How to Live Like a Millionaire


Many would love to live the millionaire lifestyle.  Spending each day at the beach, on the golf course, or in exotic resorts around the world.  Each night would be parties and galas.  Perhaps a random trip to the office to check on things and grab some cash from the safe.

Sadly, that is not the normal lifestyle of the typical millionaire.  As chronicled in The Millionaire Next Door, the flashy lifestyles seen are those of people who have a large income, but probably would be on the streets within six months of losing that income.  Most millionaires work a lot harder than most other people.  They forego a flashy lifestyle, instead saving religiously and judiciously buying things that will increase in value rather than drop.

(Never read The Millionaire Next Door?  It is a must for anyone wanting to actually become a millionaire.)

Millionaires could afford to buy new cars every few years, but they choose not to because they know they are a wasting asset.  Likewise they could buy big, flashy mansions in new subdivisions, but instead they chose to buy modest houses in older neighborhoods since they cost less to maintain and the rate of appreciation for the neighborhood can be judged from its history.  Whenever they make a big purchase, it is something that will grow in value such as fine furniture, works of art, or properties.  They minimize the amount of money they put into things that go down in value (such as cars).Millionaires also tend to own their own businesses.  It is much easier to become wealthy when doing something that allows each of your hours spent at work to be multiplied.  For example, if you work for someone, you may get paid $30 per hour.  You can earn more by working more hours, but you still only get $30 per hour.   If you work for yourself and use the time to design and market a product, you can get paid each time someone then buys the product.  If you write a novel, you get paid each time someone buys a copy of the novel.  If you own a movie theater, you get paid more if more customers attend the movies and buy popcorn.

Having people working for you also multiplies your time since for each hour you spend supervising, several other people are working to increase the money your business earns.  If you hire effective people and manage well (eventually hiring other effective managers), the more people who work for you the more money you can make for each hour of your time.  Note that even doctors and lawyers don’t make a lot of money because of their salaries.  They make a lot of money because most of them own a practice or are partners in a law firm with people working under them.   They are business owners.

      

So, if you wish to become a millionaire, here are some tips:

1) Spend less than you make, and religiously put money away into assets – things that grow in value and eventually provide an income.  Note that investing in your own business can be an asset.

2) Start your own business, or find something to do that multiplies the value of your time.  This is a tough step for many to take and requires a certain type of personality, but it definitely makes becoming rich a lot easier.

3) Cut down on expenses and payments as much as possible – it is easier to invest and save if you do not have every dollar spoken for before you earn it.

4) Live below your means.  Have a smaller house, older cars, and take less exotic vacations than your level of wealth and income will allow.

5) Make smart purchasing choices.  Bring in drinks from home rather than hitting the vending machine every day.  Bring a lunch in rather than eating out all the time.   When you do eat out, have a water and save $2.50 plus taxes per meal.

(Save money by bringing your own water bottle and skipping the vending machines. Shown: CamelBak Eddy Water Bottle, 0.75-Liter, Cardinal.)

6) Plan your success.  Don’t simply hope your investments will grow.  Make a budget, plan how much you will invest each month, then stick to that plan.  Good luck generally comes to those who have set themselves up for success.

7) Work hard.  Whether you own your own business or work for someone else, you can plan on working harder than most other people if you want to become wealthy.  Additional money earned generally is available for investments since other expenses have been taken care of.

8.) Hire people to perform tasks you are not skilled at doing.  Most millionaires would not work on their own cars, repair their own sinks, or cut their own grass unless it was a leisure activity for them.   Millionaires would rather spend the time doing what they do best or with their families than doing tasks that they can hire someone to do who will do a better, faster job.  If you will take 8 hours to fix a sink and could make $400 in those eight hours at work, it makes sense to hire a plumber at $150 and instead work the extra hours.  Even if it only takes him 1 hour because of his experience and tools, you come out ahead.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Hedging Strategies to Protect Yourself Against a Market Drop


With the big run-up in stocks this year and many people expecting a pull-back or an outright bear market, perhaps you’re getting nervous and looking for ways to protect the gains you’ve made.  Hedging refers to taking positions that will reduce your loss should the market drop while still allowing for gains should the markets continue to perform well.  Today I thought I’d discuss some hedging strategies for those who are looking for a little protection.  Understand, however, that any hedging strategy you employ will reduce gains in the future.

In speaking about hedging we’ll assume that the investor is primarily long to start with, meaning that the investor will make money if the stocks he/she owns go up in price.  (When you buy a stock, bond, or mutual fund, you are “long.”  When you sell short or buy an option that goes up in price when a stock goes down, you’re “short.”)  Most people are long most of the time and this makes sense because the market’s long-term tendency is always up.  Being short for a long period of time would be like entering a turbulent river and expecting to travel mostly upstream.  Hedging a short position can also be done just by doing the compliment of the trades I describe.  For example, buying a call option instead of a put option.  (If you are not familiar with options, check out Options Trading: QuickStart Guide – The Simplified Beginner’s Guide To Options Trading or a similar book.)

One often associates hedging with risk, largely because of the term, “hedge fund” applied to the high risk/high return funds purchased by wealthy individuals.  These funds get their names because they can take long or short positions, but often these funds are not hedging.  Instead they are using large amounts of leverage to make large gains from relatively small movements in the markets.  This causes a substantial risk of losing money.  True hedging actually reduces risk.

To hedge is to take up positions that are designed to offset long positions, such that the investor will be less susceptible to losses due to falls in the market.  For those who play roulette, you would be hedging a bet of $100 on red by putting $50 on black as well.  You would be reducing the amount you would win if red were rolled since you would lose the bet on black, but you would also be reducing your loss should black be rolled since your small win on the black bet would reduce the loss on the red bet.   If an investor is perfectly hedged, he/she will not lose money no matter what the market does.  But by taking up these positions, one also limits or eliminates the possibility for making gains while the hedges are in effect.  The following are ways to hedge a long position:

Selling shares of the same stock short-  This is also called “selling short-against-the-box” and forms a perfect hedge provided that equal numbers of the shares are sold short as are held.  No matter the movements in the stock, no money will be gained or lost.  (Note that if the stock price goes up an investor would need to add cash to the account or pay margin fees, since this would result in  negative cash balances in the account).  Selling short-against-the-box has little purpose other than delaying gains from one year into the next for taxes.

Selling shares of other complimentary companies short-  In this strategy, the investor sells short shares of a company that he/she expects to decline if shares of the company he/she owns fall in price.  For example, if he owns McDonald’s, he might sell shares of Wendy’s short, figuring that is the market turns against fast food companies shares of both companies will fall.

Buying put options- A put option is a legal contract by which someone agrees to buy shares of a stock for a predefined price before a certain date.  This can be though of as an insurance contract on the shares of the stock.  In exchange for this agreement the owner of the shares gives the seller (called the writer) of the put a certain amount of money, called the “premium”.  For example, a put option for selling 100 shares of XYZ stock at 50, good for three months, might cost $300 when the price of XYZ was at $51 per share.

Writing covered calls on the stock–  Here a contract is written that allows another individual to purchase your shares for a fixed price.  This limits the amount the investor can make on the shares (since if they go up above the agreed to sales price they will be purchased for the sales price) but reduces losses somewhat if the shares decline in price due to the premium collected.

Buying short ETFs– This involves buying short exchange traded funds (ETF).  These are financial instruments that are designed to go in the opposite direction of a particular market segment or index.  For example, an owner of several mining companies might buy a short basic materials ETF as a hedge against a fall in commodities prices or a slowdown in goods production.

Selling a portion of the position The simplest way to guard against losses in a position is to simply sell some or all off the position, and is probably the best thing to do if you really need the money in the short-term since it is the most cost-effective way to be safe.  This, of course, reduces the possibility of future gains, however.

If you’re interested in individual stock buying and this strategy, I go into far more detail in my book, SmallIvy Book of Investing: Book1: Investing to Grow Wealthy.  Check it out at the link below if interested.

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Conservative’s Welfare Plan


Let’s face it – welfare just isn’t working.  There is a lot of money being spent, but a lot of it is being wasted, to the point that kids are showing up at school hungry despite all of the food assistance money being sent to their households.  The issue is the same one that is always seen when you try to run something through central planning – those setting up the program don’t have the ability or the time to customize it for every person or region, so they create something that really doesn’t work for everyone.  In addition, the power created through centralization leads to fraud and abuse.  We need a better way to do welfare.

 

Some people are incapable of taking care of themselves and therefore need to be handed food, clothing, shelter, etc….  Others could take care of themselves but choose to game the system instead, taking resources from those who really need help (for example, those who abuse Medicaid to abuse prescription pain medications, making it more difficult for those who need the medications to get treatment) .  Rather than a check in the mail or an Obamaphone, many people really need a firm but caring “no” and perhaps an offer of something like a job or job training to get them back on track and being productive (and happier in the long run).  Some parents are struggling and sacrificing for their children and just need a little help to make ends meet, but others just ignore the children and spend all of the money on themselves.  Others have addictions, where giving them money just helps buy the next shot of heroin or fifth of whiskey.  A centralized program, with an army of government workers who quickly have any desire to change the system beaten out of them, gives you what we have:  fraud, waste, abuse, and a lot of hoops for those who really need help to jump through.

              

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The Conservative’s welfare program would rely on free-enterprise.   There would be a plethora of well-funded local groups that provide food, shelter, job training, and other assistance to those in need.  Because they were local, they could learn who really needs help and what kind of help is needed, be it a sandwich or a connection to a next job.  These groups would compete for donations by showing the good works they were doing.  Those who were effective at meeting needs would grow and receive more donations.  Those who were wasteful and ineffective would go out-of-business.  People could decide what was needed and direct their donations there.  If something got over-funded, to the point people for the charity were building palatial offices, people would donate somewhere else.

The issue with going to such a system is converting from what we have now.  Because people are already having a good portion of their tax dollars, on the order of 50%, going to welfare, it would be difficult for them to give additional money to charities (although a lot of them do).  It is also difficult to eliminate existing programs in order to cut taxes to allow for more private giving because there are always tragic cases for those that want to keep the power in Washington to parade in front of the cameras.  Luckily, there is a simple solution, and it would require very little effort.


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Here’s the plan:

Allow individuals to deduct their contributions to charities that provide services that replace government programs (food, shelter, job training, clothing, health care, etc…) directly from their taxes, dollar-for-dollar, up to 10% of their income.  Then, as the needs in different areas are met by private charities, discontinue the government programs, keeping them in place in areas where the needs are not met. 

Here’s why this would work:  

Right now, individuals are taxed, their money taken to Washington.  Washington bureaucrats making high six-figure incomes then hire an army of civil servants making high five-figure incomes to disperse the money they collect to programs such as food stamps and section-8 housing/HUD.  A lot of the money collected is lost in the process, plus the money is not distributed efficiently, resulting in bad results and/or an enormous cost.

By allowing individuals to give the money directly, which they would do if given the choice of giving it to causes they believe in or sending it off to Washington, groups that meet the needs of the poor and disadvantaged would be funded.  Because more money would be available, more groups would be developed and compete for funding by trying to do the most good at the least cost.  By limiting the amount that could be given, there would still be funding for things like Defense and essential government processes.

Advantages:

  • There would be more money available for the needy since there would be less waste.  Wasteful charities would change their ways or go out-of-business as more efficient competitors emerged.
  • People would be helped locally, meaning the charities would be designed to meet their needs, rather than some global need.  We’d see things like families being provided directly with food that met their dietary requirements rather than a check being sent to the home that gets spent on cigarettes and lottery tickets.
  • There would be enough different groups and people working within those groups to determine how to best meet the needs of those around them and actually improve society.  Imagine the minds who create things like the smart phone and FaceBook working on addressing the needs of society!
  • Needs currently not being met would be addressed as individuals looked for new charities to start once the space for things like food and housing became crowded.  Maybe there would be groups who drive people to job interviews or help those who are victims of crime right after they are robbed or assaulted.
  • Taxes could be lowered as needs were addressed more efficiently.
  • Those who are able to take care of themselves would be transitioned into productive members of society with an income, which in turn would further reduce the burden on those currently paying for welfare.  It would also bring pride back to people, which could change futures and neighborhoods.
  • Payers would feel good about their donations rather than feeling bad about needing to pay taxes.  There might be less tax-cheating.


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So in the end, we would all pay less in taxes, there would be more people working and producing things, which would make society wealthier, people would be seeing their needs met more efficiently and with less red-tape, and we would end the cycle of poverty, bringing pride to individuals.  If this sounds good, forward a link to this post to a friend or your FaceBook page.  Then, write your Congressman and your local newspaper.  We can make society better if we all work together for change.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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