Financial Freedom For Smart People Thu, 30 Oct 2014 21:13:15 +0000 en-US hourly 1 The Ten Commandments Of Wealth Building Wed, 27 Aug 2014 23:30:30 +0000

Discover the Ten Key Principles to Build True Wealth

Key Ideas

  1. How you can build wealth automatically with the least amount of effort.
  2. How “environments” and habits can literally pull you toward your wealth goals.
  3. 6 different types of leverage to build your wealth.

True wealth is about a lot more than just growing your net worth.

Yes, it’s true that financial independence is all about money, but living a wealthy life is not. This distinction is critical.

We’ve all seen rich people who are miserable, and poor people who are happy. Research even shows the relationship between money and happiness is small.

Below are the key ten principles that will help you achieve true wealth — both financially and personally.

1st Wealth Building Principle: Get Deeply Motivated

Money is a shallow motivator — too shallow to drive you deep enough to achieve success.

The problem is financial wealth is an external goal with benefits limited to the world outside of you. Money buys things, but money doesn’t buy happiness. It can build you a prettier prison, but it can’t get you out of prison.

The inherent limits of external goals (fancy houses, cars, and big bank accounts) similarly limits how motivated you will be when pursuing them.

To succeed in building wealth, you want to be driven by internal goals deeper than just the external trappings of wealth. You want a cause that will bring transformation to your life and drive you deep enough to overcome all the obstacles that stand between you and financial freedom. 

Internally-driven goals that might focus your attention long enough to succeed include the following:

  1. Freedom: Break loose from the shackles of daily labor so that you have more time to grow, create, and live to your fullest potential.
  2. Charity: The more you have the more you can give. Charitable foundations created by wealthy families often provide the financial muscle to empower great social and environmental causes.
  3. Growth: When you have financial freedom, you also have more time to pursue personal freedom. The wealth in your external world becomes a mirror to the wealth in your internal world. The principles that lead to financial wealth can also lead to true wealth by affecting other areas of your life.
  4. Leadership: Grow your own wealth ethically and joyfully so that you can lead by example for friends and family to rise above the bonds of financial mediocrity and follow in your footsteps.

The reason deeper causes are essential is because building wealth isn’t easy.

You will encounter many problems that must be overcome along your journey to financial freedom. You will pay a price to reach your goal.

To stay the course long enough to succeed, you must be motivated by a commitment that runs deeper than just the lifestyle that money can buy.

2nd Wealth Building Principle: Give More Value Than You Take

Adding value to the world by giving more than you receive makes everyone better off. That is how you build true wealth. You improve other’s lives by improving your own.

Sure, history is replete with people who have amassed financial empires by exploiting others or the environment, but taking value can never lead to happiness or fulfillment. Exploitation may bring riches, but giving value brings happiness and fulfillment as well as riches — and that’s true wealth.

By giving more value than you receive, success becomes a measure of how much you have given. The wealthier you become the more you are giving to others.

It is a rewarding way to live.

“From what we get in life, we make a living. From what we give, we make a life.” - Arthur Ashe

3rd Wealth Building Principle: Live With 100% Integrity

Never do or say anything that wouldn’t make your Mother and Father proud.

Don’t cause harm, encroach on other’s property, violate moral law, or damage the environment. Don’t lie, insult, or cheat in pursuit of financial wealth.

Heck, don’t even stretch the truth. It just isn’t worth it.

The rule is simple: if it doesn’t feel right then it probably isn’t. If you don’t feel comfortable telling your spouse, children, and parents what you are doing, then you probably shouldn’t do it.

Never choose expediency over integrity because no amount of financial wealth can replace a good night’s sleep, a clear conscience, and a peaceful mind.

4th Wealth Building Principle: Be Courageous

Humans are social animals which makes us cautious to venture independently. Yet, wealth doesn’t come from following the crowd. It results from doing what others won’t so you can have what others never will.

It takes courage to be a self-starter and be self-responsible. It takes courage to walk new paths and develop new skills. It takes courage to stand out from the crowd. It takes courage to put out the extra effort when others don’t.

In short, it takes courage to build wealth.

It may be true that the nail that stands up is the nail that gets hammered down, but it is equally true that the nail that never got driven is the nail that didn’t fulfill its purpose.

Live with courage so you can live fully and experience true wealth.

These 10 Commandments of Wealth Building will help you achieve financial success and true wealth.

5th Wealth Building Principle: Be Disciplined

Wealth is the cumulative result of many little things added together and compounded over a lifetime. That means your daily habits will make or break your success.

Saving, investing, reinvesting, and growing your financial and business intelligence are all essential wealth building habits that require persistent and consistent effort.

In other words, wealth building requires discipline.

Without discipline, you risk falling prey to the number one wealth killer: procrastination. You must begin the right habits today without delay. It takes discipline to overcome procrastination by starting today and persisting tomorrow.

Another obstacle to disciplined, daily habits is “magical thinking.” This is the false belief that financial security will magically appear out of thin air without a specific plan or action causing it.

Wealth happens because you do what it takes to make it happen. The appearance of “instant wealth” actually stands on the foundation of years of disciplined, daily habits. Luck comes to those who make their own breaks.

6th Wealth Building Principle: Avoid Conspicuous Consumption

The illusory carrot for building wealth is the attraction of a “more, better, different” lifestyle.

This myth is perpetuated by brokerage ads filled with sailboats, European vacations, and perfectly manicured golf resorts. The problem is consumerism causes your limited resources to be directed toward lifestyle and away from building wealth.

They are competing demands for the same scarce resources – and only one can win the battle.

“Seek freedom and become captive of your desires, seek discipline and find your liberty.” - Frank Herbert

The reality is wealth is a form of delayed gratification. Wealth builders live modestly by spending less than they can afford (in money, time, and energy), so they can invest the difference for greater value in the future. They understand happiness does not result from the material trappings of wealth, because that would only keep them from fulfilling the deeper cause that drives them to success.

Every day you make a choice between consumption today or wealth for tomorrow.

The only way to live delayed gratification as the most fulfilling alternative without any sense of sacrifice is when your motivating cause is a deeper drive than your desire for lifestyle. If lifestyle is your cause then consumption becomes the priority — making wealth eternally elusive.

7th Wealth Building Principle: Build Supportive Environments

[dont-hire-a-financial-coach] If building wealth was easy, then more people would achieve it. Yet few succeed in their pursuit of financial freedom even though anyone can put together a reasonable plan to become wealthy.

The difference is consistent, persistent, focused action. Life provides an endless stream of distractions to sidetrack your plans for wealth. The solution is to create a support system that keeps you focused, on track, and literally draws you toward wealth.

Your family environment, relationships, work environment, financial habits, daily rituals, and more must be pro-actively designed to literally pull you toward wealth by supporting and reinforcing your plans.

You must structure your life to support a wealthy outcome. It’s the path of least resistance.

Financial Mentor’s coaching and educational products can help you re-design your life to achieve financial freedom. You either direct your daily life to achieve your goals, or you can passively allow your days to be filled with alternatives.

You either get the results you choose, or you get the results that are given to you. Which path will you follow?

8th Wealth Building Principle: Apply Leverage To Build Wealth

Leverage is the essential success principle that builds wealth. You won’t get wealthy by trading time for money and you can’t do it all yourself.

Building wealth requires you to work smarter rather than harder by applying the following principles of leverage:

  1. Financial Leverage: Other people’s money so that you are not limited by your own pocketbook.
  2. Time Leverage: Other people’s time so that you are not limited to 24 hours in a day.
  3. Systems and Technology Leverage: Other people’s systems and technology so that you can get more done with less effort.
  4. Marketing Leverage: Other people’s magazines, newsletters, radio shows, and databases so that you can communicate to millions with no more effort than is required to communicate one-on-one.
  5. Network Leverage: Other people’s resources and connections so that you can expand beyond your own.
  6. Knowledge Leverage: Other people’s talents, expertise, and experience so that you can utilize greater knowledge than you will ever possess.

Leverage allows you to build more wealth than you could ever achieve alone by utilizing resources that extend beyond your own. It allows you to grow wealth without being restricted by your personal limitations.

Leverage is the principle that separates those who successfully attain wealth from those who don’t. It’s just that simple.

If you aren’t using leverage then you are working harder than you should to earn less than you deserve — and that isn’t going to make you wealthy.

9th Wealth Building Principle: Treat Your Wealth Like A Business (Because It Is)

[how-much-money-do-i-need-to-retire] You wouldn’t build a business without a business plan. Why should building wealth be any different?

Design your wealth plan based on proven business principles that lead to success. These principles include competitive advantage, leverage, accurate record keeping, and accountability– just to name a few.

Run your money like a business, because that is exactly what it is: a personal financial management business.

Additionally, your personalized wealth building plan should take into account your unique skills, interests, and resources while incorporating the Ten Commandments to Wealth, successful investment principles, and much more. When complete, your wealth plan will be tailor-fitted to your unique life situation, while honoring the proven success principles that no wealth plan is complete without.

Run your money like the business it is. Anything less will slow your journey to wealth.

10th Wealth Building Principle: Steward Your Wealth

“If a man is proud of his wealth, he should not be praised until it is known how he employs it.” - Socrates

Wealth is your servant, and you are a servant to your wealth. Money is little more than a tool that comes with a responsibility to use it wisely.

The rich man is a fool who dies without arranging his affairs to assure that his wealth does good during his lifetime and after his passing.

Through your legacy of wealth, you have the opportunity to bless yourself and your family’s life now and into the future. And you can go beyond that by expanding the circle to include the lives of all who follow you.

As a successful wealth builder you will be in the unique position to organize charities that can do great social good. The fact that you can’t take it with you means wealth is a gift to be given.

Always understand that wealth is not something you possess, but it is a flow which has found a temporary parking place under your stewardship.

Eventually this stewardship will move to others as all things must pass (including you). The wealth builder’s solemn responsibility is to use this temporarily gifted power wisely so that it creates maximum benefit for all those who are touched by what you created in your lifetime.

In Summary…

There are ten key wealth building principles that lead to true wealth, not just monetary wealth. The objective is not just to become rich, but to build a balanced, fulfilling, wealthy life.

These ten key principles will help keep you on track:

  1. Build Wealth For A Deep Cause: Money alone is too shallow a goal to motivate you to overcome all the obstacles that stand between you and wealth. When you find a deeper goal like freedom, growth, creativity, or charity then you will have the internal motivation to persist and succeed.
  2. Give More Value Than You Take: When you give value then your financial success becomes a measure of how much you have given to the world. It is a satisfying way to live.
  3. Live with 100% Integrity: Integrity is non-negotiable because no amount of money can replace a good night’s sleep, a clear conscience, and a peaceful mind.
  4. Be Courageous: Wealth results from doing what others won’t so you can have what others never will.
  5. Be Disciplined: Life will conspire to distract you from achieving your goal so that only the disciplined will stay the course with consistent enough action to get results.
  6. Avoid Conspicuous Consumption: Nobody ever spent their way to financial freedom. Every day you make a choice between consumption today or wealth for tomorrow.
  7. Build Supportive Environments: The path of least resistance to wealth is paved by supportive environments that literally pull you toward the goal.
  8. Apply Leverage: Leverage is what separates those who achieve wealth from those who don’t because you can’t reach the goal by trading time for money and you can’t do it all yourself. You need leverage.
  9. Treat Your Wealth Like A Business: As a wealth builder you are in the personal financial management business and must manage your net worth just like an executive manages a successful business.
  10. Steward Your Wealth: Money is little more than a tool that comes with the responsibility to use it wisely. It is not something you possess, but something that passes through you and must be given back.

Follow these ten success principles and you will be on the path to true wealth.

After all, isn’t life too short to settle for anything less?

“Say what you will about the Ten Commandments, you must always come back to the pleasant fact that there are only ten of them.” - H.L. Mencken

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7 Key Reasons Why Financial Education Is Your Best Investment Fri, 22 Aug 2014 00:02:11 +0000

If You Think Investment Education Is Expensive, Just Try Ignorance

Key Ideas

  1. Reveals the only way to make consistently smart investment decisions.
  2. Shows you how to build a wealth plan custom fitted to your unique values, skills, and resources.
  3. Discover why you can never pay an advisor enough to put your interests before his own… and what to do about it.

Do you know the difference between a balance sheet and an income statement?

Do you know the necessary due diligence steps to take before putting capital at risk on a new investment?

Do you know the difference between investing and gambling and how it affects your profits?

Amazingly, the single biggest skill that can make or break your financial success is not taught in school. You can graduate with a four year degree and learn nothing about personal finance or investing.

Doctors and attorneys can open their own practices without any clue how to read a financial statement. Business owners and investors can remain dangerously ignorant of the tax law.

The truth is, financial literacy is the essential skill you must develop if your goal is to build wealth and enjoy financial security. There’s no alternative.

The best investment you can make is in yourself and your financial education. It’s the obvious starting point to building wealth.

Why? Here are seven reasons:

  • Provides dividends for life that nobody can ever take from you.
  • Increases your earning potential.
  • Increases your return on investment.
  • Improves the quality of your life and finances.
  • Secures your retirement.
  • Defends your portfolio from unnecessary losses.
  • Provides peace of mind around money.

That’s a long list of advantages, but what about the disadvantages? Why doesn’t everyone master these essential skills for investing and develop their financial literacy?

Because it requires time and effort — and they’re too busy.

That’s it. There are no other disadvantages.

If you are willing to commit the time, you can have all the advantages that accrue to becoming financially literate. All you have to do is put out the effort and a lifetime of benefits is yours for the taking.

“Invest in yourself, in your education. There’s nothing better.” - Sylvia Porter

It is one of those “duh-obvious” decisions that is easy to understand, but hard to live.

After all, what do you prefer: a little bit of effort now in exchange for a lifetime of financial security, or a little bit of procrastination and avoidance now in exchange for a lifetime of financial mediocrity?

Not a very difficult decision, but surprisingly few people make the wise choice.

Financial education is one of the great bargains in life: it costs little, risks nothing, and returns huge rewards. It is the best investment you can make.

The sooner you get it the more it will be worth to you. The longer you wait, the more it will cost you. Which path will you choose?

Below we’ll examine each of the seven reasons why financial education is your best investment so that you make the a profitable choice.

Why financial education? Because it's the best investment you can make in yourself

Most Investment Advice Is a Dangerous Half-Truth

Aren’t you tired of all the financial and investment experts with their conflicting investment advice?

  • One expert says diversify to reduce risk, and another expert calls it di-worsefying that insures mediocre results.
  • One expert says pay down all your debt because it is bad, and another says leverage up with good debt to build wealth.
  • One expert says the stock market is the key to riches, and another expert tells you more millionaires come from real estate than any other source.

How is a person supposed to learn how to invest money when the supposed experts can’t even agree? It’s enough to make you go bonkers! Who can you trust?

Each authority speaks as if there is one and only one right answer, yet each financial expert offers differing and often conflicting investment advice. It makes no sense! It’s frustrating.

[the-four-percent-rule] It drives me nuts when supposed financial experts speak in over-simplified, dogmatic statements as if they have the one right answer. True experts know that most financial truths are more subtle and complex so they don’t insult your intelligence with over-simplified, sound-bite investment advice.

Even the most basic investment ideas such as buy and hold stocks for the long term are too complex to be adequately explained in a media sound-bite or brief article.

The reality is each item of conflicting investment advice above is partially true and partially false – depending on the situation.

There are times when it makes sense to leverage up with good debt, and there are other situations where it can be equally correct to pay off existing debt. There are times when “buy and hold stocks for the long term” is a sound strategy, and there are other times when the risk isn’t justified by the reward.

Each is a dangerous half-truth.

One reason financial education is necessary is to understand the subtle shades of gray hiding behind all the investment half-truths you hear.

How else are you going to process this information into profitable investment decisions? You must know when a conditional-truth is applicable and when it should be disregarded because it can get you in financial trouble.

For example, do you understand when buy and hold is a smart investment strategy, and when the risk is not justified by the reward? Do you know when to leverage yourself with debt to grow wealth, and when it makes sense to pay off debt? What is the best wealth building vehicle – paper assets, business, or real estate – and why?

Questions like these can make or break your financial future.

Learning the assumptions and reasons behind investment half-truths is one reason why financial education is necessary. It’s the only way you can know who is right, who is wrong, and why in a world of conflicted and contradictory investment advice.

One Size Doesn’t Fit All Investors

Despite what all the investment experts selling seminars and courses want you to believe, there aren’t any secrets to investing. To paraphrase John Bogle of Vanguard Investment fame, “The secret is there are no secrets.”

There are many different ways to invest profitably, and there are many sources where you can learn the information. There’s nothing new under the sun, and no marketer has a corner on teaching any particular type of investment strategy

If you don’t want to pay a high-priced guru thousands for his boot camp or seminar, then you can probably find very similar information for less than a hundred dollars at your local library or online bookstore.

What you can’t get from a bookstore — or most gurus — is the real key to financial security: figuring out which of the many available investment strategies will work for your personal situation.

Their investment advice is generic, but you need it personalized. Not all investment strategies are appropriate for all people, but there is one right solution for you.

Your job is to find it so that you can achieve financial security.

You’re a unique individual with your own skills, background, experiences, and outlook on life. You have a risk tolerance unique to you and preferences, time frames, and goals that are different from everyone else’s.

What are the odds that a weekend investment seminar or week-long boot camp teaching one specific investment technique is going to be the right fit for your unique needs? It makes no sense.

The hidden assumption behind most investor education is “one size fits all.”

It doesn’t work with clothes, relationships, or sunglasses, and it certainly doesn’t work with investment strategy. One size does not fit all.

“If you want to be truly successful invest in yourself to get the knowledge you need to find your unique factor. When you find it and focus on it and persevere your success will blossom.” - Sidney Madwed

Each person has a unique gift to bring to the world and financial success results from an investment plan that capitalizes on that uniqueness. How you retire early and wealthy is going to be different from everyone else you talk to or associate with.

That’s why prepackaged advice, investment seminars, and generic computer solutions that spew static financial “truths” can never measure up to personalized education that helps you find your own truth.

Therefore, the second reason for the necessity of financial education is so that you can learn enough about yourself and the various investment strategies in existence so that you can develop a wealth building solution custom fitted to your unique skills, values, and resources.

If you don’t educate yourself to do it, nobody else will.

How to Overcome the Conflicts of Interest in Investment Advice

The only person 100% committed to your pocketbook is you. Everyone else has a conflict of interest.

No less an authority than Alan Greenspan told Congress that “for an increasingly complex financial system to function effectively, widespread dissemination of timely financial and other relevant information among educated market participants is essential if they are to make the type of informed judgments that promote their own well-being.”

[how-much-money-do-i-need-to-retire] Greenspan also spoke about the need for Americans to better educate themselves about managing their finances and to promote greater financial education for children in the school system. He stated “financial literacy can help prevent younger people from making poor financial decisions that can take years to overcome.”

You must learn how to invest your money because no one will ever care about it as much as you do.

Nobody else is making financial decisions in your life with zero conflict of interest except you. You are the only investment advisor for your portfolio that solely has your best interests at heart.

Everyone else is in business to serve their best interests.

Avoiding conflicts of interest by being skilled enough to sort investment fact from fiction is the third reason why financial education is necessary.

You Can Delegate Authority, But You Can’t Delegate Responsibility

Many people want to believe their advisors will take care of the big financial issues like retirement, college savings, and wealth planning for them.

Just delegate the issues to a professional advisor and don’t bother learning for yourself. They’ll take care of it.


Whether you hire financial experts or invest independently – you’re still responsible for your investment results. Each choice is a decision you make; therefore, you’re responsible.

You decide which investment expert to hire and you decide which investment to buy. If you don’t like your investment results, there is no-one except you to blame.

You can’t delegate the responsibility, even if you delegate the authority.

“The difference between success and failure in the stock market is education.” - Bill Griffeth, CNBC Anchor

The only way to make consistently smart investment decisions is if you learn what works, what doesn’t, and why.

If your investment decisions aren’t based on knowledge, then what are they based on – salesman’s charisma, speaker’s charm, media sound-bites, trust, or blind faith? None of these are a reliable prescription for investor success.

There’s no substitute for knowledge.

It’s incongruous to own self-responsibility in your mind for your financial future, yet not take action by educating yourself on how to make smart investment decisions. Anything less is irresponsible.

Prioritizing your financial education is how you become self-responsible for your financial future. It is the fourth reason financial education is necessary.

Your Financial Intelligence Compounds Like Money

It’s critically important that your financial intelligence grow at least as fast as your portfolio. Why?

Because there is nothing more financially dangerous than a million dollars worth of investment decisions being made with a thousand dollars worth of financial intelligence.

“Perhaps the most valuable result of all education is the ability to make yourself do the thing you have to do, when it ought to be done, whether you like it or not; it is the first lesson that ought to be learned; and however early a man’s training begins, it is probably the last lesson that he learns thoroughly.” - Thomas H. Huxley

Your financial intelligence acts as a ceiling that limits the growth of your wealth. As you raise your financial intelligence, you raise the ceiling on what’s financially possible for you.

Your financial intelligence sets the context for your investment success – or lack thereof.

Your return on investment should improve as you learn how to invest more consistently and control losses when the inevitable mistakes occur. That translates into more dollars in your pocket and greater financial security.

A little known fact about financial intelligence is it grows and compounds just like money. The effect is multiplicative – not additive.

Each new tidbit of information connects to all the other knowledge which multiplies. It doesn’t just add up, but it grows geometrically by multiplying.

Your goal should be to make regular deposits every week into your financial intelligence account just like you make monthly deposits into your investment accounts. When you do this, your financial intelligence will multiply and grow ahead of the growth in your investment accounts to help create a lifetime of financial security.

Financial Intelligence Is the One Investment You Can Never Lose

Financial education is like an annuity. It’s a one-time investment that pays dividends for the rest of your life.

People can steal your money, but nobody can ever take your financial education from you. Once you know it, you can never un-know it.

The sooner you seek investor education, the sooner you can begin reaping the rewards. The longer you enjoy financial literacy, the more value you will get from it.

Every year it compounds profits in your portfolio.

Why not start learning how to invest and manage your personal finances today?

Benjamin Franklin quote on financial education

True Freedom and Independence Requires Financial Intelligence

Needing others to make financial decisions for you is dependence.

Regardless of the amount of money you have, you will never be financially independent or secure as long as you depend on someone else to manage your money.

You can’t experience true freedom if you’re dependent on someone else’s experience and knowledge for your financial well-being.

The world is littered with people who built vast fortunes and lost it all because of their own financial ignorance. Lacking financial intelligence is the opposite of financial security – no matter how much money you have.

Choosing the path of financial intelligence, where you learn to make decisions independent of other people’s advice, leads to investment wisdom. This allows you to independently sort all the divergent opinions with confidence and decide what’s uniquely true for you and your portfolio

The alternative is to remain permanently dependent on all the conflicting and confusing opinions offered up as expertise by others and play a guessing game as to what’s true for you.

Financial education teaches you how to fish so that you never have to be dependent on another person to give you a fish again. Financial education teaches financial independence.

Financial Education Is Your Best Investment

So what should you do now? The answer is simple: commit to growing your financial literacy with a process of continual improvement by beginning to learn today.

Rome wasn’t built in a day and neither is financial intelligence. You have to start somewhere – wherever you are right now – and fortunately, success is a learnable skill.

If you work on yourself and study regularly, the reward for persistence can be financial freedom.

There will never be a better time than now to learn and prepare so that all these benefits can be yours:

  1. Financial education will teach you how to sort all the conflicting investment advice so that you know how to manage your way through a world filled with investment half-truths.
  2. Financial education will help you build a wealth plan custom fitted to your individual needs.
  3. Financial education will help you negotiate the conflicts of interest inherent in investment advice.
  4. Financial education is how you demonstrate self-responsibility for your financial security.
  5. Financial education is how you raise the ceiling on your financial future by raising your financial intelligence.
  6. Financial education is like an annuity – it pays dividends for the rest of your life, and nobody can ever take it from you.
  7. Financial education is the foundation on which true financial independence stands.

Financial education is a long term approach to wealth. It builds success on several levels by growing your knowledge, experience, and portfolio simultaneously so that you can retire early and wealthy with security and peace of mind.

Financial education is your best investment, and the only thing keeping you from enjoying all the benefits of smarter investing is… you.

If you aren’t clear on the tangible dollars and cents value of financial education in your life, then here is a quick and fun exercise to prove it to yourself.

Go to this free retirement calculator and input your financial information as best you know it today and print out the results. Don’t worry about accuracy: just do the best you can.

Then increase your savings rate and investment return by 20% (i.e. from 10% to 12% investment return or from $400 saved per month to $480), and notice the dramatic change in results when compounded over your expected lifetime.

That’s an example of the potential cash value of financial literacy. It’s literally worth a fortune.

It can mean the difference between financial security and flipping burgers in your old age.

So what are you going to do about it? What actions are you going to take today?

If you aren’t motivated to make a change, then all I can say is I walked the talk and it literally made me a fortune. I’m a big believer in financial education because I know the difference it made in my life. I hope you”ll join me and do the same.

Nobody said it better than this:

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10 Commandments of Investment Strategy Mon, 18 Aug 2014 02:00:18 +0000

Discover How Your Investment Strategy Measures Up to Proven Success Principles So You Can Improve Your Portfolio

Key Ideas

  1. How to use the “expectancy principle” to stop gambling and profit regularly with confidence.
  2. How to combine offensive and defensive investment strategy for reliable investment performance.
  3. The 3 investment mistakes you never want to make.

Smart investing isn’t as hard as it seems.

You just need to know the right principles, and you need to follow them with discipline.

Unfortunately, much of what is taught about investment strategy is a dangerous half-truth that can be expensive.

Below are ten proven principles to help get you on the path to greater investment success.

1st Investment Strategy Commandment: Thou Shalt Not Gamble

“Expectancy” is what separates investors from gamblers. If you follow hunches, guess, take tips, or “play the market,” then you are a gambler — not an investor.

If you put money at risk on “one-off” investments, special situations, or economic forecasts, then you’re also a gambler because you’re betting on an unknown expectancy.

Expectancy is a formula that shows the average amount of money you can expect to make per dollar risked if you follow your investment strategy consistently enough to achieve statistical validity. It tells you what profits to expect.

Expectancy literally determines the compound growth of your wealth. It is inviolable mathematical rule whether you use it to your advantage, or not.

Gamblers put money at risk on unknown or negative expectancy situations. Investors only put money at risk on known, positive expectancy situations.

Thorough and accurate research is required to know your investment strategy’s expectancy with confidence. You must understand the assumptions underlying the research and know when those assumptions may no longer be valid.

Anything less is gambling.

The principle of expectancy implies a systematic and methodical investment strategy (an investment plan). Otherwise, you cannot have confidence that you will ultimately profit.

Your disciplined investment strategy should include one or more of the following characteristics to create positive expectation:

  • A positive paying attribute: For example, positive expectancy results from certain value-based strategies in the stock market such as Tobin’s Q-ratio and Graham’s intrinsic value. Additionally, well located and properly purchased investment real estate is so well known for it’s positive expectancy under most economic conditions (not all) that a myth about “real estate never going down” resulted (just ask anyone who owned investment real estate beginning in 2008).
  • An exploitable inefficiency: For example, many bond mutual funds are mispriced during rapidly moving interest rate markets because of the infrequent trading of the underlying portfolio of individual bonds and mark-to-market accounting rules.
  • A competitive edge: For example, some people have a competitive edge in real estate foreclosure through their banking network and marketing systems. In paper assets, some firms have a competitive edge in computer systems to exploit option pricing inefficiencies. Competitive edge is usually the result of a business system or specialized knowledge applied to investing.

Most people don’t want the scientific rigor and discipline of mathematical expectancy. They prefer the fun and adventure of “story” stocks, investing by the seat of the pants, or trusting in an advisor.

You must ask yourself, “do I invest for fun, or do I invest for profit?”

Don’t confuse the issues. If you want financial security and consistent profits then expectancy is a required investment discipline. There’s no way around it.

Growing wealth is governed by mathematics. It’s science-based around the core principle of mathematical expectation.

Insurance companies don’t gamble, and neither do casino owners … only their customers do.

Both types of businesses rely on mathematical expectation to profit reliably. You should do the same with your investment strategy.

You either invest scientifically with the odds in your favor based on known, positive, expectation strategies, or you gamble with your financial future. There aren’t any other alternatives.

2nd Investment Strategy Commandment: Thou Shalt Forsaketh the Advice of False Prophets

Never try to outguess the market by following forecasts from the financial media or the latest investment guru. Don’t fall prey to cover story articles about “10 Hot Stocks to Own for 200X“.

Financial forecasts are little more than entertainment, and should never be part of your investment strategy.

“The greatest obstacle to discovery is not ignorance – it is the illusion of knowledge.” - Daniel J. Boorstin

Three types of information exist in this world: known, unknown but knowable, and unknowable. Foretelling the future (forecasting) is unknowable. Any investment strategy predicated on any forecast for the future is inherently flawed because the unknowable has no mathematical expectancy.

It’s gambling — not investing.
Abide by these 10 commandments for success with your investment strategy.

3rd Investment Strategy Commandment: Thou Shalt Do Thy Due Diligence

Only invest in what you understand.

If you don’t understand it then don’t invest. One of the best ways to expand your investment knowledge is through the due diligence process.

Never skip due diligence and rush into an investment strategy because of time deadlines, someone’s recommendation, or because you believe you should put your capital to work. Don’t succumb to the temptations of sloth, laziness, or avoiding inconvenience by neglecting due diligence.

What you don’t know will cost you when investing … big time. Due diligence is how you learn what you need to know to make an informed investment decision.

Your first task in due diligence is to determine the mathematical expectation for the investment strategy so that you add only investments that increase the expectation of your portfolio. Understanding expectation includes understanding the source of returns and the assumptions underlying the persistence of returns in the future (see Commandment #1).

Your second task in due diligence is to determine the correlation of the investment strategy so that you can build a portfolio of uncorrelated risk profiles to minimize overall portfolio risk (see Commandment #5).

Your third task in due diligence is to understand what risk management strategies will apply to the investment so that you can accurately assess your risk/reward ratio and know how your capital is protected from permanent loss (see Commandment #6).

There are many other criteria to consider for a complete due diligence process, but mathematical expectation, correlation, and risk management form the foundation by which 95% or more of all potential investments can be eliminated from your portfolio.

4th Investment Strategy Commandment: Thou Shalt Compound Returns

Albert Einstein declared compound growth the eighth wonder of the world … and for good reason. Compound growth is how the average person can attain extraordinary wealth. It is how lots of little things done right can grow into very big results during your lifetime.

To put compound growth to work for you requires just four actions:

  • Begin investing now (not next month or next year). Procrastination is the number one wealth killer. Every day wasted is another day that compound returns won’t work for you.
  • Invest only in known, positive mathematical expectancy investment strategies. Never risk capital on unknown or negative expectancy investments.
  • Reinvest all profits from your portfolio. Don’t spend the profits from your portfolio until after your passive income exceeds your expenses.
  • Accelerate your compound growth by adding to investment principal from earned income.

When you follow these four steps, wealth changes from a question of “if” to the security of “when.”

5th Investment Strategy Commandment: Thou Shalt Diversify, But Not Di-Worse-ify:

Never place all thy eggs in one basket. Similarly, never spread thy eggs among so many baskets that your investment returns become average.

Thou shalt place thy eggs in a carefully selected group of baskets, each with positive mathematical expectation and an uncorrelated risk profile.

For example, don’t attempt to diversify by adding a technology mutual fund to a portfolio already concentrated in NASDAQ listed securities. This will only cause your portfolio to more closely replicate the technology averages. The two assets are highly correlated.

Similarly, don’t add another real estate asset from the same general location to an existing real estate portfolio. Property values are primarily determined by local economies, so each asset will behave similarly.

These are examples of di-worse-ifcation because they don’t meaningfully change the risk profile of the portfolio. They also cause your returns to regress to the mean.

The objective of diversification is to lower the risk profile of your portfolio by adding non-correlated or inversely correlated investment strategies. This allows the performance of each asset to smooth the performance of the other.

When one zigs, the other should zag.

For example, an investment strategy utilizing gold and gold stocks is a natural diversifier for a conventional equity portfolio. They are low or negatively correlated to each other and both can have a positive mathematical expectation when properly managed.

Real estate is another natural diversifier to a bond or equity portfolio for the same reasons.

The point is to never add more of the same risk profile to any investment portfolio. Instead, find other investment strategies with an equal or greater mathematical expectation coupled with a low or negatively correlated risk profile.

The result is lower portfolio risk, more consistent profits, and the ability to rest easier knowing you’re diversified (not di-worse-ified).

Image of Will Rogers with Quote about Investment Strategy

6th Investment Strategy Commandment: Thou Shalt Invest Defensively

Your first objective with any investment strategy should be “return of” capital, and only after that should you concern yourself with “return on” capital.

The hallmark of consistently profitable investors is their focus on controlling permanent loss of capital through risk management disciplines. You’d be wise to do the same.

Carefully examine every investment strategy to determine its maximum downside risk should Murphy’s Law prevail … because eventually, it will.

Your investment strategy must have built in safe-guards that manage risk exposure and control losses to an acceptable level under both normal conditions and worst case scenarios. The alternative is to accept too much risk into your portfolio (which is a bad thing).

7th Investment Strategy Commandment: Thou Shalt Invest Offensively

At first glance, offensive investing might seem contradictory to Commandment #6 . The truth is they work together synergistically to form a complete and balanced investment strategy.

Stated another way, you must invest offensively to seek gains while you invest defensively to manage risk and control losses. Either half of this equation without the other is an incomplete investment strategy.

Your objective as an offensive investor is to maintain and improve purchasing power. You can do this by achieving profits sufficient to overcome the ravages of inflation, currency devaluation, capital losses on other investments, taxes, transactions costs, and more.

History proves this doesn’t happen by stuffing your money under a mattress or in Treasury Bills. An aggressive, offensive strategy is required.

The way you sleep at night investing offensively is by controlling risk through defensive investment strategy (see Commandment 6 above). Isolating the risk exposure to acceptable levels for each strategy and diversifying among non- or low-correlated strategies in one portfolio can provide both strong, positive returns and a controlled, acceptable, risk level.

In fact, offensive and defensive investing are flip-sides of the same coin. No investment strategy is complete without either half of the coin.

8th Investment Strategy Commandment: Thou Shalt Avoid Illiquidity

Liquidity refers to the ease with which an investment can be sold and converted into cash. Certain hedge funds, partnership interests, and real estate are examples of assets that have the potential to become illiquid. Large cap stocks and bonds are examples of highly liquid investments.

The reason liquidity is important is because the risk management tool of last resort (see Commandment #6) is a sell discipline.

If an asset becomes illiquid then you can’t sell it which means you can’t control the losses during adverse market conditions. Loss of liquidity equals loss of flexibility.

Illiquidity places an extra premium on all other risk management tools because it eliminates the possibility of controlling risk by liquidating to cash. Experience has shown most of my worst losses have resulted from illiquidity restricting my ability to manage my risk exposure.

I’ve learned from the school of hard knocks to approach potentially illiquid investments very cautiously. You can learn from this experience and avoid the same mistakes.

“If you have made a mistake, cut your losses as quickly as possible.” - Bernard Baruch

9th Investment Strategy Commandment: Thou Shalt Respect (But Not Obsess About) Expenses

Expenses are a cost of doing business.

The business of investing involves management and transaction expenses such as taxes, brokerage fees, and more.

I have seen people lose fortunes because they refused to pay the taxes and transaction costs necessary to exit a formerly good investment. I have also seen people miss out on great investments because they did not want to pay what appeared to be high management fees.

Neither approach is balanced. The question you must answer is whether the expense adds value in excess of costs.

Does the management company add value (greater return) to your portfolio net of management fees and expenses — or not? Does selling the stock add value to your portfolio by lowering risk and redeploying assets to higher mathematical expectation investments net of transaction fees and taxes — or not?

You must strike a balance. Don’t be a miser on expenses and miss your next great investment. And don’t be wasteful by paying unnecessarily without receiving a value added benefit.

For example, most loaded mutual funds could be avoided by finding a no-load equivalent and investing the fees saved. Rarely do loaded funds justify the fees. Research shows they don’t add value in excess of costs.

Similarly, many high priced hedge funds are now being usurped by specialized mutual funds and ETFs offering a competitive risk/reward profile at a lower cost.

Be smart by willingly paying for value added investment services. Likewise, always seek to get the greatest value from your investment dollar by not paying for services that don’t add value. Again, balance is the key.

10th Investment Strategy Commandment: Thou Shalt Invest in Thyself

[dont-hire-a-financial-coach] Nothing is more financially dangerous than a million dollar portfolio managed with a thousand dollars worth of financial intelligence. Your investment skills and knowledge will be reflected in your investment results.

If you want to improve your return on investment, then you must first improve your financial intelligence. That’s where Financial Mentor can help.

The best investment you can make is in yourself because nobody can ever take it away from you, and it will pay you dividends for the rest of your life. The goal of Financial Mentor’s coaching and educational products is to grow your financial intelligence so you can grow your portfolio.

Let us know how we can help you make your financial dreams come true beginning right now. Whether it is going from zero to wealth or better managing the wealth you’ve already accumulated, Financial Mentor is here to support you.

“An investment in knowledge always pays the best interest.” - Benjamin Franklin

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Andrew Carnegie “The Gospel Of Wealth” Fri, 15 Aug 2014 05:52:12 +0000

The Gospel of Wealth, by Andrew Carnegie, Is a Politically Incorrect Assessment of Wealth in America from One of the Greatest Philanthropists and Industrialists of All Time. Learn from His Experience and Uncommon Wisdom.

Key Ideas

  1. The surprising way that wealth inequality is good for society as a whole.
  2. How good wealth management benefits the lower classes more than charity.
  3. 3 ways to distribute wealth — including the shocking method Carnegie thought was best.

Editors Note: Andrew Carnegie was a poor immigrant during the 1800s who became one of the wealthiest men in the America. He built a vast steel conglomerate and became a philanthropist giving away more than $350 million during his lifetime.

Andrew Carnegie was one of the first to publicly assert that building wealth included the responsibility to use it wisely for community benefit. Carnegie saw great value in self-education and built 2,509 public libraries at a time when few existed.

I have taken great pains to provide as complete a version of The Gospel of Wealth as was available; however, I have added some paragraph breaks, punctuation and other details to increase modern day readability. I hope you enjoy Andrew Carnegie’s wisdom.

If you do, please share it with your friends and followers with a tweet:

Andrew Carnegie, The Gospel of Wealth, or Wealth, North American Review (June 1889)

Read the full text of Andrew Carnegie's The Gospel of Wealth.


The problem of our age is the proper administration of wealth, so that the ties of brotherhood may still bind together the rich and poor in harmonious relationship. The conditions of human life have not only been changed, but revolutionized, within the past few hundred years. In former days there was little difference between the swelling, dress, food, and environment of the chief and those of his retainers. The Indians are today where civilized man then was. When visiting the Sioux, I was led to the wigwam of the chief. It was just like the others in external appearance, and even within the difference was trifling between it and those of the poorest of his braves. The contrast between the palace of the millionaire and the cottage of the laborer with us today measures the change which has come with civilization.

This change, however, is not to be deplored, but welcomed as highly beneficial. It is well, nay, essential for the progress of the race that the houses of some should be homes for all that is highest and best in literature and the arts, and for all the refinements of civilization, rather than that none should be so. Much better this great irregularity than universal squalor. Without wealth there can be no Maecenas. The “good old times” were not good old times. Neither master nor servant was as well situated then as to-day. A relapse to old conditions would be disastrous to both — not the least so to him who serves — and would sweep away civilization with it. But whether the change be for good or ill, it is upon us, beyond our power to alter, and therefore to be accepted and made the best of. It is a waste of time to criticize the inevitable.

It is easy to see how the change has come. One illustration will serve for almost every phase of the cause. In the manufacture of products we have the whole story. It applies to all combinations of human industry, as stimulated and enlarged by the inventions of this scientific age. Formerly articles were manufactured at the domestic hearth or in small shops which formed part of the household. The master and his apprentices worked side by side, the latter living with the master, and therefore subject to the same conditions. When these apprentices rose to be masters, there was little or no change in their mode of life, and they, in turn, educated in the same routine succeeding apprentices. There was, substantially, social equality, and even political equality, for those engaged in industrial pursuits had then little or no political voice in the State.

But the inevitable result of such a mode of manufacture was crude articles at high prices. Today the world obtains commodities of excellent quality at prices which even the generation preceding this would have deemed incredible. In the commercial world similar causes have produced similar results, and the race is benefited thereby. The poor enjoy what the rich could not before afford. What were the luxuries have become the necessaries of life. The laborer has now more comforts than the farmer had a few generations ago. The farmer has more luxuries than the landlord had, and is more richly clad and better housed. The landlord has books and pictures rarer, and appointments more artistic, than the King could then obtain.

The price we pay for this salutary change is, no doubt, great. We assemble thousands of operatives in the factory, in the mine, and in the counting-house, of whom the employer can know little or nothing, and to whom the employer is little better than a myth. All intercourse between them is at an end. Rigid castes are formed, and, as, usual, mutual ignorance breeds mutual distrust. Each caste is without sympathy for the other, and ready to credit anything disparaging in regard to it. Under the law of competition, the employer of thousands is forced into the strictest economies, among which the rates paid to labor figure prominently, and often there is friction between the employer and the employed, between capital and labor, between rich and poor. Human society loses homogeneity.

The price which society pays for the law of competition, like the price it pays for cheap comforts and luxuries, is also great; but the advantages of this law are also greater still, for it is to this law that we owe our wonderful material development, which brings improved conditions in its train. But, whether the law be benign or not, we must say of it, as we say of the change in the conditions of men to which we have referred: it is here; we cannot evade it; no substitutes for it have been found; and while the law may be sometimes hard for the individual, it is best for the race, because it insures the survival of the fittest in every department.

We accept and welcome, therefore, as conditions to which we must accommodate ourselves, great inequality of environment, the concentration of business, industrial and commercial, in the hands of a few, and the law of competition between these, as being not only beneficial, but essential for the future progress of the race. Having accepted these, it follows that there must be great scope for the exercise of special ability in the merchant and in the manufacturer who has to conduct affairs upon a great scale.

That this talent for organization and management is rare among men is proved by the fact that it invariably secures for its possessor enormous rewards, no matter where or under what laws or conditions. The experienced in affairs always rate the man whose services can be obtained as a partner as not only the first consideration, but such as to render the question of his capital scarcely worth considering, for such men soon create capital; while, without the special talent required, capital soon takes wings. Such men become interested in firms or corporations using millions; and estimating only simple interest to be made upon the capital invested, it is inevitable that their income must exceed their expenditures, and that they must accumulate wealth.

Nor is there any middle ground which such men can occupy, because the great manufacturing or commercial concern which does not earn at least interest upon its capital soon becomes bankrupt. It must either go forward or fall behind: to stand still is impossible. It is a condition essential for its successful operation that it should be thus far profitable, and even that, in addition to interest on capital, it should make profit. It is a law, as certain as any of the others named, that men possessed of this peculiar talent for affairs, under the free play of economic forces, must, of necessity, soon be in receipt of more revenue than can be judiciously expended upon themselves; and this law is as beneficial for the race as the others.

Objections to the foundations upon which society is based are not in order, because the condition of the race is better with these than it has been with any others which have been tried. Of the effect of any new substitutes proposed we cannot be sure. The Socialist or Anarchist who seeks to overturn present conditions is to be regarded as attacking the foundation upon which civilization itself rests, for civilization took its start from the day that the capable, industrious workman said to his incompetent and lazy fellow, “If thou dost not sow, thou shalt no reap,” and thus ended primitive Communism by separating the drones from the bees.

One who studies this subject will soon be brought face to face with the conclusion that upon the sacredness of property civilization itself depends — the right of the laborer to his hundred dollars in the savings bank, and equally the legal right of the millionaire to his millions. To those who propose to substitute Communism for this intense Individualism the answer, therefore, is: the race has tried that. All progress from that barbarous day to the present time has resulted from its displacement.

Not evil, but good, has come to the race from the accumulation of wealth by those who have the ability and energy that produce it. But even if we admit for a moment that it might be better for the race to discard its present foundation, Individualism, — that it is a nobler ideal that man should labor, not for himself alone, but in and for a brotherhood of his fellows, and share with them all in common, realizing Swedenborg’s idea of Heaven, where, as he says, the angels derive their happiness, not from laboring for self, but for each other, — even admit all this, and a sufficient answer is, this is not evolution, but revolution.

It necessitates the changing of human nature itself — a work of eons, even if it were good to change it, which we cannot know. It is not practicable in our day or in our age. Even if desirable theoretically, it belongs to another and long-succeeding sociological stratum. Our duty is with what is practicable now; with the next step possible in our day and generation. It is criminal to waste our energies in endeavoring to uproot, when all we can profitably or possibly accomplish is to bend the universal tree of humanity a little in the direction most favorable to the production of good fruit under existing circumstances.

We might as well urge the destruction of the highest existing type of man because he failed to reach our ideal as to favor the destruction of Individualism, Private Property, the Law of Accumulation of Wealth, and the Law of Competition; for these are the highest results of human experience, the soil in which society so far has produced the best fruit. Unequally or unjustly, perhaps, as these laws sometimes operate, and imperfect as they appear to the Idealist, they are, nevertheless, like the highest type of man, the best and most valuable of all that humanity has yet accomplished.

We start, then, with a condition of affairs under which the best interests of the race are promoted, but which inevitably gives wealth to the few. Thus far, accepting conditions as they exist, the situation can be surveyed and pronounced good. The question then arises, — and, if the foregoing be correct, it is the only question with which we have to deal, — What is the proper mode of administering wealth after the laws upon which civilization is founded have thrown it into the hands of the few? And it is of this great question that I believe I offer the true solution. It will be understood that fortunes are here spoken of, not moderate sums saved by many years of effort, the returns from which are required for the comfortable maintenance and education of families. This is not wealth, but only competence, which it should be the aim of all to acquire.

There are but three modes in which surplus wealth can be disposed of. It can be left to the families of the decedents; or it can be bequeathed for public purposes; or, finally, it can be administered during their lives by its possessors. Under the first and second modes most of the wealth of the world that has reached the few has hitherto been applied. Let us in turn consider each of these modes.

The first is the most injudicious. In monarchical countries the estates and the greatest portion of the wealth are left to the first son, that the vanity of the parent may be gratified by the thought that his name and title are to descend to succeeding generations unimpaired. The condition of this class in Europe to-day teaches the futility of such hopes or ambitions. The successors have become impoverished through their follies or from the fall in the value of land. Even in Great Britain the strict law of entail has been found inadequate to maintain the status of a hereditary class. Its soil is rapidly passing into the hands of the stranger. Under republican institutions the division of property among the children is much fairer, but the question which forces itself upon thoughtful men in all lands is: why should men leave great fortunes to their children? If this is done from affection, is it not misguided affection?

Observation teaches that, generally speaking, it is not well for the children that they should be so burdened. Neither is it well for the state. Beyond providing for the wife and daughters moderate sources of income, and very moderate allowances indeed, if any, for the sons, men may well hesitate, for it is no longer questionable that great sums bequeathed oftener work more for the injury than for the good of the recipients. Wise men will soon conclude that, for the best interests of the members of their families and of the state, such bequests are an improper use of their means.

It is not suggested that men who have failed to educate their sons to earn a livelihood shall cast them adrift in poverty. If any man has seen fit to rear his sons with a view to their living idle lives, or, what is highly commendable, has instilled in them the sentiment that they are in a position to labor for public ends without reference to pecuniary consideration, then, of course, the duty of the parent is to see that such are provided for in moderation. There are instances of millionaires’ sons unspoiled by wealth, who, being rich, still perform great services in the community. Such are the very salt of the earth, as valuable as, unfortunately, they are rare; still it is not the exception, but the rule, that men must regard, and, looking at the usual result of enormous sums conferred upon legatees, the thoughtful man must shortly say, “I would as soon leave to my son a curse as the almighty dollar,” and admit to himself that it is not the welfare of the children, but family pride, which inspires these enormous legacies.

As to the second mode, that of leaving wealth at death for public uses, it may be said that this is only a means for the disposal of wealth, provided a man is content to wait until he is dead before it becomes of much good in the world. Knowledge of the results of legacies bequeathed is not calculated to inspire the brightest hopes of much posthumous good being accomplished. The cases are not few in which the real object sought by the testator is not attained, nor are they few in which his real wishes are thwarted. In many cases the bequests are so used as to become only monuments of his folly.

It is well to remember that it requires the exercise of not less ability than that which acquired the wealth to use it so as to be really beneficial to the community. Besides this, it may fairly be said that no man is to be extolled for doing what he cannot help doing, nor is he to be thanked by the community to which he only leaves wealth at death. Men who leave vast sums in this way may fairly be thought men who would not have left it at all, had they been able to take it with them. The memories of such cannot be held in grateful remembrance, for there is not grace in their gifts. It is not to be wondered that such bequests seems so generally to lack the blessing.

The growing disposition to tax more and more heavily large estates left at death is a cheering indication of the growth of a salutary change in public opinion. The State of Pennsylvania now takes — subject to some exceptions — one-tenth of the property left by its citizens. The budget presented in the British Parliament the other day proposes to increase the death duties; and, most significant of all, the new tax is to be a graduated one. Of all forms of taxation, this seems the wisest. Men who continue hoarding great sums all their lives, the proper use of which for the public ends would work good to the community, should be made to feel that the community, in the form of the state, cannot thus be deprived of its proper share. By taxing estates heavily at death the state marks its condemnation of the selfish millionaire’s unworthy life.

It is desirable that nations should go much further in this direction. Indeed, it is difficult to set bounds to the share of a rich man’s estate which should go at his death to the public through the agency of the state, and by all means such taxes should be graduated, beginning at nothing upon moderate sums to dependents, and increasing rapidly as the amounts swell, until of the millionaire’s hoard, as of Shylock’s, at least ” —- the other half comes to the privy coffer of the state.”

This policy would work powerfully to induce the rich man to attend to the administration of wealth during his life, which is the end that society should always have in view, as being that by far most fruitful for the people. Nor need it be feared that this policy would sap the root of enterprise and render men less anxious to accumulate, for to the class whose ambition it is to leave great fortunes and be talked about after their death, it will attract even more attention, and, indeed, be a somewhat nobler ambition to have enormous sums paid over to the state from their fortunes.

There remains, then, only one mode of using great fortunes; but in this we have the true antidote for the temporary unequal distribution of wealth, the reconciliation of the rich and the poor — a reign of harmony — another ideal, differing, indeed, from that of the Communist in requiring only the further evolution of existing conditions, not the total overthrow of our civilization. It is founded upon the present most intense individualism, and the race is prepared to put it in practice by degrees whenever it pleases. Under its sway we shall have an ideal state, in which the surplus wealth of the few will become, in the best sense, the property of the many, because administered for the common good, and this wealth, passing through the hands of the few, can be made a much more potent force for the elevation of our race than if it had been distributed in small sums to the people themselves. Even the poorest can be made to see this, and to agree that great sums gathered by some of their fellow citizens and spent for public purposes, from which the masses reap the principal benefit, are more valuable to them than if scattered among them through the course of many years in trifling amounts.

If we consider what results flow from the Cooper Institute, for instance, to the best portion of the race in New York not possessed of means, and compare these with those which would have arisen for the good of the masses from an equal sum distributed by Mr. Cooper in his lifetime in the form of wages, which is the highest form of distribution, being for work done and not for charity, we can form some estimate of the possibilities for the improvement of the race which lie embedded in the present law of the accumulation of wealth. Much of this sum, if distributed in small quantities among the people, would have been wasted in the indulgence of appetite, some of it in excess, and it may be doubted whether even the part put to the best use, that of adding to the comforts of the home, would have yielded results for the race, as a race, at all comparable to those which are flowing and are to flow from the Cooper Institute from generation to generation. Let the advocate of violent or radical change ponder well this thought.

We might even go so far as to take another instance, that of Mr. Tilden’s bequest of five millions of dollars for a free library in the city of New York, but in referring to this one cannot help saying involuntarily, how much better if Mr. Tilden had devoted the last years of his own life to the proper administration of this immense sum; in which case neither legal contest nor any other cause of delay could have interfered with his aims. But let us assume that Mr. Tilden’s millions finally become the means of giving to this city a noble public library, where the treasures of the world contained in books will be open to all forever, without money and without price. Considering the good of that part of the race which congregates in and around Manhattan Island, would its permanent benefit have been better promoted had these millions been allowed to circulate in small sums through the hands of the masses? Even the most strenuous advocate of Communism must entertain a doubt upon this subject. Most of those who think will probably entertain no doubt whatever.

Poor and restricted are our opportunities in this life; narrow our horizon; our best work most imperfect; but rich men should be thankful for one inestimable boon. They have it in their power during their lives to busy themselves in organizing benefactions from which the masses of their fellows will derive lasting advantage, and thus dignify their own lives. The highest life is probably to be reached, not by such imitation of the life of Christ as Count Tolstoi gives us, but, while animated by Christ’s spirit, by recognizing the changed conditions of this age, and adopting modes of expressing this spirit suitable to the changed conditions under which we live; still laboring for the good of our fellows, which was the essence of his life and teaching, but laboring in a different manner.

This, then, is held to be the duty of the man of wealth: first, to set an example of modest, unostentatious living, shunning display or extravagance; to provide moderately for the legitimate wants of those dependent upon him; and after doing so to consider all surplus revenues which come to him simply as trust funds, which he is called upon to administer, and strictly bound as a matter of duty to administer in the manner which, in his judgment, is best calculated to produce the most beneficial results for the community — the man of wealth thus becoming the mere agent and trustee for his poorer brethren, bringing to their service his superior wisdom, experience, and ability to administer, doing for them better than they would or could do for themselves.

We are met here with the difficulty of determining what moderate sums are to leave to members of the family; what is modest, unostentatious living; what is the test of extravagance? There must be different standards for different conditions. The answer is that it is as impossible to name exact amounts or actions as it is to define good manners, good taste, or the rules of propriety; but, nevertheless, these are verities, well known although indefinable. Public sentiment is quick to know and to feel what offends these.

So in the case of wealth, the rule in regard to good taste in the dress of men or women applies here. Whatever makes one conspicuous offends the canon. If any family be chiefly known for display, for extravagance in home, table, equipage, for enormous sums ostentatiously spent in any form upon itself, — if these be its chief distinctions, we have no difficulty in estimating its nature or culture. So likewise in regard to the use or abuse of its surplus wealth, or to generous, freehanded cooperation in good public uses, or to unabated efforts to accumulate and hoard to the last, whether they administer or bequeath. The verdict rests with the best and most enlightened public sentiment. The community will surely judge, and its judgments will not often be wrong.

The best uses to which surplus wealth can be put have already been indicated. Those who would administer wisely must, indeed, be wise, for one of the serious obstacles to the improvement of our race is indiscriminate charity. It were better for mankind that the millions of the rich were thrown into the sea than so spent as to encourage the slothful, the drunken, the unworthy. Of every thousand dollars spent in so called charity to-day, it is probable that $950 is unwisely spent; so spent, indeed, as to produce the very evils which it proposes to mitigate or cure.

A well-known writer of philosophic books admitted the other day that he had given a quarter of a dollar to a man who approached him as he was coming to visit the house of his friend. He knew nothing of the habits of this beggar; knew not the use that would be made of this money, although he had every reason to suspect that it would be spent improperly. This man professed to be a disciple of Herbert Spencer; yet the quarter-dollar given that night will probably work more injury than all the money which its thoughtless donor will ever be able to give in true charity will do good. He only gratified his own feelings, saved himself from annoyance, — and this was probably one of the most selfish and very worst actions of his life, for in all respects he is most worthy.

In bestowing charity, the main consideration should be to help those who will help themselves; to provide part of the means by which those who desire to improve may do so; to give those who desire to raise the aids by which they may rise; to assist, but rarely or never to do all. Neither the individual nor the race is improved by alms-giving.

Those worthy of assistance, except in rare cases, seldom require assistance. The really valuable men of the race never do, except in cases of accident or sudden change. Every one has, of course, cases of individuals brought to his knowledge where temporary assistance can do genuine good, and these he will not overlook. But the amount which can be wisely given by the individual for individuals is necessarily limited by his lack of knowledge of the circumstances connected with each. He is the only true reformer who is as careful and as anxious not to aid the unworthy as he is to aid the worthy, and, perhaps, even more so, for in alms-giving more injury is probably done by rewarding vice than by relieving virtue.

The rich man is thus almost restricted to following the examples of Peter Cooper, Enoch Pratt of Baltimore, Mr. Pratt of Brooklyn, Senator Stanford, and others, who know that the best means of benefiting the community is to place within its reach the ladders upon which the aspiring can rise — parks, and means of recreation, by which men are helped in body and minds; works of art, certain to give pleasure and improve the public taste, and public institutions of various kinds, which will improve the general condition of the people; — in this manner returning their surplus wealth to the mass of their fellows in the forms best calculated to do them lasting good.

Thus is the problem of rich and poor to be solved. The laws of accumulation will be left free; the laws of distribution free. Individualism will continue, but the millionaire will be but a trustee for the poor; entrusted for a season with a great part of the increased wealth of the community, but administering it for the community far better than it could or would have done for itself. The best minds will thus have reached a stage in the development of the race in which it is clearly seen that there is no mode of disposing of surplus wealth creditable to thoughtful and earnest men into whose hands it flows save by using it year by year for the general good. This day already dawns.

But a little while, and although, without incurring the pity of their fellows, men may die sharers in great business enterprises from which their capital cannot be or has not been withdrawn, and is left chiefly at death for public uses, yet the man who dies leaving behind him millions of available wealth, which was his to administer during life, will pass away “unwept, unhonored, and unsung,” no matter to what uses he leaves the dross which he cannot take with him. Of such as these the public verdict will then be: “The man who dies thus rich dies disgraced.”

Such, in my opinion, is the true gospel concerning wealth, obedience to which is destined some day to solve the problem of the rich and the poor, and to bring “peace on earth, among men goodwill.”


The Gospel of Wealth, or Wealth, North American Review (June 1889)

If you enjoyed reading this selection, you might also enjoy learning about why money isn’t the secret to happiness, and how financial freedom is only one part of true wealth.

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Multiple Streams Of Income – Truth Revealed Tue, 12 Aug 2014 04:40:55 +0000

Multiple Income Streams Is a Wealth Building System Whose Time May Never Come. Uncover the Pitfalls You Must Avoid if Financial Freedom Is Your Goal.

Key Ideas

  1. Why multiple streams of income is not for everyone.
  2. 6 questions to determine if multiple income streams are right for you.
  3. 3 step process to creating multiple streams of income the right way.

Forget everything you’ve read about multiple streams of income.

They haven’t told you the real truth.

The idea is simple enough to understand: diversify your businesses and investments into various, non-correlated sources of residual income so that you are never reliant on any one source.

Unfortunately, this simplicity masks problems that the promoters of this wealth building system don’t talk about.

Just to be fair, the clear benefit of multiple income streams is classic risk diversification. Build a portfolio of non-correlated streams of income and your risk is reduced making your wealth more stable and secure.

This logic is valid because your international bond portfolio should not be affected by what happens to your apartments in St. Louis which should not be affected by your dividend stocks or the income from your business. Each stream of revenue is relatively independent.

The problem rests not in the idea, but in the practical application of the idea.

The key problem is implementation – not theory. Few people ever succeed in building just one stream of income sufficient to achieve financial freedom … let alone several.

It is better to have a permanent income than to be fascinating.
– Oscar Wilde

The idea of diversifying into your personal conglomerate by creating multiple streams of income and successfully competing in all these areas is a task reserved only for the select few. Are you one of them?

Let’s examine this in greater detail…

Multiple Streams of Income Explained

Multiple streams of income image

There are three broad areas in which to create multiple income streams: real estate, paper assets, and your own business. These are the primary asset classes in terms of building wealth and residual income.

You can then subdivide each asset class into specific styles or strategies. For example, real estate can be divided into buy and hold, flipping, foreclosures, single-family, multi-family, and commercial. Business can include many strategies such as infopreneuring, hard goods, retail, and intellectual property, to name just a few.

According to the multiple income streams philosophy your objective would be to build residual income streams in several of these subcategories, each of which is sufficient to live on.

Sounds pretty appealing, eh?

Just imagine all these streams of income flowing into your “Lake Prosperity.” No worries if one of the streams dries up because you have other streams flowing. Your financial future would be secure allowing you to run off and live the high life.

Gee, I can hardly wait to start! But wait…

The Problem Creating Multiple Income Streams

Unfortunately, this simple concept with wide appeal is just another example of a dangerous half-truth.

Deeper issues that could cause great financial and personal problems lie hidden beneath the surface and only appear when applied in the real world. Below are two realities that fly in the face of multiple streams of income.

  • Reality One: We live in a competitive and fast changing world. Business has become highly specialized and niched because knowledge is growing exponentially requiring specialized skills to employ it properly. Successfully competing in many widely varying fields is contradictory to the specialization and complexity required by our current business climate.
  • Reality Two: You have a limited amount of time on this planet to implement your business plans and strategies while also trying to balance the needs of family, health, spirituality, recreation, relationships, and much more. Do you really want to spend your limited time nursing more than one stream of income? Happiness has more to do with balancing life than making tons of money.
  • ResultFinancial success results from focused attention directed to a specific outcome, and happiness results from balancing your personal life with your business life. These are key points, and multiple streams of income is contradictory to both of these realities.

Multiple streams of income diffuse your laser focus from a single point of high probability success into a scattered beam of ineffectual light. It creates multiple demands on your limited time and energy turning your relationships, family, spirituality, business and investing into a difficult juggling act.

Something will likely suffer, and that something will probably be you.

He that is of the opinion money will do everything may well be suspected of doing everything for money.
– Benjamin Franklin

Should Multiple Streams of Passive Income Be Part of Your Wealth Building System? Answer These Questions…

Building multiple streams of income isn’t the right path for everyone. The skills required and the demands on your time grow with each stream you add.

Below are some questions you should consider before embarking on the multiple streams of income journey:

  1. Do you understand the principles of time leverage and technology leverage well enough to manage the complexity of multiples streams of income?
  2. Are you experienced at hiring and managing a staff to run multiple streams of income so that you don’t have to do it yourself?
  3. Do you already have a history of success in business or investing proving that you are ready to graduate to a more advanced, complex strategy?
  4. Do you possess the negotiating skills, business expertise, and street smarts that are required to compete on multiple business and investment fronts simultaneously?
  5. Do you have a team of experts assembled to advise you on the myriad of legal and financial issues involved in managing multiple streams of income?
  6. Are multiple streams of income more important to you than enjoying the freedom that results from successfully building one stream of income?

Think about it. Building multiple streams of income is the equivalent of building your own personal conglomerate. Given the poor track record corporations have demonstrated at this task while employing teams of MBAs, what makes you think you will fare better?

Each stream of income requires its own skills and expertise. Each stream of income has a separate culture and network. Each stream of income makes demands on the most precious and limited resource in your life – time.

In short, there is a price to pay for each stream of income, and only you can decide if multiple streams of income are really worth that price.

Multiple income streams require hard work that can distract you from enjoying your financial freedom.

The Wrong Way to Create Multiple Streams of Income

There are some people who play the money game because they love it. Investment and business strategy is exciting and the process of building wealth is a great adventure.

These people are willing to play the multiple streams of income game because it is the logical next step. It is a challenge.

If you are so inclined then beware because there is a right and wrong way to go about implementing multiple streams of income into your wealth building system.

The wrong way is to get all fired up and launch a new business, begin stock investing, and buy your first piece of rental real estate all in the same few months. This is the financial equivalent of running before you ever learn how to walk. The likely outcome is you will stumble and fall flat on your face.

It’s not smart business strategy to take on risk recklessly, compete in fields without adequate preparation or knowledge, and spread your resources too thin. This is not how you set yourself up to succeed.

I’m not going to tell you it can’t be done because it can. I’m also not going to set you up for disappointment by leading you to believe it is reasonably achievable by anyone – because it isn’t.

It is a tough game to play and you will pay a price whether you succeed or not.

Every approach to wealth building is highly competitive and you will be going head to head with professionals who live and breathe what they do as their sole source of income. Any one person could spend a lifetime developing in-depth knowledge of any one of these money making areas because of the complexity involved.

To begin all three simultaneously is asking for trouble and disappointment.

The Right Way to Create Multiple Streams of Residual Income

If you are going to pursue multiple streams of income then it is important to follow a proven, step-by-step process that will maximize your odds of success. Below is that step-by-step process:

Step 1: Master the First Stream of Income

Begin by picking one stream of income that you are deeply passionate about. For some people it will be real estate and for others it will be owning your own business.

Your first stream of income should be something so personally exciting that you would do it whether you ever made a buck at it or not.

Why? Because the first stream of income will be the toughest.

This is where you will develop your Rolodex of support team members, learn fundamental skills applicable to all streams of income, overcome personal obstacles to success, and create enough cash flow to get out of the rat race.

Your first stream of residual income is where you will get the most bumps and bruises. By choosing an area you are passionate about it will increase the odds that you persist long enough to clear all the hurdles and succeed.

Master your first stream of income and in the process you will develop the necessary foundational skills and abilities that can then be leveraged to develop other streams of income.

Step 2: Systematize the First Stream of Income

Once you have mastered the first stream of income then it is time to systematize that stream so that it no longer requires your limited time and attention.

Systematizing is done through the application of time leverage (human employees) and technology leverage (digital employees). Master the skills of systematizing so that your first success runs on auto-pilot without requiring your time thus earning you residual income and cash flow.

Step 3: Leverage Resources to Create Additional Streams of Residual Income

Once you have systematized the first stream of income to produce residual income without your involvement, then you have the free time and energy to add multiple streams of income. This is done by intelligently adding additional revenue streams that leverage the skills, knowledge, and network you created in the first stream of income so that you aren’t starting from scratch on each additional stream. This is a key point.

For example, I know of highly successful direct marketers who have leveraged their marketing skills, network, and databases to create residual income through offering other product lines with minimal effort.

Another example is Robert Kiyosaki, bestselling author of “Rich Dad Poor Dad,” who got out of the rat race through real estate. Then he added paper assets and leveraged the financial knowledge he gained from his investment business experience into a successful information publishing business.

Similarly, I got out of the rat race through paper assets before leveraging my investing knowledge into real estate and then re-leveraging that same skill set into my information publishing business.

Notice the pattern. Each of the above successful examples developed multiple streams of income by learning the base skills in one stream and leveraging those skills later to create additional streams.

Each successful example learns to walk with one stream before running with multiple streams of residual income.

I challenge you to examine anyone who has succeeded with multiple streams of income and see if they violated my rules of walking before running. Every “multiple streamer” I have met built their success from one stream they were passionate about.

Only after that initial success with one stream of income did they leverage their resources into multiple streams of income.

In fact, to do it any other way is to throw away one of the primary benefits of multiple streams of income: leverage of existing resources.

This concept is known in the corporate merger world as “operating efficiencies.” It takes less effort to operate each additional stream of income because they are all built upon the same foundational resources.

When you attempt to create multiple streams of income simultaneously, you’ll create mayhem instead of leverage because no base resources exist to build upon. It makes no sense. It has no advantage sufficient to justify the problems it creates.

The bottom line is if you are going to build multiple streams of income, then there is a right and wrong way to go about it. Follow this step-by-step process and you will maximize your odds of success.

Should You Even Bother to Create Multiple Streams Of Income?

The primary benefit to multiple streams of income is the consistency and security of your income coming from non-related sources. But there are other ways to achieve this security without all the complication.

[how-much-money-do-i-need-to-retire] After all, how much more financial security do you need than a laddered bond portfolio that throws off more income than you spend so that you can reinvest and continue to grow the income offsetting inflation?

No complication or multiple streams of income here, but lots of financial security.

Another alternative is to own ten free and clear, well located, rental houses. This is something very achievable for most people, not complicated, no multiple streams of income, but extremely secure. What more do you need?

You could easily skip the whole multiple streams of income thing if your goal is time freedom and personal freedom. What do you gain from all the complication created?

These are questions you must consider as you design your wealth building system.

Should you focus your time and resources by really doing one stream right, or should you spread yourself thin by doing multiple streams of income? What is more important: your health and relationships or another stream of income?

What do you gain and what do you lose?

Multiple income streams are complicated, and you can achieve financial freedom without them.

In Summary…

Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game.
– Donald Trump

Creating multiple streams of income is a wealth-building system that has some advantages and disadvantages.

The desirable characteristic of multiple streams of income is it can diversify your passive income into non-correlated streams. When something goes wrong with one stream, your lifestyle and freedom are never at risk.

Also, multiple streams of income allow you to leverage existing resources to create additional revenue — but only when the strategy is implemented properly.

The downside to multiple streams of income is it requires you to juggle all the issues for each stream, which can diffuse your limited resources, create distraction, and lead to confusion. This is the antithesis of success and true wealth.

Similarly, multiple streams of income can divert your attention from deeper sources of happiness such as family, recreation, spirituality and relationships.

[dont-hire-a-financial-coach] My experience after coaching many clients through the process is you are better off succeeding with one stream of income and only leverage into additional streams after you are successful with the first.

I would rather coach you to focus on building one stream very well, creating a high probability of success, than to juggle the distraction and complication of managing several streams simultaneously.

Succeed by building one stream of income first, then use the freedom created from that success to create additional streams if that’s what your heart desires. This path is valid for people who truly love the wealth-building game and desire the creative challenge that comes with building multiple streams of income purely for the fun of it.

Alternatively, you could just decide to skip the whole multiple streams of income idea and learn to enjoy the freedom created by your one successful stream.

Happiness and true wealth are the real goals, and multiple streams of income may just serve as a useless distraction from the reasons you sought financial freedom in the first place.

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The Secret To Happiness… And Why It Has Nothing To Do With Money Sat, 09 Aug 2014 05:38:55 +0000

Discover How a Simple Daily Habit Can Create More Happiness Than Achieving Financial Freedom

Key Ideas

  1. The shocking truth about how financial freedom can cause unhappiness – and how to avoid it.
  2. Step-by-step instructions to enjoy freedom now regardless of your finances.
  3. Grab your free, printable checklist so you can choose happiness every day.

You don’t have to be rich to be happy. Cliche maybe, but also true.

The secret to happiness is well within reach. Happiness is a state of mind and completely within your control regardless of your financial situation.

Don’t make the same mistake I made and wait until you gain financial freedom to learn these lessons. You can have happiness right now regardless of your finances or what’s going on in your life because happiness is a choice.

It’s a state of mind.

Below I share my personal story explaining the painful process I went through to learn these lessons about money and happiness — and the secret to happiness — so that you can hopefully avoid repeating my mistakes.

Then I will provide you with step-by-step instructions showing you how to achieve personal freedom right now regardless of your financial situation.

I hope you enjoy…

The secret to happiness has much more to do with your actions than your money.


How Financial Freedom Forces You to Learn the Truth About Money and Happiness

There is a seldom spoken, little secret about financial freedom that I will let you in on. It is counter-intuitive and illustrates an essential principle about money and happiness.

Here it is: when you achieve financial freedom your life suddenly changes from pre-determined to self-determined.

The surprising affect of this is you are suddenly stripped of all excuses for why your life might be less than ideal. You instantly become solely responsible for your happiness with no excuses allowed.

To understand how this works and why it’s important, let’s first look at the reality faced by most people living the work-a-day existence.

Their lives are largely pre-determined. They spend the bulk of their time working to earn the money necessary to build a better lifestyle. The little time that remains is quickly swallowed up by family, errands and other personal needs.

Very little free time remains to create your unique life destiny, and very little creative thought is required to live out your lifetime. You work 40 hours (or more) per week for 40 years and try to have a little fun with what little time remains.

It’s pretty straightforward and uncomplicated. Society wrote the script and nearly everyone follows it.

However, once you achieve financial freedom all that changes. Suddenly 2,000 hours a year previously spent on work related issues is yours to do with as you please. Your days have zero pre-determined structure.

Your time becomes an open canvas for you to paint the life of your dreams upon.

Let me repeat this because it is very important: one of the little-discussed aspects of attaining financial freedom is how your life changes from pre-determined to self-determined.

You don’t get to follow the default script imposed by society because financial freedom obliterates the script and leaves a void in its place.

For some people the adventure this situation presents along with the “burden” of responsibility is exciting, but for many others it’s frightening. You become self-responsible for your day, your life, and most importantly… your happiness.

All the excuses are gone.

[how-much-money-do-i-need-to-retire] You no longer have the excuse of a job and a nasty little boss to blame your unhappiness on. You no longer have your days automatically filled with everything to do so that you never have to think for yourself, deal with your personal issues, or constructively plan your life.

With financial freedom all those excuses are gone, many of your day-to-day responsibilities are gone, and you must re-create yourself and your life.

For some people that becomes a tremendous and unexpected burden. It happens to new retirees every day and it  happened to me in 1997 when I sold the hedge fund business and had enough money to retire.

My plan was to marry my long-time girlfriend (currently my long-time wife) and take a six month honeymoon by traveling around Europe and the Middle-East with nothing more than a backpack and a credit card.

Then It Was All Downhill From There Once The Unexpected Reality Struck…

I was on top of the world. I had achieved financial freedom, found love, and was about to embark on the adventure of a lifetime. I was young, healthy, and had my whole life in front of me. It should have been nirvana — and it was for a brief period of time.

Money can’t buy happiness, but neither can poverty.
- Leo Rosten

I made the classic mistake I see so many of my financial coaching clients make — and that you are likely making as well. I projected my value for personal freedom onto money.

I naively labored under the delusion that if I could just attain financial freedom, I would be personally free as well. I falsely believed that once I no longer had to work I would enter the pro-leisure circuit of life where every day would be filled with fun activities, friends, and one continuous holiday.

I was wrong. It doesn’t work that way.

When I achieved financial freedom and quit working, the biggest realization I had was that I was the same guy. I had the same hang-ups and personal issues facing the same life I had before.

The only difference was now I had a lot more time to wallow in it, and no distractions or excuses from the presumed work-a-day life script to distract me from seeing the truth about my life.

What I realized was the goal all along had been personal freedom — not financial freedom — and the one thing I knew for certain was I had not achieved the goal. I was happy with financial freedom because it provided the time, money and flexibility to focus on personal freedom. (No complaints there.)

But I also realized that achieving financial freedom had done little more than lift the mask that had hidden the deeper issues. It had removed all the distractions and external things, like job and money issues, that I used to project my unhappiness onto.

It forced me to look inward and own full responsibility for my internal state of being because I could no longer project my problems outward on life’s circumstances.

In a nutshell, when you have the financial ability to arrange your life in any way you want, the one thing you lose is any excuse for aspects of your life that don’t measure up.

Financial freedom removes the facade by eliminating the excuses.

Don’t get me wrong; I didn’t slip into depression or anything like that. I just wanted to know how to enjoy each and every day of my life — no excuses allowed — regardless of the circumstances of the day. I didn’t want to have another unhappy day ever again.

This set me on a journey of personal growth in pursuit of that elusive animal known as happiness.

While I’m still a little shy of reaching that lofty objective, I have made significant progress toward the goal and I’ve learned some valuable lessons along the way. One of my discoveries I would like to share with you here. It’s what I call my “Daily Happiness Accountability.”

Secret to Happiness Quote 1 Image

Daily Happiness Accountability

The essence of the daily happiness accountability is that your happiness is a product of your thoughts. Nothing more, nothing less.

This may sound goofy to some of my hard-nosed finance readers, but it’s timeless wisdom that really works. Hang in there while I explain.

The happiness of your life depends upon the quality of your thoughts, therefore guard accordingly; and take care that you entertain no notions unsuitable to virtue, and reasonable nature.
Marcus Aurelius Antoninus

To get myself in the correct frame of mind every day, I created a “cheat sheet” that can be read in less than a minute. This cheat sheet serves as a sort of Cliff Notes version of the greatest wisdom on the subject of personal freedom. You can read it each morning and evening to slowly but surely re-train your mind for happiness.

It doesn’t matter what occurs during your day or how many things go wrong. You can still experience happiness. All it takes is the correct frame of mind.

Your daily practice is to read the following brief list of thoughts at least once per day so that you re-focus your mind on personal happiness. After a month of practice, you should notice tangible results. After 90 days of habitual practice, you should have internalized much of the thinking pattern.

Best of all, it costs you nothing. You risk nothing, and nobody can sell you anything. It isn’t even complicated.

From an investment perspective, that’s a no-brainer proposition. It offers huge potential reward yet costs nothing and has no risk. The only price you pay is the work it takes to put into practice with enough persistence to notice the difference.

Remember, your happiness is a state of mind. You don’t have to be rich, and you don’t have to wait until you reach some level of achievement in the future.

You can have happiness right now.

Learn from my mistake. Don’t wait to become rich to figure this stuff out. Financial freedom is important and worthwhile, but the real game is personal freedom and happiness.

That’s what will make the biggest difference in the quality of your life.

Below are some of my favorite thoughts to re-read each day that redirect my brain toward choosing happiness. I emphasized certain quotes to give a quick mini-reminder when I’m in a rush:

Choose Happiness as The Priority for the Day

  • Most people seek happiness as a by-product of their achievements, actions and other things they do throughout the day. This makes their happiness dependent upon what happens during their day. I can make happiness a direct choice without any dependency.
  • MY HAPPINESS DOES NOT REQUIRE FAVORABLE EVENTS, INTERACTIONS, OR ANY PARTICULAR STIMULUS. I can just choose happiness at any given moment, no matter what’s going on and for absolutely no other reason than to just be happy.
  • Suffering today in an effort to earn greater success and income for tomorrow so that I can relax and feel secure at some future date is insane. I can embrace the adventure that is my work. I do what I can each day without stress but with creativity and joy, and trust the results will be meaningful.
  • I can pursue all my goals from a happy place today. My internal state of being doesn’t depend on external events that I believe will make me happy at some unknown future.
  • There’s no reason to limit happiness to the dessert in life. It can be the whole meal.
  • Happiness is an option and misery is an option. They are both choices you can apply to the same day’s events. Which option do you choose?

Let Go Of Judgments

  • Adopt an accepting attitude to all things and events in life.
  • Try to go the whole day without blaming, shaming or complaining. No negative thoughts.
  • See everyone as being on their own heroic journey through the trials and tribulations of life. We are all doing the best we can with what we know. If others do you wrong, then have compassion for the pain that motivated them to do wrong.
  • Develop a trust that everything in life is somehow for the best and accept that you will never know why or how.
  • Remember this great quote from Byron Katie: “There are three kinds of business in the world: your business, other people’s business, and God’s business.” I think of it this way: unhappiness always occurs when I stray from my business. I have no right being in God’s business because I don’t know the big picture. Anytime I’m in other people’s business, I’m in judgment which makes me unhappy. My business is where my happiness is. Everything else creates unhappiness.

Be Present


Be Grateful

  • Gratitude isn’t just about enjoying and appreciating. It’s a bigger idea about living in the blessing and wonder of an experience.
  • Train yourself to become sensitive and appreciative for all the miracles that occur for daily life to simply go on.
  • Notice how much time today is spent on thoughts of gratitude as opposed to thoughts about problems.
  • Happiness doesn’t mean you have more to be grateful for. It means you spend more time being grateful for what you already have.
  • Say or do something to make your gratitude visible and real.
  • Begin and end each day in active gratitude. As you lay down to sleep think of five things from the day to be grateful for. Before you get out of bed in the morning think of five things to be grateful for.
  • Gratitude is simply a choice to become aware of the good things that are already true in any given situation and become consciously thankful for them.

Create Strong Social Connection

  • The risk we associate with authenticity is illusory. The more we nurture our true selves, remove our masks, and allow uncensored expression, the more our relationships and surroundings will support our true selves.
  • Personal authenticity creates inner-outer harmony and greater connection with others.
  • Simplify your life and greet every person and situation with one face.
  • Quality relationships nurture. Quantity distracts.

Live With Contribution

  • Find at least one way each day to make another person happy. It could be as simple as a kind word, a personal acknowledgement, giving anonymously, or allowing someone in a rush to get ahead.
  • By giving happiness, you experience happiness.

Secret to Happiness Quote 2 Image

My suggestion is to print the points in this article and review the list daily for at least three months. Try to put these thoughts into practice as you go through your day.

This will force the thoughts into your brain so that you live them rather than just intellectualize them. They will become part of your daily existence.

On days when you don’t have enough time or need a quick refresher just scan for the bold and capitalized items on the list. These are the key principles.

Here’s a link to an MS-Word file containing just the checklist. You can print it, edit it, and tinker with it to suit your needs. No opt-in required or other tricks. Just enjoy.

I know this checklist has made a big difference in my life and hopefully it will do the same for you.

Happiness is found in the journey, not the destination. Don’t make the same mistake I did and wait until you achieve financial freedom to realize the importance and value of these ideas. Learn them now and begin enjoying the benefits today while you work toward financial freedom.

Finally, let me know what quotes or sayings you find particularly valuable in your own practice that I failed to include in this list. Add your favorites to the comments section below. There is always room for more wisdom so please share with us.

Here’s to your happiness!

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12 Tips To Build Wealth For Early Retirement Wed, 06 Aug 2014 05:23:43 +0000

How to Retire Early and Wealthy…

Key Ideas

  1. Discover the 3 required action steps to ensure your early retirement goals.
  2. Reveals the 2 obstacles that derail most early retirements and how to overcome them.
  3. Find out how to simplify your financial security by putting it on auto-pilot.

Believe it or not, building wealth for a secure, early retirement is actually very simple – in theory.

The equation for financial success is a function of just three easy-to-understand principles:

  1. The amount of money you invest.
  2. The growth rate of your money.
  3. The amount of time it has to grow.

Unfortunately, few people succeed in building wealth because it has little to do with understanding simple principles and everything to do with taking effective action. The challenge isn’t in knowledge, but in translating that knowledge into meaningful results.

Why? Building wealth requires you overcome the following two hurdles:

  1. You must translate the wealth building principles into actionable rules that will take you to your goal.
  2. Then, you must actually live according to those rules. 

You probably already know the three principles for compounding and building wealth. Most people do; yet, few people actually live according to them. To know and not do is to not know at all.

This is critical. Most people fail to succeed financially because the rules are easy to understand but surprisingly hard to live by. Living them is the key… and also the problem.

For that reason, don’t judge the quality of the following twelve tips by whether they “rock your boat” with originality and genius. That’s not the point.

If early retirement planning via smart wealth building is as straightforward as I claim, then this shouldn’t be rocket science. In fact, you probably already know most of what’s in this article.

But before you yawn and click away from the page, you may want to consider whether or not you are living in congruence with each of the following wealth building tips. You may think you know this stuff already.

But if you aren’t talking the talk and walking the walk, then it requires revisiting. Either you are living in integrity with what is taking you toward wealth and an early retirement, or you aren’t. It’s just that simple.

As you read this article, ask yourself, “Are my daily retirement planning practices honoring each and every one of these financial truths?” Judging by results will tell you what you really know, and an honest assessment should be a little uncomfortable for most.

Want to succeed with early retirement planning? Use these 12 tips.


Early Retirement Tip #1: Have a Plan

The first mistake most people make is they lack a written plan to build financial security. You can’t put the formula for financial success to work for you without a plan to accomplish it.

It may be a simple process, but it won’t happen randomly. You make it happen by taking action. A written plan with goals provides the road map and is a necessary first step.

Financial success is a choice. It results from the many small decisions you make each and every day. Without a plan and goals to achieve wealth your life is like a sailboat without a rudder: it just spins in circles without definite direction.

Plans and goals provide the necessary context to focus each and every decision in your life with purpose.

Time spent writing goals and building a step-by-step plan to achieve those goals is an investment in your future. It reduces wasted effort, increases efficiency, produces amazing results, and best of all, costs you nothing.

Every research study on goal setting and planning support the same conclusion: it’s a remarkably effective tool.

For example, a 30-year study by Harvard Business School showed the 3% of participants with written goals produced 10 times the results when compared to the 83% of participants with no clearly defined goals. A 10-fold improvement is a life-changing difference worth planning for.

[how-much-money-do-i-need-to-retire] To get results like that you must create written savings and cash flow goals, and you must formulate a plan complete with specific actions steps to achieve those goals. Your plan can use the investment vehicles of paper assets, business, real estate or any combination thereof.

There is no single right answer to wealth building despite what the latest guru of the day is telling you. The key point is to formulate a plan specific to your unique interests, skills, resources and abilities. No two people’s plans should be identical since each person’s situation is unique.

You want to formulate your plan based on three separate financial stages during life:

  1. Aggressive accumulation during career
  2. Continued growth of assets during semi-retirement
  3. Spending down accumulated assets during final retirement when all earned income ceases

How you manage your income and assets will vary with each financial stage of life thus requiring a different plan.

The overall objective of your plan is to utilize your career and semi-retired years to build residual income in business, real estate, and/or paper assets so that your passive income exceeds your living expenses. When you reach that point you are infinitely wealthy as long as you continue to grow your income and assets in excess of inflation. You will always feel abundant and never outlive your income.

Achieving this goal may sound nice, but results like this only occur when you build a plan and take the necessary action steps to achieve the result. Are you doing that?

Ensure you are with the rest of these tips and actionable steps to financial success.

Early Retirement Planning Quote 2 Image

Early Retirement Tip #2: Lifestyle Lags Income

Most people prefer the trappings and illusion of wealth over the freedom of actual wealth. They want to look wealthy rather than be wealthy.

Don’t believe it? Just look around you and see how many people are in debt compared to how many people are wealthy. Most people choose lifestyle over financial freedom and violate the first principle in the wealth building equation: accumulate assets.

They spend instead.

The problem is you will never become rich by spending money. You must control your spending so that your lifestyle lags behind your income. This will create available capital for your investment activities.

If you know how to spend less than you get, you have the philosopher’s stone.
– Benjamin Franklin

The life cycle of building wealth dictates the most important factor early in your wealth cycle is your rate of savings or asset accumulation. At some point in the wealth building process, you cross a threshold where the return on your assets is more significant than how much you add to them, but that is much later in the equation.

However, in the early stages you must build the assets so that you have something to grow. For most people that starting point is to save money.

Whether you own your business or work as an employee, you must think of each dollar as a little soldier on the battlefield of your wealth. Every time you spend that dollar on consumption instead of investment, the soldier dies.

But when the soldier is invested he produces new soldiers and creates an ever growing army working for your financial security. The bigger your army the greater your financial security.

According to the “Millionaire Next Door” by Stanley and Danko, frugality and disciplined savings is the cornerstone of a financial plan. Self-made millionaires share a common value for thrift and discipline with their finances through budgeting, controlling expenses, and saving a portion of their income.

Judging by results, you would be wise to follow their lead.

Consumer debt is the antithesis of wealth and should be avoided. It causes enslavement to the system in the name of false prosperity.

If financial freedom is your objective then your practice must be to earn interest and compound your assets — not pay interest and compound your debt. The only debt that is acceptable is to buy productive assets.

A home mortgage, positive cash flow real estate, and certain business debt all qualify. Debt for consumption does not qualify.

The rule is simple for principle #1 in our wealth building formula: save money and build assets. The sooner you begin and the more you save each month, the sooner you will retire early and wealthy (see How Anyone Can Retire In 10 Years Or Less).

Every day you are making choices between lifestyle now and wealth accumulation for tomorrow. You can either invest those soldiers for freedom tomorrow or slaughter them for goodies today.

This rule is simple to understand, but hard to live. Are you walking the talk?

All men have an equal right to the free development of their faculties; they have an equal right to the impartial protection of the state; but it is not true, it is against all the laws of reason and equity, it is against the eternal nature of things, that the indolent man and the laborious man, the spendthrift and the economist, the imprudent and the wise, should obtain and enjoy an equal amount of goods.
- Victor Cousin

Early Retirement Tip #3: Invest in Your Financial Education

The second principle in wealth accumulation is the rate at which your capital grows.

This is largely a function of your financial intelligence. You must learn before you can earn. It is possible to profit from any market condition if you know what you are doing (although, admittedly, some market environments are easier than others).

Every investment in your financial intelligence will pay dividends for a lifetime. I recommend that clients regularly contribute to their financial intelligence by taking courses, reading, and researching so that their financial intelligence grows faster than their wealth.

This is critically important because financial intelligence cannot be developed overnight any more than wealth can be accumulated overnight. It takes time and disciplined effort.

The earlier you learn your lessons, the less they will cost you. You’ll gain experience on smaller investment decisions, where mistakes can be offset by new savings.

The longer you wait to learn these lessons the more they will cost you. That cost comes in the form of years of missed opportunities and mistakes made with big investment decisions later in life that can’t be offset by savings.

There is nothing more financially dangerous than an investor making a million dollars’ worth of decisions with a thousand dollars worth of financial intelligence.

When it comes to investing, a little knowledge can be a dangerous thing, and a lot of knowledge can be a profitable thing. Get a lot of knowledge.

By growing your financial intelligence every day, you are investing in your financial future. Are you living in integrity with this wealth-building principle and regularly learning about investing and personal finance?

Early Retirement Tip #4: Don’t Procrastinate – Start Today

The third variable in the wealth accumulation equation is the amount of time your wealth compounds and grows.

If you wait just six years to get started and your assets grow at 12% annually, you will have half as much money when you retire compared to starting today (assuming equal contributions over working lifetime).

If you wait just twelve years you will have only a quarter as much.

That’s a dramatic change in wealth for just a little procrastination.  Just getting this one idea into your bones early enough in life can change your financial future. It’s that important.

The power of compounding is an invaluable wealth-building tool because money grows geometrically instead of arithmetically — but only when you give it time to work. Procrastination kills time, and as a result it kills more plans for retirement security than all other culprits combined. It is wealth suicide on the installment plan.

Every day you delay is another day where opportunity is thrown away.

Many people procrastinate because they feel uncomfortable and out of place making financial decisions. They feel ignorant or the subject seems dry and complicated with confusing technical jargon.

Get over it! Nobody is born a financial genius. Everyone has to start somewhere. Just get started and fumble through it. Even silly mistakes are better than doing nothing at all.

Every day you wait puts you at a greater disadvantage. The more time that passes before you start, the harder the wealth building process will be for you.

According to the Schwab Center for Investment Research, workers who begin saving for retirement in their 20’s can safely save between 10-15% of their income and achieve financial security. If you wait until your 30’s the percentage required rises to 15-25%. Ouch!

If you wait until your 40’s the percentage is an astronomical 25-35%. If you’ve reached your 50’s or 60’s and haven’t yet started to save then the only viable strategies for financial security are non-traditional and outside of the normal “save and compound grow” formula. They require leverage, additional risk, and a totally different skill set.

Clearly, the earlier you start the easier the process is to swallow.

The reality is anyone reading this article will have more than enough money pass through their hands during their lifetime to secure the retirement of their dreams, yet few will achieve success.

Are you letting the procrastination monster stop you from retiring early and wealthy? What are you going to do about it?

Early Retirement Planning Quote 1 Image


Up to this point we’ve summarized the tried and proven wealth building formula for most self-made millionaires as follows:

  1. Spend less than you earn and save the difference.
  2. Build your financial intelligence while building your wealth so that you can make wiser, more profitable decisions to grow your assets.
  3. Start early because time is the most important factor in compounding wealth.

Notice how it is the opposite of get-rich-quick: it is the slow and steady path to wealth.

Get-rich-quick uses various principles of leverage which increases the risk and lowers the probability of success. It’s faster, but less likely.

The slow-and-steady method requires more discipline and time but the odds for success are extremely high if you actually do what it takes. It’s a proven formula that just plain works.

But only if you work it.

Our character … is an omen of our destiny, and the more integrity we have and keep, the simpler and nobler that destiny is likely to be.
- George Santayana

The way to work the “save and compound” strategy is to begin the process early enough in your career so that you have lots of time. If you get started late you will either have to save an impossibly large portion of your income or apply a leveraged strategy to make up for lost time.

Regardless of the path you choose, your wealth is always a function of the amount of investments multiplied by their rate of growth and the number of years they grow. The math is always the same regardless of the strategy. It’s inviolable.

Unfortunately, as I’ve said before, it is also difficult for most people to live.

That’s why I am including the following 8 tips as a bonus. You only need the first four to succeed, but the next 8 will help you walk the talk and shorten the learning curve by avoiding some of the more obvious and common mistakes.

These extra tips will help you live according to the principles. Remember, it’s no good having a system to build wealth unless you put it to work for you. Get to work by putting these 8 principles in practice.

Early Retirement Tip #5: Put Your Wealth Building on Auto-Pilot

The easiest, least painful way to save your way to wealth is automatically.

Arrange you finances so that every month certain actions take place that automatically grow your assets without any decisions or extra effort on your part. This creates an enforced discipline to keep you on track.

Below are a few examples:

  1. Own Your Home: Purchasing your personal residence has several advantages. A portion of each monthly payment pays down debt which builds equity, automatically. Assuming you finance with a fixed interest rate, fully amortizing mortgage, you can expect appreciation from inflation over time; yet, you will repay a fixed amount of debt with depreciating currency. Again, that’s automatic. And you can set your mortgage payoff date to coincide with your expected retirement date . Doing so lowers your cash flow needs when you retire.
  2. Rental Real Estate: If owning your own home is a great idea, then owning even more homes where someone else makes the payments for you is an even greater idea. But be careful: make sure the property has a safety margin of positive cash flow and make sure you’re willing to deal with the potential headaches of being a landlord. It isn’t right for everyone, but owning a rental property can be a great automatic wealth building tool for some.
  3. Tax Deferred Retirement Plans: Maximize your contributions to your tax-deferred retirement plans so that the money comes out of your paycheck automatically before you ever see it. This is a relatively pain-free way to save because you seldom miss what you never had. Additionally, if your employer offers a savings match program make sure to save enough to maximize this free money: it is the easiest savings you will ever put away. These savings cost far less than you might think because Uncle Sam gives you a tax break to boot. For example, let’s assume you earn $50,000 per year, and let’s also assume your company offers a 401(k) with 50 cents on the dollar matched savings up to 6% of your salary (a very common formula). If you contributed just $250 per month ($3,000 per year) you would get an additional $1,500 paid by the company – absolutely free. Assuming a combined federal and state tax bracket of 30%, your take home pay would be reduced by a mere $175 per month; yet, you would be receiving $375 per month in benefits… yes, once again, automatically. This is a no-brainer way to build assets.
  4. Automatic Savings Plans: Another disciplined approach to savings that reduces the temptation to spend your entire paycheck is the automatic savings plan. If your tendency is to spend whatever you have then these programs are a must. The money is deducted from your pay before you ever see it, making the whole process of saving a lot less painful. The key principle is the money is saved automatically. The only decision you have to make is to start the process. After that, it is on auto-pilot.
  5. Join An Investment Club: While group decisions are probably not the smartest way to invest, the social support, regular learning, and forced savings will assist putting your wealth building and financial intelligence on auto-pilot.
  6. Subscribe to Educational Investment Newsletters: The internet is a treasure trove of investment education, and much of it is freely available. Newsletter issues come regularly causing you to grow your financial intelligence over time and automatically. Consider the free investment newsletter from this web site as a good example of this strategy.

These are just six ways you can put the growth of your savings and financial intelligence on auto-pilot. Many more exist.

John Lennon said it best when he sang, “life is what happens when you are busy making other plans” (although I doubt he intended it to be used for building wealth for early retirement).

You must make growing your wealth a habitual part of your daily life so that it happens automatically while the rest of your life runs its normal course. You must build your wealth for early retirement while making other plans.

You can either choose to arrange your life so that growing your wealth and financial intelligence is an automatic habit, or you can let time slip away and allow procrastination to win the day.

Early Retirement Tip #6: Take Responsibility for All Your Investment Results

Unless you are a trust fund baby or win the lottery, the way you will become wealthy is by owning full responsibility for every aspect of your wealth.

This causes you to get into action and correct and adjust your plans until you reach your goal. You must build your wealth like an entrepreneur builds a business: “if it’s got to be, then it is up to me.”

You are solely responsible for organizing your life so that wealth accumulation is a habit. Nobody else will do it for you.

You are the one that determines the priority of your spending habits and whether your lifestyle lags your income or not. You are the one who determines whether you start today or procrastinate until tomorrow.

Liberty means responsibility. That is why most men dread it.
- George Bernard Shaw

When you take the right actions with consistency it will get you the desired result. Early retirement and financial security becomes a question of “when” – not “if.”

Similarly, you are also responsible for the investment growth you create whether you hire an investment advisor or make the investment decisions yourself. You can’t blame Alan Greenspan, your broker, market conditions, bad luck, or anything else.

You made the decisions therefore the results are yours to own. That is how you learn from your mistakes and make better decisions the next time.

Some people feel intimidated by the idea they are fully responsible for their results, but in fact it is an empowering concept. It means that no matter what your results have been to date, you have the power to turn it around beginning right now.

You are in charge. Nobody else is doing it to you, and nobody else will do it for you. You decide what your financial results will be by the actions you take every day.

Your financial bottom line is you make the decisions: you are responsible. You own the results. That is the only way to achieve true financial security.

Early Retirement Tip #7: Commit What Is Necessary to Succeed

Successful retirement planning requires you to provide the necessary resources to reach the goal. Don’t set yourself up for failure by under-committing.

For example, you don’t want to build a retirement plan around owning and managing rental properties unless you want a part time job. Operating real estate requires effort and can be appropriate for some people and not for others depending on your values, interests and skills.

Don’t commit to real estate as your path to wealth unless you are willing to commit to doing the work required to run a real estate portfolio properly. It isn’t a 100% passive investment. It is part business and part investment for as long as you own it.

Similarly, you don’t want to build your retirement plan around passive investing in paper assets if you’re in your late 50’s, have zero assets, and are just getting started. Someone in that situation will require greater leverage and require active investment strategies to make up for the late start.

A passive strategy can be great when time is on your side, and inappropriate when time is in short supply.

If you are relatively young (40’s or less) and plan to save and compound your way to wealth with paper assets, the good news is that it is a mathematically viable strategy. The bad news is you must set realistic expectations because much of the apparent return on investment from paper assets is eroded by inflation.

You must understand the long-term real return characteristics of various asset classes and use realistic assumptions. Don’t set yourself up for failure by committing too little savings to your plan and expecting unrealistic return assumptions to bail you out.

In short, you must set yourself up to win by designing your retirement plan consistent with the time, money, and energy required for success, and you must be willing to commit those resources to the process.

Every person’s situation is different and successful retirement planning must reflect that. One size does not fit all.

Is your wealth plan uniquely fitted to you?

Early Retirement Tip #8: Make Your Money Hard to Reach

A pile of savings that is easy and pain-free to reach is an easy solution to life’s troubles.

Your car breaks and you use your savings to buy a new one. You get laid off and use your savings to carry you through until the perfect job arrives. Life throws you curve balls, and savings without barriers to protect them are an easy target for solution.

That is why I love the government-sponsored retirement plans with all the difficult rules and penalties you must overcome to access your money prior to retiring. These obstacles provide a measure of discipline for those who inherently lack this life skill.

Even if you have the discipline of a celibate monk, the rules and penalties provide a formidable barrier for your inevitable moments of human weakness.

The rule is simple: when you build a nest egg, don’t raid it. Never borrow money from it for current lifestyle and don’t spend a dime of it until after you retire.

Just let it grow and grow until you are financially free. This is easy to understand but hard to live by.

Self-discipline is that which, next to virtue, truly and essentially raises one man above another.
- Joseph Addison

That is why many smart investors place their retirement money in hard to access investments like real estate or government-sponsored, tax-deferred retirement plans. This reinforces discipline by making the money just difficult enough to reach that you don’t raid your nest egg when those inevitable “emergencies” arrive.

Additionally, hard-to-reach assets like real estate and retirement plans have another huge advantage: tax savings.

Retirement plans allow you to compound your money while deferring or avoiding taxes altogether (depending on the plan and your circumstances), while real estate provides tax savings and deferral through depreciation deductions and 1031 exchanges.

Building wealth for retirement is not just about how much money you make, but about how much money you keep. That is why tax savings is an essential element of your plan.

Conveniently, both real estate and government-sponsored retirement plans offer both tax savings and barriers to access thus reinforcing discipline while enhancing savings.

You would be wise to put these tools to your advantage. Are you?

Early Retirement Tip #9: Risk Management Is Essential

The mathematics of compounding wealth prove that avoiding large losses is equally as important to growing your wealth as pursuing large gains. They are mathematical flip-sides to the same coin.

For that reason, a smart investment strategy manages risk of loss and volatility risk using a variety of tools. These include diversification, careful asset selection, valuation, and a sell discipline to create a defensive investment plan.

While it is essential to practice defensive investing through risk management it does not mean you should avoid risk altogether by hiding out in Treasury Bills or other so-called “safe assets.”

You must have an aggressive, offensive investment strategy to build wealth because your objective is to grow your assets faster than inflation erodes them so that you increase purchasing power. Hiding out in safe investments won’t achieve that goal.

In other words, you must balance both your defensive and offensive investment strategies to pursue gains in excess of inflation without undue risk of loss.

Are you doing that? Do you know how?

Risk management principles apply equally well to your personal finances as they do to your portfolio finances. For example, the rule with insurance is to insure away all risks that you can’t afford to lose.

The alternative is to put a lifetime of hard work, saving, and investing at risk for one mistake, accident, or health problem that causes a loss large enough to financially destroy you … and that is not acceptable.

Types of insurance to consider include homeowners, health, long-term care, automobile, disability, umbrella, and various other insurance products (Don’t worry, I don’t sell insurance. It is just something to consider).

Whether it is your investment portfolio or your personal finances, risk management is an essential principle. You must manage your investments so that you never lose more than is mathematically acceptable, and you must manage your personal financial risk so that you never lose more than you can afford.

Are you managing both of these risks successfully?

Early Retirement Tip #10: Use Your Common Sense

Common sense is the knack of seeing things as they are, and doing things as they ought to be done.
- C.E. Stowe

Investing is really about business. You can avoid most of the speculative manias and frauds that can rob your retirement plan of valuable principal by following this simple rule: the price you pay for any investment must make economic sense consistent with the earning capacity of the underlying business that you invest in.

In other words, valuation matters – it’s a primary risk management tool.

What this means is when the NASDAQ stock index is selling for more than 200 times earnings as it did in 2000 you should not have your capital at risk in that market.

No businessman in his right mind would ever pay 200 times the earnings capacity for a broad cross-section of technology businesses, and you shouldn’t either. It’s bad business because the valuation built into the price is unsupportable.

Similarly, in 2005 when investment real estate in Southern California was selling for prices so high that the rental income couldn’t cover the mortgage payment even when you assumed no delinquency, no vacancy, no expenses, no insurance, no taxes, no maintenance, and the lowest interest rates in the last 40 years, then you have to step back and question the logic. It makes no business sense and is purely a speculative mania (this was first written two years before the eventual price collapse beginning in 2008). [investment-fraud]

Likewise, if an investment offers you above market yields then you should assume there is a very risky reason that they are forced to pay such high rates to attract capital. Always treat above market yields as a warning sign and perform extensive due diligence before committing retirement funds.

(There’s an entire section on Investment Fraud Prevention for you if you want to learn more.)

Finally, it’s just good business common sense to only pay for investment services that put more money in your pocket than they take out. They must be value-added.

For example, a broker or money manager’s fees can only be justified when his insights and services add more profit than they cost when compared to a passive index investment strategy that could be easily implemented on your own. You need to get what you pay for.

I have helped clients save many hundreds of thousands of dollars in mistakes by applying simple business common sense to their investing to avoid excessive fees, speculative manias, and blatant frauds. Investing must make business sense.

Do the investments in your retirement plan pass the business-common-sense test?

Early Retirement Tip #11: Basic Estate Planning

It is irresponsible to leave a burden for those you leave behind. The fact is you will die with 100% certainty.

No one likes to think about it, but that’s the reality. Another reality? Your loved ones will be distraught over your passing, busy with their own lives, and not interested in cleaning up a messy financial legacy.

Your estate plan covers your financial assets and also helps set a clear legacyGet your affairs in order and make all the decisions about who gets what now. Depending on your particular circumstances this might include:

  • Powers of Attorney
  • Will
  • Living Trust
  • Life insurance
  • …and much more depending on your circumstances and desires

Many people rationalize avoiding estate planning with thoughts like, “who cares about all that stuff; I’ll be dead anyway,” or “it’s not that important.”

I disagree completely. After all, what would happen if you were incapacitated but still living? What are the guidelines for moving you into a nursing home? What are the rules for pulling the plug on life support or administering controversial and expensive medicines during your final hours? How do you want to die?

In short, there is a lot more to estate planning than just dividing up your assets. It affects your life and the life of your loved ones left behind. You should care — a lot.

Make sure to seek competent legal guidance for estate planning that will customize a program to fit your personal situation and needs. Quality and price will vary so seek referrals and interview several attorneys specializing in this field until you find someone you’re comfortable with.

Have you set up your estate plan yet? Is it up to date?

Early Retirement Tip #12: Get A Life

There’s more to retirement planning than just money.

What about relationships? What about your health? What activities engage your interest?

Money is just a lubricant to life, but it’s not life itself.

I have never been a millionaire. But I have enjoyed a crackling fire, a glorious sunset, a walk with a friend and a hug from a child. There are plenty of life’s tiny delights for all of us.
- Jack Anthony

Happy retirees have fulfilling lives with the health and money to enjoy them. Make sure you have plenty to live for when your work no longer fills your days, and make sure you take care of your health so that you have the energy and vitality to pursue whatever brings you joy.

Protect and enhance your health by investing daily in proper nutrition, regular exercise, and preventative health care to reduce the risk of catastrophic illness. Get adequate sleep, avoid anxiety, and counteract the stress you do incur with proper exercise and recreation.

We never realize the value of our health until we lose it.

Also, invest time now in relationships that sustain and nurture you. Build the connections you desire with family, friends, and business associates. Life without them would be empty.

Avoid retiring simply to get away from your current job. It’s far more fulfilling to retire toward a life that excites you than away from a life you dislike.

Remember, money is just the means, not the end. Family, friends, robust health, and motivating interests are the real tools of a fulfilling retirement while money is just the lubricant.

Once you put in place all the financial tips above so that your financial retirement plan is in order then it is time to consider your life plan as well. One without the other is only half the picture. Both are essential to a fulfilling and happy retirement.

In Summary:

Financial planning for early retirement is simple to understand and hard to live. That is why so few succeed at it.

It all boils down to prudent, routine management of your investments and personal finances. It’s not exactly rocket science. The principles aren’t complex.

The only question now is, “are you walking the talk?” You may know most or even all of these principles, but how many are you actually living right now? 

If your score based solely on results is less than you might have liked, then you have just identified one value of financial coaching. Even though you know the “how-tos,” the reality is that incorporating them into a plan of action that actually gets accomplished is another matter entirely.

That is where Financial Mentor can help. We can help you bridge that gap between knowing something and following through with action that gets results. There is more to financial success than just recognizing the essential principles.

Financial coaching can literally make or break a secure and prosperous retirement for you and the people you love.

Let us know how we can help.

Also, please share your thoughts in the comments section below. What other ideas did we miss that you think are important? What did you think about the ideas we shared?

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Retirement Planning Checklist Fri, 01 Aug 2014 05:00:13 +0000

How to Plan Your Retirement Whether You’re 20 or 80: Get Started with this Simple Retirement Checklist for Each Stage of Life

Key Ideas

  1. Discover the no-brainer first step everyone must do – starting today!
  2. Find out which advanced strategy is seldom used but amazingly powerful.
  3. Learn why formal retirement planning too early is actually a bad idea.
  4. Uncover the exact action steps required in the years immediately before retirement.

Retirement planning doesn’t have to be complicated.

You don’t need a degree in finance and you don’t have to read a bunch of books to understand the important action steps.

For the bulk of your working years, there are just a few important and very simple actions that need to be done right. The rest can be figured out in the years immediately preceding the day you retire.

That is why we created this retirement planning checklist: to demystify the vagueness around retirement planning, simplify the process where appropriate, and provide a step-by-step guide so that you can do those few important things right at each stage of your life.

The retirement planning checklist is an easy-to-use reference for people who have other things to do besides get a degree in financial planning.

Retirement Planning Checklist in Your 20s: Save Money & Build Assets

You’re out of school and you’ve begun working at your first job. You’re finally on the path to independence after relying on your parents or other adults all your life. The future is in your hands, and so is your financial security.

Let’s face it: at age 25, your priorities don’t include reading books on retirement planning. Yet, if you don’t begin the process of saving for retirement now it will only get harder with each passing year.

You stand at a crossroads. You can choose between good money habits or financial ignorance.

You can take the easy and secure path to financial security by saving from each paycheck… or you can follow the more common path of consumerism and financial mediocrity by putting it off until later.

Which path you choose will largely determine your financial outcome in life.

Admittedly, saving for retirement is easier said than done for most in their twenties because old age seems impossibly far away. Why save for it now?

The Importance of Starting Now

There’s plenty of time so it’s not a priority. Right?

Not really. Every 60 year old that started building their assets later in life wishes they started earlier.

The math is simple, compelling and undeniable. And that’s good news: there is no need to get complicated at this stage.

You don’t have to read investment books, get a masters degree in finance, or build some fancy plan because that would only cause you to put off doing what is important at this stage.

Trying to immerse yourself in complicated materials doesn’t do anything to help you. Instead, it serves as a great excuse to not get started because you feel overwhelmed.

But that’s the only thing to do right now: just get started.

“Sometimes the questions are complicated and the answers are simple.” - Dr. Seuss

How to Begin

One simple action is sufficient. Here’s what you can try to just get started today:

  • Max out your government sponsored, tax-deferred retirement plans. Your employee benefits department, accountant or any mutual fund company can show you how.
  • If your company offers a 401(k) or similar plan, contribute the maximum.
  • Fund either a traditional IRA or Roth IRA to the maximum amount allowed by law. (Self-employed? Try the SEP IRA.)

Put as much money into tax deferred savings as you can. Few things are black-and-white clear in financial planning. If you’re in your 20s or 30s, you’re in luck: you just found one of them. Just do it and get started.

Want Retirement Planning Extra Credit?

For those that are savvy wealth builders, an additional smart strategy at this stage in life is to buy real estate with a fully amortizing, fixed-rate mortgage that can produce income and provide positive cash flow.

Notice the details of that last sentence: positive cash flow, fully amortizing fixed-rate mortgage. These are important details. Don’t gloss over them.

Rather than rent an apartment, buy a starter home or a small apartment building that you can live in now and use as a rental unit later. The fully amortizing loan will be paid off by the time you are ready to retire and you will have inflation-adjusted income you can never outlive.

This is also a very good strategy for people who choose lower paying careers thus making it harder to save large amounts of money in retirement plans. Skilled deal-makers, handymen, and construction workers with specialized talents can also benefit from this investment approach.

These two strategies may sound aggressive, but anyone in their 20s or 30s today must own up to the idea that the Baby Boomers will either bankrupt Social Security or change it beyond recognition.

You can’t depend on Uncle Sam to pay for your retirement. If you are going to retire in style, then it is up to you to make it happen. You’re on your own. Sorry, but that’s reality.

To sum up, here’s all you need to worry about right now:

  1. Max out your tax deferred retirement plan contributions. This is the no-brainer first step that everyone should do. It requires no education or financial experience so you can start immediately. It’s as simple and direct as anything gets in the financial world.
  2. Acquire positive cash flow rental property: This strategy is for more aggressive wealth builders with the skills and inclination to go one step beyond the basics. It’s not necessary and isn’t for everyone, but it has the unique advantage of providing inflation-adjusted income during retirement that you can never outlive.
  3. Oh yeah, and don’t forget to have fun! You’re only young once.

Don’t worry about creating a highly-detailed plan at this stage of life. Complicating your situation will only serve as an excuse for procrastination.

You don’t need to learn about retirement planning or hire a financial planner. Just follow these two simple action steps designed to put you in the asset accumulation mode and never touch the savings that accumulate.

If you keep it simple and get started accumulating assets, you’ll complete all the retirement planning that is necessary at this stage of life.

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Retirement Planning For Mid-Career: Grow Your Assets and Financial Intelligence

Mid-career is defined as the period following your 20’s and 30’s but ends 5-10 years before your retirement.

The length of “mid-career” retirement planning varies widely from person to person: some will retire in their 30’s and others won’t retire until their 70’s. Some will have very long “mid-careers” and others will have very short “mid-careers”.

Your retirement planning objectives for mid-career are twofold:

  1. Grow a nest egg large enough to support retirement.
  2. Grow your financial intelligence to make smarter, more profitable, financial decisions

Your twenties were about getting started building assets. Your mid-career years are about turning up the volume on asset growth and your financial skills. It is the beginning point of real retirement planning but is still too far away from your actual retirement date to benefit from formality and over-planning.

“Our life is frittered away by detail. Simplify, simplify.” –Henry David Thoreau

The reason you don’t want to get into formal retirement planning yet is because too many factors will change between now and when you actually retire. Much of the planning you would do now would just be invalidated by the time you reach actual retirement.

Instead, focus the available resources you do have where they can make a difference. Emphasize your investment skills to grow your assets by developing your financial intelligence. It is a skill that will pay you for a lifetime, and by now your assets should be large enough to justify the time and effort required.

Below are the mid-career action steps that you can add to the savings process you already put in place during your 20s:

  • Build Your Financial Intelligence: Now is the time to begin learning more about investing and personal finance. Read books, listen to audio courses, and study the investment masters. You need to learn what works and what doesn’t with investing so that you can hire smart money managers and make wise investment decisions.The reason this is important is because the return on your assets will be a far greater determinant of your financial security than your savings abilities, and the return on your assets is a function of your investment knowledge and decision making. By contributing to your investment education regularly you are compounding your financial intelligence just like regular contributions to your savings compound your wealth. It is essential to a secure retirement and true financial independence.

“Employ your time in improving yourself by other men’s writing so that you shall come easily by what others have labored hard for.” —Socrates

  • Keep Accurate Records: Another habit to develop in mid-career is good record keeping. You want to run your finances like a business. That’s exactly what it is: a financial management business. Maintain expense records showing how much you spend and where it all goes so that you know how much income you need to retire securely. Keep your investment records efficiently organized and monitor the progress of your assets. Treat your money with the respect it deserves and it will respect you back by sticking around and growing in your accounts.
  • Create Your First Ballpark Estimate: Make your first attempt at figuring out how much money you will need to retire comfortably. Don’t worry about doing it perfectly because so much will change between now and retirement that perfection and accuracy are impossible at this stage.All you want to do is create a ballpark estimate so that you can get your head around the size of the goal and whether or not you are on track. Determine the low end range of acceptable savings required using optimistic assumptions then determine the high end range using pessimistic assumptions. Reality will likely be somewhere in between. This task is easily completed using our free retirement calculators.
  • Never Raid Your Retirement Accounts: This should go without saying, but just in case there was any vagary – you can never, ever raid your retirement accounts to support current lifestyle. If you lost your job and can’t find a suitable position then take an unsuitable position but don’t use retirement savings as an easy solution. If the car is broken then fix it but don’t buy a new car with your retirement money.Whatever problem you face in life must be solved as if the retirement accounts don’t exist. They will always appear as the easy solution to life’s economic difficulties, but that will only create bigger problems for you in the future and defeat the whole purpose of saving for retirement.The truth is you would find a solution if you didn’t have the retirement plans, so just assume they don’t exist and find that solution anyway. Never raid your retirement accounts – never. Did I say never? Yes, never…ever.
  • Think Long-Term: Your habits will determine your success. Every day you make a choice between consuming today and delaying gratification by saving and investing for consumption tomorrow. You can enjoy a BMW or Lexus today or you can invest that money so that you can enjoy a lifetime of BMW’s and Lexus’s. Similarly, you make a choice every day between the mindless rot of television or growing your financial intelligence with good investment books and seminars on CD or DVD. The habitual way you spend your limited resources of time and money during mid-career will determine your long-term financial success. It’s not how much money you make that determines your financial success, but what you do with what you make. Your habits will determine your success.

Checklist For 5 To 10 Years Before Retirement

Up to this point the retirement planning process has been intentionally oversimplified so that you don’t get distracted by unnecessary information that might divert or delay accomplishing the most important tasks. Your responsibility so far has been to build a solid foundation of good financial habits so that you can grow your assets and grow your financial intelligence.

Now it is time to up the ante because retirement is within sight. You have a limited number of years remaining to adjust for any errors or shortfalls.

“We think in generalities, but we live in detail.” - Alfred North Whitehead

It’s time to take retirement planning seriously and dig into the details. You’re getting close enough that time is running short.

Any critical adjustments must be made now while there is still sufficient time to change course. In order to know what adjustments to make you will have to get more detailed.

Below are some actions steps to consider now that you can see light at the end of the retirement tunnel:

  • Build Your Dream: Grab a favorite bottle of wine, relax with your spouse and share your dreams for retirement. You want to answer the “what, where, and when” questions.Where do you want to live? What do you want to do? When do you want to do it?Answering these questions is essential because they determine “how much” your retirement will cost. You must know the “what”, “where” and “when” of retirement planning to go to the next step and figure out “how much”. Think in stages because the early period of retirement when you are active and traveling will be very different from late stage retirement. Build a vision that both of you are excited to live.For the whole story on how to complete this step please see Five Essential Questions For Pre-Retirement Planning on this site.
  • Create A More Accurate Ballpark Estimate: Once your dream for retirement starts taking shape you can then sharpen your pencil when estimating “how much” assets and income you will need to retire securely. Your dream for retirement determines the cost. Five-star travel is more expensive than camping, and playing golf costs more than playing bridge. Where you live and what you choose to do will determine your financial needs. It is time to tighten up your budget estimate and determine if your assets are on track or lagging behind. With just a few years to go you have precious little time to make adjustments. For the whole story on how to complete this step please see How Much Do I Need To Retire and 27 Retirement Savings Catch-Up Strategies For Late Starters on this site.
  • Consider Paying Down The Mortgage: If your savings is on track and there is still more money than month then consider paying down your mortgage. There are many advantages to living mortgage-free in retirement: not only does it lower your monthly income needs but your home is a uniquely protected asset against certain debts and financial obligations. Many retirees feel more secure and sleep better at night when they own their home free and clear.
  • No More Consumer Debt: Consumer debt including auto loans and credit card debt are a no-no at this stage of the retirement planning game. Debt is antithetical to wealth building and financial security. You should only spend what you can afford because retirees need to earn interest – not pay it. Eliminate debt and learn to live within your means now before it is too late.
  • Take Care Of Your Health: There’s not a lot of value in spending your working years building a robust nest egg only to die of a heart attack before you get to enjoy it. As youth fades, your body becomes less tolerant of poor health habits. It may be a cliché but now is the time to build the habit of exercising and eating right so that you can add more years to your life and more life to your years. Get regular checkups and screenings so that any problems can get caught early enough to do something about them. Take care of your health now so that you can live a long, full retirement.
  • Encourage Independence For Dependents: You may be at a tough stage in life where aging parents need help and adult children are just getting started. When you get squeezed at both ends like this it is hard to take care of your own retirement planning needs at the same time. If your kids are out of school and not disabled, encourage their independence. Empower instead of enable. It is important to respect your financial needs as much as everyone else’s.
  • Review Your Insurance Coverage: Life insurance that was appropriate when your savings and kids were both small may be a wasteful expense now. Alternatively, it may be appropriate to raise the liability limits on your home and auto insurance policies and consider an umbrella policy as your assets grow. You should also understand long-term care insurance and how it fits into your overall financial plan. You’re entering a different phase of life and your insurance needs should change to mirror life’s changes.
  • Get Defined Benefit Plan Estimates: Contact Social Security and your company’s human resource department to get a benefits estimate based on possible retirement dates. How are your benefits affected by your expected retirement age? Are any special severance packages being offered? What career changes can increase or decrease benefits? What about health care insurance? Learn the arcane rules and intricacies for both the public and private pension systems so that you can plot a strategy to maximize the benefits you will receive. This knowledge can make a significant difference.
  • Get Health Insurance Estimates: It’s time to determine what Medicare supplemental insurance will cost and get estimates for self-insuring the time period between when you retire and when you qualify for Medicare. Fidelity Investments estimates that a couple retiring at age 65 with no employer health coverage will need close to $200,000 just to fund out of pocket medical expenses in retirement. These numbers are significant and must be built into your budget.
  • Get A Second And Third Opinion: Get referrals for at least two fee-only financial planners who specialize in retirement planning. Have them look over your portfolio, budget, and investment allocations and provide additional opinions. You want to make sure you haven’t overlooked something important or completely misjudged the situation. Fee-only financial planners can help you sort out some of the more technical questions like taking Social Security early or waiting until later for bigger benefits. Should you take a lump-sum retirement plan distribution or monthly payments? What is the best order of liquidating assets to support spending in retirement? What is their recommended asset allocation and investment structure?

These questions are complicated and vary with individual circumstances. The fee charged for the personal advice is cheap insurance for the value provided by having an educated, second set of eyes look over your retirement plan. Just don’t let them sell you any investments or insurance. You want impartial advice – not a sales pitch.

[dont-hire-a-financial-coach] I would be remiss if I didn’t mention that a retirement planning coach such as myself can be very valuable as well. See our page contrasting financial advice with financial coaching do decide which is best for you.

If you and your hired experts agree that you are on track for a secure retirement then congratulations: you are a retirement planning genius. On the other hand, if it looks like you are lagging behind then now is the time to do something about it. (Again, you can check out 27 Retirement Savings Catch-Up Strategies For Late Starters to learn how to correct the problem.)

Also, because this stage of retirement planning is about detail it is important to understand the limits to what can realistically be accomplished here.

The scientific appearance of the retirement planning process paints a deceptively detailed picture about what is essentially an artistic and inherently imprecise process. Don’t be deceived by the mathematical precision of it all. Retirement planning deals with the vagaries of life – not the precision of science.

For these reasons it is wise to use a range of assumptions from pessimistic to optimistic to determine how secure your retirement plan is.

Try inflation at 7% rather than the customary 3% and watch the impact. Throw a bear market, cancer, and Parkinson’s disease at your plan and see how it holds up.

Ultimately, no retirement plan is ever complete no matter how accurate it appears today. This is just the unfortunate reality of making a long-term bet on an unknowable and unpredictable future. Do the best you can and build a safety cushion just in case one of your assumptions proves to be too optimistic.

The problem with retirement planning is the necessity of making a bet on an unknowable future. You must make assumptions about the future to build your plan, but the assumptions could be wrong. Inflation might be higher than expected, you might live longer than expected, or your assets might grow slower than expected.

Worst of all, you could experience catastrophic and expensive health problems. Each of these risk factors is potentially large enough to undermine the best planned retirements.

This may not be a pleasant or comforting way to approach retirement planning, but reality is reality whether we like it or not.

Retirement Planning Checklist Image

Checklist For 1 To 3 Years Before Retirement

Up to this point you have been progressively adding more and more detail to your retirement plan.

You began in early career with simple asset accumulation strategies then added growing your financial intelligence to the picture during mid-career. In recent years you formalized the process with more concrete retirement plans. At this stage your retirement plan should be fairly complete.

If it is not, then please review the previous sections of this article for any missing pieces.

Using a home building analogy you have laid the foundation, raised the walls, and capped it off with a roof. The structure should be more or less complete so the only tasks remaining at this stage are to paint and decorate as a final preparation for moving in.

In other words, with just a couple of years to go it is time to put the finishing touches on your retirement plan.

  • Color in The Dream: By now the “when”, “where”, “what” and “how much” of your retirement plan should be very detailed. Your budget should be based on real numbers rather than generalized assumptions. Your future lifestyle should be estimated, and your expected income from investments and retirement plan benefits should be known. If you don’t have these in place then there is no time like the present. Retirement is right around the corner.
  • Test Drive the Dream: If you are thinking of spending your retirement in Panama then schedule your next few vacations for different times of year in different locations throughout the country. Also, brush up on your Spanish lessons and begin building your network so that you are ready to go. Similarly, if you plan on retiring at home with only 50% of your current income try living on that budget now while you still have earned income to bail you out if it proves unworkable. Or if you plan on building a second career then begin laying the groundwork. In short, start test driving your dream today so that you can correct and adjust any incomplete plans and move toward your new future with confidence. Getting started now will smooth the transition.
  • Review Social Security and Pension Benefits: Rules can change and data can be entered incorrectly. Go through your benefits statements with a fine tooth comb to check for errors and correct as necessary. Make sure the benefits you were expecting to receive match the current rules.
  • Long-term Care Insurance: Examine the risks and benefits of long-term care insurance so that you can make an informed decision. Get cost estimates and learn the various alternatives when purchasing this insurance product.
  • Financial Planning: Are you going to take a lump sum payout or monthly payments? Are you going to leave your 401(k)s where they are or roll them over into an individual retirement account? Are you going to take Social Security as early as possible or delay for a bigger monthly benefit? What is your investment strategy? What will be your asset allocation during retirement? Are you going to purchase fixed annuities or accept the risks of fluctuating investments in hope of a higher return? You are entering the window where these decisions must be made. It is time to begin finalizing these plans. A fee-only financial planner and a retirement planning coach can help.

Checklist For Less Than 12 Months To Retirement

You’re in the home stretch now. You should be complete on everything listed in this article up to this point.

The golf clubs are dusted off and you can almost taste that fancy drink with the little pink umbrella in it.

But don’t make the mistake of celebrating too early because you still have a few important details to tend to. Below are some final actions steps:

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  • Get Organized: If you are like most people you have retirement accounts and savings scattered in various places. Find a service where you can consolidate your accounts and view them as just one source. Automate as many of your financial transactions as possible including routine bill paying and monthly deposits so that you have the flexibility to run your financial affairs on the road or in a foreign country. You want to simplify so that you are free during retirement to do as you please without being bogged down by disorganized financial problems.
  • File for Defined Benefits: If you will be filing for pension and Social Security benefits get the paperwork prepared and finalize any last minute questions. Plan on Social Security and Medicare requiring a three month lead time to process so don’t wait until the last minute or you could be throwing away some benefits. Consider requesting direct deposit to reduce your paperwork while also eliminating delays in processing checks while away from home traveling.
  • Finalize Your Withdrawal Strategy: When the time comes to replace your paycheck by withdrawing assets, where will the money come from? How much income will you need each month? What are your sources of income? If you are liquidating savings to fund current living expenses what accounts will you liquidate first and why? You want to have the answers to these questions before your paycheck ends.
  • Finalize Health Insurance Coverage: Get up to date quotes for any supplemental coverage to Medicare or transitional coverage until Medicare kicks in. Complete and file the applications once you have decided the plan that best fits your needs.
  • Finalize Your Long-Term Care Insurance Strategy: Learn the facts about long-term care insurance and decide if and when it is appropriate for your retirement plan.
  • Complete Any Rollovers: Rolling over a workplace retirement plan to an individual retirement account can take anywhere from several weeks to a couple of months. If you are relying on that money you will have to begin the process well in advance of when you need to make your first withdrawal.
  • Give Notice to Your Employer: Find out from your employer what is required to begin receiving the benefits your have earned and to end employment. Most employers appreciate receiving more than two weeks notice. Determine the timelines and complete the required paperwork.

A Checklist For After Retirement

Congratulations! You did it. You are now retired and hopefully living the fulfilling life you always dreamed was possible.

But even though you are now retired, it doesn’t mean retirement planning is finished. There are still a few financial matters requiring your ongoing attention beyond just deposit and spend. Think of these actions as your long-term maintenance plan.

  • Annual Budget, Asset and Cash Flow Review: Just because you put a retirement plan in motion doesn’t mean it necessarily worked according to plan. Sometimes your finances do better than planned and sometimes they do worse. For that reason, you must review your assets, budget and cash flow each year so that you can correct and adjust. This includes reallocating assets, reviewing investment performance, adjusting withdrawal rates, and anything else necessary to make sure your money lives as long as you do.
  • Healthy Habits: Multiple studies show the human body has a remarkable ability to recover from a lifetime of abuse with just a few short years of healthy habits. Now is the time. You may have used the excuse of being too busy working and raising kids to rationalize not preparing healthy food and exercising regularly, but you don’t have that excuse any more. It is hard to imagine a more important and worthwhile way to spend your new-found extra time than taking care of your health. After all, what is the point in spending a lifetime building a secure retirement only to die early and never enjoy it all?
  • Don’t Forget Required Minimum Distributions: Traditional IRAs require minimum distributions beginning at age 70 ½. Check with your accountant or financial advisor as the rules may change and exact details may vary depending on your situation.
  • Beware of Fraud: Retirees are unfortunately a favorite target for con-artists because they usually have more assets to be conned out of than the average citizen. See our extensive list of articles on How To Avoid Becoming A Victim of Investment Fraud to assure you aren’t next in line.
  • Update Your Estate Plan Periodically: Check with your attorney to make sure your estate plan includes such items as powers of attorney, gifting, account titling, and all beneficiary designations are accurate and current.

Finally, go out and enjoy yourself. You’ve earned it. Live all those forgotten dreams that got buried in the busy-ness of working life and have a great time doing it.

It is time to live your dream retirement. You deserve it.


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How To Pick Dividend Growth Stocks – A Fully Revealed Model Mon, 16 Jun 2014 17:50:51 +0000

Key Ideas

  1. An explanation of what dividend stocks can help you accomplish.
  2. 5 steps to better dividend stock investing.
  3. How to use the quadrant strategy.

Editor Note: This is a guest post from Mike who manages dividend growth stocks portfolios. (affiliate link) He reveals his entire dividend stock investment model for free in this extremely valuable, educational article. It is a complete system for dividend growth stock selection. Take it away Mike…

I started investing back in 2003 when the bull market made everything easy.

Between 2003 and 2006, I made enough money to buy my first house with a 25% down payment. Those were the good years.

While I spent numerous hours in front of my computer analyzing trends and company fundamentals to become a successful investor, many other investors just picked stocks based on the news and made almost the same returns. The economy was booming, and we were able to find stocks doubling within the year.

Then 2008 Happened

I was somewhat lucky when the 2008 bear market occurred because most of my investments were cashed out in 2007 to buy my second house. Even though I was still hit by a -27% drop in my portfolio, the total dollar loss wasn’t too bad because my account was much smaller.

Anyway, I was too busy working my way up the corporate ladder and completing my MBA to worry about it. I didn’t have much time to invest my money.

From 2003 to 2008, I had a very aggressive investing model making a few trades per month on average. I was fast on pulling the buy and sell trigger in order to generate more profit.

But after 2008, the game changed and I didn’t have enough time to continue with my original investing plan. Plus, losing 27% of my portfolio in one quarter had left a sour taste in my mouth. This is what drove me, in 2010, to develop the dividend investing strategy I share with you here.

How I Developed My Own Dividend Growth Model

Dividend Growth Stocks Image

Over the past 4 years, I’ve continuously tweaked my dividend investing strategy to achieve two goals:

  1. Build a powerful portfolio– able to generate both capital and dividend growth
  2. Keep it simple but efficient– I wanted to build a simple investing system that works consistently

I’ll tell you upfront, I don’t hold the key to becoming a millionaire through dividend investing. I still make mistakes, but they are rarer and smaller than most investors. This is how I was able to beat the market in 2012 & 2013 with my dividend stock picks.

In 2012, I wrote a very popular book about dividend growth investing, Dividend Growth: Freedom Through Passive Income, and received hundreds of emails. People wanted to take charge of their investment portfolio because they were upset about their advisors’ inability to answer their questions and/or the high fees they were paying. And while I received many different questions, two main points kept coming up:

  1. The lack of time to build and manage a solid dividend stocks portfolio
  2. A systematic method for buying and selling dividend stocks.

This is when I realized that I had battled with  the same issues and found a way to solve these two essential investing problems. Over the past four years, I’ve worked on an investing strategy that doesn’t take me forever to apply and tells me when to buy and when to sell stocks.

Below I will share that same dividend growth model with you. It’s the same model I’ve used that has performed so well over the past few years.

A Dividend Growth Model That Works

As I’ve previously mentioned, my investing strategy is built on a simple but efficient model. It is relatively straightforward and easy to implement, but it requires discipline. That is the success of my strategy.

Let me break it down step-by-step for you:

Step 1 – Start with Stock Filter Research

I start the investment selection process with a stock filter. I use a paid subscription to Ycharts (no affiliate link here) as it provides an enormous quantity of information. But you can achieve almost the same results with a free stock filter called FinViz.

FIN VIZ stock filter doesn’t provide the 5 year dividend growth metric. This is one of the reasons I use Ychart (and the fact that I can create multiple charts to compare several metrics at the same time!) But if you prefer the free way, you can still select other metrics to pick stocks that will show great dividend growth. Below are the metrics I use:


  • Dividend yield: over 3%
  • P/E Ratio: under 20
  • Forward P/E Ratio: under 20

Company Fundamentals:

  • EPS Growth next 5 years: positive
  • Return on Equity: over 10%
  • Sales Growth past 5 years: positive
  • EPS Growth past 5 years: positive
  • Payout ratio: under 70%

This is enough to give you a good list to work with. It’s not perfect, but you will discard several bad stocks in a blink of an eye with these filters. (Editor Note: This approach is called stock factor modelling. It will be discussed in greater depth in future posts and podcasts.)

Step 2 – Sort For Sales and Earnings Per Share

Everyone first wants to look at dividend payouts, but I think it’s more important to look at revenues and earnings. If sales are not up, chances are profits won’t keep an uptrend. It’s really common sense: if you can’t generate sufficient cash then how can you pay dividends?

The relationship between sales evolution and earning per shares will tell you 3 things:

  1. How is the companys main market doing (are sales growing?)
  2. How are the companys profits growing (are they making more profit or not?)
  3. How are the companys margins doing (if the sales and EPS graph don’t head in the same direction that can be a red flag)

Below is an example of a combination of EPS and Revenues graph with two different companies in the same industry.

The first is Procter & Gamble (PG)

P & G EPS for dividend stocks investing

P & G Sales Chart For Dividend Stocks Investing

As you can see right away, there is a call to action to dig deeper inside the financial statements; the sales are going up but the EPS is trailing behind. There must be something hurting the margins or special expenses that won’t happen in the future. You need to get these facts straight before you can consider buying this stock.

However, if you look at Colgate-Palmolive (CL) you will find a more consistent trend (but not perfect):

CG Net Sales Bar Chart For Dividend Stock Investing Analysis

CG Dividend Growth Stock Bar Chart Showing Earnings

Step 3 – Analyze Dividend Growth History

Now that you’ve created a list of companies able to pay dividends over the long haul, it’s time to perform some deeper analysis.

The process of choosing final “buy” candidates from your screener list can’t be formulated in a rules-based structure here because it will be different for every investor based on risk preferences, portfolio objectives, and personal preferences. Instead, what I will do is provide several ideas for you to consider in developing a selection process that specifically matches your objectives.

The first thing to do when choosing final “buy” candidates is to download the company’s financial statements. Often, you will find an “Investor Fact Sheet” or “Recap” giving you some key ratios such as Earnings per Share, Sales, Profit, and Dividend Payouts over past years.

If you can’t access this information from investor fact sheets then you’ll have to dig inside the company financial statements. Another alternative is the annual report because it will provide more than one year of information with all the necessary numbers already calculated for you.

I like to use the past 5 years when analyzing dividend growth history. Also, I suggest you make a quick graph of the past 5 years’ dividend payouts instead of simply calculating the dividend annualized growth rate. This will give you a clear idea of which stocks have a strong dividend payout strategy compared to the others. The graph can be as simple as the following:

Dividend Growth Chart

Which looks a lot better than the following:

Unstable Dividend Growth Pattern

The first graph is a good indication of a solid company that is looking to consistently increase its dividend year after year. You want to invest in companies with a favorable dividend policy.

Step 4 – Examine For Sustainability

If this seems like a lot of work, it is important to note that we are only halfway through the process. That is why I offer an affordable alternative that does all of this for you for just $15 per month. (Affiliate link) After all, if picking double digit dividend growth stocks was easy, we would all be rich!

As a quick recap, what we’ve done so far is examined past data with stock screeners and financial statements as an efficient way to clear out the most “unreliable” stocks. Your next step in this process is to examine current information about the company to see if it will be able to increase and sustain its dividend.

  • How is the Management?

Something that is ignored too often is the current management team. Have members been there for a while and are they responsible for the previous performance? If so, are they still on board to continue their good work, or are they just trying to get their golden parachute?

The management compensation system explained in the financial statements along with the longevity of the board will help you make up your mind about their competence. If you are lucky, they might even disclose their dividend payout philosophy for the upcoming years. If they put a lot of emphasis on the dividend in their financial statement then that’s a great sign it is a focus that will continue into the future.

  • How Does the Company’s Recent Quarterly Performance Look?

Besides pure metrics, which we analyzed in Step #2, recent quarterly results will tell you if the company has been beating analysts’ expectations. In addition to analysts’ opinions, you can check to see if the company is confirming their previous sales guidance. A good site to get this information quickly is Reuters because they usually report when companies comment about their outlook for the upcoming year. This is a good way to interpret the current and forward results.

Your objective in this step is to find companies confirming or increasing their earnings and sales guidance for the upcoming quarters.

  • What Projects Are They Currently Pursuing?

While you are looking for financial ratios within the financial statements, also look at their current and future projects as well. A company dominating its sector must always look towards the future. For example, Intel (INTC) has been dominant in the PC world. However, they are experiencing problems entering the tablet and smartphone sectors. Since PC sales are slowing down and INTC is still not able to expand into other markets, future growth will be harder to achieve and margins will likely be reduced.

I personally looked into INTC and saw that they are multiplying their efforts in order to expand their niche into other markets. Following these current projects will tell me if INTC can successfully transition their previous business model (being the leader in processor chips for PCs) to a new business model (which not only includes tablets and smartphones but also servers and hosting services). Again, the goal is sustainability of the dividend and this is yet another quality indicator.

Step 5 – Look To The Future

All of this analysis of past data and company fundamentals serves one purpose – to figure out if the company can continue its dividend payout strategy. It is not a Crystal Ball, but it’s your best indication of future results.

A stable evolution of past sales, earnings and dividend payout ratio are all positive indications for the future dividend. If the company has a proven ability to generate growth and manage earnings then chances are good that their payout ratio will remain stable over time. It’s important to form your own opinion about the company instead of blindly believing what you read.

However, even if everything looks good, it is still important to remember that market and technology innovations can cause bad things to happen to good companies. That’s why you want to determine:

  • If the company is solid enough to weather a recession?
  • What kind of impact would a sales slowdown and pressure on margins have on the dividend payout?
  • Is the company distributing all their profits (i.e. high dividend payout ratio) or is there room for bad luck?

Once you reach this point in the analysis then these questions are easily answered. That’s why it is so important to have your own opinion with the economic facts to back it up.

From Stocks Picks To Dividend Portfolio

Now that you’ve had fun screening stocks and sorting for fundamentals, it’s time to get serious: how do you build your portfolio?

Do you simply invest in a random selection of 20-30 stocks from your list and rake in the dividends? You can certainly do that (I know investors that have a few Dividend Aristocrats and just wait for their quarterly payout), but my experience says you can do a lot better with proper selection.

The purpose of the rest of this article is to provide you with the tools you need to build your portfolio from your final list. These techniques don’t contain the absolute truth, but they will prevent you from mistakenly chasing too much yield or too much growth without properly considering investment fundamentals.

My favorite technique is to build quadrants to compare stocks, use diversification to your advantage – and as a bonus – I’ll also show you how to cheat on your investing strategy.

How To Use The 4 Quadrant Strategy

The first thing you should do when building your portfolio is to test the stocks that passed the screening criteria against 4 different types of quadrant analysis.

Quadrant analysis techniques are used to quickly compare how stocks rank relative to each other. It also reveals specific shortcomings not easily found through other analysis techniques. What is cool about quadrants is that they are easy to use, easy to understand, and don’t require much time.

The idea of building a quadrant system is quite simple: first, you select two characteristics you want to compare (consider dividend yield and dividend payout ratio). Next, you compile the data for both characteristics for all stocks on your shopping list that passed the earlier screens. Once you have all the data, you simply position each stock according to its yield (on the X Axis) and their payout ratio (on the Y Axis). Here’s a quick example:

Dividend Yield vs. Payout Ratio Quadrant Graphic

In this example, it is quite obvious that you would like to see as many of your stock picks in the #4 quadrant (high dividend yield with low payout ratio) as possible. The least attractive quadrant is #1 (low dividend yield with high dividend payout ratio). Within minutes, you can determine which stocks are a good addition to your portfolio and which are not.

Different quadrants can be used to cross-compare related data to see contradictions and inconsistencies thus allowing you to further narrow your shopping list. Companies use quadrants to position their products (high-end vs low-end, mass consumer vs. niche, etc.) We will use them to position your stock.

For example, if you hope to live off dividends one day, you need stocks that:

  • Provide a healthy dividend from day one.
  • Grow their dividend over time.
  • Grow their income over time (so they can keep up with their dividend and provide you with capital growth at the same time).

In order to find those stocks, you would want to use the following four quadrant models…

Dividend Yield Vs. Dividend Payout Ratio

The next quadrant we will look at compares the stock’s dividend yield to its ability to continue paying the dividend (the dividend payout ratio). In other words, most dividend investors first look at dividend yield. But instead of chasing yield blindly, like a dog running after a cat that just crossed a boulevard, you should check the dividend payout ratio to make sure your dividend (or your dog) doesn’t get squished!

Using an actual example, I’ve pulled 10 stocks from the S&P 500 and the NASDAQ to show you how they compare using this first quadrant analysis. Here’s my data compilation:

Ticker Dividend Yield Dividend Payout Ratio
T 5.63% 259.00%
CPB 3.67% 47.20%
HRS 2.93% 21.60%
AFL 2.87% 28.11%
MSFT 2.48% 23.33%
BMY 4.03% 60.96%
GIS 3.09% 40.56%
CVX 3.02% 22.83%
BLK 2.93% 43.39%
GRMN 3.83% 59.62%


As you can see, you have both high and low dividend yields and payout ratios. That doesn’t mean, however, that all of the low yields have a low payout ratio and vice-versa. This is what the quadrant will show you at a glance:

Dividend Yield vs. Dividend Payout Ratio Quadrant

The less attractive quadrants, in my opinion, are above the 100% line. It really doesn’t matter how high the dividend yield is because they’ll eventually have to cut the dividend or sell assets to balance the books when paying out more than 100%.

Since we only have one stock in that category (AT&T), I would go back into their financial statements and calculate their payout ratio myself. Unfortunately, data on payout ratios can be less than accurate when you use free sources (the 259% payout ratio was taken from Yahoo Finance back in April 2012). But T is showing such an attractive yield for a large utility that I think it’s worth a little bit more investigation to understand why the payout ratio is so unsustainably high.

In an ideal world, we would only pick stocks in the #4 quadrant because those stocks should provide high & sustainable dividend yield. Fortunately, many of the stocks on our list are part of this quadrant (GRMN, BMY, CPB, GIS & CVX) and we have three stocks very close (BLK, HRS & AFL). Those stocks show a great combination of good dividend yield with a sustainable payout ratio.

Dividend Yield Vs Dividend Growth

Once you’ve narrowed your shopping list to companies showing sustainable dividend levels, the next step is to sort these same companies for dividend yield compared to dividend growth.

The goal is to find high dividend yield-payers with low payout ratios that also show 5 year dividend growth. Conversely, you want to avoid companies with a temporarily high dividend because its price has been devalued due to recent news or a market downtrend.

When comparing dividend yield and dividend growth over 5 years, you want to pick the highest yield with the highest dividend growth. Continuing the same example, here is my data for the following quadrant:

Ticker Dividend Yield 5 Yr Dividend Growth
T 5.63% 5.05%
CPB 3.67% 8.83%
HRS 2.93% 22.69%
AFL 2.87% 15.80%
MSFT 2.48% 13.63%
BMY 4.03% -2.24%
GIS 3.09% 11.13%
CVX 3.02% 8.86%
BLK 2.93% 23.85%
GRMN 3.83% 31.95%

You can already guess that BMY will get eliminated in this analysis. Here’s the quadrant:

Dividend Yield vs. 5 Year Dividend Growth Quadrant Image

This time, the most interesting quadrant is #2 because it provides stocks with high dividend yield and high dividend growth. GRMN is a great example. However, we also have BLK, HRS & AFL showing a strong dividend growth (over 10%) with a divided yield closer to 3%. CVX and CPB are close runner-ups because of decent dividend growth too (8.86% and 8.83%). You can see that, for a second time, MSFT is being penalized in this analysis due to a low dividend yield compare to other stocks.

Use this quadrant analysis to build your portfolio. More aggressive investors might ignore MSFT, while retirees might consider it a reasonable choice because of its leadership position within its industry accompanied by strong dividend stats.

5 Years Dividend Growth Vs. 5 Years Revenue Growth

The first two quadrants showed you stocks offering a combination of attractive dividend yield and dividend growth. The next two quadrants will take a different look at the same stocks to determine if they can sustain their dividend level over time.

Why compare the five years dividend growth with the five years revenue growth? Because the first depends on the latter. Since dividends are paid with after tax income, you want to make sure the company has enough funds to maintain its dividend payouts. More importantly, it will tell you more about the dividend distribution strategy of the company.

Low dividend growth combined with high revenue growth (quadrant #1) demonstrates that the company is in a growth stage. The company believes it’s best to use cash flow to push the company to another level instead of giving back to the shareholders. This might be good if capital gains are your goal, but it’s not desirable when seeking dividend growth.

Alternatively, high dividend growth with negative revenue growth (quadrant #4) demonstrates that something is wrong and requires further investigation. In these situations the company dividend payout ratio will increase over time, which is not a good sign for an investor.

The perfect scenario would be to find a company with a steady dividend growth and revenue growth at a similar level. This tells you that the company is growing and has the intention of giving money back to its shareholders at the same time. Staying with the same sample stock list, below is the data:

Ticker 5 Yr Dividend Growth 5 Yr Revenue Growth
T 5.05% -18.83%
CPB 8.83% 6.83%
HRS 22.69% 21.91%
AFL 15.80% 7.20%
MSFT 13.63% 17.63%
BMY -2.24% 28.37%
GIS 11.13% 13.27%
CVX 8.86% 11.50%
BLK 23.85% 26.17%
GRMN 31.95% 2.61%


Before looking at the quadrant, you can already see that BLK and HRS are following an interesting trend on both revenue and dividend growth. Now let’s take a look at the big picture:

5 Year Dividend Growth vs. 5 Year Revenue Growth Quadrant Image

Notice how things get clear on a great graph?

We have only 2 stocks in quadrant #2 showing both strong dividend and revenue growth; however, we also have 3 interesting stocks (MSFT, GIS & CVX) in quadrant #1 showing a great combination. We can also see that BMY & T are far from being in a strong position in this quadrant. GRMN obviously shows a shift in direction while they have decided to become a “strong dividend-payer” over the past several years. This is quite logical for an established company with a lot of cash flow (after powerful dividend growth over 5 years, their payout ratio is now at 59%).

P/E Ratio Vs. 5 Year Income Growth

The last quadrant (but not the least) compares the P/E ratio with 5 year income growth. It’s like comparing future assumptions with past results.

The P/E ratio is the current evaluation of a stock by the market – the future assumptions. A high P/E ratio means that the market is anticipating strong growth. You will more likely find overvalued stocks in this category (just think of RIM a few years ago). The historical P/E ratio of the S&P 500 is 16. Anything over 20 means the market is pricing in a great deal of growth making the stock much riskier for decline in the event of a disappointment.

On the other side, a low P/E ratio is consistent with a stock evolving in a mature industry, or occurs when a stock is undervalued. It is obviously tricky to determine which stocks are priced correctly or not. Also, please keep in mind that the P/E ratio will be greatly affected by the stock market’s assumptions.

For example, after two years of deceiving financial results, RIM has traded at a P/E ratio as low as 3.81! This doesn’t mean that the company is undervalued; it means that the market doesn’t believe the company can keep up with its previous results!

This quadrant will help you find stocks with the lowest P/E ratio relative to the highest income growth. In other words, it helps you find growth without paying a premium.


Ticker P/E Ratio 5 Yr Income Growth
T 14.33 19.59%
CPB 12.44 0.09%
HRS 9.61 8.17%
AFL 7.28 20.20%
MSFT 11.9 11.21%
BMY 15.07 6.41%
GIS 16.04 6.29%
CVX 8.13 7.21%
BLK 17.29 23.02%
GRMN 17.4 14.79%


With this quadrant, look for stocks in quadrant #1 (low P/E ratio with positive income growth). Those stocks are more likely evolving in a stable environment (this is why their P/E ratio is lower) making them lower risk, but with income growth (so they are able to increase their dividends). Those types of companies will likely only become stronger over time:

P/E Ration vs. 5 Year Income Growth Quadrant Image

This quadrant highlights AFL as being the only stock with a high income growth and low P/E ratio. This is also related to the fact that AFL is evolving in the financial industry. Stocks like BMY and GIS are quite deceiving because they are trading at higher P/E ratios without showing strong income growth.

This quadrant will help you choose stocks in terms of their past growth showing how much you are paying for expected future growth. For example, GRMN had an interesting 5 year growth and is expected to grow in the future… unless the stock is overvalued. As long as you stay under a P/E of 20, you should be playing in a relatively safe playground.

Cross Referencing the Quadrants

Now that you know how to use the four quadrants, the most important thing is to use all four of them!

Don’t get complacent and use one or two comparative measures. Use all four of them to paint a complete picture. Don’t jump to a conclusion and don’t be afraid to look into financial statements once in a while to understand how a stock might be less attractive in one quadrant compared to the others.

By cross referencing the 4 quadrants, you will find certain stocks that keep showing up with desirable combinations of characteristics such as GRMN, BLK and AFL. While none of the 10 stocks are strong in all aspects, those 3 stocks have a better “batting average” than the others.

Other stocks might look promising based on the fact that they passed the screener and measured well on a couple different quadrants thus requiring deeper research to understand the inconsistencies. Stocks on the “to be researched further” list include CVX, MSFT and HRS. These are three mature companies leading their respective markets. They should be on your “stocks on the radar list” according to the screener and quadrant analysis.

Finally, you have other stocks that didn’t quality half of the time or more (T, BMY, GIS and CPB). I would just eliminate these because they miss the target on important metrics. It doesn’t mean that they are not interesting stocks, but when your goal is reliable dividend growth there are better purchases.

So out of 10 stocks and 4 quadrants, you have:

  • 3 very interesting picks (GRMN, BLK & AFL)
  • 3 “further research” picks (CVX, MSFT & HRS)
  • 4 “not very interesting” picks (T, BMY, GIS, CPB)

Doing this exercise can require some time as you first need to put all of your stocks in an excel spread sheet, then find all the metrics and create your quadrants. In order to do it, here’s a very easy tutorial for excel users:

  • Create a table as shown in this book (ticker, metric #1, metric #2)
  • Select data only in metric #1 and metric #2 (the 2 columns)
  • Click on “insert”, then “other charts” and select “X Y (Scatter)”

Analyzing Divdend Stocks In Excel

  • You’ll get your points in a graph. You select Chart Layouts and take the circled one in the second line of options.

Dividend Stocks Investing Using Excel

  • Then, you simply have to print it and add the stock name besides each dot and you have your quadrant!

Using Dividend Stocks Rock to Facilitate Your Investing Process

If you are thinking, “Wow, that looks like a lot of work”, then you would be right.

Yes, it takes time and effort to first complete all the factor screening to create a dividend stock shopping list and then further sort for quality and consistency using company fundamentals and then quadrant analysis.

After teaching this method to many people the one consistent response was, “Interesting. I like it, but is there a way for me to just pay you to do it for me?”

And so that is why I’ve developed a membership web site that does exactly that. (Affiliate link) If you want to do it yourself, you have all the knowledge you need in this article. I gave it to your freely. You don’t need me because this is the complete recipe. Nothing held back.

However, if you want someone to do all the screening and quadrant analysis for you then I’ve built a website that does exactly that by allowing you to:

  • Search through my pre-screened stock lists,
  • Monitor my model portfolio performance,
  • Read my stock commentary every two weeks,
  • Know exactly when any company in my model portfolio provides quarterly reports,
  • Benefit from my unique stock ranking system.

You can get to this website here and it simply does what I taught you here at such a low price that it really doesn’t make sense for you to do it yourself. (Affiliate link)

I hope you found the ideas in this article helpful for your dividend growth stocks investing strategy.

Please let me know your thoughts in the comments.

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FM 019: Expected Value Formula – The Missing Key To Building Wealth with Billy Murphy Sun, 11 May 2014 18:16:48 +0000

Financial Freedom For Smart People

Wealth is math.

That’s bad news for math phobics, but it’s great news for the rest of us because it means there are rules and science behind how wealth building works. It isn’t random luck.

In Episode 19 of the Financial Mentor podcast we’ll explore the most essential math principle to wealth building – the expected value formula.

This essential principle eludes most people because we inherently think in terms of probabilities – the likelihood of something occurring. It could be an investment going up or a business going bust. Either way, you most likely think in terms of the probability of the event occurring, and that is unfortunate.

Why? Because wealth is built according to expectancy – which is probability times payoff.

It’s an entirely different way of thinking that produces surprising results. Discover how expectancy will literally determine the financial outcome of your life, and how you can use this uncommon knowledge to make smarter, more profitable investment decisions.

In this episode you will discover:

  • How a career as a professional poker player shaped Billy’s view on traditional investing.
  • The difference between gambling and investing.
  • Why variance is a dangerously misleading measure of risk that can cost you a fortune.
  • The concept of “edge” in investing or “competitive advantage” in business.
  • How increasing sample size can lower risk, but only if you have positive expectancy.
  • The essential difference between asset wealth and cash flow wealth.
  • Why EV, or the expected value formula, permeates all forms of wealth building – paper assets, business, and real estate.
  • How to use the expected value formula for every business and financial decision you’ll make.
  • The many dimensions to risk management revealed by a deep understanding of expectancy.
  • How to make more by risking less.
  • How diversification, when done incorrectly, can become di-worse-ification.
  • How the pursuit of safety can put you at even greater risk.
  • Why all expectancies are not created equal, and how that spells opportunity for you.
  • The dangerous illusion of results, and why expectancy is actually more important.
  • How recency bias causes you to make losing investments.
  • The two essential skills you must develop to invest with greater profit and reliability.
  • How to use risk management skills to raise your expectancy.
  • The right (and wrong) time to avoid analysis-paralysis in the due diligence process and just pull the trigger.
  • How to test any investment using the “cocktail napkin test”.
  • How missing a positive EV investment is mathematically equivalent to negative EV, and avoiding negative EV is mathematically equivalent to positive EV.
  • Why insurance makes good business sense, even when it has a negative expected value.
  • The right and wrong way to use insurance to manage negative expectancy risk.
  • and much more….

Resources and Links Mentioned in this Session Include:

Expected Value Formula with Billy Murphy Image

Help Out The Show:

The feedback on these podcasts has been great! Your enthusiastic response is what drives me to continue producing them.

5 star reviews and new subscribers over at Itunes increase the show’s rank and help more people benefit from the message.

If you could spare a minute to leave a review on Itunes it would mean a lot to me. Thank you so much!

Click here to subscribe to the show on ITunes and leave a review…

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Click here to subscribe and leave a review from inside your ITunes account…

Get Episode #19 PDF Transcript – Expected Value Formula: The Missing Key To Building Wealth:

Click here to grab the PDF transcript of Episode 19 where Billy Murphy explains how the expected value formula works to help you build wealth.

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