Hi Brian - are you using a self-directed IRA for your real estate investments? Also, what sort of retirement account are you using for your business. SEP-IRA vs 401K.
Thanks,
Chris

Hi Chris,

This is a great question, and it might surprise you to hear that I don’t use any IRA’s or 401K’s whatsoever.

The reason is simply that I’m working toward building financial freedom which is quite a bit different than working toward retirement. Let me explain…

What most people do (working toward retirement) is to save a bunch of money so that one day when you are 60 or whatever you can finally stop trading 8 hours of every day for a paycheck. Then in your old age you live off your savings, pinching pennies and hoping that you die before your money runs out.

Working toward financial freedom is a little different. The way I define financial freedom is that your passive income exceeds your expenses. So if all your expenses, including everything from rent to movie tickets, is about $3,000 per month (just as an example) and your passive income is $4,000 per month, when do you have to go back to work?

The answer is of course, never. So why have a retirement account? That same passive income will be there whether you are retired or not. It will be there whether you are 20 years old or 80 years old. It will be there whether you are bed ridden or in good health.

In fact it will continue to grow as you reinvest (plus real estate income automatically adjusts for inflation, etc).

Anyway, businesses that you own or invest in, real estate, book royalties, etc. These are all good passive income models.

Kiyosaki has some great stuff on this topic by the way.

I had a Roth IRA for years before I started getting more into this stuff but I decided to stop using it because of the above reasons. Basically I wanted to be financially free in something like 5 years, and waiting to take advantage of it until I was 65 made no sense to me.

The penalty for liquidating it was miniscule too, since all contributions to it are untouched and they made up 95% of the value. Only got taxes and penalized on the 5% that was gains.

Before I finish up I just wanted to make a few other points.

1. Many people do these types of retirement accounts for the tax advantages. Real estate has huge tax advantages and I get the benefit now instead of waiting till I’m 65, so I prefer real estate.

2. Rich people don’t use these types of retirement accounts. Do you think Bill Gates or Donald Trump have 401K’s and IRA’s? They own businesses and real estate which pay them whether they work or not.

3. I realize that what I’ve said here goes totally against conventional wisdom that 90% of people follow. And any financial planner reading this probably thinks its ridiculous. But most financial planners aren’t rich (otherwise, why would they still be working) and I get advice from rich people.

Anyway, this post can sound somewhat arrogant and it will probably challenge many people’s closely held beliefs about financial planning that they have followed for years.

So I will just end by saying that I don’t claim to know everything here. I am very much a student of this as well. This was simply the conclusion I came to after doing the research and talking to rich people, so thats what I decided to do.

Take it for what its worth, and keep breaking free!
Brian Armstrong

A lot of people shy away from any talk about “finance” or “accounting” because (1) its boring (2) it involves math and (3) its hard work.

Well it’s not as bad as you think. I’m going to show you how to understand financial statements in about 5 minutes. Then I’m going to give you some Excel templates to create your own. (See the video demo at the end.)

But first…

Why Should You Create A Personal Financial Statement?

If you wanted to lose weight, you’d have to weigh yourself right? If you wanted to be a great race car driver, you’d have to time your laps.

Well if you want to get rich (or become financially free), you have to create financial statements.

You are a business. You have money come in and you have money going out. You have things that you own and things that you owe.

If you don’t have a way to MEASURE progress and COMPARE what works and what doesn’t, then you are just wandering blindly in the dark.

Robert Kiyosaki talks a lot about this, how rich people are “financially literate” and how this should be taught in schools. That way we wouldn’t have so many Americans in credit card debt, losing their homes, and retiring flat broke only to become a burden on their families.

But that is another story. The thing to remember is that something MAGICAL happens when you start to measure your progress. Your success rate goes through the roof.

If you aren’t looking at your financials about once a month then you quite simply AREN’T serious about becoming rich. (You can pay a bookkeeper or accountant to do it as well if you don’t want to go through the process below.)

Understanding Financial Statements In 5 Minutes

I’ve tutored about a dozen people in MBA level finance and accounting courses. Here is the explanation that seems to work the best.

There are only two types of financial statements that you really need to know: a balance sheet and an income statement.

BALANCE SHEET

• Shows what you own (assets) and what you owe (liabilities)
• The difference between these two (assets - liabilities) is your net worth.
• Shows one particular MOMENT in time, a “snapshot” if you will.

Click the thumbnail to the right to see an example. As you can see, the money in your bank account, the market value of any property you own, your car (if you own it outright), and stocks are all examples of assets. Mortgages, car payments, credit card debt, and other loans are all liabilities. The difference is your net worth. Notice how it says a specific day in January and not just “January 2008″ because a balance sheet refers to one moment in time, not a period of time like a month.

February and March haven’t been filled out yet, but if you spent a few minutes once a month putting in those numbers you can see how easy it would be to track your progress month to month.

INCOME STATEMENT

• Shows where money is coming in (income) and where money is going out (expenses)
• The difference between these two (income - expenses) is your net income.
• Shows what happened over a PERIOD of time, instead of how things are at one moment like a balance sheet.

Again, click the thumbnail to the right to see an example income statement. For most people the primary source of income is their job so you might have that first. After that you can see the income from those two properties listed on the balance sheet, as well as income from a small business you started, just as an example. Secondly, you see expenses broken down by category and net income at the end. I’ll show you how to quickly categorize your expenses in a minute.

Notice how in the second month your cash flow is negative and the number appears red. Negative cash flow is bad! It means you are spending more than you’re earning, and that is the way toward bankruptcy, not financial freedom. If you hadn’t made your financial statement that month would you have ever know this? Probably not.

Thats it. Not as scary as you thought right? On corporate financial statements you will sometimes see some strange terminology, but the basic concept is the same as for this personal financial statement. Balance sheet: what you own, what you owe. Income statement: what you made, what you spent.

Why Quicken and Microsoft Money Suck
Read the rest of this entry »

I’ve been listening lately to Robert Kiyosaki’s Choose To Be Rich, and I have to say that it is outstanding.

Probably one of the top three book on building wealth I’ve come across, and as you know I’ve read (or listened to) a lot.

He gets into all sorts of topics in the book, but here are three ideas that stood out in my mind.

Hopefully you will find them as insightful as I did. They may even challenge some closely held ideas that you have!

1. Having Lots Of Money Doesn’t Make You Rich

   Being rich is much more about your mindset and your financial intelligence than it is about how much money you have.

   Take Richard Branson for example. The man is a billionaire, but if you took all that money away from him he would still have all the knowledge. He would still know how to start businesses, invest wisely, etc. In fact, if he had to start from zero today I’m quite sure Richard Branson would have lots of money again in less than five years.

   Take the opposite example though: what about a person who wins the lottery but doesn’t understand how to be rich? Is it any wonder that 1 in 3 lottery winners are flat broke in five years? Even though they had all the money in the world, they still had the mindset and financial intelligence of a poor person, so they lost their money. They were not “rich”.

   If you understand how to build wealth than you are rich, no matter how much money you have.

   A person who make $100,000 a year and spends $100,000 a year is not rich. They are thinking like a poor person and remaining stuck in the rat race. In fact, a person who makes $40,000 a year and invests $20,000 is richer.

2. Read the rest of this entry »

Thanks to Anjali for sending in this article where four millionaires are interviewed about how they got rich.

The most striking thing to me (aside from the fact that 3 out of 4 quit their jobs to do it) is that they all persevered through incredible odds and difficult times. They wanted it so badly they decided to just never give up.

If you’re looking for a little inspiration on your quest for wealth, get tips from people who already have made their millions. These success stories run the gamut from Grammy-winning songwriter to first-generation entrepreneur to everyday people who simply lived below their means. Their paths to wealth are diverse, but what they have in common is a 24/7 commitment to their goals. Learn from their experience what it takes to become a millionaire.

Check it out here.

I started re-reading one of my all time favorite books this week, The Richest Man In Babylon.

The principles to building wealth really haven’t changed much in several hundred years, and this book has been around forever. Building wealth isn’t that hard; just look at what successful people are doing and model it. Trying to do things your own way or taking advice from those without a proven track record is what gets you in trouble.

The book is told in parable form. Through some interesting characters and memorable stories the book is able to convey its lessons much more effectively than if they simply made a list of points to remember. Even if they are talking about building chariots and selling sheep, the lesson still applies to modern day. (Side Note: I find this is an effective technique in public speaking as well: make a point and then back it up with a personal story or anecdote. It really drives the point home.)

As an excerpt from one chapter, here are seven cures for a lean purse, which each contain a story behind them:

1. Start thy purse to fattening
2. Control thy expenditures
3. Make thy gold multiply
4. Guard thy treasures from loss
5. Make of thy dwelling a profitable investment
6. Insure a future income
7. Increase thy ability to earn

Highly recommended: check it out.