ship.  No matter how much you may be tempted, don't storm out of your current job with bridges flaming behind you.  If the business doesn't work out – and statistically it won't – you may find your job title changing from President to supplicant.