When politicians are campaigning, some try to reinforce the idea that they are similar to most Americans. Candidates for President of the United States try to avoid being labeled as elitist, because some sort of connection and kinship with their constituency is important for winning the favor of voters who aren’t already entrenched with a Democrat or Republican ideology.

Of course, the attempt to be viewed as an “average American” is nothing more than marketing and public relations. In order to find one’s way into the political arena at that level, you need to carry something that sets you aside from most Americans. And while money doesn’t guarantee a victory, it doesn’t hurt.

CNN has reported the net worth and income of the Republican presidential candidates as well as President Obama to see how they compare with each other. Like most Americans, they generally have wealth tied into their homes, but their investments, and in some cases, major liabilities and use of blind trusts, show that this crew lives in a world unfamiliar to most Americans.

Mitt Romney’s net worth is between $85 million and $264 million. This is a wide range; with lenient reporting requirements, it’s difficult to be specific. He earns most from dividends and interest on his investments as well as from speaking engagements. Romney includes horses and gold among his investments. According to the Federal Election Commission, Mitt Romney has raised $32 million for his campaign as of September 2011 (the latest data).

Jon Huntsman’s net worth is between $16 million and $72 million. CNN points out that Huntsman’s father is one of the richest men in the world, as has donated more than $1 billion to universities and medical research. Huntsman has raised $4.5 million for his campaign as of September 2011.

Newt Gingrich’s net worth is between $7 million and $31 million. Last year, Gingrich earned $2.4 million from his own company, Gingrich Productions, and most of his assets are tied to this company. He also has listed up to $1 million in liabilities in the form of a line of credit with Tiffany and Co. Gingrich has raised $2.9 million for his campaign as of September 2011.

Barack Obama’s net worth is between $2.8 million and $11.8 million. Thanks to sales of his books, Obama can count himself among the richest politicians. He also earns a $400,000 salary as President. Obama has raised $88 million for his re-election campaign as of September 2011.

Ron Paul’s net worth is between $2.4 million and $5.4 million. This includes a five-year personal bank loan of up to $500,000. As a fan of gold, Paul has major investments in companies involved with gold and silver mining. Paul has raised almost $13 million for his campaign as of September 2011.

Rick Santorum’s net worth is between $1 million and $3 million. Santorum’s wealth is in rental real estate properties. He also has mortgages comprising debt of up to $750,000 on properties with a value of up to $1.25 million. He earned $1.3 million from January to August 2010 as a contributor on Fox News and from the Ethics and Public Policy Center think tank. Santorum raised $1.3 million for his campaign as of September 2011.

Rick Perry’s net worth is between $1 million and $2.5 million. The “poorest” of all presidential candidates, Perry receives a $133,000 salary as the governor of Texas. He has a diversified portfolio of stock investments. Perry raised $17 million for his campaign as of September 2011.

Should the individual who represents the United States of America domestically and globally be a reflection of American society? Does wealth tie into that equation?

Photo: Maassive
CNN, Federal Election Commission

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The wealth gap is growing, and if the Occupy Wall Street and its satellite protests are any indication, those not within the top one percent of income earners are not happy with their circumstances or the policies that help foster the wealth of those at the top. It’s been called class warfare, but there are other dimensions to the wealth gap than the spectrum that includes poor, working middle class, upper middle class, and wealthy.

The gap in wealth between young and old Americans is growing. Today, the Pew Research Center released new data showing the widening divide between Americans 35 years old or younger and Americans 65 and older. In 1984, the median net worth for the younger group was $11,521 (adjusted for inflation). The same year, the median net worth for the older group was $120,457. Net worth includes the value of all one’s assets, including a house, minus the value of all one’s liabilities, including student loan debt, credit card debt, and mortgages.

The passing of twenty-five years makes a difference. Today’s median net worth — actually not today’s number, but 2009′s number — for Americans 35 years old or younger is $3,662. That’s a 68% decline! Today’s youth is significantly less wealthy than the youth of the previous generation. In 2009, the older group’s median net worth was $170,494, a 42% increase.

This is a comparison between age groups, which I would expect to be fairly similar to each other and similar to the past in terms of socioeconomic distribution. They would have to be, or the data would need to be standardized, for the numbers to have merit. There are great reasons to be happy about the increase of wealth in one group, but there is also a wide variety of reasons why young people (and I am one — I’ll remain 35 for just a few more months, if all goes well).

• Unemployment within the young age group is high, while older workers are opting to stay in their jobs longer. In fact, recent graduates facing unemployment may never reach their income potential. This problem isn’t just going to go away when the job market improves.
• Some call today’s young adults (or old adolescents) the Boomerang Generation. After college, they move back to their parents’ house while looking for a job. They delay marriage and purchasing a house, both activities that are correlated with increased wealth. Yesterday’s recent graduates had jobs and houses, both of which contributed to gains over the past 25 years, particularly if the house was purchased in advance of the real estate bubble.
• Student loan debt is a much more significant part of a young person’s life today than it was in 1984. College costs have far outpaced inflation, and lenders have always been keen to extend the availability of higher education to more students (otherwise known as borrowers and customers).
• A college education is increasingly seen as the gateway to a good career in any field. It’s difficult to compete in an information-based economy (opposed to a manufacturing-based economy) without a bachelor’s degree. A high school diploma is no longer enough for participation, particularly when companies can afford to be selective in hiring.

If you’re in the younger group, the question should always be what you can do to reverse this trend. While there can be some results by supporting public policies that don’t include bail-outs for the rich (socialization of losses) while cutting back resources for those with the least opportunity (privatizing the gains), it’s important to put yourself in the best position possible so that you don’t need to rely on public policy in your favor.

Assume you’re a major league baseball player. (That will easily put you in a position where your wealth is quite healthy, but that’s besides the point at the moment. Just go with the unexpected metaphor for a second.) You have three balls and two strikes, there are two outs, you’re down by one run, the bases are loaded, and it’s the bottom of the ninth inning. You hit your next pitch to the shortstop. He mishandles the ball but gets it over to first base. It’s a close play, a tie, but the umpire calls you out. Your manager rushes the field from the dugout to argue, but it’s no use. You head back to the showers momentarily defeated.

It’s easy to blame the umpire for getting the call wrong on such an important play. It’s your job to perform well enough that there’s never any question about whether you’re safe or out. The “system” that requires an umpire to make a snap judgment call on a close play is the same “system” that makes it difficult for people to succeed financially. By taking control of your finances, you make the “system” — the job market, the economy, politician’s policies, to name a few societal aspects that aren’t easily controlled by one person — less relevant to your long-term success.

Photo: Jinx!
Pew Research Center

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Steve Jobs may not have been as wealthy as his arch-nemesis Bill Gates, but after his successes with Apple and Pixar, he was one of the world’s richest men. Forbes recently listed Jobs as 39th on the Forbes 400, a list of the richest people in America, with a net worth of $7 billion. The author of Jobs’ biography has been offering some insight into the billionaire’s life in advance of the book’s release. Some of the insight pertains to his attitude towards being rich.

As success came to Jobs and his colleagues, he observed the effect of the influx of wealth after Apple became a public company. An excess of money turned those who benefited from the company stock into “bizarro people” who purchased unnecessary things like Rolls Royces and plastic surgery. Jobs said he wanted to avoid “that nutso lavish lifestyle.” Although he could afford to upgrade his lifestyle, Jobs lived with his family in a modest house in Palo Alto and didn’t hire help or an entourage.

Jobs was’t a complete stranger to living a finer life than most of the country could afford. He owned an apartment in The San Remo, a building in New York that featured residents including Steven Spielberg, Steve Martin, and Bono. Steve also owned a 17,000 square foot mansion in California. While he didn’t own a Rolls Royce, he drove a 2008 Mercedes SL 55 AMG.

If Steve Jobs gave to charitable causes, he didn’t want anyone to know. There is virtually no record of Jobs sharing his wealth with causes needing funding, unlike many of the other billionaires outranking him. His direction for the posthumous distribution of his wealth is not public information. While many have criticized Jobs for not being a philanthropic role model, using his wealth to inspire others to focus on worthy causes, those with opposing viewpoints argue that his work building a successful company, creating wealth for others as well as revolutionary technology that, among other things, facilitate larger and faster contributions to these worthy causes, has done enough to improve the world.

It’s a weak argument, but it’s one that caters to the more capitalistic approach to philanthropy. It relies on the idea that by providing salaries to his employees, they will go out and accomplish the philanthropic goals that Jobs did not set for himself. The argument assumes that organizations using iPhones, iPads, and MacBooks to collect funds wouldn’t have been just as capable with other devices. Furthermore, the argument ignores that Jobs shut down corporate philanthropy on his return to Apple in order to save money. Did reducing charitable expenses play a significant role in saving the company?

Despite some fancy homes that often went unused and a moderately flashy car, Jobs seems to have taken the ideology of The Millionaire Next Door to heart. He continued to live his life mostly as he always had, not flaunting his wealth and not drawing too much attention to himself outside of his job responsibilities. For someone whose motto and company marketing slogan was “Think different,” Jobs appeared to desire to keep his differences unseen.

The Millionaire Next Door changed the way people think about millionaires. Most millionaires worked hard building a company to earn money. They didn’t earn it. They tend to blend in with their surroundings, not flaunt their wealth. Those who buy items as status symbols tend not to be wealthy (purchasing items on credit) or are wealthy only temporarily due to overspending. This idea of an understated millionaire, comfortable with his wealth and free of a need to prove himself, seems to fit the profile of Steve Jobs.

It’s perhaps an approach that would befit anyone who found himself with any amount of wealth beyond what is needed to afford the necessities of life.

Photo: Annie Bannanie 06
Business Insider, Examiner, Forbes, Forbes #2, Washington Post

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A typical professional athlete may be a prime example of the situation in which an individual might find himself suddenly wealthy. The idea that a person could consider himself middle class or lower one day and wealthy the next is a recipe for financial disaster. It’s easy to look at athletes because their trials and tribulations are often front page news. Michael Vick had some problems with the law, but now he’s dealing with financial fall-out. He has declared bankruptcy, and for the first time, the public is getting to see the choices he made with his money.

Vick listened to the wrong people and was perhaps a little gullible and trusting. His seemingly unlimited income gave him the opportunity to spend with zeal. He paid $223,000 a year for dubious financial advice, $78,000 a year for allowances for his family members, and an extra sum of $209,000 for his mother. His obligations included various house payments for his family in addition to the allowances, salaries for his entourage, $10,000 per month on jewelry for a period of 20 months, payments for his own houses (four), boats (five), cars (eight), and horses (unknown).

And then he wasted his money on failed business ventures for which his friends and advisers convinced him to part with more of his money, like a rental car franchise, janitorial operations, a restaurant, and of course the issue that eventually landed him in jail, the dog fighting ring.

The result of all his money missteps was bankruptcy, with a variety of companies staking claim to his future earnings. At least in Vick’s case, he is getting a second chance. With his new contract, and with a new approach to managing his money, he should be able to meet all his financial obligations.

The thought of having a sudden influx of cash, particularly if it puts you in a significantly different financial situation that those who are closest to you, is frightening. Suddenly, friends and strangers might approach you with investment ideas or pleas for help. Many suddenly wealthy individuals are grateful for their situation and want to help others, but responding to these requests can be a quick road to losing everything.

Ron Lieber, columnist for the New York Times, offers a three-pronged approach for people, not just professional athletes, whose financial situation changes significantly, quickly: slow, small, and scrutiny.

Slow

Don’t make decisions right away, and keep the money invested safely in cash or bonds from the outset. Don’t give in to the immediate pressure you may receive from friends, family, and strangers looking for investment capital or financial help, even though you may strongly desire to help those closest to you. Decisions made quickly could end up hurting your financial security later, so slow down your approach and resist the temptation to immediately go after investments that promise to pay off handsomely. It’s true that the wealthier you are, the more access you have to potentially lucrative, but complicated, investments, but keeping money invested safely for a while helps you wait until you can make more rational decisions.

Small

The good-hearted among us will want to use newly-acquired wealth, particularly if there is more money available that any one family could use in a lifetime, to make grand gestures with large amounts of money, making the world a better place. The adviser quoted in Lieber’s article points out that many athletes invest in a city only to find out they would be traded to another city the next year. Keeping gestures small would make more sense.

Additionally, if we’ve seen anything from celebrities in Hollywood, there’s often a temptation to use wealth to buy a massive house. Many people, even the wealthy, aren’t prepared for the expenses involved with maintaining a house, particularly if that house is large. There’s always a chance that it proves to be a good investment, if another celebrity makes the risky decision to buy the mansion at a higher price down the road, but there are never any guarantees. In the case of athletes, many become wealthy at a very young age — and they may have never even lived on their own before. The article suggests buying a small home to start, perhaps even a condo.

Scrutiny

Shady advisers appear out of the woodwork when there’s money to be made. The article says it’s a good idea to have an adviser, but be very selective. I’ve written a series about selecting and working with financial planners, and weather you’re suddenly wealthy or looking to build wealth over time, the same concepts apply. The most important factor is finding a fee-only financial planner to serve as a fiduciary, which means they are bound to advise in your best interests only. Even this doesn’t prevent an adviser from taking advantage of a client, though.

I would also argue that a good, solid education about basic money management can go a long way in reducing the need for outside “expert” opinions about how to hold or invest your money.

An athlete signing a professional contract, a lucky individual who wins the lottery, or an entrepreneur selling his company to Apple all might have to deal with a sudden influx of wealth. Keep cool and don’t make any sudden moves. Wait before offering any financial help or investment capital to friends, family, and advisers. From a practical point of view, these are likely to be good priorities:

• Pay any taxes due.
• Put aside a year’s worth of expenses in a liquid investment like a money market account or a high-yield savings account.
• Pay off any debt.
• Update or create a will.
• Determine how your wealth can help you reach your non-financial life goals and plan accordingly.

ESPN, New York Times

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In her new book, Delusions of Gender: How Our Minds, Society, and Neurosexism Create Difference, the author, Cordelia Fine cites studies that show how our lives are affected directly by the labels we give ourselves. I’m not interested in the strictly gender-related aspects of this discussion, at least not for Consumerism Commentary, but I am interested in the study that was related to an audience via NPR.

People in the study were asked to imagine the life of a certain vocation. Those running the study separated the subjects into one group asked to visualize the life of a physics professor, while the other group considered what it would be like to be a cheerleader. Then, the study required the subjects to imagine themselves in those roles. Those in the first group were more likely to consider themselves clever while the others were more likely to consider themselves gorgeous.

That result provides some insight into how visualization can change the perception of ourselves, but that’s not quite startling. The interesting part is what follows:

The exercise had actual effects on how people performed on tests. Those who had identified with the professor performed better on tests of analytic intelligence than those who had identified with the cheerleader!

Not only were those in the physics professor group more likely to consider themselves clever, they were tested and proven to be more clever — as a result, the researchers concluded, of the visualization technique.

I haven’t read the book, and I haven’t analyzed the study. From what I’ve seen of criticisms, the sample may have been too small to conclude anything significant about the effect of this type of visualization in psychology and neurobiology. I believe visualization is important, but it is not alone going to change one’s life, unlike some pop psychology advice. You cannot manifest a change in your life, like being smarter, more attractive, or wealthier, just by imagining what life would be like for someone who is smarter, more attractive of wealthier. The Law of Attraction is an idea that changes in one’s life can manifest just by focusing thoughts on a particular issue.

I can’t manifest a steak dinner just by thinking about a steak dinner, and chances are you can’t, either. Focusing thoughts on something is necessary to make a change in your life, but it’s only the starting point. I improved my finances and moves from a negative net worth to a positive net worth just about a decade ago, and this wouldn’t have been possible until I stopped to think about my situation. My life didn’t magically change; I had to make conscious decisions — and I was not used to making conscious decision in most areas of my life — and take direct actions to improve my money management skills.

Visualization is not a fruitless exercise. If you’re a fan of his investing style, consider Warren Buffett. Get to know him. Think about what his life might be like, from the moment he rises until he falls asleep each night. Consider what he might think about on a daily basis. Now imagine you are Warren Buffett, not just by imagining having the same sources of stress and frustration, work and leisure, but by being him inside and out.

If Buffett doesn’t work for you, maybe Bill Gates is your man — or Steve Jobs. Maybe your goal is entrepreneurial. Maybe you’d rather have a woman as a role model. Choose the individual whose success you most relate to, and let their thoughts, feelings, and concerns — or what you imagine them to be — occupy your body and mind for a while.

This may be where some pop psychology ends — just the visualization is enough to lead to success. I think there must be more. This is just the first step. Now, with frequent visualization reminders, make the decisions your role models would make. Ask yourself, “What would Gates do?” and follow that path. You may not be right all the time. Your role model might make a different choice than the one you’d expect, so the more you know about your role model, the more accurate your decision-making will be. Decision-making is an active process, and participation is mandatory. Although I didn’t realize this until I was in my late twenties, and some aspects of my life I still leave to chance despite knowing better, the more I play an active role in my life, the better it is.

By focusing on what your role model would do and taking this approach to decision-making every day, it will become second nature. You won’t have to think about what Buffett would do when deciding to invest in a company because your process will automatically identify the more Buffett-favored option (assuming your understanding of Buffett is accurate enough). By making the choices as if you were someone more successful from you, the choices will eventually result in your success. This isn’t pop psychology, it’s simply understanding how your role models make decisions and learning from them. Visualization is just the first step.

There’s a wrong way to do this, though. Consider the choice of spending $80,000 on a new BMW or $18,000 on a new Honda Civic. What would Buffett do? Well, if he drives rather than outsources his transportation to a driver, he might buy the BMW. $80,000 might be a drop in the bucket to him, considering his total wealth. But what would Buffett do if he had your net worth? Well, if your net worth dictates the Civic is the better choice for future financial stability, he would choose the Civic.

Be relating — or conflating — yourself to your financial heroes, you find yourself making better decisions about money. A series of better financial decisions results in increases of net worth beyond what you might experience if you continue living your life without considering the differences in decision-making between yourself and those whose success you admire.

NPR

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According to the latest World Wealth Report, a study designed by Merrill Lynch Wealth Management, last year was a good year for high net-worth individuals (HNWIs), people with more than $1 million in investable assets. After a few years of lagging due to the global recession, the number of millionaires worldwide has climbed past the former peak. There were an estimated 10.9 million millionaires globally in 2010, an 8.3% increase over the number of millionaires in 2009. The year with the next highest tally was 2007, with 10.1 million.

The total wealth of these millionaires also exceeded its 2007 peak. The 10.9 million high net-worth individuals amassed a total net worth of $42.7 trillion, an increase of 9.7% over 2009.

The United States Census Bureau estimates the global total population to be 7 billion, so having $1 million in investable assets places an individual among the top 0.15%. In other words, it’s more likely you’ll die in a pedestrian accident than be a member of this club.

This year’s World Wealth Report also looks at what these millionaires consider important when managing their wealth. 97% consider capital preservation important; particularly after a global crises, millionaires don’t want to lose their wealth. 93% want fees to be transparent, so they fully understand the cost of the investment services provided by their wealth manager. Other top priorities include effective portfolio management, specialized advice, global asset allocation, and independent financial advice.

For the first time, the Asia-Pacific region has overtaken Europe as the second most-represented area on the millionaire list behind the United States.

Despite all the hype about having $1 million in investable assets, being a millionaire isn’t all that impressive these days. When the term was first used in English in 1816 by Lord Byron (according to Wikipedia), $1 million had much more buying power than it has today. Having this level of net worth put you inside a much more exclusive group than today’s fellowship numbering 10.9 million.

Photo: mediafury
Capgemini

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Last week, I wrote about a study that evaluates the most important issues for wealthy people, and a new study released recently, sponsored by Fidelity, also takes a look at the attitudes of the super-rich.

If I were to have $1 million in investible assets — the value of what I have available to invest in stocks, businesses, etc., not including retirement savings or what’s needed to cover my expenses — I don’t believe I’d feel wealthy. To me, wealthy means not having to work. While I could take $50,000 a year out of this pot for 20 years, and if that “income” were to be combined with that of a working spouse, I could live a middle-class life where I do now. Of course, after 20 years, I would have nothing of this left. The real power of having $1 million in investible assets is the income that this value of investments can generate. Playing it very safe, taking only 2% of the investment to allow years of great returns to offset years of negative returns, I would be working with an “income” of only $20,000. The good news about this approach is that 20 years later, I’d still have wealth; the bad news is that’s not a living wage in most areas of the United States.

If my investments could generate over $100,000 each year, I would feel wealthy. At that conservative rate of 2%, I’m looking for an initial investible net worth of $5 million. That’s the point that I’d feel wealthy. 42% of Fidelity’s survey 1,000 respondents with an investible net worth of over $1 million don’t feel wealthy. They need, on average, $7.5 million to consider themselves among the wealthy elite. 58% of the respondents do consider themselves wealthy. This set of individuals pointed to $1.75 million in investible assets as the point at which they began feeling wealthy.

There’s quite a difference between those who do not consider themselves wealthy, who estimate they’ll cross that threshold at $7.5 million, and those who do consider themselves wealthy, who claim to have come to that realization at $1.75 million.

Although we could point to the Global Rich List again to gain a greater perspective on our place among the community of the world, but that has little bearing on our day-to-day experiences. Much of this comes down to the meaning and sense of the word, “wealthy.” This is a word that can mean different things to different people. For the purposes of the Fidelity study, this may not have been defined, leaving the respondents to come up with their own interpretation of the questions based on their understanding of the word.

I would love to hear comments from readers on the issue of wealth.

What does it mean to be wealthy? If you consider yourself wealthy, at what point (and level of net investible assets) do you believe you crossed that threshold? If you don’t consider yourself wealthy, how much do you need to feel wealthy?

Wall Street Journal
Photo: david_shankbone

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A Boston College study recently looked at the community of the “super rich,” defined in this case as households with a net worth above $25 million. The purpose was to determine whether wealth, or more specifically, absolute financial security, resulted in fulfillment. There have been numerous studies on wealth and happiness, and often, the results are contradictory. This study set out with the goal to survey 1,000 individuals whose household net worth exceeds the aforementioned minimum with open-ended questions. The researchers were able to collect only 120 responses, so the sample might not be representative. The resulting information, however, did speak to the level of fulfillment among this crowd.

The survey shows that people have a craving for financial security, perhaps an inborn drive like other factors needed to survive like the desire for food. While we may stop eating when we are sated, by looking at the environment that changes with growing wealth, we may never feel we reach full financial security.

The survey also identifies differences between people who have inherited their wealth, those who have earned their wealth, and those who suddenly became rich due to, for the most part, luck. For the latter two categories, gained wealth often brings upon a change in social environment — some friends disappear while some new friends enter the picture. For this reason, many wealthy often keep their success a secret. The onset of wealth could make you wary of your intimate relationships, and make you question whether your partner loves you or your money.

Possibly worst of all the psychological issues wealth brings, wealthy people know that their issues are “rich people’s problems,” and as a result, believe that they shouldn’t be complaining publicly. For example, the super rich could be anxious when the holidays arrive, because no gift they could present to someone will live up to expectations of an appropriate gift from a wealthy individual. It’s dangerous to internalize these feelings of dissatisfaction or frustration.

Most of the wealthy individuals surveyed in this study are concerned about their children. While they are pleased that they don’t have to worry about affording education, they fear that their children will grow with a sense of entitlement if they are fully provided for, or will grow with a sense of resentment if wealth is held back in an attempt to teach them responsibility and the value of earning one’s way through life.

Every individual exists in a unique situation. Though it’s possible to generalize all the problems one might have based on the level of that individual’s wealth, we shouldn’t write off someone’s deepest concerns because they are different than other people’s concerns or because we feel they should be happy with what they have. It might be difficult to feel compassion towards someone who seems to have all the luxuries a non-wealthy family would want, but I don’t think psychological isolation is good for anyone. It also helps to remember that even though you might not be super rich in terms of this study, even a small income of $26,000 in the United States puts you well above 90% of the world’s population. We all have “rich people problems.”

The Atlantic

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At some point within the past couple of years, I became a millionaire.

There was no party, no celebration. In fact, it was clearly a non-event, considering I have no idea when it might have happened. If you’ve been tracking my financial progress monthly with me, you may be a little confused. After all, my December 2010 update listed my net worth as only $538,000. I’m happy with the progress I’ve made throughout the past decade, starting from a net worth below zero, but my December 2010 total is a bit shy of $1,000,000.

So where do I get the impression that I’ve been a millionaire for some time? It’s all in the way I calculate my net worth.

A full calculation of someone’s net worth includes the value of everything they own: a house, a car, electronic equipment, and jewelery, for example. Except for the bigger items, those that could be sold if necessary to have more money in the bank, it doesn’t make much sense to include the value of your stuff. If your purpose is to track your financial progress over time, there is not a lot of information that you can get from including the value of your computers or televisions in your net worth. There are many things I don’t include in my monthly net worth calculation for that reason, such as my coin collection or musical instruments, or even more abstract financial concepts like an accrued tax liability.

I also haven’t been including my business in my net worth calculations. The value is just too hard to pin down. Also, I don’t include a business value for the sake of consistency. When I started tracking my finances, I had no business to include. My calculation has remained the same since then. If I really needed to know my financial worth, I would be required to include some legitimate valuation of my business.

There are a lot of methods of determining the valuation of a business. I won’t go into the calculation options here, nor will I speculate on the financial value of Consumerism Commentary. I will say that looking at the present value of the projected income, the business would be valued high enough that I would be considered at least a millionaire.

This is only on paper. I’m not going to change the way I live and my approach to my finances. There are a few things to keep in mind. A millionaire means much less today than it did when the word was coined. Inflation is cruel. Also, someone may not consider himself a millionaire unless he had $1 million in more liquid form — not a in the value of a house or a business. Having $1 million to invest is different than having a good portion of that value locked into assets or representing a future income stream that, in a worst-case scenario, could disappear.

I didn’t write this article to brag about my net worth or to pat myself on the back; it’s just a statement that there are a few ways of looking at your finances, and certain labels can be meaningless. Becoming a millionaire was never a goal. I don’t believe in using financial targets or milestones as goals because the important idea or guiding force in a life is not the money or your net worth, but what you do with your life.

I’ll stick to calculating my net worth the same way I have been, by not including a speculative value on my business.

Photo: Rojer

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On Thanksgiving, the New York Times published a story about a man who had a check for $14 million ten years ago — $10 million after taxes — and who now has little to his name (Nick Martin). It’s not the sort of uplifting, family-focused feature article you usually see around the holidays, but people do seem to enjoy reading about the misfortune (quite literally, in this case) of others.

During the holidays, I was able to forget about money for a little while, but returning to “real life” after a vacation means I have to get down to business. For me, that means doubling my writing efforts and managing Consumerism Commentary better and stronger. Back to the series of Nick Martin’s unfortunate events.

In 1998, Nick received a check for his portion of the proceeds from the sale of his family’s billboard company. The urge to spend took hold, resulting in cars, houses, and horses. To keep his new purchases in good condition, he needed cash flow, something that was significantly lacking, particularly as real estate investments and the stock market crashed.

It’s easy to be judgmental. The internet is a place where armchair quarterbacks feel comfortable. Very few people know what would happen if the same situation — an unexpected windfall — occurs to them. There’s enough blame to go around. Here is Mr. Martin’s perspective:

He is furious at the banks and the bankers, who he thinks gave him bad advice, and he still sounds angry at his brother and others who decided to sell the company and who he says gave him little voice. Some of them got more than $100 million each, he said, while he got $14 million, as did his father and his sister Ann, because they were all minority shareholders.

In any similar situation, we see bankers who give advice with their own financial gain in mind rather than fiduciary responsibilities, individuals who trust a limited number of professional opinions, and the temptation to spend. Placing blame isn’t really important.

We can play games of hypothetical situations, asking each other, “What would you do if you inherited $10 million?”. When we can separate ourselves from the situation, it’s easy to think rationally. Here is what one might consider if they took the opportunity to envision receiving such a lump sum ahead of time.

• Invest conservatively to ensure a cash flow and live off the income.
• Have a low-stress job to boost that income.
• Invest a small portion in the stock market for a chance to grow wealth without risking too much of the balance.
• Possibly start a foundation, passionately supporting a cause.

These are all rational choices. Unfortunately, rationality is often the first thing to go once that check is in hand. In general, financial decisions are rarely rational even when not involving windfalls because humans are generally irrational, favoring emotional decisions. It is quite unfortunate that a descent like Nick Martin’s can occur, but losing a great deal or having a windfall slip through your fingers can be a good reminder that these is more to life than your net worth.

New York Times

The original version of this article, How To Lose $10 Million Fast, is copyrighted by Consumerism Commentary.

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On Saturday, an auction in New York featured items once owned by Bernard Madoff. The auction raised over $900,000, beating expectations. Once combined with proceeds from another auction later this week, it’s likely that this money will go to investors who were burned by Madoff’s Ponzi scheme.

Here are some of the items that received winning bids this weekend:

• Two pairs of Ruth Madoff’s diamond earrings: $140,000
• Bernie’s Mets jacket: $14,500
• Three duck decoys: $11,500
• Madoff branded boogie boards: $1,000
• A life preserver: $7,500

Serving 150 years in prison could likely be, from an asset value standpoint, one of the best things to happen to Madoff. Of course, he won’t be able to enjoy the benefits of his celebrity status. The benefits of this auction and Tuesday’s auction of larger assets such as Madoff’s boats will go to his victims. One of these victims is allegedly Zsa Zsa Gabor. She owes $120,000 to the IRS and claims her inability to pay is due to Bernard Madoff who took $7 million of her money through the Ponzi scheme.

Zsa Zsa will assemble the money with the help of her ninth husband and will do what many people do when they owe the IRS money: They will set up a payment plan on pay the debt over time.

Watch eBay and other auction houses; perhaps some of these items will continue to fetch higher prices due to their association with the most popular investment scammer in recent history.

Madoff’s Mets jacket sells for … $14,500, Les Christie, CNN Money, November 15, 2009
Zsa Zsa Gabor says she was victim of Bernie Madoff, Jessica Hudson, Examiner.com, November 15, 2009

Consumerism Commentary was included as an Editor’s Choice in the 229th edition of the Carnival of Personal Finance earlier this month with Seven Zen Principles to Guide Your Money and Your Life.

The original version of this article, The Madoff Name Premium, is copyrighted by Consumerism Commentary.

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It is a shame that people are still fascinated with the idea of being a millionaire. According to an online etymology dictionary, the word “millionaire” was first seen in print in 1826, a year when having a net worth of one million dollars was an amazing accomplishment. An inflation calculator puts this into perspective; $1,000,000 in 1826 has the same buying power as $19,359,086.05 in 2009. There is nothing wrong about aspiring to become a millionaire as long as you realize that over time, the cachet of this status decreases and the number of millionaires increases.

Financial authors still look to millionaires as examples for the rest of us. Books like The Millionaire Next Door by Thomas Stanley and William Danko point out that most millionaires have self-made wealth, are business owners, and have a mostly frugal attitude towards spending.

A net worth of one million dollars in 2009, even if this does not include money tied up in the value of a primary home, will not provide financial independence for most people in United States. Assuming the one million dollars is invested in the stock market, and assuming financial planners’ recommendation of a safe withdrawal rate of 4% for maintaining value, a retiree or retired couple would be living on $40,000 each year. Considering families in this economy may be wary of investing their total nest eggs in the stock market, 1% or 2% may be a safer withdrawal rate.

One million dollars is not going to provide enough income each year for full retirement unless investment income is augmented by income from working, which defeats the purpose of traditional retirement, drastically reducing expenses to the point where retirees might need to redefine their planned retirement adventures, or moving to a country with a lower cost of living. For these reasons, my Number is well north of the one million figure. Note that I don’t call any certain number a goal, a real goal is not a number but the purpose behind acquiring wealth.

Rather than looking at the habits of millionaires, many of which are helpful but commonplace, I’d like to see more books focusing on the habits of those who have amassed wealth in the eight or nine digits. A quick look at the list of the world’s top billionaires (see Wikipedia) shows that like millionaires, the richest people in the world built their wealth by being atop the world’s largest corporations, and in Warren Buffet’s case, great investment prowess.

I prefer to focus on those who have achieved my Number, somewhere above “millionaire status” but below the stratospheric net worth enjoyed by the richest in the world.

Photo credit: TEDizen

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We spend our life in modern society accumulating Things and possibly accumulating money. When you take a step back and look at life on the larger scale, money is not a goal in isolation. We strive to accumulate wealth not to die with our names in various banks’ computers associated with high numbers. There must be something else we intend to do with that money, as it is only a tool, a means to an end.

Among the ability to buy and accumulate Things, having money allows us to have more options. Having money allows us to have children — although the lack of money rarely stops people from procreating. Parents who have unspent money may decide to transfer their wealth to their children as they approach or reach the end of their lives.

The decision to leave money to children is personal, and there are many arguments both for and against. But assuming you’ve made the decision to pass wealth to younger relatives, how do you decide how much each heir should receive?

One option would be to divide your estate equally among all recipients or equally among recipients of the same level. For example, with $30 million to distribute and two children and four grandchildren, you could leave $5 million for each heir. Another option would be to leave $8 to each of your two children and $3.5 million to each of the grandchildren. Either one of these options might be considered “equal.”

What if one of your children is a successful entrepreneur who is wealthy in her own right and the other is a successful non-profit manager who has not earned a fortune on their own but has struggled for an important cause? Would it still be right to leave equal amounts to each child? What would you do if one of your grandchildren is developmentally disabled and would benefit from several million dollars to cover a lifetime of health care expenses?

“Equal” is not always the same as “fair,” and it’s usually easier to determine what is equal than to determine what what is fair. How would you decide to allocate your wealth among your heirs? This dilemma could be avoided by giving your fortune to charity. However, assuming you’ve decided the money could be well cared for in the hands of offspring or other heirs, what would you do?

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Even though I share my financial reports every month, I don’t see increasing my financial wealth as a goal. The accumulation of money is not a destination. I am not aiming for any particular measure of financial worth, such as ten million dollars of net worth or one million dollars of passive income each year. While these milestones would be nice, they, or any other financial metrics, are only means to an end — or to no end.

Money is only worth what you can do with it. What is the point of accumulating a higher balance in a banking account or a higher value of investments if you never put that money to use? I will concede:

• Leaving money alone to appreciate through compound interest or investment gains is a great way to build wealth over time.
• Saving as much as possible when you are young allows you to have more options as you proceed along your journey through life.

But money has very little meaning now on its own. There is no money, there are only bits and bytes in banking institutions’ extensive computer server farms. You trust that when your banking institution says your bytes have changed to award you a higher number, you can connect that account to someone else and transfer your bytes to pay for an expense. In rare cases, you may even wish to turn those bytes into pieces of paper or coins.

So when I hear that someone’s goal is to have a nest egg of ten million dollars, it is an empty goal. This goal is nothing more than having bits and bytes in a certain configuration on a certain server in a database record associated with your identity. I accept that it will be difficult to get the bytes to arrange in that fashion, but look beyond this. What would you like to do with that money?

You may feel happy or proud when you reach this or any milestone you set for yourself, but wealth doesn’t do any good sitting in your bank account. I mentioned above that saving more now provides you with more options in the future, so rather than looking at a number, start deciding which options you would like to pursue. Here are a few in no particular order. Assign your goals to the reasons you are saving money, not the money itself.

Providing the basic necessities for yourself and your family. Many people build wealth simply so they can survive, sometimes with just the necessities and sometimes in the style to which they are accustomed. These financial needs, including shelter, food, water, and health, need to be taken care of before you can consider doing anything else with your money. If you plan to stop working and expect your income to cease, saving for the necessities is essential.

Leaving money to your heirs. If you don’t have children, perhaps this is not a concern. But many people do have children and would like their wealth to pass along to the next generation. Not everyone with children will choose to set aside money for their children. I have heard arguments claiming that children are better off without trust funds and what may be excessive support from parents, but I feel that children can succeed with as many options available as possible.

Education for yourself and your family. Analytical people suggest basing decisions about education based on your financial return on investment. If you spend $100,000 for a degree, or much more if you have loans with interest to pay, how quickly will your new degree allow you to recoup those expenses? Well, thankfully not everyone believes that the only value of education is the ability to earn an increased income. A life without teachers, non-profit organizations, researchers, and artists would not be worth living. Saving for future education expenses, for you or your children, will reduce the difficulty in affording an educational program that does not put one on track to become a hedge fund manager.

Be a positive force in the world. There is at least one issue that is important to every adult. Money allows you to change the world if you concentrate your funds towards that issue. For example, Bill Gates believes that it is despicable that people throughout the world are still dying of malaria, a preventable and treatable disease. Through the Bill & Melinda Gates Foundation, an organization whose existence is possible due to his financial success, Bill uses his wealth to help eliminate needless death in Africa.

It’s admirable to want to increase your wealth, but that can’t be a goal. It’s one step on the way towards other goals. Money is nothing by itself, particularly if it is sitting in your bank account.

Why do you save money?

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Let’s face it: if she (and her husband) can, you can, too! While acknowledging that a million bucks ain’t what it used to be, Liz, a columnist for MSN Money, shared her secrets about how her family’s net worth climbed to $1,000,000.

There were no game shows or “reality” TV appearances. According to Liz, here are the elements of her strategy:

You’ve got to want it — and plan for it. “There are few accidental millionaires in the world. People who achieve financial independence, however they define it, make getting there a priority in their lives.” She started investing in her company’s 401(k) in her mid-twenties and chose cheaper trips rather than expensive vacations.

Live within your means. Spend less than you earn, pay yourself first, and set up automatic transfers and investments.

Invest regularly and don’t stop. If you react to market movements, you end up buying high and selling low.

Be smart about debt. Avoid high-rate debt and use low-rate debt to your advantage. “We chose an old-fashioned, 30-year, fixed-rate mortgage because the low payments allowed us to invest more for retirement while still allowing us to gradually pay off our debt. I’m not saying it’s the best mortgage for everybody, but it’s working for us.”

Own a house — and don’t waste it. “There’s no question that owning a home in Southern California got us to the million-dollar mark a few years earlier than I’d projected.” Bingo. Most millionaires have reached that level due to home ownership. It’s one thing to be a millionaire “on paper,” and another to have $1,000,000 of cash at your disposal at any time. “Homeownership isn’t a no-brainer. You can always mess up by buying more home than you can afford, draining your wealth away with home-equity loans or trying to speculate in an unstable market.”

Invest in yourself. “We’ve discovered (duh) that it’s easier to meet your goals, and have money for fun, if your income is rising. So we’ve invested in education, launched our own businesses and looked for new ways to generate cash. In today’s ever-changing economy, you have to be ready to learn new skills and take new directions.” As you can see, income plays a very important role in building your net worth. Keep that in mind when someone tells you, “It’s not what you earn, it’s what you spend.” It’s both. It may be hard to change your income if you believe it is already maximized, but chances are, it’s not.

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