When I was in grade school I was terrified to break the rules.
I dreaded the thought of having my teacher move my behavior card from green to yellow over a perceived infraction in class.
Then there was that fateful session in the principal’s office during second grade. I thought I would spend the rest of my life rotting in jail over a stupid cafeteria incident involving pizza crust and salad dressing.
Luckily I got out early for good behavior.
But this article isn’t about my past transgressions, it’s about financial freedom.
So what do rules have to do with money or financial freedom?
Playing by the Rules
Well, money is like a game in a way.
There are rules that govern financial success and in order to win you have to follow those rules.
Obviously there are elements of luck and good fortune involved in building wealth. But we can’t control luck or good fortune, and here at Lever Builders we’re all about focusing on what we CAN control.
One of the things we can control is learning the rules that lead to financial freedom and taking the right action to follow those rules.
So let’s get started.
Playing By the Rules
I said a minute ago that money is a game and that to win all you have to do is follow the rules.
That’s true, but there’s a catch.
I suspect you’ve noticed that there are many, many people who work hard, earn decent incomes but still have not achieved financial freedom.
You probably know people who have “followed the rules” and yet are still struggling financially. Perhaps you feel like one of these people yourself.
How can this be?
Simple. Because most people aren’t playing by the right rules.
Let me explain.
Imagine you’re playing Monopoly for the first time and the friend who explains the rules forgets to mention that every time you pass GO you get paid $200.
If you’re not paying attention to the $200 your friends collect each time they pass GO and don’t start collecting your own income, you’ll be declaring bankruptcy long before they do.
The problem wouldn’t be that your friends are smarter than you; the problem would be that they are effectively playing by a different set of rules.
Two Sets of Rules
I hate to say it but the scenario above pretty much sums up how the modern financial world works.
The reality is there are two sets of rules that a person seeking financial freedom can follow.
Set #1: Rules for the Nearly Wealthy
Set #1, is what we’ll call the “Rules for the Nearly Wealthy” (RNW).
Those who follow the RNW will likely have a comfortable home, decent cars, nice things and be able to enjoy a great vacation now and again.
At the same time achieving the kind of retirement that you’re dreaming of may always feel out of reach.
The Rules for the Nearly Wealthy are the kind of rules taught to the middle class by folks like Dave Ramsey, Suze Orman and the average financial advisor.
The RNW involve steps you’re probably familiar with:
- Aggressively eliminate your debt
- Build up a financial reserve of liquid savings (e.g. bank accounts, CDs, cash)
- Max out your “tax advantaged” retirement accounts (e.g. IRA, 401(k))
- Save for your children’s college using tax advantaged savings vehicles (e.g. 529 plan)
- Pay off your home
- Invest extra money into rental properties, mutual funds, etc.
The Trouble with the RNW
What’s wrong with these rules?
Well, it’s not an inherently flawed plan per se.
Like I said, if you follow these rules you will likely live a comfortable, peaceful life and, if you start early enough, may even enjoy a comfortable retirement.
So why do I call these the Rules of the Nearly Wealthy?
Because, there are two major issues with the RNW as they are executed by most middle class folks that can severely limit your ability to achieve financial freedom. These issues are:
- A primary focus on growth (i.e. investing in things that go up in value) which you CAN’T control, over cash flow (i.e. investing in things that pay you regularly) which you CAN control
- A “head in the sand” approach to ignoring significant risks
We’ll talk much more about investing for growth versus investing for cash flow in the article on the Rules for the Truly Wealthy.
With regards to the risks often ignored by the RNW, here’s a few examples:
Do you know what impact taxes or mutual fund fees will have on the income you’ll ultimately receive from your retirement accounts?
Do you have any idea what will happen to the value of the “safe” bond funds in your retirement accounts if interest rates return to their historical average?
How would you fare in retirement if the stock or housing markets were to suffer multi-decade bear markets like they have in Japan?
We can explore these topics in much greater detail in future articles but suffice it to say that The Rules of the Nearly Wealthy make some pretty dangerous assumptions that can prevent you from achieving financial freedom.
We’ve talked before about the dangers of betting your freedom on this kind of modern mythology.
The Truly Wealthy Are Doing Something Different
Have you ever noticed that these kinds of factors never seem to impact the wealthy?
When there is a crash or financial calamity, somehow, the wealthy always bounce back much faster than everybody else.
Why is that? What do they know that you don’t know?
The key is that the wealthy are playing by the Rules for the Truly Wealthy.
The wealthy are passing GO and collecting $200 while the middle class is busy trying to figure out who to blame for their misfortune.
You Can Learn to Play Too
The great news is that the Rules of the Nearly Wealthy provide a great foundation. With some education and a change in mindset you too can learn to play by the Rules of the Truly Wealthy.
I won’t pretend this transition is quick or easy but it is absolutely possible and absolutely key to achieving financial freedom.
To illustrate this transition in thinking I want to go back to Dave Ramsey.
I really like Dave. I think he is a good man doing a great and important work.
But I want to ask you a question. Why is Dave Ramsey wealthy? Is he playing by the RNW that he teaches or the RTW?
Give that some thought.
I’ll give you my answer in a couple of days when we take up the fascinating subject of the Rules of the Truly Wealthy.
The set of rules that leads to true and lasting financial freedom!