28 January 2011

financial boot camp - week 1

by mo


Earlier this week I attended the first of seven classes of Kustom Design’s Level 1 financial boot camp.

paraphrased: “Accumulate assets that are valuable whether or not the financial system crashes.” - Mike

The class is taught by Michael E. Lepitre. Mike is super passionate about money, and it shows when he’s teaching.

Financial freedom: Where you do not have to work for money. Instead money works for you providing plenty to fulfill your purpose, enjoy life and allow your wealth to grow for future generations and charity.

The 5 Steps

  1. Develop a closed circle budget.
  2. Eliminate bad debt (consumer & mortgage).
  3. Legally Minimize Taxes.
  4. Wealth accumulation & increase passive cash flow.
  5. Wealth preservation.

Today’s educational system focuses on:

  • academic education: ability to read, write and compute.
  • Professional education: learning a trade to earn money, to get a job.
  • NOT financial education: learning how to make money work for you.

Classes of Investors

  • Non-investor (the poor)
    • consume everything they earn.
  • Active Investors
    • these people are entrepreneurs.
    • They invest first in becoming financial experts.
  • Passive Investors (the middle class)
    • believes in good education, a high paying job, home ownership and saving for retirement through a pension.
    • Turns their money over to financial experts to invest.

Key Differences

Passive Investors

  • no control
  • higher risks
  • banks will not lend money to them
  • higher taxes
  • worries about market crash
  • low returns
  • plan can run out of money
  • may never retire

Active Investors

  • has control
  • lower risks
  • use bank’s money (OPM)
  • uses insurance
  • may pay zero taxes
  • welcomes market crash
  • high returns
  • plan provides for generations
  • may retire early (choice)

Cash Flow Quadrants

  • E Employee - You have a job
  • S Self Employed - You own a job
  • B Business Owner - You own a system & people work for you
  • I Investor - Money works for you.

Employee

  • earns income, works for money, has a job.
  • Believes the harder you work, the more money you make.
  • Believes more money will solve their financial problems.
  • Searches for a safe secure job with good pay and excellent benefits.
  • Believes the level of formal education relates directly to receiving a higher income.
  • Taxes are their number one expense.
  • Invests in RRSPs and mutual funds.

Self Employed

  • hardest working people on the planet.
  • Usually wear all the hats.
  • 90% fail after 5 years.
  • Work harder and longer than most employees and bring their work home with them.
  • Like to “be their own boss” and do it themselves.
  • Seek to be in control and resist delegating.

Business Owner

  • surround themselves with smart people from all four quadrants
  • learn technical skills:
    • reading financial statements
    • marketing
    • sales
    • accounting
    • management
    • how to lead people
  • pay very little in taxes
  • protected by using corporations and trusts.

Investor

  • knows that you must invest to be wealthy
  • have money working for them
  • do not invest in RRSPs
  • main focus on ROI (return on investment) and cash flow
  • pay the least amount of taxes
  • invest utilizing corporations and trusts

investment income

  • interest income: taxed very high
  • capital gains income: taxed at 50%
    • if you buy one share at $10. Then watch it go up to $20, and sell it you will be taxed on the $10 increase at 50%.
  • dividend income: most tax advantageous

There are people who become wealthy in each quadrant and sometimes derive income from different sources.

History of Money

  • Before money, the barter system was used.
  • Silver, gold and other metals were the first forms of the monetary system.
  • Gold became the standard of currency banking.
  • The fiat money system has been tested for 2000 years (never with any long term success due to debt.)
  • The separation process of gold from paper money began in 1933.
  • In 1971, Richard Nixon took the US off of the quasi-gold standard.
  • Savers become losers because they were now saving a currency instead of saving money.
  • The problem with saving a currency is that a currency is designed to go down in value.

Wake Up Call

Banks make a tonne of money off of our money. E.G. If I deposit $100,000.00 in to the bank and I receive an interest rate of 3%. I can expect to make about $3000.00 in a year.

The bank could then lend out $100,000.00 at a rate of 6% and make $6000.00.

So far the bank has lost $3000.00 but gained $6000.00, so that would be about a 100% return for them.

Apparently, banks can actually lend out 20 times that original $100,000.00 I put in. Which means that bank can lend out $2,000,000.00 at 6% and get a return of $120,000.00 in a year. It costs the bank $3000.00 and earns them $120,000.00. This sounds crazy!

It’s called fractional reserve banking

Next, up it’s time to visit the Finance section of the Khan Academy.

money