What you spend on is more important than frugality.

When it comes to the blogs and other tracts providing information on building wealth, frugality carries most of the weight. And it makes sense. The greater the difference of income over spending is a strong determinant of the level of wealth an individual will achieve during their lifetime as compared to their income level. 

As important as frugality is, spending is even more important, even if it doesn’t garner the column inches the matter deserves. Spending less than you earn is the seed money for investments and without investments it is impossible to build significant wealth.

As an accountant I see people from all spectrums of income. Frugality, even hyper-frugality, is the hallmark of those with modest levels of wealth. Even the lowest income earners can amass a half million or more in a working career when frugality is taken to religious levels, with the excess invested in equities like index funds.

Mid-levels of income also do well with only the single tool of frugality. As their wealth grows they sometimes seek out professionals to help them. These clients tend to want short consulting sessions once a year with a review at tax time. 

Then come the serious achievers. These people sometimes have modest incomes, sometimes large incomes.  Regardless their income level, these people smack it out of the park. Their level of wealth is well beyond what would be expected for their income level or level of frugality (the excess of income above spending).

Super-achievers in wealth building focus on spending rather than frugality. They know spending is more important. And they know most spending drains their energy and wealth while proper spending can actually make them richer!

They also know that wealth is fleeting. The highway is littered with the corpses of wealthy people of yesteryear. A lifetime of building wealth can be lost in less time than it takes to snap your fingers. That is today’s topic. Wealthy people that keep it long enough to leave a legacy spend on the 5 things listed below in a disproportionate amount compared to the general population. As you flex your frugality muscles you want to consider spending some of that excess on these things to grow and preserve your wealth. Because, remember, when you have money there are always those looking to separate you from it.

Millionaires and Health

How wealthy can you really be if you are chronically sick? In pain? Or dead! 

If you have your health you are already wealthy and rich people know it and take steps to keep it that way. Eating quality food and exercise are primary. Proper medical care also plays a key role.

I see poor people and those looking to super-charge their frugality, to achieve goals like early retirement, refuse to pay for quality food or a gym membership or a piece of exercise equipment. It is counter-productive behavior.

I have a membership at Lake Park Swim & Fitness. Mrs. Accountant attends two or three exercise groups per week and I hit the floor (where the weights are) three times per week. This is a part of our routine! Physical activity is a priority in our life. Mrs. Accountant loves it so much she took a part-time job their working two nights per week cleaning up a bit (and for a free membership).

Outside the gym I also remain active. I walk an hour each day and sometimes jog. My sneakers see at least 3 miles of travel daily above and beyond normal movements (walking to the water cooler, et cetera). I chop wood on my farm, plant trees and work the garden. I recently bought a step meter to see how I’m doing. Rare is the day with fewer than 10,000 steps and many days are well above 20,000. Mrs. Accountant has similar numbers.

Lake Park isn’t the cheapest gym, but they also are not the cheapest gym. (Yes, you read that right.) It is the cleanest gym (and friendliest) gym I’ve ever been a member of.  I want a clean environment and working equipment. My workouts are serious business and I want a gym that feels the same way.

Food is another important expenditure for the wealthy. I grow much of my own food, but nutritious food can be had from the grocery store and it doesn’t require the “organic” label. Processed foods are limited in my household. Fresh fruits and vegetables are a common sight. We freeze and can lots of homegrown produce. Home prepared meals are the best so we do it a lot.

Health includes medical services. I see many poor people (and even some earning a reasonable wage) foregoing medical care and recommended treatments. Modern technology has given us the longest lifespan in human history, but it does no good if you don’t use the technology. 

Reasonable medical insurance to deal with a big medical issues is a must in the U.S where there is limited national healthcare for people under age 65. Regular checkups and taking required medications are all part of the program. Wealthy people know it is easier to stay healthy than to regain health. And as a reminder, without health, financial wealth has far less meaning.

 

Millionaires and Legal

Most people know they need to take care of their health. Fewer understand the importance of legal protection.

What takes a lifetime to build can be sued away in a fraction of a moment. Wealthy people know it, too. Keeping wealth already accumulated is vital to keeping wealth all the way to the finish line. 

It blows this accountant’s mind when people set up their own business entity. They have no experience (in most cases) in how to do this correctly, but they do it anyway. These hard working people put in the hours for years and even decades. Yet, their first step is to take a shortcut, the cheaper way. (Notice I said cheaper, not frugal. Frugal doesn’t take shortcuts; cheapskates do.) 

The same applies to wills and other legal documents. Of course, if you do it wrong you will not be around to clean up the mess; your friends and family will. (Nice memory you left the kids.) 

In all my 37 years in practice I’ve never seen a truly wealthy person take legal shortcuts. I have seen many people lose a lifetime of work, sometimes while in retirement, over  not using a qualified professional to handle their legal needs. 

I keep a law firm on speed dial for legal questions and other legal services. They have my retainer. When in doubt I go to the professionals to help me make quality decisions. I understand tax laws well (and still rely on other tax professionals for research all the time), but legal matters not so much. Attorneys sometimes have a bad reputation. It should not be that way. My legal team is a vital part of my financial plan. Their advice is always welcome. Attorneys can save you a massive amount of money and grief when planning ahead, or, they can cost even more trying to fix a mess that might end up with a settlement costing you decades of your invested savings (work or lifeforce, as some say).

 

Millionaires and Tax and Accounting

I’ll admit this part is self-serving. It is also a vital part of wealth creation and retention. 

When you add up all the taxes you pay (income, property, excise, gift, sales and more) it is the biggest single expense in your life. Even your home doesn’t cost as much as all taxes combined are pealing from your wallet. Even a modest income can see half or more lost to the litany of taxes the government has devised to separate you from your hard-earned money.

In my office the tax professionals sometimes laugh when people say they prepare their own tax return. “We always enjoy summer work,” is their response. There is some truth to that.

Frugality is not enough if you want to be wealthy. How you spend and what you spend on will make the difference in how wealthy you become. If you want to be a millionaire you need to spend like a millionaire. That means frugality one one hand and intelligent spending that serves your needs on the other.But it gets worse. To this day I have never had a consulting session with a client or someone from this blog where I didn’t save that client several times in taxes what they paid me. There have been cases where a $1,000 consulting fee yielded 6-figures in additional wealth, much of it from tax savings. 

I have no problem with people preparing their own return when it is very simple. However, a tax professional is worth her weight in gold if she works with you! Rare is the non tax professional that knows when it is best to elect to treat their side hustle or business as an S-corp over a sole proprietorship. If you own income properties do you understand the mechanics of a cost-segregation study? If you own any investments are you aware of tools to defer and eliminate taxes on the profits? Like-kind exchanges? Opportunity funds? Delaware Statutory Trusts?

Even something as simple as  professional bookkeeping can send your net worth skyward faster. One of my accountants just helped an investment property owner from Mississippi clean up his books. Now he knows where he is financially at all times. He can make better decisions; I can give him better advice. Banks loans are easier to get and rates lower. He really has professional looking books! (It would be bragging if I did the work, but Dawn gets all the credit.)

His taxes are also lower because I can help him plan instead of react. He refers to us as his OCD accountant. Yes, we take pride in our work and pay attention to detail. It is never enough to have clean books. We demand we provide guidance to optimize wealth building for every client we serve. 

It doesn’t come cheap, of course. But I deliver greater results because I am incentivized to do so and invest in growing my arsenal to better serve clients. The cheapest isn’t always that cheap.

The income property owner discussed above had several accounting firms who could not get his fast growing rental business under control. Dawn even struggled in the beginning. There was, and is, a lot to digest. I kept applying steady, yet firm, pressure. While the client benefited, I was training an accountant on how to handle the difficult cases. Now that the books are clean it isn’t so challenging anymore.

And this brings up another important point. Not every tax and/or accounting professional is cut from the same cloth. Some are better than others and some are outright incompetent. In a previous post I discuss how you can find high quality tax professionals and accountants for your wealth building team. The same applies when looking for a legal professional.

With so much on the line it is worth hiring a competent tax professional. If your return is simple you can prepare it yourself. I have many consulting sessions with people who prepare their own tax return. I review the prior return as part of the consulting session and it is usually okay.

Tax and accounting  professionals are worth their most when consulting. Their large reservoir of knowledge and experience can help you make better career and investment choices. It is difficult at best to build serious wealth without a highly qualified tax professional.

 

Millionaires and Education

Primary and secondary schooling, along with a college, is designed to teach you how to learn. Until you learn how to learn nothing else will matter. Yes, college will educate you on the basics in your field of study, but it is just the basics, as hard as those final exams were.

The most powerful tool the millionaires has to create and build wealth is never-ending education. Learning never ends for the wealthy.Nothing prepares you for real world. College textbooks have nice neat questions with exact answers. Real life rarely delivers such a neat package. Thinking on your feet and designing answers on the go is vital to success. That is why doctors spend so much time in college and even more time sharpening their skills as interns and in residency.

Once you learn how to learn the world is at your beck and call. What you learn in college can quickly become dated. Your “real” education begins after graduation!  

Many professions require continuing education (CE). Doctors, attorneys, accountants and enrolled agents (a tax professional designation) all are required to take continuing education courses each year. And for good reason. Bad habits can set in and CE can bring behavior back in line. New technologies and changing laws all require more learning, more education.

Application is harder than theory. I see tax professionals and accountants come out of college and struggle when they move from the legal facts to applying those facts in real world situations. Clients don’t always bring in all their paperwork. Some (all too many) are trying to game the system. Your job is to keep clients in line (they didn’t teach you that in college, did they?) and use the material at hand to build the most accurate record.

Doctors face a rude awakening when the classroom makes way for the medical theater. Answers are not always easy to define or find and time is of the essence. It’s an open book test with a human life on the line and the clock speeding forward.

You don’t have to be in a profession to benefit from education. In all facets of my life I have continued learning. Reading is a daily part of life (a big part of life). Every day is a learning experience! Even after all these years of study and thousands of books digested, I still feel like a neophyte most of the time. The more you learn the more you realize there is to learn. It is humbling.

Learning is one of the great pleasures in life, too. Wealthy people find this compelling. They spend a disproportionate amount of their income and wealth on education at all times of their life and enjoy the process. The wonder of discovery never grows old. 

Spending on education is a guilty pleasure wealthy people never skimp on. My personal library has pushed past 3,000 volumes and I make prodigious use of several local libraries as well. I am a sponge for knowledge and people pay me a lot of money to see how I put the pieces together as it applies to them. And there is nothing more pleasurable and fun than that.

 

Millionaires and Insurance

This expenditure of the wealthy might come as a surprise to many. That is because you need to sift the junk insurance from the stuff that matters when it come to building and retaining wealth.

To start, we are not talking about the insurance you purchase for small electronics at retail outlets. If you can’t afford to fix or replace an $86 item you can’t afford the item. This is junk insurance and wealthy people don’t buy it. Besides, most credit cards provide similar insurance for free just for charging the item on their card.

Wealthy people strategically target their insurance spending. It has to protect wealthy adequately or build wealth.

Large assets require coverage. Homeowners should have adequate insurance to protect against large losses. Wealthy people frequently have high deductibles, however. Small losses are easily handler out-of-pocket and insuring for small losses is always a losing game.

Home and auto insurance are more than just protecting the asset’s value. Many wealthy people don’t have collision on their vehicle or have a high deductible. That is because a damaged car is a mild inconvenience when it comes to building serious wealth. 

Lawsuits, on the other hand, are a different story. A minor fender-bender might set you back a few thousand; the lawsuit several hundred thousand and a boatload of time, anxiety and stress.

Wealthy people almost always enhance their insurance with an umbrella policy, extending liability coverage beyond the original policy limits. Damage to property almost always  is a minor issue when it comes to wealth, but a lawsuit can eliminate all vestiges wealth ever existed in your portfolio. And, as already mentioned, it can happen faster than the snap of the fingers.

Other insurances wealthy people use fund legacy planning and business protection. Protecting a business protects the income stream, an important consideration for the wealthy and those soon to be. Legacy planning frequently includes insurance to deal with tax issues, fund charities of choice and provide long-term for family after our wealthy friend departs this realm. You would be surprised how much income can be generated with a proper insurance policy and it isn’t the insurance policy providing the income, only the protection and/or framework to provide such additional income.

Non-wealthy people fight this expenditure the most. I even saw a popular blogger a few years back claim he forewent homeowner’s insurance. I can only imagine the risk and damage readers taking his advice faced. (The real value of homeowner’s insurance in the liability protection, not the casualty coverage, by the way.)

Wealthy people buy insurance that protects against serious losses to wealth while poor people insure items on Amazon with a sticker price under $100. That one simple fact tells a very large story.

The right insurance is important. The insurance agent might not be the right place to go to find out the best values in insurance (insurance agents don’t always understand legal and tax issues). That is why we consult with educated attorneys and tax/accounting professionals. Your accountant and attorney are a vital part of your plan to build and retain wealth, and frequently have a fundamental understanding of all the wealth issues involved, including insurance.

 

Coda

There are other things wealthy people spend on too. The 5 above are areas wealthy people generally do not skimp on. Too much is at stake if they do.

Thinking like a wealthy person is the first step in building wealth. Keep yourself as healthy as possible, adequately protect yourself with qualified legal professionals, also hire qualified people in the tax and accounting field, never stop learning and protect your current and future assets with proper insurance.

You might have other priorities. Many wealthy people travel more than I do, but it isn’t required. Some buy more home than I would feel comfortable living in. To each their own, I say. But the 5 categories above are where all wealthy people focus their spending if they plan on keeping it. That might be a hint you should, too. 

Engage frugality and put the excess monies to work. Learning to save and spend properly is the only way to reach financial goals; to reach true levels of significant wealth.

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

People prefer the familiar over honesty. That's not good for your wealth. If you want money you have to stop following the herd.By now you’ve probably realized this blog is a bit different from others in the personal finance arena. Sure, we talk plenty about taxes, investing, frugality, retirement and more, but how we go about it is different on a very subtle level.

The general media and popular bloggers of personal finance preach the same information without saying anything new. They spout “spend less than you earn”, “invest in index funds” and discourse endlessly about the 4% safe withdrawal rate from retirement accounts. 

Well, duh!

Yes, you might find often repeated advice motivational (I do), but you can go almost anywhere to hear it. Dave Ramsey is right. Get rid of debt! You do this by spending less than you earn. Baby steps help as you develop your financial skills. Then what?

However, once you get serious—I mean really serious—advice like “spend less than you earn” seems darn basic. Heck, grandpa told you that 30 years ago without referencing any blogs or media outlets. You need better information if you are going to climb to the next level.

In the early days of this blog I worked hard to find a place in the demographic. I always wanted to take the less traveled road. If everyone said you should retire early and travel the world, I pointed out the flaws in the logic. Conventional wisdom—much like the herd of lemmings racing for the cliff—is wrong!

If I was to add something to the heap of personal finance material already in existence, I would need to take drastic measures. And do it subtly!

You might notice the bloggers spouting the same gibberish get picked up by mass media outlets while your favorite blog (that had better be this one!) gets nary a mention. The reason for this is people prefer the familiar to an honest answer that could make a real difference.

 

Comfort Zone

Therein lies the risk to your wealth. The pantheon of bloggers telling you the same message risks you joining the herd. And as we all know, the herd gets slaughtered. (Grilling season is right around the corner.)

If it’s easy and fits in a witty soundbite (or click-bait title) it gets more attention. But this isn’t necessarily good for you financially. 

I made you, readers of this blog, a promise. Last autumn I promised to change the tempo of this blog, focusing on you, the reader. Prior to that I provided good information, but always with a jaundiced eye toward what would bring in more readers. That required me to sound like everyone else.

Put an extra $1 million into your investments easily. These proven methods are used by the wealthiest people today.But you can’t point out the flaws in over-simplistic information by sounding the same horn. If I was to give my readers a chance to put at minimum $1 million dollars in their pocket, I had to step up my game.

I did that before to some extent with a few notable exceptions when I sold out to the crowd. Time for consistency.

Things are different now. When was the last time a blogger dropped north of $16,000 to test outsourcing so his readers could benefit?

I’m not talking about building an addition to your home and making a blog post out of it. The blogger benefits regardless. I’m talking about dropping serious cash to explore an option with the benefit going to the reader whether it worked or not.

In the office they said I was nuts with my outsourcing idea. It turns out I was. Still, readers won! Other tax professionals (even those hiring a tax pro) received valuable information on a powerful trend affecting many industries.

That is what I mean by being different for the benefit of the readers of this blog.

 

Million Dollar Opportunities

So how can reading this blog add $1 million to your wallet?

You have probably read blog posts on side gigs that pay well. All those posts and articles in the popular media outlets spout pretty much the same thing. And the biggest complaint is that they don’t work as promised. 

The reason they don’t work as promised is because they require a special skill (maintenance man for landlords) or have low expectations (dog walker or Uber driver). Sure, you can make money house sitting and walking the neighbors dog, but the opportunities are limited and frequently less than satisfying ways to spend a day. Doing what nobody else wants to is not a side gig; it’s as torturous as working for the man!

This blog has offered several side gig ideas over the years as well:

Several additional idea have been interspersed throughout the text. 

The nice thing about my side gig recommendations is that they are rarely mentioned outside this blog. And you can do these all from home. Many small tax offices are run out of the owner’s home. It keeps costs low and allows you to stay small so it doesn’t overtake your life. 

Forensic accounting, for example, is a wide open field. Yes, you can work for someone else, but you can also start your own business specializing without any formal education, except what you learned reading The Wealthy Accountant. Nothing is more rewarding than helping people find financial stuff they thought lost forever.

I also warned about side gig risks and even offered a side gig tax guide

 

Flaws and Solutions

So how do you get your hands on the promised $1 million? 

Lists of side gigs have one inherent problem—they lack details. It’s wonderful to tell someone they need a dog walking job, but then forget to provide a play-by-play to do so. My post on 12 seasonal, high-paying side gigs has the same flaw. It takes the shotgun approach and fails as all other similar attempts do.

I did a better job outlining tax preparation and forensic accounting as a side gig. I recommend reviewing those posts if you are serious about a side hustle that is fun and very profitable.

Most opportunities are more subtle. Last week I published on when it’s a bad idea to add to your retirement account. The wire to my email box melted off after I published that. I think I had more people contact me asking for help on this than read the article. (That’s not as much of an exaggeration as you might think.}

The flaw with most blog posts and popular media articles is trying to serve everyone. The solution is to serve just one person: you, the reader. 

You can’t give 30 good ideas and expect people to use any! Research into retirement plans has made this clear. (Several research papers have found that the more options you give people the less action they take.) 

That is why I don’t tell you each week is yet another great side hustle idea. 

Take last week’s post, for example. I provided multiple examples of situations where adding to a retirement account would exacerbate future tax problems. Several solutions were provided while special note was made that facts and circumstances of the individual would prevail (we are all unique). 

I know many readers understand full-well what I was talking about. Focusing on this one special situation is a massive side hustle opportunity with plenty of income potential.

I charge $350 an hour for consulting on stuff like this and I’m booked out till Christmas. You can be just as booked with a few strategically placed speaking presentations at a local Optimist Club or Eagles. The average client will save well into the six figures in taxes and net worth. You will log an average of over 5 hours per client at your regular rate.

 

Show Me the Money

It’s all about focus. You can’t be everything to everyone. (God knows I tried.) 

Find your niche, get good at it and sell it to the world. 

Warren Buffett’s Berkshire Hathaway owns a lot of different companies. But Warren does only one thing: allocating capital. He is really good at one thing and let’s others do that they specialize in.

The same applies to you. Find that one niche that tickles you and exploit it. 

Don’t worry about not liking it down the road. I tried a lot of different things. That is why I have so much to share here. I’m always into something. 

It’s okay to get good at something, do it for a while and then move to something else. I did it my entire life (all under the umbrella of my tax practice, my true focus) to great success.

 

It’s About More Than Earning Money

So far I focused on earning more. Plenty of readers have reminded me it isn’t worth cutting taxes if you are earning minimum wage. Many have lamented not having money to invest so I started with earning more money.

You can pick almost any post on this blog and turn it into a profitable side hustle. I warn you to only focus on one project at a time if you want to keep your sanity. It’s also more profitable that way

The amount of wealth you have is in direct proportion to understanding the secrets of money. Wealthy people know how to focus on the right things for maximum wealth creation.But now that you are earning more money you need to know what to do with it. I’ve discussed that a lot too.

The conventional wisdom is to drop the whole shebang into an index fund and live with the results. It’s sound advice if you can live with the decision.

Instead, I encourage readers to put most of their liquid assets into index funds and also have a small mad money account for crazy ideas. 

But serious money doesn’t belong in a mad money account! That is why I recently revealed I’m dropping my mad money account. Money is too important to just throw away on crazy ideas! 

When it comes to investing, emotions are the most important element. I’ve witnessed so many clients over the years in my office lose money on investments they were stellar performers. The constant buying high, only to be scared out of the investment on a temporary pullback, is cancer to a portfolio.

Last December the stock market dropped around 20%. People in the demographic that read blogs like this one were starting to panic. And there was no real pain at that point! On Facebook people were screaming they were ready to pull the plug (sell into the down market). 

I was buying more. I actually bought my largest portfolio addition of the year on Christmas Eve, the market low of the pullback. I was able to buy when others panicked because I had no emotional attachment to my investments.

When it comes to investing I recommend reading the same thing again and again until it sinks in as long as what you are reading tells you to not trade based on the current direction of stock prices.

If you are good with numbers and have a small amount of business training (you read good business books) you can research potential investments outside an index fund.

I frequently share what I am buying (and every so often, selling) in a private Facebook group.  If you want to join just make a request. Since I run the group you have a good chance of becoming part of our tribe. Just mention this blog post and I promise quick approval.

 

Here’s Your Check

None of this should be surprising. Picking up a side gig where you don’t have to run the world (just focus on a narrow service) is the perfect solution to increasing your income. 

Learning to set aside emotions (something I publish about a lot when the market is down so readers don’t make a stupid mistake) takes practice. If you master that trait you will watch your net worth rise higher than Jack’s beanstalk. 

And it doesn’t take long either. I’ve seen more people build a million dollar income and/or net worth in a manner of a few years more times than I can count. It happens a lot more often than people realize.

Once you learn the secret (it’s not much of a secret anymore) all that is left is controlling emotions.

Set your focus on one post here and read it several times. Then follow the links, if provided. Read outside this blog, too. I don’t know everything and my worldview isn’t absolute. 

Where possible, run scenarios. (Example: If you plan on helping people optimize the right amount to invest in retirement accounts versus non-qualified accounts, run a few few tests to see how the numbers interplay with the tax code.) 

Then set a game plan to acquire clients. I’d tell you how to do this, but I already have (check the link).

Now that you have more money, sock half of it into an index fund. Leave a bit to the side for what I call pleasure investing. Research companies you are familiar with (maybe you use their product or work in the same field they serve). When you find an under-priced gem, buy. (Next week I’ll show you where I find under-valued stocks.)

It’s as simple as that. 

If you follow what I outlined in this post you should see no less than $1 million of income and net worth growth above what you already have. All you need to decide is how fast you want it.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Every fortune starts with the first small investment. See how this man turned a small investment into a large fortune with a steady stream of income.

Every fortune starts with the first small investment.

I did something different this holiday season than I ever did before: I took two five-day weekends. This may sound like a minor thing considering the FIRE* community I supposedly belong to**, but to me it was a serious adjustment.

The first long weekend over Christmas didn’t feel like a true long weekend. Every day was filled with family events so I didn’t have to worry about filling lots of dead time.

The New Year’s weekend was the opposite. I had a full five days to do anything I wanted. Sure, I still checked the office email a few times and kept current with social media, but for the most part I stayed the course and enjoyed five days without the obligations of work.

As most people know, it is easy to waste a day or five if necessary. For hyper-productive people this is more of an issue. Can you imagine what Elon Musk, Bill Gates, Warren Buffett or the late Steve Jobs would do with their free time? You guessed it. They do exactly what they do every other day. Either you create value in the world or you don’t. One has a reason to be alive; the other does not. You choose.

The extra days off were delightful, actually. I enjoyed several good books and extra time with Mrs. Accountant and the girls. Still, I was reading the stuff I always read. I was learning and growing. The only difference is I was on my couch versus my office chair.

But this story isn’t about my long holiday weekends; it’s about money; the reason you stopped by this place.

Anyone Have Some Spare Change?

As the holiday came to an end I was sitting on the living room  floor reading a book as Pinky, my cat, pawed underneath the edge of the couch. I put my book down to see what she found. (I was hoping it wasn’t a real mouse (as opposed to the toy mouse we gave her.))

Pinky had her paw underneath the edge of the couch as far as she could reach and kept trying to push further. Whatever she found—or lost—she wanted back badly. I nudged Pinky to the side and lifted the edge of the couch and reached under and found the elusive prize.

A quarter! Pinky’s keen eyesight found a shiny quarter deep under the couch. A guest over the previous weekend must have lost the coin and it finally fell through the cushion to the floor beneath the couch.

To most people this coin is a modest 25 cents. If found in a casino most people would immediately drop the coin into a slot machine with the outside chance of turning the coin into serious cha-ching. Most people would be just as broke as the moment before they found the coin.

Pinky is not a gambler; neither am I. As small a prize as the coin was, Pinky still wanted it. It was shiny. That was it’s value and Pinky knew it.

The Gift that Keeps Giving

Like any cat, Pinky soon gave up her prize when she realized I wasn’t giving it to her. (In my defense, I retrieved the coin she couldn’t get. A smile emoji might go nice here.)

Proud of the prize I stole from Pinky, ah, earned, I should have dropped it into my coin bucket I use for playing cards Friday night. But I didn’t. Something else entirely different crossed my mind.

Why does one man succeed and another fail? It comes down to one simple rule. Follow it and you win; break it and you lose.

Why does one man succeed and another fail? It comes down to one simple rule. Follow it and you win; break it and you lose.

You see, that simple coin is money! Add enough of them together and it becomes a serious nest egg. Even a mere 25¢ has value! If you respect money—which is a store of value—then a simple quarter will be respected as much as a hundred dollar bill. You don’t toss it away in a mindless casino game.

Even Pinky understood the coin has value (as a toy). But it’s worth a heck of lot more than that to me.

The first thought that entered my mind when I saw the coin was how much of a fraction of a share of an index fund will that buy and how much of dividend (an income stream) will it throw off? Pinky, our resident diva, placed a more immediate, hedonistic value on the coin. Pinky’s human (me) was thinking longer term.

Now I know what some of you are thinking. How much income can one simple 25¢ piece actually throw off? Well, by my calculation, the same amount as every other quarter in my portfolio.

Think about that a moment. From this perspective, your entire investment portfolio is made up of a bunch of quarters throwing off an income stream.

This isn’t a hard concept to understand. Your body is made up of a large number of cells. Cells are made up from numerous chemical compounds constructed from atoms. Atoms are made of electrons, protons and neutrons. And the components of atoms consist of a number of elementary (sub-atomic) particles.

All things of size are composed of many parts. Each part alone seems small, but remove the infinitesimally small part and the house of cards starts to crumble. Remove an electron from an atom and the atom is different; responds and reacts different. Helium has two protons. Take one away and the atom is now hydrogen, a very flammable element. One small change does make a difference.

Anatomy of Wealth

What makes one person rich and another poor?

Two people working the same job side by side earning the exact same wage can have radically different financial conditions. One worker can squander her paycheck each week while the other maxes out her retirement plan and saves even more for a rainy day.

The worker spending all her income as it comes in is under a lot of stress. A slow economy is cause for concern. If her hours are reduced, or worse, she is let go, hard times will follow quickly. The worker saving a large percentage of her income feels virtually no stress. A lay-off or reduced hours is nothing more than a reallocation of life-hours. She can always do something else productive with her time. Since she has plenty saved, money will not be a problem.

How much can you turn a 25¢ coin into to? How much of an income stream? If a man and his cat can do it, so can you.

How much can you turn a 25¢ coin into to? How much of an income stream? If a man and his cat can do it, so can you.

So why did one worker save/invest and the other live paycheck to paycheck? It might take a series of questions to get to the bottom line, but I bet the final answer sounds something like this, “I save so I have an income stream when I need it or when I retire.”

The concept is simple in theory; difficult in practice. Everyone knows they need to save and invest for the inevitable day when the money will make life easier. But some see money as a chance to spend and party. So why do some save? What motivates them? Triggers them?

Once the thought entered my head when I saw the quarter Pinky was trying to dig from under the couch it seemed silly. Why was my first thought to invest the newfound wealth for an income stream? And do other people think this way or am I just weird? (Don’t answer that!)

My guess is about the same number of people who have financial wealthy have the thoughts I have about money. Financial wealth is a simple process. Start investing early as much of your income as possible, reinvesting the income stream except in extreme emergencies. Yet, some people can’t do it. If they have it, they spend it.

It comes down to mindset. The ancient Stoics talked about visualization. Well, investing money for an income stream tomorrow requires vivid visualization. I could see the income stream from that quarter the second I saw it. It’s the reason my first thought was to invest it.

People who spend most or all their income can’t see the benefit of saving/investing some of their hard-earned income. “I don’t want to be the richest guy in the cemetery,” they say. “Can’t take it with you.” To which I reply, “You’re right. But I’d like to have some while I’m here!” Perhaps it is time to train your mind to visualize yourself with lots of money and the income stream it provides.

If Pinky can see value in digging a coin from under the couch you can visualize the value and benefits of investing a significant portion of your income.

Warren Buffett is known to keep personal expenses low so he has more to invest. Wealthy people think this way and you need to adopt the financial mindset of the rich if you want less stress and more options in the future.

Every dollar that passes your paw is an opportunity to create an income stream. Even a bank deposit throws off a limited amount of interest. The income stream is vital to your financial health and future.

My grandfather always had a saying that has stuck with me: Never take off the pile. Granddad was an old farm boy living the dream in the backwoods of Nowhere, Wisconsin. He lost the farm in the farm crisis of the early 1980s and then rebuilt his fortune doing nothing more than saving a serious portion of all his income. Most money was only deposited in bank accounts. And he still managed to re-grow his liquid net worth well into the seven figures starting over from an old age. His rule of only consuming the income from an investment had a lot to do with his success.

The corpus of your investments, that original seed money, is sacred. If you never touch the sacred you will always be safe! The income stream keeps growing larger with time. Dividends reinvest to earn more dividends. You don’t need a pension when you have one far safer and personally designed.

 

As for the quarter I commandeered from Pinky? Well, I tossed it into the coin bucket I use for Friday night cards. Seems Vanguard requires a deposit larger than 25¢. Guess I’ll up next month’s auto investment.

 

* FIRE: financial independence/retire early

** Before someone takes these words wrong let me clarify. There is no doubt I’m a member of the FIRE community. I handle tax issues for several key bloggers of the demographic and attend conferences periodically. I say “supposedly” because I don’t feel like a member to the FIRE community. I’ve never been a fan of retirement—I like doing productive activities as long as I’m breathing. As readers may notice, I don’t chum with many members of the community either, instead choosing to keep plugging along in my tax practice. I’m a rural guy who likes his rural life without the bright lights of center stage.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Stalking humans.

A new tax guide arrived late last week: The Complete Analysis of the Tax Cuts and Jobs Act. It’s what I consider light reading on a Sunday afternoon.

Tax season is over, but tax planning is more important than ever with the new tax laws and changes. Consulting and planning with clients started May 1st and continues strong. I’m booked out until mid-July. If you own a business or investment properties you need to consider consulting with a tax professional to take full advantage of the new Qualified Business Income deduction.

One problem from earlier in the year has probably corrected itself. Withholding tables were adjusted in early February to account for the elimination of exemptions and the new tax brackets. The new tax tables overcompensated by under withholding. This meant people would pay less tax while getting a smaller refund or even owing! It was a timing issue of when you would actually pay your tax liability.

Mid-April brought revised updated withholding tables correcting the issues. Preliminary analysis of client files show the new tables handle around 60% of withholding correctly. The reason for the 40% error rate is the elimination of exemptions. The good news is that the withholding tends to err on the conservative side, creating slightly higher refunds than the original withholding tables.

It might pay to review your tax situation this year. The last decade or so had modest annual changes to the tax code. This year is radically different. New deductions, expanded tax credits and extended tax brackets created opportunities to reduce your tax liability if you plan properly. This extra money funneled into an index fund or reducing debt should have long-term positive affects to your wealth creation. You have a window of opportunity to reach financial independence and early retirement funded by the tax reductions.

All is not rosy. The limits placed on state and local tax deductions (SALT) coupled with the elimination of itemized deductions, subject to 2%, means some taxpayers will see a tax increase.

Contact me if you are interested in a consultation. Be sure to review Working with the Wealthy Accountant before hitting send.

I’ll need a copy of your 2017 tax return and a list of questions prior to our meeting so I can adequately prepare. Sometimes I can do more than just cut taxes. Several clients were able to reduce their expected larger refund and funnel it into a Capital One 360 or similar savings account where the interest on the lowered withholding will exceed my fee. Each situation is different so I need your information to provide the best advice. Keep in mind I consult on Tuesdays and Thursdays each week only. I sometimes open another day, but I do have other obligations consuming my time.

Winner’s Circle

We have three winners since the last Stalking installment. Gretchen D of Birmingham, Terry C of Dallas and Cindy M of Rapid City, SD saw some Amazon gift card love slide their way.

What I’m Reading

Bill Gates contacted me the other day to share a book he found interesting. He is well aware of my love for good books and was excited to share another gem. The conversation went something like this:

Bill: Hey, Accountant guy! I have an awesome novel you must read.

Accountant Guy: Bill, you know I don’t read many novels anymore. It better be darn good to break me away from my regular science and financial planning books.

Bill: Trust me! You’re going to love this book.

So I dragged my feet for a year before I decided I needed a comfortable summer novel to disappear into. Enter Neal Stephenson’s Seveneves.

Anyone for some light reading. The book only cost your favorite accountant $85.

Seveneves starts with the moon blowing up. The book alludes that it might have been a micro black hole racing through our neck of the galaxy. Regardless, people didn’t know what caused the catastrophe. The event split the moon into several large pieces. A few days later the first two large pieces smashed as gravity brought the pieces back together, creating smaller pieces. Scientists realized the collisions would continue breaking the moon into smaller debris. It also meant a large amount of moon debris would eventually hit the Earth.

Mankind has two years to get to space if it wanted to survive. The International Space Station was the beginning building block of a larger space habitat. A few thousand people were brought to space to wait out the Hard Rain that would turn Earth into a boiling inferno where no life could survive. To keep the Ark manageable, DNA and DNA data were transported to the Ark.

Space is unforgiving. The Hard Rain came and the Earth was destroyed. A safe haven was finally achieved by the Ark with one problem: only eight women were left alive. One woman had reached menopause. The seven Eves were all that remained of the human race and its hope for a future. The human race was all but extinct. These seven women would use technology brought from Old Earth to bring humanity back from the abyss.

The novel picks up 5,000 years later when Earth is ready for life again. I don’t want to spoil it for you so I’ll stop here.

Seveneves is hard to put down. It isn’t light reading either, as I teased at the open of this section. It is classified as hard science fiction, something I do enjoy. If you want a solid novel to fill a few sunny afternoons or early evenings, consider Seveneves. It’s worth your time.

 

 

Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Jordan Peterson is one of the greatest thinkers of our time.

When you think of the most powerful, motivating speeches ever given, Abraham Lincoln’s Gettysburg Address comes to mind. In less than three hundred words* Lincoln encompassed the issues facing the nation. As great as the speech was, it was backward looking (Four score and seven years ago) with hope to the future. Lincoln was able to clearly articulate his message in a few minutes. He struggled up to the moment of addressing the crowd as Gettysburg. It was the planning and preparation that lent to the quality of the message.

Closer to home we might consider the commencement address Steve Jobs gave at Stanford in 2005. At fifteen minutes, Jobs communicated a narrower message with significant reinforcement of his theme. Once again, serious planning took place prior to the presentation. Jobs was legendary in his drive toward excellence. He could speak before a crowd extemporaneously, but preferred formal presentations he could and did practice again and again until everything was choreographed to perfection. Errors were ironed out. He practiced so much that when he was live he could continue without missing a beat if technology failed while he was on stage. A Steve Jobs presentation was a show to behold.

Speeches that resonate come in many flavors. YouTube is filled with powerful speeches from movies and sports coaches. Speeches that cause a shiver to run down your spine include elements of life itself. “You can do it” is motivational, but when the words and emotions dig deeper we quickly realize the importance of what we are hearing.

Today I want to share a short speech (10 minutes from a longer interview) by Jordan Peterson. I’ve been reading and listening to his work for a while now. His recent rise to fame makes his plea more vital than ever.

A Typical Day at Harvard

The excerpt comes from a longer interview Peterson gave to a group at Harvard University. The video begins with Peterson asked what advice he would give students that want to make a difference in the world after they graduate. Peterson never missed a beat when he said, “Read great books!”

You can watch the video on your own and should several times to digest the entire message. What you should get on the first pass is that while Peterson was giving an interview, his responses are not completely extemporaneous. Over a long career he has developed a remarkable philosophy on how to live a good life. Does that sound familiar? It should. It’s been a while, but I’ve talked about Stoicism plenty enough in the past in this blog.

The overtones in this interview are dripping with stoic thought. Around halfway through the excerpt the interviewer even asks Peterson how to live a good life. What makes the responses so powerful is how Peterson opened the floodgate and released an articulate and passionate plea for listeners to accept how incredibly awesome our lives are today in the Western world.

A Game of Cards

Friday night is sheepshead (a card game with some (okay, few) similarities to bridge) night in the Accountant neighborhood. Since we are all a bunch of old duffers living in the backwoods of Nowhere, Wisconsin, the game starts at 7 and ends shortly after 9. (Did I mention us country folk prefer to hit the hay shortly after sundown?)

A few weeks ago one of our players, Pete, asked — as he always does — how our week was. I decided to return the favor and ask Pete how his week was. The rest of the night was shot. I don’t think we got more than three or four hands in before closing time.

My faith in the future is firmly intact. A recent sunset at the Accountant farmstead was a reminder and renewal of my faith in life, the future, the world around us and the beauty of life.

My polite interest in Pete’s prior week was all it took to open the gate and let it all out. Pete couldn’t stop talking about how awesome and great life was. Backwoods people live a frugal life due to environment. We can’t order pizza delivery. (There is no pizza delivery in our neck of the woods.) The closest shopping opportunity is 30 miles away and none of us miss the chance to be separated from our cash. (The card game is frequently brutal on the family budget. We play for dimes and a bad night could set a guy back a full dollar, dollar and a half. Like I said: brutal.)

Pete didn’t miss any of the highlights of our incredible modern world. We have internet (high speed!) here in the backwoods. Food is cheap and varied. The cost of living is cheaper than ever. We live longer and have medical technology to not only keep us alive, but to live better. A bum knee is a simple replacement today; in the past it was a permanent diminution to quality of life.

Debt is the only real problem messing up all the fun in our ultra-modern world, according to Pete and company. When things get tough (as if that is even possible today) you can reduce spending in all areas. You can cook more at home or turn down the heat/turn off the AC. You can walk or bike instead or burning gasoline. All budget items are easily reduced, expect debt payments. Those stay stubbornly locked in place regardless of events chipping away at family finances.

Pete retired fifteen or so years ago when he was about my age. He cut back even earlier, enjoying three day (or four) weekends. Now Pete is looking down the barrel of Social Security. Any day now he can pull the trigger and enjoy the influx of even more income. In Pete’s own words, he can’t spend what he already has! He has lived off an amount less than his Social Security check promises to be for years.

What Everyone Must Learn in College, But Rarely Does

Back to Jordan Peterson.

Peterson made it clear what college and a college education is all about. Most people think college is about learning a skill you can use to get a job. It’s not! College is where you must learn to think; a place where you must learn to articulate. That’s why he places such emphasis on reading good books.

Books have been a massive part of my life from an early age. I took a super early mini retirement in my young 20s to sit at home and read all day. There is no doubt the three or four years I bowed out of life to immerse myself in quality literature determined the success in all areas of my life.

My thirty year marriage has been the highlight of my life and still going strong. I learned from people who spent a lifetime together how to have that very thing. I read about raising good children, running a business, investing, personal finance, budgeting and taxes. I also took time to read novels with a powerful message.

So, if you go to college to learn how to articulate, think and speak, what are you to do with this superpower? “Stop unnecessary suffering,” according to Peterson.

Personal Mission

Money is only a tool. This is a personal finance blog firmly in the categories of tax, financial independence, early retirement and wealth building. But none of that is the underlying theme. I need to learn to articulate better, as Peterson suggests, to communicate this message. You don’t want money; you want to be useful!

The wisdom Peterson shares in a ten minute interview segment is a lifetime worth of knowledge. He shares another secret society is struggling with currently. He talks about how the 1% are not greedy bastards. He explains why you are not richer than you are. It’s because you are young! If you are a good steward of your money it will grow. Given time it will grow rather large. Your favorite accountant is a prime example. I’m currently on the top of the net worth list over at Rockstar Finance. I’m also a bit old to be telling people I’m considering early retirement. Give it another decade and I’ll be looking over the edge of late retirement (grow up, man!).  The truth is I had more time than folks in their 20s to accumulate my wealth. And as Peterson said, I’m not a greedy miser hoarding my money. I’m looking for new opportunities to reduce suffering in the world so to speak.

Life is so good today! When people whine and complain over how oppressed they are, I, like Peterson, am so disappointed. We can make a difference, but it will never happen complaining about everyone else!

The Accountant girls enjoying Frogg’s ice cream in Sherwood, Wisconsin.

My card-playing buddy, Pete, shares some traits with your favorite accountant. He doesn’t like to travel and has managed to live a life with far less traveling than yours truly has done. His wife likes to travel and does so with her friends. Pete happily drives his old truck (he recently bought a new one since the old one gave up the ghost) around the neighborhood playing with his solo rental property. He milked cows for a farmer just south of my farm for many years to pass time. If he gets bored and something pops up (it always does) he will do that for a while. Oh, and he stops at Frogg’s Ice Cream a lot in the summer.

If you get the chance to cure cancer, then do it! The suffering your will reduce in the world will be incredible! Most of us will make a smaller mark in the world. I’m here to tell you it’s okay to make a small difference. Just make a difference!  Daily incremental improvement compounds into massive results.

Pete provides shelter for a family and helps neighbors in need of fill-in help. He reduces suffering in his small way while living the life of his dreams. Maybe you prefer travel and grander endeavors. Awesome! We each need to play the role our personality allows.

I’m a lowly tax accountant. Yes, I reduce suffering by solving tax issues for businesses and individuals. I also contribute by sharing my experience and knowledge on this and other blogs.

Jordan Peterson makes it clear we need to learn to articulate because the world is in desperate need of people who can communicate a message, knowledge and information in an articulate way. I still have room to grow.

And good thing because I’m not ready to hang up my cleats yet.

 

* There are at least five versions of the Gettysburg Address, each with slight variations from the others, including word count. The Bliss copy is the most famous.

 

 

Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Build the life you want. Control money rather than having money control you. #goals #financialgoals Early retirement. #success #wealthIt’s hard to see when watching at the speed of life, but there is no doubt it keeps getting easier to reach financial independence. Some in the crowd might disagree with me. The statistics are clear, however. As the hand of time ticks by the human race is finding greater and greater opportunity at every turn until now when it is laughably easy to reach virtually any financial goal.

But we need to start at the beginning.

In the Beginning

Depending on whom you ask, humans (Homo sapiens) have been around for around 300,000 years. For most of this time we were limited in our conversion of energy into useful tasks. Men, women and children all contributed to their subsistence lifestyle.

Because energy input determines so much of quality of life (as will soon become clear) we need to use a consistent measure of power. Energy is best describes in joules and power by watts (W). This allows a better understanding of inputs by humans over time.

A human can sustain around 100 W of labor. From the beginning when modern humans started its own branch of the family tree until the third millennium BCE, the most power mankind could muster was limited by the backs of the very same people. It took several hundred thousand years before mankind figured out a way to utilize more than the limited 100 W of power available from an average adult male.

Sometime during the third millennium BCE people learned to harness draft animals and their sustained 300 – 400 W of sustained labor. Not satisfied with the several fold increase, humans experimented with different ways of harnessing draft animals and even breed animals for greater labor.

Over thousands of years the maximum prime movers (draft animals in this instance) slowly increased until around 1000 of the Common Era when horizontal waterwheels came into wider use, providing up to 5,000 W of power. (The waterwheel was employed earlier, but not widely or in a modern sense.)

What took over a hundred thousand years to move from 100 W of manpower to draft animals and their approximate 350 W of power only took four millennium to reach the technology of the waterwheel. As slow as it moved it was still an improvement. Progress was slow because people needed to expend all their resources to survive. Draft animals allowed more land to be tilled which meant more people could be fed and better.

By 1800 steam engines surpassed 100,000 W (100 KW) of power. The late 19th Century brought water turbines, driving the maximum power of one unit to as much as 10 megawatts (MW).

The pace of energy use expanded rapidly. Life was still harsh for many people, but the goods and services available grew as more prime movers grew more and more powerful. Subsistence living was declining. Life was still hard, yet more people than ever had a better diet. Also, more people than ever before were able to live an upper class lifestyle. As power use increased due to technological advancement, fewer people had to work to cover the basics of living for the entire community.

The rate of increase accelerated until 1960 when the largest steam turbine reached 1 GW of power.

Modern World

The more technology increased the power of a single prime mover, progress advanced in efficiency.  The first draft animals could replace three or four men max. By the 19th Century better harnesses and certain horse breeds could do the work seven or more men.

Waterwheels increased in size and efficiency until steam turbines were invented, catapulting the power available in one unit (prime mover) to unheard of levels.

Start living your dreams today. Financial independence is easy if you follow a few simple rules. #easystreet #personalfinance #financialindependence #FIRE #earlyretirementThermodynamics places a limit on the maximum power that can be extracted per unit of coal or other energy source. Steam turbines also have theoretical maximums. The first steam engines were extremely inefficient. Advances in efficiency were slow at first, increasing faster until the gap between best performance and the maxima narrowed.

The first steam driven machines operated at less than 1% efficiency to over 40% today! While 40% seems like there is lot of efficiency left to wring out, there is only modest possible improvements available.

Home heating has come even further. Heating a hut with grass or dung has serious disadvantages. Wood was a major improvement once tools were invented to cut trees versus the limited supply of branches available on the ground. Early gas furnaces enjoyed 40% or less efficiency; today homes have gas furnaces up to 97% efficient.

Lighting has an even greater efficiency improvement. Candles convert between 0.01% to as much as 0.04% into light. Edison’s first light bulbs were 0.02% efficient. The first fluorescent bulbs in 1939 were 7% efficient. In the year 2000 a lumen of light in Britain cost 0.01% of what it did in 1500 and 1% of what it did in 1900 (see reference at the end of this post).

The Ease of Wealth

We will now switch from the historical use of power to how the above information yields increased ease in acquiring financial independence.

It seems like wages have been stagnant forever while prices continue to climb. The data tells a different story.

Overall Adjusted Average Salaries, Five Year Increments

Adjusted for inflation, wages have been flat for at least 50 years (see chart)! Before anyone become alarmed, know that wages are what drive inflation. When wages increase it eventually is reflected in the prices of goods and services, kind of.

Natural gas and gasoline prices have been steady to lower over long periods of time, adjusted for inflation (see charts). Natural gas has been up and down, but is basically unchanged since the mid-1990s even before considering inflation or the unadjusted growth in wages. All this while vehicles are larger than ever with more gizmos and home gas furnaces are the most efficient than they’ve ever been.

Historical gasoline prices in today’s dollars.

Inflation causes the most angst. In 1913, when statistics were first kept in the U.S., the CPI-U started at 9.8. The latest CPI-U (April 2018) stood at 250.546. What cost a dime is now 25 times more expensive. The average worker earned around $300 per year in 1910! (A competent accountant could earn $2,000! I would like to think I’m competent so, adjusted for inflation, I should make around $50,000. Looks like this competent accountant is doing a bit better than expected. Bet you are too.) In 1918, after the inflation of WWI, the average household earned $1,518, which is, adjusting for inflation, less than the average household income today.

Inflation is real and affecting household budgets. But while prices are increasing, wages are oscillating around the baseline, adjusted for inflation. At first glance we might be depressed to learn we’ve made no progress. However, wages and inflation only tell part of the story.

A hundred years ago many homes lacked indoor plumbing. We’ve rectified that problem since. Electric appliances have been added to the daily luxuries of life. Over the last 30 or so years we have added computers, internet and smart phones to our list of luxuries. You’re probably reading this on a smart phone.

Natural gas prices haven’t moved at all while wages and efficiency have continued to climb.

Increased efficiencies are where most of our increase in living standard comes from. Wages mimic prices as efficiency keeps rolling along. Energy costs have gone nowhere fast over the last century. But what we do with that energy has changed radically. Heating our home takes less than half the natural gas of 50 years ago. Of course, our homes are twice as big so we’re still broke. The electricity needed to light our homes has decreased to such a level that it is an insignificant part of our budget.

Money for Nothing: FI for Free

Frugal today is nowhere near what frugal was a century ago! What we consider austerity would get us laughed back into our time machine if we had such a machine to transport us back in time. Most households spend less than 10% of household income feeding the family. There was a time not that long ago when 50% or more of the budget went to feeding hungry mouths. Back then the house didn’t glow at night the way our cities do today.

As technology allows us to utilize energy resources like never before, we have a lifestyle never before enjoyed by any species in history. And it gets easier to reach financial goals!

Once upon a time all but a few worked till the day they died. A select few, very few, enjoyed a life of luxury supported by the backs of the masses. Then draft animals were put to work, allowing for a larger population and a better diet. Later coal, oil and gas powered the turbines of industry and heated our homes. More work horses (steam turbines, et cetera) meant we could delegate the most back-breaking labor to machines. We went from nearly 100% of the population working in the fields to under 2%. The freed labor did other things. Many spent more time in educational pursuits; some did nothing at all, choosing to live longer with mom and dad.

Some lived frugally for a few years and retired early.

In the U.S. 49% of the population works a traditional job. That percent has probably crept up in the last year so we might be over 50% as of this writing. Young children and the old are understandably unemployed. Still, of working age adults, we are near the multi-decade low labor participation rate. What gives!

The answer is rather simple. Our use of energy resources continues to become more efficient while wages remain stable and prices are moving in tandem with wages over time. Productivity slowly grinds higher. After centuries of progress, the cumulative gains have made it possible for large numbers of society to pursue other interests. Food is plentiful thanks efficient use of energy. Even with half the population not engaged in traditional employment, we still have abundant food, shelter and clothing.

Financial independence keeps getting easier and the trend will remain intact! There is no excuse to not have financial wealth. None. We are so rich today with abundant resources and technology we can throw away massive amounts of money on interest to support debt. This is unheard of in history. Debt was always considered bad, if not an outright sin. Governments had debt, but regular people who knew better followed the adage: neither a lender nor borrower be.

Mass media has brainwashed us into thinking things are hard. The 2008 financial crisis was not that bad compared to reality of 100 years ago. The Great Depression was bad. The Irish potato famine was bad! When was the last time you heard of a famine in a developed country? It’s been a long time and for good reason. The only reason less developed countries starve is because they have not implemented the prime movers the way developed countries have. Once you use the energy resources efficiently you can move food from any part of the planet to wherever a drought or blight is affecting crops.

We live in an age of abundance like never before. We need to start acting like it. We need to feel grateful for our largess. It’s easier than ever to save a massive percentage of our income and invest it safely into index funds. You can retire early with plenty of financial wealth because you live in the most awesome time in history. All thanks to the never ending increase in energy utilization and increasing efficiency of its use.

Reference

Smil, Vaclav 2017. Energy and Civilization: A History: Cambridge, MA: The MIT Press (Pages 397 – 407 were used in the writing of this post.)

 

Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Note: This post is not intended as personal or personalized advice. It is provided for informational reference only and is the opinion of the author.

Anyone who has been around the FIRE, leanfire, FI blogosphere, podcasts and book tours know the demographic is heavily invested in index funds and for good reason. Active management’s record tends to be unflattering compared to index peers and with a heavier expense ratio for opportunity to enjoy underperformance.

People serious about building wealth as quickly as possible learn the index fund trick early on. But there are times when index funds are not an option.

Back in the 1990s I was a securities broker with H.D. Vest Financial Services down in Dallas as my broker/dealer. Broker/dealers have an obligation to monitor their brokers so they require all investments of brokers placed though the broker/dealer. Back then it meant actively managed funds only and the expense ratios were a heck of a lot higher back then. There was only one redeeming grace in the deal: all mutual fund trades were commission free with the exception of 12(b)1 fees which generally were 25 basis points of the account’s value. In a way all mutual funds looked like no-load funds for me.

My net worth grew significantly slower during my tenure with Vest. Actively managed funds with heavy fees caused underperformance. My choices were also limited. The worst part is the rule extended to my other businesses and immediate family. Mrs. Accountant and the girls couldn’t invest elsewhere either. Vest even wanted to know where I had money in the bank and a list of all income properties and loans. It was a pain in the tail. Now you know another reason why the dream of schlepping securities wore off fast.

 

Normal People with Abnormal Choices

Stock brokers aren’t the only people with restricted investment choices. Work retirement plans hold a large percentage of all investable funds in most households. 401(k)s and other work retirement plans are notorious for limited choices. The choices are frequently laden with fees driving down performance.

Matching and the ease of regular investing make work retirement plans the best options even when the choices are bad. I’m asked to help clients make the best choice in their 401(k) more than any other request. Most people are clueless to the jargon used to help employees invest their contributions and employer matching wisely.

In my stock broker days my investments were exclusively growth & income funds. Before I knew about index funds front-brain I already knew a basket of successful growing companies throwing off an increasing dividend was a solid decision. The advantage I had was the large basket to choose from. I had my pick of thousands of funds so I had options, even if they were limited to actively managed funds.

Now we need to learn how to pick the best investment from a limited pool. The right choice in your 401(k) could shave years needed to retire and add tens of thousands of dollars to your account value.

 

Needle in a Haystack

Employers offer more retirement plan options than ever before to limit their liability. However, most employers aren’t licensed to give financial advice so they steer clear. Large employers may bring in an investment advisor, but these advisors may not have your best interest at heart and they may not have the time to know you well enough to give quality advice.

Your best defense is knowledge. Certain choices tend to better than others. Specialized funds are almost always the worst choice as they usually have higher fees and are not broadly diversified. Sector funds are a good example. I know of no reason anyone would want a gold fund in their 401(k) portfolio.

International and aggressive growth funds also tend to have higher fees. They can outperform, but they still have a higher mountain to climb to offset the higher fees. All else equal, the lower a fund’s fees the better the long-term results.

Realistically there are only a few acceptable choices for most 401(k) investments. Money markets are out because you have no chance of growing your nest egg. Bond funds are a poor choice in a low interest rate environment and only a small percentage of the portfolio should be in bonds if you are approaching retirement and rates justify a modest investment. Company stock is not diversified and if your employer does poorly your job and retirement are both at risk. Insurance products are almost always the worst of all choices. That leaves broad based funds.

Acceptable choices (in this accountant’s mind) include: growth & income, growth and international or world funds. It is my opinion the largest investment in most 401(k) portfolios should be a growth & income fund when an S&P 500 index or total market index fund isn’t available. Growth & income funds will be the closest choice to an S&P 500 index fund and G&I funds tend to have lower expense ratios than other actively managed funds.

I’m content with one investment in a 401(k). A G&I fund is a diversified choice, grabbing a large slice of large growing companies. But it looks too barren to be correct so people want more. More isn’t always better.

Growth funds are similar to G&I funds with the exception that they can hold non-dividend paying stocks. Amazon is a large growing company that doesn’t pay a dividend. A growth fund can own Amazon; a G&I fund generally cannot.

You may also wish to have international exposure. BP (British Petroleum) is more likely to be in a world or international fund. (Some G&I funds may hold BP.) Toyota is another example. International funds have higher fees due to higher trading costs and travel expenses for the active managers.

G&I funds have the lowest expense ratio of my group followed by growth funds. Fees play such a large role in long-term performance that I have an allergic reaction to more than 10% or so of a 401(k) in an international fund.

If you can’t stand a simple G&I fund in your 401(k) there are a few mixes I approve of:

70% G&I; 20% growth: 10% international, or

80% G&I; 10% growth; 10% international, or

60% G&I; 25% growth; 15% international

Of course you need to modify to your personal situation. (I have to say that for liability reasons. Personally, I can’t think of a better mix than the first choice I offered unless index funds are an option.)

 

A Plethora of Choices

Studies have shown more choices aren’t always better. If you have a dozen choices in your 401(k) you are more likely to take advantage of the 401(k) than if it had 20 choices. The more choices added might reduce employer liability, but it also discourages employees from taking advantage of the 401(k) due to the apparent overwhelming nature of setting up the account.

I’ve seen this first hand in my office. Some employer retirement plans offer a small number of choices, but some come to a rabbit hunt with a bazooka! A hundred choices aren’t needed to offer employees quality choices!

When the stack of papers to sign up for a 401(k) plan exceeds an inch employees are lost. Even I need to spend time digging through the papers before providing reasonable options. Here is what I look for when reviewing employer retirement plan options.

First, most choices are junk. I dump all the specialty funds and insurance products. I’ve yet to see an insurance company fund outperform. The gold and bitcoin funds are removed from the list, too.

Next I separate my choices by investment house. I like Vanguard and Fidelity. If I’m unfamiliar with the investment house, but like the fund option I need to dig deeper. I want to feel comfortable with the investment house as well as the mutual fund.

Then I separate further into categories. I pray for at least one reasonable growth & income fund in the lot. If not, I have to settle for a growth fund.

Last, I review expense ratios. Once again, the lower the fees the higher the chance the fund will perform better. The change in the total stock market value is reflected in all investor accounts, minus fees. Unless you can prove you can outsmart the market, fees are a good determinant of return comparable to the overall market (peers). (Don’t even start with me. Even the pros can’t beat the market consistently.)

From my list I usually pick the fund with the lowest expense ratio with attention paid toward which investment house runs the fund.

 

The Final Choice

Employer retirement plans are often the best tool a person has to accumulate significant wealth. Many employers match contributions at some level. The money is tied up so it is difficult to withdraw; this prevents impulse decisions from ruining your plans. Employers are providing more choices than ever. This is a double edged sword. Move past the psychological deer-in-the-headlights response to a large number of options and hone the list to a workable few choices and then make the choice! Employer retirement plans also make it super easy to invest on a consistent and regular basis, the true foundation of any retirement plan.

Lack of an index fund as an option is no excuse to not invest in an employer retirement plan. Many people face the same problem. I did back in the 1990s and made the best of it. My current net worth would be well into the seven figures lower if I took a pass when I sold securities because of restrictions. The bank would have been a much worse choice.

Of course, you need to modify my suggestions to your personal situation. I think you will find the best choice for you will be very similar to what I propose. No choice is the absolute worst choice! Without investing you will never reach your retirement goals or financial independence!

It’s your life. You can get serious with whatever choices you have or work forever.

 

Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Today we have a special feature. My daughter provided today’s post as promised last week. It is hard to capture the work she did in preparation to winning all those scholarships and the pitch contest. She practiced in front of anyone who would sit still long enough for her to get it out. She honed her presentation until it was as smooth as silk. I even tried to interrupt and distract her as she practiced so she would be prepared for anything.

A few notes are in order. When Heather says the pitch conext was organized by a local bank, local business owners and the college, know I was not involved in any way with the program and had zero influence over the results. I listened to Heather practice, but did not attend the event. I didn’t want to be a distraction.

I want to point out Heather mentioned hard work. Sorry to say you can achieve great things as long as you are willing to do the work necessary to succeed. Another point I hope people don’t miss is Heather’s encouragement to never give up. If one thing doesn’t work, research and study more and reapply. The prize frequently goes to the consistent and persistent.

Taking the Lottery Out of Scholarship Applications

by: Heather Schroeder

 

I’ve never been comfortable with bragging. I wouldn’t go around telling people I got the best grade on a math test or that I got accepted into one of the best colleges in the United States. This is something I just can’t get myself to do. So, when my dad asked me to write a blog post about a recent success I had, I had to tell myself that it’s OK to be excited about winning something.

I struggled when I was in primary school. I was in a special reading class as I couldn’t read at the level I needed to be at and I was equally horrible at comprehension and writing. My reading disorder continued throughout my middle school career and I thought, based on my experiences, that I would never be able to read. Once I entered high school and wasn’t forced to read, I willingly picked up a book at my high school library. In less than a year, I had read more than twenty books and suddenly I knew how to write. This was the starting point that has led me to where I am today—an entrepreneur, a mentor, and a teacher.

I’m currently a student at Fox Valley Technical College in Appleton, Wisconsin. Fox Valley Technical College has a 94% employment rate, the highest in the area. This was the first year that the college had a pitch contest for FVTC students. A local bank, several entrepreneurs in the area, and FVTC staff all supported and funded the pitch contest.

Naturally, I felt a need to sign up, but even though I signed up, there was no guarantee that I would be picked to be one of the eight finalists. Three months after I signed up, I got the email stating I was accepted as one of the finalists. I was rejoicing, and I felt like I was on top of the world. There was only one problem, though—I had a lot of work to do because my business was not what the judges were looking for. And if I wanted to win the grand prize, I needed to switch from being a solopreneur to an entrepreneur.

Think about it. I started a tutoring business with the intention of being the only employee and taking on as many clients as humanly possible. This worked great and was a nice way to have some extra cash coming in on the side; yet, I wasn’t making enough to survive. This is one of the reasons I decided to go back to college. I knew I needed an education, no matter how little or how much, to be taken seriously as an academic tutor.

I had one month to come up with a 90-second pitch for the Fox Trap Pitch Contest in hopes of winning the grand prize. First through third place were guaranteed a financial award. This is something I was bound and determined to win.

My adrenaline was pumping as I entered the room full of judges and FVTC staff. My entrepreneurship teacher was also running the show. I had to make him proud as my entrepreneurship teacher is the reason I’ve come so far. My pitch went great and the judges seemed interested in my teaching style I created and the opportunities for people in the valley and around the world to become employed by me. I’m an ambitious little thing that doesn’t let my size determine how big my dreams can be.

I won first place at the Fox Trap Pitch Contest. This was one of the first times I’ve seen myself succeed at something and then be told that I need to continue with my plan. I learned many things when I prepared and presented my 90-second pitch. The most important thing I learned was that writing a pitch is nearly identical in writing an essay for a scholarship.

When preparing my pitch for the contest, I had to identify a problem, identify the target market, identify the solution or solutions, and determine how my idea will make money. I also had to identify what I was going to do with the winnings. This outline is exactly how many scholarship essays should be written.

All scholarships follow the same general rules including determining the winners by how creative the applicant is, how well written the essay is, the quality of the information, and determining if the applicant is a right fit for the scholarship. When writing an essay for a scholarship, follow these simple rules.

  1. Identify the problem or identify the topic

When writing essays, research reports, and personal memoirs, the stories or the introduction introduces the audience to the situation. Research reports are the easiest when determining and solving a problem. With my pitch, I determined the problem by stating startling statistics and examples of why it’s important to help “at risk” students and students in special education succeed.

 

  1. Identify the target market or who you are trying to reach

Scholarship essays usually want applicants to write about issues that are affecting others in the United States. One scholarship I run across yearly is the drinking and driving scholarship that requires applicants to write about and videotape themselves on describing how they think they can help make people aware of the risks that come with drinking and driving. With my pitch, I determined my target market by identifying who I wanted to help. My target market is “at risk” students and students in special education. The target market for the drinking and driving essay could be people who drink often and take the risk of driving or college students. According to the college drinking prevention website, “1,825 college students between the ages of 18 and 24 die from alcohol-related unintentional injuries, including motor-vehicle crashes.”

  1. Identify the solution or what you think could be done in the future

When writing a scholarship essay, determine what you think could be done to solve the problem. My solution for my pitch was offering academic tutoring services for “at risk” students and students in special education and teaching these students by utilizing my teaching style, which has so far been a success.

 

  1. Identify what you will do with the winnings

Like with the pitch contest and writing scholarship essays, judges want to know what you will do with the winnings. I determined in my pitch that if I won I would use the winnings to go to China to determine if my business idea can work globally. With scholarships, determine how you will use the winnings. I usually state that I would use the winnings for housing, tuition, food, and supplies.

The last piece of information I can give is to research how to write scholarships outside of reading this blog post. I have given some valuable information, but there is so much more available online. I suggest looking on YouTube and searching for videos on pitch contests. These contests have great insight on how to reach your audience and make a difference in lives of others.

I wish you the best of luck.

May the odds be ever in your favor.

Endnote: Once again I encourage you to reach for your dreams. Heather is 23 years old and living her dreams. She is on her way to China for a month to teach in a few weeks. More opportunities are coming her way as a result. I don’t like to travel; she does. I never asked my kids to live the life I expected of them. I always encouraged they walk their own road. There will be bumps and even painful experiences. It’s part of life. But the journey is all worth it.

Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to skyrocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here.