Generational Wealth

Too often I see people spending their money frivolously, and I admit, I’ve done it myself. Spending money is usually fun. Yet fundamentally, wasteful spending satisfies a short-term desire, often at the expense of long-term success. In other words, there’s an opportunity cost.

In the early years of my career I worked at several leading financial institutions, providing operational and technical support to fixed income traders. These were high-net-worth individuals, many of whom grew up in high-net-worth households. So whenever I got an opportunity, I would ask questions in an effort to expand my knowledge. The traders would often tell me things like:

  1. “Don’t take risks with your money; take risks with other people’s money,” and
  2. “Accumulate principal, then live off the interest – never, ever spend the principal.

The first point is an example of the risk taking philosophy of many people who accumulate significant wealth by using the financial resources of others. This includes corporate resources used to create profits; the more profits one creates for a company, typically, the larger income one can demand. “Other people’s money” also includes client resources: it’s no secret that wealthy hedge fund managers did not simply accumulate their wealth because they’re great investors. They magnified their wealth by charging a 2% fee on assets under management (AUM) and 20% on profits. So the first key is getting AUM (aka “other people’s money”), and keeping it long-term. To reiterate, this does not require one to be a great investor, but rather a great marketer.

The second point is the philosophy of many people who accumulated a large amount of wealth, whether on their own, or from family wealth passed to them. Irrespective of how wealth is accumulated or how much wealth one accrues, if one does not manage their money well, they can blow a fortune.

“…just look at the latest news headlines. I’m sure you’ll see an article about a down- and-out famous movie star, or a current or former professional athlete who has recently declared bankruptcy.”

-Gregory Collier, The Janitor’s Sons: A True Story of Hope, Shattered Dreams, and Winning Despite Adversity © 2012 by Gregory Collier.

Creating generational wealth does not require one to become the next Bill Gates and accumulate a large net worth via the price increase of a single stock. If one manages their financial resources well (including managing risks) and saves and invests for the future, they can establish the basis of generational wealth for their family.



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Ghetto Economics

My family didn’t move to the ghetto when we relocated from Brooklyn to Detroit. But by the time I moved out of Detroit, my neighborhood had a large amount of crime — it had become the ghetto. Even if I had spent my entire childhood in the most decrepit ghetto in America, it’s irrelevant. It doesn’t matter where you come from — what matters is where you’re going.

While education can help one achieve a level of financial success, good financial management can help one enjoy prosperity for an entire lifetime. In fact, good financial management can help future generations of a family capitalize on opportunities, and bask in the joy of success. This requires managing wealth with knowledge, skill, and appropriate risk management. Conversely, poor financial management can wipe out a fortune and potentially destroy one’s life.

I know many people who consistently earn large incomes. None live in the ghetto, but many have a ghetto mentality when it comes to managing their finances. “Ghetto Economics” is not limited to minorities living in urban areas. I can introduce you to numerous suburban white people who are as “ghetto as hell” when it comes to managing their wealth.

Class is open, please take notes. This is Ghetto Economics 101. Your final grade in this class is based on whether you succeed or fail economically. There are Ivy League MBAs who’ve failed this course, while folks who’ve never taken a college class earned an A. It’s not simply one’s level of education that makes them good at managing their wealth; devotion to using good wealth management principles is required.

Yet, probably the most important factor for continued prosperity is one’s ability to manage any emotional propensity to make poor economic decisions. There are PhDs in business and economics who cannot manage their money because emotions dominate their thoughts. This is practically the same as a medical doctor who’s overweight, smokes two packs of cigarettes a day, and never exercises.

If you do the following things, you are “ghetto as hell,” regardless of your income level. Unless you avoid these pitfalls, you deserve an F in this class, and failing this class may lead to failing in life.

1.      Spend all of your money and save nothing

One way to help achieve this is to attempt to keep up with the Joneses; that is, buy things because someone you know has them. Another way to achieve this is to become a connoisseur of the finer things in life when you can’t afford them: expensive automobiles, McMansions, expensive vacations, and designer clothes.

Even people who earn massive amounts of money can go broke — just look at the latest news headlines. I’m sure you’ll see an article about a down- and-out famous movie star, or a current or former professional athlete who has recently declared bankruptcy. A way to avoid going broke is to maintain a budget and manage your finances meticulously. If necessary, you may need to aggressively alter individual and/or family spending habits in an effort to thrive financially. This may require distancing yourself from friends and family members, and may even cause divorce.

2.      Get payday loans or otherwise use credit poorly

 By spending money you have not yet earned, not only will you waste money on finance charges, you’re on a path to ensuring you remain broke. Every dollar spent on finance charges is one less dollar available to save and invest for the future. Bad things often happen to good people, but good people make bad things happen to themselves when they spend money they don’t have.

Ideally, the full balance owed on a credit card should be paid off each month. The only debt that is “good debt” is that which earns a greater return than the cost of the debt. Many financial advisors consider the purchase of one’s primary home “good debt,” as a long-term investment in real estate tends to rise in value over the long term (that is, many years). Children should educate themselves on using credit wisely, so by the time they are young adults, they’ll understand the optimal uses of credit, as well as the risks. (Adults should educate themselves on this too.)

Using credit poorly can easily lead to having bad credit; this is not good for any reason. Whether due to a catastrophic circumstance, or living a lifestyle of the rich and famous, bad credit is typically a roadblock to success. This can ensure you don’t quality for credit in the future, and prevent you from being able to purchase a home or vehicle. At a minimum, bad credit may require one to pay an extremely high interest rate when approved for a loan or credit card.

Good credit is often a prerequisite for many job opportunities, as many employers consider bad credit a sign of incompetence. Also, from the point of view of many potential employers, someone with poor credit is a risk to a company. Such individuals are often desperate to dig themselves out of a financial hole, and therefore, lack the ability to focus fully on a job.

Long-term strategic financial planning can help individuals and families avoid financial disaster. Some keys are to have the appropriate type and amount of insurance coverage, as well as a savings plan for the future.

3.      Drop out of high school or college

This is a prudent strategy if you aspire to limit your career options and earning potential. The statistics on education and lifetime earning power tell a compelling story of why education is important. Though there are financially successful people who drop out of high school or college (or don’t attend college), I doubt any of the wealthiest people in the world would honestly advise anyone to drop out of high school or college. If I ever meet Bill Gates, I will ask him about this.

4.      Rest on your laurels

 Some people stop working hard once they attain a level of success. This includes those who think education ends the day they graduate from high school or college:   they never focus on learning new things. Many such individuals watch in disgust as the world changes and their nice, safe jobs go by way of the dinosaur — to extinction.

Most often, it is those who continue to expand their horizons who achieve at the highest levels. Whether earning an advanced degree, professional certification, or otherwise enduring the pain associated with striving for a higher level of achievement, one should never rest on their laurels.

If you achieve all of these points, you are well on your way to having a miserable life. If you achieve just one or two of these points, you’re in luck: you still qualify for potential misery. Ghetto economics dominates the lives of many people. In fact, it dominates the spending habits of many local and national governments. Alas, the world has embraced ghetto economics — now much of the world finds itself in peril. Please take my words to heart for your own good: save and invest for the future — and never spend more money than you earn. 

 “To whom you give your money, you give your power.”

—W.E.B. Dubois

Excerpt from The Janitor’s Sons: A True Story of Hope, Shattered Dreams, and Winning Despite Adversity © 2012 by Gregory Collier. All Rights Reserved.

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Educate yourself on Finance!

Everyone should study finance. Quite possibly, it is the most important thing people should learn and teach their children, especially behavioral finance, that is, how emotional factors can impact financial decisions. If more people actually understood finance, I doubt there would have been a global financial crisis.

When I moved into a technology role on Wall Street, many of my coworkers laughed at me because I have a MBA in Finance. Little did most of them understand that many of the senior most technology managers on Wall Street hold MBAs, including the global head of IT at the company where I worked at the time. Now many of my former coworkers question why they didn’t continue to educate themselves (especially in finance).

I didn’t get a MBA to get a higher paying job in corporate America, though higher compensation did come. I did it because I wanted to acquire the same level of formal education many CEOs of the world’s leading companies have. This would not guarantee I rise to the level of CEO, but it would ensure I possessed additional tools with which to capitalize on opportunities.

I also chose to study finance because I sincerely believe the more one knows about finance, the better their life will be. As an example, having started my career in fixed income, I’ve become knowledgeable on the subject. This helps me to structure scenarios whereby individuals can use their money to make money, and based on their level of risk aversion. To structure a bond purchase that allows the accrued interest received to pay all or part of one’s living expenses is a win-win situation. This is a strategy often used by the rich and powerful — those who most often have educated themselves on finance.

Take time to study finance and control your destiny.

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Banking: The Besieged Profession

A former co-worker told me, “bankers get a bad rap.”

I disagree! Bankers deserve criticism. However, my former co-worker is correct that bankers get much more criticism than the general public and government in regards to the global financial crisis.

So why does it seem like banking is “public enemy number one?” Because in banking, even with just a hand-full of bad people with decision making authority, you have a recipe for disaster. This also holds true when there are good people in leadership roles who make bad decisions.

I worked at investment banks for nearly 20 years, and had business dealings with numerous commercial bankers as an entrepreneur, consultant, and on a personal level. I can say from first-hand experience, most bankers are hard working and honest people. But often endemic in business is a financial incentive to be devious – an incentive clearly present in banking.

What profession other than “check cashing stores” so aggressively targets the poor, uneducated, and vulnerable?

Of the investment banks I worked for that also had commercial banking units; each one was sued by governmental bodies for predatory lending while I worked there. Many of the cases were settled for significant monetary damages, with the banks admitting no wrong doing.

To give banks the benefit of the doubt, certainly some of the lawsuits against them were frivolous – but not all; at minimum, some were culpable of aggressively seeking profits with a blatant disregard for ethics. Banks are profit seeking entities. However, to what extent must one go in order to achieve profitability? The answer to this question depends on who you ask. It was apparent to me in my days on Wall Street, as it is now to the global masses, that some banks will go to nearly any extent to maximize revenue.

So now bankers must work hard to re-build public trust. It doesn’t help that a British bank was recently fined £290 million for attempting to fix the London interbank offered rate (LIBOR). The same bank now faces new charges for allegedly selling interest rate swaps to small businesses. The interest rate swaps were designed to protect against interest rate volatility, however, in numerous cases the buyers of the swaps were crippled by them – many lacked the capacity to understand the complexity of the transaction they were entering.

To reiterate, not all banks are bad, and not all bankers are evil. But just like there’s a heaven, there’s also a hell. Evil bankers created their own purgatory, and in doing so besieged the entire banking industry, and the world for that matter. It’s up to the good banks and honest bankers to always serve their clients with honesty and integrity. Only then will the trust of the public be restored, if this is even possible.

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Racial Profiling

The murder of Trayvon Martin on February 26, 2012, is a reminder that African Americans are often the victims of racial profiling, not just by the police, but by many in society.

In the early 1990’s, I worked a grueling job at an investment bank in New York City. Often, when I took a day off or had a vacation, I would stay in New York and do things I rarely got to do because I was always working. On one such day, I sat at the Pulitzer Fountain, across the street from the Plaza Hotel at Central Park South and Fifth Avenue. As I read a book and enjoyed my day, I made an observation. New York City police were stopping black drivers and giving them tickets. Though more than 90% of the vehicles I observed were driven by whites or Hispanics, the police only stopped black drivers. By definition, this was racial profiling.

There were two white police officers parked beside the Plaza Hotel. As cars drove eastbound in gridlock traffic on 58th Street, the officers stopped some of them for what I presume was running a stop sign. Though the cars couldn’t move faster than five miles an hour, the officers aggressively issued tickets. This helped ensure the police met their quota of tickets for the month.

In the opinion of many, there is an unwritten rule that New York City police must issue a certain number of tickets. This helps produce revenue for the city and increases the paperwork of police officers, thereby helping increase overtime pay. Ultimately, this inflates a police officer’s pension benefits at retirement if the current year is part of their pensionable earnings calculation.

After observing this pattern of racial profiling, I started taking notes. At one point, two black men in a commercial van were stopped. After what appeared to be a brief argument between the men and the police officers, the men were handcuffed and placed in the back seat of the police car. I approached the police car and wrote down its license plate number and car number. Then, an officer approached me and asked me what I was doing. Without replying, I wrote down the officer’s badge number. He then boastfully said,” I’m Officer McMurray,” and pointed to his name tag.

I replied, “I’m fine-tuning my documentation so I can report you.”

Officer McMurray replied, “Do you realize what a difficult job this is? We put our life on the line every day!”

I did not respond, but kept writing notes. The police could have harassed me or possibly arrested me for some bogus charge. However, they were scared. They knew what they were doing was wrong. They also clearly saw I was not intimidated.

The police got in their vehicle and drove off with the two black men in the back seat. As I watched, it appeared they were having a discussion. Before they got to the next corner, they stopped their car and let the two black men go – they were free. The police officers then drove away. As the black men walked back to their van, they thanked me.

The most dangerous thing to be in America is not a police officer or firefighter, it’s a black man. I don’t claim to know a solution to this, nor do I accept the fact that this will always be the case. However, to force change, blacks must be vigilant in removing the target clearly placed on us by some – we can’t expect others to do it for us.

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President Obama, the Antithesis of Arrogance

Yesterday I met President Barack Obama prior to his speech at a luncheon in Coral Gables, Florida.  What was extra special is I was able to bring my five year old son, Bradley – his second time meeting the President.  What amazes me most about President Obama is his genuine lack of ego – the antithesis of arrogance. Despite handling the most difficult job in the world, among a frenzy of people trying to shake hands and take photographs, he took the time to take a personal photo with my son, creating a cherished memory for my lineage.

I’ve been active in politics for decades, but in the midst of the global financial crisis, I became much more active. The future of America requires leadership and participation by people committed to doing the right thing. I can’t compare my level of service to some, but I have to do my part. Much of my attitude is inspired by President Obama.

Over the years I’ve met many business leaders and politicians. A few traits stand out among many: selfishness and arrogance. However, in President Obama I see a lack of  selfishness, combined with pride and a passion to do the right thing – helping all of us win, not one of us win at the expense of others.

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No More Hazing

The recent death of Robert Champion, a band member at the historically black university, Florida A&M, has created national attention on the topic of hazing. Allegedly, Champion was hazed prior to his death. The absurd practice of hazing, which from my experience is endemic in Greek letter organizations, clubs and bands, must end. Whether a verbal assault, psychological harassment, or assault with a paddle, cane or fist, hazing must go by way of the dinosaur.

Decades ago, I spoke with a Florida State University professor, the late Dr. Charles Billings, who hailed from my home town of Detroit, Michigan. Dr. Billings talked about his experience pledging a predominantly black fraternity at the University of Michigan in the 1950’s. He spoke about how his pledge class had to carry bricks everywhere they went.  As he held a brick in his hand, a member of the fraternity pushed the brick towards his face with such force, that a tooth penetrated his lip and the brick. Though he had a physical scar, the scars from his experiences as a pledge were much deeper.

As a young man, I had the privilege of meeting Bishop Edgar A. Love, one of my grandfather’s best friends, and a founder of a predominately black fraternity. If I can be sure of one thing, it’s that no one ever hazed Bishop Love – for that matter, I’m sure no founder of any Greek letter organization was ever hazed. If peer pressure to endure hazing is applied for social acceptance, such peer pressure should be re-directed from hazing to the encouragement of academic achievement. Some traditions must come to an end.

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