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Wealth Management 2.0
Wealth Management 2.0
Wealth Management 2.0
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Wealth Management 2.0

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I've always found it ridiculous that millions upon millions of individuals earn a living online, yet nobody thought about writing a book which teaches those people how to manage their money properly. Therefore, I've decided to roll up my sleeves and write one myself.

Why? Simply because I also earn a living on the Internet and have been doing it since... well, since pretty much forever. Aside from that, I'm an economist and this unique (or feel free to call it weird) combination of street smarts and book smarts puts me in a reasonably good position to help people enhance the wealth they've generated online.

If you earn a living online in one way or another (as a freelancer, as an online entrepreneur, as an indie author, as a domain investor, as a bitcoin early adopter, as an online trader, as a website flipper, as an online marketer and so on) or at least generate a significant percentage of your revenue online and want to find out how to manage your money wisely, this book is just what the doctor ordered.

Throughout my career, I've been involved in a lot of different dimensions of the online world. I've been a freelancer. I've run an outsourcing business. I've invested in domains, offered domain brokerage services and even started an auction platform for domain names. I've started an escrow business, which has been sold to Agreed.com, which was then sold to Escrow.com... and which was ultimately sold to Freelancer.com. I even owned three Web hosting businesses. All in all, it's fairly safe to say I've seen the Internet under the hood, so to speak. Frankly, I'd say finding someone who understands those who make money on the Internet better than yours truly would be quite a challenge. No matter what it is you currently do online, chances are I've at least dabbled in it.

As an economist, I consider myself well-balanced. I'm not a Keynesian. I'm not an Austrian Economist either. Nor do I blindly adhere to Monetarism. Unlike a lot of "guru economists" out there, I don't claim to be able to predict the future. In fact, I actually embrace this limitation (and make no mistake, we all have it: nobody on this planet can predict the future in an accurate and consistent manner) and make it a part of my wealth management approach.

Will this book help you double your wealth in a month?

No, it will not.

Is it an "easy way out"-type book?

I'm sorry but no.

Wealth Management 2.0 is not an easy fix, nor is it a sleazy "one size fits all" approach that sounds good but has zero real world applicability. It's a common sense guide which, if used properly, can and will help you enhance your wealth in a sustainable manner.

Writing the 450+ pages of Wealth Management 2.0 took over two years of blood, sweat, tears and sanity. I'm a perfectionist. I could have launched this book a lot sooner but didn't. It wasn't ready and I wasn't about to put my signature on a product I don't believe in 100%. It is most definitely ready now and to say I believe in it 100% would be the understatement of the century. This book means so much to me that a statement such as "I believe in it 100%" seems way too diluted.

Whether people realize it or not, wealth management was, is and always will be a fundamental part of our existence. Make no mistake, all of those sayings about how keeping your money is harder than making it are definitely anchored in reality. The idea of managing your wealth may sound complicated but it fortunately isn't.

Wealth management is lucrative, fascinating and (dare I say it) fun: give Wealth Management 2.0 a chance and I'm confident you'll end up agreeing with me!

LanguageEnglish
PublisherAndrei Polgar
Release dateJul 5, 2016
ISBN9789730220582
Wealth Management 2.0

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    Wealth Management 2.0 - Andrei Polgar

    Chapter 1: Who Should Read This Book?

    Money is hard to earn and easy to lose. Guard yours with care.

    Brian Tracy

    Maybe you made a lot of money after selling an online business and don’t know what to do next. Maybe you did well investing in digital assets or even cryptocurrencies such as bitcoin by buying/selling when the time was right and now find yourself sitting on a nice nest egg. Maybe you generated money online through other methods and all of a sudden realized you now have some wealth that has to be managed.

    I have some good news and some bad news. The bad news is that a lot of Internet professionals end up squandering wealth due to their bad habits, flawed investment strategies, reckless financial behavior and so on. Don’t make the mistake of assuming this can never happen to you or that the people who lost money made mistakes due to poor intelligence.

    Not at all!

    Those people are all smart because if they weren’t, how would they have made money in the first place? Unfortunately, being smart is not enough. Enhancing your wealth rather than squandering it, especially in the current worldwide economic climate, will be an even more challenging adventure than generating it has been. This book has one purpose and one purpose only: helping you position yourself by making the right financial decisions.

    The good news however is that managing your Internet-generated wealth is not exactly rocket science once you understand how things work. In fact, pretty much anyone can do it. You can be your own financial advisor and quite frankly, you should. Why would you put everything you’ve worked so hard for in the hands of a random person who most likely doesn’t care all that much (if at all) about you? If you want to know who is best positioned to make the right decisions, look in the mirror.

    Some readers might be asking themselves what a lot of money or doing well means. You might be wondering how much money you need to have for this book to be relevant for your specific financial situation. My answer is simple: there’s no such thing as a minimum net worth that you need to have for wealth management to be of interest. Terms such as a lot of money or doing well are highly subjective.

    Perhaps your Internet-generated wealth represents a few thousand dollars. Perhaps it represents millions upon millions of dollars. The only aspect which matters is that it’s your wealth and as such, it’s perfectly rational to start understanding what you have to do to keep it or even more so, to enhance it. Don’t make the mistake of assuming you’re too poor or too rich for this book to be relevant.

    As an entrepreneur, an investor and an economist, I’m in a very good position to analyze things from various different perspectives. I’ve been where you are today and therefore understand your journey and the things you are going through right now. I understand the uncertainty that’s assaulting you, I understand how hard it is to form an opinion when there are people who want to manipulate you from all directions.

    From fear mongers who constantly tell you the world will end any day now to overly optimistic mainstream media talking heads, a lot of individuals have a vested interest in manipulating you. I have done everything humanly possible to ensure this book will provide some much-needed clarity. After reading it, I hope you will realize that managing your Internet-generated wealth doesn’t have to be a burden. In fact, it can and should be fun as well.

    To a lot of individuals, wealth management is an abstract and hard-to-understand concept. It’s perfectly natural to fear the unknown and throughout this book, I will try and hopefully manage to help readers realize that after they are armed with information and the mindset needed to interpret it, the fog will gradually disappear. After the image you have in front of you is no longer blurred, you will come to the conclusion that embracing rather than fearing wealth management is the way to go.

    So, who exactly should read this book?

    Here are just a few examples:

    Someone who sold an online business and doesn’t know where to start when it comes to capital allocation

    A freelancer who managed to gradually put a little something aside and doesn’t want to squander it

    A person who invested in anything from domain names to bitcoins and after selling, doesn’t know how to manage the nest egg in question

    An individual who currently makes enough money by running a website or multiple websites to be able to start saving for a rainy day or why not, even start building wealth

    … the list could go on and on but the bottom line is this: if you make or made money online, you’re my target audience! In a monetary policy environment such as ours, savers like you can’t afford to be passive anymore. According to a report published by Swiss Re¹ back in March 2015 which analyzed the effects of the 2008-2013 Federal Reserve monetary policy, US savers lost almost 500 billion dollars (470 billion, to be precise) from 2008 to 2013 (lost interest income net of lower debt costs). If you think limiting yourself to putting money in the bank is a viable approach, you couldn’t be more wrong.

    Given the fact that I’ve built businesses from scratch as well as made money by investing in digital assets, I’m in a reasonably good position to offer advice. I’ve dealt with most if not all of the issues you are struggling with right now. And since I’m also an economist who specializes in seeing the big picture, I’m in a considerably better position than most authors to cover a topic as new but at the same time fascinating as wealth management for Internet professionals.

    Maybe your net worth is only in the four-figure zone at this point. Maybe five figures, six figures, seven figures or more. It doesn’t matter. What’s important is that I have your attention and that you understand how crucial it is to learn a thing or two about how wealth should be managed. Millions upon millions of people currently make money online and the number will probably grow exponentially as time passes, yet few are wise enough to take wealth management seriously.

    Congratulations for being one of them!

    Chapter 2: What This Book Is and Isn’t About

    Intelligence is not expecting people to understand what your intent is; it is anticipating how it will be perceived.

    Shannon L. Alder

    As you’ll undoubtedly conclude after finishing this book, I believe in being brutally honest and always try to be brutally rational. Some people hate me for it but that’s just the way it is. Before getting down to business, I just want to make a few important clarifications as to what this book is and isn’t about. This is important because what you have to understand is that everyone has an agenda.

    Everyone. No exceptions.

    I won’t pretend to be this amazing human being who selflessly wants to help you become a better investor. If I were to do that, I’d be a liar and a hypocrite. Yes, I have an agenda just like everyone else. But the good thing is that as opposed to most people, my agenda isn’t hidden at all and I feel comfortable disclosing it right from the beginning. My agenda is making money by selling as many copies of this book as possible.

    I don’t make money by selling you precious metals like a lot of gold and silver gurus. I don’t have a vested interest in specific companies like a lot of stock gurus do. I don’t have a vested interest in real estate like a lot of real estate gurus do. At the risk of repeating myself, my agenda is transparent and blatantly obvious: making as much money as possible by selling as many copies of this book as possible.

    In a lot of cases, your agenda and the agenda of the person you’re listening to are actually divergent. Gold and silver gurus will tell you to constantly buy even when it’s obvious we’re in a downtrend and the price is in a free fall. Stock market gurus and real estate gurus will do the same and this is precisely why your interests are frequently not exactly aligned.

    When it comes to this book, our interests are anything but contradictory. In fact, the exact opposite is true. If you do well by putting the advice I’ll be giving to good use, you’ll spread the word about this book and I’ll make more money. If you don’t do well, you won’t spread the word. Therefore, it’s in my best interest to give good advice. The same cannot be said about precious metal gurus, stock market gurus, real estate gurus and so on. As far as they’re concerned, it doesn’t matter whether you do or don’t do well, all they care about is their hidden agenda.

    Just something to think about.

    That being stated, let’s move on to the first subchapter, through which I’ll try to explain what this book is about and what you are about to learn.

    Chapter 2.1: What This Book Is About

    The fool doth think he is wise, but the wise man knows himself to be a fool.

    William Shakespeare

    This book is a guide I hope will be just as relevant 50 or 100 years from now as it is today. It isn’t about just one event, about just one so-called guru or about just one industry. Instead, I tried to turn it into something which shapes your way of thinking in a way that enables you to make your own decisions. Sure, it would have been easy for me to pitch this book in a these simple steps are all you need to succeed-ish manner but by doing that, I’d be just another impostor and we can’t have that.

    I don’t believe in one-size-fits-all solutions.

    Now more than ever, we have to understand that the world around us is way too complex for rigid ways of thinking to be effective. That’s precisely why, in a sometimes brutally honest manner, I will try to free readers of the bad habits they have been indoctrinated with since in some cases early childhood. Don’t think of me as a hero who is here to save the day, think of me as a friend who is trying to guide you towards the right path.

    How will I do this? By giving you all of the tools you need to be able to make informed decisions with respect to your financial present and future. It’s interesting to observe how gurus are so popular despite the fact that most of them are essentially liars or frauds to put it lightly. Unfortunately, they are preying on something deeply rooted in our subconscious: the willingness or even desire to follow a leader.

    Essentially, they are manipulating people by leveraging the herd mentality² which is ultimately a part of who we are. By branding/selling themselves as the providential leaders who can and will solve all of your problems, they are basically selling a dream built on an appealing lie. No, blindly listening to a guru is not the best approach and as convenient as the thought of using quick fixes to deal with one of life’s most complex challenges (wealth management) may seem, it’s nothing more than a mirage.

    As Robert Arnott used to say:

    In investing, what is comfortable is rarely profitable

    Wouldn’t it be nice if managing your wealth would be as easy as 1-2-3? Wouldn’t it be convenient to tackle this enormously important issue without compromising your comfort zone in any way? Without investing time and energy? Without doing your own due diligence? It sure would but the old „if it sounds too good to be true, it probably is" adage has never been more valid.

    That’s actually one of the main goals this book has: convincing you to stop being the prisoner of your comfort zone. To illustrate this, I will refer to gold and silver investors. I will do this because I’ve noticed something truly fascinating: a lot of the people who built their wealth online are drawn to precious metals. The explanation is not hard to understand: since we (because I am also a person who earns a living online) have made money by dealing with the intangible dimension of life, there is this tendency to also crave tangible assets such as gold or silver.

    And there’s nothing wrong with that as long as people understand this asset class and don’t invest for the wrong reasons. To a lot of them, precious metals are unfortunately not just something they can invest in and this is precisely why they end up either losing money or not making as much as they could have. To quite a few individuals, investing in precious metals is a way of life. They get emotionally attached to them and end up tricking themselves into associating this asset class with safety. Investing in precious metals makes them comfortable and that brings us right back to the previous quote which tells you how in the investment world, what is comfortable is rarely profitable.

    Wealth Management 2.0 is all about helping you become a brutally rational investor. Why? Simply because brutally rational investors make money, while those who let emotions take over don’t. To help you become such an investor, I will often state things you don’t want to hear. I apologize in advance but there’s just no other way. I’ve decided to say „I’m sorry now but at the end of this book, I sincerely hope a „you’re welcome will be in order.

    If there were a way to be a rational investor without also being brutally honest with yourself, I would have told you. Unfortunately, there isn’t. Being honest with yourself is not always very pleasant. As human beings, our brain is wired to keep us from facing the truth. It’s always more convenient to find somebody else to blame (the human brain tends to be remarkably good at that) than admit we made a fundamental mistake.

    Furthermore, this book will also teach you how to be a reasonably diversified investor. Again, reasonably diversified because as Warren Buffett pointed out, excessive diversification is only required when you as an investor don’t understand what you’re doing. In other words, only required if you want to protect yourself from… well, from yourself. Whether you're a value investor³ like Buffett or adhere to other schools of thought, I'm sure you agree being reasonably diversified makes perfect sense.

    To sum it all up, I have done everything humanly possible to turn my book into a resource which can help you put together the best strategy for your needs and your specific situation. The secret to investing isn’t blindly following a guru and it definitely isn’t trying to find a „one-size-fits-all" solution. Please get used to the fact that this book lacks easy-way-out-ish solutions and I’m quite proud of this state of affairs.

    The secret is that there is no secret!

    A strategy which works well for a grandmother won’t be the optimal choice for a young person who is just starting out. A strategy which works well for someone from the US won’t necessarily be the optimal choice for someone from a different country. For example, if you live in a developed country such as the US and want to invest in real estate, you at least know there will be some kind of predictability involved when it comes to the government. But if you live in an unstable country and want to invest in real estate, you have to be well aware of the fact that nationalizations or new restrictive fiscal policies can end up drastically altering your plans. If your country doesn't exactly rank high on The International Property Rights Index⁴ for example, be very careful and skeptical.

    That’s just one example but I’m sure you understand where I’m coming from. Trying to find a „one-size-fits-all" solution is definitely one of the most common mistakes investors make and this book will help you be one step ahead by putting together a strategy which represents the best possible solution for your financial needs, risk tolerance, geopolitical situation and so on.

    Chapter 2.2: What This Book Isn’t About

    The broker said the stock was ‘poised to move.’ Silly me, I thought he meant up.

    Randy Thurman

    Opinions and predictions are like… foreheads. Everyone has one. If this were a colloquial conversation, I would have said something else but you get the point. First and foremost (no pun intended), I want to make it clear this book isn’t about predictions and it isn’t about opinions either. I don’t believe in financial predictions and am firmly convinced those who „got it right" in one situation or another were lucky and nothing more.

    To validate my argument, we can try an experiment. Pick a guru. Any guru. A stock market guru, a bond guru, a real estate guru and so on, doesn’t matter. Think of one prediction he got right and then try to find an extensive list of predictions made by that person. If he’s at least reasonably well-known, the Internet should help you find more than enough.

    You will, without a doubt, notice that the track record in question is anything but perfect. Quite the opposite, in fact. Gurus tend to be very good at marketing themselves and that’s actually pretty much the only thing most of them are good at. They constantly mention the predictions they got right, yet conveniently avoid talking about their mistakes. If you diligently track down their past predictions, I’m sure you will end up agreeing with Peter Lynch:

    „Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert."

    The quote above is about stocks but we can extrapolate and at the end of the day, I’d say it’s a matter of common sense to conclude most gurus are nothing more than glorified snake oil salesmen. In fact, research such as a study entitled Inside the 'Black Box' of Sell-Side Financial Analysts⁵ make it clear accuracy isn't even a priority among Wall Street analysts. Let’s just say their loyalty lies elsewhere. It might sound harsh or downright politically incorrect but it’s true and the sooner you realize this, the better.

    Through this book, I won’t make the „guaranteed 100% foolproof" predictions you are probably already sick of. In fact, I’ll do the exact opposite by making it clear why there’s no such thing and why relying on anyone but yourself would be a huge financial mistake. This book will help you calibrate your strategy, it will help you figure out what the best approach for your specific situation is and after reading it, you’ll be in a good position to make informed decisions.

    Jon R. Orcutt nailed it with his highly quoted remark about teaching people to fish as opposed to simply handing them a fish. This is what it all boils down to and precisely why I believe in doing just that: teaching you to fish. By eliminating bad habits such as constantly being on the lookout for predictions and gurus to blindly follow, you’ll be able to focus on the aspects which actually matter.

    Finally, I want to make it crystal clear that this book isn’t about how you’re an innocent victim and gurus are bad guys. Sure, most gurus may very well be bad guys but this doesn’t mean you are a blameless victim. If you lost money because you blindly listened to a guru, most of the blame lies on your shoulders. My goal isn’t making you feel better about yourself because you found someone to blame, it’s the exact opposite: pointing out what you did wrong, explaining that you and you alone are to blame for your financial decisions. Start building on a solid foundation as of this point using the advice I’ll be sharing and you will be on the right track.

    Chapter 3: A Brief Introduction

    „Don't let the opinions of the average man sway you. Dream, and he thinks you're crazy. Succeed, and he thinks you're lucky. Acquire wealth, and he thinks you're greedy. Pay no attention. He simply doesn't understand."

    Robert G. Allen

    People who earn a living online are a special and often misunderstood breed. This however is understandable (see what I did there?) because if you stop for a moment and think about it, you will realize we made and are making money in a way outside most people’s realm of possibility: by sitting behind a computer screen and typing some words on a keyboard each day, without even having to go to the proverbial office.

    The Internet shattered quit a few let’s call them „hardcore" beliefs about life and business. For example, what I do for a living goes against pretty much all standards when it comes to business. I don’t wear a fancy suit when sealing business deals. In fact, I’ve often done it without even wearing pants, all from the comfort of my own home. In the spirit of full disclosure, I’m not wearing pants when writing this either.

    Since our lifestyle is so let’s say out of the ordinary, it should come as no surprise most people don’t understand it. I’m in a reasonably good position to cover an issue as important as wealth management from the perspective of a person who earns a living online rather than someone who possesses theoretical knowledge but doesn’t speak from experience.

    As a person who has been making money on the Internet for many years by running online businesses as well as by investing in exotic assets such as domain names, I’m able to understand and analyze the „new world in an accurate manner. As an economist however, I can also put my knowledge when it comes to the „old world to good use in order to basically build a bridge between them.

    Make no mistake, the old world as well as the new world are here to stay. Ignoring one or the other would therefore be a silly mistake. My role is simple: leveraging my experience in order to help readers make informed decisions by being brutally honest with themselves. Yes, „brutally honest" is a term you’ll be hearing rather frequently throughout this book.

    Why? Because I don’t want to be like everyone else. I don’t want to lie just so I can sell a few more copies of my book. Even if I sell no copies at all, I would still be doing reasonably well financially. I’m not a hypocrite of course, I do want to make money but as I hope I’ll be able to prove throughout this book, it’s not my only goal. Not by a long shot.

    The easiest thing in the world for an author is making money by selling people books which tell them what they want to hear. That regular folks are just innocent victims of Wall Street, of governments, of the 1% and so on. Isn’t that convenient for you as a reader? Finding out most if not all of the unpleasant things in your life aren’t your fault, that you did absolutely nothing wrong and so on?

    I won’t tell you that. If you want to read reassuring lies, look elsewhere. Resorting to intellectual bribery with the purpose of pleasing readers might have proven to be lucrative but I refuse to go down that path. Instead, through this book, I’ll be doing the exact opposite. You will learn how to make rational financial and life-related decisions by facing rather than hiding from reality.

    Will it be a painful experience? Yes, occasionally it will.

    Will I be nice and politically correct? No, not always.

    If reading this book will not prove to be a life-altering experience for you, it means I’ve failed. I don’t want to entertain you. I don’t necessarily want you to like me. I’m a big picture kind of guy and my goals go significantly beyond selling as many copies of my book as possible. I want this book to change your life for the better and while my methods may seem out of the ordinary, I firmly believe in their effectiveness when it comes to generating win-win⁶ situations.

    That being stated, I don’t want to end this chapter without referring to the structure of the book. The next chapter will be dedicated exclusively to explaining why and how most people squander their wealth, whereas the following one will do the exact opposite by focusing on the eleven virtues you should embrace if you’re serious about being good at wealth management.

    I will then dedicate an entire chapter to the let’s call it mindset issue by addressing the two extremes you should avoid (excessive doom and gloom-ish pessimism on the one hand and excessive mainstream media-induced optimism on the other) in order to draw some conclusions with respect to the attitude I think you should have. Finally, I will analyze all asset classes one at a time and do everything humanly possible to help you make your own decisions. Should you invest in the asset class in question? How much exposure should you have? What are its main advantages as well as disadvantages? These are just some of the questions I will help you find answers for and as mentioned previously, I will do it in a brutally honest manner.

    Why? For the simple reason that being honest with yourself is the only way to go.

    As strange as it may seem, a lot of authors act like politicians for one simple reason: they desperately want to be liked by their readers. To be popular, if you will. That's great and everything but this attitude tends to greatly inhibit the ability of a writer to actually articulate his honest opinions. What if your opinion about Topic X completely goes against status quo thinking? In such cases, an author who is obsessed with being popular and pleasing everyone might decide not to share the opinion in question. Or he might even lie and pretend to embrace the status quo way of seeing Topic X.

    We can't have that!

    Throughout this book, you might hate me on more than one occasion but I hope that after understanding the messages I’m trying to get across, you will realize my tough love was administered with the noblest of purposes. After my death, nobody will care how much money I made. Or how opulent my residence was. Or what cars I’ve driven. I don’t want to die without making a contribution to society and through this book, I will try to do just that. Before starting, I want to congratulate you for having the courage it takes to listen to someone like me. To someone who tells you things you don’t want to hear. There are so many reassuring lies packaged as books that you could have bought, yet you chose this one. This says a lot about your character and for that, you have my respect.

    Chapter 4: Why Most People Squander Their Newly Generated Wealth

    There are just three things that you can do with money: save, give, or invest. Somehow in here in America, with all our creativity, we have invented a fourth use for money: we can squander it

    Celso Cukierkorn

    Poor financial education makes most people blissfully unaware of the fact that they’re doing pretty much everything wrong until it’s too late. Don’t make the mistake of assuming losing it all is hard. Not at all, it is in fact ridiculously easy. Keeping and enhancing wealth is what’s really hard, oftentimes multiple orders of magnitude harder than generating it has been.

    This poor financial education often has its roots in one’s early childhood⁷. The reality is most people suck at wealth management and your parents, relatives and friends probably don’t represent an exception. Throughout your existence, you have been repeatedly exposed to bad financial role models and don’t assume I’m telling you to call all those people and blame them. It’s not their fault, they didn’t give you bad advice on purpose. Quite the opposite, actually. They probably had the very best intentions and might have been excellent role models when it comes to other things (family life, health and so on) but the truth is that when it comes to the wealth management side of life, you have most likely been exposed to poor role models.

    That’s just the way it is, no need to start looking for people to blame.

    Instead, learn from the past and do everything you can to do the right things in the future. This book is here to help. Chapter number four will have six subchapters. One through which I will analyze the genuinely reckless financial behavior exhibited by some people. One through which I will focus on decisions people think are good but aren’t (so on the less obvious financial mistakes). One related to improper ways of dealing with friends/family. One through which I will explain why not preparing for negative life-related events can bankrupt even otherwise money-savvy individuals. One about the fact that you just cannot be good at *everything*. And, finally, I will cover the two re-investment extremes: insufficient re-investment vs. excessive re-investment.

    Chapter 4.1: Reckless Financial Behavior (No, You’re Not a Rock Star)

    My problem lies in reconciling my gross habits with my net income.

    Errol Flynn

    For some strange reason(s), quite a few individuals who all of a sudden realize they’re considerably wealthier than in the past assume acting like a rock star is the appropriate thing to do. After all, you now have more money than at any other point in your life. You’re finally able to afford a lot of things that used to be out of reach. Isn’t it time to show everyone how good you’re doing?

    No. Seriously, no!

    If you don't believe me, just analyze one of the many documented examples of lottery winners who lost it all⁸ or once wealthy athletes who are now broke⁹. Sure, maybe you can now afford a fancy car. Or outrageously expensive clothes. Or a lifestyle which makes people think you’re a rock star. So what? This doesn’t mean you actually have to spend (actually waste) your money on those things. At least not right now. Look, being a bit reckless might make sense if you have let’s say 50 million dollars. In that case sure, spending $100,000+ on a car does not constitute outrageously reckless financial behavior.

    But if $100,000 is all you have, spending everything on a car for example is downright silly despite the fact that yes, you can afford it. Again, so what? And don’t make the mistake of assuming I’m only referring to things like $100,000+ cars, not at all. Maybe you now have let’s say $25,000 sitting in your bank account and decide to spend it all on a vehicle. That would be equally silly because $25,000 is all you have.

    The bottom line is that before even thinking about spending money on something, you should take a step back and ask yourself if *now* is the right time to do it. In other words, ask yourself if whatever it is you were thinking of buying costs a low enough percentage of your net worth to represent a smart or if not smart then at least reasonable purchase.

    If $25,000 is all you have, spending $25,000 on a car means allocating 100% of your net worth that way. Bad idea. Bad, bad idea! What you’d fail to understand is that affording something doesn’t or shouldn’t only mean being able to buy it without taking out a loan. You can only afford something if the purchase in question represents a reasonably low enough percentage of your net worth.

    Alright, so should you spend $12,500 on a car if $25,000 is all you have? In other words 50% of your net worth? Nope, too high and all it takes to understand this is asking yourself one question: would spending 50% of my net worth on a depreciating asset represent a good idea? The answer should be obvious. Always apply this way of thinking before making a purchase because it’s a remarkably effective way of figuring out just how reckless the financial decision you had in mind would have been.

    Maybe you’ll come to the conclusion that the only car you’d be able to afford at this point wouldn’t be safe or good enough. Fair enough, I’m definitely not encouraging you to buy pieces of junk which can get you killed. Instead, why not simply decide to buy a car later on as opposed to right now? Public transportation for example isn’t just an option for broke people and it may very well represent the best solution for your transportation needs at this point.

    Again, the percentage of your net worth the car should cost needs to be reasonable and there’s no way for me to tell you what the word means in your specific situation. If you don’t actually need a car at this point, the percentage of your net worth you’re willing to allocate in that direction should be lower than if you desperately need one (to get to the office if you have one or for whichever objective transportation-related reasons) and there are no good alternatives (like public transportation).

    My advice is this: simply treat the acquisition of a vehicle as a business decision. How much time would you be able to save by owning a car as opposed to walking or using public transportation in various scenarios? How much additional money would you be able to make by putting that time to good use? These are just two examples of questions you should be asking yourself in order to make the final decision rational as opposed to emotional.

    The same principle is valid when it comes to almost everything else, not just cars. The only exception (in my case at least) is represented by health-related decisions. For example the things you eat. I can put a price on a lot of things but not on my health and therefore, I’m considerably more willing to spend money on things which affect my health in a positive manner but when it comes to almost everything else, I am (or at least try to be) not rational but brutally rational.

    Why?

    Because when you’re allocating money in one direction (by purchasing a fancy car, for example), you’re not just losing that money. You’re losing the money you could have made by putting the amount in question to good use. Just think about how much you’d be able to accomplish by re-investing the amount you wanted to spend on a fancy car in your business or whatever it is you did to make money in the first place and I hope you’ll understand my point.

    The desire to show people how successful you are¹⁰ is understandable. Seeking the approval of our peers is an impulse which tends to be hard to control but if you don’t succeed in doing just that, your life might end up ruined and your wealth squandered with little to show for it (because the things associated with a rock star lifestyle are usually rapidly depreciating assets).

    Am I saying you should never buy expensive things? Of course not! I’m simply trying to explain you should probably not do it right now. Instead, focus on enhancing your wealth and putting the money you would have otherwise wasted to good use. That way, you’ll ultimately end up being able to actually afford all of the things you’re currently saying no to. Think about it: the wealthier you are, the smaller the percentage of your net worth represented by those purchases will be and the closer you will get to genuinely affording them.

    In most cases, fancy cars are your enemies. Fancy clothes are your enemies. All ridiculous expenses are enemies and powerful ones at that because you have no idea how many victims they’ve left behind. Smart people (no, there’s no correlation between IQ¹¹ for example and wealth), talented people, you name it: reckless financial behavior has left more victims than you or I could possibly comprehend, don’t be one of them.

    Chapter 4.2: Decisions Which Seem Responsible but Aren’t

    The only reason a great many American families don't own an elephant is that they have never been offered an elephant for a dollar down and easy weekly payments.

    Mad Magazine

    In the previous chapter, everything was pretty much straightforward. Reckless financial behavior is relatively easy to identify and analyze but the same cannot be said about the decisions covered through this chapter. You see, there are certain decisions regarded as the proper thing to do by society as a whole which are anything but responsible. They’re the exact opposite, in fact.

    Each person/family should have a home. Each person/family should have a car. Each person/family should have a fancy TV. Each person/family should have the latest gadgets. Each person/family should go on an expensive vacation once or a few times per year. Each person/family should… and the list could go on and on. Humans are social creatures and as such, this kind of peer pressure often takes its toll on even some of the most responsible individuals.

    Some people call it the desire to show off, some people call it keeping up with the Joneses but no matter how you choose to describe such behavior, this much is certain: from a financial perspective, a lot of these things are downright destructive. Now some of you might think I’m encouraging readers to live like those below the poverty line, not at all.

    There’s nothing wrong with buying a house. Or a car. Or a fancy TV. Or the latest gadgets. Nor is there anything wrong with enjoying life by experiencing an amazing trip. It’s the timing that’s often inappropriate. Do you really have to allocate capital towards these things right away? Are you 100% sure it wouldn’t be better to wait even just a little bit?

    This is the fundamental mistake people make, they are not willing to wait. For this reason, families end up buying grossly overpriced real estate despite the fact that it’s clear the prices are currently out of touch with common sense. Or a second car that’s not really necessary at a certain point. Or things like the newest TV or the latest fad in terms of gadgets despite the fact that the markups are usually huge on hot products and one could save a lot of money by simply waiting a few months.

    But no, the average individual hates waiting!

    People have gotten used to the idea of instant gratification and the consequences are often catastrophic. Nowadays, almost everything is within reach and this has altered our way of thinking. If you want information, a simple online search which takes a few seconds is enough. If you want to shop, go to the mall and pretty much everything is within reach. The instant gratification lifestyle has taken over.

    A 2007 FTC paper¹² illustrates that in 2004, children aged two to eleven spent over 10,000 minutes (or approximately a week, if you will) per year watching TV ads and 16 hours per week watching ad-supported TV programs. They're influenced by ads from an extremely young age and the parents who should be guiding them watch about two times more ads. Consumerism 101.

    You want a house and you want it now! You want a car and waiting even an extra second is out of the question. You hear the latest gadget was just launched and can’t wait to get your hands on it. Without realizing it, you are being manipulated from all sorts of directions and the techniques are remarkably effective. At the end of the day, the concept of having to keep up with the Joneses whatever it takes represents peer pressure on a large scale.

    But guess what: the Joneses are usually broke¹³!

    Don’t make the mistake of idealizing a certain lifestyle, whether we’re talking about your neighbor who likes to brag about how well he’s doing or about the image of what successful should mean that’s shoved down your throat in the media. In the overwhelming majority of cases, it’s just a mirage and that brings us right back to the quote this subchapter started with.

    What if the nice house the Joneses own was bought at the height of the bubble through a mortgage which crippled their family finances? What if their car was bought through yet another loan which adds gasoline (pun intended) to the fire? What if they use their gadgets to surf the Web for advice on how to avoid personal bankruptcy after all the bad financial decisions they’ve made?

    You don’t know the truth about their situation.

    On the surface, the Joneses may seem like people who are living the proverbial dream but if you look even a bit beneath the surface, you might end up realizing their dream has turned or most likely will turn into a nightmare. In some cases, these people are honest with you and admit that they’ve made financial mistakes but more often than not, they do their best to act as if absolutely everything in their lives is perfect.

    They don’t do it because they’re evil or because they have malicious intentions, it’s just the way society has conditioned them to act and you have to do everything in your power not to let yourself be influenced by the image they’re trying to sell (with or without realizing it). Resisting peer pressure is easier said than done, fair enough, but you have no other choice.

    Perhaps you’re familiar with the paradox of thrift¹⁴.

    If not, don’t worry, the concept is easy enough to understand. The paradox of thrift basically revolves around the idea that while saving money and being financially responsible may be a good decision for one individual, the effects on the worldwide economy would be catastrophic if everyone were to act this way. In other words, it revolves around the idea that society needs consumers and not people who are let’s say frugal.

    Is this true?

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