I’m on an airplane flying back from 8 days in Cancun as I write this.
I’m excited to get back to work and see the kids (we leave them with a nanny when Tiffani and I travel)…but I’m sad to say goodbye to the beauty of Cancun.
One of the items I have on my vision board is kiteboarding, so I wanted to take some time in Cancun to learn how. I’ve heard it’s dangerous, and I’ve seen some YouTube videos of people flying away, crashing into trees and cliffs, so I knew it wouldn’t be easy…or even safe for that matter.
I picked it up pretty quickly after a day of lessons and was able to get up and ride. I did get pretty torn up, with cuts all over my legs and feet, and I got tossed into the sandbar pretty violently…and at one point I thought I was going to drown, but that’s another story. Overall, it was a blast learning how to do it, and I’m chomping at the bit to get back to Cancun and do it again.
While there we were offered by our resort, the ‘opportunity’ to learn more about their properties and they promised 2 free massages on the beach for our time.
The couple’s massages on the beach was awesome. It was a wonderful experience I highly recommend:).
But I digress, I like listening to sales pitches every once in a while because I’ve always been fascinated by persuasion and human psychology. I like to see what these companies do in their presentations. I’m always a student trying to learn as much as I can.
So we went ahead with the presentation knowing it would be a timeshare pitch. My wife loves looking at resorts so she was excited about it.
Long story short, by the end of the presentation I had to politely tell the folks multiple times that I wasn’t interested, and that I just pay cash for all my vacations whenever I travel.
The one lady commented “that’s weird” and the other gentleman didn’t seem to understand, but I didn’t try to explain it. I just kept telling them thanks, but no thanks.
The reason why I never buy time shares is because of the way I was taught to think about money by my wealthy mentors.
It’s a whole new perspective on spending that most people never understand about making their money work for them instead of them working for their money for the rest of their lives. This one concept is the single most important reason why people stay poor.
So let’s dive in.
There are three major paradigm shifts, I call them prosperity perspectives, that I think will be beneficial.
#1: COUNTING THE TOTAL COST
The first is what I call counting ALL the costs of a purchase, the TOTAL COST.
When we want something emotionally we tend to down play the cost of something in order to justify it to ourselves. We choose to ignore the total cost, or minimize those costs.
The best way to control our money emotions is to put down in black and white on paper, what the costs are so we can’t justify them away.
In this case the timeshare points they were offering cost $15,000. Of course the sales pitch minimized the cost by showing zero percent interest and small monthly payments of just $400 for some period of time.
But upon looking closer, there was actually a $1500 closing cost fee, plus 16% tax. Once you factor those costs in what looked like a $15,000 purchase is now about $20,000. About $5,000 MORE than the initial price.
But it doesn’t end there. There’s a $600 per year maintenance fee, a $220 per year Interval International fee if you want to trade to go to a place you want to go, and a $110 per year fee if you don’t want to use your points but want to push them to next year, which is a benefit they promoted heavily…but if you don’t use it you lose it.
Those three fees add another $930 to the cost of the timeshares, plus the maintenance fees can, and usually do, go up over time.
Most people never have the financial savvy or discipline to look at all the expenses of a purchase like this, but when you do, you’ll be able to count the TOTAL cost of the purchase, which gives you more clarity in making a good decision.
But this is just the beginning…
#2: TRUE PRE-TAX EXPENSE
The second prosperity perspective is considering the TRUE PRE-TAX EXPENSE of the purchase.
This was taught to me by my grandfather years ago. The point is that you are using AFTER TAX dollars to make most purchases. (One of many major benefits of owning a company is that you can buy some things pretax as a business expense. This is a concept we will talk more about next month.)
The true pre-tax expense of the purchase is figured by taking the TOTAL COST of the purchase (which we covered in the first concept) and figuring out how much pre-tax money you have to earn in order to pay for it.
For example, if I was in a 39.5% tax bracket, plus 6% state taxes, I’m paying a full 45.5% tax on the discretionary money I would be using to make this purchase.
So what does this mean? It means this purchase will cost me 45.5% more than the sticker price. In real dollars that means this $20,000 purchase really cost me $37,000. I would have to do the work to earn $37,000 in order to pay for a ‘$400’ per month payment!
This gets my attention! It also helps me think clearly about just how expensive this purchase will be. It also helps me get unemotional when deciding if I want to spend my money on that item.
(I didn’t take the time to explain this concept to the sales people pitching the sale, because it would be over their heads, but since you are part of the Safe Money Millionaire tribe, this is the kind of information we share with our insiders.)
Now if $37,000 for a $15,000 time share doesn’t get your attention, the next perspective should.
#3 TRUE OPPORTUNITY COST
The third prosperity perspective is the most compelling for me personally. It’s called the True Opportunity Cost
I’ll let you in on a weakness. I’m not proud of this, and maybe I shouldn’t reveal such personal flaws, but here goes…I like to spend money. I like buying things, traveling, and experiencing adventures. I work hard, but I like playing hard even more.
Now, even though I like spending money, I also like making money, and having my money make me money.
If you ever watch the TV show Shark Tank (which I highly recommend if you are in business for yourself, or would like to be,) Mr. Wonderful often says “Money speaks to me.” I feel the same way about growing my wealth.
So here’s how True Opportunity Cost works, and this is, for me, the most powerful tool I use when deciding whether to save or spend.
I have to give my father full credit for teaching me about this. In fact, last night I went to pick up my 9 year old son from baseball practice. It was the first practice of the season and when I picked him up I expected to see my usually very happy boy, and instead he was crying.
I was shocked. “What happened?” I asked.
“Dax was swearing at me, and calling me names all practice long, and he was throwing dirt at me.” Joshua said.
I know this kid Daxton. He was on our team last year and he’s the most disrespectful child I think I’ve ever met. While we were warming up for tryouts he and his father were throwing the ball close to us and he repeatedly told his dad to Shut Up, and was even swearing at his own father. I was appalled. I would have been spanked and grounded for the rest of my life if I had ever even taken that tone with my father, much less swearing at my own dad. I would have never dreamed of doing it for fear of my life.
So obviously there was a problem with this kid not getting disciplined, but when it is directed at my son, and other kids on the team, I am not going to put up with it.
4 other parents came over to me after Joshua shared this with me, and told me other boys were crying too because Dax was yelling and swearing at everyone.
So I told Joshua he needs to be tough enough to handle this kind of stuff, because it’s not going to be the last time someone is mean to him. If he tells the kid to shut up and he keeps bullying him, I will never be upset if he stands up for himself. If he needs to punch the kid in the mouth to get him to shut up, then he needs to do it. I spoke with the coach and then when we got home I called Dax’s dad. As calmly as possible I told him this behavior was outrageous, that his kid was totally disrespectful and there was no way it was acceptable for a 9 year old to be swearing at his teammates.
His dad claimed to not know anything about it, even though he was there during the entire practice (I was not unfortunately). He didn’t have Dax apologize either, which didn’t surprise me based on what I know about this family.
After I calmed down, Tiffani (my wife) and I were talking about how it is really sad for Dax, because he’s crying out for some discipline, and without it he’s going to ruin his life. We agreed we were both blessed to have good fathers and mothers in our lives.
Yesterday was my father’s 61st birthday. I sent him a text telling him happy birthday and how much I love and appreciate him. Much of my financial success is a direct result of what I learned from him and this principle of TRUE OPPORTUNITY COST is one he always reinforced to me.
Here’s the formula:
Step 1: (Cost of Purchase X Rate of Return) = (Annual interest earned)
Step 2: (Annual Interest earned) X (Years left in your life) = (interest opportunity cost)
Step 3: (Interest opportunity Cost) + (Cost of purchase) = Total Opportunity Cost
Let’s continue with our example of the timeshare. We take the $20,000 and instead of spending it on a timeshare, I take that money and invest it at 15% (which I routinely do using some of our Prosperity Black Box Strategies), that nets me $3000 per year.
That’s $3000 I could be earning every year for the rest of my life, let’s say 40 more years. So that’s $120,000 down the drain. Plus the initial $20,000 I would have lost by spending it. So now that $20,000 purchase cost me $140,000.
Timeshare example: ($20,000 X .15) = $3000 per year. $3000 X 40 years = $120,000
$120,000+ $20,000 =Total Opportunity cost of $140,000.
Here’s another, perhaps simpler way of looking at it
If I keep that $20,000 working for me at 15% interest, I would earn $3000 per year. Plus I’m saving $900 per year not having a maintenance and exchange fees on the time share.
So now I’m up $3900 per year by NOT buying this time share.
You can stay in a pretty decent hotel for 7 nights at $300 per night. That’s $2100. Then you can buy two airline tickets at $500 each and STILL come out ahead at $3100. PLUS you still have your $20,000 working for you! So your $20,000 can basically send you on a free vacation every year for the rest of your life.
This is how the wealthy think. They keep their principle working for them, and if they are going to spend, they spend the earnings.
If all you did was adopt these three concepts in your financial life and teach them to your kids and family, you can change your family’s financial future forever.
It most certainly has changed mine.
To Freedom, Prosperity and Independence,
Brett Kitchen
P.S. To get another perspective on how the wealthy think, if you haven’t read the Millionaire Next Door, by Dr. Thomas Stanley, you should pick that up today and read it.
P.P.S. Some might say “That’s great but what if I can’t get 15% on my money?” My response is simple. Learn how!
Don’t settle for next to nothing in a bank account, or stuffing your money in a mattress, there are proven ways to get a good rate of return on your money, without gambling in the stock market.
Our brand new training Prosperity Black Box shares multiple strategies to grow your wealth; you can check it out at www.prosperityblackbox.com.
