Forecasts & Strategies
by Mark Skousen
“In the midst of the biggest economic boom ever, millionaires are going bankrupt.” – Forbes (October 2, 2000)
Last March, I reported the findings of Professor Thomas J. Stanley, author of The Millionaire Next Door and The Millionaire Mind, that the rich are model citizens-frugal, well-educated, balanced, religious and happily married. But according to the October 2 Forbes, a growing number of millionaires are going bust. Doctors, lawyers, accountants and executives are declaring chapter 7 and 13 bankruptcies at record numbers during this time of prosperity, due to bad business decisions, poor budgeting, overuse of credit cards and divorce. I also know a few financial gurus who continue to dispense advice yet are strapped (but I won’t mention any names).
There are several important lessons here:
(1) An above-average income is no guarantee of financial success. Forbes describes individuals earning $300,000 a year, and some with assets exceeding $5 million, going under. Las Vegas singer Wayne Newton was earning a million dollars a year when he went bankrupt in the early 1990s. (He blamed it on his advisors for getting him into leveraged real estate projects.) Earning more money is not the answer to one’s financial problems-living within your budget is.
(2) Open-ended credit card and business debt is a major source of trouble. If you can’t pay off your credit cards every month, you are headed for trouble. Replace them with debit cards or the American Express card, which requires you to pay off your obligation every month.
(3) Avoid margin debt and leveraged business ventures. The majority of busted millionaires made the mistake of getting in over their heads in leveraged real estate deals and highflying stocks. In many cases, greed drove them to put too much of their savings into one risky scheme.
(4) Most importantly, always spend less than you make, year after year. This advice may sound simplistic, but I’m amazed at how often it is violated.
The Best Book on Avoiding Bankruptcy
There are some excellent books on the subject: Rich Man, Poor Man by Robert T. Kiyosaki, The Wealthy Barber, by David Chilton or High Finance on a Low Budget, by my wife, Jo Ann, and me (all available through amazon.com). But the classic work on the subject is The Richest Man in Babylon (New Library edition). I require it in all my investment classes. It tells the story of Arkad: “In old Babylon there once lived a certain very rich man named Arkad. Far and wide he was famed for his great wealth. Also was he famed for his liberality. He was generous in his charities. He was generous with his family. He was liberal in his own expenses. But nevertheless each year his wealth increased more rapidly than he spent it.”
How could Arkad accomplish this financial miracle of being a big spender and yet still grow richer every year? Simple. Whether he earned a lot or a little, he always set aside at least 10 percent of his income, which he religiously saved and invested. He scrupulously avoided living beyond his means. Thus, in times when he earned more, he could afford to spend more-even as he added to his net worth.
My Financial Life Story
I read The Richest Man of Babylon when I was a young adult and have followed it ever since with great success. I started college with $50 in my pocket, but have always lived frugally. I pay cash for everything, including big-ticket items like cars. I seldom buy stocks on margin. I put aside 10%-20% of my income every year through my pension plan and Automatic Investment Plans (AIP) with various brokers. Like Arkad, I spend money liberally on my family, church, charities and other good causes (such as the Foundation for Economic Education). My only major debt was my home, and I paid off my mortgage several years ago, so I am totally debt free. Yes, I invest frequently in high-risk ventures, but I always diversify enough to keep out of trouble.
If you haven’t read The Richest Man in Babylon, I suggest you do so. It is entertaining and enlightening-and will keep you financially straight.