Automatic Wealth: The Six Steps To Financial Independence by Michael Masterson
In this book, Automatic Wealth: The Six Steps To Financial Independence, the self-made millionaire, Michael Masterson gives a road map for anyone who desires to be free financially to build wealth.
It a great book that can help you achieve your goal of retiring early and living the lifestyle that you want, and never have to worry about money.
Here is an excerpt from it, enjoy!
The Eight Habits of Highly Successful People
1. WEALTHY PEOPLE LIVE IN (RELATIVELY) INEXPENSIVE HOMES
How much do you think the typical American worth $6.8million typically pays for a house?
I put this question to the Early to Rise staff. Their guess was between $2million and $3million. Being older and wiser, my guess was closer to the truth. I figured the number was closer to $1million.
But then we checked the IRS records. And the answer was an astonishing $545,000. That’s not a lot of money for someone who’s worth almost $7million. So what’s going on here?
Take a look at Table 3.1. Why would a guy who’s worth $1.4 million live in a $220,000 house? Does he know something that you should find out about?
Table 3.1
Net Worth (In Millions) |
Average Net Worth |
Average House Value |
|
$1 to under 2.5 |
$1,470,553 |
$220,796 |
|
2.5 to under 5 |
3,392,416 |
354,043 |
|
5 to under 10 |
6,809,409 |
545,499 |
|
10 to under 20 |
14,045,501 |
779,444 |
|
20 and more |
58,229,024 |
1,073,980 |
Actually, he knows two things:
1. The cost of your house determines the cost of your lifestyle. Consider this: Property taxes on a $500,000 house are about $4,000 to $5,000 more per year than on a $250,000 house. Utility expenses are also proportionately greater. If you live in a more expensive house, you’ll pay a lot more for maintenance costs. And not just because there is more house to keep. When many contractors see that you live in a nice house in a fancy neighborhood, their fees shoot up. Call it a wealth tax. They figure, “He can afford it. I need it. So why not?â€
But taxes, utilities, and maintenance form just the tip of the expense-rising iceberg. The major cost of owning an expensive house is beneath the surface. The number one reason expensive homes cost so much (much more than you’d think) is because they are inexorably attached to a more expensive lifestyle. By lifestyle, I include everything you pay more for now that you live in a nicer neighborhood – furniture and landscaping, automobiles and education, restaurants and vacations, just to name a few. It’s not that you are consciously trying to keep up with the Joneses. It’s just that you can’t seem to find those inexpensive things (or places or service people) anymore.
2. Home-spending decisions are not – or should not be – primarily about return on investment. In buying, fixing up, and furnishing your home, you will spend a good deal of money on things that will have a lot of emotional value but little financial worth. If you want to put a new set of windows in the living room, repaint a bedroom, or buy a bookshelf for your beer can collection, you don’t have to do a financial analysis first.
In contrast, the investments you make for financial gain can and should be decided on such rational, bottom-line thinking.
I bought my first house 20 years ago for $175,000. I put down about $15,000 – which was the sum total of my net worth. Ten years later, I was living in an $800,000 house, which represented about 25 percent of my net worth. Today, I live in a more expensive home, but one that accounts for only about 10 percent of my wealth. And that feels good.
What about the Tax Benefits of Stretching Yourself
Financially When Buying A Home?
It’s true that a more expensive home that has larger mortgage payments will also have larger tax-deductible interest payments. But you’re better off spending less money in the first place. Remember, in order to save money with tax deductions, you have to spend more than you save. If you are in the 28 percent tax bracket, for example, every dollar you spend on mortgage interest is deductible, and that will save you 28¢ in taxes. But you’ll have spent a dollar to get that 28¢ saving and will be 62¢ poorer. It’s better to take that 62¢ and invest it elsewhere. Soon it will be worth $5.
The bottom line is this: Buy a house that accommodates all your needs comfortably, and invest time and care to make it beautiful. Then, take the money you didn’t spend on a more expensive home and invest it in something that will earn money for you. (I’ll give you my recommendations in the next chapter.) You’ll get richer faster.
2. WEALTHY PEOPLE ARE MODERATE IN SPENDING
Carlos, one of my jiujitsu instructors, is living the American dream. He came to this country to compete in mixed martial arts and earn his fortune as a champion fighter. While building a stellar win-loss record, he lived on club sponsorship and fees for giving lessons. For the first three years of his time here, he managed to support himself and his wife on less than $15,000 a year. Recently, he captured three title belts and now fights at the top level in Japan. His typical payday has gone from $500 to $25,000.
“The problem with making more money in America,†he told me, “is that every time you make an extra dollar you spend two.â€
How true. The first couch I bought cost $400. I remember thinking, “It doesn’t get any better than this.†And it never did. The couches I buy today give me no more pleasure, comfort, or space. Yet they cost much more.
What happened? Did I miss out on some inflationary spiral? The truth is that my own success victimized me. In earning more, I allowed myself to spend more on things like couches. If I had gotten more out of it, that would have been fine. But I didn’t.
Master wealth builders understand a secret that it took me years to learn: You have to keep your spending down while your income increases.
We’ll talk more about that later. But now, let’s talk about Mike Tyson.
The Sad Story of Mike Tyson: A Spending Fool
During the 20-year span of his career, Mike Tyson’s income exceeded $400 million. Yet in 2004, before his 39th birthday, this amazing moneymaker was $38 million in debt. He had some assets – equity in some mansions, some cars, and some jewelry – but insiders speculated their total value at least than $3million. For the sake of wishing him well, let’s assume it was twice that much. That would have put his personal net worth at negative $32million.
Think about that: minus $32 million.
That could make him the world’s poorest man. With a negative net worth that large, Mike Tyson is 160,000 times poorer than the average wage earner from Sierra Leone, the poorest country in the world, with an average annual income of $200 per person.
“How can a man with a $4million estate in New Jersey be poor?†a colleague asked me.
“He can still make millions every time he fights,†my sister said. “Anyone who can make millions isn’t poor.â€
Yet by every recognized standard of accounting, he is poor. Extremely poor.
But he doesn’t think so. And that’s part of the reason he got so poor in the first place. The faster money came in, the faster it went out. Stories about his profligacy are already legendary. Tyson employed as many as 200 people, including bodyguards, chauffeurs, chefs, and gardeners.
He spent:
• Nearly $4.5million on cars and motorcycles
• $3.4million on clothes and jewelry
• $7.8million on “personal expensesâ€
• $140,000 on two white Bengal tigers and $125,000 a year for their trainer
• $2million on a bathtub for his first wife, actress Robin Givens
• $410,000 on a birthday party
• $230,000 on cell phones and pagers during a three-year period from 1995 to 1997.
The purpose of this is not to shake a finger at Mike Tyson, but to alert you to the dangerous temptation to spend more when you make more. As someone who grew up drinking powdered milk and wearing hand-me-downs, I understand the strength of that temptation.
Why Spending Feels So Good
Why do we do it? Why do we feel the need to spend more when we make more?
Here’s what I think. When you are poor, you are surrounded by things you think you would like to own but cannot afford to buy. After a while, you equate the feeling of unsatisfied desire with poverty. And when desiring begins to feel poor, having seems like it will make you feel rich.
That’s the heart’s logic, at least.
If that’s the way you feel now – if your idea of being wealthy is filled with images of mansions and sailboats and expensive watches – you are going to have a difficult time saving money. And saving money is another one of the common habits of people who know how to build wealth.
6. WEALTHY PEOPLE ARE EXTRAORDINARY AT SAVING
The rich save more than the average person. Relatively speaking, that is. I don’t mean they save more because they have more money to save. I mean they save more in general, because they have a saver’s mind-set.
According to Thomas Stanley, author of The Millionaire Next Door, the average millionaire is much more frugal than you or I would have believed. (By the way, Stanley gets most of his data from the IRS and other government sources.) For example, the average millionaire
• Drives an older car
• Buys inexpensive presents
• Eats at home and seldom dines out
• Takes a vacation every other year
• Wears clothes until they fray and resoles shoes when they wear thin
To develop a saver’s mind-set – a wealth builder’s mind-set – you must change the way you feel about spending. You must teach yourself to feel the truth: that every time you buy a depreciating asset, you become poorer.
Remind yourself repeatedly that most of the junk you buy (1) becomes unused after a few months and (2) doesn’t provide you with that much value anyway. Remember that the best things in life – the picnics you have with your family, the walks you take with your lover, the time you spend with your friends – are free, or nearly so.
There are so many ways to save money. You can spend less on just about anything without giving up either the pleasure you take in buying or the quality you get from your purchases.
Instead of buying new clothes that will be out of style in a year, buy vintage clothing that looks great and distinguishes you.
Instead of signing a lease for an expensive car you can’t afford, find something old but still good that has a personality.
Instead of going out to lunch every day, eat a can of tuna at your desk. (This is one of the things I did. By eating a can of tuna everyday instead of going to lunch with my coworkers, I saved almost $2,500 in a single year. Plus, I went from staff editor to publisher by applying that extra-lunch-hour time to improving the business.)
Don’t worry – I’m not going to try to turn you into a miser. The purpose of spending less is to have more. I enjoy the luxuries that wealth can bring, but – as I’ll explain later – I don’t believe you have to spend a lot more to get them.
You’ll have your cake and eat it, too. You’ll spend less, waste less, save more, and have plenty left over to enjoy life.
7. WEALTHY PEOPLE PAY THEMSELVES FIRST
Many financial advisers recommend sticking to a budget. By categorizing expenses and limiting spending, they argue, you can have enough left over every month to save money and grow rich.
The trouble is that budgeting almost never works.
Budgeting is like dieting: It’s enormously sensible but almost never effective. I’ve tried budgeting myself a dozen times. I’ve also made the mistake of encouraging others to keep a budget. I can’t think of a single case where it worked.
The problem is that when you budget, you pay everyone else first. As best-selling author David Bach says:
[You] pay the landlord, the credit card company, the telephone company, the government, and on and on. The reason (you) think (you) need a budget is to… figure out how much to pay everyone else so at the end of the month [you] will have something “left over†to pay [yourself.]
So at the end of the month, you have nothing left to put in the bank. You promise yourself you’ll do better next time, but you never do. There are always unexpected bills to pay, unanticipated sales to take advantage of, and that impossible-to-figure-out $200 or $300 that seems to fall through the cracks.
Budgeting doesn’t work. But there is something that does: putting some predetermined percentage of your income into a savings account each month before you pay any of your bills.
Think of yourself as a personal corporation and the money you save as your personal income. All the other money you spend on house and car payments and so forth are the expenses of your personal corporation. Only the portion that goes into a savings account is really yours.
Of course, it’s not enough to simply think of your income this way. You must actually do something to effect a change. You might, for example, have a portion of your paycheck automatically deposited in your savings account each month – as soon as the check is deposited.
Paying yourself first in this sense (i.e., saving before you pay bills) is actually, as Bach points out, paying yourself second. He reminds us that withholding taxes are the government’s way of paying itself first. Before your salary is deposited into your checking account, the government has already taken its piece.
This is a great book by all standard, and I very much gladly recommend it to you.
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