How to Accumulate Wealth

Copyright © 2005 by Christopher Chima, Ph.D.

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Contents

Preface

Acknowledgements

List Of Figures

List Of Tables

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Selected References

Dedicated to my dad and my mom.

PREFACE

The motivation for this book resulted from several years of teaching economics and conducting investment seminars and talking to people about investments. I wanted to answer most of the questions that people ask time after time. But most of all, I also wanted to demystify the mystique of Wall Street so that the concepts and principles of investing become understandable.

This book is intended for anyone who wants to get ahead financially. It is also intended that the material be entertaining and pleasurable reading while providing valuable information to the reader. This book is designed to guide young college students and others who have plans for growing rich. It is my hope that everyone who reads this book will, at the end, know how to go about creating and maintaining wealth. This book is recommended for law school students who are taking corporations for the first time and for business students seeking careers in financial services. Financial advisors and planners will find this book a handy tool for their clients.

Chapter 1 of this book contains an introduction to the basic concepts of money and financial management. I included in this chapter a discussion of some of the factors that cause people to become overburdened with debt and approaches to debt relief. The second part of this chapter discusses the role of education in accomplishing financial goals. It is true that not all readers of this book need this section. I am sure that there are lots of people out there who already know what I am talking about here. But for the few, who still need the inspiration, the section helps to point out the importance of seeking more knowledge and information in the quest for financial success.

In Chapter 2, we explore the relations between money, inflation, taxes, and the time value of money. Every successful investor understands the role that these factors play in the art of investing. This chapter serves as an important foundation for the materials in the subsequent chapters.

Chapter 3 presents a classification of the different types of investment objectives, including a detailed analysis of what they are and the goals that each type of objective is designed to meet. People invest for many purposes and objectives such as for growth of assets, or for income. Thus, this chapter is important because it will provide you with the tools you need to allow you to modify your objectives as you go along. Your investment objectives should change over time based on your age and income, so you must be flexible.

In Chapter 4, we introduce the theories of financial planning and how you can use them. The concepts discussed in this chapter will enable you to focus and hone down on your money management asset allocation abilities. Thus, your capacity to create wealth will be greatly enhanced.

Chapter 5 discusses the secret to wealth, and the process of wealth creation. The material covered in this chapter will walk you through the process of wealth creation and the technicalities of getting rich. One of the new insights offered in the chapter is the formula for wealth and a detailed analysis of that formula with hypothetical investment data. The examples and illustration presented in the last section of the chapter will show you how to approximate how much time it will take you to achieve your financial goals.

In Chapter 6, we explore the benefits of having a financial portfolio and the endless opportunities that are available to you once you have created the type of wealth you want. We discuss all the many things and avenues for the allocation of your wealth. Wealth is good so long as it is virtuous.

Chapter 7 shows you how to evaluate your investments. This chapter is important because as an individual investor you should be able to make your own independent assessments and decisions on where you put your money.

Chapter 8 focuses on the advantages of using mutual funds as a basic instrument of wealth creation. For many people who want to invest in the market but have not enough time to follow or study the market variations everyday, a mutual fund is one definite option for getting at it. So here, we present more detailed discussion on this type of approach to the stock market.

Finally, Chapter 9 is a glossary of terms. This final chapter is designed to help define and interpret the terms used in the book, along with other common investment terms. It is intended that this chapter serve as a reference source, so a comprehensive list of terms has been provided.

I sincerely hope that everyone will enjoy reading this book.

ACKNOWLEDGEMENTS

First, I thank God for the gift of writing. I hereby express my utmost gratitude to Newton Ilawole, for his assistance in reviewing the materials contained herein and lending his expertise. I also would like to thank all the students at California State University Dominguez Hills who read and commented on the earlier versions of this work, especially, Edgar Poureshagh, Yaakov Pilowsky, Brent Meredith, and Tatia Hodges.

LIST OF FIGURES

Figure

1. The Investment Pyramid

2. The Stock Market

LIST OF TABLES

Table

1. Net Worth Calculation

2. Cash Flow Calculation

3. ROWA: Investing $100/month at 10% ROR

4. ROWA: Investing $100/month at 12% ROR

5. ROWA: Investing $200/month at 10% ROR

6. ROWA: Investing $200/month at 12% ROR

7. ROWA: Investing $500/month at 10% ROR

8. ROWA: Investing $500/month at 12% ROR

9. ROWA: Investing $750/month at 10% ROR

10. ROWA: Investing $750/month at 12% ROR

11. ROWA: Investing $1000/month at 10% ROR

12. ROWA: Investing $1000/mont at 12% ROR

CHAPTER 1

IN THE BEGINNING

Throughout my professional career, I have observed that almost everyone I run into is interested in creating an investment portfolio. People are always talking about their investments. More people than ever before are considering various investment proposals, ideas, or programs. There seems to be an insatiable interest in the topic of investments. It makes a good conversation piece at any time. Many people dream of having lots of money someday, and most people wish to retire in financial independence. These are all worthwhile goals. The essence of this book is to illustrate how painlessly everyone and anyone can achieve financial independence. It is a creative walk through the Wall Street of Life.

We should begin by attempting to explore and explain why there is so much interest in the subject of investments. First, owning an investment portfolio carries with it both real and aesthetic values. The real value relates to the actual monetary worth of your investments which can be measured in dollars, while the aesthetic value stems from the positive feelings of financial security and well being that you get from owning these investments.

Everyone I talk to about investments listens with undivided attention. There seems to be a part of the human personality or makeup that always wants to let our peers know that we know what to do with money—that we are money smart, and are part of the sophisticated Wall Street crowd. Hence, the subject of economics and investments never ceases to be a part of the conversation at dinner or cocktail parties, and among friends and family. The more sophisticated you sound about money, the more you’ll be like E. F. Hutton—when you speak, people will listen. Therefore, knowing how to meander through the stream of investments out there and emerge victorious is very important to everyone today.

The secret to wealth requires knowledge—knowledge of how the stock market works, knowledge of the available instruments for creating wealth, knowledge of the accessibility of these instruments, knowledge of how to participate, and knowledge of how to be a winner and become financially independent.

One of the major hindrances that many people have in regard to investing is the misunderstanding and misuse of credit. Everyone must understand that one of the fundamental secrets to being wealthy is not to be a debtor. You can never claim to be rich if you owe everyone out there, and you owe more than you own. Your wealth is measured in terms of what is called net worth. Your net worth is arrived at by simply taking the current dollar value of everything you own, including your personal belongings like clothing and jewelry, and subtracting from it the current dollar balance of every debt you owe. The difference is your net worth. So, if you owe more than you own, you have a negative net worth. This means that you are worth nothing financially, so you will find it very difficult to obtain credit.

Credit is important, especially having a good credit profile. But you cannot overuse or abuse your credit. Thus, the less you owe to others, the more you can keep for yourself, no matter what level of income you have. A lot of people need to understand that it does not make economic sense for anyone to go into a store, for example, and charge clothes, jewelry, perfumes, shoes, and other personal items on a credit card. It means that you are borrowing money (sometimes from the retailer) with interest to buy items that have already been marked up by the retailer. You have thus left yourself in a no-win situation, economically. First, the retailer has already made a profit on the merchandise that is being sold to you at the marked-up price. Second, the financier or issuer of the credit will make money from the interest it charges, which is usually high.

Think of it—it is like double jeopardy for you. You will never get out of debt that way. You cannot get rich because you have already committed your entire future income to paying creditors for the debts that you are incurring now. Most people, once they get into this trap, just cycle their lives, and from that point on, they begin to work very hard for the landlord, and the bank, and for Visa and MasterCard, and the department store, and have nothing left at the end of the month. They have already committed their future earnings to paying others. Thus, many of these people do not have the slightest chance of acquiring wealth because the funds with which they could have acquired wealth have all been committed to paying others.

If you want to create wealth, you must first get out of debt or at least lower your debt ratio, the amount of debt you carry relative to your income. You could give up the use of credit cards completely for a period of time. Pay cash for everything you need and forgo some of the things you want. Then you will be on your way to financial freedom.

The Role of Education

Investment in education is an investment in the human resource, which is you. It is an investment in your personal resource development, your skills, and your ultimate tool for survival. Education is your most important personal asset. Once acquired, it can never be repossessed, or taken away from you, not even by force.

Education can set you free from any kind of captivity or bondage that you may be in today. With education, you can become somebody, even if you were the child of a nobody. Education shall free your mind from bondage. Education and knowledge, once acquired and properly applied, can open the doors to greatness and unlimited fulfillment in life. No matter what you want to do in life, education is the key to success.

Through education, you will learn to think and react appropriately to changing economic conditions. Once educated, when some doors seem to be closed you’ll always find ways to unlock other doors. In the New World Order, you need to be flexible to survive. You must be ready to adapt to abrupt changes in order to succeed. This means that you need to broaden your skills, making sure that these skills are transferable to many jobs, many companies, and many industries. You can become whatever you want to be, an accountant, doctor, lawyer, engineer, architect, dancer, actor, banker, astronaut, economist, musician, businessman, politician or administrator—whatever it is, education is the key. A well-educated man or woman is always well armed for survival.

College education is very important, especially if you come from a disadvantaged background. It can help you get out of the doldrums and change your life. A good college education is also better when it is acquired earlier in life rather than later, but there is no age limit to the quest for knowledge. However, the earlier in life you acquire it, the more time you have to enjoy the fruits of your labor. It is most ideal if you have finished college in your early twenties, and by that time have also mastered the secrets to wealth. You may begin right then to put away your 10 percent and then work your way up. You should not deny yourself the opportunity to experience college life and the quest for knowledge at a young age. This is the time of your life when you likely have the fewest responsibilities. You can enjoy yourself while studying hard, but most of all, you get a chance to meet a lot of different people, including some of the future leaders of your generation.

After college, you’ll have all the time in the world to do all those other things in life that you always wanted to do. After college, what you want to do with your life is up to you—how you apply yourself, what dreams you have, and what goals you plan to attain in life, including the decision to start a family. College life is a whole lot of fun. With a college education in hand, you stand a much better chance of providing a good life for yourself and your family.

In the New World Order, education and knowledge is the key because we are now in the information age. The ability to understand and communicate is even more crucial today than it has ever been. The New World Order that we live in today is more complicated and more interwoven than ever before. Everyone is now plugging into the information superhighway. If you cannot plug in, then you will be left out. If you were not born with a silver spoon in your mouth, education and knowledge could be the key to money and power for you in the modern world.

In life, they say that too much of anything is not good for you. In fact, too much of certain things in life can kill you. For example, they say that water has no enemy, because it is essential to life, all life. But if you take in too much water, like one who is drowning, water could kill you. Education is the only exception to this stated rule. You can never have too much education. The reality is that most people will never have enough education in their lifetime. I am yet to find that one person who has been hurt in life by too much education. Rather, we see lots of casualties’ everyday, worldwide, resulting from lack of education.

You must bear in mind that education is a long-term investment of time, money, and effort into the human stock. In addition, it requires other intangibles such as dedication, self-denial, self-discipline, and self-sacrifice. Therefore, you should plan to make this investment pay off for you later. Every investment carries with it an expectation of future economic reward. Investment in education almost always has a positive return. Sometimes, it might take a while for the positive returns to show, but it will surely happen if you persevere and apply yourself properly. For people who come from disadvantaged backgrounds, it may take a little longer for things to happen, mainly due to the lack of proper connections. But it must surely come, because once you have your education, no one can take it away from you. Yes, no one, and you will find ways of applying the knowledge.

After you have paid your dues in getting yourself educated as much as you possibly and physically can, you should never give up trying to be all that you can possibly be, and all you want to become. It may take time, but it never fails. It will not fail you either, because you have acquired the ability to use your own mind, to seek and thus find. You have acquired the ability to create, to understand, to interpret, and to analyze. You have acquired the ability to react positively and become a winner at the end. Even if for some reason you don’t believe in going to college, or you are not able to go due to circumstances, you still owe it to yourself to get as much education as your talents and resources will allow. Educating yourself will help you make the right investment decisions.

A good education can make it possible for you to have a good job and good income. For people who were not born rich, a good way to go in setting up a good income stream is through education. It is not being suggested here that a college education is the way to make it. There are many ways of making it, but education is certainly one of them. It could at least offer you that chance to make a decent income, so that you can have something to plan with. A good source of income is the essential tool for achieving financial independence, using the systematic wealth accumulation approach. As an investor, you need a certain level of knowledge and education to be able to objectively evaluate those investment opportunities that might come along.

In terms of wealth accumulation, we must all realize, first, that there are different types of wealth. One type is measured in terms of financial success and economic well being. Let us not forget that education and knowledge represent other forms of wealth by themselves. People have been