The Story of How the Quest for a Financial Dream Turns into a Financial Nightmare

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LukeLewis

LukeLewis

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Tell me is any of this sounds familiar.

Two highly educated people find each other and get married. Each of them rents an apartment, but since they're now married, they move into only one of them. They save money by letting the other one go. The problem is, the apartment was never intended for two people, so it's uncomfortable and tight to live in. Because of this, the couple searches for their first home to buy. After all, their plan is to create a family, so to do that, they'll need to buy a house. They find one, buy it, and all seems okay.

Both people of this couple are working high paying jobs. They decide to furnish their new home and to enhance it so it becomes more aligned with their personalities. Their expenses begin to climb. They both get raises at their jobs, so their incomes rise as well. The problem is, so do their taxes. With higher incomes come higher taxes. With the purchase of a home, another tax was added to their already high taxes - property tax. With the addition of new appliances, new cars, and new children, this couple's liabilities begin hovering near the red zone. They're too high. But because this couple makes good money, they don't really feel the threat.

The spending continues through the years and as they continue to earn more money through their jobs, their income tax brackets increase. So instead of paying a low percentage of their earnings in taxes, they're now paying a much higher percentage. They're also using credit cards to purchase both small and large items alike. Their debt gets to the point of discomfort, so the couple seeks out a bank to refinance their home. And in doing so, they'd like to consolidate their credit card debt into their home mortgage, essentially spreading the credit card debt out over 30 years. They accomplish this task and have a zero balance on all their credit cards. They're comfortable once more, until they begin using the credit cards again. They didn't want to at first, but since they had them close by, they decided to go ahead with it. They continue using the credit cards until their balance is too high. It's at this point the couple seeks help in the way of financial advice. They want to know how they can make more money. That's what they think will cure them of their blues. If only they could make more money, they could make their financial problems disappear. The issue with this way of thinking is that the couple isn't realizing that making more money was the cause of the situation they find themselves in. Their thinking was like this: Since we're making more money, we can spend more money. Well, they did and they spent. And they got themselves in trouble. I'm not sure how amplifying the cause is going to help.

There's an old saying that goes like this: If you've found that you've dug yourself into a hole, stop digging. It isn't additional earnings that can help this all too common couple. It's the way they're spending their money that's the trouble. they're spending on the wrong things.

Robert talks about how the Japanese are aware of three powers. His father used to tell him about them when he was a kid. They are:

The sword: Symbolizes the power of weapons. He who has the weapons can win any fight. The problem is, weapons cost a lot of money.

The jewel: Symbolizes the money. He who has the money makes all the rules. He can even control he who has the weapons.

The mirror: Symbolizes self-knowledge. He who knows things as well as he knows himself, doesn't do stupid-ass things his entire life.

The goal is self control. They say the power of self-knowledge is the most sought after of the three powers. If you let the other two control you, you'll find yourself walking down a dark path. Both of the first two powers have to do with money and those powers can easily overwhelm the untrained. It's he who knows how to think rationally and ask himself if what he's doing makes any sense who will prevail. All he needs is a small amount of training to wake up from his financial slumber.

Let's talk about fear for a moment. Did you know that it's been said that public speaking is the greatest fear some people have? It's true. It's greater than anything else. The reason certain people are susceptible to this fear so much is because they feel that as they speak all alone, in front of everyone else, they'll be singled out. Completely accountable for what they say, how they act, and how their presentation is interpreted. Obviously, as a person gets more used to speaking in public, the more comfortable they become with it. But for those who have never experienced the full attention of an audience, the idea can be unnerving. They have no interest in being so alone. They don't want to be singled out and to have all that attention payed to them. They spend their lives hiding behind others, whether they know it or not.

Have you ever thought about the true motives of advertising? Yes, it's to get a business' message out to the masses. It's also much, much more. I remember taking an advertising course in college and in that course, I learned that there are two different types of advertising. First, there's regular advertising that's meant to tell you there's a sale going on somewhere. Regular businesses that you and I have never heard of may engage in this type. The other type is called branding. This is the type of advertising that aims to make a business' name and message part of regular household dialog. Think Geico, Coca-Cola, IBM, Google, Facebook, and the rest. Back around 2005, I recall Google spending tons of money trying to make their brand a household name. They engaged in something called banter branding, where they'd pay radio DJs to incorporate their brand name into an otherwise innocuous conversation. Something like, "Hey Beverly, I was searching Google the other day and found this great web page..." This would be one DJ talking to another while on the air. The goal isn't necessarily to make the brand more well known; it's already very well known. The goal is to make the listener believe that everyone else is using the product or service. It's to make the listener believe that if they use the product or service, they won't be alone. That they'll be in good company. I'd say Google did a fantastic job with their branding. Think about the last time you heard someone say, "I just Googled it." Remarkable.

Finances work the same way. Only a few select individuals are comfortable with feeling alone when dealing with money. As for everyone else, well, they like to be part of the herd. If all the neighbors on the block take out loans to buy new cars, most everyone will feel just fine about doing the same. If every friend a person has talks about going to a financial adviser, that person will have no reservations about going to see one too. Heck, we all know how powerful word of mouth is. It's exactly what I'm talking about here. Mortgages, college loans, car loans, shopping at Christmastime, buying a boat, sending kids to private schools - if everyone else is doing it, it must be okay, right? I mean, everyone else can't be wrong, could they be? It's actually gotten to the point of someone feeling extremely uncomfortable if they stray from what the crowd is doing. I remember a friend telling me once that he prefers to "hold a mortgage." I could never quite wrap my head around that one. He preferred to have the deed of his house held by a bank and to pay a bank monthly payments, plus interest, for a house he's living in? I still don't get it, but I'm sure he heard something that made him believe what he believed along the way. Messaging is powerful like that.

Have you ever watched as someone from the Baby Boomer generation tried to handle their investments. It's one of the most outlandishly expensive activities I've ever witnessed. I know people who could have bought second and third homes with the money they've spent on professional fees and commissions. I actually once wanted to become a financial adviser, just because I watched how much my father was spending on fees. He once told me that he spent over $30,000 in commissions in one year. That's utterly insane, especially because a person can handle his or her investment for free today. But tell me - do you know one Baby Boomer who manages his or her own investments? I don't know one. Not one. Talk about following the crowd. And if you bring the idea of saving a bit of money by handling investments in-house up to one of these people, they'll turn you down faster than you can blink. "I've known John for years and he's always taken very good care of me," they'll proclaim. And you've taken very good care of him too, I'm sure.

I performed terribly in school while growing up. Today, when I think about how poorly I did back then, I wonder if something was wrong with me. For some strange reason, I persistently wanted to look outside through the window, rather than listen to what my teacher had to say. And when the time for recess rolled around, I shot out of that classroom like a rubber band. I always thought there was something bigger and better for me out there. I didn't see the value of me being cooped up all day as opposed to talking with real people, doing real things. Of course, today I do know that what I was doing was of value. I wouldn't be sitting here typing right now if I never learned how to spell - or to think, for that matter. It's just that I always felt I was a hands on type of guy, rather than someone who thought theoretically or someone who would work for someone else. I was a self starter, not an employee. I always knew that.

It's important to have good exposure to the reality of how the financial world works at a young age. I've always believed that. The sooner you can show your children how much things cost and how much money you make per year, the better. They'll learn to have a healthy respect for the dollar. I don't believe in shielding children from the truth. Kids who are shielded grow up to become spoiled, lazy wimps. I also think that kids should begin mowing lawns and shoveling neighbors' sidewalks after it snows as early as possible. I did this beginning at around eight years old. I was making decent money by the time I was 13 years old. I can remember counting my earning from one week back in my childhood bedroom. I was in my early teens and I was earning approximately $45 per week mowing lawns. That's not bad. Even today, that's not bad for a 12 year old. I was doing well, learning to have a respect for money, and learning about entrepreneurship. I was teaching myself how to eventually one day become an employer as opposed to an employee. Most importantly, I was teaching myself not to fear hard work and how to get used to earning money. Believe it or not, a person really does need to get used to taking money from someone else after it's earned. It's not the easiest thing to do.

Let me ask you something. Is a house an asset? Most people would say yes. I would say no. Here's why.

Let's pretend that you're a single man and you purchase your first home. It's a one bedroom/one bathroom house that's 400 square feet in size. It cost you $100,000 to buy. Do you remember the rule? Assets put money in your pocket while liabilities take money out. Ask yourself if the house is going to put money in your pocket or take it out. I can tell you right now that by purchasing the house, money wasn't put in your pocket. What if you paid cash for the house though? What if you paid for it in one lump sum? Is it an asset then? I still say no. Think about insurance and property/school taxes. Think about maintenance and upkeep. If you didn't pay cash, you'd have a mortgage to pay as well. Are any of these things putting money in your pocket? Absolutely not.

Here's the common argument I hear when I say things like this. "But, but, but...everyone has to live somewhere, right? And a house holds value, so of course it's an asset!" Okay, fine. Let's dissect these two arguments.

Everyone has to live somewhere: In the example above, you, as a single man, purchased a very small home for 100k. To you, it's an asset. What if you sold that home tomorrow and purchased one for 200k? You have to live somewhere, right? Hey, wait. Why stop at 200k? If we're buying assets and that's a good thing, why not go straight to $1,000,000 or even 10x that amount? Now, we all know that a single man purchasing a 10 million dollar house because he believes the house is an asset is ridiculous. If it weren't, we'd all be finding the owners of all the mansions in American and congratulating them on their brave and wise financial decisions. Have you ever heard any of the torrid tales of the British aristocracy? Most of those people went broke in the early 1900s because their "assets" become too expensive to own. And according to the logic of a home being an asset, I suppose all those people who owned multiple homes before the financial crash of 2008 were sitting pretty. They could easily sell their assets if need be and make tons of money. Oh wait - that didn't happen. Most of their homes fell into foreclosure because the "owners" couldn't pay for them anymore. Trust me, homes aren't assets. If buying homes because you need to live somewhere and because homes are assets, people would be buying bigger and more homes every day. True, that may be happening, but bankruptcies and foreclosures are happening every day as well. Even restaurant owners have learned that their restaurants can be money pits. Many of them have moved over to driving food trucks around town to lower their costs. No property tax, school tax, less maintenance, etc...

A house holds value: Does it? Sure, in a good market. During times of inflation and demand, it can be very beneficial to own a house, if you plan on selling it when the market is hot. I know a lot of people who made tons of money by selling at the right time. I also know a lot of people who have lost their shirts by selling at the wrong time. House prices go up and down and counting on your home holding its value is foolish. As an example, let's turn to money making businesses. Let's pretend that your home is a business for a moment. The business is the exportation of ice from the state of Maine in the United States to India during the 19th and early 20th century. Back then, this type of business boomed and made tons of money for the business owners. They owned land here in the U.S. with beautiful freshwater ponds from which they'd harvest their ice. They owned ships on which to transport that ice. They had employees whom they paid to haul the ice. They had everything and were becoming rich from their endeavors. And the Indians were happy as well. Their food was staying fresh because it stayed cool. They enjoyed many benefits.

So here's the question. Where is the ice trade today? I'll tell you where it is - gone. With the onset of electricity and the refrigerator, the ice trade was decimated. All the employees had to be fired and all the ships had to be sold. Those lakes with the ponds? Useless. My point is, don't count on things holding their value. It's a stupid thing to do. Think your house is holding value? What if high tension power lines are built next door? What if a highway is built in the back yard? What if low-income housing is built across the street? Each of these things can utterly destroy a property's value overnight. I think you get my point. An "asset" can turn into a "liability" rather quickly. But really, the primary reason a house isn't an asset is because it costs so damn much money to buy and to keep. They're crazy expensive and getting worse every day.

This post is part of a series: Rich Dad Poor Dad by Robert T. Kiyosaki
 
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The Story of How the Quest for a Financial Dream Turns into a Financial Nightmare was posted on 06-05-2021 by LukeLewis in the Finance Forum forum.

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