Editor’s Note: Yesterday Mark addressed the “existential” questions behind wealth building in an eye-opening interview with Agora Financial UK publisher Glenn Fisher. Today Mark concludes by covering the most critical insights in any wealth builder’s journey. They go far beyond the financial realm…
The existential and psychological benefits of wealth
Glenn Fisher, publisher, Agora Financial UK: Mark, yesterday you mentioned the idea of saving 80% of the extra money you make. As your income grows, you must prevent your expenses from growing along with it. That’s sensible advice.
Now, providing you do that, how do you recommend that money is used? Should you be investing in the stock market? Or do you recommend a different strategy for using the extra income you’ve saved/generated?
From Mark Ford, founder, Palm Beach Research Group: As you know, Glenn, asset allocation has a greater impact on creating wealth than almost anything else… including the return you get from any one particular asset class.
In fact, it’s the primary factor in long-term success in the stock and bond markets.
I’ve always said you need more than stocks and bonds to grow rich. So the asset allocation models we developed at the Palm Beach Research Group—and our Wealth Builders Club—also include cash, precious metals, income-producing real estate, direct investments in entrepreneurial businesses, and more.
The traditional approach to asset allocation is biased in favor of the financial industry—toward financial assets that typically generate fees and commissions to brokers.
Our model is based on the three factors that matter most: safety, net investible wealth, and time.
I’m very proud of PBRG’s asset allocation models. I recommend them to everyone.
Glenn: You mention “time” as an important factor. I agree. But many people cite lack of time as the reason they can’t become wealthy. Can you share some thoughts on how people should best organize their time? When you were still in the early days of growing your fortune, how was your typical day structured?
Mark: The problem with time is not that we have only 24 hours per day… the most successful people in the world have no more. But we ordinary people tend to use those hours less efficiently than the great wealth builders.
To make time work for you, you must spend the time you have on the objectives most likely to give you the results you most desire.
The human impulse is to do the opposite. We’re all inclined to spend our best hours taking care of urgent tasks… tasks that have little long-term importance. We put out fires, answer emails, etc. It eats up hours of time each day. We tell ourselves we’ll get to the important but not urgent objectives later. But later never comes.
And those big life-changing goals we set years ago remain on our “to do” lists with each passing year.
You can quickly change all that by following this simple rule: Spend 80% of your work time (and always the first and best hour of each day) working on the wealth-building projects that are likely to bring you the greatest returns in the long run.
The most important factor in making time work for you is to employ two “rules” of productivity: the priority system (popularized by Steven Covey) and Pareto’s 80-20 rule. You should spend 80% of your work time focusing on important but not urgent goals. (And make sure one hour of that time is first thing in the morning.)
If you want a step-by-step guide, my book, The Pledge, shows you the exact steps to take.
Glenn: You’re right. It’s such a simple idea—yet it’s often overlooked. We’re all guilty of letting those little jobs take over and putting off the “serious” work for later.
Your way of thinking makes you truly consider what your most important objectives are. And that sometimes scares people. That’s because they realize having enough time isn’t the obstacle… it’s not understanding what their objectives are… or at least which ones take priority.
Understanding what one wants to achieve in life takes us back to a point you made earlier: that wealth is—in part—about achieving a greater level of prestige. A lot of people think prestige means having the “best” of everything. Is it?
Mark: Wealth conveys one fundamental existential benefit and two psychological benefits.
The existential benefit is the freedom to buy a wide range of things and experiences.
The psychological benefits are security and prestige.
Security is defined in many ways, but most people understand it. Security means you don’t have to worry about paying the bills or going into debt or being embarrassed at the grocery store checkout line. You can feel good about planning future expenses—a new car, a family vacation, college for the kids—because you know you have the money saved for it.
Prestige is more difficult to talk about because most people don’t know how to feel about it. We all desire it at some level. But we also feel it’s sort of shallow: If we were the sort of people we want to be, we wouldn’t be hankering after prestige.
Prestige can have practical value. It conveys power. And power, when used properly, can be beneficial.
But prestige is also like pride—relative, fleeting, and self-indulgent. For instance, a bottom-of-the-line Mercedes ($40,000) will provide a great deal of prestige in Lake Worth (about 15 minutes north of my hometown). Park that same car in Boca Raton (15 minutes south), and people will assume you’re “hired help.”
Prestige is expensive. A Seiko watch is among the best in the world performance-wise. You’ll pay $30, at best, to own it. A Richard Mille watch is made of the finest materials in the world. It’s run by an old-fashioned mechanical contraption… and it’ll cost you $175,000 (it costs the manufacturer maybe $3,000 to make).
Prestige is socially respectable. Nobody will ever accuse Richard Mille of ripping off its customers, but the guy selling knockoff designer watches for $25? He gets arrested.
My advice is this: Realize that, generally speaking, when you’re buying prestigious luxury items, you’re paying a huge premium for the benefit of having or wearing a status symbol.
If the difference between spending $30 and $175,000 for a watch is significant to you, think about how much true value you’re getting for that prestige.
Here’s a tip: Ask yourself how you feel when you see someone wearing a super expensive watch (or driving a status-symbol car). Do you feel admiration? Or is it something less kind (like jealousy or contempt)?
If—after considering the actual cost of the prestige you’re buying—you decide to buy it, go ahead… so long as it’s within your spending budget.
But spending money on prestige that should be going toward wealth building is just plain dumb, from every point of view. Unless you’re a hustler, conning dithering rich people out of their money…
But that’s not you.