Breaking the Chains of Financial Slavery (Secret 3)

I recently received an email from one of my readers, JI, who complained that "all the material being covered is for long-term investing. What about short-term? I've been trying to free my family and myself from the chains of slavery for far too long now. Show me the truth." I had three distinctly different thoughts when I read that. The first was "JI, your desire for short-term success is a terrible impulse. It may be the reason you are in trouble now." My next thought was "I bet a lot of my readers have different ideas about what 'long term' and 'short term' really mean." Then I thought, "This guy is in trouble. He needs help, and he is a subscriber. I shouldn't criticize him. I should help him." For better or worse, those were my thoughts. JI's comments reveal a big reason why so many perfectly smart and hard - working people never break free from the "chains of financial slavery."  In today's essay, I want to address that. Let's begin with a definition. What do I mean by "long-term" investing? I mean seven years. I believe it is possible for anyone to get out of debt and acquire financial independence in seven years or fewer. I have been making that case since I started writing about wealth accumulation more than 13 years ago. If you read the books Automatic Wealth, Ready, Fire, Aim, or - most appropriately - Seven Years to Seven Figures, you will see that my long-term framework has always been seven years. It's not a magic number. It's a number that - based on my own experience of helping others acquire wealth - I feel confident is sufficient. Even if you are in debt. The next thing I want to say on this subject is that going for short-term wealth is almost always a bad idea. If you are in business, you should go for short- term cash flow, and you should expect to make a profit in year two, but acquiring wealth - real wealth - almost always takes longer than one or two years. When you are down and out, seven years seem like a terribly long time. But time passes regardless of how you feel about it or what decisions you make. If you spend your time and intelligence trying to get rich quick, you will almost certainly NOT be rich at the end of seven years. But if you are more realistic about it, you can accomplish all you need in that stretch of time. And here is the greatest advantage: If you follow the program I recommend, you will start feeling better about your situation in a matter of weeks. My idea is to get wealthier every single day. That means every single week,every single month and every single year. If you accomplish that, you will feel better about everything almost immediately, and you will maintain your enthusiasm. You won't be making foolish decisions that set you back. This is the most important factor in creating significant wealth. You need to feel good about what you are doing. And that means you must be continuously moving in the right direction. If you are in JI's situation, don't despair. Hope is not lost. You can turn your life around. You can eliminate your debt. You can acquire wealth. You have all the resources you need to accomplish that turnaround. Here is what you must do: First, you need to understand that investing in stocks and only stocks cannot make you rich. You must give up the idea that if you just buy the right stock everything will be okay. Likewise, you must give up the idea that you can become financially independent in a year or two. You must accept the seven-year time frame. Third, you must be open to expanding your efforts to build wealth. You must be willing to try the five wealth-building strategies I've outlined here. If you can't honestly do those three things, you might as well cancel your subscription now and go buy yourself another investment newsletter that will tell you what you want to hear. But you already know, deep down inside, that you don't want to do that. You already know that the desire to get rich quick is foolish. You've tried a few schemes and have lost money on them already. You know I'm telling you the truth. Just accept it. If you are mentally ready to accept all that, the next thing I'd like you to do is think about what "financial slavery" means. Here's my definition:  § You earn less than you spend. § You owe more than you own. If you earn less than you spend, you are in a constant state of stress. You must put off or partially pay your bills. You must appease creditors. And all the while, your debt is mounting. If you owe more than you own, you can't buy a house, lease a car, or get a loan from anyone other than your parents. (And what if they are dead or tired of helping you... or don't have the money?) Because you are in so much financial trouble, you can't even think about taking nice vacations or retiring someday. Instead, you have to worry about losing your job. So you keep working and reading investment newsletters. But as each month passes, your financial situation gets worse. It's a miserable existence. But it doesn't have to last. You can break the chains and be free of them by reversing the two "facts" mentioned above.  Problem #1: You earn less than you spend.  Solution: Spend less and earn more. Spend Less. A Lot Less You can't break the chains of slavery with a nail file. You must smash them to smithereens with a big steel mallet. What do I mean by that? Most of the financial gurus who focus on "un-wealthy" people recommend cutting expenses in small ways. Spending less on cable TV. Buying less- expensive coffee. When I read their advice, I get annoyed. They must know this kind of "budgeting" won't do any good. Why do they keep on with it? The only answer I can imagine is this: It is politically correct. They will never be criticized by telling people to be more frugal by small degrees. They will be praised by the liberal press. Their books will sell hundreds of thousands of copies. But their advice is bullshit. The truth is that you will never be able to become financially independent by cutting a few bucks here and there. You need a big, big mallet. My recommendation is to cut your expenses by 30 - 50%. I know that sounds crazy. And it may even be impossible, in some cases. But for millions of middle-class people, not only is it possible, it is the only option. Don't dismiss this idea until you hear me out. The primary factor in how much you spend every month is the neighborhood you live in. Huh? What is Mark talking about? Listen, I've been thinking about this for a long time. And although I've never heard anyone else say this, I'm very confident this is true. Your neighborhood creates the financial culture that presents the spending choices you make. Let me give you a few examples. If you live in a community of million-dollar homes, there is a 90% probability that you drive a $50,000(about Rs30 lac) car, take European vacations, send your kids to expensive schools, and spend $200(Rs 13,000) every time you go out to dinner. If you live in a community of $350,000(about Rs 2 crores) houses, there is a 90% probability that you drive a $25,000(about Rs 1,500,000) car, stay at $250(Rs 16,000) per-night hotels, spend $600(Rs 30-40,000) for a new sofa, and spend $100(about Rs 6,000) every time you go out to dinner. And even if you live in a neighbourhood of $180,000(about Rs 1 crore) homes, you still have a lifestyle that costs you more than you need to spend. How much you spend on transportation, education, entertainment, and everything else depends very heavily on the neighborhood you live in. So if you want to really cut your expenses, you have to downgrade your neighborhood. Stay with me. I know you don't like this. I have friends and family members who, while not absolutely broke, live in financial stress because they refuse to downgrade. They live in $350,000homes in beautiful neighbourhoods and have new cars, but the cost of all these "necessities" is keeping them in debt. Most of them, in fact, are getting poorer every month. Yet when I suggest they downsize, they look at me like I'm crazy. No, it's worse than that. They look at me like they believe I want them to suffer. They don't stop to realize they are suffering already. My advice is the only thing that will take that suffering away. Holding on to a lifestyle you can't afford will make you poorer - every month. And it will make you more fatigued and more angry. And it will goad you into making bad financial decisions, such as investing in schemes that promise to solve all your problems in "the short term." Moving to a less expensive neighbourhood is the quickest, biggest, and surest way to bring your spending down by 30-50%. It is the big steel mallet. Pick it up. Feel the weight. You know it is the only thing that will break those chains! Earn More The second big thing you must do is to earn more money than you are earning now. Again, I am sure you don't like hearing this. I'm sure you are thinking, "Easy for you to say. I work my butt off as it is. I have responsibilities. I don't have an ounce of energy or an hour of extra time to devote to increasing my income." You may be thinking that, but if you are, hear this: You are wrong. You can always earn extra money. I won't prove this point to you now. I will do that in future essays. I will simply state here that I know from my own experience and from working with dozens of people that anyone can increase the income they are earning. Your goal should be to increase your income by 20-50%. Yes, that is radical. None of the self-help gurus on the best-selling lists would even suggest such a thing. But I'm telling you: This is a must. It is just as important as radically cutting expenses. There are dozens of ways to increase your income. I will talk about none of them here. Expect to see plenty of ideas in the future.  Problem #2: You owe more than you own.  Solution: Start owing less and owning more. Owe Less If you have accumulated a lot of debt, it means that you don't see debt as financially dangerous. You have made decisions that put you into debt. Decisions you didn't have to make. Again, you may want to argue with me on this point. Don't waste your time. This is not about my financial situation. It is about yours. You must accept the fact that most debt is bad for you. You must develop a loathing for debt. There are a few exceptions: mortgage debt (when interest rates are low) and business debt (when the business is sound and you are not personally liable). But I don't want to talk about these now, because these are not the sorts of debts that have debilitated you. The reason you are in debt is because you did something you should not have done if you had the proper hatred for debt. Did you refinance your home when its value soared eight or 10 years ago? Did you buy cars and TVs and appliances on credit? Do you buy things you can;t afford because you can pay monthly installments? After accepting the danger of debt, the next step toward fixing your financial situation is to get rid of every credit card you have, as well as any credit you have with your bankers. Use cash or debit cards for your shopping. Yes, that means there will be lots of things you can't buy every month. That's a good thing, not a bad thing. If you have a lot of existing credit card debt, you need to consolidate it. Then work with a professional to pay it off at reasonable interest rates. And here is the big one: If you are lucky enough to have equity in your home or in your cars or in any other non-appreciating assets, you should sell them and buy something cheaper. If you have Rs 80 lacs in a Rs 2 crore house, you should sell it and buy a house for Rs 1 crore. Take the $40,000 in cash you get back (after putting aside Rs 40 lacs for the down payment) and invest it in an appreciating asset. Own More The next important thing you must do is increase what you own. By that, I do NOT mean buying more cars or boats or furniture. I mean buying assets that are likely to appreciate. You should also put at least 80% of the extra income (see above) you earn into such assets. Appreciating assets include quality stocks and bonds but also real estate and entrepreneurial businesses. I will have lots to say about these "outside stock market" asset classes in the future. (Just know now that these are going to be an important part of your recovery and wealth-building plans.) Being financially independent is not about having a big house or driving new cars or taking fancy vacations. There are millions of people who have expensive houses and cars but who are financial slaves. You don't want to be like them. You don't want the stress. You don't want the turmoil. Being financially independent means having more income than you need and owing far less than you own. Being financially independent means knowing that you won't be harassed by bill collectors or embarrassed at the supermarket. It means you have money put aside to take care of any emergencies that come up, and it means a savings account that gets substantially bigger every year. As I said earlier (and will explain in detail later), becoming wealthy will take you as many as seven years. But you can break the financial chains that bind you almost immediately if you follow the very simple guidelines I've just given you. The hardest part is recognizing the chains that are binding you-earning less than you spend and owing more than you own-and deciding to do something serious about them. This is my plan for JI, and it is my plan for any subscriber in his situation. It is a realistic plan. It is a plan that will work for you. It is, in fact, the only plan that will work. It is up to you whether you follow it or send me an email explaining why you can't. And if debt is a burden weighing you down, do not worry, because in secret # 4 I show you exactly how to deal with your burden.

By Mark Ford