Wednesday , 21 February 2024

Wealth: Requirements To Succeed (Chapter 3)

If you are unwilling to save, save some time by ignoring this book. Stop reading right here! Savings are an absolute prerequisite for wealth creation. Without savings, there can be no wealth. Read that sentence a few times. It is an immutable fact. Words: 800

Before reading the following please read (here) the Preface and Overview of the book WEALTH IF YOU WANT IT on wealth creation by “Monty Pelerin” (a pseudonym) of

Arguments made to invalidate the need for savings are frivolous and futile. Here are some of the wackier ones and simple refutations:

  • Winning the lottery. Required savings to purchase the ticket (s).
  • Inheriting money. Made possible because your parents saved.
  • Robbing a bank. Required savings to purchase guns, masks and a get-away vehicle in order to steal the savings of depositors.
  • Starting a business. Required savings to purchase assets and supplies.
  • Discovering gold. Required savings to buy assets and equipment (prospecting tools, supplies, maps, etc.).

Wealth without savings is not possible: savings is the seed corn of wealth.

Warren Buffett has been quoted as saying:

“Do not save what is left after spending but spend what is left after saving,”

…Think of your savings obligation as the payment to a loan shark. Pay it first and always on time. Broken legs occur otherwise!

Savings increase wealth; dis-savings (spending more than you earn) reduces wealth. It is that simple! If you can’t save, have no existing assets to grow and are unwilling to change your behavior, stop reading now! Spend your time more productively, perhaps looking for a prime spot in a desirable homeless camp.

There are only three ways to increase savings or reduce dis-savings:

  1. decrease spending,
  2. increase income or
  3. do some of both.

Savings are necessary but not necessarily sufficient. You must employ these savings productively. Today, the interest return on savings is less than the inflation rate. That means you grow poorer in purchasing power because income doesn’t keep up with the cost of living. You must invest your savings in something other than fixed income assets.

Savings is the seed corn. It is not wealth, but the seeds you cultivate to grow into wealth. You need an investing domain and vehicle for that.

Wealth is possible in many areas. The stock market, real estate, family business, etc. provide opportunities. All, save one, require specialized knowledge, training and time. All, save one, requires constant oversight and management.

The stock market is that all-save-one-vehicle. Whether you consider it the best route to wealth or not is immaterial. It is a practical vehicle for everyone because:

  • Everyone has easy access to the stock market.
  • Stocks are liquid; easy to buy and/or sell.
  • Trading costs are low (arguably zero with no-commission trades).
  • Stocks are profitable over long periods.
  • The investor requires no specialized knowledge or expertise.
  • A system or style to fit your needs is available.
  • Managing the process takes little time with a proper model. (The model developed in Part Two requires about 3 hours per year).
  • You define your risk exposure.

I designed The Lifetime Portfolio for dangerous markets expected ahead. The model requires no prior investing expertise. The reader should have little difficulty understanding its philosophy, rationale, or how to manage it. Users assess and control their risk exposure. Portfolio changes occur quarterly.

You set your wealth goal. Self-assessment determines this goal. Changes in lifestyle and behavior are usually necessary. You determine the goal and the extent of changes you will make.

Changing spending habits or increasing income are the two principal ways to alter savings.

You assess yourself and your spending patterns. This process determines what is possible and how you can achieve it. The goal is yours. The road map to reach it is also yours.

You determine the goal. You also determine the trade-offs necessary to achieve the goal. The development of your goal and the road map are simultaneous.

This determination defines:

  • where you are,
  • where you want to go,
  • and how you will get there.

The next two chapters are foundational in the sense that the reader defines his wealth goal, tests it for reasonableness, and determines what behavioral changes are necessary to achieve it.

The process is tedious and somewhat discomforting. An in-depth self-examination is necessary. Feelings of pride and guilt are common during this process. You deal with facts about yourself that you have kept from others (and perhaps even from yourself). Some are uncomfortable; others are rewarding.

Self-criticism is normal. It is also an important requirement for effecting change.

You were likely attracted to this book because you are unable or unwilling to save. Understanding why is the first step toward changing this condition. You will examine every dollar you spent over the last few years. Then you must determine what spending was truly necessary. This examination defines who you were. Determining what was necessary defines who you intend to be.

The above post is a slightly edited (…) version of Chapter 3 from a book entitled Wealth If You Want It by “Monty Pelerin” (a pseudonym) of

Pelerin has a doctorate degree in Finance from Syracuse University, an MBA from the University of Chicago and an undergraduate degree in economics from Duke University. He can be reached at [email protected] if you have any questions (put HELP in the subject line to attract my attention). Permission is granted to copy this post for non-commercial purposes with proper attribution.

Additional Contents of WEALTH IF YOU WANT IT

1. “Wealth If You Want It” & How To Get It: An Introduction

Wealth creation is a right if you choose to exercise it but you must understand the economics and politics of wealth and this book helps you do just that. It deals with how to improve your wealth, your financial independence and your quality of life. Words: 910

2. Wealth: Don’t Get Discouraged (Chapter 1)

Wealth provides independence and security. For our purposes, wealth is a relative thing; something you define, in reasonable terms, for your situation. I approach wealth in terms you can understand and achieve. Words: 572

3. What Is Wealth? (Chapter 2)

Understanding the creation of wealth is easier than achieving it. Achieving it also requires commitment, behavioral change, and sacrifice. If you are interested in success, regardless of how you define it, take charge of your life. Planning is essential. Happiness, regardless of what that implies, requires commitment and planning. Do not depend on luck! Do not think that you may win the lottery. Words: 1362

Editor’s Note:

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