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Making Money-Goes-to-Money Work For You

By Kevin M

How do we define rich and poor? The dividing line is more subjective than real in that we tend to think of rich as anyone with substantially more than we have, and poor as anyone with substantially less. Since we always see ourselves as more or less in the middle, how do we determine at what point we might transition into “having money”?

Trying to fix a dollar amount that moves us into that status is probably a waste of time.
A more useful metric might be the point at which:

  • we earn more money than we need to live,
  • we have savings in excess of predictable contingencies, and
  • we’re debt free.

For example, a middle income person living beneath his means, and having above average savings with zero debt probably has more economic options, more day to day freedom, less stress, and probably even more unencumbered cash flow than a high income person living above his means with below average savings and an excessive level of debt.

In this example, the middle class person has reached the all important tipping point where money is now working in his favor, rather than against him, often described by the term “money goes to money”.

It’s about control of money and not being controlled by it

Perhaps the more basic division is between debtor and creditor. Though usually associated with banking, the debtor/creditor spit is equally true with individuals. The debtor owes more than he owns, while the creditor owns more than he owes. In today’s debt laden world, you’re practically rich by virtue of not having any debt.

Money-goes-to-money works against the debtor because he’s on the paying side of the equation. In fact, he’s legally beholden to everyone he owes money to, and because of this his options—even with his own time and money—are often limited by the whims of those to whom he owes. He’s not free to maximize his financial potential, which keeps him mostly in the same situation all of his life.

Compare that position with that of the creditor who:

  1. Keeps 100% of his income with every paycheck
  2. Doesn’t pay interest but collects it, thus earning even more money
  3. Doesn’t lose sleep worrying over how he’ll get money to pay his bills
  4. Has fewer financial obligations keeping him trapped in an undesirable job situation
  5. Has the potential to accumulate savings rapidly because there’s no prior lien on his earnings
  6. Is free to invest both his time and his money into new or additional money making ventures, earning still more money

Money is the creditors’ friend because his financial lifestyle draws more of it to him almost by default.

Transitioning from debtor to creditor

The truly great thing about this is that you don’t need to be “rich” to attain creditor status and get money-goes-to-money working in your favor. In fact, it can be achieved by anyone at nearly every step on the economic ladder.

If you’ve spent most of your life as a debtor, getting up to creditor status and making money work in your favor won’t be easy. Nothing short of a radical change in financial habits, and in lifestyle, will make it happen. How do we get money working for us?

1. Favor MONEY over STUFF. Its’ often said that the two best days in a boat owners life are the day he buys his boat, and the day he sells it. So it is with so many possessions in life. Stuff seems to define who we think we are and even where we fit in the social pecking order.

This is an expensive way to live, and can also be emotionally draining. Always wanting to have the latest and best stuff is an arms race we can never win because someone else will always up the ante. If we’re going to make money work for us, we need to redirect not only our money, but also our interests, from stuff to money. Stuff may bring a certain amount of pleasure, but it can also bring debt and almost never affords us freedom of any sort. Next time you’re about to make yet another major purchase, stop and think about how much better you might feel if an equivalent amount of money were sitting in your bank account.

2. Get rid of your props. Before we can fix what’s wrong in our lives, we first need to feel the pain it’s causing us. When we immerse ourselves in various habits—alcohol, drugs (prescription or otherwise), over eating, media/pop culture/celebrity fascination, sports, or what ever else is it we cling to in order to get ourselves through the day, we’re often taking cover from a reality we’re loathe to confront.

Ask yourself: how many successful people do you know who wile away several hours each day in front of the TV, playing computer games or slowly polishing off a six pack of beer? There are only so many hours in a day, and they need to be spent primarily on the most productive activities. Props divert our attention and take us away from activities which could improve our lives.

3. Cut spending. Unless you were born into money, there’s no way around this one. Making money work for us requires living beneath our means and banking the difference—but first we need to create a difference to bank!

How far you need to go depends on your present situation. For some that might mean cutting at the fringes, like clipping coupons, lowering the heat in the winter, using less air conditioning or cutting back on dinners out. For others it may mean eliminating the family vacation, cutting out cable TV, or selling a boat or a second home.

In more extreme circumstances, it could involve selling your home and moving to a smaller one, and sending junior to a local state school rather than to a pricey out of state university. Many spending choices create a trail of complementary expenses to go with them—the choice of a house being one—and there may be no logical alternative to wiping the slate clean and starting over.

4. Save substantial amounts of money. Many financial advisors recommend saving 10% of your income as a guideline, and that’s certainly a good start. But if you’re serious about making money work for you, you’ll have to do more. 20%, 30%, even 50%, including retirement savings, are worthy goals.

Home equity and retirement savings are components of financial freedom, but don’t represent financial success by themselves. It’s not at all uncommon for people to have them while also carrying enormous debt in the form of home equity lines of credit, 401k loans, credit cards and student and auto loans. This has been referred to as “suburban poverty”—high income and high assets offset by equally high expenses and debts. To get money-goes-to-money working for us means that we’re the ones with unencumbered cash!

5. Get out of debt and stay out of it. If you’re deep in debt right now, close your eyes and imagine for a few moments that you have no debt—zero! How does that feel? How would you like that to be your reality? Some people can manage money quite successfully while carrying a mortgage, an occasional car loan and routinely with credit cards that they pay in full each month. But if your debts are out of control, you need to take what ever steps are necessary—for as long as necessary—to get out of debt. And once out, don’t even dabble in it. Debt is a self-perpetuating lifestyle, and if it’s been a problem at all in the past, you need to swear it off from this point forward. Be the person collecting interest, not the one paying it! That’s money-goes-to-money 101!

6. Avoid speculation. The first rule of making money is not losing any, and I can think of no situation more deflating than doing all of the right things—cutting expenses, living beneath your means and saving all the money you can—only to lose it on an “investment” or investment class that falls into a sink hole. The various bubbles of the past few decades have blurred the lines between investing and speculating, but that line needs to be identified and respected. Capital preservation must be given at least equal weight with growth. Once you have money, you have something to lose—and as the last two stock market crashes have shown, sometimes you come out on top just by virtue of not losing!

7. Associate with people of like mind. There’s a saying, “you’re the average of your five closest friends”; what are your five closest friends like? I’m not suggesting that you begin cutting people out of your life because of their spending habits, but it would be in your best interest to emphasize friendships with those who best support your new direction in life. You will not be able to mobilize money-goes-to-money if you’re running with a large number of free spenders unconsciously sucking you back into the chase for that next toy, exotic vacation or spending spree.
 

Moving into position to benefit from money-goes-to-money can require tremendous effort, but success can transform personal finance from an uphill struggle, to a down hill glide.

What other advice can you offer that could put the money-goes-to-money principle to work for us?

( Photo courtesy of alancleaver_2000 )


8 Responses to Making Money-Goes-to-Money Work For You

  1. Kevin,

    Another great article loaded with with wisdom and practical advice. The only additional tips we could offer are an extension to points 6 & 7. In addition to carefully choosing the friends we run with we should also ensure that those we’ve delegated responsibility to in caretaking our investment funds also share our core values. In other words, they should, at a minimum, understand and implement the principles of the golden rule where they treat your funds with the same care and respect they would give to their own precious funds.

    We are very much hands-on with our own investment funds, but when do delegate or entrust others with the direct management of our funds we prefer to engage the services of those whose fee structures correspond directly to the growth of our account. In other words, if we don’t make money, they don’t make money.

  2. Steven and Debra – There was so much more I wanted to write on point #6 but the post was already over length.

    Like you, I favor the hands-on approach to investing. We should only invest in vehicles we fully understand, including and especially with regard to risk. If we have to put someone else in charge of the investing function it may be because we don’t fully understand what we’re getting into. That’s not a good sign.

    I also completely agree with the fee structure you’re suggesting. No one should be paid for losing your money! Yet it isn’t uncommon. Heck, we could put money into Treasury bills, have a small but guaranteed return, assume zero risk of loss and not have to pay anyone anything. An investment manager should be able to do better than that at a minimum.

    There’s an investment pyramid–that I couldn’t find–that shows graduations of investment categories, with the largest concentration in the base which is comprised of fixed principal/income investments, with the smallest amount at the peak to include high risk/high return vehicles.

    I think that’s the kind of allocation we should have, and age has less to do with it than we commonly think. I.e., risk investments have a place even in a retiree’s portfolio, just as fixed income investments should be included even if you’re in your 20s.

  3. My guess is that when at the end of the day, week, month or year, we look back and think that we were too busy to accomplish what we wanted/needed to, that it’s usually our props that are the culprits.

  4. A lot of people seem to have this rather unhealthy obsession with material things. And it baffles me how caught up with it people get. But this is pretty much where the big dogs; the richest, want them. They have nowhere to go where to put their money, because countless salesmen, retailers, servicemen, and con artists will gladly tell them where to put their money.

    But it’s such a simple principle between rich and poor. The rich acquire assets. The poor acquire material sillyness. The rich buy luxuries last. The poor buy it first. The rich buy assets to cover their luxuries. The poor buy luxuries with credit. The poorest, out of usury.

    A dragon fully well knows.. It’s not what you make.. But what you keep.

  5. I think the cutting spending part is the hardest and most effective. The problem is it requires discipline, which many people lack. That is a major source of all kinds of problems in life. If you want to achieve anything in life discipline is a major ingredient pretty much everything. Without it unfortunately progress can not be made!

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