HowWealthWorks.com

[Dave]

Why most people aren't wealthy
Quite simply, most people confuse the wealthy lifestyle with real wealth. They confuse “spending a lot of money” with “having a lot of money.” You've probably heard people make that mistake yourself. Wealth is the freedom to do whatever you want, not buy whatever you want. You will not become wealthy if you live the wealthy lifestyle before you are wealthy. In fact, the more you borrow and spend today the more trapped in your job you will feel. Even people with high earned income fail to become wealthy because they spend more in anticipation of earning more. This is the reason that most people feel trapped in their jobs.

Most people are trapped in their jobs
Do you feel trapped in your job? Would you like to explore other career opportunities but can't because they don't pay enough? Maybe you just feel like you're going to have to keep working forever. Perhaps you'd like one spouse to stay home & take care of the kids, but can't cover the bills on a single paycheck. Do you have: 1) higher monthly expenses, 2) increasing tax bills, or 3) less money left over at the end of the month? If so, there is a good chance you're caught in the IncomeTrap.

Are you caught in the IncomeTrap?
The IncomeTrap is dependence on your earned income (or more) to make ends meet. Contrary to what most folks think, increasing dependence on earned income (what we work for) is a symptom of our decreasing wealth, or "net worth." As wealth decreases, we depend more and more on our paycheck to meet our expenses. This decrease in wealth may seem like higher prices and bigger bills, but in reality our net worth is decreasing. Businesses and accountants define wealth as assets minus liabilities & expenses. If our assets go down or stay the same, while our liabilities & expenses rise, our wealth decreases. I used to believe I could increase my wealth by increasing my salary, but I now realize that is really only part of the picture.

The IncomeTrap limits our freedom
What does the IncomeTrap mean to us? First and foremost it limits our freedom. Our freedom is limited because we depend on our paychecks to pay our bills, so we can't stop working or change careers to something that doesn't pay as well. Does this sound familiar? I know I've felt trapped, and many of my friends have told me about feeling trapped as well. For the longest time, I didn't really understand these feelings or what to do about them. Now I understand that building my wealth, by decreasing my liabilities and expenses and working on increasing my assets provides the freedom to get me out of the trap. Imagine, for example, a situation where your income from your assets pay all of your expenses, with money left over. Over time, your wealth would grow on its own, without the need for you to work! Once I began to understand how I could get out, I began to wonder if making more money would solve the problem.

Higher salaries usually mean less wealth
Even when their salary or cash flow goes up, most folks these days experience a decrease in net worth. When their salary increases, their house appreciates, or they get a tax refund, most folks consume this increase or leverage their paycheck by taking on greater debt, usually to the detriment of their net worth. The increase in consumption and debt, especially long term debt like mortgages, car loans, and big credit card balances effectively trap the consumer in a lower net worth existence. And as we know, when our net worth goes down we'll have to work longer and harder. For families, this often means that both spouses must work to support the current standard of living. And even if folks don't consume all of their pay increases and home appreciation, our biggest expense keeps much of the new money from making us more wealthy.

Taxes are your biggest expense
The government isn't making getting out of the IncomeTrap any easier. Contrary to what most folks believe, taxes are our biggest expense. What makes taxes so insidious is the nature of income tax withholding. The government gets paid before we do! Hey, who is doing the work around here, anyway?!? Indeed, most of us are taxed far more than we realize. Our employers pay tax on our employment and wages; our employment benefits are taxed, as is our paycheck; and then we pay tax on almost everything we consume-including food, clothing, and shelter. You might not realize it, but you're a 50/50 partner with Uncle Sam on every dollar you spend, effectively making every purchase twice as expensive as it otherwise might be.

Taxes make spending more expensive
Our partnership with Uncle Sam makes keeping up with the Joneses especially costly. Income Tax, sales tax, Social Security & Medicare taxes, service taxes, energy taxes, personal property taxes, state and local taxes. While we buy bigger homes, bigger automobiles, and the other trappings of the "wealthy lifestyle," Uncle Sam just rakes in the additional taxes from our consumption. And when prices go up, our over consumption hurts us just that much more-the more we consume, the more we're affected by increases in prices. And make no mistake, prices are increasing. Uncle Sam has been running the printing presses night and day to create more and more credit, inflating the money supply in a way that ensures rising prices.

"Wealthy Lifestyle" keeps you poor
What causes the IncomeTrap? For me, the IncomeTrap was caused by confusing the end with the means. I used to believe that expensive cars, a big home, and a lavish lifestyle meant I was wealthy. As it turns out, I had it completely backward. By consuming my paycheck through taxation, consumption, and debt I never gave my wealth a chance to grow-I was keeping myself from becoming wealthy by living a "wealthy lifestyle." Indeed, almost every form of media encourages us to live the wealthy lifestyle so that we put more money in the pockets of big business and government thereby keeping us working harder and longer.

Consumption keeps you in the IncomeTrap
By confusing the "wealthy lifestyle" of consumption with growing wealth, I was keeping myself in the IncomeTrap! I was acquiring "things" so that I'd feel more wealthy, only to find they impoverished me. Why do I say this? The more I acquire and consume, the more depreciation I pay, the more energy, insurances, taxes, debt, the bigger the headache and expense from upkeep and repair, the more risk of damage and loss, the more storage needed, and most important, the more time I waste on acquisition, upkeep, and organization. Quite frankly, I just don't need the headache. Of course, the Madison Avenue crowd and government have other ideas. Yes, government. You didn't think all that cheap and easy credit was to encourage a decrease in consumption and an increase in savings, did you? All that credit has filled government tax coffers-almost enough to cover the very large increases in government spending.

Consumption costs more than you know
And I know I'm not alone in my acquisitiveness. Witness the booming market in rental storage. Rental storage is a testament to the struggle between the scarcity of real estate (space) and most folks' desire to acquire more stuff! I used to think that my cars were assets on my balance sheet, but now I know better. Even if I own a vehicle free and clear (perhaps I even paid cash at the dealership) a car is very expensive acquisition. On average, a new vehicle depreciates 42% in the first 3 years. On a $30,000 vehicle, I’m paying $350/month in depreciation alone to possess this "asset." Add in fuel, personal property tax, tags, registration, and insurance, and we're talking some serious money. And let's not forget, that $400+/month is after tax dollars equating to roughly $7300/year in gross salary. All this for a vehicle you own free and clear. If I've borrowed the money for the vehicle the picture becomes even more grim.

"Assets" are often liabilites
People tell me that vehicles are an extreme example, but I have to be honest. I feel this way about most of the "stuff" that I have in my life. Home ownership, another "asset" costs me in depreciation (kitchens, roofs, floors, paint, HVAC, and appliances all wear out), upkeep, insurance and risk, time and worry. Sure, real estate has been a great speculative investment the last 4 years, and I've benefited right along with every other homeowner. But interest rates are rising, and real estate typically flatlines or falls in value when interest rates rise. Moreover, unless I sell my home, it is only taking money out of my pocket. That said, the tax benefits and monthly expenses might make home ownership worth it in your situation, but don't assume that it's right for you without running the numbers. I know far too many friends that are buying houses, townhouses, and condos at almost double the current rental equivalent. Would you rather rent the house for $1000/month or rent the money to "buy" the house (with all the responsibility and taxes it entails) with money you're renting from the bank for $3000/month? Rest assured that either housing prices, rent, or both must adjust to bring the housing market back into "balance." It may seem as if we're painting a bleak picture, but there is hope.

Is escape even possible?
If you're like me, you're probably asking yourself whether you can escape the IncomeTrap at all. Perhaps your current financial circumstances make escape seem impossible. Good news: we can all escape the IncomeTrap! All it takes is education, action, and effort over time. HowWealthWorks.com is a free and open community dedicated to helping you escape. Together we provide the education and tools you need to begin increasing your wealth today. We have a process specifically for you that will start increasing your wealth right now-and it's completely free. You'll read more about exactly how to escape the IncomeTrap in other areas of this site. For now, let's consider what life will be like once you escape.

Growing our wealth is up to us
High salaries, cheap and easy credit, and Madison Avenue all make it seem smarter and more desirable to consume and leverage our paycheck to live the wealthy lifestyle. And of course this makes sense. When we spend and consume our paychecks, we provide more of our income to Corporate America and Uncle Sam. Clearly, it is not in the best interest of our creditors, corporate America, or Uncle Sam for us to maximize our wealth. This means growing our wealth, our "net worth,” is up to us. Government will not help us-- indeed our schools are woefully deficient in teaching our children even the most basic of personal finance concepts. Big business will not help us-- it is in their interest that we consume to the maximum. HowWealthWorks.com is dedicated to help you (and us) escape the IncomeTrap, and put you on the road to financial freedom.

Escaping the IncomeTrap is simple
Simple, however, is not necessarily easy. It comes down to this: run your personal finance like a business. We call this your “Personal Business.” By cutting your expenses, you're going to have more money left over at the end of each month: this is your profit. IncomeTrap has a number of forum categories focused on helping you cut your expenses. To view the categories, click here. You enjoy more freedom as soon as you begin cutting your expenses. You can take a lower paying job or drop down to a single paycheck family. However, we suggest you take that extra money left over at the end of the month and invest it in capital assets. Assets that will grow your net worth and begin grow unrealized wealth and to put unearned income in your pocket. Those assets often grow tax free until you chose to realize income, and even then you'll pay lower taxes than on income from a job. You can read about the major asset classes by clicking here. We discuss which assets to acquire to grow that precious unearned income, and our regular global economic news will provide the financial education you need to profit for years to come.

Escape Means Increasing Freedom
HowWealthWorks.com is focused on your freedom. If you feel trapped today, it might be because you don't have a lot of choice in your life. You can't choose another career because it won't provide a big enough salary to pay your bills and expenses. When you begin to escape from the IncomeTrap, you'll start to feel free. Your freedom will be growing by the month. By taking stock of your financial situation, you'll understand what needs to be done to begin cutting your taxes, reducing liabilities and expenses, and increasing your income producing assets. You'll become less dependent on your job and your paycheck, freeing you to explore other career opportunities, perhaps doing the job you've always dreamed of. You'll have a new freedom from financial insecurity, you'll no longer fear retirement or unemployment, confident in your ability to understand and manage your own finances with our simple tools. Even if your economic situation changes, you'll know how to change with it, and if you don't, the HowWealthWorks.com community will help you.

In the end, we'll help you stop working so hard for your money and start putting your money to work for you.

[Suresh]

Minyanville: The Courage to Choose
...
I believe that in time, historians will define the last twenty years in America as the “Age of Aspiration” where, thanks to unprecedented levels of credit, Americans could become anything they wanted. Where, thanks to zero percent down debt and a seemingly robust economy, we could own bigger homes, fancier cars, and more lavish vacations – where our bounty was limited only by the boldness of our wants.

Well, I, for one, believe that our Age of Aspiration is ending. And, with its conclusion, we must, for the first time in almost a generation, begin to reconcile our wants with our means. We must choose what to do without, rather than what more to do with.

But I would suggest that few of us are prepared for this challenge. Why? Because abundance relieves each of us from having to prioritize what is important. When anything is possible, everything is possible. Few of us have really had to choose.

As I look ahead to 2008, though, I believe that each of us, the communities we live in, and the organizations and companies we serve, are going to have to make choices. We are going to have to separate what is most important from least, and act accordingly. Where life was once limitless, it will now be constrained.

And, like it or not, all of us will need to return to our vocabulary a simple phrase that I believe has been lost over the past twenty years: “I can’t afford that.”

So as we approach 2008, I wish the Minyanville community the wisdom to prioritize well, the courage to make the hard, and often painful, choices, and, most of all, the strength and conviction to follow through.

Minyan Peter
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Minyan Peter's Age of Aspiration sounds more polite than the age of infantilization discussed in Benjamin Barber's article entitled "Spent Youth: The global marketplace aims to create a world of adolescents: children with consumer power and adults with the appetites of spoiled kids." If you haven't read the article, consider at least the excerpt at the link.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Dave and I have noted several times that Madison Avenue is not your friend, when it comes to your financial freedom. Madison Avenue's job is to get you to buy products or services such that you don't need with money that you don't have to impress people you may not even know or like. Home equity loans are just one such product. Don't believe me? Read the whole article below.
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New York Times: Home Equity Frenzy Was a Bank Ad Come True

“Live Richly.”

That catchy slogan, dreamed up by the Fallon Worldwide advertising agency, was pitched in 1999 to executives at Citicorp who were looking for a way to lure Americans to financial products like home equity loans. ...
The advertising campaign, which cost some $1 billion from 2001 to 2006, urged people to lighten up about money and helped persuade hundreds of thousands of Citi customers to take out home equity loans — that is, to borrow against their homes. As one of the ads proclaimed: “There’s got to be at least $25,000 hidden in your house. We can help you find it.”
...
The portion of people who have home equity lines more than 30 days past due stands 55 percent above its average since the American Bankers Association began tracking it around 1990; delinquencies on home equity loans are 45 percent higher. Hundreds of thousands are delinquent, owing banks more than $10 billion on these loans, often on top of their first mortgages.

None of this would have been possible without a conscious effort by lenders, who have spent billions of dollars in advertising to change the language of home loans and with it Americans’ attitudes toward debt.

“Calling it a ‘second mortgage,’ that’s like hocking your house,” said Pei-Yuan Chia, a former vice chairman at Citicorp who oversaw the bank’s consumer business in the 1980s and 1990s. “But call it ‘equity access,’ and it sounds more innocent.”
...
Marketing executives knew that “second mortgage” had an unappealing ring. So they seized the idea of “home equity,” with its connotations of ownership and fairness.
...
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Dave]

Just as you wouldn't practice medicine on yourself, you're probably not qualified to manage your own wealth. Wealth management requires

Financial Express: Top 10 wealth management mistakes

What is the difference between wealth management and portfolio management?

But the essence of wealth management, as most managers would tell you, is distinct from portfolio management. It is more long term and entwined with your life rather intimately. It is the creation of wealth to meet individual goals and the goals of the family. It even goes beyond your own life, it could even include your philanthropic and other related aspirations of seeing that your wealth has grown and is well distributed.

1. Going it alone: And one of the biggest mistakes people make in this area of wealth management is to do it alone.

2. Not picking the right partner: Most investors pick multiple wealth managers to manage different portions of their portfolios. This mistake means they're above to avoid disciplined portfolio management and managing all aspects of their wealth.

3. Lack of Clarity: Though not water-tight, you have to have some clarity on the broad goals that you want to achieve in your life. These goals could be in the form of your children’s education, buying a farm house, children’s marriage, retirement and even beyond your demise.

4. Not regularly revisiting objectives: Obviously, as life goes on, objectives and goals keep changing. And when these happen, the wealth manager or the relationship manager must be consulted to reset the entire portfolio. And this is a critical aspect many clients tend to forget, says a wealth manager.

5. Giving in to Panic or greed: Wealth management is a long term process and there will be times, especially in the bull-run, when you would be tempted to risk more.

6. Communication hassles causing you to neglect your portfolio: However, you need to be clear about where your funds are being allocated and how are they being monitored.

7. Neglecting protection of your wealth and focusing only on return: Often enough, wealth management is considered to be just about growing a set capital and then deciding how to distribute these monies.

8. Neglecting succession/estate planning: There have been umpteen cases where the family members of the deceased have been involved in bitter legal wrangles over sharing the estate.

9. Involving family: Though it comes at the bottom of the rankings, not involving your family in the wealth management process could easily be one of the biggest mistakes.

10. Overdependence: Lastly, wealth managers are human too and they make mistakes. Being completely dependent on them could be as counter-productive as constantly prodding them with suspicion.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom

[Dave]

Families that require both spouses to work just to meet expenses leave no cushion in case something goes wrong. Throughout the 90s and the early 00's, nothing did go wrong.

Now that the wheels appear to be coming off the economic cart, families that relied on two incomes to fund their standard of living are at risk.

We'll highlight those aspects of the article that are attributable to inflation and wage stagnation.

Sun Times.com: Caught in the 2-earner trap- When one breadwinner loses a job, making ends meet can be daunting -- even when families cut away the extras

With more middle-class women with children working today than a generation ago, total household incomes have climbed. While female earnings used to account for a quarter of that income, last year it reached 44 percent.

But with so many women joining the work force, other expenses have skyrocketed for middle-class families, who have bid up prices for things like a home in a safe neighborhood with good schools. Other expenses in a dual-earner family -- including child care, an extra car for mom to go to work and rising college costs -- have gobbled up nearly all of the gains in salary, some argue.

"The second income has largely just gone to the basics,'' said Amelia Warren Tyagi, co-author of The Two-Income Trap: Why Middle-Class Parents are Going Broke. "A generation ago you could buy a home on one average income and live a normal middle-class life and have money in the bank. That's changed.''

In fact, research by Tyagi and her mother, Harvard Law professor Elizabeth Warren, shows that the average two-income family now has $1,400 less at the end of the month after paying expenses than a family with a single breadwinner a generation ago.

Burnley said it's impossible to save. In fact, half of middle-class families have no savings, according to Demos, a public policy research group in New York, and Brandeis University.

"In a world where you've already committed both incomes, a family doesn't have a reserve,'' Tyagi said. "They just go into debt. Even once that worker gets back to a job, there is no income to pay off that debt.''

The result is two-income families with children are more likely to file for bankruptcy than ever before, and more likely to do so than single-income homes a generation ago. They are also more likely to get divorced, something Burnley is acutely aware of.

The result is two-income families with children are more likely to file for bankruptcy than ever before, and more likely to do so than single-income homes a generation ago. They are also more likely to get divorced, something Burnley is acutely aware of.
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Dave

Please feel free to agree with or critique the article excerpts and our comments. Alan Greenspan: Gold and Economic Freedom