Archives For September 2012

Does it matter if you grow up with rich or poor parents?

If only I grew up rich, then I’d have it made… I’d be cruising the seven seas in a yacht named Spartacus while sipping the world’s finest wines.  I’d throw away my soap after I wore off the letters because I can’t stand using small bars!

The kids who grew up in rich families never had to forgo the new pair of shoes because their parents couldn’t afford them.  They went to the best schools because their last name was their admissions ticket, and the Ivy League education was all but guaranteed.  After graduation, they had a plum job with a large salary already lined up.

Even if they didn’t receive millions from work, they would surely get it through an inheritance.  They hit the genetic jackpot.

Would rich parents have been the answer to all of our problems of too little money and too much work?

How about the boy whose father left the family when he was a teenager and was forced to be the provider for the family at a young age?  He had to quit school so he could work full time and feed his younger siblings.

Does that sound like the upbringing of a rich man?  Ever heard of John D. Rockefeller, the richest person ever?

This begs the question, is it better for your financial future to grow up rich or poor?

Let’s look at the obvious answer; it is better to grow up rich.  Some reasons:

1.  You can receive a great education

2.  You have great connections due to your pedigree

3.  You were raised to know how to manage money

4.  You’ll inherit millions!

Now, the not so obvious answer; it’s better to grow up poor.  Some reasons:

1.  You’ve had a job since you were young, and you have great work ethic

2.  You have an unquenchable thirst to become wealthy because you’ve never had money

3.  You understand the value of a dollar and can live frugally

First, there are definitely some advantages to growing up poor.

We always hear the stories of people who grew up poor and later became wealthy.  What’s the reason for this?  In The Wealth and Poverty of Nations, David Landes writes, “Nothing so concentrates the mind as lack of money.”  Andrew Carnegie was a perfect example of this as he grew up poor and vowed to never be that way again.

Carnegie was a first time millionaire in his family.  According to Dr. Tom Stanley’s book The Millionaire Next Door, 90% of millionaires are first time millionaires.  They achieved that status themselves.

However, that statistic doesn’t mean 90% of poor people will become millionaires!  For every story you hear of someone making millions, there are probably one million stories for people who never made it.

Next, there are obvious benefits of growing up rich.

We tend to learn the most from the people we spend the most time with.  If you grow up in a family full of doctors and lawyers, there’s a great chance you’ll do something similar.  It’s just the way things are, and you wouldn’t even worry about how to pay for your school.

However, just because you grew up with money doesn’t mean you’ll have money when you grow up.  A common scenario is for families to inherit massive amounts of money and then squander it away quicker than it took to earn it.  The typical reason for this is the first generation rich doesn’t do a good job of teaching future generations how to manage money.

Some other disadvantages of growing up rich are you’ve never experienced what it’s like to be broke, and your parents may have spent too much time making money and not enough time teaching you anything.  Living a life of comfort can be dangerous to your wallet.

In Thou Shall Prosper, Daniel Lapin wrote, “Generations raised with very little in the way of material possession often focus so single-mindedly on providing their children with everything they didn’t have that they neglect to provide their children with what they did have.”  They give them the money, but they don’t teach them the principles that will lead them to success.

In reality, most Americans are somewhere between the two extremes discussed above, and you must remember we all have different defintions of rich.

I grew up with very little money, and I’m glad that I did (in hindsight!).   It taught me many lessons, but it also taught me the importance of values.  When I was young, I didn’t think I was poor because I felt like I had everything I ever needed.   Notice, I said ‘needed’ and not ‘wanted’.

My parents provided an incredible amount of support for me and my three brothers while growing up, just as they do today.  I’m still not sure how my mom was able to keep up with all of our sports practices or how both of my parents managed to attend all of our games (baseball, soccer, football, tae kwon do, etc).  We never had a doubt our parents would be there for us.

We were taught humility, rock solid values, a strong work ethic, and that the world was ours to explore.  All of these qualities helped me get to where I am today.

In Out of the Labyrinth, Robert and Ellen Kaplain explain, “Man can be better understood in relation to his potentials than to his beginnings.”

So, where does that leave us?  Is it better to grow up with rich parents or poor parents?  In my opinion, neither is a true indicator of future success.  The most important predictors of your potential wealth are your values and financial education.

The most promising part of this discussion is you can learn what it takes to be successful and many people – rich and poor – have done it.  If you have the ambition are are willing to take the right steps to educate yourself, you have the possibility to get rich.  It may not happen overnight, but it’s possible.

So, what excuses are left?  It doesn’t matter if you didn’t grow up rich or poor.

Who Do Your Work For?

September 17, 2012 — 1 Comment

No, I’m not asking about your boss, organization or company… I want to know why you work. Let me add some perspective to my question, courtesy of the Greeks:

“Where there are kings, there must be the greatest cowards. For men’s souls are enslaved and refuse to run risks readily and recklessly to increase the power of somebody else. But independent people, taking risks on their own behalf and not on behalf of others, are willing and eager to go into danger, for they themselves enjoy the prize of victory.”

Man, that’s a powerful quote! I’ve struggled for a long time to finish this article because it hits so close to home. From the very moment I read it in The Wealth and Poverty of Nations, the quote has stuck with me like one of those annoying little gnats flying around your ear. I’d swat it away only to find it drawn back into my head.

It hits close to home because I believe it to be very true. Don’t get me wrong, I’ve been passionate about my work before, and I’m very thankful to my employers for providing a great living for my family, but there’s always something missing. I don’t feel I’ve been working at my full potential since college.

I felt closer to “full potential” in college because I was involved in leading multiple activities along with taking classes and really enjoyed it. As the quote says, I was willing and eager to go into danger because I was enjoying the prize of victory, even if it meant 16 hour days.

However, after I graduated from college, I got a “good” job at a consulting firm. Things were ok, but I quickly discovered it wouldn’t be the same. I feel like much of my working life after college has been much like the example of what happens when we work for kings who are now the businesses we work for. I don’t get to do what I love, instead I get to do what the king needs done.

Our kings treat us well and we choose to remain cowards afraid of taking too much risk. Many of us receive a sense of security with our jobs even though we’ve seen the lay-offs over the last couple of years. We give up our lives to them, and they continue to give us paychecks.

As I mentioned when talking about the Company Store, we often create our own reasons for getting stuck at our jobs – often times debt. We sacrifice our freedom from the kings for stuff acquisition.

Another reason we don’t take large risks in our jobs is because we know we don’t always reap the full outcome of the reward or as stated in the quote, we won’t enjoy the prize of victory. If we pour our lives into designing a new process that saves our company millions of dollars, most of us would only receive a pat on the back – usually the same pat on the back we receive for completing mediocre work.

Next, if we take the large risk and fail, it could lead to us losing our title or even our job. It’s hard for many companies to embrace the culture of allowing people to fail in the trade-off for possibly hitting it big. Once again, if we don’t take risks and continue doing our job, we will probably stay safe.

There should be some difference between us and the early Greeks because the king’s people didn’t have full control of their lives and were typically stuck under the person who ruled their lands. The only options were to leave everything behind to risk success in a new land, overthrow the king, or just deal with it. We’re different though because we have a choice… right?

So what are our options?

The key is to not blame your “king” for the position you’re stuck in. We can quit and change jobs without worrying about getting hunted down like a rabbit by an angry king. However, the “switch jobs” option more than likely means you’ll go to work for a new king and you still won’t be taking risks on your own behalf.

Another option is to start working on our passion on the side, while using your current job as a tool to get you where you want to go. You might use it to gain skills, save money, or even network while you try to turn your side job into the full time job that you willingly take risks as independent person thirsting for the prize!

However, none of this will even matter if we don’t take control of our money and invest wisely first. If you’re living paycheck to paycheck, how the heck are you ever going to be able to leave your job and take risks on your own? You may not even know your current battle cry or what you want to do with your life, but you must start taking control of your money so you can someday control your life.

There are no kings holding us back, we do it just fine by ourselves. Once you get the taste of independence and treasuring the work you do, you may never turn back. I hear this time and again from successful entrepreneurs… and I’ll continue to work towards getting there myself. What about you, do you work for a king or are you your own king?

Here’s the rule I use to determine how much house you can afford based on your income – let’s call it to the 2x income rule.  Simply, you should only spend two times your annual gross income on a house.  I’ll discuss some other financial rules for home buying below, but this is the most simple.

How much house can you afford based on your annual salary?

$25,000 a year salary = $50,000 house

$50,000 a year salary = $100,000 house

$100,000 a year salary = $200,000 house

$200,000 a year salary = $400,000 house

This may seem low to some people, but if you want to control your money, this is a great way to do it.  It’s easy to get sucked into spending the bank pre-approved limit which is usually much higher, but they don’t have all of your best interests in mind.

In addition to the 2x annual income rule, you should also try to pay 20% down and use a 15 year fixed loan.  Easy as that, right?  Of course not, but this will at least give you a guideline to think about.

We bought our first house with a 30 year loan and didn’t pay 20% down because we wanted to use our extra cash for a much needed renovation, but we did stay within the 2x income rule.  The only way we could get into the neighborhood we wanted was to do it this way.  I know, excuses, excuses, excuses.  However, from here on out I promise to use the 20% down payment rule and hopefully pay for future houses with cash!

Today’s mortgage rates are incredibly low so it makes mortgages more affordable.  Let’s see how it’d look if you followed this rule to home buying across multiple interest rates:

    Annual Income        Mortgage Amt          3%       5%       8%      18%
 $         25,000  $       50,000  $       345  $       395  $       477  $       805
 $         50,000  $      100,000  $       690  $       790  $       955  $     1,610
 $       100,000  $      200,000  $     1,381  $     1,582  $     1,911  $     3,220
 $       200,000  $      400,000  $     2,762  $     3,163  $     3,822  $     6,441

Remember, the mortgage amounts listed above don’t include all of the other housing expenses – insurance, property tax, etc – which can increase the payment about 20-30% depending on where you live.   Also, you’d add your down payment amount on top of the total mortgage amount listed above.

It’s incredible how much more affordable housing is with low interest rates… I still can’t imagine how crappy it would’ve been to go through the early 80s when rates were in the high teens!  The 2x income rule for buying a house would probably have to go down to 1x!

The monthly mortgage payment ranges right around 30% of total monthly net income when using the 5% interest rate.   A 3% rate would take you closer to 25% of your monthly take home pay.  The 2x annual income rule keeps you in a pretty comfortable range where you won’t be overspending on the house.

That brings us to the next set of financial recommendations for how much house you can purchase.  Mortgage lenders typically use the 28/36 ratio rule to determine how much mortgage you can afford.  Basically, they look at your monthly gross income and want to keep you from spending more than 28% on the total monthly house payment – including insurance and property taxes.

The 36% rule takes a look at your total monthly debt and says you shouldn’t spend more than 36% of your monthly income on all of your debt combined.  What does this do the income ranges we were looking at earlier?  Based on your monthly gross income, you could spend this much on a monthly mortgage payment using the 28% rule:

    Annual Income           28% rule     
         $25,000         $583
          $50,000        $1,166
        $100,000        $2,333
        $200,000        $4,666

As you can see, this rule allows you to spend more on a monthly mortgage than the 2x income rule.  If you add in the property tax and insurance to the 2x rule it’s a little closer, but 2x keeps you more in line with what you should be spending.

Based on that assessment and the current interest rate environment, I’ll stick with recommending the 2x annual income rule for home buying.  What do you think?  Have you stayed close to that rule?

One other thing, if you’re buying a car, remember to use the 20% rule!  Do you agree with the 2x income rule to determine how much house you can afford based on income?

When I heard he had an MBA from the University of Pennsylvania (Wharton), I knew he was going to be brilliant. His consulting must be like no other, with the ability to create business cases from thin air and pull PowerPoint presentations from places the rest of us didn’t even know existed.

I had my first exposure to Ivy League graduates while I still worked at the large consulting firm, Accenture. We worked with many smart people from state schools, private schools, and of course Ivy League schools. Since I graduated from a lowly state school (Oklahoma State), there must’ve been no way I could keep up with these people.

As we started the new project, I was nervous working around him because I didn’t want to seem dumb. However, it didn’t take long to realize he wasn’t born with super powers. He put his pants on one leg at a time, but he had a much bigger college loan to prove he went to an Ivy League school… and now we were doing the same job! This is what initially made me question how much we should really spend on a college degree.

One advantage/disadvantage of growing up in a smaller town with a blue-collar family is you aren’t exposed to many Ivy Leaguers except for what you see on TV. They’re always the high-flyers making earth-shattering decisions and printing money like they’re the fed. The only way they got there is because their parents were a part of the elite societies and wore the skull and crossbones.

Luckily for me, I was able to gain exposure after college and realized that neither of these assumptions are necessarily true. Sure, some of them only got there because of their pedigrees, but many others got there through hard work. They didn’t have connections or the “inside”, but they set a goal and worked incredibly hard to get there.

I also learned they’re not much different than the rest of us. Some Ivy Leaguers like to think they are, but in reality they don’t have special powers. The majority are great people who don’t hold their attitudes to the high esteem bestowed upon them by their degree.

So what made them Ivy Leaguers? One of my friends/mentors grew up in Boston and had many friends who went to the Ivy League schools. We were discussing this very point, and he asked me what percentage of my high school class went to college. I wasn’t exactly sure but assumed around 50%. He was amazed because his school was more like 95%-97% college bound.

These kids were raised in a different culture. If your friends and parents are all likely to have been to or are going to an Ivy League school, your chances of attending one increase dramatically. They’re raised with the idea that not only is not going to college not an option, but not going to an Ivy League school isn’t an option either! This is why I make the point that sometimes hanging out with rich people will make you rich.

According to The Chronicle, there is a noticeable advantage for legacies – students whose parents or family members attended the elite school. They wrote:

“A researcher at Harvard University recently examined the impact of legacy status at 30 highly selective colleges and concluded that, all other things being equal, legacy applicants got a 23.3-percentage-point increase in their probability of admission. If the applicants’ connection was a parent who attended the college as an undergraduate, a “primary legacy,” the increase was 45.1-percentage points. ”

That’s a pretty big advantage! However, some people say it’s a disadvantage. When I was still at OSU, the business school sponsored CEO Day where they brought in OSU Alumni who were CEOs at various companies. I was lucky enough to host the CEO of Praxair. He told me he’d rather hire graduates from state universities because they’re much more well-rounded and don’t have the Ivy League sense of entitlement.

Next time you feel intimidated by someone because they have a degree and you don’t, or because they have a list of degrees from prestigious universities, don’t give them the green light to walk over you. They don’t have special powers… in fact, the only power they have over you is what you give them.

The debate of whether it’s an advantage to grow up rich or poor lives on! Have you ever been through an experience such as this?

 

September 3, 2012

When we moved to New Orleans three years ago, we did so knowing we could experience a hurricane or two. Most people live in areas where natural disasters are possible, so we didn’t let that stop us. We were excited to see what the hype of one of America’s most celebrated cities would offer. It must be special if the city was nearly wiped out four years previous and a good chunk of the population decided to rebuild.

When we got here, it was evident the wounds of Katrina were mostly healed, but the scars on the people who lived through it would last a lifetime. It only took a few minutes into most conversations before you were introduced to a local’s Katrina experience. However, they loved their city so much they could look past it.

Here comes Isaac

Hurricane Isaac was almost never even born. It wobbled around in the Gulf while defying forecasters expectations of intensity and direction. Just when they thought it was locked in on a path, it would do something unexpected. Warren Buffett made the point of the difficulty associated with complex systems when he discussed the stock market:

“Speaking of complex adaptive systems… Sometimes, the behavior of the parts creates a trend. However, because each agent has only limited knowledge, everyone perceives a trend but no one has any ideas what caused it.”

Isaac moved into the New Orleans area on Tuesday, August 28th. However, forecasters weren’t even sure if New Orleans was in the path all the way until Sunday. When we went shopping on Saturday, we bought some items just in case, but we weren’t in full hurricane mode. By Sunday morning the track was more certain and it seemed we’d be impacted. With this information, we took our shopping more seriously and stocked up.

My wife’s job required her to sleep at the office during the storm because of her “essential” status. This meant I was left at home with our dog Lucy and a friend’s dog who also had to ride work out at the office… so that was one of the biggest bummers!

After I tweeted some “preparedness” pictures, one got picked up by Tech News Daily and they featured the pic and talked about how some of us continued to show our “spirit” through the storm.

 TechNewsDaily

During the Storm

The early bands moved in on Tuesday evening. It wasn’t anything too intense, mostly just gusty winds to 40-50 mph and some rain. It felt like I was on a sailboat with the wind perfectly capable of filling the sales and the light rain falling sideways as if it blew off of the top of waves.

Even though the wind wasn’t much, it was enough to knock out power around 6pm because of our aged Uptown infrastructure. When this happened, I went out on the front porch to see what was going on. I guess that’s our first reaction when something happens because we want to see if any of the neighbors know what’s going on.

As I made it up there, I realized all of my other neighbors had the same idea, and I was the last one to the party! I said hi to neighbors I already knew and introduced myself to the others who I’d seen many times but never had the time to talk to. Isn’t that always the case (excuse)? The power came back on shortly after, but we had all already been pulled to the porch.

Luckily most of my neighbors are veterans and knew how to prepare for a hurricane. They pulled out two gallons of daiquiris they purchased earlier in the day! The rest of the night was spent turning neighbors into friends as we watched the storm gradually strengthen. I headed back to my house around 11:00pm with the power still on.

The winds were howling and it was evident Isaac was about to get serious. Tropical storm status was no longer enough and he was ready to hit the shore as a hurricane. As I laid down in bed, I was reminded of childhood fears. One of the scariest things was when the lights turned out and the things that went bump in the night started bumping. No matter how many times my parents told me there was nothing to be afraid of, I couldn’t help but wonder if they knew what was really in the closet.

This time I knew what was causing the bumps, but I had no idea what would be next. Could the large tree in our backyard withstand Hurricane Isaac like it had done with other hurricanes for decades previous? Did I sufficiently board up my windows to prevent the things that were hitting the side of my house from coming inside? I fell asleep.

Instead of the light of morning shining through my windows and gently removing me from slumber, I woke up to the hot humid air which had taken the place of the cool air I went to sleep with. I looked down at my phone and noticed my neighbor texted me to tell me he was turning the generator on – it was 4am and the power was out. He previously offered me a power cord hooked to his generator that I could use if the power went off. What a neighbor!

The only problem was I hadn’t figured out the best way to snake the cord into the house. The back doors weren’t an option because they were boarded up and too tight to fit a cord through anyway. Instead, I’d have to go outside and feed it through a small crack through the bedroom window where the shutters didn’t quite cover. The sky sounded even angrier.

I put on my shoes and rain jacket and felt like I was going to battle. As soon as I opened the backdoor, I realized Isaac meant business. The large tree in our backyard looked like it was bending over in an attempt to touch my roof while the rain was taking the same sideways angle and pelting the side of the house. As I took the cord to the alley where our bedroom is, the narrow passage between my house and my neighbors felt like a wind tunnel.

The gusts had to be up to 80-90 mph, and I was more scared now than I had been before. I was no longer protected by the reinforced structure of the house; it was just me and nature. As I was feeding the power cord through the window, my hat blew off and the thought of leaving it behind crossed my mind but I retrieved it. The cord was through the window and I headed back inside as I watched the tree continue to dance with the wind. Luckily none of the branches still on the tree decided to join their brethren already on the ground.

When I got back inside, I decided to get on Twitter to get some updates. I tweeted a few things about the intensity of the storm, and before I attempted to go back to sleep, but before I did, I noticed someone tweeted me to ask if I’d be willing to come on their show to give a phone update. It was someone from the BBC! I replied back and offered my first hand perspective.

They initially called me around 5am to test the phone quality before the program which was to start at 6am my time. This meant I wasn’t going back to sleep. The 25 minute BBC program was “World Have Your Say” and they brought on 4-5 people from the New Orleans area to give updates. I was the “main” interviewer and answered 5-6 questions about the current status of the storm, how we were coping, and if we had confidence in the levees.

By Wednesday morning, if you were watching national news, you might have seen why they asked me about the levees. The fear of another levee breach inundating the city like it had done during Katrina was present. However, the Army Corp of Engineers had spent the last 5 years and tens of billions of dollars shoring things up. Everyone felt pretty good about them, but this would be the first test. When the news started coming down that levees had failed, national media panic ensued.

What they didn’t realize was the levee that failed was a small “private levee” that was quite a distance from New Orleans. It was not one of the corp’s levees and New Orleans was not in danger. Luckily we had a Baton Rouge meteorologist on the BBC program as well who was able to explain all of this to the people of the United Kingdom. After the interview, I went back to sleep around 6:45am.

My next wakeup call was around 8:30am by the same howling winds I encountered during my power cord rendezvous earlier. We didn’t have any damage to the house, but I did see some neighbors had some downed branches and knocked over fences. Even though it was just as strong, the storm wasn’t as scary in daylight because of the comfort of seeing things.

Just as the neighbors became friends, so did the dogs. There’s nothing like a little adversity to pull everyone together. The rest of the day was spent congregating with friends and doing minimal work outside as the storm was still raging. I did manage to snap a few pictures during the day.

 Isaac_walking in street

 Isaac_tree down in park

 Isaac_tree in median

By Wednesday night, Hurricane Isaac was downgraded to a tropical storm and the winds and rain weren’t nearly as strong. We all gathered to eat dinner at a friend’s house and trade war stories from the previous night. We enjoyed some margaritas and looked forward to starting clean up work in earnest the next morning.

A Return to Normalcy

At times in life we have a break from the day routine and Hurricane Isaac definitely provided that; a break from the living the life we’ve either intentionally or unintentionally built. A life that most of us love and a routine most of us love and would never give up… but it makes you think. How have I been living?

We’ve overcomplicated our lives. As my neighbors and I were commiserating about how miserable it was without electricity, air conditioning, television, and the inability to leave our houses, we started to realize how easy it was to live without all of that.

Maybe this is what they meant when they talked about the good ole days. Before the air conditioning, when the front porch was the coolest place to be, and before television, when talking to neighbors and friends provided all the entertainment you needed. Now we’ve managed to turn our houses into our own jail cells and have become janitors to our stuff, locking ourselves inside to keep out the elements and plugging ourselves into electronics to keep from thinking or connecting too much.

All of our neighbors came together to hang out and talk in the absence of our modern day conveniences. We were forced to build friendships, entertain ourselves, and live without air conditioning.

When you’re without power and away from the daily work routine, you’re reminded that time is a human invention. You don’t start your morning by punishing your alarm because you’re angry it woke you up. Instead, you wake when your body is ready. Your day isn’t controlled by a schedule dictated by work. You can spend two hours hanging out with a neighbor friend without feeling guilty because you should be somewhere else or doing something else.

Now the utility companies are out working hard to restore power to the city. My wife is back now and we hope our electricity will be on by Friday, but it could take longer. Even though we’re ready for it to come back on and resume normalcy, there’s a little part of me that’s not looking forward to it…

Then again, maybe it’s just the break in routine that I really desired instead of not having modern day conveniences. I guess it’s like a vacation. It’s awesome to get away, experience new things, and break the normal routine. However, at the end of vacations we’re usually ready to get back to normal.

**Most of this article was written on Thursday, and I didn’t want to rewrite it based on additional perspective I gained later in the week. Mainly, we were without power for three more days, and it was a horrible experience! The heat index was over 100 each of those days, and it made it very hard to be productive or even stay cool. Be sure to check out my Facebook page to see additional pictures and updates from the storm.**

Isaac_park bench