I have spoken to many crowds on the subject of money and finance from a few intimate friends to hundreds of people, and I am always asked the question of “What’s the next hot investment?” and “Where should I put my money?” That is a question that no properly trained investment person can answer off the cuff. They need to know more information about where you are. However, most people believe that there is a group of people with an all-seeing crystal ball into the future. After years of getting this question and attempting not to give some flippant answer to the individual that makes me sound like some arrogant finance guy by saying “You don’t have enough money to get in.” Which is the truth…
ONE SIZE DOES NOT FIT ALL, there are Entry level investments, Intermediate level investments, & Sophisticated level investments. Here is the key, understanding where you are and honestly telling the truth. Reality is, you can jump to an advanced level, no one will stop you but, you can and probably will be burned royally if you jump to the next level before your are ready. It is akin to purchasing a 6,000 sqf house when you have apartment money. What I will be diagramming is slow & steady or Balance Sheet management. Unfortunately, this is not talk that most people are used to. Most people are Income statement managers, money comes in, money goes out, & only the names change.
Entry Level (Take care of Home)
The issue with most persons at the entry level is their high levels of debt compared to their low assets. In other words, they owe (Liabilities) more than they own (Assets). They are into Stuff accumulation not Asset accumulation. It is possible to accumulate assets without loans. You don’t have to have a car loan, student loan, credit cards, or mortgage. I don’t purchase things so that I can pay someone else to use it, I purchase things so that I can own it. Ask yourself what is more important pride of use or pride of ownership? Now understand, I did not mention their low income, because even a person with a low income level can become wealthy with good money management, and a person with a high income will be poor if they have poor money management. Your income does not show up on your balance sheet your habits (good or bad) do.
Simply stated to grow your balance sheet you need to Get out of Debt, Build an Emergency fund of 6-9 months of expenses, Plan retirement (15%+ of annual income)
Intermediate level (What’s your Business)
Persons at this level have “Home Taken Care of.” These persons Create or Grow their Businesses, Practice True Tax Management Strategies, & take some calculated risk by learning new things.
Create or Grow Your Business - (See my previous post “Whats Your Business.”) Understand the difference between getting paid 1099 versus w-2. Most people are very familure with form W-2, the employer will automatically withhold and pay all of the necessary employee income taxes which are required by the IRS, State Income Tax, and FICA. In addition, the employer will pay all of the necessary employer taxes. Working on a 1099 basis actually means that you are working as a true Independent Contractor under the IRS rules. You work on a 1099 basis when you are self employed such as a sole proprietor or as a corporation. Your clients will report the monies they pay you to the IRS on a 1099 form. Your clients will typically contract with you to work on a specific project. You should have a written contract with each client that will outline the work you will perform, the fees an or cost the client will pay, and how the client will pay you. You will forward invoices to the client according to the contract terms. Actual independent contractors are responsible for maintaining all business expenses and income and for making quarterly federal and state income tax payments.
Practice True Tax Management – (Time for a Paradigm shifting moment) I would much rather owe taxes at the end of the year than get a refund (You can only get a REfund when you PREfunded your taxes). Who is more responsible in the use of your money, you or the government? If I owe taxes that means I got to use my money in the most optimal situations that I saw fit and got to pay the government what was left. Most people give the government all that they can and hope for a refund. Essentially they gave the government a interest free loan for 12-15 months and the government refunded them what was left. The optimal situation is to completely break even. If you are filing a 1040ez or 1040a you are not at this level back up
Take some calculated risk & Learn some new things… Nuff Said… Fo Sho!!!
Sophisticated Investor (Accredited Investor)
Investopedia Says: In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following:
- earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income.
- have a net worth exceeding $1 million, either individually or jointly with his or her spouse.
- be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.
One Size Does Not Fit All and If you happened to get in an investment in an area that you are not ready for it can cause you much pain, strife, & frustration…
Econ for the African (aka Rufus Xavier Sarsaparilla)
Book Suggestion: The Richest Man In Babalyon- George S. Clason
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