Learning to think like a Rockefeller: how to build your net worth and gain financial independence.

Hello again, dear reader. I know, lately we have been discussing and pontificating on the importance of having an understanding both a physical and mental EDC were everyday carry system. But I think there is a very important part of the mental EDC system that often gets overlooked, especially by young college students (particularly those who have just graduated and now have student loans) or by young adults in general, and sadly, even by not so young adults and that is understanding and taking care of your general finances. This is a very important part of a well functioning mental EDC system. Most people, unfortunately, have a "paycheck mentality" meaning that they only concern themselves with how much immediate finances may have access to IE cash in their bank account whereas financial experts and top business people tend to have an "net worth mentality." This means that they are not just simply concerned with the amount of money they have direct access to, but also the possible value of assets such as stocks, bonds, commodities and other bankable assets along with personal possessions such as jewelry, furniture, art, books, their home and other property or anything else that can be leveraged for financial gain the necessary people that are concerned about their net worth. Know that their money works, while they sleep and having these assets allows them to take risks, such as investing in a new product or starting a new business simply because there will being does not hinge on their paycheck along. By the end of this conversation, dear reader, hopefully you will begin to shift your thinking from a "paycheck mentality" to a "net worth mentality."...

Do you feel like you’re not getting ahead with your finances? That no matter how hard you work or how much extra money you earn, you’re still in the same place as you were a year or even five years ago? It may be that you have the wrong mindset about your finances.

The authors of The Bogleheads’ Guide to Investing (a book inspired by the sage investing principles of Jack Bogle) describe two mentalities when it comes to personal finance: the paycheck mentality and the net worth mentality. A person with a paycheck mentality just focuses on increasing their income in order to increase their wealth. A person with a net worth mentality also seeks to boost their income, but builds their wealth through saving and investing as well.

Pretty straightforward, right? The second path seems like the obvious tack to take. And yet many people are stuck in a paycheck mentality.

The problem, according to the authors, is that it’s easy to conflate income and wealth:

“From the time we are old enough to understand, society conditions us to confuse income with wealth. We believe that doctors, CEOs, professional athletes, and movie actors are rich because they earn high incomes. We judge the economic success of our friends, relatives, and colleagues at work by how much money they earn. Six- and seven-figure salaries are regarded as status symbols of wealth. Although there is a definite relationship between income and wealth, they are very separate and distinct economic measures. Income is how much money you earn in a given period of time. If you earn a million in a year and spend it all, you add nothing to your wealth. You’re just living lavishly. Those who focus only on net income as a measure of economic success are ignoring the most important measuring stick of financial independence. It’s not how much you make, it’s how much you keep.”

Before I read this, I understood the importance of saving money and living frugally, but I hadn’t really thought of income and wealth as distinct concepts. Consequently, I was more focused on increasing my income as opposed to increasing my net worth. I had a paycheck mentality.

After reading the above words of wisdom, and learning more about the best practices of personal finance, I started shifting to a net worth mentality. My primary goal now isn’t just to make more money, but to keep more of it so I can create long-lasting assets and security for myself and my family. Below is a guide to help you make your own shift from a paycheck mentality to a net worth mentality.

The Benefits of a Net Worth Mentality

The paycheck mentality is fragile; the net worth mentality is antifragile. Sure, life is great when you’ve got a steady income coming in. But what happens when that income stream dries up because you get laid off from your job? If you’ve been living paycheck to paycheck, you’re going to find yourself in a real pinch.

The paycheck mentality makes you fragile. Your financial security depends on your income, which is often something you don’t have complete control over, and can be taken away from you at any moment.

A net worth mentality, on the other hand, makes your finances much more robust. You have resources beyond your weekly paycheck, so that if setbacks occur, you can bounce back. And if you save and invest wisely, you’ll not only develop financial resilience, but financial antifragility; instead of merely getting by during times of stress, having money in the bank provides flexibility to take advantage of unforeseen opportunities or to pursue goals.

Wealth grows even when you’re not working. To increase your income you either have to 1) work more or 2) provide more value in some other way to your employer or client. Increasing your wealth, on the other hand, doesn’t necessarily require you to do either of those things. You can simply save more to increase your assets. And at a certain point in your wealth development, your money starts working for you instead of you having to work for it thanks to the power of compound interest. Your wealth will grow even when you’re sleeping or on vacation.

A two-pronged approach builds wealth faster. In the battle to become financially secure, concentrating solely on increasing your income represents a one-dimensional and less effective strategy. In working to boost your net worth as well, you attack debt on two fronts, and build wealth faster.

How to Calculate and Track Your Net Worth

Calculating your net worth is easy. Simply add up all the money you have as well as the value of assets like your home and vehicles, and then subtract your debt. Boom — there’s your net worth.

When it comes to determining the value of your assets, some people recommend including things like personal belongings such as your furniture, jewelry, and even your clothing. But you don't have to do that if you are feeling a bit lazy, but if you want a more accurate picture of your net worth, add those things in as well.

If you don’t want to go through the hassle of figuring out your net worth yourself, just connect all your financial accounts to Mint.com. You can connect all your savings and investment accounts (your assets), as well as your credit cards, student loans, and mortgage accounts (your liabilities). Mint makes tracking your net worth a breeze and generates an up-to-date chart of how it’s increasing or decreasing day-to-day and month-to-month. The goal, of course, is to see the line move in a generally upward trajectory.

How to Start Increasing Your Net Worth Today

Increasing your net worth is just a matter of paying off debt, saving more, and earning more. Simple in concept, but often hard to do. You really have to start playing the long game with your finances when you switch from a paycheck to a net worth mentality. Some months, you’ll barely see your net worth budge. You may even have periods when it decreases significantly. But if you keep working at it, you’ll slowly start seeing your net worth inch up.

Practice frugality. Spending less than you earn is the easiest way to increase your wealth. While you might not have much control over your income, you have significant control over how much you save. So maybe your boss can’t give you a raise this year — start saving more money by going out to eat less or buying fewer clothes.

According to the authors of The Bogleheads’ Guide to Investing, reducing your spending is not only easier, but also more efficient: “For every additional dollar of earnings you plan to save, you will likely have to earn $1.40 because you have to pay income taxes. However, every dollar you don’t spend is a dollar that can be invested.”

Start an emergency fund. Focusing on a big, long-term goal like accumulating a million-dollar net worth can seem so daunting that you’ll just give up on even trying to grow your overall wealth at all. So break your ultimate goal into more manageable micro-goals.

Your first micro-goal towards building your wealth should be establishing an emergency fund. An emergency fund is money for those unexpected setbacks in life and their accompanying bills. Instead of taking on more debt by using your credit card to pay for these expenses, you can use cash from your emergency fund, and if you’re lucky enough not to have to dip into your fund? Well, you’ll be accruing interest (albeit small amounts) in your bank account, thus increasing your net worth.

  Ramsey recommends creating a $1,000 emergency fund before you start paying down your debt. That way, you can use this small cushion for emergency expenses, instead of adding debt by using your credit card. You’d be surprised how easy it is to scrape together $1,000 in savings, even if your income is pretty marginal. People have managed to save $1,000 in two months through a combination of cutting expenses and selling stuff on eBay and Amazon. In short, sacrifice and hustle.

Once you pay down your high-interest consumer debt, you can set the goal of having 3-6 months of basic living expenses in your emergency fund. At this point, the fund is designed to cover a fall into a variety of temporary financial straits, including losing your job.

Pay down your debt. The easiest way to increase your net worth is to simply eliminate any debt from your balance sheets. Again, the beauty of focusing on paying off your debt is that your ability to do so isn’t entirely dependent on your income. You can always find ways to save a bit more and pay down that nut.  Some people, when in aggressive debt demolishing mode, each spaghetti and cheap frozen pizzas for dinner every night. Breakfast and lunch is usually a peanut butter sandwich. They rarely go out to eat or buy new clothes. The money that they save goes directly to paying down their debt, and after a few years of sacrifice, they manage to pay it all off and finally have a positive net worth.

I know for some of you, the idea of paying off your debt in a few years seems downright impossible. But it can be done. I know folks who had over six figures of credit card and student loan debt who paid it all off within five years without a six-figure salary. They just saved like crazy, found ways to earn extra money through side hustles, and funneled all that extra money into getting in the black.

What about your mortgage? If you have one, you don’t need to pay it off as fast as possible. But when you consider that, on average, your mortgage interest payments will tack an additional 100% or more to your loan value; it’s beneficial over the long run to pay less interest to the bank. You can cut your payments in half by following this bit of advice from the The Banker’s Secret: The next time you write your monthly mortgage check, write a second check for the principal-only portion of next month’s payment. In many cases, doing this can allow you to pay off a 30-year mortgage in 15 years.

Start investing in index funds. Once you demolish your debt, start focusing on increasing your net worth through investing. When you’re investing for wealth, you want to think long-term. You’re not trying to make a quick buck through day-trading. Besides being super risky, that sort of “gambling” takes a lot of work and know-how. The average Joe with a day job and family simply doesn’t have time for that. That’s why I recommend that you focus on index funds for your investments. It’s what I do and it’s what several extremely wealthy and smart individuals recommend as well, like the Oracle of Omaha, Mr. Warren Buffet himself.

Index funds provide myriad benefits over traditional stocks and actively managed mutual funds. In fact, research shows that, over the long-haul, index funds outperform actively managed funds. Moreover, you keep more of your money because you pay less in fees and taxes. To compound the tax savings of index funds, hold them in a retirement account like a 401(k) or IRA.

Find ways to increase your immediate income. Thus far we’ve focused on the saving and investing part of creating wealth rather than on increasing your income. That’s because I really want to hit home the point that creating wealth isn’t just a matter of making a lot of money. I want you thinking net worth, not just paycheck. But increasing your income does have a role to play in boosting your net worth, of course.

The fastest and easiest way to increase your income is to ask for a raise from your employer. Lots of guys get sweaty palms just thinking about doing that, but it never hurts to try. Before you sidle into your boss’ office to ask for a paycheck enhancement, do your research and put together a solid case for how you add value to the company.

If it looks like you’ve peaked at your salary level with your current employer, then it’s time to start looking for another job.

And if you’re self-employed, consider raising your rates or increasing the number of clients you take on/products you make/services you offer.

In addition to finding ways to make more money with your day job, look for ways to increase your income by starting a side hustle. A side hustle is something you do to earn money during your spare time when you’re not on the clock at work. The sky’s the limit with side hustles. Just take inventory of your talents and figure out if they could be turned into a product or service for which people are willing to pay. For example, I speak Spanish fluently. So when I was in college, in addition to waiting tables, I also tutored fellow students in Español. All I did to create that side hustle was put up some flyers on bulletin boards around campus with my email address and my rate of $20 an hour. Within days I had several regular clients.

Besides creating a side hustle, another way to increase your income is to sell your old crap on Amazon, Craigslist, eBay, or through an old-fashioned yard sale. Kate and I were able to significantly increase our cash flow by doing this.

Shifting from a paycheck mentality to a net worth mentality is a shift from short-term to long-term thinking. Because the long-term future is so fuzzy and amorphous, it can be hard to plan your finances around something so abstract. But remember: One day an old man will visit you, and that old man will be you. By switching to a net worth mentality, you can be confident that the finances you leave him will be secure.

As always dear reader, thanks for listening, and there will be more to come soon.

Mayday it's not just a springtime holiday: tips to increase your chances of survival during an airplane malfunction.

Hello again, dear reader. During yesterday's conversation, we discussed things that everyone should have in their motor vehicle. As part of their EDC mindset and overall EDC system, however, this thing got me thinking about traveling in general and with summer coming up. I started thinking about vacations and airports, and then of course my logic led me to think about airplanes and how as a well-informed citizen with a well-developed mental EDC system a little knowledge about airplanes and air travel could go a long way to helping you dear reader (not to mention myself), survive an aircraft related incident. Hopefully by the end of this conversation, dear reader, you will have a better understanding of what to do during an aircraft related incident, and you also had a few more bits of knowledge to your mental EDC system......

We often think that plane crashes are catastrophic and un-survivable events. Thanks to movies and 24/7 news channels, the enduring image of a plane crash usually involves an aircraft plummeting to the ground from 30,000 feet and obliterating everyone on board in a terrifying fireball.

Thankfully, that isn’t the case. In a report analyzing airline accidents from 1983 to 2000, the National Transportation Safety Board found that the survival rate of crashes was 95.7%. Sure, there are some accidents where everyone, or nearly everyone, died, but those are much rarer than you’d guess based on what you see in the news. The NTSB found that even in serious accidents where fire and substantial damage occurred, 76.6% of passengers still survived.

Combine those stats with the relative rarity of airplane accidents even happening in the first place (the average American’s chances of being killed in an airplane crash are about 1 in 11 million), and you can see that flying is actually the safest form of transportation there is. Taking to the road on an average day is far more dangerous — it just doesn’t feel like it because you have four (or two) wheels on the ground and a sense of control.

But it’s important to take note of another interesting tidbit that the FAA and NTSB found in their research on plane crashes: 40% of fatalities that did occur happened in crashes that were survivable. Close to half of all airplane crash fatalities might have been prevented had passengers taken proper action.

While the odds of being involved in a plane crash may be slim, they’re not zero. If it happened to you, would you know what to do to increase your chances of walking away? In today’s post we’re going to offer research-backed advice from Ben Sherwood’s The Survivor’s Club on what you can do to make it out of a plane crash alive.

You’ve Only Got 90 Seconds to Get Out

Understanding this is the key ingredient to surviving, and will frame all the other tips in this post. If you’ve survived the crash landing, you have a pretty good chance of getting out of the airplane alive. But, you only have 90 seconds to do so.

You see, the thing that kills most passengers in a plane crash isn’t the actual impact, it’s the fire that typically engulfs the plane afterwards. Folks may be surprised they survived the impact, and become complacent about other dangers. People vastly underestimate how quickly a fire can spread and consume an airplane. Surveys show that most people think they actually have about 30 minutes to get out of a burning plane. The reality is that it takes, on average, just 90 seconds for a fire to burn through the plane’s aluminum fuselage and consume everything and everyone in it. If that sounds scary, it should; you need to be motivated to get your rear end out of the plane!

Be Fit

The FAA has rigorously studied and crunched the numbers on airplane crash survivors, as well as tested nearly 2,500 people in simulated evacuations to find out the type of person who typically survives. Their results?

Young, slender men have the best odds of surviving a plane crash. (Old, fat women have the worst odds — sorry Aunt Myrtle.)

The FAA has found that differences in age, gender, and girth account for 31% of the difference between people’s evacuation times. Escaping a plane crash requires you to maneuver quickly through narrow aisles with luggage and wreckage strung about. You may even have to throw blockages out of your way. You then have to slip through an emergency exit that may only be twenty inches wide. Kind of hard to do if you’re fat and out of shape.

Not only can being out of shape reduce your chances of survival, it could also put other people’s lives at risk because they have to wait for you to exit safely. Hold-ups at the exit due to passengers having trouble deplaning has caused many unnecessary deaths. In a runway collision that occurred in 1991, investigators found the charred remains of 10 passengers lined up in the aisle waiting to leave the wing exit; folks who froze up and had trouble squeezing through the exit had created a fatal bottleneck.

If you’re on the rotund side, make it a goal to shed some of that table muscle so you’ll be fit enough to save your own life and perhaps the lives of others (and not just on a plane, either, but in all kinds of survival situations). We’ve got plenty of workouts on our site to choose from to get started. If you’re looking for more practical and accessible exercise and diet tips, I highly recommend Nerd Fitness.

Fly in Bigger Planes if Possible

If you have the choice between flying in a puddle jumper or a 737, choose the 737. According to FAA investigations, larger planes have more energy absorption in a crash which means you’re subjected to less deadly force, and that may equate to a better survival rate. This fact alone is why I try to fly on Southwest — whose fleet consists only of 737s — whenever possible. The carrier is also rated as the third safest in the world (their recent landing gear malfunction notwithstanding). (Landing gear malfunctions aren’t actually a big deal, by the way.) Also avoid regional carriers if possible — they have an accidents and incidents rate double that of national carriers and their pilots are often less experienced and overworked. Note that national airlines frequently use a regional carrier for some of the routes that fly under their name.

Remember the Five Row Rule

A few years ago, Popular Mechanics put out an article that analyzed every commercial plane crash in the U.S. and where survivors were sitting in each accident. The article’s author concluded that in the event of a crash, the safest place to be sitting was in the back of the plane. After reading that article, I started to sit in the back of airplanes. Come to find out, Popular Mechanics’ conclusion isn’t well supported by expert research.

According to the folks who dedicate their lives to studying plane crashes, the statistics are inconclusive because every plane crash is different. Sure, many crashes are nose-first, thus making the back of the plane safer, but several are tail-first (as with the recent incident in San Francisco) or wing-first. You just don’t know what kind of crash you’ll be in. Instead of worrying about whether your seat is near the back, focus on finding a seat near an exit. According to researcher Ed Galea, those who survive a plane crash typically only have to move an average of five rows to escape. Beyond five rows the chance of getting out alive decreases.

The best seat to have is in the exit row as you’d be the first one out should you need to exit. If you can’t snag that seat, go for the aisle. Not only do you have easier access to the lavatory during flight, you also have a 64% chance of survival compared to the 58% chance you’d have sitting in a window seat. Also avoid bulkhead rows. Sure, you have more leg room, but the walls don’t “give” as much as seats when you collide with them in a crash.

Galea admits that there are exceptions to the Five Row Rule; he’s found people that successfully moved 19 rows to get to an exit. Moreover, even if you’re just two rows away from an exit, there’s always the chance that the exit door will be blocked or jammed. Overall, though, your chances of survival will increase if you’re within five rows of an exit.

Overcome the Normalcy Bias With an Action Plan

As we discussed in detail in our post on why we’re hardwired for sheepdom, we’re all naturally affected by the Normalcy Bias. The Normalcy Bias causes our brains to assume that things will be predictable and normal all the time. When things aren’t normal, it takes our brain a long time to process this. Instead of springing to action when something unexpected happens, our brain kind of shrugs and figures that what is going on can’t be so bad, because truly bad events are so out of the ordinary.

Investigators have discovered that normalcy bias has caused many unnecessary deaths in plane crashes. Instead of taking immediate action after a crash, people sort of mill around. Many will even start looking for their carry-on luggage before getting to the exit.

Normalcy bias manifested itself in dramatic fashion during a plane collision in 1977 that killed 583 people — the worst aircraft disaster in history. Two 747 jumbo jets collided with each other just above the runway on the small island of Tenerife (part of the Canary Islands off of Morocco). After the collision, one jet tumbled to the ground and exploded, killing all 248 passengers on board.

The other jet crash-landed, but didn’t explode. The collision sheared away the top of the jet and flames began to take over the aircraft. Passengers who survived the initial collision could have escaped unharmed, but they had to act fast. Paul Heck, a passenger on the burning plane (who was 65, by the way), sprung to action. He unbuckled his seatbelt, grabbed his wife’s hand, and hightailed it to the nearest exit. They, along with 68 other passengers, survived, while 328 died.

In an interview after the disaster, Mr. Heck noted how most people just sat in their seats acting like everything was fine even after colliding with another plane and seeing the cabin fill with smoke. Researchers believe that passengers had a little over a minute to escape before being consumed by the flames, and are convinced that if more people had taken immediate action instead of remaining in their seats pretending like things were okay, the survival rate would have been much, much higher.

To overcome the normalcy bias, you need to have an action plan on what you’re going to do in the event of an accident every single time you get on the plane. Know where the exits are. When you’ve spotted the nearest exit, count the number of rows between yourself and that row. Should it be nighttime, or the interior lights fail, you won’t have to succumb to confusion because you’ll know right where to go. Size up the passengers around you to see who could be potential roadblocks to your exit. If you’re traveling with kids, talk to your wife about who will be responsible for which kid in the event of an accident. Mentally rehearse quickly springing to action as soon as the plane comes to a stop.

Another reason it’s important to have an action plan is that there’s a good chance you won’t have too much assistance from the flight crew. One study found that 45 percent of the flight attendants in survivable crashes are incapacitated in some way. You need to be ready to take action without direction from anyone.

Read the Safety Card and Listen to the Flight Attendants

Another thing you can do to overcome the Normalcy Bias is to read through the safety card as well as listen to the flight attendants when they give their pre-flight safety spiel. Just because you’ve amassed enough frequent flier miles to circumnavigate the globe 1,000 times, you’re definitely not off the hook. You may think you’re justifiably confident, but you’re probably complacent; in a report published a few years ago, the FAA found that frequent fliers were the least informed on what to do and most susceptible to the normalcy bias in the event of a plane crash.

Re-reading the safety card will remind you where the nearest exits are and what to do during a crash landing. As you read through the safety guidelines, formulate your action plan.

Remember the Plus 3/Minus 8 Rule

In the aviation world, Plus 3/Minus 8 refers to the first three minutes after takeoff and the last eight minutes before landing. According to flight crash investigators, close to 80% of all plane crashes occur during this timeframe (the events leading up to the recent Asiana plane crash happened during the last 8 minutes of descent). In between those times, the chances of a plane crash occurring drop dramatically. Thus, if you want to up your chances of survival, you need to be extra vigilant and ready to take action during the first 3 minutes after takeoff and the last 8 minutes before landing. Here are some suggestions from The Survivor’s Club on what to do and not do during Plus 3/Minus 8:

• Don’t sleep.
• Make sure your shoes are on and secured. If you’re traveling with your wife or girlfriend, make sure she’s wearing flats and not high heels. It’s hard to run in stilettos.
• Don’t drink before getting on a plane. You want to be fully present in the event of a crash.
• Make sure your seatbelt is securely fastened — low and tight.
• Go over your action plan.

You don’t need to be paranoid during this time, just vigilantly relaxed.

Put on Your Oxygen Mask as Soon as It Drops

Airplane cabins are pressurized so you can breathe normally at 30,000 feet. When a cabin loses pressure, there’s so little air at high altitudes that getting oxygen to your bloodstream is next to impossible. That’s where oxygen masks come in. They pump pure oxygen into your nose and mouth so that you can get the air you need.

In an event where the mask drops from above, put it on as soon as it drops. According to passenger studies, most folks think they can survive an hour without a mask after a plane loses pressure. You actually just have a few seconds. Just a few seconds of oxygen deprivation can cause mental impairment. If you want get out of a crashed airplane alive, you’ll want all your mental faculties intact when it lands. Also, follow the safety guidelines of securing your mask first before helping others secure theirs. You’re pretty much useless to others if you’re not getting oxygen to your brain.

Assume Brace Position

I always thought the brace positions were kind of silly. There’s no way that curling up in a ball would help you survive in a plane crash. But research has shown that brace positions do indeed up the chances of survival in an emergency crash landing. The positions help reduce the velocity of your head when it inevitably slams into the seat in front of you. Moreover, they help minimize limb flailing.

Also, make sure your seatbelt is securely fastened — low and tight — over your lap. Those bad boys are designed to withstand 3,000 pounds of force, which is about three times as much as your body could handle without passing out. You can trust ’em.

Forget Your Carry On Luggage, Remember the Kids

Alright. The plane has crash landed and you’re still alive. Time to get to those exits as fast as you can. Remember, you only have 90 seconds.

Believe it or not, you need to be reminded to forget your carry-on luggage! It will slow you down and block others’ escape, and it may injure you or someone else if you try to get down the very steep inflatable slides with it. You can get another iPad when you return safely to your home.

In your rush to get out of the plane, don’t forget your kids. That actually happens. Your brain does stupid things in disasters. Keep reminding yourself, “I have kids. I have kids. I have kids.” Ideally, you should have a plan with your wife and kids on who those with whom in case of an emergency exit.

As always, dear reader, thanks for listening, and there will be more to come soon.