The other day I asked a very wealthy entrepreneur about his main financial concern. He's probably worth anywhere between $50 million to $75 million dollars. Given he has so much money, I thought his answer would be more philosophical, like “making sure my kids appreciate the value of money,” or “how to create a lasting legacy.”
Instead, the entrepreneur responded, “My biggest concern is making sure I have enough cash flow to maintain my lifestyle.”
I initially thought the answer was odd because why bother measuring cash flow given he can simply draw down principal to fund his lifestyle forever. $500,000 here, $1 million here, who cares? He's still left with tens of millions of dollars left over! But maintaining a lifestyle that is meaningful to you is what having money is all about.
Many people with tremendously high net worth figures don't have nearly as much LIQUID net worth as one would assume. People mistakenly think that just because someone has a $10 million net worth, that they can withdraw 10 million $1 dollar bills and make it rain. Instead, high net worth individuals likely have much of their net worth tied up in equity stakes that could disappear if a downturn like 2008-2009 ever happened again.
Just look at the guy who founded CNET, the technology online review site. He was worth $2 billion dollars, but after a divorce and leveraging up in 2007, he filed for bankruptcy. Every super wealthy person I know is well aware of how ephemeral wealth is. This is why buying real assets, like property or fine art is so attractive to many equity millionaires.
The Importance Of Cash Flow
Whenever the stock market takes a dump, I lose a lot of money due to my absolute dollar value exposure. But I really don't pay attention so much after I establish a proper asset allocation based on my risk tolerance. The stock market's daily movements are out of my control and I don't recommend anybody wasting their time trying to trade the market if they have more interesting things they want to do.
The only thing I pay close attention to on a weekly basis is where the 10-year bond yield is moving so I can jump on refinancing my mortgage debt. When I see the S&P 500 drop 1.5%, I don't care so much unless the S&P 500 continues to drop for consecutive weeks. But when I see the 10-year bond yield collapse, I am exciting as all get out!
There's two years left on one of my 2.625% 5/1 ARM mortgages. If I'm able to refinance the mortgage to 2.25%, I'm able to save $3,750 a year in interest on a $1 million loan ($1,000,000 X 0.00375). The $312.50 in monthly savings excites me even though I'm probably losing five figures in the stock market that day alone when rates are collapsing! Weird, isn't it?
It's not so weird because taking action with your finances feels good. If I refinance a $1 million mortgage at 2.25% at a cost of $2,000, I will break even in 6.4 months and save $312.50 in interest expense for 43.6 months left = $13,625. As for the stock market? I can't be sure what tomorrow will bring.
For anybody who has a mortgage, inquire about the latest mortgage interest rates. Take a look at the mortgage rate chart below.
I spoke to two bankers, and they said there is a tremendous amount of volatility in the bond market now with Russia, Europe in general, and the oil market. I've specifically told them that if they can get 2.25% for a 5/1 ARM jumbo, I'll do business with them. This way, I don't have to keep on checking. Two people are already incentivized to save me money so they can make money.
My only problem with refinancing a mortgage is that banks require two years of 1099 wages (independent contractor) and I've only got one, so my entire 2014 contractor income does not count. Furthermore, I've decided to earn a much lower W2 income amount than what I made in finance in order to reduce my tax liability. A 25% Federal tax rate feels fair. A 39.6% Federal tax rate feels like highway robbery.
The “good” thing is that refinancing a mortgage can often take 60 days. And within those 60 days, I can up my business salary to a point where my debt to income ratio passes by bank underwriting standards.
Control What We Can, Make Peace With The Rest
The Serenity Prayer says, “God, grant me the serenity to accept the things I cannot change, The courage to change the things I can, And the wisdom to know the difference.”
I love this prayer because it reminds us that action can be taken to improve a situation, and we should let go of things outside of our control.
I view the following things as what we can control:
* Our attitude. Are we coming in with a positive, cheerful, hopeful mindset? Or are we bringing a bitter, angry, pessimistic, and jealous mindset?
* Our work ethic. Given we all have the same amount of time during the day, are we trying our best to utilize our time to learn more, focus more, and try harder? Do we wake up before dawn or stay up way past when we kiss our loved ones goodnight to work on our dreams?
* Our generosity. Do we think how our actions will affect other people? Is there a way of enriching ourselves while enriching others as well? Are we thankful for what has been given to us, and mindful of the suffering around us?
Luck Comes And Goes
Eventually, our luck will fade. Hopefully, we'll have done enough good things during our time of good fortune where we'll be able to maintain a steady state of happiness once the bad times return – savings, asset diversification, etc.
The super wealthy contain the very same survival mode instincts as the rest of us, despite accumulating more wealth than they could ever imagine. The super wealthy know their riches could disappear in an instant. They just need enough risk-free assets to keep the income flowing.
Other Cash Control Ideas
* Call your credit card company to lower your interest rate.
* Transfer your credit card debt into a 0% intro card. Haven't done this since I was 25, but it's effective.
* Find out what the latest HELOC rate is and consider conducting some debt arbitrage.
* Call your mobile carrier and ask about the latest data deals.
* Analyze the latest rental market and raise the rent.
* Research the latest high dividend yielding stocks.
* Invest in REITs
* Invest in real estate crowdfunding platforms through debt or equity
* Get rid of things you don't use and take advantage of the sharing economy.
TRACK YOUR MONEY TO GROW YOUR MONEY
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Updated for 2019 and beyond.