What is the most effective way to become wealthy?

[Lenie]

amen.

[Still Growing]

guzenteit

[teatree]

I would actually say that the surest way to beome wealthy is to carry very little debt. Debt is a huge drag on people - most pay more in interest than on tax. But if you can get rid of debt, things ease immediately.

eg my sister paid off her mortgage two years ago - she is only in her mid-thirties, but every spare pound went into overpaying debt, and she was pretty frugal with everything else. It took her seven years of hard focus to do it. Of course now she is laughing, she gets to keep all of her salary, with no housing overhead, so even if she is spending far more than previously, she is also accumulating savings very fast.

I would advise everyone to clear their debts first. Once you've done that you have so many more options in place, as the claims on your income are reduced.

[Still Growing]

Teatree,
I agree mostly except for paying off your house.

I am unsure about the UK but let me give you a scenario of the US. Lets assume someone has debt of $200K on a $300K house in the US at 6% interest. A good portion of interest of that 6% is tax deductable; so essentially the interest is more like 3 to 4%.

Now lets say that someone has a matching 401K with 100% contribution from employer. The person not only can earn more than 4% on average but they also get a matching contribution from the employer AND this is all pre-tax whereas making payments on your house is post-tax. So they get a higher rate of return, one tax deduction, matching contribution AND pretax savings.

Or lets say someone didn't have a 401K and they simply invested money into a CD or other investment. Historically the person would make a higher rate of return than the 3 or 4% they were paying in real interest on the house.

Almost all professional financial advisors in North America DO NOT recommend paying off the house early.


But I think your sister sounds like a pretty smart person to me; after all she saved irregardless. I'm impressed !

[teatree]

Still Growing - in the UK we used to have tax relief on mortgage interest, but it got abolished in 1997, as the govt thought it caused people to speculate on housing un-necessarily and carry too much debt.

So be warned, it could get abolished your end too.

Many people advance the idea that you would be better off putting money into tax-free vehicles that allow stocks and shares (in the UK, ISAs and Pensions, in the US, 401ks).

But they neglect the safety and risk side of things. When you pay off your mortgage quickly you are guaranteed to become richer. There is no risk - after all, you have to pay off the debt at some point, and the longer you leave it, the more interest you pay. Investing in stocks by contrast is hugely risky. On paper you might make more than 3% per annum return, but in practice, you might make zero, or even a negative return. The Dow Jones was 11773 in Jan 2000, but is below 10,000 now. This isn't a new phenomenon. The Dow Jones for instance was flat from 1937 to 1950, and then flat again from 1966 to 1982, and the 1950 to 1966 rise was very shallow indeed (you'd have been better off sticking your money in a deposit account). The go-go period from 1983 to 2000 was as rare as the period from 1914-1929.

IMO you should always go for the risk-free returns first - which means paying down debt including mortgage debt. Once you have your shellter all paid for, then you can afford to start taking other risks - it won't matter then if you make some losses, as you will have had your basics all sorted out.

[Marth]

I worked towards my passion of game making for over 10 months & made a total of $0.02, it never financially paid off. Now I opened myself up to other income sources & am making about $10/day & will be making $70/day by the end of this month; I also still believe I will be able to fit some game making in, but not currently. I think you need to focus on both, but I voted focusing on generating money.

[Brutha]

Value =the market worth or estimated worth of commodities, services, assets, or work.

That might be the definition that you use in business.
It isn't the definition that I have in mind.
I think that there are things that money can't buy that are still valuable.

Think about twitter. Twitter is an example of a company that said, we focus on value and will worry later about money.
I think that Twitter does provide value.

We've all heard "Do what you love and you'll be successful" yet so few people become successful even while doing what they love. Why is that?

The people I know that are passionate about what they doing are more successful than those people who aren't passionate.

Most people simply haven't found something to be passionate about.

If your goal is to make money then do the following:

Nobody said that's the goal.
If I focus on value, value might be my goal.

[Still Growing]

Originally Posted by Brutha

That might be the definition that you use in business. It isn't the definition that I have in mind..

Originally Posted by Brutha

Nobody said that's the goal. (to become wealthy financially) If I focus on value, value might be my goal. ..

Reallly? The question asked was.
What is the most effective way to become wealthy?

The choices were:
1. Focusing on money
2. Focusing on providing value
3. I don't know.

Now where on earth would I think that this thread was about finding "what is the most effective way to become wealthy?" Oh wait, thats the title.

In over 80% of the posts in this thread alone the word "money" was used. Now you are telling me that this thread was not speaking about money? Brutha, just be patient and you'll find something to disagree with me on. You don't have to jump the gun prematurely to find something to pick at me. In almost every thread you disagree, poke and prod with what I say. Just be patient and I'll say something that is inaccurate or I'll mispeak and then have to clarify. Then you can pounce. Don't be so eager to find something to disagree on.

[Still Growing]

Originally Posted by teatree

Still Growing - in the UK we used to have tax relief on mortgage interest, but it got abolished in 1997, as the govt thought it caused people to speculate on housing un-necessarily and carry too much debt.

So be warned, it could get abolished your end too.

Many people advance the idea that you would be better off putting money into tax-free vehicles that allow stocks and shares (in the UK, ISAs and Pensions, in the US, 401ks).

But they neglect the safety and risk side of things. When you pay off your mortgage quickly you are guaranteed to become richer. There is no risk - after all, you have to pay off the debt at some point, and the longer you leave it, the more interest you pay. Investing in stocks by contrast is hugely risky. On paper you might make more than 3% per annum return, but in practice, you might make zero, or even a negative return. The Dow Jones was 11773 in Jan 2000, but is below 10,000 now. This isn't a new phenomenon. The Dow Jones for instance was flat from 1937 to 1950, and then flat again from 1966 to 1982, and the 1950 to 1966 rise was very shallow indeed (you'd have been better off sticking your money in a deposit account). The go-go period from 1983 to 2000 was as rare as the period from 1914-1929.

IMO you should always go for the risk-free returns first - which means paying down debt including mortgage debt. Once you have your shellter all paid for, then you can afford to start taking other risks - it won't matter then if you make some losses, as you will have had your basics all sorted out.

I agree that the stock market has more risks over the short term. Historically if you diversify and have the time you should average more than 4% in gains in most stock markets (Lets say 30 years like a typical mortgage).

Since the UK (as you say) no longer allows for tax deductions on home ownership or morgage interest it does make it a little more appealing to pay off the house. What has the UK stock market averaged over the past 30 years in increases vs what was your sister's home interest at?

Just curious.

Also, there is no correct answer. I'm replying to you because I might start paying more to pay down my mortgage. Currently I do pay an additional 10% per month and that alone will reduce many years off the mortgage. Maybe I'll increase it to 30% additional. I am however looking to start moving money out of CDs and into the stock market soon. I think it still has a way to go down and of course I'll invest into company with great debt equity ratio.

[ming]

1-Marry money.

2-Work in financial services.

3-Invest in property.

[Hyperchiller]

Originally Posted by Still Growing

It seems a lot of people are confused about what value really is. Lets examine it.

Value =the market worth or estimated worth of commodities, services, assets, or work.

So no matter how much you focus on giving you'll never make money unless your product or service has market worth. That means that others have to value your product or services as much as you do.

We've all heard "Do what you love and you'll be successful" yet so few people become successful even while doing what they love. Why is that?

If your goal is to make money then do the following:
1. Find something you are interested in or love. You'll need to do it a lot and money will loose its attraction at some point. You should almost be willing to do it for free; Note I said "Almost"
2. Ask yourself "Will others find value in what I'll be providing"
3. Ask yourself "How can I provide this product or service better than anyone else?" Do I have some advantage or special talent? Can I hire someone with some advantage or special talent?
4. Focus on giving the most value possible while making substainable profit. If you do not make a profit (in most cases) you will go out of business.
5. Stay focused and keep your finger on the market pulse. You must be nimble and able to change with your markets changing needs. Market demand changes and so does value. People may value a product today and find no value in it tomorrow.

If you are focused on money only you will fail. If you focus on providing value where there is no demand you will fail. There are no quick answers or one simple thing that will make you wealthy. As I said the question is redundant.

Good post.

Another thing to remember about all this being wealthy is that your compensation from providing value isn't all financial. You will get compensated in different ways. For example Steve is generating a lot of good karma, goodwill, relationships, credibility and other things.

And the question about making a lot of money (a financial asset) is of lesser importance if you consider the other five life assets I posted previously which will provide way better returns on your time, energy and money in the long term if you invest in them.

[teatree]

Still Growing

What has the UK stock market averaged over the past 30 years in increases vs what was your sister's home interest at?

My sister bought her home in 1998 and paid it off in 2006. The FTSE100 was 4750 in 1998, it's 4300 today...

There is this myth that stocks always go up. No they don't! The 1982-2000 period was an abberation, as was the 1914-1929 period. And you only really saw returns if you invested at the start of those periods. Most people on this board probably started investing towards the end of that late 20th C bull run, and have lost out. I'm not sure we are going to see high returns again for several decades in the western world.

The other thing you have to consider is that if you have a 25 year mortgage, you pay a hell of a lot of interest over that time. Crude rule of thumb is that you pay roughly three times your purchase price once you've paid interest and repaid your capital - that is, if you purchase a home for £100,000, you end up forking out £300,000 over the 25 years before you have paid the debt. That's around £200,000 in interest, which is a small fortune. Much better to pay off the debt asap.

As I said, once you have your shelter all paid for, you can afford to take risks and not bat an eyelid if you make a few losses here and there (some losses are inevitable when you take risks). But you do need to secure basics first. Think of all those people losing their homes and moving into trailers - it's not pretty when you lose your shelter.

My sister is only in her mid thirties - it was a lot of hard work paying off the debt so fast, she was shopping at Aldi, while others were living it up eating out every night. But she now has her whole life ahead, with good earnings, and shelter all paid for, and she can enjoy herself, work part-time, afford to have children, etc etc.

More important than anything is the sense of peace of mind - it's hard to describe how well you sleep when you have no debt and your home paid for, and are therefore pretty much invulnerable to the vagaries of the economy. It's a priceless feeling, worth more than the actual wealth you accrue by paying off debt.

[rodie151]

I think that you certainly have to provide value, no doubt about that, but do have to be aware of the money side too. You need a good balance of both really I think.

[Still Growing]

Teatee,
Historically the stock market has given a higher rate of return than 4%. Of course if you look at 5 years vs 30 years then that is not always the case.

I like the idea of paying off the house because its a sure thing. Its really like comparing a guaranteed 4% savings vs the opportunity for a 12% return IF you get in at the right time and get out at the right time and are diversified.

Of course right now is the time to buy if you select the right company.

[teatree]

Still Growing, it depends on which 30 year period you are looking at. Lots of people can't let go of the recent past, particularly the dot.com boom, and keep believing it will happen again. It will of course happen again, but not for a few decades. What is going on in the markets right now is very nasty indeed, and will burn many.

If you do buy shares, buy companies with a shedload of cash on their books and no debt - they will be the only ones left standing after this. I recommend reading "The Intelligent Investor" by Benjamin Graham - I think it's available on Amazon. He talks about investing in the post-wall street crash environment of the 40's and 50's (when the Dow was flat, but he still made money) and has useful things to say. He was Warren Buffet's guru. It's a great book, full of scepticism and wisdom - the best investors look at the downside and diligently protect themselves from it. It's the wishful thinking ones, who only believe things can go up, that get hurt.

[Marth]

I seriously think you have to first focus on how to create wealth through focusing on money & apply your passion & value around that. I think this is true online with e-commerce, market differs very much.

[Still Growing]

Teatree,
Maybe you're right I can't find the data. I assumed that the averages over every 30 year period were higher than 4%, even from 1920 to 1950 hitting the US depression for example.

Are you sure it depends on which 30 years? I'm curious to know because I'm not 100% sure in what I'm saying about this.

[sirdayor]

i thinkwhen you create value,money willcome.

[Orange]

I think if you focus on making money you will find yourself having to focus on creating value. So maby start with focusing on money itself if you wanted a hollow goal like that.

[Still Growing]

Originally Posted by sirdayor

i thinkwhen you create value,money willcome.

This is not always true.

You can create value for a single person and no money will ever come if too few people have the demand.

To be more clear you could add "a lot" in front of value or "for enough people" after value then its far more accurate.

[dannielo]

Focusing on finding the sweet spot between doing something you love and making money from it. Usually that implies you are creating value. (unless you are a crook and loving it)

After that, it's a matter of working hard and providing even more value.

[Still Growing]

Originally Posted by dannielo

Focusing on finding the sweet spot between doing something you love and making money from it. Usually that implies you are creating value. (unless you are a crook and loving it)

After that, it's a matter of working hard and providing even more value.

I don't think there is exactly a sweet spot in terms of sacrificing or that a choice has to be made via subtracting value in order to love what you do. Also the fact that you love something does not imply you are creating value quantitatively.

There are really two ways to use the term creating value. You can create value for an individual or you can create value for a lot of individuals.

Lets say you love making tooth pics out of blades of grass. There may be some individual who values not chopping down wood however the value you create within society is almost null.

If you measure value on a scale of "how many people it helps" then you'll typically find market viability for the product or service.

If someone says I like making green products then maybe we can incourage them to make toothpics out of bamboo as it will create value for the masses however if the person says "my love is creating toothpics out of grass" then it doesn't necissarily equate being able to make money out of it.

As I said in an earlier post, in terms of making money, focusing on adding value vs focusing on money are redundant. If you are so focused on making money that you are blind to the value you are really creating you will not make money however if you think that simply because you help someone find a grass toothpick and that you love doing it will it mean that you can make money from it.

It is my advice to ask yourself the following questions....

1. What do I love doing? Ex: working with people, skydiving, adventure, etc.
2. What is missing in society? What around me can be done better but aligns with what I love doing?
3. How can I do what I love while contributing to the most people

If you think about my three steps its impossible to separate providing value and focusing on money. If you take one out of the equation then you will not be financially wealthy.

[teatree]

Originally Posted by Still Growing

Teatree,
Maybe you're right I can't find the data. I assumed that the averages over every 30 year period were higher than 4%, even from 1920 to 1950 hitting the US depression for example.

Are you sure it depends on which 30 years? I'm curious to know because I'm not 100% sure in what I'm saying about this.

Hi

I found the following link which should answer your question:

History Dow Jones Index

Note that the returns quoted are per ten years - so the 5% return from 1970-1979 equates to 0.48% per annum - way less than the 4% per annum you are assuming!

The return of 17% from 1960-1969 equates to 1.56% per annum, and the return of 47% from 1940-1949 equates to 3.92% per annum.

There have only been five decades where the Dow exceeded 4% per annum - 1900-1909, 1920-1929, 1950-1959, 1980-1989 and 1990-1999.

There seems to be twenty year gaps between the good periods and the awful periods. Given that we are in the middle of an awful period, it's likely that a good period won't start till 2019. And of course part of success is avoiding plunging in just as a good period ends...

The period 1980-1999 has been extraordinary. I'm not sure we'll see the likes again. Of course it's still worth investing, but you need to be selective. As I said, I recommend Benjamin Graham's book "The Intelligent Investor", because he talks about investing during the lean times of the 30's and 40's.

Hope the above helps!

[Still Growing]

Teatree,
I looked at your link and what I saw was much different.

Period Dow Return
1900-1909 67%
1910-1919 7%
1920-1929 135%
1930-1939 -(49%)
1940-1949 47%
1950-1959 288%
1960-1969 17%
1970-1979 5%
1980-1989 267%
1990-1999 362%

It seems to me that the return for most ten year periods is far greater than 4%.

Can you explain?

[teatree]

Still Growing - they are quoting the returns AFTER TEN YEARS, not return per annum.

That is, say you invested £1000 in 1970, you ended up with £1050 in 1979, which equates to a growth of 0.48% per annum, which is pitiful, it didn't even keep up with inflation. But most mortgage payments are at least 4% per annum - so to break even, your investment needs to return 48% after ten years - that you need £1000 invested to be worth £1480 after ten years.

Get it? The calculation is (1.04)^10 to work out what an annual return of 4% compounds to after ten years.

There have only been five decades where the DOW return exceeded 4% per annum. The last decade we've lived in certainly hasn't been one of them, and I'm not sure the next one will be either.

Be careful when you invest. Read Benjamin Granham's book. It might be worth brushing up on basics of how compounding works and how to work out what the per annum equivalent is of returns quoted over longer periods.

[jpmcgrew]

Judging by most of the blogs I come across, more people are driven by making money and regurgitating things that have been written a million times. However, I think making money probably relates to dedicating your time to creating something worth reading. Which is what a lot of bloggers seem to misunderstand...

[smartile]

Originally posted by Brutha
Among the two choices, what do you think is more effective?

Providing value that targets the user. The only way someone is going to take their money out of their pocket and give it to another is if they believe they are going to receive something more valuable in return.

For example, I bought a $15,000 course that spanned over 3 years. It was not a traditional University or College course. It was a personal development course. Some people thought I was crazy. The reason I bought this course is because I knew (or believed) I was going to receive massive value in return for my investment.

The company held true to their promise. They delivered massive value. I wouldn't hesitate to give someone my money when I know (or believe) I'm going to receive massive value.

[netanel22]

People gave great explanations already why you should do both of things: focus in giving value and in money.
how you gonna focus in them is gonna determin your success, you should only have a glance on both of them.
Keep your main focus on the why.
If you feel more ease to focus on the why in money do so, and vise versa.
I believe that successful people achieve things with passion, unestly there is no other way. To have that burning desire and wants you have to focus on the why, this cause people a flawless success that feels natural.
Offcourse eatherway what is truely gonna determain if you fail or not is your action level. Commit to have money like you do to survival

[Sam988]

Focusing primarily on money and having a decent plan to get it.


First you need to make a decision that you want to get rich, then you decide to follow a path/plan that will get you money.