Ingredients for Success

Before describing those qualities that lead to success, we’d better make certain we’re talking about something we agree on. Do we consider a fellow whose sole accomplishment is superb clarinet playing to be a success? Probably so – in the musical sense. And what about a highly effective third grade teacher who inspires her students to learn? We have here an unquestionably successful educator.

However, for the purpose of this discussion, I’m narrowing the scope. Success, as defined here, is financial success. You may consider this too restrictive, and I’ll admit I’ve known wealthy persons who by every standard except net worth were failures. Nonetheless, the riches a person attains is the way the world commonly keeps score of the winners and losers. If nothing else, it’s a convenient yardstick by which to measure a person’s stature.

Now that we’ve established what constitutes success, let’s consider the factors which help bring it about. But by bring it about, I mean the personal qualities leading to wealth accumulation. Inheriting a fortune, winning a lottery, or snagging a rich spouse – though not a bad idea if you can arrange it – is not what I have in mind. Let’s look instead at character traits.

Thrift: A primary requirement in accumulating riches is to ensure income consistently exceeds outgo. Though you’d think this fundamental relationship goes without saying, there is a world of opinion questioning whether two plus two really equals four. Without a doubt, the finest enlightenment on this principle is found in a publication of a quarter century ago: The Millionaire Next Door, a 1996 book by Thomas Stanley and William Danko. It provides outstanding guidance.

Imagination: The 19th Century German philosopher Friedrich Wilhelm Nietzsche said: “Life is a struggle for existence in which the fittest survive.” Though he was a most unpleasant character, he occasionally got things right. And what defines fitness? It means you conjure up solutions to whatever problems you face. When a competitor’s actions threaten your livelihood, you contrive some way to come out ahead. If confiscatory tax laws are enacted, you search for loopholes. Competitiveness demands imagination.

Awareness: You’ve received your semiannual auto insurance bill in the mail.  Before cutting a $542 check, you dig from your files the prior bill showing a $428 premium. A quick inspection reveals the reason. Your deductible has been lowered from $1,000 to $500, requiring a $114 payment to avoid a $500 risk – certainly not a wise expenditure. A three-minute telephone call to your agent restores the deductible and eliminates the premium increase. The message is clear: If you are to prosper, you must pay attention.

Skepticism: A sign in a shop window tells the story: “Sale, All Items 50% Off.” The mob of enthusiastic buyers seems to lend credence to this popular theory: As cartoonist Al Capp’s character Mammy Yokum, in his magnificent comic strip “Li’l Abner,” proclaimed: “Anything fo’ half price is a bargain irregardless o’ how much you pay fo’ it.” If your brain functions in this manner, expect to be taken advantage of regularly. For self-preservation, subscribe to one of life’s more helpful rules: Ninety-five percent of everything is nonsense.

Persistence: Few worthwhile accomplishments occur quickly. Earning a college diploma takes years. Raising a well-integrated family can require decades. Likewise, building a fortune is seldom an overnight accomplishment. Be prepared to devote both time and effort to the endeavor. And never forget, the winner in many a contest is the one hanging on the longest.

This concludes our recommendations on how to make money. Now that we’ve generated these extra dollars, how might we benefit from them? Your trip to the mailbox proves to be significant this morning. There’s a greeting from the Internal Revenue Service. You open the envelope and view a report of the tax rebate you’re entitled to. There’s no doubt – the Gods are smiling on you.

Now that you’ve caught your breath, it’s time to take stock of what this bonanza means. Before we zero in on sensible options, you’re entitled to fantasize a bit. There’s enough for the down payment and a dozen installments on a Ford Explorer. As an alternative, what about the 21-foot secondhand catamaran you’ve dreamed of? And, of course, a sheared mink coat with black fox trim would feel good next winter. Or, as a last resort, a two-week vacation to Hawaii (Those of you living in Honolulu may ignore this suggestion).

With this now off your chest, let’s get real. To begin with, this bonanza is not a gift from your favorite uncle. It’s merely his grudging return of your overpayments during the prior year. As it was your money all along, treat it as something you worked to attain. Put it where it benefits you the most. And where is this? I’m glad you asked me that question. I know of three ways spare cash can be used effectively.

First of all, get rid of credit card balances. If there’s a single sword of Damocles hanging over our collective heads, it is the unpaid credit card debt for which 120 million Americans now owe $915 billion. With an average balance of $6,194 at 14.58% interest per citizen, is it any wonder many people never get out of the hole? If you’re one of those with an outstanding balance, there’s nothing better you can do than pay it off in full and at once.

And while we’re on the subject, let me add some gratuitous advice. My belief is a credit card serves a single purpose – a convenience when neither check nor cash is handy. Most importantly, when the monthly statement arrives, pay the full cash balance before the date interest is charged. Follow this rule and the interest rate means nothing. If for any reason you cannot regulate your credit card use in this manner, destroy your cards, swear off cold turkey, and fashion your life accordingly.

Next, dispose of other outstanding debt. Do you have an auto loan on which you continue to make payments? Or, perhaps you acquired something you still owe on. If paying it off saves further payments of interest, you’d be wise to do so. Rarely is the interest rate so low it’s worth letting it run. But watch it; some debts are structured with the interest jammed onto the front end, so paying them off early saves nothing.

And finally, save whatever’s left for your future. If, after giving your creditors the final goodbye kiss, anything is still left, I’ll tell you where it should go. It belongs in your handy retirement fund – and if you wisely opened a Roth IRA, it’s the ideal place. In its absence, a traditional IRA will suffice. Admittedly, merely urging you to place money into a retirement account does not reveal what it’s supposed to do there, so I’ll tell you.

Briefly, it belongs in sound interest-bearing securities – money market accounts, bonds, mortgage loans and the like. I’ll concede that current rates are abysmal, but they cannot stay there forever … at least I hope not. This is a subject I feel strongly about because of the long-term benefits attainable from such programs. Although investments in corporate bonds are, by tradition, relegated to wealthy old men, they belong in the portfolios of the young and old, as well as those of the well-to-do and the modestly endowed. And in addition, if the investments are designed to generate compound interest, you’ll find this to be as close to magic as you’ll ever experience.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. Al may be contacted at al@abjacobs.com.