SIX FINANCIAL PRINCIPLES DRIVING
LONG TERM WEALTH
My entry into financial consulting, focusing on the Professional Salon Industry, has certainly opened my eyes to the lack of understanding of basic financial principles held by most people including veteran professionals that should have captured these in some manner, way, shape, or form over their business career.
The material to follow includes marketing information, business ideas, small business ideas, and business online suggestions to impact the ability of everyday stylists and aestheticians to plan for and reach retirement in a financial condition that allows them to outlive their money.
I have also been shocked, to say the least, in how many salon and spa owners spoken to could care less about their staff’s long term financial condition. I always ask for the owner or manager of the space, as having had responsibility for two Redken Concept Salons in the 70’s, I choose to respect the management of the space before going in and speaking directly to the stylists/aestheticians, who are now in most cases Independent Contractors, which in California are now approximately 99% of the market. Being an old school owner, when salons were set up as commission salons, anyone coming into our spaces had to have permission, one to be in the space, and two and more importantly, to speak directly with any of our staff members.
You would think that since no one to my knowledge is presenting financial information related to a retirement plan in our industry, that people would be jumping all over the information and its application to current market dynamics. My feeling is that better informed stylists/aestheticians make better long term employees or Independent Contractors, understanding the value of money and utilizing the principles to have money working for them, instead of them working only for the money.
Unfortunately that is not bearing out. The one conversation that stands out in my mind with a small distributor that I actually helped in launching her main line back around 2004, was her comment to me when I asked her for support in what I was doing in salons/spas. “I cannot support you in what you are doing, as the last thing I need is someone else taking money from my stylists that should be coming to me.” Talk about being shocked!!!
Let me share the results of calling on all 137 salons in Oxnard, California to make the point of why this type of information is desperately needed. Out of the 137 salons, I immediately got 25 of them to tell me that they were set up and did not need this type of information. In asking these owners what their plan was all about, the majority of them did not want to share their plan or could not share even details of what plan they were following to such an important date in their lives.
From the 112 salons left to visit, there were only 15 that showed interest in continuing the conversation. So you can see that with a starting base of 137 salons, 18% or 25 had no interest. From the remaining 112 salons, the 15 showing interest broke down to 13%. Typically stylists /aestheticians should have some sort of retirement vehicle such as an IRA, SEP, or 401(K), if their salon is large enough, but surprisingly when asking which of these they had, most did not or could not expand on the question, telling me that possibly they did not have anything. In going further with a few more questions, I determined that if they did have one of the retirement plans offered, they knew very little about it. One of my concerns especially with 401(k)’s, are the hidden fees in most plans. Some of these are high enough to limit the long term potential of their plan with thousands and hundreds of thousands lost in the process over time.
My basic presentation is clearly stated as the answer to the burning question, “Are You Working for Your Money? or Is Your Money Working for You?” The bottom line supporting why so many people in our current economy lack the knowledge, determination, and ultimately why they do not understand long term planning, is that are so involved in working for their money, that they never get the other half of the earlier question, which is based on how to get your money working for you.
A lot of the misinformation related to this topic is that this material is never taught in the school system. There are six important money principles that drive the accumulation of wealth. We have all heard these in one way or the other over the years, but it is hard to find a clear explanation of how to use these six financial factors to your benefit. I am going to cover these six factors so that we can showcase the formula for building wealth and how these basic principles synergistically work to create long term wealth.
Before I start covering these six money principles, let’s have a quick conversation about your money. Where do most people in the 99%, such as you and I put our money? The bank of course and it doesn’t matter which brand, as they are basically the same. How much are they paying you for your deposits? Nothing, to make it simple, as what I find locally is that most banks pay you .01%, which is a whole lot less than 1%. Let’s talk about inflation next. Rather than asking you the question, I will state the answer, which is that inflation is the consistent rise of prices for goods and services, year to year. Rising prices limit the buying power of your money, thus putting more strain on your money. In California at the moment, inflation is running at 4%, excluding gas and food, which technically add another 2 to 3 points to the basic 4%. Let’s stay with the 4% for our use. It should be obvious that if the banks are paying you .01%, that you are already behind the eight ball and that your money is actually going in reverse with inflation where it currently sits. Now for the killer question, “What are the banks doing with your money, my money, and all other bank customers’ money?” They are making big money from our money, as our money is not kept at the bank waiting on you to take it out. Money brought into the bank by its customers is loaned out in the form of home loans, car loans, personal loans, and credit cards. Credit cards are their favorite of course, demanding up to 30% interest on the remaining balance in many cases today.
Banks in general are making 15% + interest on the average, which in comparison to what they pay us, at .01%, show cases how lopsided this comparison becomes. If this fact alone does not upset you as the reader of this article, then I do not know what will.
My presentation to salons/spas relative these numbers is to get their staff to acknowledge that unless you personally take charge of your money and emulate what the banks do with their money to reach higher levels of return, you can never achieve the results needed to drive your personal plan. By mimicking and producing the same impact that the banks make with their money, you can start to compete. By following the six basic money principles that the 1% use to build their wealth, the stylist/aesthetician can start to turn the tide and over time create the wealth necessary to reach retirement age with enough money to outlast their living years.
So let’s break down these six money principles that are key to the money building process.
ROR – RATE of RETURN:
Rates of Return are established by market dynamics. Higher rates do create higher returns. I want you to at the very least, get ahead of inflation at 4%. Remember that unless you are getting a return of at least 4%, you are literally going backwards with your money. The first thing I ask you to do, even though we have heard this one before is to Pay Yourself First. Unless you take the responsibility for creating this habit, it will probably not happen. We suggest that you pay yourself 10 to 15% of your net pay. Make yourself the most important of your bills. Do wait to pay yourself after paying everyone else. Pay yourself first, that is the only way to start a long term plan that prepares you for the many things in life that come down the pike: bills, emergencies, large expenses such as home ownership, etc. Learn to buy only what you need, as our consumer driven culture is always working to take our money, for that new car, new phone, new headphones and on and on. I learned this from my negative experience in the Market Crash of 08/09, when I lost the bulk of my 401(k) and my planned retirement. This one loss is why I am still out here, still educating stylists/aestheticians that will listen on how to avoid my mistakes and miscues on this highly volatile and important subject. Spending is a habit and so is Savings. Start creating these habits early in life or as soon as possible, as time is not on our side. In our current economy, rates of return at 7 to 8% are considered good. Look for these levels of return as you establish your own plan.
RISK – FEAR:
Most people in the 99% do not invest in the market, as they are fearful of losing their hard earned money. Our role in the consultation process is to get you to acknowledge a simple question. “How do you want your money to grow?” There are three options that you can select and they all play a working role within the process. First option is to utilize a FIXED RETURN, which is exemplified by the bank paying you a whopping .01% on your money. You will never lose money with this option, but it is obvious from our earlier statements that it is also not going to make you the kind of money needed to retire with. The second option is the VARIABLE RETURN, which is exemplified by the stock market and its daily ups and downs. We are presently at the height of a Bull market where prices are reaching the highest levels in recent history. Anyone jumping in right now has to understand that the traditional way to enter the market correctly is to buy low and sell high. We continue to watch this bubble and the impact that another burst can create. If you utilize the Variable approach at growing your money, the wise thing to acknowledge is to stay in long enough for the average return, which over a twenty years run will average out at 7 to 8%. The latest investment vehicle to hit popularity because of its flexibility and great return is the INDEXED RETURN, which mimics the Stock Market. You are not in the market, merely following the progress of the market. The Index option is unique in that it has a floor, sometimes at 0%, in some cases at .75%, which gives you the security of never losing your money or at the least generate a .75% return, even though the market drops below the floor. On the other side of the coin, with a ceiling ranging from 13 to 15%, you are assured of great returns. Keep in mind that the security of knowing your money can grow and never lose its initial value has wide impact for many people that are skittish about the market. These three options work together in formulating a long term plan of action.
Let’s face it. You make money. They tax you. You spend money. They tax you. You save money. They tax you. You die. They tax you. Taxes are not going to go away. If anything based on our escalating national debt, we know that taxes will continue to go up over our lifetimes. Whatever we can save you on taxes, adds to money in your pockets. There are three categories on how money gets taxed. TAX NOW works on your checking, saving, CD’s, stocks, mutual funds, etc. You are paying taxes on these categories annually if not sooner. TAX LATER means the money you put in is pre-tax. Some people call this option Tax Deferred, as you will not pay taxes on the money until it is withdrawn. These investment vehicles are your 401(k)’s, IRA’s, SEP’s, 403(b)’s, etc. Understand that these accounts cannot be drawn on until you reach the age of 59 ½. To do so warrants a 10% Penalty, along with payment at the current tax rate. TAX ADVANTAGED is a category that many people do not know about and one that is critical to understand if you are serious about building long term wealth. Tax Advantaged means that you will generally not pay taxes when you withdraw money from your account. This money is after tax money because you have already paid taxes on it. Roth IRA’s, 529 College Savings Plans, TFSA’s, and Life Insurance are popular investment vehicles that get tax exempt distributions.
Compound Interest is a powerful concept, and it is important to understand how it can work for or against you. Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Compound interest is also called interest on interest, as you are calculating on the accumulation each cycle, not just on the principal. When you see the difference between simple and compound interest, you can quickly start to see how powerful this entity can be. Tag compound interest to rates of return and you can see why our earlier explanation of higher rates of return and their impact to a well thought out plan make a huge difference.
RULE OF 72:
This basic money principle, formulated by Albert Einstein, clearly supports our explanation of Compound Interest. This basic rule states that if you divide the interest rate into the number 72, the resulting answer will be the number of years that it will take your money to double. Example: If your interest rate on your investment is 4%, and you divide 4 into 72, the answer is 18. This means that your investment will double every 18 years. Another example to define how important it is to understand this rule is we have an investment with a 10% return and divide 10 into 72, yielding 7.2. This means that our money will double every 7.2 years. It is obvious that the higher the rate of return sets up the shortest time intervals between our money doubling. Compound interest and the Rule of 72 have major impact on our credit card interest rates as well. Here we see how compound interest can work against you if you have credit cards or loans that carry high interest rates. A credit card balance of $ 20,000 carried at an interest rate of 20% (compounded monthly) would result in total compound interest of $ 4,388 over one year or about $ 365 per month.
THE POWER OF TIME:
Time can be your worst enemy or your greatest ally. No matter where you are in life or in building a financial strategy, the key is to begin saving as quickly as possible. The sooner you begin, the less money you need to set aside to create a solid financial future. A quick way to understand the power of time is to use an example. If you are working to achieve a one million dollar ($1,000,000) Retirement Goal, let’s evaluate different ages and what they would have to deposit into their retirement accounts on a monthly basis to achieve the goal. If you are younger and have the time to build, saving $ 286.45 a month, would take you 40 years to achieve the 1M goal. If you wait a little longer, and deposit $ 435.94 monthly, it will take you 35 years to achieve the goal. In my case at an older age, if I deposit $ 5466.09 a month, I can achieve my goal of 1M in only ten years. These are all examples of how much you need to set aside each month to reach a one million retirement goal based on a compounded rate of return of 8%.
You can start to see why these six basic money principles have a direct impact on your money. It is imperative to not only understand them, but as important, to use all six in synergy to drive your retirement program.
Your financial future depends on how you address your individual circumstances. There is no one way of preparing for the future that is right for you and your family, but there are common elements. That is the reason you need the help of a licensed financial consultant that can assess your particular needs and help you work towards a sound financial future. It all begins with a good understanding of how these six basic money principles benefit you, with a well thought out retirement plan that covers you and your loved ones.
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The Author, James Hobart, has a fifty nine year career behind him, ten in the U.S. Military and forty nine in the Professional Beauty Industry as an industry executive at every level, with certification in hypnotherapy and a Life and Health license. His insight and experience has helped many companies and individuals with their growth and development over the years. His books, Happiness Is Your Birthright, and Salon / Spa Retail – The Lost Revenue Stream, and his Blog: http://jameshobartmarketing.com, support his philosophy on life and are practical sources to create positive change throughout one’s life.
His support of the global Wellness movement and its eight dimensional model is defined by a focus on three income streams, Financial Consulting with a world class financial services company, a Certified Hypnotherapist with a practice in Ventura, CA, and a Wellness Coach with the largest Consumer Direct Wellness Marketing Company in North America. More information is available at http://makegreengogreen.com/jameshobart or http://melaleuca.com/jhobart