The Most Important Financial Insight Ever

Thomas J. Stanley and William D. Danko, the authors of the book, The Millionaire Next Door, spent years studying self-made millionaires to discover the personal traits that had led them to wealth.

The following is perhaps the single most important insight to be gleaned from that book:

"Planning and wealth accumulation are significant correlates even among investors of modest means."

And what that statement means is that if you have a plan to save and then execute that plan, the odds are you will reach your financial goals—if you plan to save, you will.

But to that, I would add three more:

1. Your plan to build wealth must be documented;

2. You must, on a regular basis, measure your progress towards meeting the goals of that plan, and;

3. Accountability, that is, you need to report your progress to someone else. Obviously, this other party must know of your plan and goals and, ideally, this other person would be knowledgeable in the field of personal financial management; in other words, you need a personal money coach.

And, in this regard, I am not talking about a financial adviser who is always trying to sell you something…like a stock broker or someone who peddles life insurance products. What I mean is a fee-only financial adviser and in some communities there are services that will provide this assistance for little or no charge.

In fact, a friend, who you know to be financially savvy, might also be able provide this discerning eye. The goal in this regard is to inject some level of outside accountability into the process.

It is, of course, possible to go it alone…but based on research, being held accountable to some extent will help motivate you to achieve your goals and stay on track. And, because building wealth is something you do over time not over night, it’s a long haul and it helps to have someone you can count on who can count!

There are only two ways to get rich—accidentally and on purpose. The odds are against you getting rich accidentally. Yes, you might win a big lottery prize, but, really, the odds are against it. And, besides, do you really want to bet your financial future on getting lucky?

You Can Have Anything You Want

Or, rather, you can have anything you really want…as in whatever you want enough to work for.

It is common to hear someone say they want something but their actions will always reveal their true desires.

Someone, for instance, might say they want to open a restaurant. But are they doing anything to make it happen? Well, I don’t have the money, they might say…so what can I do?

There is a lot you can do, actually…go to work in a restaurant, take business classes, start creating recipes…you know, all the stuff you would to do if you had the money but before you signed a lease or gave the place a name.

Instead, you spend five hours a day watching TV or surfing the internet…in other words, your actions reveal exactly how important something is to you.

If you want to see your future, look at what you are doing in the here and now…and what you are doing is crafting your future one day at a time.

I always said I wanted to be a writer…and I did do some writing…a little bit, not much, once in a while. And then I got serious about it and committed to writing 2,000 words a day, every day. One year later I had written my first book, Money Well Saved.

And I kept at it…2,000 words a day…one year later I had written my second book, The Debt Whisperer. The day I received the proof copy of my second book in the mail, and I was holding it my hands, it suddenly dawned on me—I am a writer!

So look at how and where you invest your time and that will tell you three things:

What is important to you;

What your future will look like, and;

What you really want!

What is James Altucher Talking About?

Extreme wealth inequality not only hurts family well-being, it hampers economic growth in our communities and in the nation as a whole. In the U.S. today, the richest 1 percent of households owns 37 percent of all wealth. This toxic inequality has historical underpinnings but is perpetuated by policies and tax preferences that continue to favor the affluent. Most strikingly, it has resulted in an enormous wealth gap between white households and households of color. In 2009, a representative survey of American households revealed that the median wealth of white families was $113,149 compared with $6,325 for Latino families and $5,677 for black families.”

That from a research and policy brief by The Institute on Assets and Social Policy (IASP).

And the paper went on to explain what single factor accounts for the majority of that wealth gap:

Among households with positive wealth growth during the 25-year study period, the number of years of home ownership accounts for 27 percent of the difference in relative wealth growth between white and African-American families, the largest portion of the growing wealth gap.”

Owning your home is the path to growing your net worth; plain and simple. And anyone who tells you otherwise is trying to justify their own decisions. Owning a home is more work than renting; how much more is hard to quantify as it can vary so much. Some choose not to own, then, out of sheer laziness. But that laziness comes with a price.

And I am not implying by any means that the wealth gap between whites and minorities is caused by laziness but rather that some people who could afford to buy their home choose to rent instead to avoid the additional work and responsibility that comes with owning as opposed to renting.

And it is often the same people who promote the idea of renting as being somehow superior to owning that have now taken to pooh-poohing the value of a college education. But the level of education accounts for five percent of the wealth gap according to that same IASP study.

According to the US Census Bureau, on average, someone with a four-year college degree will earn about a million dollars more than someone with a high school diploma over the length of a typical career. The difference in income over the study period (25 years) accounted for 20% of the wealth gap. And whites, according to the same study, earn 45% more degrees than people of color—that is a margin of almost two to one!

A college education and home ownership are the path to wealth and the wealth gap is continuing to grow because whites, on average, have more college degrees and so more income to invest in guess what—the education of their children and home ownership.

‘Nuff said!

Pay Yourself (Back) First

If you have a bunch of credit card debt, if your creditors are breathing down your neck and you have fallen for the siren call of Dave Ramsey and his misguided ilk…the first debt you should repay is the money you owe yourself.

And what is money you owe yourself? The money that you should have been saving all these years, the 10% of your annual gross income with interest for each year you have been working. All those years you didn’t save, all that money, is what I mean by the title of this post:

Pay yourself back first—the money that you should have been saving all these years!

Before you send one dollar more than the minimum, or 4% of the outstanding balance, whichever is more, you need to start an aggressive plan to pay back the money you spent when it should have been saved, instead.

The first step in the process is to figure out how much you do, in fact, owe yourself.

“But, but…but,” I can almost hear Dave Ramsey sputtering, “but bad stuff can happen if you don’t pay back your debts!”

Nothing will happen if you keep paying the minimum….on the other hand, if you do not pay yourself back the money you owe to you, there is actual and real bad stuff coming down the road at you.

Do you ever want to retire? Do you really think working until the day you die is actually a workable plan?

Forget your credit card and other consumer debt: Put an automatic payment plan in place to pay the minimum on each card by way of recurring automatic payments from your checking account and then forget about them or it, whatever the case may be.

Now, and this is the part of the plan you must follow, cut up those cards and shred the pieces. And rest confident in the knowledge that someday they will be paid off and in the meanwhile you never need to think about them again—ever!

Now focus on your future and rebuilding the financial relationship with yourself: Pay yourself back first!