The Psychology of the Rich

OK, so I'm not a rich guy but I find it fascinating to study the psychology of the rich. What do they do differently than poor people? You might say, that's easy, they make more money. Not necessarily true. It's not about how much you make, it's all about how you handle it. This blog entry is based on an article from Entrepreneur magazine. It listed the 9 habits of rich people. But get this, none of the 9 factors have to do with money. They are all about attitude, priorities and how the rich spend their time. If one wants to be rich, study rich people. It's just like weight loss. Want to be in good shape? Study those who eat right and exercise. Here are the habits of the rich.

1. They are goal oriented, and they write down their goals.

2. They have a to-do list that prioritizes tasks that need to be done.

3. They watch very little TV, especially staying away from reality shows. They use their time wisely, and often watching TV is a waste of time.

4. They read a lot, especially self-improvement books. They always want to get better and push themselves to succeed.

5. They enjoy audiobooks, often listening to them in the car while commuting.

6. At work, they go above and beyond what is required.

7. They seldom play the lottery. The rich know that the lottery is a foolish way to spend money.

8. They take care of their health by watching their diet and exercising. An unhealthy body can stand in the way of being financially successful.

9. They take care of their teeth, often flossing every day. Dental problems can be painful and expensive.

What do these have in common? They all boil down to properly managing finite resources, such as time, money and health.

Information from this article.

"The Millionaire Next Door"

What does a rich person look like? What is their lifestyle? From what we see on TV on shows like MTV's "Cribs", they drive outrageous luxury cars by Rolls Royce or Lamborghini, wear expensive Italian suits and live in over-the-top multi-million dollar mansions. That is true for some people, but assuming that all wealthy people live that way is incorrect. They often don't drive luxury cars, they don't always buy $25,000 fancy Rolex watches or have closets full of Armani suits. They have basic credit cards like Visa, Master Card, Sears and JC Penney. They are rich because they are frugal. They stay rich because they are smart with money.

These topics are covered in a book called "The Millionaire Next Door: The Surprising Secrets of America's Wealthy" by Thomas Stanley and William Danko.

There is a phrase that says "The rich get richer and the poor get poorer." This happens since the rich know how to put their money to work for them. They spend time studying personal finance and accounting. They read publications like Forbes magazine and The Wall Street Journal. They know to avoid the pitfalls that lead to financial ruin such as accumulating too much debt. They stay away from wasteful spending like rent-to-own stores, playing the lottery and falling for fraudulent investing schemes. Are there exceptions to the rule? Yes, there are many. Often the rich get greedy and take foolish risks in order to multiply their wealth. Look no further than the likes of Bernie Madoff or the crooked bankers behind the 2008 housing crisis.

Those who have inherited money tend to be show-offs more often, buying expensive possessions, when compared with those who have earned their wealth. Earning something makes you enjoy it rather than having it handed to you with no work involved.

You can't judge a book by its cover. Spotting a truly wealthy person is not as easy as you might think.

Apple Stock is Now Much More Affordable

Due to a 7-for-1 stock split, Apple (AAPL) is now under $100 per share. Last Friday it was $645. If you want volatility, this may be a good buy. The beta is 0.74, so it goes up and down frequently. Steve Jobs' innovations like the i-pod, i-pad and i-phone have made Apple the go-to tech company with fiercely loyal followers. The stock has been amazingly successful, rivaled only by another tech stock, Google (GOOG). The 52-week range has been between $55 and $95 per share so one can get in and get out and make a tidy profit, or hold onto it for the long haul. The stock scouter rating on msn.com gives this a 10 out of 10. The chart above shows the monumental rise of Apple since 1992, and it is nothing short of amazing. In 2007 it was $100 per share and it has shot up to over $600 since then. A plus for investors is the fact that this stock gives a good dividend too, of 13.16 and a yield of 2%. As of 9/28/13 the total assets are $207 billion and the total liabilities are $83 billion, so the debt load for this company is not too high. Investing in a company that is drowning in debt is not a good move. Looking at the amount of debt compared to assets is a key indicator of whether or not a stock is a good investment. Debt can sabotage monetary success, whether we are talking about a business, or personal finance. Many will be interested in buying this stock at a "bargain" price. At over $600 per share, it was out of reach for many. Google stock is currently $555 per share. Will they follow suit and also exercise a stock split to make their stock more affordable? Information on the implications for Apple shareholders who exercise options can be found here.

Millionaire's Top Investing Mistakes

Building wealth is not easy. Make the right decisions and it can be done. The rich make good decisions more than they make bad decisions, but they are not perfect. Unless money is inherited, becoming wealthy is about hard work and researching how to make your money work for you. I contend it is not about having a big salary. Over and over, the rich become poor due to bad decisions. Those with a modest salary can build a significant nest egg if they have discipline and knowledge. CNBC found out the top 5 investing mistakes of millionaires.

1. Failure to diversify. Don't put all of your eggs in one basket. Do this through investing in mutual funds or if you have individual stocks, do not have more than 20% of your investments in one sector. Don't have all tech stocks, or all bank stocks for example.

2. Investing without a plan. Have a plan for your portfolio. Think about your risk tolerance, investing timeline and your goals. Are your investments going toward retirement or are you planning on selling once you make a profit?

3. Making emotional decisions. It's easy to fall into certain investing trends or fads, but the successful investor will adjust the portfolio based on research, not emotions.

4. Failing to review the portfolio on a regular basis. Make a plan to review your investments every so often. If you are investing for the long term, as most do, then reviewing it often is not as important since you can afford to ride out the ups and downs. A short term investor will want to watch the portfolio more closely. A 5% loss can turn into a 25% loss quickly.

5. Focusing too much on the historical returns of investments. The past matters a certain amount, but future performance is what really matters. One cannot invest in past gains, only future gains.

The whole article can be accessed here.

Dave Ramsey Classes for High School Students

In my opinion, this country needs to educate people on the basics of handling money. We know that our federal government sets a poor example on how to do that. Imagine if the average person had $1 million dollars in credit card debt, and acted like it was no big deal, and kept on spending. That is what our politicians do with our money. Financial expert Dave Ramsey know makes it possible for high schools to teach his class to teenagers. This should be a required curriculum in every high school in America. Teach the kids financial responsibility early. Then, they will avoid the pitfalls of credit card debt and making poor decisions. College students are often bombarded with credit card offers from all directions. People who are taught about money early will learn the importance of saving for retirement. Imagine if everyone in America started investing during their teenage years. Retiring at age 65, or for many people earlier, would be no problem. Find out more about the curriculum here: http://www.daveramsey.com/school/foundations/

Ten Tips to be Financially Fit

No matter who you are, managing money is a challenge. Here are some basic tips that will make it easier.

1. Invest automatically. Have your 401k/retirement investments taken out automatically each paycheck so you don't have to think about it. If your employer has a certain amount they will match with their own contribution, take full advantage of it. That's free money. Or, you can invest a certain amount automatically by using an online broker such as e-trade or sharebuilder. Start as early as you can. If you start investing at age 25 and want to retire at 65, you have 40 years for your money to grow. Time is money. Track your investments and make changes if your results are not satisfactory. Inflation is normally about 3% per year, so if your investment gains 3% per year, you have no real gains.

2. Don't buy a new car. The depreciation on a brand new car is rapid, the value drops as soon as it is driven off the lot. Buy a slightly used car, maybe one that is a year or two old. Even the rich do this (maybe that is why they are rich). The book "The Millionaire Next Door" points out that most millionaires do not buy new cars.

3. Banish debt payments. Do what you can to get rid of car payments, credit card debt, student loans, any other debts, and finally, house payments. Dave Ramsey says that debt is the #1 thing standing in the way of building wealth. Pay cash whenever you can. Why give the bank your money? Think about what you could do with your money if you had no house payment, no car payment, no credit card debt and the like. You could save tons for retirement, give to charity, and simply have peace of mind financially.

4. Avoid wasting your money on things like lottery tickets, rent-to-own businesses and payday lending services. The chances of winning the lottery are miniscule. Putting your money in a good growth mutual fund is a better bet. Rent-to-own businesses and payday lending services are scams that charge obnoxious interest rates.

5. Separate wants from needs. This is tough since in America we are big time consumers, being bombarded with advertising every where we look. Some feel pressure to keep up with the Joneses. You might want to buy a $50 shirt, but a $25 shirt will still do the trick. Sure, we'd all like to drive a Mercedes, but a Chevy might be 1/3 the price and it still gets you from pont a to point b. Give up on seeking status symbols, it is an empty pursuit.

6. Term life insurance trumps whole life insurance. Go with the no-frills, basic, convertible, renewable term life insurance. Sales people will try selling you whole life or universal life or annuities but those are a waste. The investment component of most whole life policies is poor. But, insurance agents love them since their commission is greater. Financial experts like Bruce Williams and Dave Ramsey recommend term life insurance. Do your investing elsewhere, not with insurance.

7. Make more, spend less, sell stuff. Want more money? You have three options. Make more by working overtime or getting a second job or a better paying job. Analyze your spending habits and spend less. Set up a monthly budget and stick to it. Sell things you don't need. Have a garage sale. Set up an amazon.com or an e-bay account to sell some possessions.

8. Diversify your investments. This means, don't put all of your eggs in one basket. If you have $1,000 to invest, don't buy $1,000 worth of stock in one company. Consider a mutual fund or an ETF (exchange traded fund). These will diversify your risk and invest in many stocks that compose one financial investment vehicle. Or you can choose an index fund, perhaps one that mimics the return of the S&P 500 or the Dow Jones Industrial Average. Vanguard and Fidelity are two of the top mutual fund companies. Analyze before you buy though. What is the track record of the mutual fund? How diversified is it? Does it have any international stocks (this may be good or bad)? what are the associated fees? Is it a no load fund (no fees for purchasing) or a loaded fund (you pay fees when you buy)? All mutual funds or ETFs are not the same. Seek out a financial advisor if you need assistance, or do your homework, as mentioned in the next tip. If you are dead set on buying individual stocks, make it a small part of your total portfolio, perhaps 10%. The stock market is incredibly resilient. It goes up and down, but over the long run, it generates a good return on your money. Those who stay with it for the long haul will do well. Buying and selling frequently is risky and the tax implications can be expensive. Beware of fad investing trends. When gold was at an all time high, we heard lots of ads telling people to buy gold. Why would you buy a commodity when it is at an all time high? Seems like selling gold would be a better move, then buy when it is cheap.

9. Seek out the experts, and educate yourself. Buy books by Dave Ramsey, Suze Orman or Clark Howard. Listen to financial radio shows or watch financial TV shows on CNBC. Get a subscription to Forbes magazine, Kiplinger's Personal Finance or The Wall Street Journal. It's amazing what you can learn on your own. Take a class at a community college about the stock market or personal finance. Community college classes are affordable and the instructors are knowledgeable. You'll get out of it whatever you put into it. Jim Cramer has a TV show and he writes many investing books. He is not a buy and hold advocate. He says to buy and homework (study your investments). Decide which approach is better for you. Some are risk adverse when it comes to investing.

10. It doesn't matter what you make, it matters how you handle it. This is perhaps the biggest tip to remember. How often have we heard about celebrities who made millions and ended up broke due to poor decisions? It happens all the time. A person who makes $25,000 per year might be better off financially than someone who makes $250,000 per year. The person with the high salary might be up to their eyeballs in debt, on the verge of financial ruin. The person with the modest salary might be a saver who is smart with money, building a nice nest egg a little at a time. Think about money decisions, look before you leap. The decisions you make today will determine your financial fitness in the future. The rich get richer and the poor get poorer for distinct reasons. The rich get richer since they know about money management, investing wisely and they put their money to work for them. The poor get poorer since they do not do their homework regarding investments and they make poor decisions with money on a day-to-day basis.

Facebook's Latest "Status Update" is Troubling

The Facebook IPO was much anticipated, but it seems that the original price was overinflated. The original price was $38, but now it has fallen below $30 for the first time. Its original valuation was $104 billion. By comparison, amazon.com is valued at $98 billion. I think that Facebook is a phenomenon for now, but in the future I predict it will fade away just like My Space. It does not have the long term staying power of a company like Apple or Google in my estimation. Could this be the beginning of the end for Facebook? Stay tuned. Read more here: http://www.therepublic.com/view/story/bbe2ef5cbf84400e85316a6408425755/US-TEC--Facebook-Stock/