I recently read The Education of Millionaires: It’s Not What You Think and It’s Not Too Late, and I highly recommend it. Not because it is written by a friend, Michael Ellsberg, but because he’s written a provocative book challenging a deeply rooted belief about college education: That there is an inherent correlation between a college degree and professional (and thus financial) success. Given how dramatically the financial crisis of 2008 altered the economic, business, and employment landscape, his message couldn’t be more timely.
Inspired by his wife’s story, Jena, who dropped out of college during her junior year and now owns a highly successful business, Michael set out to interview and showcase other successful people who didn’t complete (or attend) college. For the majority of the people he profiled, instead of in a classroom, their education came in the form of real-life experiences and lessons learned thereof. He weaves their stories into a bigger story about the cultural and technological shifts that are afoot, and how both are impacting how and where we learn, conduct business, and create prosperity.
As I read The Education of Millionaires, I often found myself humming in agreement. I have an MBA in finance, and yet everything I’ve learned about running a successful business, I’ve learned from being in business. And like most people, I’ve learned much more from my mistakes than from my “wins.” I’ve also experienced the most profound personal growth from the process of unlearning some beliefs that weren’t necessarily taught in school, but nonetheless are part of our social discourse. For example: You have to work hard to be successful. Do you believe this? Do you practice this? How’s the ratio of hard work:success working out for you?
Blindly following financial wisdom can actually hurt you…
Michael’s book made me wonder about the financial principles we (as a profession and society) advocate as must-dos for financial success. So for fun, I thought I’d highlight some tried-and-true nuggets of financial wisdom and shed light on how intentionally breaking the rule might be in your best interest!
- Common wisdom:: Avoid debt
Tailored wisdom:: The housing crisis brought to light just how highly leveraged many people were (still are). With the Great Recession gripping our country, having debt, in my opinion, became the new scarlet letter. But not all debt is bad; in fact, if used strategically, it can help you accomplish some of your life-purpose goals. So don’t go to the extreme of avoiding all debt at all costs. Instead, have an exit strategy – with several plans – before going into or acquiring new debt.
- Common wisdom:: Save 10-20% of your gross income
Tailored wisdom:: I am definitely one who advocates aiming for this target. But I also emphasize that the dollar amount or percentage matter a lot less than putting a system in place that enables you to save with consistency. This becomes particularly important to keep in mind during those years when you miss the mark. Sometimes, your life’s circumstances preempt you from doing the ideal but it should never prevent you from doing something.
- Common wisdom:: Max out your 401(k)
Tailored wisdom:: To not invest in your company’s/organization’s sponsored retirement plan is ludicrous — that’s akin to leaving money on the table. Just as crazy, though, is to contribute above your company’s match. Yet, how often have you heard you should max out your 401(k) plan or similar sponsored retirement plan? A lot, probably.
Check with your CPA, but for most people it may actually be more advantageous to contribute to your company’s match and invest additional funds in another tax-deferred savings vehicle – perhaps an IRA. So if your firm matches to 6%, you should contribute to 6% – not the 401(k) contribution limit (currently $17,000). Why? You’ll have more freedom and control of choosing investment options for those tax-deferred savings that work for you, rather than making the options available to you work for you – a subtle but important difference.
- Common wisdom:: Own your residence instead of renting
Tailored wisdom:: When you run the numbers, it may make sense to own your home. However, as the housing crisis reminded us owning isn’t always better than renting, for reasons far beyond a down-payment and creditworthiness. Even if you can afford to buy, do a professional and lifestyle inventory to determine if the timing is right for you. Especially now with mortgage rates at an all time low and less-inflated housing prices, you might be seduced into taking the plunge. Just as with stocks, don’t just buy because the “market” says it’s a good time to do so. Buy because the time is right for you.
If you decide to buy, opt for a 30-year mortgage, but make extra payments and pay it as if you got a 15-year mortgage. Again, just based on the numbers, this suggestion doesn’t make sense. It is true opting for a 15-year mortgage is better from a financial perspective (you’ll be out of debt sooner; you’ll lower your overall payments), but you’ll have less flexibility for life’s unexpected surprises if you experience an interruption in your cashflow.
- Common wisdom:: Avoid credit cards
Tailored wisdom:: Actually, the goal should be to avoid carrying a balance on your credit card.
- Common wisdom:: Reduce your equity exposure as you get closer to retirement
Tailored wisdom:: The danger with this tried-and-true wisdom is that it hasn’t evolved to account for our longer life-spans. Follow this wisdom and you just might outlive your savings and investments. Instead, make certain your portfolio mix has enough equity (stocks) to generate appreciation and enough fixed income (bonds) to generate income to meet your lifestyle needs. (If retirement is a long way off for you, it probably isn’t for your parents…talk with them.)
Just as Michael isn’t boycotting getting a college education (he did after all graduate from Brown), he is encouraging you and me to speak more openly about the assumptions we make about academic and professional success. As he states frequently in his book, we pay a cost when we undervalue real-life, real-world education and the application of lessons learned.
Therefore, I share the above in the same spirit. If you can follow these common financial nuggets the way they’ve been dispensed all the time, then by all means do so. But for most people, they can follow some of the rules some of the time. And guess what? That’s okay. A modified approach is better than none at all!
The key is to be intentional about your approach. And that requires knowing your money story and understanding when you need to travel down the road less traveled and break some rules to fit your short term needs as you work toward your long-term goals.
p.s. if you want to be more intentional about your financial choices and feel fully in charge and more confident when you decide to break with conventional wisdom, then check out my latest group coaching program – What’s Your Money Story? This six-week program is designed for people ready to learn how separating fact from fiction can increase their wealth. We start June 20th – will you join us? Click here to join the sneak-peak list.
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