Wednesday, January 03, 2007

Success Secrets - The Lessons of Finacial Failure

Whitney Houston is in massive personal debt and selling her possessions. Mike Tyson is bankrupt. Michael Jackson is broke.

What success secrets can we learn from these spectacular financial failures? No amount of income is enough to protect you from financial failure. No amount of income excuses you from personal responsibility for your financial life. No amount of income can save you from bankruptcy. No amount of income can save you from a lack of self-discipline. How many millions, or even billions of dollars have passed through these celebrities' hands, or perhaps the hands of their associates? How much “cash” has turned to “trash”?

In my own life I have seen a number of people with substantial incomes lose everything. I have often asked myself why.

One component of the problem is that people mistake their current income for their lifetime income. A very wise advisor of mine once said “anyone who makes six figures can expect to see six-figure fluctuations in their income”. Your best year is just that. Your best year. It is not every year. It is not even every quarter. It may even be an “outlier”: a statistical fluke that may never ever occur again. Are you going to take on ongoing years of cash flow drains such as luxury car payments, giant mortgages, or a high-class wardrobe based on income that may never be there again?

Another component is that many people do not look upon financial security as a “possession” in the same way they look on, say, a Harley. Financial independence could, in fact be viewed as a “status symbol ”: the Rolex of a life well lived, though not nearly as visible as a flashy fashion accessory. It is hard to wear to parties.

Additionally, money is a “squirrelly” concept: it can be looked on as “spending power” or it can be looked on as “capital”: i.e. the means to invest for future returns. When you get your bonus do you think “Gosh!!! How much bond income will that buy?” If so, you will probably never end up like the celebrities mentioned above.

Wealth can be viewed as “the number of years that I can live at my current lifestyle without working”. Instead, wealth is often viewed as “the number of consumer items I can buy with my current income…including any debt the bank will allow me to take on”.

Wealth can buy us “things” or it can buy us “states”. That windfall could buy you a “boat” or it could buy you “serenity”. It could buy you a “trip to Paris” or “freedom for 20 years”. It helps to externalize these outcomes so we can “buy in” to “states” as well as “things”.

Suppose someone gave you a choice right now: a) 30 years of your current mortgage + 30 years of credit card payments with no guarantee that your income will remain the same or b) never having to work a day in your life again …which would you really choose? In actuality that choice is in front of each of us every day. Personally I find item “b” to be incredibly tempting. Why not go for it? What do you think Whitney, Michael, and Mike would choose right now?

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