Romney's rich follow a different strategy
Fitzgerald: “The rich are different than you and me.” Hemingway: “Yes, they have more money.” This famous, but fictitious, exchange between F. Scott Fitzgerald and Ernest Hemingway suggests something more than just money. One fundamental difference may be strategy.
Wealthy people view financial moves as a chess game. Winning means having the best strategy and ending up with the most money. No doubt the real reason Romney was so reluctant to reveal his incomes taxes was not because people would see that he is very rich. We already know that. But because people who are even richer would see that he wasn’t as rich as them.
Ultimately the interest rate defines the difference between the rich getting richer and the poor getting poorer. When interest rates rise, the rich celebrate and the poor despair. Which side of the interest rate you are on makes all the difference. Not surprisingly, politicians who side with the rich threaten to eliminate the Federal Reserve when it holds interest rates down.
Recent reports based on census data note that the average household headed by someone 65 or older has 47 times the wealth of the average household headed by someone 35 or younger. To some extent this makes sense, because most of us start out with nothing and build our assets over time. The key to becoming rich is the strategy of gradually replacing external financing and external insurance with self-financing and self-insurance and to convert your savings from taxable status to nontaxable status. Understanding how this strategy works makes all the difference.
The first step is to keep debt to a minimum. Do you need to attend the most expensive private university or would a less expensive public university do as well? Should your first car be the latest and greatest or would a more modest used car be a better choice? Even Romney drives an old station wagon, not a fancy expensive car. Do you need to live in the trendiest location in the most expensive area or would a somewhat longer commute save you big bucks in the long run?
Saving and dieting have a lot in common. As the old adage goes: “You can never be too rich or too thin.” Both require a strategy of sacrifice now for benefit later. Do you want to just pretend to be wealthy, or to really be wealthy? To understand the difference, read the 1996 book by Thomas Stanley and William Danko: The Millionaire Next Door. The authors reveal that most wealthy people value financial security and not ostentatious status seeking. Remember the saying: “It is hard to get rich the easy way, but it is easy to get rich the hard way.” The easy way is winning the lottery. The hard way is with nickels and dimes.
If you minimize your debt and pay it off as quickly as you can, you can shift gears and start replacing external financing and external insurance with self-financing and self-insurance. You need to save enough money to be able to replace your car when it wears out (thus avoiding another auto loan). With enough money in the bank to afford a replacement car, you can then drop the collision insurance on your current car. Liability insurance is another matter unless you have so much money that you can afford to hire your own gang of lawyers.
The second step is in understanding the difference between qualified money and unqualified money and doing everything you can to maximize your qualified money. Qualified money is money that the IRS recognizes as ultimately eligible for conversion to an IRA. Qualified money comes from earned income that goes into specialized accounts such as your 401(k) or 403(b) accounts. Your regular checking and savings account money is not qualified money, regardless of whether it was earned or unearned.
The third step is to convert your qualified savings from ultimately taxable to permanently nontaxable. You need to find just the right time to roll over your qualified money into a Roth IRA, where it becomes nontaxable. Preferably do it before age 63 and when the stock market is in a slump. Be sure to pay the taxes required in the rollover with unqualified money.
These three steps explain, in part, how the average older person ended up with 47 times the wealth of the average younger person. The bad news is that you will become older. The good news is that, with the right strategy, you can become richer.
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Mark Hastert
3 months, 1 week agoNo Mr Marsh, The first step is to hire a good tax lawyers. They will take care of the rest.