One of the key factors of the presidential campaign this election year is the state of the Economy. Talk about tax cuts, tax increases, the rich, the poor, the middle class are abundant. The Republicans are going to save us and the Democrats are going to ruin us. The Republicans are for the rich and the Democrats are for the poor. I have heard it all before and I am quite frankly not impressed. I guess I am one of those moderates that believes there are good and bad points of each and they spend too much time pointing figures and playing the blame game instead of actually doing any good. Neither of the parties is perfect nor have all the answers. I am tired of having to choose which bad points I am willing to live with. One of the more annoying pieces of rhetoric is taxes and the state of the budget deficit. They all quote their own numbers and declare they have made things better for the American people by doing completely opposite things. The truth of the matter is that the Average Joe has no chance of ever knowing the truth. They never use the same method of determining their answers and they never tell you how they come to their conclusion. If they do give an explanation it is always with graphs and language that most of us just don't speak.
Let me give you my simplified view on life. You can be on one of two. It doesn't matter if you are "rich", "poor" or in the "middle class". Throw out whatever definition you have formed for what qualifies you as one of those three tiers. Everyone is in one of two tiers and here they are. You are either a consumer or an investor.
A consumer spends their money and usually has debt. How much debt a consumer has will determine how far to the left they are on the scale of poverty. A consumer can have assets like a home, stocks, bonds, cars and boats, however, what is owed on these items are often more than what they are worth. A consumer generally has a negative net worth or has very little positive net worth in comparison to an investor. The more negative a consumer's net worth the harder the struggle will be to ever get to the investor side of the scale. Once a consumer reaches a certain point on the consumer scale, they will forever struggle to not be a consumer in debt. Go too far to the left and the best case for a consumer is to stop the slide to the left. Standing still on the slide is the best you may ever do.
An investor owns assets. They generally have a positive net worth. An investor will forever struggle to keep their positive net worth and their assets. The more assets an investor owns the further to the right of the investor scale they are. An investor has assets like homes, stocks, bonds, cars and boats; however, the value of these assets is often higher than what is owed on them. Over time, the equity they have in these assets grows as the debt on the assets is amortized and the values of the assets rise. The further to the right of the scale an investor is the easier it is to stay on the right side of the investor scale. Once you reach a certain point on the scale, you will forever be an investor unless you choose to throw it all away. Stop investing before you reach that point and you can quickly slide to the left and into the consumer in debt scale.
This is an important point. It is fiscally easier to be a consumer and difficult to be an investor. Being a consumer can mean a life of constant struggle. Being an investor can make life easier in the long run. A consumer must constantly struggle to make money so they can pay their debt or purchase the next big toy. While an investor will struggle to stay an investor, the struggle will result in greater rewards. A consumer can do give up and slide further to the left of the scale with little or no effort. An investor must actively labor to stay an investor. If an investor stops working at being an investor, they have the ability to slide quickly into the in debt consumer side. A consumer will never accidently ascend into the investor scale.
So where are you? Where do you want to be? You can be a consumer living with debt and be "happy." If you are close to the center of the scale then you can maintain your position as a consumer by just doing the bare minimum to make it. You will always have debt or little to no net worth, but you can live with it. Or you could be the poor sole that is deeper in debt every day that you wake up. The further from the center you are, the more rapid the movement and steeper the path to the investor side. As your debt grows, the speed at which you move to the left of the economic scale will increase. Move too far to the left of the scale and you will never be able to recover on your own. You can struggle toward the right of the scale, but it is kind of like the 900 pound person losing 200 pounds. They lost a lot of weight and should be congratulated, but they still weigh 700 pounds! You are much better served to go on the diet at 200 pounds.
Then there is the investor or right side of the scale. If you have a positive net worth you have much more opportunity to raise it. The more assets you own the more you can invest and the more your assets can grow. The more the assets grow the larger your net worth will be. It compounds just like that savings account with the insulting interest rate from the bank. Every time you increase your net worth, those assets compound to create more net worth. As your assets grow you move further to the right. Move far enough to the right and you can ensure you stay on the right side of the scale with minimal effort.
So are you the one with all the newest fancy gadgets that has enough money to get you to the next paycheck, or are you like Mr. McCain and can't keep track of how many houses you own? If you don't know what your net worth is then you are on the left half of the scale. I suggest that you do everything in your power to start out on the right half of the scale. When you are on right half of the scale, you can waste a little of your net worth and still be on the right half. However, if you start on the left, you will forever struggle to reach the middle. You will most likely never pass into the right half for any significant length of time.
A mistake a lot of consumers make is to spend their pay raise before they get it. This can be dangerous. According to the Federal Reserve Board, Survey of Consumer Finances the mean of family incomes fell by 2.3% actually decreased during the periods of 2001-2004. It must be those tax cuts that saved us.
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So what does the top 0.5% wealthiest in the nation invest in that the others don't? According to a paper Estimation of Household Net Worth Using Model-Based and Design-Based Weights: Evidence from the 1989 Survey of Consumer Finances by Arthur B. Kennickell and R. Louise Woodburn the wealthy invest in businesses, bonds and real estate. The top 0.5% own 51.6% of the businesses, 66.1% of the bonds and 33.4% of all real estate (not including their principal residence). So if you want to be in the top 0.5% of the nations wealthy you will need to invest in businesses, bonds and real estate that you do not live in.
What do the lower 90% of consumers spend their money on? Automobiles (75.5%), their principal residence (65.1%) and life insurance (60.5%).
If you want to move toward the right, then I suggest you start spending less and investing more. Putting money into a savings account does not count as investing. Savings accounts with lots of cash in them are nothing but nest eggs. They can crack and rot at any time. You need to buy assets to be an investor and cash is not an asset. Assets will appreciate and create additional net worth. When you have enough assets to generate income to support you without working then you have moved far enough to the right to stay there. If you are depending on a pension, job, or Social Security then you are at the mercy of others. That is not a position you want to be in. Your pension, job or Social Security should be extra money that you use as play money.
So how does the Average Joe reach retirement? I would suggest you try one or a combination of what the wealthy are doing. Own a business, purchase some bonds, and/or purchase some investment real estate. Not everyone has what it takes to own and/or run a business. Building or purchasing a business can take a lot of capital that man do not have. Bonds can be purchase a little at a time, but most of us don't have enough capital or time to purchase the number of bonds required to generate a sustainable income if we retire. That leaves us with real estate. Real estate is one of the few investments where you can purchase with very little of your own money and use leverage to your advantage. Personally, I think that real estate is the best chance that the Average Joe has of becoming wealthy enough to retire. A home is something that an Average Joe can understand and actually purchase with relatively small amounts of capital and receive huge returns on that investment. The key is to purchase real estate that you do not live in. Get somebody else to pay the mortgage on it.
Yes, I am aware that the housing market is in the middle of a melt-down. Must I remind you that the stock market has gone through a few melt-downs in the past? That is part of the economic cycle. Housing will return. The problem is that nobody knows when. The cost of food is increasing but you haven't stopped eating. As housing goes boom or bust you don't stop investing in it. You simply make sure that when you purchase the house that you have made a good investment. If you make a good investment then where the housing market goes is irrelevant.
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Consider this. The median family net worth of homeowners in 2004 was $184,400. The median family net worth of a renter was $4,000. As you can see, the median net worth of homeowners increased from 1995-2004 while the network of renters decreased. Why is that? There are number of factors, but the primary factors is the ownership of real estate.
If you’re a renter, now might be the time to sit down and take a good look at your finances. Get in touch with a Realtor who can help you get prequalified for a home mortgage. Stop paying your landlords mortgage and start investing in yourself, and your future.
If you have considered buying real estate as an investment, be sure to contact a Realtor that understands your specific goals and understands how to evaluate an investment opportunity. Not all Realtors are investors.
One last item of note. What is the number one reason stated for saving money? Retirement. Here is to the pursuit of retirement, however it may come.
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© 2008 Robert Little
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