Wisdom From Babylon

The Richest Man in Babylon, the book written by George S. Clason, is a regular revisit for me, at minimum on an annual basis. Written in story form and fairly short, it's a simple read, but full of the wisdom of handling money and building wealth. Here are some highlights of the great wisdom shared in this classic book. The concepts are fairly basic and practical, and yet most do not heed these simple rules of money that will, over time, create a fortune for them.

• A part of all you earn is yours to keep - Set aside at least 10% of your income. Save it and invest it, don't spend it.

• Seven Cures For a Lean Purse

1. Start thy purse to fattening - Only live on 90% of your income. As stated above, you need to have the mindset and discipline that a part of all you earn is yours to keep.
2. Control thy expenditures - Cut your expenses to the essentials. It's ok - and I believe necessary in order to keep your sanity and stay disciplined - to have some "fun" money set aside as an essential, but be realistic and keep it reasonable. You likely will have to cut some things out, but keep something you enjoy doing on the table. Use those things you want to do but can't fit in your budget to motivate you to get yourself in a position where you can add those things back in.
3. Make thy gold multiply - Invest wisely the money you have been diligently setting aside. Put your money to work for you.
4. Guard thy treasure from loss - Protect your principal from loss. Invest in secure investments, not "blue sky" propositions. Gain knowledge of what you're investing in. Find those who are knowledgeable and heed their advice.
5. Make of they dwelling a profitable investment - Own your own home.
6. Insure a future income - Put proper insurance and other protection in place to protect yourself and your family and provide for your needs as you get older.
7. Increase thy ability to earn - Increase your knowledge and your skill set, and your ability to earn more will increase with it. Don't rely on policy or your boss for an increase in pay. Make yourself more valuable and the opportunities will come, or even better, you can create them for yourself.

• The Five Laws of Gold

1. Gold comes gladly and in increasing quantity to any man who will put by not less than one-tenth of his earnings to create an estate for his future and that of his family.
2. Gold labors diligently and contentedly for the wise owner who finds for it profitable employment.
3. Gold clings to the protection of the cautious owner who invests it under the advice of men wise in its handling.
4. Gold slips away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.
5. Gold flees the man who would force it to impossible earnings or who follows the alluring advice of tricksters and schemers, or who trusts it to his own inexperience and romantic desires in investment.

Here are a couple great little "one liner" pieces of advice as well:

• Better a little caution than a great regret.
• We cannot afford to be without adequate protection.
• Where the determination is, the way can be found.
• Opportunity waits for no man.
• Men of action are favored by the goddess of good luck.

If you're in debt (and I'm talking here about "bad" debt such as credit cards or car payments, etc. There are plenty of instances, especially in business, where debt makes sense and can be used as a tool. We'll talk more about this in a future post) the book gives a simple formula to chip away at those balances that are hanging over your head. Live on 70%, use 20% to reduce your debts and pay off your obligations, and at the same time do not neglect to put aside 10% to save and invest. You can do it. Find a way.

I implore you to take these nuggets of advice seriously, and if you're not practicing them in your life, start doing it today. Not tomorrow, not next week, but today. Why won't most do this? First of all, it requires discipline, which is unfortunately severely lacking in our culture. Our "have it all and have it now" instant gratification mindset that is throw at us from every angle, easy credit and extremely little, if any, training on money before we get out into the real world all contribute to the reason why such a small number will even attempt this. Trying to keep up with your neighbors and their new cars, boat, RV and beautiful home (who, by the way, probably put themselves enormously in debt acquiring those things) will only strap you down and make you a slave to debt. Remember point 3 of the "Cures For a Lean Purse" - Money should be working for you. Make it your slave and make it produce a return for you. Don't put yourself in a position where it's the other way around.

Another reason most won't attempt these simple formulas is that it takes time. Again, in our culture, we want the instant gratification and the "quick fix". Everyone's hoping for a windfall. They sit there waiting for a "big hit" that (they think) will take care of all of their money issues. Just look at the number of people that play the lottery and you know it's true. Look closer at those who actually win, or who inherit a large amount of money, or who make it in acting or sports and all of the sudden have a huge sum of money but have no knowledge of the Rules of Money. Does their stroke of luck fix the situation? Rarely. More often than not they end up more broke than they were before. Why? It's because without the knowledge of how money works, more money flows through your fingers just as quickly as less. Money itself does not solve the problem. More money only makes you more of what you already are, and if you're terrible with money, with no plan or discipline, more money will just make you even worse with handling it. Knowledge and discipline are what gets you and keeps you in the place you want to be; with money working for you instead of you working for it.

Make your decision today to start following these simple but extremely effective rules of money. Remember, they're rules. They're how money works, so don't overthink, analyze or try to argue the points. Instead, embrace them and put them in action in your life. It will take time, it will take discipline, but I promise you will reap the rewards of it over the long term. Stay focused and stay disciplined. Teach these rules to your kids! Most of us aren't exposed to these philosophies until much later in life, when we've already lost time and made mistakes. If you haven't read "The Richest Man in Babylon" pick up a copy now and read it. You won't regret taking any of these steps now and not putting it off to another day.

Gaining by Eliminating

Ok, I'm taking a page from my mentor's book here, so credit given where it's due this is based on a coaching cd by Greg Pinneo that I recently listened to. S.I.S.E., or "Sh** I Should Eliminate" - what should we remove from our lives to be more effective, to move closer to our goals and grow to live our potential? To live a healthier, more fulfilling life? If you ask people that are very successful, especially those that seem to get more done in a day than seems possible, most of them will tell you that it's not just about what they do that is the key; it's more about what they don't do. Here's few to get you started on thinking about what you should eliminate in your own life. Some are a spin off the cd by Pinneo, and some are my own thoughts.

• Distractions - We are so distracted in our culture today it's ridiculous. Between the ads we see and hear constantly and the constant "ding" of the 30 different alerts set on our phones, we are almost always distracted in some way. It's so bad we even have a phrase to describe it: Continuous Partial Attention. If you're not acutely aware of your own distractedness, it's very easy to get sucked in. It's all around us. When you're in a state of Continuous Partial Attention, you are never truly focused on the task at hand. You not only get less done, but you're never in the moment. You rob yourself of the full experience of so many great things in life if you're never fully present in anything you do.
• Vagueness  - Who wants to live a life where at the end you, or anyone else who was around you, couldn't really say what it was you did? What if they couldn't say what you stood for, what you believed in, or what you set out to accomplish? A vague life is a life without direction. Be clear on who you are, what you stand for, what you will not tolerate in your life, and what you want to accomplish. Know what legacy you want to leave. If the picture of what you want is vague, the results will be as well.
• Negative People - These come in all types, from those who are just "takers" who will never give anything from their end, to those who make you feel less of yourself just from being around them, to those who just have an overall negative attitude, to those who try to shatter your dreams with their own limiting belief of possibility. Here's an easy tip - don't hang around these people. We become like those we hang around. No matter how mentally tough you think you are, if you spend your time around people like this, it will affect your own attitude. Not to mention the fact that many of these types of people are time suckers and will use your time without hesitation or apology - before you know it you've been on the phone with them for 45 minutes, haven't said more than two words on your end, and have just been thrown up on with all of their problems and their negative spin. You know it's true, because it's happened to you before.
• Shallow Conversation - No more "how's the weather?" talk. Let's talk deeper. Let's talk life, philosophy, goals and aspirations. Let's talk life experiences. When we talk deeper, we build deeper relationships, we challenge our own thoughts, and we become better people.
• Worry - Worry has no place in your life. Think about it - has worrying about anything, whatever the outcome, ever helped in a situation? Ever? Of course not. Worrying does nothing but cause stress and make you wonder about things that are either out of your control or will never happen. Worry is a mentally draining, time wasting activity that has absolutely zero chance of having a positive return. If you tend to worry, sit down and make a list of all the things you're worried about. Then go through the list. The things you can do something about, do something about it, and the things you can't do anything about, let it go! We can't control the government, we can't control inflation, we can't control whether we get hit by a bus today or whether we're going to get cancer. Sure, we can do things to stay healthy and we can pay attention when we cross the street. But worrying about something that may or may not happen is worthless and has no place in your life. Control what you can, let go of what you can't. Now go make your list; seriously, right now.
• Apathy - I would go so far as to say this is one of the single biggest problems in our world today. Do not settle for less than what you're capable of. Don't be complacent and stop growing and becoming better. The opposite of apathy is passion. Get involved in whatever you can do with passion and that lights your fire. Then pursue it with everything you've got.
• Exhaustion - Staying up super late and getting up ridiculously early doesn't make you a martyr for your business; it makes you less effective. You're body can't function without proper sleep. You can actually get more done in less time if you're properly rested. Yes, there are times when you need to grind it out and push through, but if you're living every day of your life without enough sleep, you're asking for your body to crash. And it will. Don't burn yourself out.

Remove these things from your life and you will see a huge increase in the quality of your life, and you'll move much more quickly towards those things which you've set out to accomplish. What other things can you eliminate from your life in order to gain? Eliminate them today and start reaping the rewards.

-Comment, let me know your thoughts and what you need to eliminate on twitter - www.twitter.com/invest4cashflow

Using Debt as a Tool

Debt is a huge topic in our culture. Americans are great at getting into it. "As long as I can afford the payments", they tell themselves. But let's dig a bit deeper into debt. Is debt good, or is it bad? It certainly would seem to depend on who you talk to, or who's advice you listen to. Take for instance Dave Ramsey. He's a huge proponent of debt free living. I can't say that I can argue with the logic. Especially for the "average" American, who trades time for dollars at a 9-5 job. Living free of consumer debt is a very worthy goal, and it opens up a lot of options and the ability to live with less stress and more freedom. But, can debt actually help you? In certain circumstances, and used the right way, the answer is "yes!".

Debt is a tool. Like any tool, it can be used correctly, and it can be used incorrectly. If you use a chainsaw to cut down a tree, and you know how to operate one, all is well. You're using it for the right purpose, and you're trained on how to do it properly. But if you've never used a chainsaw before, and you try to figure it out on your own, you're likely to get hurt. Even worse, if you try to use it in a way that it's not intended for, you'll probably lose a limb. Unfortunately this is the equivalent of where most people are in their financing intelligence and education. Our education system teaches the basics, and how to get a "regular" job, but it does a very poor job of teaching about the real world - especially when it comes to managing money. I'll admit that a lot of this responsibility should fall on the parents, not the teachers or school system. Just look at the amount of consumer debt the average American has though, and you'll see the the problem - you can't teach what you don't know (or at least what you don't practice). The "instant gratification", "buy it now and figure out how to pay for it later" mindset has taken over. Americans especially are addicted to it. But I'll digress here, as I don't want to get off topic. The point is, debt is overwhelmingly used in a way that is not beneficial to the consumer, but there is a way it can be used as a tool to further your financial goals.

Here's the basics of it. Debt that pays for itself, or brings in extra above the cost of the debt, can be good debt if managed correctly. Debt that costs you money, and that you need to figure out a way to bring money in from elsewhere to pay for it, is bad debt. Robert Kiyosaki puts it this way: if it takes money out of your pocket every month, it's a liability (bad debt); if it puts money in your pocket every month, it's an asset (good debt). This is why your accountant says your personal residence is an asset, but Kiyosaki would say it's a liability. Even if you own it free and clear, you're still paying out of your own pocket for insurance, taxes and maintenance.

One of the best examples of using debt as a tool is in real estate. Say you want to buy a rental property as an income producing asset. Your options are either to pay cash, or to finance the purchase. In most parts of the country, and for most individuals, saving up that kind of cash would take, well, a very long time. Or, you can use leverage (more on the power of leverage later), and finance part of the purchase. Not only does this allow you to buy the home sooner than if you tried to save to pay cash, it will allow you to buy more homes before then as well. Any cash you don't need to put into the property can be used to invest elsewhere. The key is to make sure the debt pays for itself, or better yet, the property cash flows and brings in money every month. If it's putting money in your pocket, and your using other people's money (the bank's and your renters) to buy an asset for you, you're using the tool of debt in the right way.

Here's another example. You want to buy a new car, which costs $50,000. I'm not an advocate of buying depreciating "assets" that are brand new, but let's just say for example's sake. You can either pay cash, or you have the option to finance. Say you're able to qualify for a 0.9% rate. The question you need to ask is this: do you have the ability and knowledge to go out and make a better return than what you're paying on the car? If you do, it'd be silly not to finance the car, as long as that's what you do with the cash is put it to work to create a better return. Now essentially you're using the banks money that they gave you for the car as leverage to invest, and you earn the spread. I also like Kiyosaki's example of when his wife Kim wanted a new car. He told her to figure out how much the payment on the car would be, go out and buy enough assets to cover two times what that payment would be, and then go buy the car. Using these two strategies together can be very powerful. Now you have assets creating income for you, paying for the car and bringing extra money in, and if you're using the banks financing, you keep your cash free to invest elsewhere.

Debt can be good. It can be used in very powerful ways. It can also cripple you and control your life. The biggest factor is how you use it. Educate yourself, know what you're getting into, and use debt to buy income producing assets. That's the right way to use the tool of debt.

Which First...Personal Residence or Rental?

First, thanks to Steve for the inspiration for this topic.

 I'm glad you're thinking ahead to make sure you know what you're getting into. The last thing you want to do is go out and buy a home, whether it's a personal residence or rental first, and then find out you just put yourself in a position where you can't do the other. I took a slightly different spin on the question, but I think I'll get the basis of it answered.

First, let's cover the basic differences between owner occupied loans and non-owner occupied loans. With conventional financing, you have a few different options on the personal residence side. You might be able to qualify for a low down payment program and put down as little as about 3% of the purchase price, or even zero down if you live in an area where the properties may qualify for USDA financing. Keep in mind that with either of these options, likely you will be paying mortgage insurance in addition to your typical principle, interest, taxes and insurance (PITI). If you can put a significant amount down, you might be better off going with a 20% down program without the mortgage insurance.

On the non-owner occupied side, you'll see a big difference in down payment requirements, as well as a difference in rates. Typically you'll need 15-20% down to purchase a home that will be a rental property. You'll also see slightly higher rates. This is a reflection of the lenders perceived risk in this type of loan. The more "skin in the game" you have, the less likely you'll default on the loan. The nice thing about these loans, is often you can use a portion of the rents to help qualify for the loan. For a new purchase, you might be able to get 75% of the rent counted as part of your income to help qualify. Once you have 2 years tax returns operating the home as a rental property, you can then use the actual income of the property to qualify for additional loans.

One strategy to consider is actually buying your personal residence first, and converting it into a rental property later. The benefit is that you get the low down and lower interest rate terms of an owner occupied property, even once you convert it to a rental. Check your loan terms to see if it states that you must live in the home for a specified period of time first. Make sure you do your calculations first as well, as when you go to purchase another property in a couple years you will likely have to be able to qualify for both the existing mortgage payment as well as the new one you're attempting to get. This may not be the case if you have gained some equity in the property, but be prepared for it just in case, especially since there's no telling what loan programs will be available 2 years down the road. Something you might even consider doing that could help with this is buying a 2-4 unit residential building. For 2-4 units, you can still get residential financing, and you then have additional units paying for your mortgage that you can use as income to help qualify for both the initial loan, as well as another loan later. If the rent of the other unit(s) covers, or at least almost covers the mortgage (or better yet the building cash flows), you're golden in a couple years and you won't have to worry about trying to qualify for both the current building and an additional one.

The other benefit with buying a future rental as a owner occupied home first is that, if you use a low down payment program for the initial purchase, you're using more leverage on the property. If you buy it as a rental first, you are putting more of your own money in, and you can't get that money back out unless the property and rents go up in value enough to be able to refinance later. As a rental property, with conventional programs, even when you refinance you will be required to keep a larger portion of equity in the property. With a low down owner occupied loan, you have less of your own money in the property, and more of other people's money in the property. As long as it still cash flows with the higher leverage, that allows you to use your own money for other investments.

Now, there's one wild card I want to throw in the mix here, and that is seller financing. A lot has changed with this since Dodd-Frank went into effect, but seller financing can be and still is done on a regular basis. There are a ton of benefits to negotiating seller financing. You're negotiating directly with the seller, so there is a lot more flexibility to the terms that can be created versus the "our way or the highway", "take it or leave it" banks. The other great thing is that, if you create seller financing on a rental property, that loan is not on your credit report so it most likely will not count against you and hurt your ability to qualify for a conventional loan. Why not go out and find a rental property that you can buy with seller terms, and also go buy your personal residence? "Why in the world would", you may ask, "would a seller finance the sale of their property?". Well that, my friend, is an entire topic by itself and for a separate post at a later day (I guess I just figured out the topic for my next post).

One final disclaimer; conventional financing terms, programs and criteria change on what seems like a daily basis. Make sure you're connected and build a relationship with an experience, knowledgeable mortgage broker who stays up on the latest changes and can help create a game plan for you based on your specific situation. Lastly, make sure you make a plan, as it sounds like you are, but then act on it. Don't overanalyze all the different potential scenarios. Be smart, come up with an action plan that makes sense, and then go out and make it happen.

Putting Your Action Where Your Mouth Is

You've heard the term "put your money where your mouth is", meaning back up what you say and don't just give out advice that you don't follow yourself, or spew an opinion that you can't or won't stand behind. However, I think there is a key word that needs to be replace in this phrase - money doesn't back up what you say; action does. Let me explain.

With all the training and endeavors I've been a part of up to this point in my life, I've seen plenty of people so called "put their money where their mouth is" by paying huge amounts of money to start a business or to go through educational courses to learn how to make money in various industries. The problem is, they think that paying the money for the education is what will solve their issues and will make them successful. This could not be further from the truth. You could pay a million dollars for education from the best educators and most prominent leaders in whatever industry you'd like to be successful in, but paying the money doesn't do anything for you. It's not paying for the training that gets you anywhere, it's the action that follows it.

So many people think that somehow paying money form something will be what gets them the results, or that it will be easy once they get into whatever program they are starting. Sorry to burst your bubble, but there is no educational program or business system in the world that you pay and then just sit back and watch the money roll in. Success is not easy! It is hard work and takes a dedication to learning whatever endeavor you choose. Success is a process. It will not happen overnight and will not happen without you putting in the effort (and if anyone tells you that it will, RUN FAST). If you want success, if you want to reach your goals, you are going to have to make it happen, and that means taking action, not just paying for a "magic formula". I makes me sad to see so many people thinking they can buy their way into prosperity.

Now I'm not trying to be negative, I'm just trying to be realistic. If you are going to back something up with your money, you have to be prepared to back it up with action. In reality, the action part is what really matters, and is the only part that will get you anywhere. Without action, you are stagnant, and you will always be where you are right now. To progress, to move towards your goals and dreams, you have to take action. Go out there and put your money where your mouth is, but make sure you are also putting your action where your mouth is. Without that final component, your money will just be wasted.