The Importance of Respect

Your Time
The Penny
Taxes (more specifically, the destructive power of)

We are inundated with an enormous amount of complexity when it comes to money. Multi-billion dollar industries have sprung up to convince us that we need their help to manage our money. IT'S NOT TRUE.

In any endeavor, the path to success requires preparation, discipline, hard work, risk, patience, sacrifice and a dozen other "stern stuff" traits. The Wall Street talking heads and real-estate gurus can't help you with that. But that's ok, they say. They promise success but without the minor messiness of preparation, discipline, hard work, risk, sacrifice, etc. Maybe they can. But you're taking an enormous risk.

There are many avenues to invest and build wealth. And within each category, there are myriad strategies ranging from get-rich-quick-schemes to tortoise-style-putting-one-foot-in-front-of-the-other grind methods. Honestly, they can all work under the right circumstances. Some of them just need extremely favorable cimcumstances! The important thing is being able to evaluate the feasibility of the strategy under consideration. We can't outline each strategy but if we always keep fundamental concepts in mind, we can make good decisions that maximize our potential while minimizing risk.

RESPECT YOUR TIME
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Time is the most essential "commodity" we have (it's also the strongest wealth-building vehicle most people have at their disposal but we'll cover that below). Every person, rich or poor, gets only 24 hours to do what she will. Nowhere is the concept of opportunity cost more fundamental than how we choose to spend our time. If we are working, we cannot spend time with our family. If we are watching some stupid TV show, we cannot be researching or learning new skills. Choosing to engage in one activity costs us the opportunity to engage in a different activity.

When it comes to building wealth and our time, opportunity costs are the foundation supporting all of our other decisions. Many of us rely exclusively on active income (compensation for a job or service or product) and until we develop a robust passive income stream (ie, dividends, interest, royalties -- anything that makes money even if we're sitting on the couch), how we spend our time has a strong effect on cash flow. For example, I spurned a good-paying job because once the time demands of the job were considered, the opportunity costs were too high. The job would have required most of my waking day and left me little time to spend time with loved ones, much less developing other passive income sources or even getting a second job.

Be aware of how you manage your time. Most people know about budgeting your money (even if they don't do it) but don't think about budgeting time. In our information age, nothing is more important

So respect your time. Even if you're not a lawyer charging $400 per hour, your time is worth money. Don't let anyone waste it or tie it up without good reason. Unfortunately, most of us are better at wasting our own time than anyone else. A good example are the "Black Friday" stories you see every holiday season. Maybe some people enjoy waiting 2 hours in line the day after Thanksgiving so they can save money on a few items that they don't really need. To me, it seems a colossal waste of time.

RESPECT THE PENNY
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Lately, Wal-Mart has come under fire for the low wages they pay to their employees. Apparently, if they raised the price on their products a mere 1/2 cent (yes, half a penny), they could give their employees a dollar raise (that's $1 per hour). Of course, they steadfastly refuse (actually, they may raise their prices but they surely won't give that money to their employees). I'm no fan of Wal-Mart but consider that if a huge corporation respects half a penny, how can some poor schmuck like you or me afford to throw pennies away?

The answer is I can't. The penny illustrates two simple but vital wealth-buidling concepts: saving and compounding money. Given enough time and a sufficient rate of return, even a penny can become a significant sum. Think of a chess grandmaster who realizes that each piece, including the pawn, is key to winning the game.

Of course, a penny is not going to make you rich. But if you can waste a penny, where do you draw the line? Is a quarter a big deal? You can't buy anything with a quarter nowadays. A dollar? That's just bad coffee and a donut. Heck, many people spend $20 on dinner without any hesitation. I know I used to. I don't have a switch that I can turn on or off; either I respect money or I don't think about it while I'm spending. And it's the slow leaks -- eating out, video rentals, the new headphones, misc stuff -- that kills us.

Every dollar spent on consumption is a dollar that's not going into investment; it can't earn interest, it can't help buy a house and it can't build wealth. Only you can determine whether that dollar was wasted. But if you're not even thinking about it, chances are that it was.

RESPECT THE POWER OF TAXES
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Why are homes "the best investment a person can make" (not necessarily true but that's topic for another day)? Why are a high number of wealthy people self-employed? Undoubtedly, part of the answer is taxes, or more specific, the tax relief you get from owning a home or running a business.

Most people know that taxes hurt their bottom line but they don't realize just how badly taxes cut into their finances. Once again, we come back to the concept of opportunity costs. Yes, taxes take money out of your pocket. Most people would prefer to have that money back so they can pay down their credit cards or buy a new TV or some other consumptive use.

But the true menace of taxes is that you no longer have use of that money to invest and grow into more money. And make no mistake about it, the politicians (Democrat and Republican alike) talk about the hard-working middle class family but the government (and the IRS) truly respect the enterprising, investing wealth-building family. That's why there are so many tax breaks available for businesses. Just a small example, if you are self-employed, then your health insurance payments are tax-deductible. If you're an employee, then you can't claim after-tax medical expenses until they reach 7% of your gross annual income.

Here's another one. If you are a hard-working American worker, your wages are taxed as income, typically 28% - 33%. Keep in mind the 2,040 hours (that's if you don't work overtime) you put in that year to earn that wage. Contrast that to someone who is invested, let's say, in the stock market. If that person buys stock and holds it for one year and then sells it at 20% above what she paid. That 20% profit is taxed as long-term capital gains which is 15% as opposed to the 33% our hard-worker is paying. Our investor also gets to write off costs associated with making the investment. That investment earned 20% passively; our investor didn't have to spend 40 hours per week to "earn" it. And while our investor may have spent a bit of time researching which stock would earn her a 20% profit, it probably wasn't close to the 2,040 hours our worker put in. Now you're getting the idea, I hope.

Of course, taxes are necessary for us to maintain our society and I don't advocate trying to cheat or evade them. However, taking the time to get familiar with the tax system may help you make decisions which will allow you to preserve more of your wealth-building possibilities.

During the great tech-bubble of the late 1990's, many people asserted that Warren Buffet, the greatest investor of our time, had "lost it." He refused to invest in tech stocks because he said he didn't understand what they did and how they made money...you know, the basics. As such, he stood on the sidelines as trillions of dollars of paper wealth accumulated in these stocks. Of course, once the bubble popped, those trillions (and more) were lost and Buffet was in good position (and probably profited by picking up good value stocks at a low cost post-crash).

The point is that fundamentals are called fundamentals for a reason. If you're lucky and in the right place, you can make money in a maze of complexity. But if you understand basic fundamentals and can apply them, you won't need to be lucky; you'll create your own luck.

Good luck.

The Enlightened American

The Importance of Respect