Chapter Excerpt

Chapter One

                                 Everyone wants to know the secret of getting rich. It's a tribute to America that there are many roads to wealth in this country, and they are open to all. Stories of young technology entrepreneurs abound, but age is no barrier. Michael Dell founded his computer company at the age of 19, and by 34 his personal stock ownership in Dell Computer was valued at $16 billion. Ray Kroc, on the other hand, didn't start McDonald's until he was in his mid-fifties. Pleasant Rowland created the American Girl doll company in 1985 in a small Wisconsin town and sold out to Mattel for more than $700 million just over a decade later. Recent immigrants have created some of the most exciting Internet companies, and Native Americans now run multimillion-dollar casinos. In America, age, race, and gender do not stand in the way of success.

    One of the fastest routes to financial success has always been through sales of a product or service. Today's technology allows startup companies to compete without the investment capital that was traditionally needed to gain a foothold in markets. In other eras, real estate developers used borrowed money to amass wealth. All of these roads to success involve the risk of uncertain compensation. And not everyone has the desire or can afford to trade a regular paycheck for the potential riches of entrepreneurship.

    It is also possible to become wealthy by investing in the business-building talents of others, but that requires patience, attention, and self-discipline. It's a matter of simple mathematics.

You Can Get Rich on a Paycheck If You Don't Spend It All

There are two simple rules for amassing investment wealth:

    * Spend less than you make.

    * Invest the difference--both money and time--to maximum advantage.

Here are two stories that illustrate these truths:


Chicago Sun-Times , July 31, 1997--A secretary who made her fortune investing bonuses from her salary, which hit an estimated high of $15,000 a year before she retired in 1969, left her fortune to Children's Memorial Hospital. Few friends suspected that Gladys Holm, who lived in a modest two-bedroom apartment, was wealthy.

Holm's boss, the company's founder, had advised her to invest her yearly bonuses in the stock market, a longtime friend said. "If he bought 1,000 shares of some company, Gladys would buy 10 shares of the same thing. Nobody gave her that money; she earned it."



Associated Press, July 14, 1998--Professor Donald Othmer and his wife, Mildred, lived modestly in a Brooklyn townhouse and rode the subway. In the 1960s, they each invested $25,000 with an old friend from Nebraska, Warren Buffett. In the early 1970s they received shares in Berkshire Hathaway, then valued at $42 a share. When the couple died recently at ages 90 and 91, the stock was worth $77,200 a share--making their fortune worth an estimated $800 million.

    All of these successful investors lived modestly all their lives. At no point did they decide it was time for an expensive vacation, an impressive vacation home, or even a new car. Thus, they were able to accumulate, invest, and leave behind a huge fortune. Surely, there must be a happy medium between living daily on credit card debt and dying with a huge fortune. Most people I know would like to live in that middle ground.

    One other similarity of note: Neither Gladys Holm nor the Othmers had children. Children may be nature's way of making sure that we can't possibly die with a fortune!

    Finally--and most important--neither Gladys Holm nor Professor and Mrs. Othmer ever sold any of their stock. Think of the temptations. As their fortunes grew, there was surely the temptation to spend just a little of their profits. And at times of stock market crisis, surely there was a temptation to sell and cut their losses. But they stuck to their long-term plan. You'll learn more about their investment strategies in Chapters 5 and 6.

    I know you're thinking there must be a faster way of getting rich. These stories reflect a generation past, not today's fast-paced lifestyle of instant gratification. Indeed, there are instant success stories of our current generation. Some revolve around the stock market, which has certainly created a lot of millionaire investors, particularly those who purchased technology stocks. Whether they hold on to their fortunes remains to be seen.

    The true headline success stories are the current generation of technology entrepreneurs. They built businesses, and their wealth is scored by the value of the stock they sold to the investing public and the shares they still hold. But behind each "overnight" success story is the truth that they followed the two principles at the top of this chapter. They lived frugally--primarily because they were too involved in their businesses to spend time on recreation and consumption. They also invested their resources, mostly their time, on building their businesses.

    Steven Jobs, who founded (and later rescued) Apple Computer, is renowned for starting the business in his garage. Only after his company proved itself did he share in the rewards. Bill Gates built his mansion after he built his company, Microsoft. Two college students started Internet pioneer Yahoo! in their dorm room.

    There's no question that their inherent brains and timing (sometimes referred to as luck) helped make them rich. Their success stories are notable because they took a relatively short time to build dramatic wealth. But they followed the basic principles: They invested their time and money before they reaped the rewards. Yes, they dreamed, but they didn't buy lotto tickets or create extravagant lifestyles before they were financially successful. They worked to turn their dreams into reality instead of living as if their dreams had already come true.

    The secret of getting rich is to make choices that help your money work for you and stop working against you. If your money works at least as hard as you do, and if you have a sensible plan you can stick to, over time you'll come out a winner. And that's the Savage Truth.

The Savage Truth on Your

Relationship with Money

Money Is Power

Before you make any investment or saving decision, before you set financial goals or choose a career, you must come face to face with the power of money in your life. Your relationship with money must be reevaluated as you reach different stages in life. Only by facing money issues directly can you become comfortable with so many other personal decisions that confront you.

    Recognizing the power of money can be exhilarating or intimidating. If other people have money, and therefore a degree of power over your life, you may react negatively. If your boss holds the power of the paycheck, you may feel forced to work certain hours or perform unpleasant tasks. If your parents hold the power of the purse, you may feel coerced into making concessions about your lifestyle.

    On the other hand, if you have the money, you axe empowered to choose how you spend your time as well as your cash. You may choose to work even harder, to enjoy more leisure, to become philanthropic or artistic, or to devote more time to making your fortune grow. Money certainly isn't the only powerful force in your life, but having money can empower you to take greater control over your lifestyle.

The Most Powerful Money Emotions Are FEAR and GREED

Decisions about money unleash these two powerful emotions, which are frequently the cause of financial downfall. Noticing the symptoms and gaining the courage to surmount these emotions is the first task in managing money. Lack of emotional control will negate all the benefits of good advice and good luck.

    Greed is understandably dangerous because it is the emotion that makes us take risks we cannot afford. Greed convinces us that we "need" instead of simply "want" to make that purchase. Greed urges us to spend for today instead of investing for tomorrow. It can distort investment decisions and blind us to long-term consequences and risks.

    Fear can be equally dangerous. Fear keeps us from taking appropriate risks or making changes to improve our lives. It paralyzes us and blinds us to opportunity. Indeed, this paralysis can be an actual physical reaction to making money decisions. It's as difficult to conquer a fear of money as it is to rein in overwhelming greed.

    These emotions may be triggered by our childhood conditioning about money, cultural expectations, or by recent experiences with money decisions. There's no doubt that people have money personalities. By nature or nurture, they become savers or spenders. Inside each of us is a small persuasive voice that dictates how we respond to fear and greed.

    Those twin emotions assault even the wisest investors and smartest traders. Taking control of your financial life requires not only knowledge of money, but also the self-discipline to use your knowledge to conquer fear and greed. What good is a financial plan if you don't have the self-discipline to stick with your decisions?

Self-Discipline Is the Essence of All Decision Making

Self-discipline should not be confused with self-denial. Self-discipline means making knowledgeable decisions based on a rational assessment of likely results and then sticking to your decisions in the face of emotional upheaval. That principle applies to every financial decision-from buying a car or a dress to investing in a stock or mutual fund. People recognize the importance of discipline when they turn to financial advisors for help--not only in determining the appropriate investment, but in sticking to that decision in the face of market reversals. It's human nature to seek advice, reassurance, and counsel about when to alter a decision based on new realities.

    Can you do it alone? Most people are capable of managing their own finances, given the knowledge and tools that are now easily available. Finding the money to invest is harder than finding the investment opportunities. However, I know that many people who call or write to me are overwhelmed by their relationships with money. Just as all the desire in the world cannot help alcoholics or gamblers to overcome their compulsions, all the investment books and rules cannot make the fearful bold, or the greedy self-controlled.

    Help is available in many forms. As you'll see in Chapter 3, there are several national, nonprofit consumer credit and spending counseling services. Your local bank may offer classes or personal help in setting up a budget and managing your money. Chapter 3 also shows you how to find a qualified and certified personal financial advisor. Even joining an investment club may give you the support to make investment decisions on your own. Automatic monthly investment plans can create the structure to override your emotions and build an investment program, just as automatic deductions can be used to cope with debt repayment.

    Keep in mind that knowledge is one ingredient of your relationship with money, but conquering your emotions is quite another aspect of financial success. Smart people do fail, but failures can always be overcome.

Bulls, Bears, ... and Chickens--Your Relationship with Money Is Unique

No matter how smart your advisor, or how sophisticated your investments, your personal relationship with money is unique, and it affects the decisions you make. No one else has quite as much insight into your desires, anxieties, and tolerance for risk. The most difficult task is to step back from your emotions and calculate the risk it is appropriate for you to take.

    This is a process of self-discovery that I have long referred to as sorting out "the bulls, the bears, and the chickens." In any financial market, the bulls invest believing that prices will move higher, while the bears sell out in fear that prices will drop. But the chickens stay on the sidelines, unwilling or unable to risk their capital. There's a little bit of chicken in all of us, and it's nothing to be embarrassed about.

    Sometimes it's wise to be a chicken because you have a very short time horizon. If college tuition is due next fall, or if money from the sale of your house must be given to the builder of your new home over the next few months, you don't want to risk investing in the stock market. Short-term losses could jeopardize your important long-term goals. It's important to sort out the portion of your finances that can, and should, be exposed to the opportunities that risk provides. But it takes discipline to set aside a portion of your assets and keep them safe from risk.

    Sometimes you're forced to be chicken because this is the only money you have. While it's tempting to risk doubling your resources in some exciting investment, you can't afford to lose even a portion of your capital. There's an old saying in the markets: "Desperate money never makes money." The world is littered with losing tickets from racetracks and lotteries. Long shots and jackpots make news when they pay off because it's so rare. Those huge lottery pools are created by all the people who buy losing tickets.

    Risk and reward are two sides of the same coin, but unlike a coin toss, on which the odds are always 50-50, risk and reward are not always equally balanced. The science of money management is understanding your own tolerance for risk and acting when the rewards can objectively be considered to outbalance the risks. Unfortunately, this is not a subject for intuition. At the top of the market, an investment seems least risky. At market bottoms, it appears most risky to invest your cash. Yet the big money is made--and lost--at the extremes.

    Never be chicken out of ignorance. There are objective ways to balance risk and reward. Nobel Prize--winning economists have created the concept of beta , a way of measuring inherent risk and volatility in individual investments. And computers can theoretically measure and limit portfolio risk, when markets run true to form. But no one has yet developed a way to measure the risk inherent in human emotions. So let's just call it "chicken money" and follow the old market saying: "Sell down to the sleeping point." If it keeps you awake at night, it isn't worth the risk.

The Savage Truth on the

Consequences of Choices

Little Choices Have Big Consequences

In the midst of life's turbulence, you're reminded of the consequences of the big choices you made over the years: the choice of a college, a marriage partner, or a career, or a decision about having children. These turning points stand out as defining moments that changed the direction of your life. But small decisions, compounded over time, can have an equally significant impact on how your life turns out--especially when it comes to money.

    Your money can work for you or against you. It all depends on the choices you make. If you make the correct choices, even a small amount of money can grow to become a powerful ally. If you make the wrong choices, your money will leverage its power against your own best interests. One thing to keep in mind: It's never too late to change course for the future.

    Every day we're faced with money choices: SPEND or SAVE, BUY or SELL. They may appear to be decisions of the moment, but today's choices can have long-lasting consequences. That's because the consequences of our financial decisions are magnified over time.

    Think of the problems NASA has in sending a rocket to Mars. Sure, the red planet is a huge target. But if the navigation calculations are off by just a fraction of a degree at the launch, the rocket will miss Mars by millions of miles. Small errors, magnified by distance or time, can take you very far off course.

    My favorite story about choices shows the long-term effect of time on money when it comes to spending decisions. Americans currently have more than half a trillion dollars revolving on their credit card bills, many making only minimum monthly payments. They've purchased things they want or need now , without regard to the long-term consequences of those choices.

    Suppose you charge $2,000 on your credit card this month and make only the required minimum monthly payments on your bill. At an annual finance charge of 19.8 percent and a $40 annual fee,

    it will take you 31 years and 2 months to pay off that $2,000!

Along the way, you'll pay an additional

$8,202 in finance charges.

    If you had made a different decision, the results would have been equally dramatic and far more pleasing. If you had invested that same $2,000 in a stock market mutual fund that returned the historical average of 10.6 percent and placed your investment inside a tax-sheltered individual retirement account (IRA), in 31 years--about when you'd be paying off your final credit card bill--

your IRA would be worth $45,540.

    If you made that same spending-versus-investing decision every year and set aside $2,000 in your IRA for 31 years at the same rate of return,

your IRA would be worth $454,000.

    Special attention to twenty-somethings: If you started your annual $2,000 IRA contribution now and averaged a 10.6 percent annual return, in 50 years

your IRA would be worth $3.1 million!

    This is a classic example of how small choices, leveraged over time, can change your life. You may not remember every small spending or saving decision as you look back over your life. They may not compare with the major life-changing choices you agonize over. But these small decisions reveal one of the greatest money secrets: the power of time in compounding money.

It's Easier to Find Money than It Is to Find Time

I've often told this story of how you could easily turn a $2,000 IRA into a million dollars or more by investing conservatively in a mutual fund that just matched the performance of the stock market averages. (For details on getting started, jump to Chapter 6.) But some people who come to my seminars are buried in debt, wondering whether to take the bankruptcy route or continue to struggle with bills. Where would they ever find the money to make a monthly investment in the American Dream?

    That's the problem with big numbers like a million dollars. They're so overwhelming. So let's make it more realistic. Just in case you were intimidated about finding that $2,000 a year to set aside in your individual retirement account, let me point out that

$2,000 a year is only $38.46 a week!

Surely you can adjust your spending--or your earnings--to find an extra $38.46 a week.

    If you're already buried in debt, then an extra $38.46 a week will pay down $2,000 of your debt within one year, to say nothing of the interest payments you'll save. Perhaps finding that weekly sum will require working in a restaurant instead of dining out. A weekend or part-time job may bring in more money if you can't possibly cut back your spending.

    Still think you can't afford to get out of debt and start investing for your future? Take a quick look at your paycheck. I'm willing to bet there's a deduction for Social Security taxes that's larger than your $38.46 weekly target. You get along fine without that money--and you're not likely to see much, if any, of it at retirement. Doesn't it make sense to put an equal amount away every paycheck in a savings and investment plan that will pay off in the future?

Time Is Money

You may have heard the story about the boy who was asked whether he'd rather have $5 million in 31 days or 1 penny doubled every day for 31 days (see Figure 1.1). The boy chose wisely.

One penny, doubled every day for a month, will grow to $10,737,418.24.

That's certainly a huge consequence from a small choice. Although this book won't show you how to double your money every day, you will certainly learn how to invest very small amounts regularly to create dramatic long-term growth.

Taxes Impact Tomorrow More than Today

No one likes to see the bite that taxes take out of a paycheck or to compute the amount owed to the government every April. And if you think taxes are rising, it's not your imagination. According to a Hudson Institute study, the growth in federal tax receipts, adjusted for inflation, rose from 2.1 percent annually in the years 1970 to 1991 to 4.3 percent annually from 1991 to 1999. At the turn of the century, federal tax receipts are 20.6 percent of the economy (gross domestic product)--the highest since 1944, during World War II.

    But the biggest impact of paying taxes every year on your wages or investment dividends and gains is the toll those taxes take on future growth of your money. Figure 1.2 shows the difference in growth of a $2,000 annual investment if it is invested in a taxable mutual fund, compared to the same amount invested in mutual fund inside a tax-sheltered IRA. (There's much more about retirement investing in Chapter 8.) So keeping your investments growing tax-deferred or tax-free is one of those small choices that have very big consequences.

The Savage Truth on

Goals and Choices

Your Goals Are Your Most Important Choices

Now that you know financial independence is within your reach--if you make the correct choices--it's time to set some personal financial goals. These are your most important choices because they create the framework for all your other investment and lifestyle decisions. These are the beacons to keep you on target; they are the guardrails that keep you from taking emotional wrong turns. Your goals are your most personal financial decision.

    Whether your goal is getting rich or having financial security, it's important to define that goal on your own terms. For some people, financial security is defined by being out of debt; others total up the amount of their investments to get a perspective on their current and future situation. Some people define financial security as being able to live for six months to a year without a job; others define it as having their money last as long as they do--a secure retirement income. Some may put a specific dollar figure on their target; others recognize that the possibility of inflation or changing health needs requires a flexible financial cushion. For some, getting rich implies having enough money to do whatever they want, although most multimillionaires will tell you that money can't buy freedom from problems.

    The best--and worst--thing about setting goals is reaching them. That means you have to set new, higher goals. Keep in mind when setting goals that you're posting both a target and a direction. You may reach milestones along the way to your ultimate goal of financial freedom. The day you've paid down all your debt will certainly be an exhilarating one. Now you can travel further down that same road, using the money you set aside to pay bills to start investing. I never heard anyone complain about retiring with too much money, and I hope your biggest problem is reaching all of your financial goals.

Set No Goal You Can't Control

The key in setting goals is to set targets you can control. If your goal is to set aside a certain amount of money every month to pay extra on bills or to start investing, don't count on a pay raise to make it happen. A raise is up to your boss. But you could reach your goal by spending less on dining out each month. That's a decision under your control.

    Since the whole idea of goal setting is to motivate yourself, you'll need some financial targets that you can reach in a far shorter period of time than it will take to hit more distant targets such as retirement. Start by listing your short- and long-term financial goals. Your short-term goals might include paying off all your credit card bills or student loans. You might set a goal of saving enough money for a car or a down payment on a first home. Short-term goals might take anywhere from six months to five years. At the same time, you should also be setting longer-term goals such as college for your children or retirement savings.

    Tape your list of goals to your mirror, where you'll notice it every morning and evening. Your goals should be motivating, not intimidating. Be realistic about your expectations, and set goals in manageable increments. Your short-term goal of paying off your credit cards might start with paying off the highest rate card, or the largest balance, first. Then move on to the next objective. Remember: No matter what the time horizon or size of your financial goals, you'll never reach them if you don't get started. The first two letters of the word "goal" are GO.

A Goal without a Plan Is Just a Dream

Only in fairy tales do castles get built without a plan. In real life, you have to hire an architect to create a drawing and then engage the services of a builder to help you achieve your dream home. A financial plan is not engraved in stone; it can always be adjusted to fit your circumstances. But having a plan is the only way to put the odds of achievement on your side.

    Life doesn't come with guarantees. When you define financial security for yourself, you'll need to make some assumptions. How long will you live? How much money will you need to maintain your lifestyle? How much will your investments grow? How much will inflation erode your savings? Those projections will change as you redefine financial security and as the economy changes. You may have lifetime goals but be forced to revise your plan because of current events. Always keep your actions on track to meet your goals.

Financial Planning Is an Art as Well as a Science

An entire industry has developed to help you make financial decisions. Mutual fund companies, insurance agents, and brokerage firms offer their services in exchange for fees and commissions on the products they sell. Bank trust departments and accounting firms have also diversified into financial planning. For many years, these professionals were the only ones who could afford the computerized resources to balance all of the variables required to make a financial plan.

    Now all that has changed. Financial planning programs allow your personal computer to do the calculations for you. In the next chapter, on money management, you'll learn how to create and track your own financial plan using computerized resources that are easily available and frequently updated via the Internet. But, understandably, many people will still want the comfort level of having a professional advisor to guide them through the process.

    It's important to have appropriate expectations about financial planning. A 1999 survey conducted by the Certified Financial Planner Board of Standards showed that more than one-third of those questioned mistakenly believed that the role of the planner was only to put them into the best stocks and mutual funds. Another 17 percent expected to be assured that a financial planner can make them rich. (That's certainly a possibility, but there are no guarantees.) Investment advice is only one part of a good financial plan that may also include tax advice and estate planning solutions as well as an analysis of your insurance coverage and even your annual budget.

    Financial planning is an art as well as a science. When hiring a financial planner, it's important to discuss the scope of the plan and have mutually agreeable expectations about the outcome.

Finding the Right Planner Is the Most Important Part of Your Plan

There are several good sources of referrals to financial planners. The Certified Financial Planner Board of Standards created the registered mark CFP. It designates licensed planners who have taken a rigorous examination covering not only the financial planning process, but also insurance, investments, tax planning, retirement planning, employee benefits, and estate planning. The board also investigates candidate backgrounds and requires adherence to a code of ethics. To access a list of certified financial planners near you, contact the board at 888-CFP-MARK or online at

    Some planners work only for a fee and do not accept commissions on the investment and insurance products they recommend. These fee-only planners have formed the National Association of Personal Financial Advisors (NAPFA). Call them at 888-FEE-ONLY, or check in at for a list of fee-only planners in your state.

    Recognizing the growing need for financial planning services--and the difficulty that the average individual has in choosing a planner--Charles Schwab & Company created Schwab AdvisorSource. It's a matchmaking program that allows investors with more than $100,000 to get referrals to carefully screened, fee-only investment advisors and financial planners who typically do investment business through Schwab's discount brokerage.

    Planners on Schwab's select list have all passed a careful background check that includes licensing, regulatory record, and even a credit history. They must already have at least $25 million under investment management and at least three years' experience as a registered investment advisor. They will assist investors in a comprehensive financial plan, in a specific financial issue (such as college funding or estate planning), or through hourly consultations. They are compensated by fee only, not by commissions. Referrals are made through local Schwab offices, but more information is available by calling 800-831-7026.

    The MoneyCentral website, which you'll learn more about on page 30, includes an Advisor Finder section that uses the Dalbar ratings for financial professionals. Dalbar ranks more than 1,000 investment advisors and financial planners, not only for performance results, but also on the basis of a customer satisfaction survey. At www.moneycentral .com you can instantly search, screen, and directly e-mail the planners you select.

The Outcome of Your Plan Is Only as Good as Your Input

Just as you'd choose an architect for your dream home based on references and examples of his or her building style, you'll have to do some interviewing and investigating before you settle on a financial planner. References, preferably from someone you know and trust, are a must. And you'll have to determine if you feel comfortable after an initial meeting or two. Don't be afraid to ask questions about the planner's fees and style. Equally important are the questions the planner should be asking of you. He or she should be willing to listen to your hopes and fears, short- and long-term goals.

    Just as you accept responsibility for determining your own goals and seek help in reaching them, you must accept ultimate responsibility for the financial plan you mutually agree upon. A special note to couples: It's unlikely that you have exactly the same money styles or personalities, but it's important that both of you feel comfortable with the plan and the planner you choose. No matter how much each member of the family contributes financially, this plan will affect your current and future lifestyle equally. Just as an architect might meld styles to suit the eclectic tastes of clients, the planner must create a product that encompasses the personal traits of the individuals. If you don't speak up during the initial meetings, the planner will not have the information to build upon.

Plans Change

Whatever dollar amount you put on financial security, your goals will inevitably change as your personal circumstances change. Flexibility in planning is not to be confused with an emotional reaction to changing life events. A plan exists to provide context for change, yet nothing changes circumstances like a change in the economy. That's why you need to understand some basic truths about the economy and politics--and how they affect your financial plans.


Copyright © 1999 Terry Savage Productions, Ltd.. All rights reserved.