Mark Ford

From Mark Ford, founder, Palm Beach Research Group: They are going to be married—my haircutter and her boyfriend. She asked me for financial advice.

I asked her what she knew about money. She likes money, she told me, and found the subject “interesting,” but she didn’t know a lot about “stocks and investing and stuff like that.”

“Do you know the difference between profit and loss?” I asked her.

“When a business makes or loses money?’’ she replied.

“How about the difference between an asset and a liability?”

“Huh?”

“How about net worth? Do you know what that means?”

She had no idea.

[Net worth is a measure of a person’s total wealth. It’s the value of all of their assets minus all of their expenses and debts.]

A colleague of mine once said that the biggest problem America faces is not political corruption or corporate greed, but ignorance about money.

He may be right.

According to a poll commissioned by Fifth Third Bank and conducted in 2016 by Research Now, roughly 6 out of 10 people rated themselves as “financially savvy.” Yet only a third of them knew the annual percentage rate (APR) on their primary credit card.

Among young people, only 13% knew the maximum they could put in a 401(k).

ABC News recently reported that Americans tested on 14 basic financial questions got an average score of 40%!

Two-thirds of those questioned believed that there is “an organization that insures you against losing money in the stock market or as the result of investment fraud.”

And nearly half believed diversification is “a guarantee” investments will do well even if the stock market falls.

Six out of 10 people surveyed did not understand the basic concept of inflation. Said one, “I know what it is but I can’t explain it.” Added another, laughing, “Inflation? It’s bad.”

This lack of knowledge translates into lots of personal financial misbehavior. For example:

  • Only 32% of American adults keep a budget and track their spending, and only 30% have a long-term financial plan (according to Gallup).

  • Three-fourths of American families say they live paycheck to paycheck (according to CNN).

  • More than one-fourth of American families have no savings at all, and only half of American families have more than three months’ worth of expenses saved (according to Bankrate).

  • About 4 out of every 10 adults are not confident that they will have enough money for retirement (according to the Pew Research Center).

  • And nearly one-third of young adults end up moving back home with parents after graduating from college (according to Pew Social Trends).

Financial ignorance in America is widespread, and it is costly. If you could add up the lost value of all the bad wealth-related decisions made on a daily basis by Americans, the number would be astronomical.

We do know that American consumers owe $11.52 trillion to lenders and creditors. And we know that this debt burden increases every year. We know that last year alone, student loan debt soared by more than 11%.

There is a reason we are financially illiterate. Less than 5% of us get any sort of financial education by the time we graduate high school. College isn’t much better. You can take plenty of courses in economics or accounting, but the fundamentals of personal wealth building?

It’s simply not taught.

I suppose it’s not taught because most teachers—even those who have degrees in accounting, economics, and finance—don’t know the first thing about it.

That’s certainly true of most of the accountants, economists, and financial experts I know.

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I was thinking about this as Kristin was cutting my hair.

There are really two problems operating simultaneously: financial illiteracy (which means you don’t know the difference between an asset and a liability) and ignorance of the fundamentals of wealth building (which means you can talk a good financial game but you are secretly broke).

What could I say to Kristin? What could I teach her right then that would be useful to her and her husband for the rest of their lives?

I could have explained terms to her, but she would soon forget them. I’d rather talk about principles and then, if necessary, explain terms.

  • I could have explained the difference between saving and investing…

  • Or showed her my “golden wells and buckets” illustration and explained how that worked…

  • I could have warned her how, with most young couples, their spending tends to rise in lock step with their income…

  • I could have told her why she and her husband should avoid buying a nicer house every time they could…

  • I might have explained why renting is often smarter than buying…

  • Or given her the one stock portfolio I’d recommend to anyone starting out…

  • Or explained the enormous advantage of time when you are banking on compound interest…

I could have done all that… if I’d had about 10 hours with her.

But I didn’t. And so I wanted to tell her something that was simpler and more fundamental than all those things. I wanted to tell her the one thing that could make the biggest difference in her and her husband’s future financial life.

I thought about it as she was trimming my sideburns, and then I had it. I told her that the most important thing she should know about money is the concept of net worth, and the first and most important rule she and her husband should follow is:

Make sure that your net worth increases—if not every day, then at least modestly every month and significantly every year.

This was a slightly refined version of a thought that hit me many years ago, one I’ve written about before. That thought was that I should “get richer every day.” It was simple and obvious, but it hit me like a bolt of intellectual lightning.

But by making that resolution—that I would do whatever it took to get a bit richer every day—my entire view of investing changed overnight.

Instead of doing what everyone else was doing, I took a different path, where the preservation of my existing net worth was the most important thing and where, to boost that net worth, I’d sometimes have to create more income.

Even if your money is conservatively diversified into great stocks and safe bonds, you can still experience a drop in net worth when—as has happened several times in my wealth-building career—stocks and bond returns go down simultaneously.

I realized I needed more diversity. But not in assets that just sit there. I needed assets that would create more income. So I got into rental real estate and direct lending and direct investments in small businesses and tax liens and all these other “off-Wall Street” ways of generating extra income.

And that worked. Since I made that change, my net worth has increased—if not every day, definitely every year. I made that decision about 20 years ago. My net worth has increased almost sixfold from there. And it has never, ever gone down.

So that’s what I said to Kristin. I didn’t brag about my net worth as I just did to you. I didn’t think she needed to hear that. She might have started charging me more (which I would have admired).

But she got the idea and liked it because, I think, it was so simple. Simple and obvious. It’s something everyone can do.

Reeves’ Note: Mark’s mentorship has made dozens of people rich over the decades. And for the past four years, he’s been compiling his 30-plus years of experience into the most comprehensive wealth-building program in existence…

The Wealth Builders Club provides the sort of mentorship that has made Mark’s protégés so successful. And he’s offering you access to all of it—from extra income blueprints (generating $1,000s per month) to off-Wall Street investment strategies far safer (and more lucrative) than where most folks invest.