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Howard's End: Making Smart Money

There are hundreds of " how to" books about becoming fabulously wealthy and most of us want to be. But, let's face it, most will only be comfortable at best until we reach retirement age. So how can we start thinking now, about generating a stream of income which does not depend on the impossible dream of 20% per year compound growth in the share market. Start young, a 50's something Maree Howard suggests.

The first step to being financially comfortable is to give up the dream that someone else will be responsible for you, other than your current or future children. If you want to minimise the burden placed on them, you must find ways to stay independent. Most of us never plan for this.

For most people, their jobs are their main source of income. They think they will be able to substitute leisure for work at aged 65, and still maintain their lifestyle. They're wrong.

I have a friend who told me a story about how an experienced salesman once asked if she wanted to learn the secret for making 20% more income. He charged her $10 to get the answer. He gave her the secret, "Work 20% longer."

My friend told me the story, not to complain about having been cheated, but because she saw the truth in the advice. That is, to increase your income you must increase your output. That $10 drove this truth home to her.

Another way of putting it is this. You can be a success if you're willing to work half a day, six days a week, and it doesn't matter which half.

So, the investment of time is the decisive factor in a person's success.

Let's look at the dynamics that time is money.

The typical kiwi worker invests fewer than eight hours a day "hard time" at their job. That statement is not meant to be inflammatory - it's normal.

Most kiwi's get paid for an eight hour day but we have a slowdown period at the end of the day in which we are not efficient. Don't worry, it's expected and it is factored into wages paid by employers.

But employers also expect management and salaried people to put in lots of unpaid overtime. Tens of thousands are expected to "donate" this time as a condition of employment.

Here is my advice: unless you are working on commission, don't submit to long-term employment by any company which makes you work more than 40 hours a week.

Here's why. You are not working for yourself, you are working for a third party. You are not buying loyalty with your extra time - there is very little corporate loyalty downward any more. Business competition is to stiff. Even in Japan the old time tradition of lifetime employment with one firm has gone.

If you have to put in extra hours in order to learn the basics of the business, OK, do it, but not for more than two or three years. If you are under 30 you can afford this. Otherwise, it is a mistake.

Those extra 20 hours a week, plus Saturday's, are your key to long-term success. You dare not allow your employer to extract those extra hours from you for free - those hours are your seed capital.

Most kiwi's don't have a lot of extra money, but most of us have a lot of spare time. The old saying "Time is money" is right. If you don't have one kind of capital (money) you have another kind (time).

So, what we now know, is that the discipline of time management plus time investment will consistently produce above-average results. Over time, the prudent investment of a high portion of these "incomes" does produce wealth.

Therefore, your time is your resource for perhaps developing your own small business. It may remain a weekend business or it may grow to be your primary source of income - but it is yours.

Instead of being economically dependent on your employer, you are then dependent on many employers - your customers.

If one of them decides to drop you, you're not in instant crisis mode. You have spread your risk of being sacked or made redundant across a whole lot of employers (customers.)

In investment circles that is called portfolio diversification and running your own small business is the best form of asset diversification. You are in charge of the product and your customer are in charge of the money. You can work out deals with them.

But many see the start-up costs as too high. They see the required investment of time as too great. They see the trouble of dealing with lots of customers.

But think about it. These restrictions are like money in the bank because they serve as barriers to entry against would-be competitors.

Most people prefer to exchange uncertainty for reduced income. They prefer to allow someone else to deal with most of the uncertainties. They prefer to take a guaranteed income. In the old days, this decision also bought them security of employment - not any longer.

Today, the senior managers of a company look at some 40-year-old and think: "This guy is over the hill, he's peeked-out, he'll win no more races. We can send him out to pasture and put our money on a younger race-horse. And even if the younger guy doesn't turn out, we can replace him."

It might all sound economically rational to the company managers - as long as your competitors aren't just standing there, ready to hire your experienced workers who have just been laid off. These days they aren't - they're also out there looking for younger race-horses.

The employer’s basic rule is this - never hire a person who will not earn at least twice his cost of employment. If you must pay him $20 a hour, you must find a way to generate a minimum $40/hour from him. If you can find this, you hire and keep the balance after costs.

The person who starts his own small business looks at that forfeited money and thinks: "I can keep that extra income for myself. I can put it back into my own business. I don't need to turn it over to somebody else's company for the next 40 years. I can increase my management skills on the job. If I can actually achieve this increase in business-management productivity, I can then hire other people who are willing to pay me 50% of their pre-tax income for shielding them from the uncertainties of running a business."

Of course there are stories where even thrifty people suffer a catastrophe and lose their money. But the relationship between high input and high output is generally closer than the relationship between low input and high output.

In one sense the small business owner is not diversified - all his eggs are in one basket. In another sense, they are diversified in that they are not dependent on the continuing favour of just one employer.

In a future column I hope to write about the joy of compound growth investment. If investor A begins saving at aged 19, and investor B begins at aged 27, investor A can stop investing at aged 26 and still have more money than investor B at aged 65.

It doesn't matter what the rate of return is - if they both earn the same rate of return, the 19-26 investor beats the 26-65 investor.

The point is: with compound growth investment/saving, earlier is better, way better - even on the interest earned in your bank account.

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