Creating Wealth – Avoid these 3 Mistakes

by Neal Frankle, CFP ®

If you’re interested in creating wealth, it’s a good idea to study the people who achieved financial success. Of course it’s important to have great entrepreneurial ideas. But it’s also important to learn from the people who had wealth and lost it. Here is one story that provides three invaluable lessons:

Peter and the Wolf

Peter started his mail order business out of his basement 15 years ago with $50,000. He borrowed the money inexpensively from his father-in-law. He worked hard and managed his small business well. Because he closely followed the bookkeeping, he knew which products were profit-makers and which were duds. He plowed profits back into the business and it grew quickly. After 10 years of hard work, Peter had over $5 million in annual sales.

Cash was coming in by the truckload. That’s when the trouble started. Peter started thinking of himself like a rock star. He saw the cash coming in but forgot to watch the bottom line. Soon his wonderful business was generating losses because his expenses were just crazy. He flew around in private jets. He made large political contributions he couldn’t afford in order to hobnob with dignitaries. He even had a picture of himself with Governors from several states taken at fundraisers he sponsored. Peter also started engaging in behaviors that eventually led to his wife and children leaving him.

But even that wasn’t enough to wake him up. He forgot the secret of being self-employed (to serve people who need your product or service and put them first.) Peter totally identified with his business and wanted it to grow to match his inflated ego.

He started from scratch taking big risks and was comfortable with that approach. So he put everything on the line just like he had done over the last 15 years in order to take the business to the next level.

This time however, it didn’t work. He failed to do his homework. Sales didn’t come in fast enough to cover his growing expenses. Even though the business looked great on paper, it developed a large negative cash flow. He plowed more and more of his own money into the business to keep it afloat. Eventually the business went under, taking most of Peter’s wealth with it.

What wealth lessons can we learn from Peter?

1. Don’t be a big shot.

Humility is really a very valuable skill in the business world. Do whatever you need to do to hold to your humility. Work with homeless people. Clean gutters for low-income people. Teach English to new immigrants. Just get out there and be of service to people who have less than you. Besides being a nice thing, it’s critical that you do whatever you need to do to stay humble and keep your feet on the ground.

“Bigshotism” ruined Peter. Because he became a legend in his own mind, he forgot to pay attention to the details of running his small business. Don’t let that happen to you.

2. Bookkeeping is the heartbeat of your financial success.

No matter what business you are in (even if you aren’t in business for yourself), you should do the budgeting for the business. This keeps you in touch with what’s happening to your cash flow (which is the lifeblood of your financial success). And if you aren’t a small business owner, this advice still pertains to you. In order to create wealth, you have to earn more than you spend. It’s just that simple. You can’t do that unless you track your spending and adjust for ups and downs in your income.

3. Invest wisely.

For years, Peter invested smart. He plowed money back into his business wisely. But after a while, he got lazy. He took a huge, unwarranted risk to satisfy his ego. He wasn’t willing to see his business fail, so he blindly threw cash at it. Had he done his homework, he would have known that the expense he was going to incur as a result of the steps he was about to take was simply too much.

Our lessons? Be mindful of your financial behavior. Never invest to satisfy your ego or because you are lazy. Even if you hire a financial advisor, make sure you understand the investments he or she is recommending and stay on top of what’s happening in your portfolio.

What lessons have you learned from the mistakes of others (or yourself)? Were they lasting lessons?

 

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{ 5 comments… read them below or add one }

Ginger June 24, 2011 at 1:26 PM

In any business, the bottom line is cash flow. I see this in real estate all the time, people count on the depreciation for cash flow, instead of just counting the cash.

Reply

Alex June 15, 2011 at 12:36 AM

Great post. I especially liked the first point about not being a big shot. This is surely the most difficult thing to achieve, considering today’s influence of the media, and what many people think that have to be in order to be successful.

Cheers.

Reply

Neal Frankle June 15, 2011 at 6:16 AM

Alex,

Right you are. Humility doesn’t seem to be a virtue that’s espoused these days. Thanks for pointing that out.

Best, Neal

Reply

InvestSmartGirl June 10, 2011 at 10:33 AM

Like cashflowmantra said, the importance of cash flow cannot be over emphasized. Just as important as establishing and maintaining a cash flow, is the ability to record accurate record of finances and expenses both coming in and going out of your company. Reliable bookkeeping is the most efficient way to track down spending and to prioritize what is most beneficial within your company so you have the ability to make more informed and carefully thought out decisions regarding your business budget.

Reply

cashflowmantra June 7, 2011 at 2:51 AM

Very good lessons in this story. Humility and keeping the customer first and foremost is very important. Plus, the importance of cash flow cannot be overemphasized.

Reply

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