I am reposting this from getrichslowly.org
This guest post is by Pejman Ghadimi. Pejman is the founder of SecretEntourage.com, an author, an entrepreneur and a leadership consultant.
Many will argue that fortunes can be made overnight; while that may hold very true in some cases, the majority of those who have made it will tell you it did indeed take a great deal of time coupled with some correct financial choices. For me, wealth did not come solely from entrepreneurship or financial risk, but rather it came as a result of diversifying my investments all while growing my equity leverage and identifying the right opportunities early on.
I made my first million before the age of 27. It took me close to 14 years of hard work and trial and error to get there. But I did get there nonetheless, and I can tell you that it was quite a learning experience. I not only learned a lot about my capacity and tolerance for risk, but also quite a bit about financial systems and loopholes that exist. I want to share with you today seven rules that you can follow to making sure you also get on the right path to slow, but sustainable, wealth.
Rule 1: Think net instead of gross. Many get consumed with the continuous desire to grow their gross income but often forget to leverage their net income. Increasing your net income by lowering your taxes is no different than raising your gross income. Make sure to reassess your net situation often by leveraging your write-offs early on.
Rule 2: Embrace economic pressure. There will be many times in the next 10 years where you will identify an opportunity to invest or be part of something that requires you to be uncomfortable in your financial position for a set period of time. Just keep in mind that risk equals reward, and without any type of financial risk, you are doomed to stay a prisoner of the lower interest rates set by banks.
Rule 3: Create residual income streams. If you are bound to only receive one form of income, it is most likely you are living paycheck to paycheck and very unlikely that you are actually saving a large chunk of that paycheck. One of the main reasons people struggle with savings is because they are attempting to save money they otherwise count on to live and as a result find themselves in a position that forces them to spend it, even if they were lucky enough to save it for a short while. Most survive of their main income and grow with through residual side income. Examples of side income may include rental income, dividends, affiliate marketing, and side businesses.
Rule 4: Turn liabilities into assets. While it is true that most of the spending an ordinary family makes is buying more liabilities, you can differentiate yourself by investing in assets instead. Equity is key when making purchases. Let’s use the example of a car since we all know most cars are liabilities. If you buy a new car for $26,000, then it is likely that it will lose the majority of its value in the first three years, but will eventually depreciate to about 20 percent of its original value by the time you actually pay off your loan (assuming a five-year loan). You therefore paid $26,000 and used your car until it was worth close to nothing. Instead of buying a liability, think of how you can turn the same item into an asset. The same $26,000 car is available used and has taken the majority of its depreciation in the first three years, and therefore can be purchased for 50 percent off that price. In many cases, it can be purchased with a similar warranty as a new one, and very low miles. Since you are finding a car with much lower miles than it should have for 50 percent of its original value, you simply can use the car until it reaches a normal mileage point and then sell it within two years at a minimal loss (usually less than 10 percent from your buying price). As many of you may not be familiar with the car market, keep in mind that great low mileage examples of your favorite cars are not hard to come by and can be found on sites like cars.com, autotrader.com and ebaymotors.com. A little patience and due diligence can save you a tremendous amount of money on this necessary but depreciating asset. Here is a link to a book that explains this system in detail.
Rule 5: Save for six months of hardship, invest for a lifetime of prosperity. While savings matter, you only need to save so much. Instead of creating budgets to save as much as possible, create budgets to save some and invest the rest. Invest your leftover capital into long-term sustainable companies and stocks. This by itself is a savings account with minimal risk that leads to much better returns than an FDIC-insured account, especially if considering a long-term approach.
Rule 6: Define your long-term financial strategy early on. Don’t wait until you reach a certain amount to define the strategy you should follow in order to accumulate more wealth. You should set financial benchmarks early on and ensure progression and diversification occurs as you reach them. By setting financial goals yearly, you can get much closer to growing rather than having years gone by only surviving. Think of your goals in various ways outside of dollar amounts to reach. For example, I used to set various goals that were financial in nature but not dollar-driven. It would perhaps be being in less than an 8 percent tax bracket one year, but the next year it would be to have six properties for rent instead of two. It’s always about understanding the financial picture in your head before painting it.
Rule 7: Scale your financial growth. As I said earlier, diversification is key to ensuring slower but healthier returns while minimizing risks. Scaling is a strategy you can use early on to set forth diversification methods based on the financial picture you want to paint for yourself as mentioned in Rule 6. Scaling is your ability to add different types of investments to your portfolio based on the size of your wealth. Create a guideline as to how to scale matters. For me, it looked something like this.
Under $100,000 in cash assets – Goal was to lower tax bracket to 12 percent by leveraging write-offs.
Between $100,000 – $250,000 – Add real estate for rental income to portfolio.
Between $250,000 – $500,000 – Add high-risk stock portfolio
Over $500,000 – Look for investments overseas as well as invest in other businesses or ventures.
Keep in mind that these seven rules are not geared to help you reach fortunes overnight, but rather help you frame your 10-year path for sustainable wealth, as it will take discipline and hard work with a hint of tolerance for financial risk.