Coach Yourself to Wealth

Live the Life You Want

Martin Hawes and Joan Baker

First published in 2005 Copyright Martin Hawes and Joan Baker 2005 All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of this book, whichever is the greater, to be photocopied by any educational institution for its educational purposes provided that the educational institution (or body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. Allen & Unwin 83 Alexander Street Crows Nest NSW 2065 Australia Phone: (61 2) 8425 0100 Fax: (61 2) 9906 2218 Email: [email protected] Web: www.allenandunwin.com National Library of Australia Cataloguing-in-Publication entry: Hawes, Martin, 1952. Coach yourself to wealth. ISBN 1 74114 365 9. 1. Finance, Personal. 2. savings and investment. I. Baker, Joan, 1956 . II. Title. 332.02401 Typeset in 12/14 pt Adobe Garamond by Midland Typesetters, Maryborough Printed by Griffin Press, South Australia 10 9 8 7 6 5 4 3 2 1

Contents
Preface: A better life Part I Setting the stage 1 How this book works 2 KASH your way to wealth 3 What is wealth and freedom? 4 WealthCoaches Model for wealth and freedom Part II Current position: Where are you starting from? 5 Facing reality 6 What is stopping you? 7 Net worth 8 Where are your assets? Getting the balance right 9 What is coming in: Income 10 What is going out: Expenditure flows Part III Your desired position: What do you want? 11 Whats the dream? 12 Who will share the dream? 13 What do you really value? Part IV Your Freedom Figure: How much will you need? 14 Whats enough? 15 SMART goals 16 Now, what do you really want? v 1 3 6 9 15 31 33 36 39 46 51 55 65 67 72 75 79 81 91 97

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Part V Strategies for wealth: How will you create wealth? 17 How wealth is created 18 How income makes you wealthy 19 How wealth is destroyed 20 How to protect wealth 21 You have to own Wealth-Creating Assets 22 Choose only one Wealth-Creating Asset 23 How to choose a Wealth-Creating Asset 24 Getting asset allocation right 25 What if you have a job? 26 You must create a surplus 27 You should maximise income 28 You have to learn to borrow 29 How to maximise your returns Part VI Action plans: What will you do? 30 Bridging the gap 31 Do a one-page plan 32 Turning strategies into actions Part VII Where can you find help? 33 Whos on your side? 34 Networking: Winners work with winners! 35 Assembling a dream team 36 Are you getting the best? 37 Making your team work for you 38 Tips for choosing professionals 39 Learning from the masters 40 The last menu item: Frogs!

101 103 106 110 114 118 122 124 126 137 141 149 156 161 165 167 171 176 183 185 188 192 196 199 204 207 215

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Preface: A better life

The principles we set out in this book work. For several years now we have been working as WealthCoaches helping people to arrange their money to live a better life. We have applied the principles set out here to many peoples finances over that time, proving that they work in many different situations. Using this book, you too can understand the principles of wealth creation and apply them to your own circumstances. Everyone is different. We all have unique circumstancesno two people, or families, have the same financial situation. Our incomes are all different; our expenditures are all different; what we own is unique, as is what we owe. Even more importantly and interestingly, we all have different dreams, visions and aspirations for our futures, different goals for what we want and what we want to be. It is these differences that keep the two of us doing what we docoaching people to improve their finances to have a better life. The differences are the challengethere is no one template that can possibly fit all people with all their different situations. The differences provide us with the challenge of working with people in all sorts of circumstances as they arrange their money for the life that they want. The differences mean that we as WealthCoaches can never relax and become detached as we work with clients. The fact that everyone has a unique position and unique goals demands that in the planning phase we listen hard and think even harder. We have to understand where our clients want to be in the future and have a clear picture of where they are now. We all have strengths and weaknesses, strong parts of our personalities and finances that can be used for the good, and weak parts that have to be accommodated. It is our job as planners and WealthCoaches to work out what is strong, what is weak, and
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to fit the pieces together to make the best whole. How do we make the pieces fit so that our clients get the lives that they want? The answer is that it is like starting a fresh jigsaw puzzle each time we take on a new client. There is a puzzle that has to be solved each and every time. Having said that theres no template which can fit and match everyone, there is a process that we follow with our clients, a process that we have developed and refined over the years and which we will never stop trying to improve. It is presented so that you can use it yourself to create the wealth and the life that you want. Our experience in dealing with people is that despite their differences, everyone wants one thing: a better life. Clients look to us to help with the money side of that, whether they have a lot of money or not much, whether they are getting to the end of their working lives or just starting out. Money is important it makes the difference as to whether you can have the life that you want or not. Money gives choiceswith good finances you have options that other people simply do not have. Having a lot of money is not a panaceait will not solve all the problems in you lifebut for most of us it is a prerequisite to having the freedom to live our lives as we want. Without money (or with our money arranged and invested badly), our lives are more restricted, our choices more limited. We are committed to helping people achieve the financial position they need to be in to allow them to live the lives they want to be able to live. That is the purpose of our work and the theme of this book. Practically anyone can become wealthy and free. We have dealt with all sorts of people, from those who already have plenty of wealth but need help to arrange it to be free, to those with very little, who are just starting out to develop wealth, and much of what we have learned is here for you to read. Joan Baker, Martin Hawes; [email protected]
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Part
Setting the stage
Chapter Chapter Chapter Chapter 1 2 3 4 How this book works KASH your way to wealth What is wealth and freedom WealthCoaches Model for wealth and freedom

I
3 6 9 15

How this book works

Chapter

So, you have decided that you want to be wealthy and free. Congratulations! That is the hardest step by far. Most people never progress beyond the stage of wishing to be rich. You are reading this book because you want your life to be different. We are going to take you through the steps you need to take in order to become wealthy and free to live the life you want. The process we work through with clients has five main building blocks or steps. We look at: 1. Your current position. 2. Your desired position. 3. Your freedom figure. And then we move on to: 4. Strategies for wealth. 5. Action plans. As you read on you will find out exactly what you need to do in each of these areas. Here we outline the sorts of things you will be working through under each heading.

1 Your current position

The most important thing here is to get a very clear sense of where you are starting from. Many of you may have only a vague idea of the current position of your financesafter all, most of us are too busy to do much more with our finances than get through each month. In this section we will be helping you work through exactly where your finances are nowhow much
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wealth you have, how your assets are allocated, what your current income is, how much money is being spent and where, and what is happening to the surplusif there is a surplus.

2 Your desired position

In many ways this is the most exciting part of creating wealth. This is where you get to decide what your dream life will look like. In this section we help you work through your dreams so that you can describe in some detail the life of wealth and freedom that you want to achieve.

3 Your freedom figure

Using your dream lifestyle as a guide, we then focus on helping you to work out how much wealth you will need to live the life of your dreams. We call this amount of wealth your Freedom Figure, the amount of money that will allow you to be wealthy and free to live the life that you want. Freedom Figures differ because everybody has a different dream of their ideal life. You will need a certain amount of passive income to live the life of your dreams. To get that amount of income you will need to have a certain level of capital to provide it. This section shows you how to calculate what your Freedom Figure should be, so that you can set that number as your main goal.

4 Strategies for wealth

Your strategy for creating wealth needs to be a good fit with who and what you are. Many people try to become wealthy by copying other peoples strategies without doing the work they
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HOW THIS BOOK WORKS

need to figure out where they are at and what they want. We think that you should do a lot of preparatory work before choosing a strategy to build your wealth, a strategy that will work best for you. We outline the various strategies for wealth creation and give you some guidelines to help you choose the one that best suits your circumstances and talents.

5 Action plans
Nothing much ever gets done without a clear plan. The path to the level of wealth that will let you live the life of your dreams is usually a long one and could take a few years. Without a good plan you are likely to lose your way or become disheartened because you cannot see that you are making progress. In this section we help you build a simple plan of action that will assist you to do the right things and let you set milestones that allow you to celebrate your success.

KASH your way to wealth

Chapter

As we progress you will find that each step to wealth requires you to examine what you have been doing and make some changes. There may be new concepts to learn (K = knowledge), new approaches to wealth (A = attitudes), new actions to learn (S = skills) and new practices to acquire (H = habits). These four letters form the memory aid KASH, representing the core of your learning. Knowledge might include a new vocabulary or concepts such as Wealth-Creating Assets and Wealth Allocation. Wealth is not nearly as complicated as many people fear but, like all disciplines, finance has its own jargon. Even more importantly, concepts such as Net Worth and Internal Rate of Return are fundamental to your understanding of the creation and maintenance of your wealth. All these ideas are introduced progressively and you will have a good general knowledge of the field by the time you have finished this book. Attitude covers many things, including our beliefs and mindsets. We all have a set of ideas and feeling about money and wealth. We did not consciously choose these attitudes most of them have been given to us through our upbringing. We inherit most of our attitudes from parents, teachers, friends, and later on in life, our colleagues and the people we socialise with. We are often unaware of the beliefsand even baggagethat we carry around concerning money. But whether you are aware of your attitude or not, it is affecting your behaviour and determining many of the choices you are making. We will be challenging you to think about your
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K A S H Y O U R WAY T O W E A LT H

attitudeand at times to change it so that you have a more helpful set of beliefs to support you in becoming wealthy. What you tell yourself about money and wealth will be very important to your success because it will determine what you choose to do, for example, whether to spend or whether to invest. Skill is required to do anything well. The basics of wealth are very simple. A lot of people feel they must need to be very good at things like maths in order to be good with money. Nothing could be further from the truth! You learned all the maths you need in primary school, but you do need to learn how to apply that learning to money. We cover skills such as how to calculate your Net Worth, how to determine your Freedom Figure, how to do one-page plans, and many more skills. You should practise all these skills until you are comfortable with them. (Keeping a folder or large notebook for this work, together with a calculator, will allow you to review your skills regularly. That will help you build your skills quickly and give you a sense of comfort and competence.) Habits make or break us! After all, we are whatever we repeatedly do. We will be pointing out to you the habits you need to develop and some of the ones you may need to change. By the end of the book you will be convinced that you need the habits of dreaming, setting goals, growing Net Worth, building networks and many more. The wealthy are different because they do things differently to the rest of us, that is, they focus on growing income rather than just spending it. If you can change just a few core habits with money, it will make all the difference to your wealth for the rest of your life. We point out these learning points, chapter by chapter, and prompt you to take action. Each chapter concludes with the KASH items you need to be good at, or need to develop. This
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is the stuff that you want to take away so that you can use it again and again to ensure you reach your dreams of a life of wealth and freedom. KASH will make you wealthy!

What is wealth and freedom?

Chapter

Having wealth and freedom is about having both the time and the money that you need to live the life you want. Neither wealth nor time is enough on its ownits hard to enjoy either money or leisure without having enough of the other. Time without money is not a lot of fun, nor is it fun having money but no time. You need both. It is all too easy to focus on money alone. Many people we see have plenty of wealth but no time or freedom, when we know that time and money are both important to having a life of wealth and abundance.
Financially Free = Having Time and Money
Lot Low Income/Lot of Time May be Semi-retired Part-time Unemployed TIME Low Income/Little Time May be Single parents Have multiple jobs Small children Little Low High Income/Lot of Time Financially Free!

High Income/Little Time May be Professionals Business owners Double income with kids Career building INCOME
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High

C O A C H Y O U R S E L F T O W E A LT H

Financial freedom is not simply being rich. Many people who are rich are not financially free. Certainly, you need to be wealthy to have financial freedomwealth is a prerequisite. But having a lot of assets or wealth is not enough by itself. For financial freedom that wealth must be invested in areas that will give you passive income. You cannot be free if you still have to work for your money and/or your money is still at risk. As shown by the diagram on the previous page, there is a tradeoff between time and wealth in everyones life. Many people struggle because they lack income; they may have all the time in the world because they are retired or unemployed, but this is a mix that leaves them with few options. Many families on low incomes have employment but are time poor, often the case where low earnings mean that both adults need to work. Their lives are often difficult and the challenges unremittingthey never seem to have enough money and are too often frantically busy trying to care for children and coordinate parenting responsibilities.

Exercise 1
Financially Free = Having Time and Money
Lot Low Income/Lot of Time High Income/Lot of Time

TIME

Low Income/Little Time

High Income/Little Time

Little Low

INCOME

High

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W H AT I S W E A LT H A N D F R E E D O M ?

Copy the blank diagram into your workbook or folder and mark the quadrant you are in. Mark the one you would like to be in, and draw an arrow showing you moving from where you are to where you want to be. To make this move, what do you have to work hardest on: time or income? Describe the way time and money interrelate in your life, for example, is it taking all your time to earn the money you need; are you short of both money and time; or do you have plenty of time but little or no money? Consider how it would be if you had enough passive income to spend your time as you pleasedwhat would you be doing?

From a wealth-coaching perspective one of the most interesting groups represented by this diagram are those people who have relatively good incomes but little freedom (time). They may appear to have lots of goodies and choices but in reality they are tied to long hours and their lifestyle is consuming most of their income. Think about itdoes this meet many of the standards of a life of wealth and freedom? The desirable quadrant in this diagram is at top right, the one where people are financially free. Financial freedom is having enough to afford the lifestyle that you want without having to work or actively manage investments. It is having investments that produce enough passive income to give you the life that you choose. Being rich is having a lot of capitalbeing financially free is having a lot of capital invested in things that will give you income safely and continuously, without having to spend a lot of time getting it. The goal is not simply to be rich, but to have riches that give you enough passive income, and give it to you reliably, to have the life you want. Those who are financially free are rich, and know they will stay rich. Without sufficient passive income from secure
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investments you will never be free to live your dreams or pursue your priorities. Without your assets being securely invested, you run the risk of losing some of your wealth (even losing the lot). Therefore, to have financial freedom, you must get yourself into a position where you have enough capital in stable investments to give you the passive income you need. This is obviously quite different from being rich, where your considerable wealth may be tied up in a business, highly geared property or a farm. Passive income is income that you receive while you are having lunch, on the golf course, playing with your children, walking in the bush, at home and asleep. It comes from assets that you need do little or nothing with to produce income. These assets are investments that will have no (or at least little) borrowings, so that you are secure in your position. Financial freedom is having enough in good solid investments (well diversified) to be able to live the rest of your life how you want. One of our clients described it as having non-treadmill incomemoney that you do not have to go out to work for. The diversified portfolio is then quite obviously still importantit is not the way that you will become wealthy, but it is the basis of being financially free. This is the thing that confuses so many peoplethey fail to distinguish between what will make them rich (Wealth-Creating Assets) and what will give them secure passive income (Security Assets). The two are usually quite different. People who are rich but who are not financially free include: People who own a business, even a quite big and very successful business, but who are still tied to it and cannot leave it for any period of time. People with jobs who earn well and enjoy good lifestyles but whose income stops the moment they do. People who own investment property with large amounts of borrowing that still needs very active management.
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W H AT I S W E A LT H A N D F R E E D O M ?

Farmers, who often have a very high net worth, but who cannot leave the management of the farm for more than a few days and are subject to all the risks inherent in farming (commodity prices and exchange rate changes, bad weather, etc.) Certainly these people may be wealthyif they do a Net Worth statement they may be worth millions of dollars. But their wealth is not the sort that gives them financial freedom. Unless they cash up (and put the proceeds from the sale into good passive investments) they are still at risk, by no means secure, and therefore are not free. They have the means or the wealth for financial freedom, but have not chosen to become free. Other people who give the appearance of being wealthy in fact are not, and are a long way from financial freedom. These are the people with good careers that yield them high incomes. They have very nice cars (company provided, of course) and a good house in a good area (often with a big mortgage). This is not financial freedom eitheras soon as they stop work, the income stops too. They have no (or little) assets and investments to give them passive income, unless they have diverted a good part of their salaries to investment (and few seem to do that to any great extent). This is not financial freedom because they are still dependent on the job that they have, and usually on their continued career advancement. Being rich is a capital game. It is having a lot of capital, not just a lot of income. For true financial freedom, the income you have must be achieved passively, not by actively working for it. You only get significant passive income if you have a lot of capital. To be free, your income has to come from capital invested, not time invested. Many people become wealthybut they do not stay wealthy. Whatever it is that makes you rich is likely to be risky. Achieving financial freedom is about developing great wealth, and
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progressively shifting it into assets that are much more secure and far less exposed to the risks that your wealth-creating activities face. Many people who develop their wealth through a business, farm, property investment or development, or share trading, carry on with that activity even after considerable wealth has been generated. Worse, they continue to plough all the profits they have made back into the activity that is making them rich. That activity is likely to be riskyit is near impossible to make a large amount of money without taking risks. Thus they are ploughing all their profits back into that thing which, by its very nature, is risky. In effect, these people are playing double or quits. By putting all their wealth back into their business (or property investments or developments), they are incredibly exposed to a downturn in that area. They are only as good as each deal that they makeone false step and they lose the lot. Financial freedom, then, is about having time and money: your time is your own, and so is your money. You do not have to spend time generating an income, and your money is secure. You need wealth, you need a good incomebut it has to be the right sort of wealth and the right sort of income. Living the life of your dreams means that you will need a plan to both create wealth and secure it so that you have enough passive income to spend your time as you choose.

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WealthCoaches Model for wealth and freedom

Chapter

If you dream of abundance in your life you have to first create wealthbut you also have to keep it. Being rich on paper for a short period of time will not give you the life of your dreams. For a life of freedom and abundance you need to create sustainable wealth. We have developed a model for our WealthCoaching clients to help them both get rich and stay rich. We first wrote about this in Get Rich, Stay Rich. The WealthCoaches Model allows us (and our clients) to conceptualise things. Its very useful to have a model to put language around what we are trying to do and put labels on the various things that clients have and are doing. It puts the various things that our clients have, or plan to have, in different compartments and makes sure that the right balance is maintained between them. It also shows what is happening to a clients incomewhere it is coming from and where it is going to. Perhaps the best thing about using this format or template is that it suits everyonewe have not yet found anyone whose financial plan cannot be put into this basic model. Our clients tell us that this framework helps them understand what they are doing and helps them keep on track both with creating wealth and making their lives secure. To become rich, you only need lots of assets. However, to get wealthy and stay wealthy (and therefore have financial freedom) you need three parts to your finances. Even while you are getting rich, you should not have everything in highperformance Wealth-Creating Assets. You need to hold some assets or money as a fallback, in case of adversity and to remind you that the endgame is having a lot of wealth in secure assets that will provide passive income. To get rich and stay rich you need these three things:
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Wealth-Creating Assets; Income; and Security Assets. In our model we keep each of these separate. To understand the process, you should think of them as separate things. Nevertheless, although they are separate, they are also interrelated. Now we start to build the model. To begin with, you need some Wealth-Creating Assets.

Wealth-Creating Assets

Wealth-Creating Assets are the things that will make you wealthy, the things that you put your money into with the intention of getting at least a 15 per cent p.a. return. They are aggressive assets: high performance and high risk. They are the opposite of the diversified portfoliothey cannot be diversified if they are to achieve a 15 per cent return (or more) for you. (More about getting this sort of return later.)
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W E A LT H C O A C H E S M O D E L F O R W E A LT H A N D F R E E D O M

There are really only three things that will make you this sort of return: A business; Property investment or property development; and Shares. You do not get high returns from just anything in these categoriesnot all businesses or property investments or shares will give you the growth that you need to get rich. So you need to know how to go into whichever of them you choose. However, these are the only three categories that are capable of giving a high enough return to grow your wealth to financial freedom. We have already said that the ownership of these kinds of things is risky: your own business is inherently risky (many do not last more than five years); property is risky because it has high borrowings, and shares are volatile, going up and down and sometimes only down. The risks associated with owning these things mean that you cannot own only these and expect to have financial freedom you do not have financial security while you own only these. You may have great wealth, but the risks inherent in all Wealth-Creating Assets mean that you cannot relax and call yourself free. Wealth-Creating Assets are by definition risky, so that your wealth is always at risk while it is still in this kind of asset. Therefore, while these are the way to become rich, they are not the endgame in themselvesyou need to have more secure investments as well, investments that are unassailable. (More on this soon.) In the next step in building the model, your Wealth-Creating Assets give you income:
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Wealth-Creating Assets

Income

Some of this will be spent in order to live (consumption). Although we are both well known for being very keen on people living on a budget, even we have to concede that you need money to eat and live! Some of your income will have to go out of the system for consumption, as shown by the third step in building the model:
Wealth-Creating Assets

CONSUMPTION

Income

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W E A LT H C O A C H E S M O D E L F O R W E A LT H A N D F R E E D O M

The question now arises: what are you going to do with your surplus income after consumption? If you consume some of the income and reinvest the remainder in risky Wealth-Creating Assets you are unlikely to remain wealthy for long. So we come to the next step of the model; some of your income needs to be invested in Security Assets:

Wealth-Creating Assets

Income

Security Assets

Security Assets are also investments, but their primary function is to store wealth in a safe place. Security Assets will give you lower returns than Wealth-Creating Assets but they are much safer. This is where you may keep your house and a diversified portfolio of investments. This part of the structure should have no (or at least very little) borrowings. When you first start off towards financial freedom, you will have very little in the Security Assets compartment. Clearly, you have to get as much of your capital working as hard as possible in your Wealth-Creating Assets, getting those high returns. If you put a lot into Security Assets, too much of your wealth will be underperforming to make you rich in the time required. Early
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on, most of your capital should be in Wealth-Creating Assets, the idea being to transfer some of it progressively into Security Assets. Right from the start, nevertheless, you should begin to develop Security Assets, even though there may only be a little there at first. You should start to develop this at the beginning for two reasons: You are learning to put some money safely away In doing so it should continue to remind you what the final goal is: to have everything, all of your wealth, in these sorts of assets. You are creating some fallback funds should things go wrong Remember that ploughing everything back into your Wealth-Creating Assets means that you are playing double or quits, the stakes are getting higher and higher, and one bad mistake could see you out of the game. Having some assets put aside allows you to prop up your Wealth-Creating Assets during a lean period, or to start again if the worst happens. You will have the means to get back in the game. It is tempting to keep putting everything into your WealthCreating Assets, especially when you are doing well there. Keep telling yourself that the biggest enemy of the entrepreneur is over-optimism. Early success leads many people to think that the game is easy and everything that they touch turns to gold. This is an illusion. You are not perfect, you are not a godyou will make mistakes. You may have been successful but that will not make you invulnerable forever. Get the Security Assets started immediately, even if you only put in a little at the beginning. Over time you can divert more into it, paying off your home loan first, and then developing that diversified portfolio. This will necessarily slow you down a little on your road to riches. The things in the Security Assets compartment will not get the returns that your Wealth-Creating Assets will get (expect to get 5 per cent here, not the 15 per cent minimum from your Wealth-Creating Assets). Nevertheless, although it will slow
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down your journey, it is a very positive step towards financial freedom. Getting rich is only half of the storystaying rich is the other half. You need to find a balance from the beginning. For many people, assets in the Security Assets compartment will be owned by an entity that is quite separate from everything elsein some countries probably some kind of trust. The idea is that your Security Assets will be untouchable if things go wrong. They will be removed, quarantined off from your other activities, so they are still yours if everything else collapses around you. Your income will come from one or more of three sources: From your Wealth-Creating Assets This may be a business and in some cases may be your only source of income (at the beginning anyway). From your Security Assets This is likely to be quite small at the start. Any income generated from this area should be entirely reinvested back into it, at least until you start to need the passive income that it generates to enjoy your freedom; and from Your job or your partners job.

Wealth-Creating Assets

CONSUMPTION

INCOME

$
Security Assets

Income

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Some of you, especially those who are quite advanced in their quest for financial freedom, may get income from all three sources (although as we said above, you ignore the income from your Security Assets as it is simply reinvested). The big part of this plan is now to decide what you are going to do with your income. This needs to be split three ways, as shown in the final step of the model: Consumption You have to live: pay for the groceries, rent or mortgage on the house, power, telephone, etc. The more you spend in this area, the less you will have for the other two things. There is a lot more on consumption in Part VI. Wealth-Creating Assets This area is likely to take the lions share of the income left over after consumption (in the early days at least). You will want to put as much spare income as possible back into this area: to buy more properties or shares or to fund growth in the business. Security Assets Some small portion of your spare income at the beginning should be put here. Initially, when your income is small and need for growth is high, the percentage will be smallperhaps only 5 per cent. Later on you should divert more, until in perhaps 10 years time everything is being siphoned off to Security Assets, when you will be fully focused on freedom rather than wealth creation. Planning to allocate your money like this is critical to your chances of finding financial freedom. If you do not plan to divide your income, you will spend it mindlesslyyou may become rich, but you probably will not stay rich. Make a deliberate plan to split your income and to set up automatic payments at the bank.

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Exercise 2
Study the completed model until you are clear that you understand the differences between Wealth-Creating Assets, Security Assets and Income. Make a full-page sketch in your workbook or folder.

Wealth-Creating Assets

CONSUMPTION

INCOME

$
Security Assets

Income

Now, write in the name of any Wealth-Creating Assets you have (business, highly geared property, aggressive share portfolio). Note down your Security Assets (family home, diversified portfolio, property with low/no borrowings). This is only a rough cut and well come back to it (in Chapter 8). The important thing is to get a feel for where your money is at present. Put the total amount of equity that you have in your Wealth-Creating Assets and in your Security Assets and put in the figures for Income and Consumption. Note how much income you have and estimate roughly how much goes on consumption, and how much is

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reinvested into either Wealth-Creating Assets or Security Assets. You should be getting a sense of where your wealth is and what the bigger picture of your finances looks like. Ask yourself: Have I created any wealth or is everything going on consumption? Do I mean to invest but never have any money left? Am I living from pay-day to pay-day?

KASH point
Now that you have some background knowledge of how this process works, lets get on with your journey to wealth and freedom.

Exercise 3: Keys to wealth quiz

Score yourself out of 10 points on each of the following 10 keys to wealth. 1. Income You must create as much income as possible. Income is the key to wealth. You have to have income to invest in Wealth-Creating Assets. It is also the income from these assets that will in turn drive up the value of your assetsyour business (from profits), your property (from rentals) and your shares (from dividends or profits). Think back over the last five years regarding how your income has changed. Score yourself 03 if your income is low and unchanged (or has fallen), 47 if you are working hard and growing income, and 810 if your income is good and growing and you are doing everything possible to grow it higher.
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W E A LT H C O A C H E S M O D E L F O R W E A LT H A N D F R E E D O M

2. Surplus Irrespective of how little or how much income you have, you must ensure a surplus. Its not how much income you have but how much you keep that matters. On the one hand you need to focus on driving up income from every source; on the other hand you must be relentless in focusing on spending less so that the amount of surplus grows. Score yourself 03 if there is nothing or very little left over at the end of the month, 47 if you are managing to save a little, and 810 if you are putting aside money regularly in a planned way. Give yourself 10 if you are paying yourself a planned percentage of your income for investment each pay period. 3. Investment in Wealth-Creating Assets Saving the surplus in low-return deposits is far better than nothing but it will not create sufficient wealth for most people unless they have huge incomes and are very disciplined savers. Our definition of Wealth-Creating Assets is that they give high returns on your money (15 per cent or more). A business, property or shares are the only Wealth-Creating Assets to give this level of return. You almost certainly will need to own Wealth-Creating Assets in order to become wealthy. Score yourself 03 if you do not have any WealthCreating Assets, 47 if you are on the way to purchasing Wealth-Creating Assets, and 810 if you already have some and are managing them well. 4. Leverage It is the lever of borrowing that gives you high returns on your money. It is very difficult to become wealthy without borrowing unless you have a very high income and lots of time on your side. When you borrow you get to use other peoples money to grow your wealth. You must borrow for the things that will make you rich (and avoid borrowing for things that will make you poor!) Score yourself 03 if the only debt you have is for consumption (credit cards, etc.), 47 if your only

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4. borrowing is for appreciating assets (family home, education), and 810 if you have borrowed to invest in Wealth-Creating Assets like a business, investment property or shares. 5. Time Unless you take extraordinarily high risks (or are incredibly lucky), it will take time for your wealth to grow. The earlier you start the easier it is, as the compounding effect is working for you. While it is never too late to do something about your finances it is important to begin as soon as possible. Time allows your wealth to growand it also gives you some room to make a mistake or two and still have time to recover. Business, property and shares all experience cycles of growth and you want to be in the game for long enough to experience the benefit. It takes patience and time to grow wealth. Score yourself 03 if you are procrastinating and wasting time (whatever your age!), 47 if you have plans to grow your wealth and are ready to start, and 810 if you have already begun and are determined not to waste a moment, much less a year, from now on. 6. Plan As in any area of life a plan makes all the difference. You need to know where you want to go (dream), be clear about end results (goals), think through what you need to do differently (strategies) and know how you will track your progress so that you can manage (milestones). All of the evidence says that written commitments in these areas make a very big difference between success and mere daydreaming! Score yourself 03 if you hate plans and never make them, 47 if you have worked out your dream and goals and have plans to start making them happen, and 810 if you have a written plan and are already taking action according to the plan. 7. Expertise Theres a lot of stuff in various fields of wealth that you will need to learn, depending on whether you decide to become wealthy through business, property or

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shares. So, depending on your chosen WealthCreating Assets, you need to find out the basics and then commit to learning everything you can to make your enterprise as successful as possible. You must be willing to learn. Score yourself 03 if you know nothing about wealth creation and have no intention of making the effort to find out, 47 if you are interested and have a plan to learn about an area of wealth creation (for example, property investment), and 810 if you have already embarked on a lifelong learning program of up-skilling in your chosen area. Give yourself a 10 if you have a written plan for growing your expertise. 8. Expert help No matter how assiduously you apply yourself to learning what you need to know to become wealthy, you will still need the help of experts in other fields such as accountants, lawyers, trust experts and various agents. You must choose wisely and manage them well. No one knows everything. Score yourself 03 if you disdain all experts and think you can do it yourself, 47 if you have already worked with a professional (for example, an accountant) to help your wealth creation, and 810 if you have a team of professionals and are managing them well. 9. Network Wealth creation is very difficult on your own. The better the network you build the more support you will have. Your network will be useful as a sounding board, will bring other skills to you and is usually a good source of referrals. Dont ever underestimate the power of a good network. Score yourself 03 if you hate networking and dont want to build a network, 47 if you have a few like-minded friends and associates with whom you discuss your wealth creation plans and efforts, and 810 if you have a wide network of people from various walks of life who know and do many different things. 10. People skills You usually have to be good with people to succeed. This will start with immediate family members,

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who need to be committed and supportive of wealth creation. No matter what you invest in you will need good people skillswith customers, suppliers, tenants and professionals in many disciplines. Score yourself 03 if you havent discussed your dreams and goals with your partner, 47 if you have enlisted the support of close family and close friends, and 810 if you are one of those people who can manage good relationships with everyone you need in order to be successful.

Score analysis
80+ You are doing brilliantly! Your knowledge and skills are very good and you are doing most of the things you need to do to ensure that you become wealthy and stay that way. Have a close look at any of the keys where you did not score the full amountthat will probably give you an indication of what you need to do to put the final touch on your wealth-creation habits. Congratulations! You must have a great attitude. 60+ You are doing well. You must be doing most things right, at least some of the time. Ask yourself why you are not more consistentyou obviously know a lot about what you need to do to become wealthy. Is your attitude stopping you? Are you giving up from time to time? Are there particular keys that you have neglected entirely and that you need to attend to? If you do more of the right stuff consistently your performance should improve rapidly. 40+ Well, you cant plead ignorance! You either have some knowledge of what you need to do but are not doing it often enough, or you have only just started and havent quite got there yet. Examine the keys where you scored poorly and pick a couple where you can take action immediately. This should make such a difference to your performance that you will soon implement the other keys.

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040 Your wealth may be in a bad state. The only way from here is up. If you are serious about becoming wealthy you should take a day off and read the whole book. You will never be wealthy unless you understand and apply these keys for wealth. Remember, anyone can do thisstart today to take action on one of these keys. Pick a chapter, do the exercises and make something happen today to take you on the path to wealth.

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Part

II
33 36 39 46 51 55

Your current position: Where are you starting from?

Facing reality What is stopping you? Net worth Where are your assets? Getting the balance right Chapter 9 What is coming in: Income Chapter 10 What is going out: Expenditure flows Chapter Chapter Chapter Chapter 5 6 7 8

Facing reality

Chapter

Lets get down to business! The most important part of the path to wealth is taking stock of where you are now. In this section you are going to build up a picture of your current financial position. Some of this will be about the hard numbers, such as how much wealth you have (Net Worth) and current levels and sources of income. Some of it will be about the soft stuff, such as understanding why you are in the position you are inthis may relate to your attitude to wealth or to poor habits with money. No matter what the picture looks like, we believe that you need to have a very firm grasp of your current financial reality before you go any further. Everyones reality is a little different. Most likely you have been working hard since the day you left school or finished whatever education or training you undertook. We have all been told thats what we need to do to succeed in life. However, you (and many others) have probably found that it isnt true, that this recipe has not taken you very far. Even when you have got further, you may not be in the place you want to be. You may have a high Net Worth but are still having to work hard. Habits can be hard to break! If you are like most people, you probably find that it is taking all your efforts just to stay in the same place. You may own a home but still have a considerable amount left on the mortgage. You may be working hardperhaps harder than ever before but feel you are unlikely to make much more headway. And you certainly wont be able to stop work very soonif at all. Depending on your age you may have more or less anxiety about the position you find yourself in: younger people often look at the work and lives of those ahead of them on the ladder and
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think that this is an unrewarding path that they do not wish to follow. More experienced people often feel that their opportunities for further advancement have passed and there is little they can do to change their circumstances. If you are the owner of a business you are likely to be working very long hours and perhaps not taking much out of the business. Your earlier hopes of becoming wealthy and free seem more and more distant. You may even be feeling trapped because you can see no way out. Even thinking about the next business cycle downturn fills you with fear because there may not be much fat in your business and you may have high levels of borrowings.

Exercise 4
Write your story about your life so far. No one will see this unless you choose to share it, so feel free to be as detailed and as passionate as you wish. What has happened so far? How are you feeling about your life at present? What do you like about your life? What is irritating you that you want to change? What do you think will happen if you stay on this path?

Whatever you are doing or have been doing is a perfect recipe to achieve your current position. Understanding the path you have taken to hereand where exactly here isis critical to moving forward towards a life of wealth and freedom. This chapter will help you gather a very clear picture of your current position. When you are finished this section you should fully understand where you are with your finances, and have an up-to-date written record of them. We will have helped you fill
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FA C I N G R E A L I T Y

in all of your financial details on the WealthCoaches Model, so that you will be able to see exactly what you own, where you have it allocated, what money is coming in and how much is being consumed or invested.

KASH points
The purpose of this exercise is to help you get some insight and self-knowledge about your financial position, that is, about the path you have been following to get to here. Your writing is likely to show you what your attitudes are to work, wealth accumulation and spending money. You may find your story highlights skills with money that you already have, or need to learn. Sometimes it is only when you look at the whole story over the years that the habits you have around money become obvious.

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What is stopping you?

Chapter

Its a very good idea to work out what is holding you back because you are then clear about what you have to overcome.

Exercise 5
Which of the following sound/s like you? (You may fit into more than one category.) I dont know what I want Many people stay poor and waste their time and energies all their lives because they never stop to work out what is really important to them. Without some clarity about what really matters, people tend to live from day to day and spend their money and time on whims. You cant become wealthy behaving like that. If this sounds like you, you will need to do some work on clarifying your dreams for your life. This is very important, because if you dont know what you want it is very hard to put together a wealthcreation plan to take you there. We find that almost nobody is motivated by wealth for its own sakerather, people desire the lives that wealth will give them. You will need to work out what that life would look like. I dont know what to do Some people are very clear about what they want but feel that they have no idea how to get there. You may think you are clear about where you want to end up but you dont know where to start or what strategy to pursue! In the following chapters we will give you ideas for starting on the path to wealth creation. You will want to choose a way to create wealth that suits your skills and circumstances.
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W H AT I S S T O P P I N G Y O U ?

I dont know how to do it We often find that people have settled on a way to grow their wealth but are not making much progress. Some people who have a business are creating less income than if they had a job while others may have amassed a property portfolio but have chosen poor properties and are not managing them well. Many people with good jobs are not actively managing their career nor are they making appropriate investments with their high incomes. All these people may know what they want, but they have little hope of achieving their dreams because they lack the skills they need to make their wealth creation a success. In later chapters we will discuss the secrets of the people who have done it successfully. I have poor habits Even when you know what you want and have the talent and skills to achieve what you want, you still have to do the hard work! Many of us know that we are sabotaging ourselves on a daily basiswe do it when we spend money on stuff we cant afford or that we should be doing something smart with. Other poor habits include refusing to learn new skills which would enable us to become more effective in creating wealth and getting closer to our dreams. I have a bad attitude Mostly people stop themselves before they even start! We do this because of what is in our heads. Depending on our feelings about ourselves this can take various forms. Some think they are too stupid because they have learned to feel that they are not good enough. Others are fearful, that if they become wealthy other people (especially family and friends) may disapprove and may not like them. Some have learned to have a very ambivalent attitude to wealthon the one hand they want it and know they can do very good things with it, but on the other hand they have been taught that wealth is evil and that only dishonest people become wealthy. If you have attitudes

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like these you will have to work hard to overcome them. Well give you some ideas of how to shift these attitudesand thats all they are, attitudes, not facts. I dont really want to Many people say that they want wealth and abundance in their livesbut they want it all today and they expect it to arrive effortlessly. In fact, they have no intention of making the effort to move in the direction of their dreams. Changing their habits and behaviours is simply not on their agenda so in reality they dont want wealth and abundance enough to do anything about creating it. Consider what might be the biggest obstacle that has so far prevented you from becoming wealthy. You are not expected to know everything, be highly skilful in every area of creating wealth, have perfect habits or attitudesnobody does. However, it is likely that most of your problems are in one of the areas above. Can you identify which one? Try to work out where you are blockedit will be much easier for you to make progress if you are clear about what is holding you back. Write some of your reflections in your workbookyou will want to refer to this again and you will also find it useful to see how far you have progressed as you go through the coaching process. These blockages and obstacles will disappear as you move forward on the path to wealth.

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Net worth

Chapter

Facing reality is essentially about looking at how things really are rather than how wed like them to be. You will have considered many aspects of your situation by now. One of the most useful ways of identifying exactly where you are financially is to do a net worth statement. This means looking at what you are worth in financial terms and the types of things you have your money in. A net worth statement is an easy enough idea, and simple enough to do. A net worth statement means writing down what you own (your assets) and deducting what you owe (your liabilities). All you are doing is adding up the pluses and subtracting the minuses to find out how much capital you have. Example of a net worth statement
Assets (+) House Shares Investment property Car Liabilities () House mortgage Investment property mortgage Car hire purchase Credit card Net Worth $450 $20 $250 $30 $ 000 000 000 000 Total

$750 000 ($260 000) ($220 000) ($15 000) ($5000) ($500 000) $250 000

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Your net worth statement is a measure of how rich you are. If you sold everything and repaid all your debts, you would have that amount of cash. This tells you where you are now.

Exercise 6
Do your own net worth statement. Assets can include things like the family home, other property, shares, or a business you own. You can include vehicles, boats, sports equipment, jewellery and art, but unless they are very valuable you are probably better to leave them out. They only clutter up your statement and often would be worth very little if you had to sell them tomorrow. (The amount you paid for them is irrelevant their value is their saleable value.) Liabilities will include any debts you owe such as the amount left on the mortgage, bank loans, student loans and credit card debt. If you have hire purchase agreements (for example, for cars or home appliances) you should include the amounts you have left to pay.
Assets (+) House Shares Investment property Car $ ................... ................... ................... ................... Total

Liabilities () House mortgage (...................) Investment property mortgage (...................) Car hire purchase (...................) Credit card (...................) Net Worth

...................

(...................) ...................

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N E T W O RT H

Add up your assets. Add up your liabilities. Subtract the liabilities from the assets. This is your net worth number. Keep this calculation somewhere safe as you will want to refer to it often. It tells you where you are starting from and it will also be the baseline against which you will measure your progress.

Everyone should do a net worth statement (even those who are not consciously seeking wealth and abundance). Not only should they do one, they should do it regularlyat least once every year. Doing a regular net worth statement allows you to see your financial progress, and lets you check that you are moving in the right direction financially, that you are becoming richer rather than poorer. If that progress is not good over a long period of time, you are doing something wrong. This means changing what you do. In the case of those who want financial freedom, it will probably mean drastic changes to what you are doing, what you own and how you are spending your money.

Exercise 7
Do net worth statements for the past few years. It does not matter if you cannot remember the exact numbers for the value of every asset and every liabilitywhat you are trying to do is to see how net worth changes and what affects your net worth. Have you made progress? How have you made progress? What has grown in value? What has decreased in value?

If you do a net worth statement regularly (each year or maybe every six months) you can graph your progress towards financial wealth. The graph of your net worth over time could look something like this:
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C O A C H Y O U R S E L F T O W E A LT H

350 300 250 200 150 100

WEALTH

50 0 50

AGE

20

40

60

80

100

In fact, the graph may be more wavy than this, as there are ups and downs on the pathyour progress towards financial wealth and abundance is unlikely to go in a nice smooth line! Graphing your net worth has the very positive effect of you being able to see how you are doing at a glance. Certainly you will have dips (and probably a few spikes as well) but the graph should, over time, run in the right direction.

Exercise 8
Draw a rough graph of your net worth, up to whatever age you are, and enter it into your workbook or folder. Note that this does not need to be perfectly accuratewhat you want to see is the way your line has moved over the years.
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N E T W O RT H

350 300 250 200 150 100 50 0 50

DEBT

WEALTH

TIME

20

40

60

80

100

What has caused the biggest gains in your net worth? What events or decisions have lowered your net worth?

Doing a net worth statement right at the beginning makes you more conscious of what is happening to your finances. You become more mindful of the impact of the decisions you are making. As you calculate your net worth, consider which of your assets are actually earning you a good return and which are not. You may, for example, consider your home a wonderful assetbut it isnt earning rent so, unless it is in an area which is greatly increasing in capital value, it is not a great asset. Similarly, consider which liabilities are costing you the most money. Your credit card debt will be costing you far more than your mortgage. This will give you useful information to begin planning where to reduce your liabilities. Your net worth statement is important because it helps you to see exactly how your financial position is and how close
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you are to having the level of wealth that you need for your desired life. Becoming wealthy is about building net worth. You need enough net worth to give you the passive income to do whatever is your dream. Some people find that when they have done a net worth statement they already have a high net worth. Their problem is that they do not have their capital in the right things for financial freedomtheir money is mostly tied up in a farm, a business or a highly geared property portfolio, all of which require a lot of management. Others find that their asset mix is wrong to grow wealththey have a $1 million house (Security Asset) that earns them no income and only $50 000 in Wealth-Creating Assets that earn income. You now know what you have to work with. This helps you make the connections between your dream and what you need to do with your financial resources in the future. Your net worth statement tells you how wealthy you are, where you are starting from and if you do it regularly (say every six months or annually) it measures your progress. It also tells you exactly what you own. You should be very concerned if: Your net worth is negative, that is, you owe more than you own. Your net worth is not growing each year, that is, you have no more wealth. Your net worth is shrinking, that is, you are spending more than your income. This is a good time to consider what you would like to be worth. It is also a good time to start thinking about how much you should be worth in a year (or three years or five years) from now.

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KASH points
Understanding your net worth and why it is important is a key piece of financial knowledge. Adopting an attitude to focus on growing your net worth is one of the big changes that you will need to make to grow wealthy.

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Where are your assets? Getting the balance right

Chapter

Now you have a number telling you what you are worth financially. However, where you have that money is also important. Remember, some things are Wealth-Creating Assets (designed to make you wealthier) and others are Security Assets (designed as a store for your wealth). You need to get the balance right to take you to where you want to be. If you want to grow your wealth strongly you will have to have more in Wealth-Creating Assets; if you do not want to grow your wealth strongly, if you value security and want to have more time, you may need to change the balance to have more in Security Assets. But first you have to look at your allocation as it is now. Once you have done a net worth statement, you can categorise what you own in terms of the WealthCoaches Model. This means deciding whether each of the things that you own is a Wealth-Creating Asset or a Security Asset. Remember that WealthCreating Assets are things which give you high returns. They are risky and are also likely to have high borrowings. Security Assets have low or no borrowing. They give low returns and are low risk. Categorising the things you currently own is a very important step. Putting each of your investment assets into its proper category allows you to see at a glance how well you have things balanced. It may be that you currently have too many passive Security Assets to get the growth that is required to get rich. Conversely, you may have too much in aggressive WealthCreating Assets and your task is to start transferring some of what you own into Security Assets. Spending some time putting your assets into the correct circles (the Wealth-Creating Assets circle or the Security Assets circle) lets you see how well you have things balanced and structured at the moment. When you see what
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WHERE ARE YOUR ASSETS? GETTING THE BALANCE RIGHT

your current allocation is you can decide if it is right, and if not, make plans to re-balance by selling some things and buying others, or by using your income to start investing in whichever area does not have enough. The balance you need depends on your age, stage and, most importantly, your goal.

Ric and Dana are in their thirties. They have no children. Ric is working full time on their property portfolio and Dana works as a customer services supervisor earning $45 000 a year. They have all their net worth in Wealth-Creating Assets. They dont even have a family home, choosing to rent instead.

At their age and stage what Ric and Dana are doing makes sense. They can carry the risk of high borrowings (although even at this stage they should be building a small amount of Security Assets). Time is on their side; they can afford to be aggressive.

Alex and Wendy are both high school teachers in their mid-forties. They are mortgage free, and have a diversified portfolio of shares and super funds. They are comfortable, are good savers, but do not have a high net worth. Alex and Wendy would like very much to retire early from teachingit is a stressful occupation, especially as time goes on.

We feel that Alex and Wendy have too mucheverythingin Security Assets. Their wealth is accumulating too slowly and they will not be able to retire early at this rate. With their combinedand securesalaries they could afford to take a more aggressive approach to wealth creation.
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Carlo and Elena own a chain of four restaurants. They have built this business over the last 20 years. They are in their late forties and apart from the business own a modest family home. Some of the extended family members are involved in the business but 90 per cent of the shares are still owned by Carlo and Elena.

Carlo and Elena have too much of their net worth invested in Wealth-Creating Assets. We think that this is too high risk at this stage and that they should sell down at least half of the business (worth in total about $2 million). We would like to see this money invested in Security Assets. The couple have worked too hard and too long to keep putting all of this achievement on the line every dayand business is always risky. Sometimes it is hard to know whether an asset is a WealthCreating Asset or a Security Asset. The real test for classifying any particular item centres on whether or not the asset is likely or able to give you a 15 per cent return. If your intention is to get a 15 per cent return from something that you own, then it is a Wealth-Creating Asset; if the return is likely to be much less than this, then it should be classified as a Security Asset. Another way to think of it is the degree of risk that an asset hasriskier assets (business, highly geared property and some shares) go in the Wealth-Creating Asset box. Some things that you own belong in neither Wealth-Creating Asset nor Security Asset. These are things that are likely to fall in value and as such are really part of your consumption because they will make you poorer. For example, in the net worth example on page 39 a $30 000 car was listed as an asset (which in a technical sense it is). However, the car is likely to fall in value (the ones we buy always seem to). Assuming that these people are going to keep the car, it should be categorised as consumption (it will certainly make them poorer).
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WHERE ARE YOUR ASSETS? GETTING THE BALANCE RIGHT

The common assets which pop up on peoples net worth statements include: The house This is a Security Asset in most cases. The only exception to this is that small group of people who successfully buy a house, live in it for a year or so while they do it up and then sell it with a good profit. Generally, however, your house should be regarded as a Security Asset (although there are people who put so much money into their houses that to some extent at least it is really consumption). It is completely wrong to think that your house will make you rich, it wont. It is a Security Asset, nothing more. Superannuation funds These are clearly Security Assets, likely to return around 5 per cent p.a. However, it needs to be said that if they are well diversified they make very good Security Assets. The business This ought to be a Wealth-Creating Asset. If you are not getting a 15 per cent return in the value of the business, you have to wonder why you own it. Investment property This may be a Wealth-Creating Asset or a Security Asset depending on what and where it is, and how you are managing it. Judicious and aggressive purchasing of rental property with a lot of borrowings, along with good active management, can achieve a 15 per cent (or better) return. If this is your intention, put your investment property into the Wealth-Creating Assets box. If, however, you make fairly ordinary purchases, do nothing to enhance the property and manage it fairly passively it should go into Security Assets. Shares These are the same as investment propertydepending upon your intention, and how aggressive you are, they could go in either box. A widely spread, diversified portfolio of market leaders is probably a Security Asset; a portfolio of two or three smaller companies is probably a Wealth-Creating Asset, especially if you have borrowed to buy them.
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Hedge funds These are definitely a Wealth-Creating Asset they look for 1520 per cent or more, and often get it. However, some of these have capital guarantees, which makes them Security Assets. Mutual funds Generally these are Security Assetsthey are usually fairly conservatively managed and do not often show returns anything near 15 per cent. There are lots of exceptions, however. There are managed funds, which have shown very high returns. We invest in the pharmaceutical/health care industries via mutual funds, some of which have given very high returns over long periods of time. Categorising these things, labelling them Wealth-Creating Assets or Security Assets lets you see what it is that you are doing now and the changes that you need to make for your future. You might eliminate (that is, sell) anything that is not really an asset at all (for example, a car or boat). Do your net worth statement and put each thing in the compartment where it belongs.

Exercise 9
Draw another copy of the WealthCoaches Model shown on page 19. Allocate your assets to the various compartments and name the assets, for example, put your family home in Security Assets and put its market value beside itFamily Home $500 000 (owe $120 000), and put the rental property in Wealth-Creating Assets22 Summer St, $350 000 (owe $290 000). This will allow you to see what you are doing with what you have. Look at the balance that you currently have. Is it right for what you want to achieve? Will this asset allocation grow your wealth? Will it grow it fast enough?

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What is coming in: Income

Chapter

Now is the time to look at what is happening to money in your life, in other words, the way the cash is flowing. Why is this important? Well, the fundamental problem with becoming wealthy for many people is not that money does not come into their lives, rather it is where the money goes. Most people would have enough income to get the lives of their dreams if they used it differently. Examining your cash flows allows you to analyse what is happening to the money in your life. This is often a reality we are anxious to avoid! Many of the people we have coached have said things like, We have no idea where our money goes! or No matter how much we earn we never seem to have anything left, and even, We dont spend much!. The easiest way to work out your income is to do a Statement of Income. Many people are vague about how much income they have each year. It can be very simple to calculate if you are a wage or salary earner. Take your pay slip and figure out how much you get each year. You may have 12 (or 13) monthly payments each year or 26 fortnightly payments or 52 weekly payments. Tax has probably been deducted and if you have no other income the calculation is quite simple. If you have income from rental property or from a trust or if you receive dividends or money from any other source, gather up all this detail and see how much income you have each year. Your statement of income is another tool for assessing where you are at financially. You need to know what is coming in (income) each year. You can do this before or after taxjust make sure that you are consistent and that you dont mix amounts that are before tax with others that are already tax paid.
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Jim and Moanas statement of income looks like this: Jims salary Rental income Moanas wages (part-time) Total income $75 000 (after $7000 (after expenses and $15 000 (after $97 000 (after tax) tax) tax) tax)

Jim has a very good job and his annual salary after he pays tax is $75 000. Moana works part-time as they have two small children. They also own a rental property (still heavily indebted), but after they have covered the expenses and paid tax it nets an extra $7000. So their total annual income (after tax) is $97 000.

Exercise 10
Do a personal statement of income by working out all your sources of income after tax
Statement of income Salary/Wages Interest Rental income Dividends Income from trust Other Total annual income ......... ......... ......... ......... ......... ......... .........

How much income per year do you have? What is the total income before and after tax? Put your income into the WealthCoaches Model

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Wealth-Creating Assets

INCOME

Income

You probably have to collect all this information for your tax return every year anyway. It is very useful when you are starting to think about your financial future to have a clear sense of where you are starting fromit will help you set reasonable goals and it will show you which areas should get priority in your plans. Income matters. Even if your net worth statement shows that you are quite wealthy, that doesnt necessarily mean you have enough income to build the life you dream of. A couple who own a valuable house may have a net worth of hundreds of thousands of dollarsbut you cant eat that or pay bills with it. One of the other benefits of doing an income statement is that it makes you very conscious of how much money flows into your handseven if you have convinced yourself that you do not earn enough to ever be wealthy and free to live your dream life.
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Take a hypothetical situation. Lets say you earned $40 000 a year and that you worked over a lifetime for 40 years. (Now we know that no one earns exactly the same each year but lets pretend.) $40 000 does not seem like a huge amount. But over 40 years that adds up to $1 600 000over one and a half million dollars in total. If you look at it like that, its a lot. If we assured you that you would earn that amount, you would take money very seriously and you would do a plan for your finances. But we get our money in small lumpsweekly, fortnightly or monthly. We are often desperate for it to arrive and seem to gobble it up in no time. Because our heads are down in the detail of managing from payday to payday we never realise the huge sums of money that we are managing. Doing an income statement is one way of helping you realise just how big the sums are. Knowing your net worth and your income lets you begin to look at the big picture. Many people are very practised at managing the micro detail of each week or month but never stop to look at the bigger picture of their overall finances. If you want to become wealthy and have choices about how you live in the future you have to move beyond the weekly or monthly pay period and start to think in terms of years and decades.

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10

What is going out: Expenditure flows

Chapter

What are you doing with your money now? Where is it going? Dont feel too bad if you dont knowhardly anyone we have ever coached had a good sense of where exactly the money was going. It just went! Now is a good time to have a good look at what you are currently doing with your money every week and month. You have already done a net worth statement and the sums to see what annual income you have. People we work with often find these exercises quite shocking. They often say things like, I cant believe I have this amount of income and yet I never have any money or I have been earning well for years and yet I have nothing to show for it or Given how much income I have, why dont I seem to be able to be or do or have any of these things I say I want in my life? These reactions are not from stupid people, rather they come about because we are often shocked when we finally write down our expenditures and look at the numbers. Perhaps its because we secretly know that we are not going to like what we see that we avoid ever doing these sums!

Exercise 11
Ask yourself: Am I always in debt? Is there any money left over in each pay period? Am I living from one pay cheque to the next? Do expenses like rates come out of the blue? Do I have blow-outs in certain areas or at certain times? Do I resist the idea of a plan/budget?

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Theres probably another shock on the wayand thats the one we get when we finally do a proper record of what we are doing with whatever income we have. Business calls this an audit but all it means is that you need to track (on paper) where every cent is going. Every cent because its the small stuff that you tend to ignore or forget about that is often using up all your discretionary dollars that could be funding all those things you would like to be, have, and do. The first thing to look at is your consumption. People we have coached find that the easiest way to do this is to carry a small notebook around for a few weeks or months and note every expenditureeven parking money, ice-creams for the kids when you get petrol, cups of coffee, etc. Remember every dollar that goes on consumption is a dollar out of the system. Every dollar that does not go on consumption is a dollar that can be invested for growth towards building the life that you want. When you have enough data you can add it up under various headings. We all find it easy to remember that we pay hundreds of dollars for power and phone and petrolbut we can get huge surprises in some of the other categories, depending on our habits. People tend to be most surprised at the small items or categories that we tend to think of as incidentals (like drycleaning) or timesavers (like takeaways, purchases at the corner shop) or small change (like magazines, parking). But when you add all these together it often comes to a very significant sum usually more than enough to fund many of the dreams that we thought were out of reach. You are on a hunt for these spare dollars to build the life that you want. As WealthCoaches we never make any criticism of how anyone spends incomeafter all its your money. But our clients often find that there is already enough being spent on stuff that they dont care about very much (for example, coffee, lunches, wine) to fund dreams that they really do care about and thought
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were out of the question (for example, travel, mortgage, share investments, education, change of career, early retirement). You can collect your spending information under whatever categories you like. If you use a smaller number it will be more manageablebut you may miss some critical information.

Jim and Elena both work and have their five-year-old son Tad cared for after school. They called us because despite both working full time they felt that they were making no progress. When we worked with them to track their expenditure Elena found she was spending $350 a week at the supermarket. It was only when she broke this into further categories that she realised nearly $60 of that was going on hot takeaway food on the evenings she shopped. All very understandableshe had already put in a full day at work and the shopping made her late in starting to prepare a meal. But Jim and Elena identified that this was $60 that they could easily harvest to grow a deposit on a do-up property to grow their wealth.

Likewise, its easy to miss what you are really doing at the service stationthat $50 of petrol may end up being $75 after each fill when you add on the cigarettes, ice-creams, papers and occasional groceries. Some of the other often-forgotten places where hard-earned income leaks include the chemist (we go in for a prescription and come out with all sorts of other goodies) and social occasions, which tend to take on a life of their own (we believe that we are going out for a beer and end up paying for food and a taxi home!).
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The short list of categories would include majors like: Rent or mortgage Utilities (like electricity, water) Transport (car, bus) Food Clothes Entertainment (hobbies, outings, sport) Gifts (birthdays, charity) Medical/dental Miscellaneous

Exercise 12
Find out exactly where the money goes. Buy a notebook and find where every cent of your money is going. When you have enough data (several weeks or months) add up the expenditure under the different categories. Its probably best to keep this quite simple to start with. If you find that a category seems quite high, then you might want to break it down in some detail. Unaccounted for spending or categories like miscellaneous may also be where your expenditure woes lie. Miscellaneous is not a slush fund in the Bahamas! Rather it might include frightening levels of expenditure under such sub-headings as: Laundry Drycleaning Coffee Lunches Magazines Taxis Car accessories Cigarettes Chocolate Treats for kids Ice-creams School lunches Takeaways Cosmetics Flowers Greeting cards Babysitting Eating out Manicures Hairdresser

You can file these expenses under any of the above headings you like but dont lose sight of themthey may be the consuming all the money that could make you rich and free.
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We are all experts at self-justification. One couple we worked with had a huge amount under Repairs and maintenance. When we enquired with great concern if the house was falling down, we discovered that she was addicted to redecorating and he had bought enough motor tools and accessories to open a commercial garage! It was their money and their choice of course, but they were not making any gains by hiding this realisation from themselves. When they confronted where their money was really going they were empowered to choose to spend it to move towards the life that they really wanteda small rural holding with enough passive income to allow them to work parttime only. So its really up to you. Above all else, you dont want to fool yourself on this. Its your money and you can spend it however you like. But you cant choose to do anything else with it until you can find where it is going now. Resolve to become a sleuthtake your notebook and go find out where you are spending your money. Some people even like to use a small diary because it can be very interesting to see what the patterns of spending are over the weekfor example, you might spend without thinking on Friday nights after a drink or two, or you might be very vulnerable to impulse spending when you are tired or rushing home after work. Just as when we are tempted to break a diet, spending is often triggered by different things. Many people overspend on groceries when they are hungry, others get carried away when they go for an after-work drink and end up spending on dinner out and a taxi home. Working late can be a trigger we are tired, we feel we should be rewarded, or we may feel guilty because we are late home and so treat the kids. Again, all of these are your choices but it does help to be aware of what you do and what events, or timing or feelings trigger your spending. It may help you to note the day, the time, and even how you were feeling when you made purchasesespecially if
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you feel your spending is getting away from you. And if you spend all your income every pay period or if you have debt on your credit card, then your spending is out of control.

Exercise 13
Write your consumption figure into the WealthCoaches Model you used for Exercises 9 and 10.

Wealth-Creating Assets

CONSUMPTION

INCOME

Income

Do you have a surplus of income over expenditure? Can you increase the surplus by growing income and/or cutting expenditure? What are you doing with your surplus income? Where is your surplus income going?

You can do your analysis of what you find with a friendyou will probably both laugh and cry! Ask yourself if this is how you wish to spend your income. Is your spending serving you
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or enslaving youare you trapped in this pattern and therefore will never have money to fund all those other things you said were important? You will find yourself starting to reallocate your income in your head. Some of your categories can be eliminated altogether if you wish (takeaway lunches, magazines) whereas others can be reduced (utilities, entertainment). Many people earn enough to become wealthy. What you do with the money is critical. It goes without saying that if you consume all your income you will be neither wealthy nor secure. You will, in fact, have a rather large problem once the income stops. To become wealthy it is not usually enough to earn income and invest in Security Assets such as a home and a diversified portfolio. This can work for some very high-income earners, however. After all, if you are earning several hundred thousand dollars a year, and have the discipline to avoid letting your standard of living rise to match that income, you should be able to save a great deal. Security Assets will accumulate rapidly enough for someone with that level of income to allow them to become wealthy. Most people do not have that level of income. Investing their surplus in Security Assets will not be enough to make them wealthy. You will need to invest some (and probably most in the early years) of your money in Wealth-Creating Assets so that you get the higher returns you need to grow your wealth. Others have too much of their surplus income going into Wealth-Creating Assets. If you are reinvesting all of your income in Wealth-Creating Assets even though you have accumulated most of the net worth that you need to live your dream, you should be investing more in Security Assets. Putting everything into Wealth-Creating Assets is a risk you do not need to take if you are close to your dream. It is a risk you definitely should not take if you are nearing the end of your working life.
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Exercise 14
Copy the model below, and work out what you are doing with your surplus income. Show where the income that is not spent (consumed) is goingeither to Wealth-Creating Assets or to Security Assets. Review whether you have enough invested in WealthCreating Assets to achieve your dreams. Reallocate income as necessary to Wealth-Creating or Security Assets.

Wealth-Creating Assets

$ data

$ data
INCOME

$ data

$ data
Security Assets

Income

$ data

If necessary, sell things in either Wealth-Creating Assets or Security Assets and reallocate to get the balance right for you. Is enough of your income being invested in WealthCreating Assets to allow you to grow your wealth so that

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you can meet your big goal and live the life of your dreams? Is too much going into Wealth-Creating Assets and therefore unnecessarily increasing the risks you are taking? Factors that you should consider to get the balance right for you include: Age Younger people have more time on their side and can therefore afford to take more risks. Dependents Those without children can take a more aggressive approach to the risks of Wealth-Creating Assets. Stage The closer you are to achieving the dream the more you should invest in Security Assets. It makes little sense at this stage to continue to take high risks or play double or quits with your wealth.

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Part

III
67 72 75

Your desired position: What do you want?

Chapter 11 Whats the dream? Chapter 12 Who will share the dream? Chapter 13 What do you really value?

11

Chapter

Whats the dream?

Money isnt importantits what money does that matters. Nobody gets out of bed in the morning for a numberthey do it because there are things they want to do, people they love who they want to help, a vision of themselves they want to fulfil. Research shows that if you are to make successful change you need to be able to visualise that change first. In other words, you need to be able to see yourself living the new life, doing different things, life being the way you want it to be. It is very difficult to make anything happen if you cannot visualise it first. In our experience the people who achieve the most on the path to wealth are those who are highly motivated by clear pictures of what they want. Sure, if you are poor, just the idea of having some more money is very enticing. However, once you have a reasonable standard of living and your daily needs are met you will need greater motivating power than just a few more dollars. Dreams are really important because they motivate you. It is only when you have a clear vision of what life could be like or what it is that you would really like to be doing that you will find the motivation to make the changes. Dreams provide the why. When you know why you want to become wealthy it will be relatively easy to work out what needs to be done and how to go about it. A clear dream also allows you to set a figure for your goals when you know what you want in your life it is easy to cost that dream. The dream sets the price for living that life. If you know what you want, it is fairly easy to work out how much wealth you need to create so you can live the life of your dreams. We often find that people are much closer than they think to being able to stop what they are doing and start living their dream life.
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Exercise 15
Start thinking about what the idea of wealth represents for you. If you had enough money so that you did not need to work again, how would you choose to live your life? What would a day in that life look like? What sorts of things would you be doing over a month in that life? How would a year of your dream life look?

Many people first respond with a vision of spending life sprawled on a beach in Fiji with someone plying them with coloured drinks trimmed with umbrellas! On reflection, most people know that they would tire of such indolence very quickly. In short, while we might all enjoy an island holiday, very few of us wish to do nothing for the rest of our lives. It can take a lot of soul-searching to clarify your dreams. We are not encouraged to dream much in our normal lives there are always people ready to tell us to stop dreaming and get on with it. If we are discouraging and even scornful of others dreams, we learn to suppress our own. We were all full of dreams as children and adolescents, but all too often we lose the habit of dreaming in our adult lives. Dreaming is very important. It goes without saying that we will be living in the future (rather than in the past) and we should take every opportunity to imagine (dream) the future that we want to have. There may be parts of it that we will have little choice about but we should try to shape the parts we can in the way that we want. You need to re-engage with your deepest dreams. Take the time to pay attention to your feelings. What is it that makes your heart sing? You can interview yourself about your deepest desires. When were you happiest in your life? What were you
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doing and how were you living? If you were not afraid, what would you change in your life? Most likely you can have a great deal of what you wantso what is it that you want?

Exercise 16
There are many different ways you can connect with your dreams. Try the following ideas. What would you do if you won a lottery? You would no longer have financial constraints. You might continue to work, but only because you like to. So what would you do? How would you spend your time? What would you do if you found you had only a year to live? That concentrates the mind. Your priorities will become very clear as you think through such a scenario. In the time you have left on earth, who do you want to be? What do you want to do? What do you want to have in your life? Make lists of your answers.

This exercise asks very hard questions. Daily life usually keeps us so busy that we never get to consider them. We all have flights of fancy over the summer holidays when we get a few weeks off, but we usually get back to normal fairly quickly once the holidays are over. Thats a pity, as these are lifes most important questions. They have engaged the best philosophical minds for centuries, but in the end we all have to answer them for ourselves. Dont expect this process to be quickyou will probably want to spend lots of time thinking about what you really want. We stress that this is a very important part of the process, after all, the goal of creating wealth is not money; rather it is to have the life that wealth can allow you. You need to develop a picture of what that life would look like for you.
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Dreams are about the future. As well as asking yourself about where you want to be in the future, ask about when. It wont help in your quest for wealth and freedom if the dream appears to be a place and time so far over the horizon that you will never get to it. Try to date it roughly. It often helps to imagine yourself at a particular age, for example, when I am 45 I will be . . . This picture does not have to be too precise. And most likely as time goes on you will modify the picture. But your dreams should be clear enough to be motivating and worth striving for. You are going to devote considerable time and effort to making changes that will take you towards your dream so you need to have a good sense of what your ideal future would look like. And when you clarify your dreams, make them non-negotiable. You can of course modify your dreams, or dream new dreams as time passes, but dont send out any messages to yourself or others that your dreams are up for debate. They are important to yoube determined to make them real.

Exercise 17
More dreaming ideas. Think back to times when you were happiest. What were you doing? Who were you with? Who were you being? What made those times special? You might find it useful to draw as well as write. Some people enjoy finding snatches of music or song lyrics that express their desires. Others enjoy collecting images of their ideal lifeyou could even build a collage of pictures you find attractive from magazines.

You should keep all your dreaming work in your workbook or someplace else that is safeyou will want to look at it again and
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add to it as time goes on. You may also want to share this work with people who are close to you and who will support you in the achievement of your dreams.

KASH points
Self-knowledge about what is important to you and how you want your life to be is an essential step on the path to wealth. There is no point in accumulating wealth if you have no idea of what matters to you. You will almost certainly find that your attitude is changing as you do this workyou will probably be getting quite determined that you will have the life of your dreams and that you will learn to do what you need to get that life of wealth and freedom. We think dreaming is a vastly underrated habitdream as big and as much as you can. The important thing is to commit to making some of your dreams come true!

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12

Who will share the dream?

Chapter

Different people like to do things differentlysome of us like to share things more than others. You must do whatever feels right for you. We have found that most people achieve much more in their quest for wealth creation if they have good support. It is very hard to make the changes you need to make if significant people in your life are opposing you and pulling against you. You can still succeed but it will be harder. We have very few rules in our WealthCoaching work, but one of them is that we work for and with both partners. Where a couple exists we do not take on individual clientsboth parties have to be involved. We think the chances are low of either person becoming wealthy without engaging the full support and commitment of the other. In a couple, both partners need to be aligned with shared dreams and goals. If you have a significant othera spouse or partner or even a business partnerit is in your interests to share your dreams and get them onside as early as possible. They are going to notice the changes you will be making and almost certainly will be affected. When we start to spend our energies and money differently other peoples lives are affected. They are likely to object unless they understand. At best, you will want the key people in your life to share the dream and to actively support you. At the very least you will want respect and understanding even if they do not offer active support. We believe couples should do a lot of dreaming together. It is best to start by asking the other person what is important to them, what they want out of life and what they dream of for
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your future together. You too will need to share your dreams. We recommend you spend a lot of time talking about the life you want to create together. If you find that you share very little in the way of dreams you will have issues to confront other than wealth creation.

Exercise 18
Consider whom in your life you can share your dreams with. If you have a life partner you should work on sharing your individual dreams and work on building a shared dream together. Get him/her to clarify dreams. Share your dreams. Do some of the exercises in the last chapter individually and then compare your answers. Negotiate a shared dream of your future together.

In our experience the most successful couples are those who have clear shared dreams. They help and support each other along the way. When they face difficult changes they are pulling together and supporting each other. They use their combined talents and energies to make sure they are successful. There may be other people with whom you can share who will offer support. Many of our clients have had significant help from parentswise, experienced people who lend a hand or an ear, and who often provide support for grandchildren when parents are busy. Some people are lucky enough to have managers who applaud their efforts and contribute experience and encouragement. If you have a supportive manager you may want to talk to them about your dreams and ask them for guidance and support. Others have good friends who act as a sounding board and cheer you on to success. If you have a business partner you will need to inform them of your plans. Your dreams will affect how you approach the business.
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A word of caution. Think about whom you will share with. You may find that your wider family and friends feel threatened by your intentions. So be careful about sharing with those who might undermine youthe path will be hard enough without having to deal with people who want you to fail so that they can feel better about doing nothing themselves. These people are toxic to your dreams, and it is probably in your interests to keep them well away from your plans.

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13

What do you really value?

Chapter

Lets say it again: its not the wealth itself that is important, its the life and lifestyle that the wealth will allow you to have. If you dont know what matters to you, you run the risk of becoming a miserable wealthy person rather than a miserable poor one! You will simply be a little more comfortable in your general state of unhappiness. Barring unavoidable disasters, it is not necessary to be miserable. You will be making choices every day which determine what your future will be like so you need to know what you value really care aboutas you make these decisions and choices. When people first talk to us about what we do there is often an assumption that the people we work with simply want to be rich, even filthy rich! Many assume our clients only care about money and only care about themselves. Nothing could be further from the truth. Something prompted you to pick up this book. Perhaps you want more choice and control in your life or you yearn for a better future than the one you are facing at the moment. Many will be seeking radical change in their lives and fortunes. The better you understand what is driving you, the easier it will be to get started on the change. Over and over again we have found that the people we work with are driven by very attractive values. The details of what they dream of varyyoud expect that. However, when you strip away those differences we find that people want to make sure that all the good values are metthings like: family leisure time
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love security personal growth health learning service success contribution

These are the values that people are expressing when they describe dreams of: spending more time at home with my children; being available to participate in childrens school and sporting lives; training my sons rugby team; taking my kids away to the bush; spending time just being with my ageing parents; travelling less so that I see more of family and friends; having more time to walk/swim/play golf ; going back to school just for me, learning how to play a musical instrument; building my own boat; making sure my elderly parents can be well taken care of ; helping some younger people succeed; mentoring some start-up businesses; and contributing to the community. Its really important to know what you mean by wealth. Values like independence, choices, security and health are all forms of wealth. Most people never stop to think long enough to figure out what really matters to them. We often only find out when we have lost something or someone in our lives or when one of our deeply held values has been violated in some way.
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Exercise 19
Its helpful to try to figure out the underlying values behind your dreams. When you know what your core values are it is easier to figure out different ways of meeting those values. While we might all sign up to a very large list of worthwhile values, typically we find that people are really driven by a small number. In other words, when you have to choose which few values are the most dear to you. Achievement Adventure Community Contribution Creativity Excellence Family Friendship Freedom Fun Harmony Health Independence Inspiration Involvement Love Power Recognition Religion Respect Society Spirituality Sucess

Which of the values above are very important to you? Try completing some sentences that would show your values: Successful people . . . I would feel wealthy and abundant if . . . If my life were truly successful I would . . . If I couldnt fail Id . . . Symbols of success for me include . . . If you could only hold four or five values, which ones would you hold? How would you like these values expressed in your life? What life experiences so far have shown you what is really important to you? What would you be prepared to give up to have these values in your life?
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KASH points
Get to know what matters to you at a deep levelotherwise you dont know whats worth fighting for. Clarifying your values is all about discovering what is purposeful for you. There is no point in pursuing wealth if you dont know what wealth really means for youyou wont have enough sense of purpose and meaning to sustain you on the journey. There is no point in soldiering away to achieve a list of what others value (or things you have been told you should value!) if you never get what you value yourself. You will be doing a lot of work coaching yourself to wealthmake sure that you are fighting the battle for the right stuff for you. Above all, dont spend your lifes energies working hard to create a future you dont want. Having a clear set of values will help you change your attitude and habits around money. When you are clear about what really matters to you, you will feel much more determined to make sure that it happens. It will also help you change your behaviour around finance so that you build new habits that will help you become wealthy and free.

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Part

IV
81 91 97

Your Freedom Figure: How much will you need?

Chapter 14 Whats enough? Chapter 15 SMART goals Chapter 16 Now, what do you really want?

14

Chapter

Whats enough?

Its really important that you know what you want so you can direct all your efforts to making sure you achieve it. Its also important to begin to cost those dreams and valueswhats the bill going to be? Theres a big difference between having a dream and knowing exactly what you will need to allow you to live that dream. The bridge consists of converting your dreams into concrete goals with numbers attached. Being financially free to live the life you want is a great dream, but its a very vague goal. The next step is to get clear about the precise numbers required for the version of financial freedom that you want. When you know how much you will need to live your dream you will have your Freedom Figurea dollar figure that is the amount of wealth you need to create. This will be different for each individual. The Freedom Figure is the amount of net worth that you need to give you the passive income required to live your life in the way that you want. This figure can vary hugely, depending on the dream. If your dream is to have a house in Tuscany, a flat in Knightsbridge, a house on Sydney Harbour, a loft apartment in New York and a Lear Jet to fly between them, then your Freedom Figure will need to be very large (perhaps $50 million!). On the other hand, if you are perfectly happy in the house you already have and would like, perhaps $50 000 p.a. of passive income so you can afford to work part time, your Freedom Figure will be much less (perhaps $1 million). Note that it is the dream that dictates the Freedom Figurebig, expensive dreams require big Freedom Figures and therefore require more time, effort, energy (and risk!) to achieve.
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We often find that clients are much closer to living the life of their dreams than they realise. People tend to think they need to be very, very rich in dollar terms to have what they want but that is not always the case. Sometimes modest amounts of wealth are sufficientand what a joy to find that you are almost there! It is a real shame to spend years and effort accumulating wealth that you dont need just because you were unclear about what was important to you. When people know what they want it is relatively simple to work out what it would take in wealth terms for them to live that life.
Hans and Marie owned a market garden. They were in their early forties and the kids were almost grown upone finishing a degree and the other in the last year of high school. Hans and Marie had worked very hard over two decades to build up their businessacquiring more land, buying Hanss brother out and developing the excellent relationships they had with customers and suppliers. They worked at least six days a week and hardly knew what a holiday wasmarket gardening is like any other kind of farming in that it is almost impossible to get away from. Hans and Marie were so used to working hard that they had never thought very much about life beyond their weekly round. They came to us because they wanted to develop a plan to be financially free by their early fifties, which meant they were willing to put in another ten hard years. After spending quite a bit of time with them working on their dreams we estimated that they would need $100 000 a year in addition to their home (they already owned a home, mortgage free). The business was fairly conservatively valued at $2.8 million. We were delighted to be able to assure them that if they wished they could start living their dream life right away.

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The money they would get for their business would more than amply cover the price of their dream life. If they sold the business and invested the $2.8 million they could expect over $200 000 p.a. in passive income. This would more than meet the cost of their dream life. At the very least they could sell half the business and work a great deal less.

You will need to work out how much income you need each year to fund your dream life. If you do not intend to work for any of that income, then it will all have to come from your investmentsas dividends, rentals or interestincome that you no longer have to do any work for. If, for example, you decided that you needed $100 000 a year (before tax) to live the life you want, then you would need about ten times that amount ($1 million) invested well (returning 10 per cent before tax) to have that amount of income. However, if you were willing to continue to do part-time work or the occasional contract you might well need far less in order to start your dream life. Everyones circumstances are different. You will need to juggle with several options to find the best mix for you. These options are your choices; all of them involve trade-offs. The more you want in the life of your dreams, the more you will have to work to achieve it. If your dream life is looking very expensive you may want to review some of the things you think you want. For example, do you really have to have that flat in Knightsbridge? Is it really so important to you that you are going to keep on working for several years to achieve it? Would you be just as happy without it? These are the sorts of things we all have to make choices and trade-offs about. Some peoples dreams are much more costly than others. Clearly if your dream life is to live modestly in a less expensive area with plenty of free time, that will be much cheaper than wishing to live lavishly in an expensive suburb with lots of
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overseas travel and holidays! You can see why it is important to know what you want.

Toni is single and in her mid-thirties. Now divorced, she has a good job at a senior supervisory level in a call centre and earns $65 000. She lives in her own small townhouse and is paying off the mortgage steadily. She still owes $55 000 on the mortgage and the house is worth about $450 000. Tonis dream for her future is very modest. She wants to retire from full-time work before she is 50. She feels that she can live the life she wants on $40 000 (before tax) if she has a place of her own. Her requirements for housing are very modestshe is happy to move to a less expensive rural centre, and is also willing to continue to do some part-time work such as customer service management for a mid-sized business or office management for a smaller business. So Toni has 15 years to create her Freedom Figure. What will she need? Housing in the areas she would consider moving to will cost about $250 000. She will need approximately $400 000 to provide income so in total her Freedom Figure will be around $650 000. She already has almost $400 000 of net worth in her house. Her challenge will be to manage consumption very well so that she can invest as much of her salary as possible to create the additional $250 000 she needs to live her dream. That looks very achievable over 15 years.

The other variable that is important is time. If you wish to live a non-working dream life that requires $100 000 before tax and you want to achieve that in three years time, it will be relatively easy if you already have several hundred thousand dollars of investments. However, if you are starting with very little it will be a real challenge to achieve that amount of wealth
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in that amount of time. You could (and we could write you a plan) but your path would be both difficult and risky and there is a high chance that you would lose it all. Very expensive dreams are achievable, but they usually take longer to fulfil. It all depends on where you are starting from and how much time you have. Amassing a lot of wealth quickly is achievable, and many have done it before you, but the faster you wish to grow wealth the riskier the path will bein other words, your chances of losing your money are higher. Each individual (or couple) has to make such choices and trade-offs in terms of goals and time. Defining the dollar figure of the wealth that you need to create your dream life (your Freedom Figure) means that you have a clear goal. This is not a fuzzy dreamthis is a number that you must now achieve in order to live your dream life. Numbers are very usefulthey are clear and unambiguous. You cant fudge a number like $850 000you either achieve it or you dont. Pricing your dreams gives you a very clear target. It also shows you how big the jump is between where you are today and where you need to be in order to begin living the life of your dreams. A number in itself will not motivate you (its the dream that is motivating) but it helps you see very clearly what you are aiming for. The number also allows you to track your progress month by month and year by year you can see how well your actions and efforts are working to take you closer to your goal. Research shows that the clearer the goal the greater the effect it has on peoples behaviour and performance. So how exactly do you work out how much your dream life will cost? How much wealth do you need to create so you can stop working and begin the life of your dreams? The first step is to decide how much annual income you need to live your dream life.

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Exercise 20
Try to price your dreamwhat it would cost you per annum to live that life. You have already done some work on how much income you are consuming at present. Use the same categories as before and consider groceries, utilities, transport, clothes, holidays, gifts, etc. How much would you need each year before tax in order to live your dream life? (It is best to assume here that you will own your house at the point you want to stop working.) This is important, because until you know how much it will cost you (approximately) to live the life you want, it is impossible to say how much wealth you need to create. Multiply that figure by 10. On the assumption that you can get a 10 per cent return approximately (before tax) on your wealth (and you should if it is well invested), this is your Freedom Figurethe amount of wealth that you need to create so that you can stop and live the life of your dreams. Remember, this is in addition to the value of your house. So, if you believe that you can live the life you want on $75 000 a year (before tax), then you will need to create approximately $750 000 in addition to your home so that you can stop and live the life of your dreams. The $750 000, well invested, should give you about 10 per cent return before tax so you should receive approximately $75 000 p.a.

Obviously, all the figures in this exercise are approximate. At the moment of writing, for example, both property and share markets are quite highly valued so that it is very difficult to get 10 per cent before tax. But most of the time, your returns should be in that area. There is also the problem of even quite a
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low rate of inflation eating away at the spending power of the passive income that you expect to get from your capital sum. Nonetheless, at most times you ought to be able to receive a return of close to 10 per cent from dividends and rents coming from a spread of shares and ungeared property investments. Moreover, you can also plan to spend a little of your capital each year as you live the dream. That would mean that you would get a little poorer each year (and the kids would get a smaller inheritance) but spending modest amounts of capital when you have stopped working is a perfectly valid plan for many people.

Calculating a Freedom Figure

Step 1 What is the value of the house you want? $1 000 000 Stan and Anya would like to have a house worth $1 million when they are free. Step 2 Do you want another holiday house? Value? $500 000 Stan and Anya would like an apartment somewhere in south-east Queensland. Step 3 What income do you need for the life of your choice? They have decided that they could live very well on $150 000 before tax $150 000 Step 4 What income will you receive from working in your dream life? They will continue to do some work as consultants and would expect to earn at least $30 000 each per annum $60 000 Step 5 Deduct the income from working (Step 4) from Step 3. This is the amount of passive income that you require $90 000
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Step 6 Multiply passive income required (Step 5) by 10. This is the amount of investment capital you need to live the life of your dreams. Step 7 Add together the house(s) that you want (Steps 1 and 2) and the investment capital needed (Step 6) This is Stan and Anyas Freedom Figure

$900 000

$2 400 000

How much you need comes down to your shopping listthe value of the home you want to live in and the cost of the lifestyle that you want. Depending on where you want to live and the expense of your lifestyle your Freedom Figure could vary from a few hundred thousand dollars to many millions. Thats your choice. And the remaining chapters in the book will show you how to create the wealth. You also need to consider the timeframe. If you are quite young and are willing to work at wealth creation for many years it will be relatively easy to create the amounts of capital that you need to be financially free. If you wish to live your dream life quite soon, then you will need to take more risks and the path is likely to be more difficult.

Exercise 21
Consider your timeframethe longer you are willing to wait to live your dream life the easier it will be. How many years are you prepared to wait to live the life of your dreams? Calculate your own Freedom Figure following Steps 1 to 7.

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Step 1 What is the value of the house you want? Step 2 Do you want another holiday house? Value? Step 3 What income do you need for the life of your choice? Step 4 What income will you receive from working in your dream life? Step 5 Deduct the income from working (Step 4) from Step 3. This is the amount of passive income that you require. Step 6 Multiply passive income required (Step 5) by 10. This is the amount of investment capital you need to live the life of your dreams. Step 7 Add together the house(s) that you want (Steps 1 and 2) and the investment capital needed (Step 6). This is your Freedom Figure

$................. $.................

$.................

$.................

$.................

$.................

$.................

You should now have a Freedom Figure and a date for when you wish to be financially free, for example, I need to create $2.5 million by 2012. That is, $1 million for the house and $1.5 million to give approximately $150 000 of income (before tax) each year. Write this information down and keep it somewhere you can see it regularly.

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The knowledge that is important here is understanding or working out what you would need as income in order to live the life of your dreams. This allows you to answer the question, How much is enough? You should work on the basis that you will need 10 times this income invested in order to give you that income (on top of owning the home where you want to live). Working on your dream with the actual numbers you need will help make your journey towards wealth feel very realit takes you away from fantasies about wealth and helps you cultivate an attitude of reality.

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Chapter

SMART goals

Goals are incredibly important for guiding our efforts and behaviour. Research has shown that people who set goals written goals especiallyoutperform those who dont. It sounds obviousbut not many people have clear goals and even fewer write them down. If you are serious about becoming wealthy and living the life of your dreams you need to settle on clear goals, record them in writing and review them frequently. You will need some big overarching goals about the amount of wealth you need to create. Your most important goal is your Freedom Figure. It is critical that this is a SMART goal (see over), that you put this in writing and keep it somewhere you can see it regularly. You will probably also want some other goals detailing some of the intermediate steps and milestones along the way. Research shows that goal-setting is most effective when people believe that the goal is achievable. It is hard to apply yourself to a goal like your Freedom Figure when it has a due date 10 years henceif your Freedom Figure is to create $5 million by 2015 you will need to set yourself some sub-goals between now and 2015. A sub-goal that sees you creating $50 000 of net worth this year is much more immediate and perhaps more believable than the final Freedom Figure. Once you experience achieving a few smaller, shorter-term goals you will be far more convinced that goal-setting works! You will also find it easier to set more difficult goals because you will have a base of success and more confidence in yourself to attain whatever goal you set.
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One of the better ideas that you can borrow from the business world is to make your goal statements SMART: S = Specific M = Measurable A = Attainable R = Relevant T = Time-bound These concepts work as a kind of checklist to make sure that your goal is clear. Lets look at each in turn and consider how you might use the idea to firm up your goal statements. Specific means detailed. Vague goals are impotent. The more specific and detailed you can be, the clearer the image in your mind about what you want. Research shows that the more explicit or specific the goal is the better we are able to regulate our behaviour to achieve the goal. A very precise goal is much more compelling than a muddy idea of what you want to achieve. If your goal was to own a lovely home, for example, you need to make this precise by defining location, value, style, age, number of bedrooms, school zone, etc. Measurable refers to writing a goal in a way you can trackyou need to be able to measure and evaluate your performance in achieving the goal. While you could not measure or track a goal of become more secure, you certainly can determine if you buy a house that meets the above specifications. The more precisely you specify the measurements of achievement the easier it is to monitor your behaviour and keep it aligned with your goal. Attainable is a check on whether your goal has any realism are you capable of achieving the goal? For example, if your desired home has a specified value of $1 million and your net worth at the moment is $50 000, that does not appear to be an attainable goal any time in the foreseeable future. Not that you shouldnt dream bigyou should. But youd probably be better to consider a more modest house to start with or
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alternatively extend the timeframe to allow you to achieve the bigger goal. If you dont believe that the goal is achievable you are likely to give up quickly. Relevant is a check on whether your goal is relevant to your dreams or values. Buying a house is relevant to the values of security and independence but probably does not satisfy a value of spirituality nor contribute to the value of lifelong personal development. And, of course, owning a bigger home may mean that there is too much capital in your house to be able to achieve your Freedom Figure. For a goal to be relevant it needs to be attractive and compelling to youthere is no point in setting goals that you dont really care about as you will never put in the necessary effort to achieve them. So be very careful that you dont take on the goals or expectations of others or those of the wider society or market forces around you. Its hard enough to work for the things we truly want without having to make the effort to achieve the things other people think we should want! So make sure that the goals you set are important to youagain research shows that people are most committed to goals that they view as important. Time-bound means that you have dates and deadlines. Its all too easy to let yourself off the hook by ignoring the timeline. Deadlines and timeframes are very good for keeping us focused and making us take action every day as the deadline looms. For example, if you say you will make $120 000 profit by the end of the year you know you only have 12 months, therefore you must average $12 000 per month or $2300 per week . . . This is very focusing. If you had a goal to buy a home, good time-bound questions might include: When will you have the deposit? Within what timeframe will you purchase? Over what period will you repay the mortgage?
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The whole point of SMART goals is to pin yourself down so that all these questions are answered. Then you can get busy on the execution of your goal because you know the details. Here are some examples of SMART goals.

Caseys SMART goals for owning her home look like this: Buy a three-bedroom detached house with verandah and garden in a suburb close to work. (Specific) Value between $200 000 and $250 000. (Measurable) Provide a $20 000 deposit (already have $15 000) and make monthly payments similar to my current rent. (Attainable) This will meet my value of security and I really care about that. (Relevant) Purchase home before the end of this year. (Time-bound)

Again, if you are finding this a bit difficult get a friend or partner to ask you questions until you are really clear about what you are going to do.

George places a high value on his personal development, and also on improving his prospects of employment and higher income. Gaining a qualification is an appropriate goal in those circumstances. A SMART goal version looks something like this: Enrol in a correspondence course to complete a Diploma in Accounting. (Specific) Complete and pass the course with a C+ grade or better in each module. (Measurable) Avail myself of offer of support from manager at work and apply for study leave time as per company policy. (Attainable)

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This will make me more employable, will likely get me a pay rise, and will allow me to be eligible for better positions with my current employer or assist me when I open my own business. (Relevant) Investigate options by the end of this month. Complete Diploma within three years. (Time-bound)

There are a lot of words here but its all really just a way of helping yourself to tease out exactly what it is you are going to do. And SMART goals make it much easier for you to make them happen. Dreams are very importantthey are powerful because we think in pictures and we use our senses to connect with what is important to us. We dont tend to visualise numbers and dates! However, when it come to making your dreams a reality you will need to be much more precise and business-likethe dream will give you the energy but it is the clear, well-specified goals which will form the basis of your plan of action. SMARTing your goals will give you a great tool for turning your desires into reality with as little wasted time and effort as possible.

Exercise 22
You should have your Freedom Figure written as a SMART goal, for example, I will create $2.5 million (Specific) by 2012 (Time-bound). I will do this by growing my income by at least 10 per cent p.a. and by keeping my consumption at its existing level (both Measurable and Attainable). I will invest my surplus income in geared property in order to grow my wealth (Relevant). Start converting your values and dreams into specific goals. You may find it easier to begin with a small goal or project

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as practice. A good tip is to revisit something you have already done (like a house extension or a major trip) and SMART it in reverse, as you already know so much about itespecially what went wrong! Is it Specific? Is it Measurable? Is it Attainable? Is it Relevant? Is it Time-bound? Use a friend to help you clarify and make your goals as SMART as possiblethey can ask you very useful questions which force you to be clearer. Write everything down. You will want to revisit these often to check how you are doing and also to update them.

Your Freedom Figure is the big goal. Most people will want to meet goals along the way, such as owning a house, growing income, acquiring a promotion, creating a property or share portfolioand each of these goals should be SMARTed.

KASH points
The skill that you need to acquire here is the ability to make your goals clear and unequivocal. This skill will help you firm up your habits around setting and meeting goals. This will be very important when you begin to take action on the strategies that will create your wealth.

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Now, what do you really want?

Chapter

Its not an easy question, is it? It can seem very frivolous but nothing could be more serious than deciding what you will devote your attention and focus and energies to. Now that you have calculated an approximate Freedom Figure you should have a sense of how big the goal is. Some of you will have enough or nearly enough to live the life you want and will be feeling very good. Others among you may be reeling at the price of your dream. You may have priced your dream life at many millions of dollars and feel that: you do not have enough years left to create that kind of wealth; you will have to work very hard for a long time to make that amount of money; you just dont want the dream enough to set a goal that high. If this has happened to you, now is a good time to think again, and dig down deep about what is really important to you. Some of the things you described in your dream might be blue sky, for example, spending winter overseas each year in your own villa in Tuscany. You should examine your dream list again and ask which things on it are really important for your happiness and which are just icing. Obviously, every item you cross off lowers the price of the dream, and that means you have to create less wealth or work for far fewer years to achieve your Freedom Figure.
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Nic and Maria are in their early forties with three children. Nic has run a successful business for years and they have a comfortable if not lavish lifestyle. When we priced their dream life, their Freedom Figure came out at $7.75 million! Not too surprising when you consider that it included: Seaside family home $2 million Yacht $1 million Holiday home in Fiji $1.5 million Holiday home on Gold Coast $750 000 Annual income $250 000 (needing $2.5 million capital to fund)

When we revisited the list with Nic and Maria, they were quick to agree that what they really wanted was a home by the sea (and a $1.5 million one would do) and $150 000 income and a very basic holiday home ($500 000) in the mountains where they could take the kids fishing and tramping. This version of their dream was priced at approximately $3.5 million. Given that their net worth was already over $2 million this new Freedom Figure was not out of reach within a few years if they continued to drive the business well and kept control of their consumption.

You are going to have to make many changes and do a lot of work to achieve your dreams, so make sure you are clear about what you really want. If you dont really want the dream you wont have the motivation to do the hard stuff to achieve itand are likely to end up even less satisfied than before. You will find it very hard to work towards a dream that will take 30 years to realise. So dont dream of a future that you cant really commit to.
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Exercise 23
Now that you have done a lot of thinking about your dreams and values you need to decide what it is that you really want. Part of this decision is trading off between what you want and how much you are prepared to do to get itwhat are you willing to give up to get the dream; what part of the dream are you prepared to negotiate on so you can achieve your dream in a reasonable timeframe? And with a reasonable level of risk?

So what would be the perfect fit for you and your family? Dreams need money so that they can become real. You and your partner have to keep discussing what you really want until you are agreed that you are willing to create the wealth that your particular dream will cost.

KASH point
The key skill to master here is the trade-off between the cost of the dream and the wealth you will need to accumulate. You (and your partner) are answering the question, How much is enough? You can choose to dream very big if you are willing to make the huge effort that it will take to meet the cost of that dream. Or you can choose a more modest dream life and the probability of getting it more easily and sooner. Your choice.

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Strategies for wealth: How will you create wealth?

Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter 17 18 19 20 21 22 23 24 25 26 27 28 29 How wealth is created How income makes you wealthy How wealth is destroyed How to protect wealth You have to own Wealth-Creating Assets Choose only one Wealth-Creating Asset How to choose a Wealth-Creating Asset Getting asset allocation right What if you have a job? You must create a surplus You should maximise income You have to learn to borrow How to maximise your returns 103 106 110 114 118 122 124 126 137 141 149 156 161

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How wealth is created

Chapter

If you really want to become wealthy you first need to understand how wealth works. Many people approach wealth as if it were a matter of luck! Others think that you have to have a lot of money to make money. Neither is true: wealth is created following some basic rules that you need to understand so that you can make use of them. Being wealthy is not about having a lot of income. It is about having a lot of capital. The ultimate aim, financial freedom so that you have the life you want, is to have a lot of income, but this has to be passive incomethat is, income that you get without having to work. Passive income can only come from capital, and so you have to grow your capital (your wealth) so that you can get plenty of passive income. Capitalism is the name of the game. This sounds simple enough. But many people confuse having high income with being rich. People who have high income (especially when it is from a job) give every appearance of being rich (they have all the toys and trappings of the rich), but they are not. Being rich is about having capital, capital that can be converted into assets that will give you passive income. It is passive income (income that you do not have to work for) that allows you to live the life of your dreams. Then you are free to spend your time on what is important to youand you have enough income to do so.

Exercise 24
Look again at your net worth figure and compare it with your level of income. Are you rich in income but poor in wealth (probably because everything is being consumed)?

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Having lots of capital is the final objectiveremember, capitalism is the name of the game. You have to be an owner: an owner of the right things. What you do with your income during the time that you are trying to get rich is important. A lot of people manage to get high incomes from their businesses or investment activities but because of how they use this income, not all of them get rich. Income has four important uses: Consumption You have to live. A proportion of your income will have to be spent on groceries, transport, utilities, etc. Reinvestment If you retain income (that is, do not spend it) it is added to your capital and will grow. When income is added to a Wealth-Creating Asset it will compound at a high rate and so grow very quickly. Paying for borrowings Nearly everyone who becomes rich gears up the capital that they have by borrowing. Borrowing reduces the amount of disposable income that you have (because you have to pay interest) but increases the amount of your growth of capital (because by borrowing you have increased your Wealth-Creating Assets). Setting capital value The income that you get from your assets values those assets. Regardless of whether it is a business, shares or property, the value is set by the amount of income that comes from them. Therefore, increase the amount of income from your Wealth-Creating Assets (business, property investments, etc.) and you increase the value of them. For example, an increase in the rents that you get from a warehouse that you own not only increases your income but also makes the warehouse more valuable. To become rich, to grow your capital quickly, you need to own Wealth-Creating Assets, things that will give a total return (capital growth plus income) of at least 15 per cent p.a. on your money. As we have said before there are only three things that
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will give that sort of returna business (this includes farms), property investment and/or development, and shares. To get rich, you have to own something from one of these three categories. This is what you will have your capital in, what you will get your income from and what will make you wealthy. If you can average 15 per cent p.a. from your business or other activities, you will become rich. You will almost certainly have to gear (borrow) to get a 15 per cent returnthere is more about gearing in Chapter 28.

Exercise 25
Consider how you view wealth and incomehave you been confusing the two? Do you see income as a means to increasing wealth, rather than as wealth in itself? Are you focused on increasing your wealth? How will you use your income to grow your wealth? Do you value your income highly enough?

You cannot continue to own these Wealth-Creating Assets if you want financial freedom. Living the life of your dreams means that you need to be free to do what you want with your time and to have enough money to do so. But to get a 15 per cent return from your Wealth-Creating Assets, you will have to manage what you own actively and take risks. As we have said before, active management (that is, work) and being in a highrisk situation is not our idea of financial freedom. Therefore you need to become rich (have a lot of capital) through some risky enterprise, but over time move that capital into something that will give passive income with low risk (Security Assets). The first thing to think about is how to get rich. The following chapters will focus on the skills of wealth creation.
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How income makes you wealthy

Chapter

Although having a lot of income is not in itself being rich, income is critical to becoming rich. To become rich you must generate a lot of income from your Wealth-Creating Assets, and then use this income wisely and well. When financially astute people have an increase in their income, they celebrate. When they have a good year with their businesses and the annual profit increases, when they manage to increase the rents on their properties, when the companies that they have invested in increase their earnings and dividends, they are delighted and happy, and they celebrate. In all of these things, their income has increased and that is very good news. However, the increased income is not good news by itself. Sure, the extra income is usefulit could be taken out and spent. But few people who are serious about getting rich would care to do that. The increased income is not terribly important in itselfrather it is what the extra income can do for them that is important. In fact, it is the attitude towards increased income that distinguishes the successful from the unsuccessful. The unsuccessful (those never likely to become free) are likely to look at the extra income and start to think what they can do with itanother overseas holiday, a boat, increase the mortgage on the house to build a swimming pool. Those who are determined to be rich and successful view the extra income quite differently: instead of thinking about what they can do with this extra income, they think about what the extra income can do for them. Instead of thinking about the fun that they can have with the additional money, people who know how to become rich are thinking about the effect on their
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positions and the opportunities that the increased income has brought about. This difference in attitude towards income is the divide between those who will become rich and free, and those who will not. Those who will not achieve financial freedom think only of consumption. Those of you who will achieve financial freedom will think of your income like this: Extra income means that our assets will have a higher value All Wealth-Creating Assets are valued by their incomethe family business is valued by the profits it makes, property investments by the rent they bring in, and shares by their earnings (in much the same way as the family business). If you own a small commercial property you might be able to increase the rent by $5000 p.a. You will celebrate the extra rent not because of the income itself and its spending power but because the value of the property will be greater (perhaps by as much as $50 000). The extra rent (or business profits) increases the value of the asset because a potential buyer would agree to pay more for it to get the higher income. The extra income means that you have become richer (you have more capital). This additional capital growth is often worth several times the additional income that was generated. The extra income can be used to borrow more Not only will you have higher capital values to use as security but you will also have more income to fund borrowings. The ability to borrow more means that you can dramatically increase the total amount that you have invested in your Wealth-Creating Assets. This in turn will generate even more income for you, spinning a Virtuous Circle of Wealth even faster. This is, of course, the compounding effectit is no less potent for Wealth-Creating Assets than it is for other investments. (In fact it is more potent because the returns are even higher.)
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The Virtuous Circle of Wealth Increased Income

Re-invest

Higher Asset Values

Additional Borrowings

Exercise 26
What have you been doing with your incomeis there any surplus or are you consuming it all? If there is a surplus where have you been putting it?

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KASH points
The critical factor is your attitude to your income, and in particular to the increases in income that you win. Most people simply spend it, consume it in one way or another. Of course, when you do this, it is goneit is out of the system. What you do with your income is critical to becoming wealthy. Those of you who are determined to become wealthy will keep it in the system. You will plough it back to keep the virtuous circle of wealth turning for your future benefit: using extra capital in your businesses as you buy new plant and equipment, increase stock levels, add a new product range or division, etc., or purchase more investment property or shares. You will re-invest, continuing to strive to grow your wealth at 15 per cent or greater, compounding your returns to riches. This is the habit that you need to create wealth. Your attitude to your income, your knowledge of how your income can become capital that in turn gets more income, is critical. People become rich because they handle the income that they have wellthey have a plan for their income and they work the plan. They work very hard to get more income out of their businesses and properties, not for its own sake but for how it grows their capital. The rich use the virtuous circle, growing their wealth with each turn.

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How wealth is destroyed

Chapter

The same mechanisms that make you rich can also make you bankrupt! It is all too easy for the Virtuous Circle of Wealth to go too fast, spin out of control and into a Vicious Spiral of Bankruptcy. If you play double or quits for long enough, some time it will be quits. There are risks involved in chasing high returns. There are risks involved in being in business (just look at statistics on how many fail), risks in highly geared property, risks from shares and any other high-return endeavour that you might try. To become rich you have to look for high returns, always remembering that high returns come with high risk. At any point the Virtuous Circle of Wealth can be brokenand send you into a downward spiral towards insolvency. It is not just that WealthCreating Assets are risky. They certainly are risky but these risks are exacerbated and magnified by the two key components of the Virtuous Circle of Wealth, borrowings and reinvestment. Borrowings Nobody gets rich without borrowing to buy income-earning assets. Gearing or leverage is a necessary part of getting rich as it greatly increases the return that you will get on your own capital. You may as well get used to the idea that you will have to borrow to become wealthy. However, although borrowing greatly increases the returns on your capital, if things go the wrong way it also greatly increases your losses. Gearing or leverage speed up the process to wealthbut speed kills. Borrowings speed up the Virtuous Circle of Wealth, but of course the faster you go, the bigger the mess that can result when things go wrong.
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Reinvestment You will be tempted. You will want to reinvest all the surplus income back into your Wealth-Creating Assets you will want to expand the business, buy more property or more shares. But in doing this you are ploughing everything back into just one areacertainly a high-performing area, but one that you know to be risky (and those risks are accentuated by high borrowings). You will want the growth that comes from reinvesting your income, but in reinvesting all of it you develop the opposite of a diversified portfolioeverything is in just one area. This is double or quits, and you are playing for the familys fortunes. These two things, borrowings and reinvestment, so important for making you wealthy, the very things that drive the Circle of Wealth, are at the same time the circles Achilles heel. The two things that will help you grow wealth are the things that will not let you remain wealthy and free. The Virtuous Circle of Wealth will give you success for a time. When the circle turns well and reinvested profits are leveraged further with debt, income and wealth increase hand in hand. This success is your greatest enemy: it leads to over-confidence and feelings of invulnerability. Too many entrepreneurs cannot imagine that they will ever have a failurethey keep reinvesting everything that they make, gearing it up further for even more wealth.

Exercise 27
Is all your net worth tied up in Wealth-Creating Assets? This is a risky allocation. Read on for advice about making your position more secure.

When the Virtuous Circle of Wealth fails, the people who have reinvested everything are shocked. They have planned for
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success with no thought of failure. They have no fallback position, nothing outside their Wealth-Creating Assets. And these are now in the downward Vicious Spiral of Bankruptcy. With nothing in Security Assets, this is a spiral that is very hard to stop.

Exercise 28
What Security Assets do you have? Do you have any plans for securing your wealth?

In hindsight, over-confidence is the greatest problem leading to the downward spiral. When things are going well, it is impossible to imagine them turning bad, there seems to be no need to think about what you might do if the Virtuous Circle of Wealth stops turning. In business and investment things go wrong for all sorts of reasons: sometimes it is the owners fault; sometimes it is not. Often it is because the entrepreneur has tried to go too far too fast, gearing up to grow the business faster or buy more shares or property, only to be caught in an economic or industry downturn coupled with a hike in interest rates. The Virtuous Circle of Wealth, with profits being reinvested and with ever-higher levels of borrowing, can quickly turn into the downward spiral: income starts to fall, asset values fall with it, cash is difficult to find and the lower asset values mean that the gearing rate (the proportion of borrowings to assets) climbs. The owner becomes a forced or distressed seller, and this means that asset values are crystallised at a level even lower than expected. Before long, the spiral has the owner out of the game, perhaps pushed by the bank, maybe jumping before the bank has to start pushing. What can you do about this vicious spiral? Well, once it starts happening, not much. Falling income and asset values are hard
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to turn around. In most markets, things will eventually come right but that will take time. If you can survive through some bad times, you may thrive in the next economic cycle. But most entrepreneurs who get caught in the Vicious Spiral of Bankruptcy do not have timethey have nothing to get them through to the next downturn except their businesses and the very investments that are the cause of their problems. Once the vicious spiral starts it is very hard to stop. The time to manage downturns is before they start. You know that in your drive for financial freedom there will be tough timesyou are bound to have to survive at least one and perhaps several economic cycles. There will be times when business and investment conditions are difficult, when income falls and interest payments are hard to find. You know that this will happenit is inevitable. You have to stop playing double or quits, stop having everything resting on the performance of one asset. You need a plan to lower the stakes.

KASH points
The critical knowledge here is understanding how you can lose your wealth. This should help create an attitude that will help you build the skill to protect your wealthinvesting in Security Assets. The habit of protecting wealth is just as important as the one of creating wealthyou need to be sure that you are going to keep most of what you have worked so hard to make.

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How to protect your wealth

Chapter

You need to use the Virtuous Circle of Wealth but at the same time guard against the Vicious Spiral of Bankruptcy. It is actually not that difficult to create wealth, but if you want to remain wealthy and be free your wealth must be secure. We have always been concerned about the possibility of any of our clients losing the wealth they have created. The WealthCoaches Model is designed to help them go on the offensive to create wealth while still having some defence plays. It allows you to plan and structure your affairs to achieve financial freedom without being stopped halfway through by some financial adversity. It is a plan that means you can survive the bad times so you are still there to thrive in the good times. In order to win, it is not enough to be able to play on the offence; you have to play a good defensive game as well. Money never takes care of itself! We have heard so many passionate entrepreneurs, and share and property investors, tell us that if they love what they do and are passionate about it, the money will take care of itself. The truth is so different. All your time and toil will probably be for nought if you do not take steps to lock in some of your gains as you go. Suffice to say here, a plan has to be developed so that money is moved to Security Assets that will be secure, and separated from Wealth-Creating Assets. You need a deliberate policy of using a part of the income from your Wealth-Creating Assets to put aside in Security Assets. The purpose of doing this is to give you a fallback position so that if you do get caught in a vicious spiral you will have other assets that you can use to help you survive. Getting rich takes place over a number of years. You want to be set up in such a way that you can weather
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adverse economic conditions (such as recession), problems in your particular wealth-creating activity, and even difficult personal circumstances such as illness or family problems. A smart wealth creator knows that some or all of these obstacles will be encountered and prepares to overcome them. The final goal of financial freedom is to have significant wealth in secure investments that will generate passive income (Security Assets). You should start shifting some of your profits from your Wealth-Creating Assets right from the beginning. Moving money to Security Assets from your Wealth-Creating Assets may seem counter-intuitive (most people want all their profits to go back into the thing that is making them rich so that they can accelerate the process). However, investing outside your Wealth-Creating Assets is a very good habit to get into, constantly reminding you that the aim is not just to get rich but to be in a position where you will always stay rich as well and have enough passive income to be able to choose how to spend your time. In some ways, this model or plan is simplicity itself. Certainly no one has trouble understanding itthere is nothing very complicated about the idea of shifting some of your wealth outside whatever venture you are using to become rich. However, what is not simple is actually working the plan. Most people who have successful Wealth-Creating Assets instinctively plough all of their profits back into them. Not a great deal of thought goes into thisexpansion is carried on as cash becomes available. Little thought is given to, or plans made for, use of the cash generated by the profits. That this is done instinctively is the problem. Ploughing back everything that you make, using every bit of cash that comes out of the Wealth-Creating Asset is not a thoughtful approach: rather it is an unplanned, unexamined, unquestioned habit. Smart entrepreneurs will take a much more informed, business-like approach to their wealth-creating activity. Not only is reinvesting all
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profits likely to be less than optimal business practice, but it is also likely to prevent you from realising your dreams of financial freedom. This is the real benefit of our model: it forces you to think about what you are going to do with your profits; forces you to plan to split the profits three ways: for consumption (you have to live); for the Wealth-Creating Assets (you have to reinvest some of the profits); for Security Assets (you have to diversify some of your wealth out to investments which will generate passive income).

Exercise 29
Where do I get my income from? Where does it go? How much do I have in Wealth-Creating Assets? How much do I have in Security Assets? Is the balance right to meet my dreams and goals?

Security Assets are what most entrepreneurs missthey do not invest outside their Wealth-Creating Assets. All their wealth is employed to make them rich; none of it to help them stay rich and become free. Yes, you have to invest in Wealth-Creating Assets, and keep on investing in them. But you also need Security Assets which are isolated from your Wealth-Creating Assets. The model helps you do that. It keeps the different things that you own in different compartments (in your mind at least). It encourages you to use part of the income that you have on an ongoing basis to move into things that are secure. Best of all perhaps, it reminds you why you are setting out to become rich: that it is not just money that is important but financial freedom. Money, wealth and riches are only important for the kind of life that they givethe kind of life that you want.
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KASH points
The attitude and habit of protecting wealth are the keys to making sure you become financially free.

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You have to own Wealth-Creating Assets

Chapter

It is time to start to think about the things that are going to make you wealthy and how you can use them. You have a dream and you know how much you need to create to live that dream (your Freedom Figure). Next you have to choose a strategy to create that wealth. For many people who have not thought much about money and wealth, it is the Wealth-Creating Assets that seem to be the hardest part. For them the really big question is, How do I get rich? In fact this is not really the hard part at all! Provided that you: have the desire to be rich; are prepared to take some risks; have a strategy to manage those risks, and are patient.

With all of the above you can accumulate the sort of wealth you need. As has already been seen (and we will show further) there are ways of getting 15 per cent and more on your money. They are not without risk. But they are available. The things that are going to make you wealthy, and grow your money at a fast enough rate must have these two characteristics: Produce a 15 per cent return of income and capital, after tax and any fees. You must be growing your wealth at this rate that means that any income that you use for consumption cannot be counted. (To get a 15 per cent return you will almost certainly have to gear.) Be saleable, that is, the Wealth-Creating Asset must be able to be owned, and then sold. You cannot become wealthy by
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growing an assets value if you cannot sell it at some point in the future. This precludes your career from being a WealthCreating Asset. There are a few people who become wealthy through their careers, but not many. To get wealthy through your career you must first have a very successful career, and second make sure that you do not increase your consumption each time you get a pay rise. The only three things we know which meet these two criteria, that you can own to make you wealthy, are, once again, a business, property investment and development, and shares. Your job at the moment is to choose which of these is the vehicle to make you rich. People often do not really choose what will make them rich at all, rather they go into some sort of activity almost by default. Thus, they go into a particular business because the opportunity arises, property investment because they attend a seminar, shares because of a tip from their cousin, etc. There is no great thought, no consideration from which a judgment can be made. This is not necessarily a bad thing. You must have some sort of affinity with what you are going to do for the next 10 or even 20 years. You are hardly likely to keep up enthusiasm for that period of time unless it is something that you want to do. The way that some people try to choose their WealthCreating activity, what sort of business or property to go into, is to analyse and then enter the business (or property type). Although you can do this kind of analysis when buying shares, it is often difficult when setting up or buying into smaller businesses. Choosing your Wealth-Creating Assets by this process can seem like the best way, but without some affinity to the activity or point of introduction to the industry it will be hard. Certainly, you will need some passion about what you do in order to be successful. But passion is not enough in itself:
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business, property and shares all take specific knowledge and skills that must be mastered if you are to succeed.

Magda and Colin live in a typical suburb with their two children. Magda is a full-time mother and Colin works for salary as a civil engineer. Magda and Colin own five rental properties. They called us because they felt that they were not making enough progress on their path to wealth. They were clear about their dreamthey wanted to be financially free by 45 and they had another eight years to go. They wanted to be able to travel with the children and live for months at a time overseas, putting the children in local schools for the experience. They had settled on property as a Wealth-Creating Asset. They both studied property with enthusiasm and Magda did all the day-to-day management of their rentals. We worked with them on a plan to accelerate their wealth creation that included actions such as restructuring their property portfolio and better debt management. Colin earned very well as a civil engineer. They could easily have settled for a high standard of living with little savings, but they were determined to create a large surplus from Colins salary and put it to work. Time was on their sidethey could afford to invest aggressively with high levels of borrowing. They turned their combined skills and education to making property investment work for them.

Most people will choose how they are going to become wealthy by looking at activities that they are already involved in, already have some interest in or already have some knowledge of. This choice by default may not sound the best way, but at least it does mean that you go into something with a bit of a start.
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Exercise 30
Do you have a Wealth-Creating Asset? What might be a Wealth-Creating Asset for you? What attracts you about business, property or shares? What skills or experience do you have that might support your choice?

Before you start, before you commit any capital, just check that the activity really is capable of making you rich. It does not have to be the most likely way to riches but it does need to give you a fairly good chance. On the one hand, do not enter into an activity that you know nothing about solely because it seems to be in the most rapidly growing industry; on the other hand, do not go into something which you are passionate about but which is an industry in rapid decline. The knowledge that you need to acquire before choosing your Wealth-Creating Asset includes understanding how you will create wealth through property, shares or a business, and self-knowledge about which you are best suited to. Do not rush into a venture hereyou will be working long and hard and have lots of risk to carry so you need to get this choice right at the start. And you must choose only one Wealth-Creating Asset.

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Choose only one Wealth-Creating Asset

Chapter

Your Wealth-Creating Assets are the opposite of your Security Assets. Your Security Assets are spread arounda diversified portfolio of quality investments that require little or no looking after. Wealth-Creating Assets still require quality, but not a spread of a whole lot of different things. Getting rich requires concentrating your assets, staying rich requires spreading them. Your Wealth-Creating Assets need to be focused on just one area. You need to focus on the one thing that will make you wealthya business, some properties, or sharesbut not all of them. Some people try a lot of different things to make them wealthy. They own some investment properties and dabble a bit in shares, then set up a business and after a while push that business into areas outside its core concerns. Such people have a series of things, one of which they hope will come off and make them wealthy. Thats the wrong approach. We know very few people who have become wealthy by chancing with a whole bunch of things. It is far better to concentrate on just one thingand doing that thing well. Certainly, this is a bit more risky, but that risk is reduced by the focus and care that you bring to it. You can have all your eggs in the one basket, provided that you make sure that it is a good basket, keep the basket in good repair and carry it over rough ground with a firm footing. People who become wealthy do it by having one really good activity that they put all their time and energy into. Such people live, eat and breathe this activityit occupies them completely. That is the sort of commitment that you need to get rich. You have to know everything that there is to know about your
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activityall the gossip about who is doing what, where the markets are heading, where the gaps in the market are and where the biggest opportunities lie. You do not get that sort of intelligence by spreading yourself across several unconnected things. You get it by concentrating and focusing on one specialist area. Remember that you are (in the early days at least) putting nearly all of your capital into this one thing. Drive it hard, and guard it carefully.

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How to choose a Wealth-Creating Asset

Chapter

You may be suited to business if: you have worked in a business; you have an underlying business skill, for example, in service or manufacturing; you are good with people; you like dealing with customers; you are prepared to work long hours; you can do lots of different things, for example, buy, sell, hire staff, deal with complaints, understand numbers. You may be suited to property if: you have owned rental property; you have handyman skills; you enjoy or are able to renovate; you are able and willing to deal with tenants; you can develop good relationships with real estate agents; you like real things like buildings; you are willing to learn the basics, for example, calculating yields; you are a good negotiator; you are patient.

You may be suited to shares if: you like analysis; you are a good reader; you can cope with lots of information; you are interested in business, markets, and what makes shares work; you like abstract ideas, for example, price-earnings ratios; you have a good understanding of business and finance.
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Exercise 31
Choose the Wealth-Creating Asset which best suits your skills and circumstances. If you have been dabbling in several Wealth-Creating Assets consider which to disinvestyou are unlikely to be successful if you are spread thinly.

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Getting asset allocation right

Chapter

We help our clients look at the allocation of their assets on the WealthCoaches Model. Then we work with them to get the right balance and allocation of their assets to get the life that they have said they want. The two main problems that we see are having too little in Wealth-Creating Assets, and having too much in WealthCreating Assets.

Too little in Wealth-Creating Assets

It is almost impossible to grow your wealth fast enough to become financially free unless you have enough in WealthCreating Assets. Many people who have put all their money into a home have a high net worth and a good Security Asset, but it is very difficult for them to grow their wealth as Security Assets do not tend to appreciate very well. (We have had recent exceptions with the surge in the property marketbut it is just a surge and cannot be depended on as a sustainable way to grow wealth.) The second problem with this approach is that there is no passive incomeyour house may be worth more (thereby increasing your net worth) but you cannot stop working as there is no income. You cannot use the wealth in your house unless you sell it and trade down or move away to somewhere considerably cheaper. People who put all their surplus income into Security Assets (like paying down the mortgage or buying a diversified portfolio) will be relatively comfortable and safe, but are highly unlikely to achieve the wealth and freedom of their dreams. To do that, money needs to be released for investment in Wealth-Creating Assets that will grow at a higher rate
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(15 per cent or more). This often involves making big and radical changes.
Mike and Melba were in their early forties. Mike ran his own professional practice and had enjoyed very high income for years. The couple had only one child who had almost finished tertiary study and was about to go overseas for a few years. Mike and Melba were devoted homebodies. Melba had worked part time (she had been an accountant) for many years but now devoted herself to looking after their beautiful semi-rural homestead with extensive gardens. She was talented at both the house and garden were stunning and she had done most of the design as well as the actual work. They had called us because they were worried about the future. Sure, they enjoyed a high income and a great, albeit quiet, lifestyle. The problem was that Mike wanted, indeed needed, according to his doctor, to slow down. However, if Mike worked less there was less income. As always, we began with talking about the dream. Mike and Melba wanted a similar lifestyle with much less work for Mike. This of course meant that they would need to find a way to get some passive income. We then did a net worth statement: Assets House Business Shares Liabilities Business loan Net worth $1 200 000 $200 000 $20 000 $50 000 $1 370 000

Mike was doing very well, bringing home $150 000 after tax each year

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We used the WealthCoaches Model to allocate these assets.

Wealth-Creating Assets

Business $200 000

Consumption

$130 000

Security Assets Income

$20 000

$150 000

Home $1 200 000 Shares $20 000

The picture tells the story: Mike and Melba looked very wealthy from the outsidepeople regularly stopped and admired the house and gardens. They certainly enjoyed their income spending a great deal on entertaining at home, keeping the house and grounds as a showpiece, and enjoying several expensive breaks during the year. This was an enjoyable way to live as far as it went but it was totally reliant on Mike continuing to work hard and long and bring in a high income. The picture showed that they had no other source of income apart from Mike. The business was in his name but, as most professional practices do, only provided a name and a group of colleagues to work with. If Mike were to sell up and leave there was a small amount of goodwill value

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that we felt his partners would buy out. We valued this at $200 000. Virtually all of Mike and Melbas net worth was tied up in Security Assets (the house). They had been putting money into the sharemarket for a few years but the tech-wreck of a few years ago had rendered their portfolio of fairly low value ($20 000). The rest was tied up in the family home that brought in no income at all. We talked a lot over some weeks. Mike and Melba understood that they had to make some changes. They could choose to live somewhere much more modest and release a lot of the capital in their house to invest for passive income. Another option was to use the capital in the house by borrowing to grow their wealth over the next decade so that they had the best of all worldsthe same or similar home and enough passive income so that Mike could move towards semi-retirement. We agreed that they needed to create an additional $1 million to provide the kind of income that would allow the life they dreamed of. The following decisions were made: Mike and Melba decided to sell the house. They realised that if they were to have the life that they wanted in the future, they couldnt afford to have all their assets tied up in nonincome-producing Security Assets. Some of the money from the sale ($500 000) would be used to buy land in a place that they would be happy to live in the future. That might be close to where they sold or somewhere else. They did not have to commit to building on that landit was a way of making sure that they would have the landor rather the land valuewhen they needed it. Put another way, they were buying a hedgeif land were to take a great jump in value (as it sometimes does) they would have land that would appreciate in value at the

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same rate. Otherwise they risked being locked out of the property market when they came to build again. The balance of the money released from the sale of the house ($700 000) would be put to work to create wealth. They would also sell the business. This would raise $150 000 after the business loan was repaid. This money would also be put to wealth creation. Mike and Melba decided to use this money to create wealth through aggressive share investment and option trading. Their professional backgrounds gave them the underlying skills they needed for analysis and, just as importantly, they were both interested in business and the markets. They understood the risks involved and agreed that they would work to a set of investment rules. Melba felt that she would also enjoy a return to part-time workif she were no longer supporting Mike in a more than full-time and stressful career she would have plenty of time and energy to do some work. She was confident that she could bring in $25 000 after tax. Mike was also confident of doing some part-time consultancy for his former partners and could expect to earn $50 000.

This would represent a considerable reduction in consumption. However, Mike and Melba felt that with less stress in their lives (and without a huge house and garden to maintain) they would manage very well on $70 000 even after paying rent. With these changes Mike and Melbas model would look like this:

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Wealth-Creating Assets

Shares $850 000

Consumption

$70 000

Security Assets Income

$5000

$75 000

Land $500 000 Shares $20 000

Change is never easyand making big changes to what you own is a difficult change. This is where it really helps if you are both committed to the dream and are able to talk well together about the future that you are hoping to create. Otherwise the focus tends to go on what you are losing or giving up rather than on what you are gaining and where you are headed. Your dream needs to be powerful enough to make to want to embrace the changes that need to be made.

Too much in Wealth-Creating Assets

Having too much in Wealth-Creating Assets is typical of business owners, property investors and farmers. They have everything (except the house) in their investments and often see no problem with this. However, this is a high-risk position and depending on
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their age and wealth usually needs rebalancing. This group is playing double or quitsalmost everything is being reinvested. It is all too easy to get carried away by the apparent success of a business or property portfolio and keep piling money back in there. Such people are often very reluctant to accept the lower returns offered by lower risk Security Assets but they need to understand that they are playing a high-risk game. High risktaking can be appropriate: if you are young you can afford to take big risks. If you fail you have plenty of time to recover and try again. Many people who are early on the journey to wealth and freedom will have to take considerable risks but we believe that this needs to be offset with some Security Assets so that if you fail you will at least have a small stake that allows you to get back in the game. Obviously, people with young families will want some kind of backstop in the event of business failure or a meltdown in their property investments. Another group who typically have far too much still at risk in Wealth-Creating Assets are those who have achieved high net worth and who do not need to continue to take the risks associated with wealth creation.
Jill and Brian were in their early sixties. Brian had run the family business for nearly 40 years and still worked hard at it, despite some health problems. Jill had taken almost full responsibility for family life, including their three now grown-up children. She had always run the familys finances and had over the years made some investments in property, as well as done a couple of property developments. Brians whole life had been around the business and he did not know how to stop going into the factory every day (and, yes, that included Sundays!). At Jills insistence, a general manager had been appointed but Brian still tried to put in the hours, believing that if he left the business for long it would collapse. The first thing we did was a net worth positioning:

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Assets House Business Land (for development) Property investments Shares Liabilities Mortgage (on land and property developments) Net worth

$700 000 $2 500 000 $600 000 $750 000 $25 000 $4 575 000 $650 000 $3 925 000

The business was profitable, making $400 000 p.a. after tax.

The next thing to do was decide what category each asset should go in. The only difficult categorisations were the land for development and the property investments. We decided that these should go into Wealth-Creating Assets as they had quite high borrowings and the aim was certainly to make big profits. The land and the property investments were together worth $1 350 000, the mortgage was $650 000, and so we put these into the Wealth-Creating Asset category at a net value of $700 000. Their current position looked like the diagram on p. 134. A quick glance at the triangle showed how badly balanced they were for a quite wealthy couple in their sixties: they had $3 200 000 of their net worth in Wealth-Creating Assets and only $725 000 in Security Assets. Virtually all of the profits from the business were going back into it. Putting the current numbers into the model showed us quickly where the starting position was and what needed to be done. We could now help Jill and Brians future. The following decisions were made:

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Wealth-Creating Assets

Business $2 500 000 Section/Property $700 000

Consumption

$80 000
REINVESTMENT

$320 000

Security Assets Income

$400 000

Home $700 000 Shares $25 000

Half the business would be sold to the general manager (he had been asking to buy it for years). An arrangement would be made for the financing to help him buy a half share. The proceeds from the sale of half the business would be invested in well-diversified funds. With the general manager now a part-owner, Brian could relax a bit and work only when he wanted to. A board of directors would be formed with two independent directors to help govern and guide the manager. A policy of paying out 75 per cent of the profits to shareholders would be adoptedhalf to Jill and Brian, half to the general manager. On this basis $150 000 would be paid to Jill and Brian, $150 000 to the general manager, and the remaining 25 per cent would be retained in the company. The development land would be sold (the couple did not need more big projects) and the proceeds would be used to retire debt. Because the property investments would now be

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mortgage free, they could be considered Security Assets (and would give some useful passive income). More money would be budgeted for consumption for travel, holidays, etc. When these steps were taken, the model would look like this:

Wealth-Creating Assets

50% Business $1 250 000

Consumption

$120 000

$150 000
Rentals

$30 000 $60 000

Security Assets

Income

$180 000

Home $700 000 Shares $25 000 Diversified Funds $1 250 000 Investment Property $700 000

Changing your asset allocation is often a painful experience even though it is necessary to get the results that you want. It often involves selling a business or propertythings that people tend to be very committed to. Sometimes it even involves selling the family homemany people have almost all of their net worth tied up in the family home. They are heavy in Security Assets but have no money to invest in Wealth-Creating Assets to grow their wealth. Selling the family home is a big step both financially and emotionally. So too is deciding to re-invest less in a business or shares or property so that you can build up Security Assets.
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Exercise 32
Revisit the model showing your asset allocation (you did this in Exercise 9 on p. 50). Decide where you need to make changes: have you too little in Wealth-Creating Assets? In this case you will need to take from Security Assets and/or Consumption and re-allocate to help grow your wealth. Have you too much in Wealth-Creating Assets? In this case you have little or no Security Assets and may need to sell down or borrow and re-allocate some wealth to Security Assets. You will be settling for a lower return on your money but you will have some wealth protection.

KASH points
Understanding how your assets need to be allocated so that you can grow your wealth sufficiently quickly to achieve your Freedom Figure is a key piece of your financial knowledge. Using the model you should practise re-allocating your assets so that you get the right balance of Wealth-Creating and Security Assets to allow you to meet your goalsthis is a skill that you will need to return to over the years as your asset allocation will need to be changed as the years go by.

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What if you have a job?

Chapter

Many readers will derive almost all their income from a wage or salary. Many of you may earn a considerable amount, even several hundred thousand dollars per annum between both partners. The problem with a career is that no matter how much income it gives you, you cannot sell a career. The day you stop working, the income ends. The income is entirely dependent on your presence and time. This poses a number of issues. If you are highly paid it seems to make little sense to give away your high income to try your hand at wealth creation in a field that is new to you, and risky to boot. If you decide to continue to work you will have to make some disciplined decisions in order to become wealthy and stay free. Most of these decisions concern consumption. Our experience with high-earning clients is that their lifestyle matchesand sometimes exceedstheir income. In other words, as income levels rise they adjust their consumption upwardsmove to a better home, drive a better (second) car, take more (and more expensive) holidays, and buy the toys. There is considerable social pressure on executive types to do all of the aboveboth from within and outside their own families. To become rich and free, a significant amount of this income will need to be diverted into a Wealth-Creating Asset. Not only will this imply a change of lifestyle from a consumption point of view, but you will also have to put the time and effort into wealth creation as well as continue your demanding job(s). Sometimes one partner gives up their job to manage this full time. It is very difficult to run a business part time. Managing an aggressive share portfolio would probably be easier if/once you have the necessary skills. Managing a property portfolio is
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probably easiest if you still need to work full time, as the work and effort can be done out of office hours. Surprisingly, many people who have earned high incomes for years have very little net worth. This also affects their Security Asset portfolio. They may live in a beautiful home but have little equity in the asset. A concerted effort needs to be made to pay off the mortgage and get some security. Many of you who are committed to becoming financially free will begin by trading down to a more modest home and ensuring that it becomes mortgage free as soon as possible.

Exercise 33
Can you afford to take some risks? How much surplus could you create from your income? What Wealth-Creating Asset could you invest in on the side? How could you and your partner make the best use of your income, skills and time? Where could you start?

If you decide to remain employed (and self-employed as a contractor or consultant is only another form of job; you cant sell the business), then you should take steps to maximise that income. It is astonishing, really, how reticent many highly skilled people are in asking for a salary increase, investigating other employment at more lucrative rates, or upskilling themselves at their own expense in order to be more valuable in the marketplace. Even a relatively small increase in salary diverted into Wealth-Creating Assets can make a great difference over a 10-year period. Many people feel at this point that there is little that they can do as all of their time and effort is consumed by a job. They look at the difficulties of starting a business or developing a property
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portfolio or becoming an aggressive investor in shares and feel that this is way beyond their reach. You might, for example, feel that you could have a shot at running a business but where will you get the capital to buy one and how will you survive in the interim period until the business shows a profit? Most people who have a job will need to continue to provide income from that job. Others have such high incomes that it perhaps makes little sense to forgo that (certain) income for much less (uncertain) income from a business. The key for career people is to create a surplus of income (either by earning more or spending lessor both!) and putting that surplus into wealth creation. Because wage and salary earners cannot devote themselves full time to active wealth-creating activities they are unlikely to try to run a business. They can, however, invest aggressively. Too many salary earners in secure jobs or industries invest too passively. They can, in fact, afford to take risks and if they really want to become wealthy that is exactly what they should do. However, they might invest heavily in someone elses business and act as a sleeping partner or as someone who provides limited input. A marketing executive might supply his or her capital and part-time skills to a manufacturing partner who is full time in the business. Other people who for various reasons must or should remain in their jobs might build up a property or share portfolio, doing the necessary work in the evenings or weekend. Couples often find that a part-time/non-working partner can carry the load of the wealth creation for a while. In the initial stages of wealth creation through property there is not a lot of property to manage because you are unlikely to own very much. What takes the time is scouring the ads, visiting prospective properties, putting in bids, arranging finance, meeting with agents, etc. None of this is very complicated, but it does take time.
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KASH points
The knowledge gem here is the understanding that it is all about creating a surplusno matter how large or small your income is. If your attitude is committed to wealth creation, you will acquire the habit of investing that surplus in Wealth-Creating Assets.

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You must create a surplus

Chapter

It ought to be obvious by now but growing your wealth is all about creating a surplus. No matter how much or little income you have you will need to avoid consuming all of it. The amount leftyour surplusneeds to be put to work to create wealth. This will be especially true for those individuals who have high income and little time. Its a simple equation: Surplus = Income Consumption This is very easy to grasp at an intellectual level but it is where the hard work is for most people because it usually means that habits and lifestyle have to change. And other people around youfriends and familymay object to these changes. Like all simple equations you can play with the variables: if you want more surplus you can either lower your consumption or increase your income or both! This is where you will find it very useful to start to work to a money plana budget. People get very strange when the word budget is mentioned. It has connotations of meanness and misery. We think that it is very helpful to think of it as a business doesnot as a way to scrimp and scrape but rather as a way to plan income and expenditure for a period of time. Remember that the choices are all yoursits your money! But unless you create a reasonable-sized surplus you will have a very slow path to wealth. Hopefully, by now you will have chosen or be ready to begin your wealth-creating activity. You will need a stake to begin with. Unless you are releasing capital from your home or another Security Asset, that start-up money will have to come from
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income. You or your partner may still have jobs. Your WealthCreating Asset will be hungry. In all likelihood it will need almost all of its cash reinvested to keep it going. You will probably also have borrowings (because the Wealth-Creating Asset will be geared to give you high returns) to service. All this means that you will need to manage income and consumption very closely. You really need a budget. This should be based on whatever time period is most convenient for you in terms of income (weekly, fortnightly, monthly). The budget should show your expected income for each period and your planned consumption. Most people find that given the motivation to get on the journey to wealth and freedom they can take many dollars out of their consumption. We would advise against making your budget too strictif you do you are unlikely to keep to it. Its just like dietingif you starve yourself, sooner or later you will attack the chocolate biscuits and eat the whole packet. You want a reasonable budget that you can live with and which will avoid big blowouts. By now you will be firming up on the dream for your life and you have probably established your Freedom Figurehow much you will need, what timeframe you want to achieve it in and what rate of return on your Wealth-Creating Asset you will need to reach your dream in that timeframe. Every dollar you dont consume can be put to work in wealth creation.

Exercise 34
The first part of any budget is to look at what income you have coming in. This could come from a number of sources: Your job. Your partners income.

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Your Wealth-Creating Assets. Your Security Assets (although any income that these generate should be ignored as it needs to be reinvested in Security Assets).

Wealth-Creating Assets

CONSUMPTION

INCOME

Income

Add up all the income you are receiving. When you are sure that you have all of your income, you need to allocate it: some for consumption; some to be invested in Wealth-Creating Assets; some to be invested in Security Assets.

Now is the appropriate time to sit down and begin to discuss what you will agree to consume from now on. You will need to talk about all the categoriesthe fixed expenses such as housing, transport, groceries and the discretionary ones such
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as entertainment, holidays and hobbies. This will take a lot of effort and discussion, especially if you have never worked to a budget before. This is where the going gets toughto achieve wealth and financial freedom, you probably have to cut your consumption, the amount that you spend on things. It is tough because there are great and powerful forces telling you to do just the opposite. We are accustomed to living up to, and even living beyond, our means. We consume more of everything than we need, or even really want in some cases. Most people are over-spending, many of us are overeating, overdressing, and so on! Every big business in the land is telling you to spend, spend, spendand they are backed with huge marketing budgets. You have to resist a lot of this. You have to stop being like most people, stop mindless spending. Mindless spending is buying things that you do not need to buy (like very expensive groceries) or things that do not give you real pleasure. Mindless spending is buying things that you have never really thought of buying. Largely this mindless spending is buying things to make you look good in the eyes of othersit is ego-spending, things that are purchased on emotion, rather than by thinking. To get to financial freedom you have to cut this, be your own person with your own aims (which have nothing to do with how you appear to others). Living below your means (rather than above your means) is a key step in becoming rich and then financially free. Every dollar that you spend is a dollar further away from your dream and your goals. In fact, it is worse than that: the dollar that is spent is gone; the dollar that goes into WealthCreating Assets remains and as well grows at a rate of 15 per cent (or hopefully more). You need to be thinking about cutting the spending (money that immediately disappears for ever) and increasing the money that goes into Wealth-Creating Assets (money that is likely to earn you a 15 per cent return). Remember, every dollar you dont spend can be put to work for you for
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24 hours a day every day. This is the money that will make you wealthy and buy you the life of your dreams. We tell our clients two things: Before you spend some money on something, imagine that you are not spending dollars but GPG shares. (GPG is a pet company of ours that has performed extremely well for its shareholders for a decade. At the time of writing the shares are trading at around 210 cents and they look like they still have a future. Dont just take our word for it thoughcheck them out first.) Imagine then that the currency you are spending is GPG shares. That means that if you forgo that suit for $800 you are gaining about 400 GPG shares. Owning the GPG shares now may be better than owning the suit. But in 20 years time it is far betterthe suit has gone off to be a duster, but if GPG shares grow at 20 per cent p.a., they will be worth $30 670. (You should be able to buy a few suits with that!) Now, we are not saying do not buy a suit (or anything else for that matter). What we are saying is think about the cost not just in dollars today, but dollars in the future. The real cost of your spending is the future value of the dollars you are spending today if they had been invested well instead. There is a very real benefit in forgoing something today for a better tomorrow. The ability to delay gratification is a hallmark of successful individuals in all areas of life. The success here is achieving your dream of financial freedom. Changing your currency to GPG shares (or some other proxy that is meaningful to you) is a good way of recognising the real cost of unnecessary expenditure. That cost is primarily what you can have instead in the future. The only thing that you need to be careful of is taking it too far, and ending up mean, miserable and no fun to be around. Which leads us to the second thing.
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By all means spend money, but make your spending count. Your spending should be mindful. The latest pitch from David Jones or Michael Hill Jewellers should not dictate your expenditure. These are companies that maybe you should own through the share market, rather than have them own your credit card! Buy quality things that will give you great pleasure. Buy things that you really want and need. Think about your purchases beforehand, rather than buying on impulse because some slick marketing campaign has pushed a product at you. Mindful spending means buying what you want, not what you are told you want. If you get a lot of pleasure from owning a nice car, you might have one. However, do not own a nice car because that is what others expect. Indulge yourself with things that make you happy, not with things that are designed to make you look good. This is a great time to revisit your dream and vision for the future. Many of the things we spend money on do not take us in the direction of our dreams; in fact they take us away. It is much easier to bypass the temptation of mindless expenditure if you are clear about what you really wantyou can distinguish easily between the big things that matter, and the trivia that does not. A key part of anyones plan for wealth is a budget. There is a price to be paid for financial freedom, and a reduction of consumption is often a part of that price. Some of our clients call the budget the B wordits another unmentionable. But all that a budget does is help you spend in line with your valuesspending on what matters to you and not spending on things that are of low value to you. This allows you to make your spending much more valuable. The budgeting process, and then living to that budget, is an important part of your plan for financial freedom. This is especially true for those starting offmaking those first few steps, developing a little bit of wealth to get things going is the greatest hurdle. Everyone says that the first $1 million is the
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Exercise 35
If you have not already done so, start a draft budget. There are several websites that provide useful categories to budget underthe main value of this is that you will not leave out items that occur infrequently, for example, rates, car registration, back-to-school expenses, etc. Decide on an overall amount that you will spend per year, for example, $30 000 after tax. What you spend this money on is irrelevant to your wealth creationwe have no opinions on whether you should buy vegetables instead of wine! All that really matters is that there is a surplus left that can be used to grow your wealth. So you will need to choose a consumption amount that allows for enough surplus to let you reach your Freedom Figure in the timeframe you have chosen.

hardest; we have heard people say that their first $1 billion was their hardest. (Well have to take their word on that!) This is just as true for the first $100 000 (or even the first $10 000). If you are starting with next to nothing, your first investments can only really come from increased income and/or reduced consumption. If you are starting with a little but not very much, reduced consumption will accelerate the process. And dont feel hopeless if you are young and poor and with very little available for surplusstarting early is the best wealthcreating strategy of all. Time is your biggest ally. Many people could become financially free just by spending less and investing the remaining money well. We have seen clients save thousand of dollars per month from their budgets and develop an impressive investment portfolio within a year! Living below your means becomes a new habit quicklyand a very rewarding one when you see the resulting assets accumulate.
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The wealthy people we coach are not mean. They are, in fact, nearly always generous. However, almost all of them are very mindful spenders. They know what they want and they have what they want. But they do not have what they do not want they are quite happy to go without if they are not getting the full measure of enjoyment for each dollar spent.

KASH points
The key bit of knowledge you need here is to understand how a smart budget underpins all your efforts towards financial freedom. As you play with various options you will develop the skill of allocating income towards the consumption essentials (like power and food) and some valued discretionary items (for example, entertainment, hobbies, holidays) and away from things that are less important to you. You will find that your attitude to spending will changeyou will start to ask whether you want this or that item more than your dream. Over time, you will develop the habits of the wealthymanaging consumption well, ensuring that there is a surplus, and using that surplus to create wealth.

Switch from mindless spending to mindful spending so that you get what you want.

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You should maximise income

Chapter

We have spent a lot of time discussing how important it is to manage income, or rather the consumption of income. Often people stop with consumption. Remember that equation: Surplus = Income Consumption You can make a big difference to the surplus you have to invest if you can raise income. Maximising any sources of income that you have should be a constant goal.

Income from employment

Have you or your partner asked for a raise in salary lately? Increasing your income will accelerate your path to wealth and freedomthe more income you have the more you can invest in Wealth-Creating Assets. A very small increase can make a very big difference. Take a basic wage for semi-skilled worklets say $15 per hour. If you work a 40-hour week, thats $600 and if you work a full year you will earn $31 200. If you could get a $2 an hour increasewhich does not seem very muchthe changes to the numbers are quite dramatic. You would now earn $680 a week ($80 extra). Your annual earning would be $35 360 ($4160 extra). It is worth looking at your own income and doing some calculations to see what difference an increase would make to your earnings. Try increases of 3 per cent, 5 per cent, 10 per cent and convince yourself that even relatively small increases are worth fighting for. Pay rates for a particular job rarely go backwardsthey tend to get locked in. So look for every
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increase you can getthat becomes the new baseline for the following year. The numbers on the previous page are significant even for a modestly paid job. If you or your partner are already earning well, then trying to increase that income will have an even greater impact on your wealth creation. There are several strategies you can pursue to raise your income from employment. Get paid what youre worth Ask your manager how pay levels are determined in your organisation. Youll be surprised how often this works if you do your homework and have all the facts you need. You can check out equivalent jobs in other places by following up on ads in the paper or phoning a recruitment agency and asking about current rates for the work you do. Even a dollar or two an hour will make a big difference to what you can saveand you could be talking thousands of dollars a year depending on your job. Ask for a raise If you are a valued employee your chances of a raise are very goodthey wont want to lose you and they know it will cost them more than your pay rise to recruit a new person. Obviously you need to go about this the right way and be ready to remind your manager of the contribution you make and your achievements at work. They are not obliged to pay you more but you are entitled to have your salary reviewed regularly. Make sure it happens. Asking for a raise also sends a signal that you care and that you expect to be valuedthat will be remembered the following year. And if you can do whatever it is that you are being paid for you can get yourself a raise! Dont be afraid to ask for more. Find a new job It is often much easier to get a pay rise by changing jobseither to a different organisation or to a different role. The biggest leaps in pay are usually achieved by changing your joba new employer usually feels obliged to
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offer more. By the time they reach the point of making you a job offer they have already invested a lot of time and money in the process. They have seen the other available candidates and they want you. This is the best time to look for an increase in payunless your request is outrageous for the role and your skill and experience level youll probably be successful. So be ready to negotiate. You may not get all you ask for but you will get some of it. So, polish up your CV, have a good audit of your skills and experience and go looking for a better job with better pay. Keep an eye on the employment pages in the paper or on websites and get a clear sense of what employers are looking for that you can offer. Often the longer you stay in a job the less notice anyone takesit can be much easier to make an impression and be properly valued by a new employer. Make yourself more valuable In the end, employers pay for the knowledge, the skills and the track record you bring to their business. No matter how you earn moneyeven if you dont consider it very specialyou should treat your work as a career. It pays to take every opportunity you can to learn more. Ask your manager for training, take every opportunity to learn new skills, both on the job and on any courses that are on offer. Volunteer for new tasks and projects. Get a reputation for being flexible and willing and quick to take on new things. These attributes can be highly valued in the workplace as hard skills. Invest in yourself Some organisations and industries are much better at developing their employees than others. While a good employer will invest in your training, your future is your responsibility. It makes great financial sense for you to invest in yourself. This might mean paying for some additional study, going on a course or buying yourself a PC so that you can improve your skills. If it applies to your area of work, take the time to read books and listen to tapes that
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will help you be better at what you do. Investing time and money in your own development will give you a very good pay-off over time. Its never too lateand its never too earlyto start to make yourself more employable and more valuable. And you should never stopthis isnt just a good idea for young people. Choose to learn in order to earn. Even on relatively low wages and salaries the average person earns millions of dollars over a lifetime. If you can get your hourly or annual pay increased by even a small amount you will not only benefit from that this year but it could be multiplying by 40 hours a week and 52 weeks a year for the rest of your working life. When you use that money for wealth creation it will make a huge difference to your future.

Income from a business

Are you sure your business is as profitable as possible? We see many business owners as clients. It is rare to find one who is maximising profits. And thats what you are in business for! The profits represent your income, they are also needed for reinvestment in the business, and when you come to sell they will largely determine the value of your business. Strategies for driving up your business income (profits) include: Putting your prices up Business owners tend to have price fright! Nothing makes as big an impact on your success as the ability to charge a higher price while keeping your costs down. This extra money flows straight to the bottom line. Reducing your costs Owners of small businesses are usually good at this but there is often room for improvement. Checking your business structure We still come across many businesses that are very poorly structured for tax purposes. Sole traders and partnerships will usually be more
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heavily taxed than companies. Trusts can offer good benefits for some businesses.

Income from property

Are the rents on your properties at full market value? Many property investors are poor property managers. Again, you are in this business for rental income. When you come to sell the rental income will also be a major factor in setting the price of the property. Strategies for driving up your property income (rentals) include: Conducting regular rent reviews Make sure that you know what equivalent properties are rented at. Many property investors get lazy and allow a rental to stand for years even when the market has moved up. Making improvements Many of the things that cost you very little will provide increased rentals. Such improvements include carports, lock-up garages, dividing a large room to create an extra bedroom, providing outdoor furniture or a paved play area. Treating tenants well Happy tenants stay and they take care of the property. This drives up your income because you do not have any vacant weeks and it reduces your repairs and maintenance costs.

Exercise 36
Choose one or more of the above (depending on your sources of income) and start immediately on your plan to grow your income. (This should be one of the key strategies on your one-page planmore about that in Chapter 31.)

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Example Objective: To grow my income from employment Goals: Increase (pre-tax) income from $60k to $90k (a 50% growth) within 2 years
Strategies Ask for pay rises Revise CV Improve qualifications Get high-profile project Get promoted Get better job offer Milestones get 5% every 6 months Updated by xx/yy/zz Do 2 papers each year Operational by xx/yy/zz One grade higher by end of year Get offer of 50% more Actions Compile dossier of achievements Get examples Enrol in course Do project proposal Make a case for review Monitor ads, contact recruiters, practise interview skills

KASH points
The key knowledge here is understanding that maximising income is fundamental to becoming wealthy. It works by giving you more surplus to invest and also by allowing you to borrow more (gear) and even by raising the value of your assets (for example, a property with higher rentals is worth more). You can revisit these ideas in more detail in Chapter 18. You should return to the ideas in this chapter frequently and check if you are growing your skill at maximising income. Successful wealth creators develop the habit of always seeking to grow income from whatever source they can.

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There is a tendency for people to think only about expenditure when they are budgeting, but just as in any business, the income side is at least as important as the expenses. So you should always be looking for ways to drive up income.

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You have to learn to borrow

Chapter

The most important thing to know about borrowing is what to borrow for. Wealthy people almost always have high borrowings at some time in their lives. Poor people often have a lot of debt as well. But there is a difference: those who are seeking to become wealthy only ever borrow for assets that build wealth. The poor borrow for consumptioncars, holidays, credit card consumption. The most important thing about borrowing is what to borrow forassets that give you income and that grow in value. You can get an even better result by borrowing money to add to your initial capital. This is risky, but borrowing (often called gearing or leverage) can really speed up wealth creation. Nearly everyone who has ever become wealthy has used OPM (other peoples money) to enhance and multiply their returns. How does this work? Lets look at the example of a property investor (it is easy to borrow money for property investment). Suppose you see a rental property that you would like to invest in that costs $400 000 but you have only $50 000 to invest. You could borrow $350 000. Your $50 000 is the owners equitythe amount of the money in the property that is actually yours. Lets say that you have to pay 10 per cent interest for the loanthat will be $35 000 p.a. For the sake of simplicity, lets assume that the rent you get for the property is also $35 000. So your rent covers the cost of the loan each year. You will only pay the interest and not any of the principal amount ($350 000) that you borrowed. Imagine that in five years time the house is worth $500 000. You sell. You pay back the loan and are left with $150 000. Your owners equity of $50 000 has grown to
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$150 000 in five yearsa good return. The value of the building has compounded and you have been able to avail yourself of this effect but without using much of your own money. While the property rose 25 per cent in value (from $400 000 to $500 000), your capital has risen 200 per cent (from $50 000 to $150 000). Gearing for wealth in this example looks like this:
Building cost Deposit Borrowed (at 10%) Interest Rent/Income Sold at Profit $400 000 $50 000 $350 000 $35 000 $35 000 $500 000 $100 000

Return on investment = 200% of $50 000

You have used someone elses money to cash in on the effect of compounding. You have in effect turbocharged your investment of $50 000 and received the benefit of the compounding on a far larger sum. The return on your $50 000 over five years has been nearly 25 per cent p.a. (that is, 25 per cent compounded each year), significantly higher than our benchmark of 15 per cent. Borrowing to buy good income-earning assets, whether a business, property or shares, is how smart people get wealthy. Borrowing to invest in this way is variously called gearing or leveraging. Its easy to see why these debts are so calledyou get the effect of using a bigger gear or of operating a giant lever. (Archimedes said he could move the whole world if he had a lever long enough!) You are using other peoples money to add to your initial stake and getting the benefit of the compounding of the total sum. Essentially, leverage is about making other
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peoples money work for you. But you only have to pay back what you borrowed, not all the money you made with that money! This also works with income, as with rentals or profits or dividends. Again, lets use a property example. Suppose that you bought a building for $650 000 with a rental of $52 000 and paid a 10 per cent deposit of $65 000. You borrow the rest, $585 000 at 7 per cent. This means your interest each year would be $41 000. However, your rental income is $52 000 so you have a profit each year of $11 000 ($52 000 minus $41 000). You are getting $11 000 profit on the $65 000 you deposited. This means you are getting a 17 per cent cash return on your investmentand thats before any capital gain. In this example, the sums look like this:
Building cost Deposit Borrowed (at 7%) Interest Rent/Income $650 000 $65 000 $585 000 $41 000 $52 000

Profit Cash return on investment = 17% Plus capital gain!

$11 000

Businesses almost always borrow money to achieve this effect. If they are good at what they do, that is, profitable, then it is logical that they should do more of it and return the benefit of the extra money generated to the shareholders. This gives shareholders a much higher return on the equity they have in the business than if there were no borrowings. We are often asked how highly geared or leveraged a business should be: there is no right answer, as it varies from business to business and person to person. In
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general, the principle is that if you can make more money with the borrowings than it costs to have the loan then it is worth having some borrowings. Obviously you have to assess the costs of the borrowing and the risks that you are taking. Many highly profitable and growing businesses pay out no dividends because they are making the judgment that it is more in the shareholders interest (that is, they will get a higher return) to have this money re-invested in the business. Conversely, when a business is holding a great deal of cash/paying out very high dividends you should be asking why they cannot find a better use for the money. (Clearly, it is a little more complicated than this, and is greatly influenced by factors such as the industry, the business cycle, the product lifecycle, etc.) Property is little different. It is often easier to borrow to buy property as there is a real asset for the bank to reclaim should you default on your loan. You can invest in property in this way with very little of your own money10 per cent or even less. A good investment property will give rentals to cover all or most of the interest repayments and the loan can be repaid when you sell. If you buy well to begin with you should achieve a very handsome return through the leverage of your borrowings. Many property investors own several properties that are financed and geared in this way. Similarly for shares. It is just as easy to use other peoples money to buy shares as it is to borrow to buy property or take out an overdraft for a business. Gearing really works for Wealth-Creating Assets because of the high returns. Borrowing to buy things which return 15 per cent or more makes great sense when you are only paying the other person 78 per cent for his or her money. Now to state the obvious: this all works in reverse as well! Leveraging or gearing is a wonderful way to turbocharge compounding which works to make you rich. Equally well, the turbocharge effect can make you very poor, even bankrupt.
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Exercise 37
What kinds of things have you borrowed for? Are you borrowing for the right things? (You get worse than no return when you borrow for value-losing assets like cars or home appliances.) Are you borrowing for Wealth-Creating Assets or just for consumption? Does your attitude to borrowing need to change?

The acceleration works in both directionsif your business wobbles, if your property purchase drops in value, if your shares go through the floor you not only lose your own money but the borrowed money as well. While your Wealth-Creating Asset is worth less, the borrowings are still the same sizeand ultimately the other person will want his or her money back. Then the debt will rapidly compound as you are unable to pay even the interest, never mind the principal. This is the process through which many seemingly very successful people go spectacularly broke.

KASH points
The key knowledge is that while leveraging makes a good investment better it makes a bad investment even worse! The right attitude and habits will see you borrowing only for wealth creation and never for consumption. Skill in borrowing is about making sure that you borrow well, that is, that you get a good rate of interest and that you manage your debt actively.

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How to maximise your returns

Chapter

Putting up a little of your own money and using a lot of someone elses to buy a high-performance asset is how people become rich. It does not really matter what the high-performance asset is, provided that you can borrow against it, and that it provides high returns. Smart people know that they need to use other peoples money to lever the relatively small amount of money they have at the start. They know that the game is to increase their wealthto keep driving up their net worth until they have enough for financial freedom. They want the Wealth-Creating Assets to grow and grow, and for their share of those assets to be greater and greater. Clever people know that they need to keep getting a high return on their money so that their equity is growing. This return on your money is called the Internal Rate of Return. This is jargon for the rate at which you are growing your own money, the rate at which you are growing the equity that you have in your property or share portfolio or business. This of course is the only thing that is important: the rate that your capital is growing will dictate how much you have in the future. This internal rate of return is different from the capital growth and returns that the Wealth-Creating Asset is getting. For example, your property might be growing at 5 per cent p.a., but your equity (your capital, your investment, your stake) is growing at 29 per cent p.a. For example, an investor buys a property at $100 000 with a $10 000 deposit and borrowings at $90 000 at 8 per cent interest. The rent is $10 000 p.a. after all costs.
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Property value Borrowings Equity Rent Interest Cash profit Capital growth (@5%) Total profit

$100 000 $90 000 $10 000 $10 000 $8 000 $2 000 $5 000 $7 000

This investor has made a profit of $7000 on the $10 000 that was invested. This is an internal rate of return of 70 per cent (the investor has 70 per cent more equity than at the start of the year). While the property is not a particularly high-performing one, the investor has quite successfully used gearing to rapidly grow the quite small amount of initial equity. This example is illustrative only. It is only to show how smart people get high rates of return and grow their net worth quickly. The example is made up and in some respects unrealistic (for example, it doesnt include any provision for tax). This next example, however, is both realistic and true.

Jenna and Mike began investing in property when they were 28. They had married a few years before and with her job (nursing), his fencing contracts, and buying, doing up and selling a few houses, they had managed to save $65 000. That $65 000, with some borrowings, was enough to start them off as property investors. As they grew their wealth they added to their property portfolio, borrowing as much as they could to buy properties that met their strict criteria for investment.

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Today they have a portfolio which is worth $3 500 000. Their borrowings are at $750 000. They therefore have a net worth of $2 750 000. This couple has grown their net worth from $65 000 to $2 750 000 in 14 years. That is a rate of return on the $65 000 they started with of 27 per cent (that is, an average of 27 per cent return, compounded every year, for 14 years!). They have worked very hard to get where they arelong days and few holidays. They have taken high risks. They have nearly gone broke twice, once during a major property slump when they had vacant properties and again during a rural downturn when there was very little work for Mike. At both times their very large borrowings were very difficult to cover. The bank was less than helpful despite the enthusiasm with which it had lent the money! This is one very smart couplethey are good property investors, good with the finances and good business people. At age 42, they could easily sell their property portfolio and sit back and enjoy the freedom that they have created. They do not want to retire from property but they are making some changes: we were working with them to develop a Security Assets portfolio (some secure non-property investments) and to take on some staff so that they can get a bit more time for holidays and so that they can work on the business rather than in the business.

The key thing for you to think of is how fast you can grow the capital that you have now. Use the engine of compounding by retaining most of your profits, and turbocharge the engine with leverage. It is the turbo that will give you the grunt that you really needthe use of other peoples money is the way to grow yours.

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Exercise 38
What internal rate of return are you getting on your equity?

KASH points
It is important to your wealth-creation knowledge that you understand the internal rate of return (IRR) that you are getting on your Wealth-Creation Assets. You should develop the habit of calculating the return you are getting each year.

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VI
167 171 176

Action plans: What will you do?

Chapter 30 Bridging the gap Chapter 31 Do a one-page plan Chapter 32 Turning strategies into actions

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Chapter

Bridging the gap

Your dreams provide the inspiration for wealth creationthey answer the why question. You should already have looked at your current position by calculating your net worth and have decided where you want it to be by setting your Freedom Figure as your main goal. Now you have to start planning to bridge the gap from where you are now to where you have to be to live the life that you want. But while you know why you want to make changes and have a good picture of the how of wealth creation, you still need to look at the what that needs to be done. Everyone is a little different when it comes to creating the life of their dreams so you will end up with some different things on your list of what has to be done. People who become wealthy and live the life of their dreams set goals and make plans in order to ensure that the dream becomes a reality. We always advise our clients to set numeric goalsthey are effectively the amount of money that you will need to afford the lifestyle of your dreams. People who become successful in any field set goalsand they put those goals in writing. Written goals are much more effectiveit seems that goals that are committed to paper are committed to mind. Time and time again it is proved that written goals are more powerful. Even when you have a compelling dream of your ideal life it can be very difficult to know where to start. Goals are about making the dream more concrete. The goals that you set should be numerical, for example: I will have a net worth of $5 million by the year 2015. I will have $2 million in Security Assets by 2010. I will invest $20 000 in shares each year for the next five years.
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I will get a 25 per cent return from my business. I will buy three investment properties this year. Goals have to be tailored and customised for each individual or couple in line with their dream. You will want to set goals that will stretch youbig dreams will need big goals. The great value of numbers is that they cannot be fudged if you put these numbers down on a piece of paper, you cannot lie to yourself about what you meant. It is easy to wax lyrical about our dreamsand we can keep shifting them if we do not want to be pinned down. Having a Freedom Figure set so starkly gives the determination to achieve them, because if you do not there is no doubt that you have failed. (This is why business is so wedded to numbersnumbers force people to get concrete and definite about their intentions!) As well as the Freedom Figure, you may put in some shorter term, subordinate or milestone goals, for example, By 2009 I will own my own business and it will be making $200 000 p.a., or By 2008 I will own eight rental properties. Be wary of these milestone goals, because the quest for wealth does not move along in a perfectly smooth upward line. Things are likely to be much more lumpy, with a rush of success followed by a long period of going sideways, or even a decline. It is the long-term, final goal (the achievement of your Freedom Figure) that is really important; the shorter term goals are only to ensure that you are on the right trackmilestones to guide you on your way and to check your progress. Goals are importantbut they are not as important as the dream that creates them. It is your vision or dream of financial freedom that will really motivate you to do what is necessary. Now that you know your current position and know where you want to be, it is time to make a plan to bridge the gap. A 10-year timeframe to achieve financial freedom is not at all unreasonable. It may sound like an impossibly long period of
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time for some people, but it does mean that a 40-year-old will be free before being 50 years old (and, yes, there is still life at 50). Some will achieve it much quicker than this. Those in business or property development and some other activities probably look out no more than 10 years. Your aim should be to achieve financial freedom within 10 years because it is difficult to plan for more than this. Perhaps more importantly, it is hard to maintain enthusiasm and motivation if the time period seems too long. If you are 35 years old now, it is hard to imagine yourself at 50 or 55 years. It is hard to imagine or envision where you will be or what you will be like in, say, 20 years, so your timeframe needs to be less than that period.

Exercise 39
Write down your Freedom Figure. Work out how many years you are prepared to work to achieve it. Calculate the rate of return you will need to get on your Wealth-Creating Assets.

You will need to set goals that work for your dream. This can take a bit of hard work and debate. Its worth it. Your mind loves goals! When you have set your goals your mind will be focused firmly on themall the time. Goals are very powerful and the fewer and the clearer the better! The next step is to make a plan to make all this a reality.

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KASH points
The key knowledge here is to understand what numbers you have to achieve to close the gap between where you are now and where you want to be. How much wealth has to be created? What rate of return will you need to achieve that wealth in however many years you will take? Obviously these numbers are interrelated: you can achieve your Freedom Figure faster or with a lower rate of return if you set the Freedom Figure at a lower level; you can achieve the Freedom Figure at a lower rate of return if you are prepared to wait for longer; if you are in a great hurry, your rate of return will have to be very high to achieve the same Freedom Figure. Play with these numbers and develop your skill at making trade-offs between them and deciding what key benchmark numbers you will set.

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Do a one-page plan

Chapter

The plan is about getting yourself from here to there. Plan is one of those words that many of our clients hate: it seems to mean drudgery and constraint to them. One of our clients describes it as a four-letter word! Our view is very different and clients usually agree after they have found how useful a simple clear plan is. It is very easy to feel that you are getting lost in all these words and ideas. Our clients find that it really helps if you can get everything you are committing to down on a single sheet of paper. You can, of course, change what is on that piece of paper at any time but it will always represent your most up-to-date thinking on your wealth-creation plan. We find that the following one-page format works really well.

Dream (words) Goals (numbers)

Strategies (words) Milestones (numbers) Actions (words)

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Dreams
Your dream should be written down in words. Keep working at it and get it to a point where you can clearly state it in a sentence or two. (If you cant state it simply that shows that the dream is still fuzzy and that you need to continue to work to clarify it.) You dont need every detail but you do need all the main components; otherwise it will be impossible to cost your dream with any accuracy. Marnie and Jacs one-page plan looked like this when they started:

Dream: To live by the sea on a small holding near the children. T T To spend our time reading and painting and contributing to the local community. y Goals: To spend a month overseas each winter. T r
Strategies (words) Milestones (numbers) Actions (words)

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Goals
The next part of the one-page plan captures your numerical goalsthe amount of wealth you need to create, the timeframe you need to achieve it in, and the rate of growth you need to get on your current level of wealth.

Dream: To live by the sea on a small holding near the children. To spend our time reading and painting and contributing to the local community. Goals: To spend a month overseas each winter.
Strategies (words) Milestones (numbers) Actions (words)

Strategies, milestones and actions

The strategies section will include the main things you need to do to create the wealth. This might include things like buying a business or growing an existing business, trading down the family home to release wealth or buying several rental properties. Well deal more with these strategies in the next chapter.
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The milestones section allows you to capture milestones and measures along the way. You might for example have a strategy to expand your business and your milestone/target might be to have a second premises open by July 2007 with revenues of $200 000. The actions section allows you to make notes of key things you need to do to make your strategy effective. In the case above you might make a note to start to headhunt someone who is capable of managing your second premises. At this point you should be able to complete both the dreams and goals sections of your own one-page plan.

Exercise 40
Copy the one-page plan format from page 171 into your workbook and write in your dream and your major numerical goals. Start to think about some of the strategies you will have to undertake to achieve these goals and ultimately your dreamyou might consider some of the wealth-creating activities you can enter, some of the things you might get out of (for example, selling some non-WealthCreating Assets), career development (if you have a job), etc.

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KASH points
The skill you need to develop here is that of making a simple plan to show how you will achieve your goals and dreams. A plan helps you outline the path to take you from where you are to where you want to be with a few key stages or changes. Once you have mastered the skill of making simple plans you are free to spend your time doing the things that need to be doneusing the plan to keep you on track and help you monitor your progress. We think that the habit of planning is essentialour most successful clients have become very good at making simple plans to ensure that they get the changes that they want and to make sure that they meet their targets along the way. The planning habit is a great tool for wealth creation.

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Turning strategies into actions

Chapter

It can be very difficult when you are starting out to know how to convert your dreams and goals into strategies and actions that will take you towards your goals and eventually achieve your Freedom Figure. In the last chapter the one-page plan showed an example of some clients dream statements and the goals they had set (which included the Freedom Figure). The next step is to choose

Dream: To live by the sea on a small holding near the children. To spend our time reading and painting and contributing to the local community. To spend a month overseas each winter. Goals: To have a net worth of $2.5m by 2015 To grow our business by 20% p.a. (currently worth $500k)
Strategies Milestones Sell family home Double income from jobs Invest in rental properties Live on $40k (after tax) Double profits from family business Build share portfolio Buy a business Sell the farm Actions

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which strategies will take you there. On the previous page is an example of several strategies that might be relevant depending on the clients circumstances. Obviously you would not want all these strategiesyou would only choose one main wealth-creating strategy, that is, invest in property or build a share portfolio or buy a business. The list of strategies is merely illustrative of the kinds of things you might choose to do in order to get on the path to wealth and freedom. Everyone will have their own preferred wealth-creating strategy. You will also have other things to choose (such as downsizing the family home in order to release funds or deciding on a consumption figure in order to create the surplus you need to invest or deciding to grow your income so that you will have more to invest in wealth creation). The strategies are the main decisions that you will make in order to get from where you are (current position) to where you want to be (desired position). These decisions are really important and you will need to spend some time thinking about what your main strategies will be. It really helps to get them down on paper in a one-page format because you can carry it around with you and use it to help you keep on track. It is much too hard to try to keep all of this in your head.

Exercise 41
Use the example on page 176 to write down some strategies on your one-page plan.

You will have noticed that each of the strategies should have one or more milestones attached to it. These are targets or markers to help you define what has to be achieved for each strategy, for example, if you decided to downsize the family home in order to release funds for investment you should set a price you expect
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to reach and a date by when it should be sold. These milestones tend to make the strategies very real and help you make what might feel like a vague idea very concrete. You cant fudge these milestones eitheryou either do achieve them or you do not. They will keep you on track and help prompt you into taking action.

Dream: To live by the sea on a small holding near the children. To spend our time reading and painting and contributing to the local community. To spend a month overseas each winter. Goals: To have a net worth of $2.5m by 2015 To grow our business by 20% p.a. (currently worth $500k)
Strategies Sell family home Double income from jobs Invest in rental properties Live on $40k (after tax) Double profits from family business Build share portfolio Buy a business Sell the farm Milestones In 6 months, for $750k Within 3 years 1 by year end, 2 a year Budget by end of month $550k by xx/yy/zz, Plan by xx/yy/zz Invest $30k by xx/yy/zz <$2m, within 18 months Within year, >$4.5m Actions

Each milestone also has some initial actions attached. These are intended to give you ideas of what you have to do and how to get started. If you were to sell the family home, for example, you might make a note to first fix up the garage and then put the house on the market.
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Dream: To live by the sea on a small holding near the children. To spend our time reading and painting and contributing to the local community. To spend a month overseas each winter. Goals: To have a net worth of $2.5m by 2015 To grow our business by 20% p.a. (currently worth $500k)
Strategies Sell family home Double income from jobs Invest in rental properties Live on $40k (after tax) Double profits from family business Build share portfolio Buy a business Sell the farm Milestones In 6 months, for $750k Within 3 years 1 by year end, 2 a year Budget by end of month $550k by xx/yy/zz, Plan by xx/yy/zz Invest $30k by xx/yy/zz <$2m, within 18 months Within year, >$4.5m Actions Fix garage, Put on market Upskill & get promotion Reading program, course Monitor consumption Courses on profitability, get consultant Reading program, course Investigate food industry Finish fencing, paint shed

The core idea of these plans is to take you from the big vague ideas right down to do-able tasks that you can take action on immediatelysuch as fixing the garage. After all, nothing will change until you take action and do something! It can be hard to know where to start, and our clients find that having simple one-page plans makes everything much easier. You can take this idea further: each strategy can have its own one-page plan. In fact, you can use a one-page plan for any aspect of your wealth creation that you like. Over the page is a plan for the strategy of growing the profitability of the businessa specific objective.
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Objective: To double profits from the family business. Goals: Increase profits from $27k to $550k
Strategies Increase prices Reduce costs Sell building and lease back Recruit 2 more in sales Exit consumer business & focus on trade only Milestones Increase margin by 5% Take out $100k Sold by xx/yy/zz Operational by xx/yy/zz Trade only by xx/yy/zz Actions Review pricing by product Delegate to Mike Call agent and list, call lawyer re lease document Advertise, call recruiters Do project plan, Jim(?) to manage

Some of the actions on this plan might in turn need a plan of their own, for example, a plan for the recruitment of two more salespeople, or Mike might want to do a plan for cost reduction in the business.

KASH points
The knowledge here is the understanding of how dreams and big goals are turned into plans that are actionable. Try doing a few of these one-page plans and you will find that your skill will develop very quickly. Having one-page plans will help you feel that the tasks that are ahead of you are do-able and that they will be easy to track and manage. This will help give you an attitude of optimism and confidence as you start to make big changesand buying Wealth-Creating Assets or changing jobs or selling other things are very big changes. The habit of

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planning on one page will give you a tool to think about what has to be done and will also help you to stay in control of all of the things you will be doing.

Making decisions and acting on them is what wealth creation is all about. The one-page plans are a tool to help you focus on the few things that matter and help you execute your decisions by indicating what you need to do.

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Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter 33 34 35 36 37 38 39 40

VII
185 188 192 196 199 204 207 215

Where can you find help?

Whos on your side? Networking: Winners work with winners! Assembling a dream team Are you getting the best? Making your team work for you Tips for choosing professionals Learning from the masters The last menu item: Frogs!

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Whos on your side?

Chapter

The company you keep really matters. It can be very tempting to assume that family and friends will be automatically on your side as you work to make your dreams come true. They may bebut dont assume it. You need to surround yourself with people who support your dreams and really want you to be successful. Most of us are very fussy about all sorts of thingsthe food we eat, where we shop, what we wear, which school our children attend. But at the same time we may be letting just anyone influence our dreams, interfere with our goals and negatively affect our success. Are the people around you working to help you get what you wantor are they (consciously or unconsciously) working to pull you back down to a level that they find more comfortable? Look at the people you surround yourself with. Will they support you when the going gets tough? Are they on your side? We dont get to choose most of our family and relativesbut we do get a lot of choice about how much time we spend with them or how much we listen to them. If you are surrounded by negative, low-aspirational people, take steps to limit their influence on you as much as possible. Similarly with friends. Choose carefully in the first place. Avoid becoming a home for victim types who simply want to complain about their lot and blame everyone else for their circumstances. As much as possible, associate with people who are positive in outlook, who are achievers, who set goals for themselves and take action to meet their goals and dreams. The path to success and abundance in life is tough enough without negative typesyou need good companions for the journey.
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If you have a partner you will have talked a lot together about your dreams and hopefully have collaborated on setting the goals you need to reach to have your dream life. Ideally you have done your planning together and have discussed in detail how you will take action on these plans. The most successful couples work as a team on wealth creation. They play to each others strengths and contribute the stuff they do best. They use their respective skills and personalities to help the other partner be the best that he or she can be. Two are far better than oneif they are in harmony about the life they want and what they need to change to get it. Effective teamsin sport, business or any disciplinealways share a dream about their destination and they talk a lot about the journey and the tasks they each will need to perform along the way. Not all couples are so lucky: some people find themselves with a partner who is at best neutral and at worst hostile to the idea of having a vision for a better life and doing what is necessary to get there. Partners are sometimes very threatened by the changes that are implied when the other partner wants to pursue a dream of a bigger and better life. This lack of interest, sometimes even ridicule, can extend to the wider family. We can only encourage people in this situation to persevere. Early signs of success will often bring others on board. If you are finding the going tough among your closer family members and friends, then wed advise you to keep much of your dreaming and planning to yourself in their presence. Seek out like minds in other placeswhether your interest is in business, property or shares you will find that there are many formal and informal groups which get together to discuss these topics. These people are likely to have similar dreams and ambitions to yours and will give you a sounding board and some much-needed support.

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Exercise 42
Make a diagram of your close friends and family. Tick the ones whose support you can count on.

Be careful about discussing your plans or progress with those who will ridicule your dreams or scoff at the plans you are implementing. In general, however, take every care to keep your partner as involved as possible. Encourage him or her to talk about their dreamsno matter how reluctant they are at first. Share the things you are reading. Talk about the plans you are developing. Ask your partner for helppeople usually respond very positively to such an appeal, even if they do not feel at this stage that they have anything to contribute. Your partner will almost certainly be better at some aspects of wealth creation than you aremaybe its dealing with people, budgeting, pinning down what the dream would look like, the discipline of sticking to a plan, doing the numbers . . . acknowledge his or her skills in that area and ask for support. No matter how little active help you get from your partner, keep him or her in the picture as much as possible. What you are doing is life-changing and both of you need to stay informed about what is going on. Some partners find it hard to commit to these changes until they see some positive results. The knowledge and insight you are seeking here is to understand how those who surround you can affect your success. You need to develop the habit of enlisting all the support you can from family and friends who understand your dreams and minimising contact with those who pour scorn on you or try to undermine your efforts.

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Networking: Winners work with winners!

Chapter

We rarely meet a successful person who doesnt have a good network. Its not just that others are attracted to them because they are successful; its that they have built a good network that helped make them a success in their field in the first place. Networking well with others is essential for success in all areas of wealth creation. No business can succeed without a great network of customers, employees, and other businesses that act as suppliers. No matter how talented you are in particular aspects of your business, you will be less expert in others. In these areas you need others to call on to discuss the problems you are facing. Some of these people will know how to solve your problem; others will be able to recommend people they have used to help in similar situations. Similarly with property investment. Good property investors are in the know. They hear all the gossip about what is happening with planning changes and consents in their area. They know what is happening in their market. How? Because they make sure that they are out and about talking to others in their network of real estate agents, conveyancers, lawyers and accountants. They meet with other investors who are interested in property and chew the fat about what is going on. Share investors have another networkthis time of brokers, business people, accountants and other share investors. Some people have an oddly negative view of networking they think it is somehow grubby, that is uses people. Nothing could be further from the truth. All successful ventures involve a network. The only alternative is to be expert at everything and do everything all by yourself. If you take that path you will need to keep everything on a very small scale. All of society operates
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in networkswhether it is young parents sharing babysitting and school runs or wider family groups which can look after those who need help and extra attention. Businesses have always acknowledged the importance of networks and actively hire and promote those who are effective in developing their circle. The more people you know and are on good terms with, the more powerful your network is. Everyone knows someone who knows someone who knows what you need help with or want to find out. So get busy on enlarging your network. Someone once worked out that there are only six people between you and anyone in the world you want to meet. Thats an intriguing and powerful idea. Networking allows you to hitch a ride on the experience, skills and contacts of others. They can give you a leg-up on your way to successand you too can be of help to them. Networking is a give-and-take proposition. People are usually generous in their giving as long as they see you giving somewhere else. Nobody likes someone who is always a taker. Good ideas for improving your network include: Business cards If you dont already carry cards get some printed. They will help you take what you are doing seriously but, more importantly, they make it much easier to exchange contact details with others. You dont need anything on the card except your name and contact details, including email address. Collect cards from others as you go. It helps to remember who each person is if you note the date and place you met them on their card (for example, Jan 2005 at Jims New Year BBQ). Email makes it very easy to follow up with people. Take cards with you everywhere. Associations There are many groups you can join that will grow your network. General business and professionally oriented groups like Rotary are excellent places to meet people from all kinds of backgrounds who will be interested in you
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and will want to understand what you are doing. There are specialised associations whatever your wealth-creation interest. Business has networks like Chambers of Commerce. Property investors can usually find a property investors association, and share-interest groups abound. You can always form your own, of course. Small informal support groups work very well. Seminars and events If you attend a course or seminar on a topic of interest to your form of wealth creation you are bound to meet people who are trying to do what you do. You have to make an effort when there to meet and talk to peopleand dont forget the business cards so you can follow up! Never underestimate the value of your network. The people you know and the people they in turn know can make a huge difference to your success. All smart business people know this thats why they spend so much energy catching up with and developing their network. The web of people you know who will support you, can teach you, can advise you, is invaluable. Some of this you clearly have to pay for, but youll get lots more as well.

Exercise 43
Draw a diagram or mindmap of all of your family, friends and contacts. Study that diagram and imagine how many other people each of these people know. Identify the gaps in your network. Do you know people who will be able to tell you what rental levels are in your area? Do you know people who know the latest on what is going on in your industry? Is there someone you can call on if you need information on tax?, etc.

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Understand that you already have access to a vast networkyou just have to get out there and engage with it. Note in your diary events to attend or people to contact and start to build your network consciously.

KASH points
The skill that you need to focus on here is the development and maintenance of a network that can help you on your journey to wealth and freedom. There is nothing nasty or manipulative in thisall these people will be delighted to have your knowledge and skill in their networks. It is easier to achieve when you have access to a big group of people who know things and people, and who have expertise and contacts that you may lack.

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Assembling a dream team

Chapter

While no one is going to take care of your finances for you, you dont have to do this all on your own. While you are responsible and have to take charge, no matter how organised you are or how well disciplined you become, you will need expert help from time to time. And there are lots of people who can help. If you are committed to wealth creation you will make sure that you surround yourself with a dream team of professionals who will assist you in making good decisions and providing good advice. Winners work with winners! Every time we deal with successful people or successful businesses we find a team of winners around them. Success is almost always underpinned by a dream teampeople who are winners in their own professions and who can also function well as a team. Beware of professional jealousies, however. You need a team, not just a number of individuals, to make your wealth creation a success. We all need help and advice from time to time. Unqualified friends and relations, no matter how supportive, will not know all they need to know to give you good advice. No matter how hard you work at learning what you need to know, you will never be across all the professional fields, nor be as up to date as you need to be. When the going gets tough you will want to call on a heavyweight in the right field. Those on the path to wealth and abundance will need one or more of the following from time to time: Lawyer; Accountant; Real estate agent;
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Sharebroker; Tax specialist; Insurance broker; Investment adviser; Trust lawyer.

Just as with your medical professionals, you do not want to be picking these people from the Yellow Pages or indeed meeting them for the first time when you are in crisis. You should start to build up a team of advisers as soon as possible. The level of professional you need depends on your circumstances and what you are planning to do: the bigger your goals, the more complicated your affairs, the heavier the advice you will need. If your affairs are fairly straightforward, for example, you have a mortgage and some rent from a rental property, a general accountant will be all you need to help you file your tax return and minimise your tax liabilities. If you have several rental properties or own your own business or have become involved in trading shares you will need an accountant with a degree of specialisation in your area. Other people who invest in the same things as you should be able to recommend someone experienced and appropriate, and its easy to find a property investment association or share investment group to join where you can get recommendations. Who should be on your dream team? What do you need from each team member? Lets consider the two most important roles in the dream team: Accountant No business can succeed without solid financial and tax advice. Is your accountant a winner? Does s/he work with other very successful people? Is s/he proactive in advising you in your business or are you dealing with a historian someone who can tell you in great detail what happened when it is too late to do anything about it? Is your accountant wiredin to the best tax ideas and practices? Will your accountant
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work well with your lawyer to ensure that your assets are properly structured and managed tax-effectively? Lawyer Wealth creation can be a complicated business. Does your lawyer understand business? Is your lawyer proactive in advising you about business structures (partnerships, companies, trusts)? Does your lawyer ensure that your wills and Enduring Power of Attorney are up to date? Is your trust being managed properly?

Exercise 44
Do you have the right individuals on your dream team? Are they winners? Do they work with other wealth creators who are winners? Do they associate with other professionals who are winners? How well do these people cooperate with each otherin your interests? Do you encourage them to function as a dream team in the interest of your wealth creation?

You may need some further specialists: Trust lawyer/adviser/trustees If your affairs are at all complicated you may need advice that is beyond the experience of a family lawyer. Is your trust up to date with legislation? Is the gifting schedule properly maintained? Are decisions properly minuted? Are you confident that your trustees will execute your wishes in your absence? Succession planner Many businesses have complicated family and business issues to address for succession. Do you have the level of help you need? Business consultant You are likely to have Wealth-Creating Assets worth hundreds of thousands (and maybe millions) of dollars. Is your business advice making the most of that asset?
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Directors Some wealth creators now have their own board of directors (or at least some sort of consultative group). You dont have to think of this as a formal board (like Vodafone or Qantas have). Rather think of it as a sounding boarda group to bounce ideas off. Are they adding value? The benefits these experts bring are obvious. Your family and your wealth-creation business need access to individuals who are leaders in their own fields and who are committed to seeing you succeed.

KASH point
The key knowledge here is that expert help will be necessary from time to time. These people are critical to your success and you need the best that can be found. It is very seductive in business to spend all your energy on operational and financial issues. However, it is a rare business that outperforms the people in it. Are you doing everything you can to get a dream team working on your business?

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Are you getting the best?

Chapter

Good advisers are often the difference between the successful and the rest. Often we only know that we have been well served or badly served in hindsight. It can be very difficult to work out what you should expect from the professionals that you usein other words, what should you ask for? The Table of Service Providers below gives an indication of the services provided by different types of professionals. You can use it to evaluate the service you are getting and to seek more from the professionals in your life.

Professional

Usually provides
Accounts Tax returns

Should be able to advise on

Business structures Busines issues Tax Debt

Ideally provides

Accountant

Planning for changes, for example, growth of business, Tax minimisation. Keeping wills up-to-date. Anticipating changes in legislation.

Lawyer

Company formation Trust formation Contracts Wills

Business structures Trust management Succession planning

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Professional
Financial planner

Usually provides
Insurance Investments

Should be able to advise on

Investments Debt management Financial plans

Ideally provides
A highly customised plan. Ongoing guidance Proactive communication on changes which may affect you. Updates on property in your area of interest. Whats going on. Conduit to other experts. Counsel on direction of business. Valued sounding board Priority for new listings. Ongoing advice/ research in companies of interest. Regular review of your risk profile. Risk mitigation.

Real estate agent

Agreements for sale or purchase Leasing General business advice

Trends Where the market is Some specialty, for example, marketing

Business consultant

Stockbroker

Sale or purchase of shares, bonds, funds.

Recommendations for sale/purchase. New listings Research

Risk adviser

Insurance

Buy/Sell agreements Risk management

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KASH point
The knowledge to focus on here is to understand what you need and should get from each expert. You will need to consciously continue to build your skill around managing your professionals so that they do a great job for youthis is not something you should just assume will happen.

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Making your team work for you

Chapter

Wealth creators are not intimidated by their advisers. The advisers are working for you, after all, and you are paying for the service. If you are not satisfied with a particular adviser, fire them and get a new one. Your financial self-sufficiency and security are far too important to be stymied by an inadequate or worse, incompetent, adviser. As always, winners work with winners: ask the people whose achievements you respect for recommendations. Typically, once you find one good professional they will be able to recommend others who can be of use to youthey too like to work with other good people. Ideally, you will end up surrounded by a team of well-informed advisers who are all willing to work with each other to secure the best outcomes for you. To get the best from a team of advisers you should ask yourself, before any meeting, which specific area or element you need the most help with. At any one time it is probably easy to identify which particular area is holding you back. Which is the one financial thing that if dealt with could transform your position? Different people will need different help at different times. You might need specialist help with the creation or management of a trust, or help to clarify what it is that you are trying to achieve, in setting goals and plans, some coaching to achieve these plans. If you are getting involved in property investment you will want to focus on finding a good real estate agent, building a relationship with a good valuer, finding a good tax accountant and dealing with a good mortgage broker. People who own a business will want specialist advisers. You might also need a general business coach. Depending on whats important to the success of your business you may need some specialist consultants. You will need to perform superbly at
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whatever is the most important aspect of your business. If you are in retail, for example, your purchasing or your merchandising might be critical to your success. In another business the most important function might be your marketing or your distribution. Whatever you business needs to excel at will determine what kind of specialist you need to find. Most importantly, when you assemble these advisers you need to get them to work as a team.
Jane and Jim are determined to create significant wealth through acquiring well-priced properties, refurbishing them and tenanting them. To do this successfully they must find the right properties and buy them at the right price. They have developed a very good relationship with a real estate agent in their area and frequently have good properties offered to them before they are publicly advertised. Their accountant has a real interest in what they are doing and helps them do the numbers to ensure that they are making a good purchase. She also sees to it that they do not become over-extended with their loans. She has been very helpful in ensuring that the properties are revalued appropriately so that they can leverage well. Jane and Jim use their builder to give them recommendations for purchase and do-up they have collaborated on so many projects now that they understand each others requirements well. The mortgage broker arranges the finance that they need. Their lawyer has made sure that all of their structures are optimised for tax purposes. She also plays a significant role in ensuring that the whole team is kept up to date with changes in legislation, and protects Jane and Jim by ensuring that all the other advisers operate within the law. Most importantly, Jane and Jim get this group of people together regularly so that they understand the big picture of what they are trying to do. They all work well together and liaise if necessary without any prompting from Jane and Jim.

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Dream Team of Advisers

Accountant

Real Estate Agent

Lawyer

Jane & Jims Property Business

Builder

Mortgage Broker

You will also need to manage your team of advisers well. You will need to be fair but firm and must expect them to perform. Make sure that you get what you are paying for. If you are not satisfied you will need to replace the adviser. It is very hard for you to outperform the teamyour success is unlikely to be better than the teams performance. If you are serious you will get a good team together and take care to keep them working for you. And make them operate as a team quite often they will need to talk to each other in helping to arrange your affairs. Make sure that they meet each other and talk to each other about your finances and what is best for you. A serious wealth creator will be at the centre of this team of professionals demanding the best from each of them, separately and together. You cant go to sleep on the job once youve assembled a team and just assume that your accountant, financial planner and
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sharebroker will now take care of everything. You can delegate authority to professionals to do certain things for you but you cannot delegate your responsibility for your finances and your future. Its your money and your life, so dont abdicate your role.

Exercise 45
Decide what type of specialist help you need to help you achieve financial independence. Find some people who fit these roles. Put them to work as your dream team to ensure you achieve your plans. Manage them wellits your money!

It costs to hire advisersit can cost hundreds of dollars an hour for a good one. But it will cost you even more for poor advice or no advice at all. (Someone once said that if you think its expensive dealing with professionals, just wait until you deal with an amateur!) As with most things, you get what you pay for. You can make sure you get value by choosing your adviser with care. You also need to brief them well so that you do not waste time (and your money). Make sure you have available all of the information that you need, and brief them on your overall plans and objectives. Introduce them to other advisers in your team so that there is no doubling-up.

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KASH points
The knowledge to focus on here is that it takes a team of good advisers to make your wealth-creation enterprise as successful as it can be. You should also focus on developing the skill to bring your team together and motivate them to work towards a common goalyour wealth creation. You will need to manage them so that they develop the habit of communicating well with each other about your wealth creationdont allow them to play games of professional jealousy with each other as you, and your wealth, will be the only victims.

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Tips for choosing professionals

Chapter

We all need good professionals to help us get things right. The thing we are most often asked by clients is to recommend other good advisersaccountants, lawyers, coaches, counsellors, investment planners and so on. Getting recommendations from people you know and trust is the best way to find a good professional, but you still have some work to do. We have two main rules: Good professionals do whats right for younot whats right for them Even though they are in business and have to earn a living it is you, the client, who should come first. Sometimes that will mean telling you they cant help, sending your business away, or advising you to do nothing (and therefore pay them little or nothing). Our definition of a professional is one who puts the clients interests before their own. Good professionals advise yourather than sell to you One of the problems for many professionals (especially in the finance field) is that they only get paid if you buy, sell or change something, as they are paid for transactions or on commission. Thus, for example, it takes a very professional share-broker to tell you to wait for a month or two. A key issue is to inquire how the professional is rewarded. Ask how they are paidwhether by fee or commission. If its by commission, its in their interest to sell you something (otherwise they dont get paid). If its by fee their advice will cost you no matter what you decide to do, but the adviser has no reason to steer you in the direction of anything that is not right
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for you. And there is no conflict of interest. Theres no right answer, but its better for you to know. You do need to understand how the system works and take care to both choose well and manage well. No adviser is perfect (neither are you)and they will make mistakes from time to time. Stay focused on managing your professionals. If they make mistakes consistently, fire them. How do you find these people? Well, you can use the obvious criteria of qualifications and experience, but with all the professionals in your life, word of mouth is usually the best. Use your network. Ask around. Inquire whom others use. Ask about satisfaction and levels of service. Get referrals. Good people will lead you to other good people. Here are some good questions to ask: What are your qualifications? What kinds of clients do you serve? How much experience do you have in working with people in my situation? What do you specialise in? What do you think that you do better than the rest? Can you tell me about some of your success stories? What professional associations do you belong to? Does your association have a code of professional conduct? How do you stay up-to-date with what is happening in your industry? What fees do you charge? What is your hourly rate? What percentage is your commission? How do you get paid? Are you affiliated with any other institution? Are you independent? What research and support do you have access to? What sort of services do you provide?
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What companies, if any, do you represent? How will that affect your advice? Who else in your business would be working on my affairs? Can I meet them? How do you work with clients? How are complaints dealt with?

Ultimately, you will have to trust your judgment. You have to be comfortable with the person and find them easy to ask questions and confide in. You are expecting to have a long-term relationship with each of your advisers, so choose with care.

Exercise 46
Decide what you need and ask for recommendations. Interview professionals to decide whether you would find them easy to approach and work closely with. Be sure you understand how they get paidit may affect the advice they give you.

KASH point
The skill that you need to focus on here is the interviewing and selection of people to work on your team. We know that this is not easyespecially when you are starting out. (We are asked to recommend good professionals more than any other thing in our WealthCoaching work.) However, this is a skill you want to persevere with as it is critical. It does get easieryou get better at knowing what will work for you and, in addition, good people will lead you to other good people. This is also an area where your growing network may be of great help.

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Learning from the masters

Chapter

One of the most interesting things about those who have succeeded in building wealth is that they are in most other ways ordinary and average people. That may seem surprising but for the most part successful people are not marked out by having much greater talents or education or abilities than the rest of us. But: They behave differently. They work to different rules. They think differently. You can learn much from the people who have already achieved wealth and freedom. Forget the ones who have stumbled into itthose who have married wealth or inherited it, or who have won a lottery. None of these people have gone out to deliberately grasp financial freedomthey have been lucky. (And some not so lucky! Research in the UK suggests that a lot of those who are lucky enough to have a major lottery win are back where they started from within five years). These people are not useful models for you. Look instead at the people who have set out to become wealthy and free, and have succeeded. Masters in any field dont just keep popping coins in a slot machine, hoping for a lucky break. They apply tried and true principles in their field and they discipline themselves to do what works. Sure, they continuously try to improve but they certainly dont ignore the methods that have been shown to work over and over again. You get lucky when you are prepared and when you have learned your tradeexpecting to be lucky just by sitting there waiting for the wind to change is rather foolish. There is more information available today about how to
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succeed in any field of endeavour than ever before in history and into the bargain, most of it is available at your fingertips in your own home and often for free! We have been thinking, writing and talking about success and money for nearly 20 years. Over that time we have met a lot of people who have succeeded, and a lot who have failed. Those who reach wealth and freedom tend to have some things in common (some of which are quite surprising).

They are modest

These people are not ego-driven. They do not do what they do because they are concerned about what other people might think about them. They are quite happy to invest in unglamorous industriesthey do not need to be in airlines or fashion or the ski industry. They know that there is money in dirt. Many of them get their hands very dirtyliterally. In many cases the whole family was involved in the operation, with children running errands, older children babysitting, and both parents working hands-on and all hours to make a go of their business venture. We have worked with clients who have used property as a wealth-creation vehicle who have lived in very modest accommodation for years so that more of their capital could be diverted to wealth creation. They did not need tobut they chose to in order to meet their dream in their determined timeline. Their neighbours probably thought they were strugglingwe knew they had millions!

They are careful consumers

They do not live in especially expensive houses nor drive flash carsnot, at least, when they are developing their wealth, and
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often not even when they have made it. They are quite happy to go without the toys that many of us think are necessary but which in reality are simply things to make us look good in our own eyes or in the eyes of others. We have seen clients run a garage sale to cash up sports equipment, special household appliances and other luxuries to raise money for their wealthcreation portfolio. Another very sporting family gave each family member a budget figure for leisure activities which was adhered tothat was good going for people who had been boating, skiing, golfing, swimming and playing tennis, all of which require expensive equipment and/or membership fees. Many of our clients who have achieved their goals still live modestly on the surfacebut have the luxury of Security Assets that ensure income and choices for the rest of their days. And they will never need to work againunless they wish to.

They are independent-minded

They do not move with the herd; are not derailed by talk of recession or a boom in a different market or international events. This takes courage. They have analysed, they have plannedand they back themselves to be right, even when others think they are wrong. They listen to others, but in the end they are their own people. They have a dream, goals and plans, and even though the path is never perfectly smooth they are never deflected from their journey. Being able to stick to a plan (with modifications, obviously) is a key hallmark of the successful. The unsuccessful are always entering the market just when they should exitand vice versa. Successful wealth creators have rules for their activities, such as the prices they will purchase at. They stick to these well-thought-out principles even when the market is going crazy around them. The clients we have who have weathered the storms of the tech-wreck, the 9/11
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disaster and the SARS epidemic had sensible plans and had not overreached.

They have good long-term relationships and marriages

Whether this is because they are good with people (have a high emotional intelligence) or whether their wealth has not been halved by a marriage break-up is uncertain. Nevertheless it is true that people who are wealthy tend to have good long-term relationships. Two people are far more powerful than one. We see this effect so strongly that we never take on a couple as clients unless both are involved right from the start and in all decisions. Couples who are well aligned in their dreams and who have agreed on the same goals support each other and help to do the heavy lifting. The path to wealth and freedom is difficult enough without a reluctant partner undermining your efforts and blaming you for the difficulties encountered along the way.

They have a high FQ (financial quotient)

They know about stuff like money and tax. They understand their accounts. They learn to do a budget. The hard skills are a prerequisite, although they are easier to learn than the soft skills. Many of our most successful clients began with almost no knowledge of money and numbersthey had a very low FQ at the startbut they were willing to learn, and read and studied what they needed to know.

They love what they do

They chose the right business for them. That does not mean that they are always doing what they love. However, whatever
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wealth-creating activity they are in, property, shares or a business, they have committed to it and driven it hard. It is hard to imagine people loving some of the wealth-creating enterprises we have seen, but the important thing is that our successful clients behaved as if they didthey paid attention, they learned everything they needed to know, they knew the business inside out, no detail was overlooked. They understood that you can do well in any industry if you are prepared to understand it well enough.

They take a position

You cannot succeed if you just stand there and dither! They do not hedge their bets or equivocate. Sometimes this can be a fault many get rich but do not stay rich. But if you are to succeed in business, property or shares you have to engage in the marketplace, buy properties or continue to put money into the sharemarket. Doing nothing will achieve just thatnothing! The successful people that we see are bravebut not reckless.

They can see both sides of a situation

They think about what they are going to do and can see both the pros and the cons of it. In doing so they analyse well and make informed choices. A useful technique to have is, before making an important decision, pretend that you have to make the case for not doing what you want to do. This forces you to look at both sides of a question. Successful clients are good at debating with themselves. They also tend to surround themselves with people who can debate the issues with them. Many of our successful clients have formed a small informal board of directors for just this purpose.
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They are persistent

Many have said that they have become instantly rich after 20 years! Some of our most impressive clients have been working on their dreams for over 20 years. They never give up. Some have even survived bankruptcy and got up and started again. You may not find the idea of bankruptcy very appealing, but their tenacity is!

They do the hard stuff

They understand the priorities that have to be addressed and they do them. We have already spoken of clients who sold the family home because they had no capital for wealth creation. We have also seen clients do difficult things, like taking on an extra job for a period, forgoing family holidays when that was normal and expected, changing family practices about treats, pocket money and holiday jobs. All these kinds of changes are very difficultteenagers do not readily relish such new regimes, but the focused people did what was needed, despite the temporary disruptions.

They invest in themselves

Successful people know that whatever enterprise they have chosen for wealth creation, the enterprise wont outperform them. So they are committed to learning whatever it is that they need to know. They network, read and study everything they can about their wealth-creating business.

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They run their Wealth-Creating Assets like a business

Whether they are in a business in the strict sense or have a property portfolio or invest in the sharemarket they treat the wealth-creating enterprise like a business: they have a plan and a budget, they keep accounts, they monitor progress, they make businesslike decisions.

They are well connected

This does not mean that they move in the right set or go to the right bars and cafes. These things may be helpful for some people in some business areas, but they are not critical. Rather it means that they have a good network of contacts in whatever field that they are in: top property people know the best real estate agents and valuers; top business people are active in their trade associations; top sharemarket investors know and talk to several different brokers. Above all, the two things that set successful people apart are hard work and homework. Becoming financially free is a gamea great game. There is no reason why you cannot play it and win. To get rich and stay rich you have to love what you do. Know your dream and love your dream. It is that vision of the future that will set you apart from the herd, let you do things differently and become financially free and have the life that you want. Business masters: start with a clear vision of what they want to build or achieve; translate the vision into a clear plan of action that sustains them when the going gets tough or the vision gets fuzzy;
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share the vision with others such as partners or key employees who need to be motivated; set milestones so that there are measures of success along the way; and celebrate achievement of the milestones.

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The last menu item: Frogs!

Chapter

If there is something that must be done and you fail to do it, the consequences for your dreams and goals can be disastrous. This is the stuff that makes the difference between the successful and the restidentifying what needs to be done and doing it, however unattractive that may be. In Get Rich, Stay Rich we talked about a technique, which originally came from Mark Twain, to help do the hard stuff . We all want to put off things that are difficult or unpleasantits a natural human response. However, there are some hard things that you simply have to do if you are going to achieve your goals. Mark Twains thoughts on stopping procrastination went like this: Imagine that you have to (yes, absolutely have to) eat a live, large, slimy green frog. You have no choiceyou have to do it. When are you going to do it? Are you going to leave it sitting on your desk (or kitchen table), watching you while you contemplate every disgusting mouthful? Are you going to leave it there for a few days or weeks while you think about it? Or are you going to get on with it, eat it now and get the unpleasantness over with? The answer is to get on with it: there is no point in waiting you are going to have to do it. Surely it is better to eat it now and stop the thing looking at you like that. It will not taste any more pleasant in a few days. (Conceivably quite a lot worse!) Doing it now, you still have the same nasty experience as doing it later, but what you do not have is the worry and stress of thinking about doing it. Once you have eaten
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the frog it no longer sits there staring at you revoltingly. Once you have done it, you have done itits over. Once you have eaten a frog in the morning everything else is easy! Twain thought that if you do the hard stuff early in the day, the rest of what you have to do is a breeze. Procrastinators are all talk, all about tomorrow. Eating your frogs is about today. It is immediate. It is about taking action NOW, not deferring things until it is too late to get the results you want. People fail not because they dont do enough but rather because they do far too much of the wrong things. Success is all about identifying what needs to be donethe prioritiesand taking action on those vital few things. We said earlier that doing what you love isnt enough for wealth or successbut if you can discipline yourself to do the stuff you dont love you will be in rare company. If there is stuff that must be done and you do not do it then you will fail in your quest for the life of your dreams. The consequences are disastrous and may affect the whole of your life. Frogs are another version of the 80/20 ruleyou get 80 per cent of your results from 20 per cent of your decisions and actions. The trick is to find the right 20 per cent and put your time and energy into those. By implication, 80 per cent of our time and activity is largely useless as it only produces 20 per cent of the results. We need to reduce these activities and the time spent on them or, best of all, quit doing them at all. Each and every thing that you do is either taking you towards your life of wealth and freedom or further away from it. Your task is to identify which actions need to be taken and what noise needs to be ignored. If that action is something that is likely to be hard and unpleasant, you need to close your eyes and block your nose and eat the frog anyway, knowing as you do it that each gulp is another step towards the life you want.
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Exercise 47
Make a list of the things that you have been putting off. Identify and define your frogs, look them straight in the eyeand eat them!

Exercise 48: WOF (warrant of fitness) checklist: Are you ready?

Have you got a dream? Do you have a Freedom Figure? Have you set the long-term goals? Do you understand the values that are driving you? Do you know what your Net Worth is? Do you know what it should be? Have you agreed to a time period? Have you chosen a Wealth-Creating Asset? How much income will you have? What amount will you consume? What rate of return are you seeking? Have you got strategies in place for driving your Wealth-Creating Asset? Is there a plan for Security? Is your partner fully on board? Have you built a network? Have you selected professionals? Is there a learning program? Who will help and support you?

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