Chapter 2 / The Formula for Riches / The Difference Between Rich and Poor / by Dr. Hannes Dreyer.

Chapter 2

Common Financial Planning Mistakes.

In the previous chapter, I wrote about common mistakes people make when they plan financial security at retirement. The first one is to plan to live a certain number of years and then live too long. This is one of the most commonly made mistakes, and it is one of the reasons why very few people become rich.

Why do people make this mistake? Mostly because they go on the projections their financial planning consultant gives them, based on industry averages. But what if you’re not average?

This is not the only mistake of conventional financial planning. I know what I am talking about because I was a top financial broker for many years. The entire system of financial planning is deeply flawed and it was only when I started to ask questions about this system that I began to see the light.

I have developed The Formula For Riches as a genuine alternative to conventional financial planning, a system that simply does not and never will work. So if you are also asking some of the following questions, you are on the right track!

Why is it that most people will have to work for more than 40 years and even then, they will not be in a position to retire comfortably?

I have asked these and other questions many times over the last 25 years and realized that there are a number of flaws in what we have been taught in school and university. Then, once we leave formal education, where do we continue our financial learning?

By means of the advertising, public relations, and “free” financial planning sessions that come our way courtesy of the financial institutions. But here lies the problem: these institutions are not really in the business of education, for all their feel-good, “trust us, we’re experts” messages. They’re in the business of making profits from our money, and that means they do not want us to know too much.

This is why what we learn and what we must do in reality are very different. If you base your wealth creation on the wrong belief systems, you cannot become wealthy. It is simply not impossible.

Yet this is what most people have done and continue to do even though it does not work. This testifies to the power of advertising and the more subtle forms of thought-shaping such as public relations, commentary in the media, “free” financial planning, influence over syllabus content in educational institutions; influence over government and the policies it sets; and more.

Unless we can change our mindset; challenge our assumptions, test and reject them if they are faulty; become aware of our own programming or conditioning, and learn to think for ourselves (something we like to think we do but in fact almost never does), we will never be in a position to become wealthy. You can also see that we need to take responsibility for what goes into our minds and how it shapes our decisions and actions.

Now, why do we believe what we believe and where are the flaws?

The biggest flaw is ignorance.

The reason why I believe people are ignorant when it comes to building wealth is that the system is designed to keep you poor.

It is not in the interest of the financial institutions and even the governments around the world to teach you the truth.

The truth is that it is possible for anybody to be rich. I base this fact on years of experience in the financial planning industry.

If you know how to become financially rich you will not be a slave to anyone anymore.

People often remark to me that they do not perceive themselves as slaves; they are professional or business people, earning good money. They are often classified as rich (by themselves and others around them).

But let's get out of the box and look at reality.

Firstly, a good income does not make a person rich. What would happen if suddenly you lost your job or your ability to carry on practicing your profession? More than 90% of all people that I have dealt with over the last 25 years would not be able to survive and maintain their standard of living for more than three months.

In other words, to have a good income does not make you rich, it only gives you a false sense of security.

It is this false sense of security that will keep you a slave of the system.

The majority of people mistake income for riches.

Why do people think this way?

Let’s go back to my statement that the majority of people are financially ignorant.

Financially ignorant people will remain poor. They will be slaves of the system, for the rest of their lives.

They will have good incomes, with good qualifications. They will perceive themselves as rich, but they will remain slaves. They cannot stop working, because if they stop working, there is no income, and on top of that, the more they earn, the more they spend, and the bank will lend them more.

So they are deeply in debt and in big trouble if the house of cards tumbles down. Like the stress of meeting all those monthly repayments brings on a heart attack. This is not a way out example!

A 2001 U.S. study showed that approximately half of all bankruptcies in that year were the result of medical problems, and most of those who went bankrupt for this reason (more than three-quarters) were covered by health insurance at the start of the illness!

These people have never learned in order to become rich they have to let their money work for them. They have never discovered the secret of investing their money – The Formula For Riches.

The system is designed to teach people how to work (slave) for their money. Unless you learn how to get your money to work for you, it is impossible to become rich. If you do not want to be a slave then you must learn how to get your money to work for you.

You are what you think you are. If you think the only way to make money is to work for it that is the way you are going to act. But if you change the way you think, you can change the way you act. However, unless you know the difference between the two, you cannot change what you are doing.

Why do we work for our money?

Because that is how we were taught. As I have said before, we are slaves. As long as we are slaves to our financial situation, someone has control over us. It is a fact of life that most people will work very hard for more than 40 years, with the hope of becoming financially free. They will seldom achieve this hope because of ignorance and following inadequate or incorrect financial strategies.

Is it possible to change your perceptions and learn how to get your money to work for you? Yes, it is, but you need to examine your assumptions.

Schools and universities base their curriculum on the fact that we are living in a world of scarcity. In other words, there is not enough for everybody. In other words, it’s a dog-eat-dog world, you have to work very hard, and don’t be surprised if you do not achieve what you want to. This is not true. We are living in a world of abundance but unless we learn how to tap into that abundance, we will believe that there is not enough for everybody.

As a result of this observation, I started to think of ways to contribute so that maybe I can help to bring about some change in people’s lives.

I believe I can teach you that you don’t have to be a slave and that it is possible with careful planning and diligence to accumulate enough and reach a point where your money works for you. Then slowly but surely we can change the world.

But first I had to challenge my own financial belief system. This is where it begins for everybody.

We are creatures of habit and we do what we do because we believe it to be the right thing. We would never intentionally jeopardize our financial future by doing something that is not the best for ourselves and our families. Yet, more than 94% of the population will not be financially independent when they retire at the age of 65. Less than 1% of the total population will be financially rich.

So you have to ask: “What if what we have been thinking is wrong”?

What if there is another way, a better way of doing things? What if it is not so difficult to become wealthy? Why do I carry on doing something that doesn’t work for 94% of people? Just because everybody is doing it, does that make it right? Not according to the statistics!”

I queried the traditional way of doing things and asked a lot of questions and as a result of these questions, I developed The Formula For Riches.

I observed that all of my clients followed the same belief system and that belief system kept them trapped and financially struggling. By stepping "out of the box" I started to change the way I was thinking and acting and slowly The Formula For Riches began taking shape.

The first thing I did was to learn to understand why people stay poor.

I then began to realize that we believe what we have been taught and these beliefs keep us poor. But before we look into The Formula For Riches let’s look at some of the general mistakes that people make, because they are ignorant.

Common mistakes most financial planners make when they advise on retirement planning for a client is to base the time period on life expectancy instead of life.

Life expectancy tables are based on actuarial averages. What this means is that the actuaries calculate many variables to try and predict how long you will live.

Factors that play a role in these calculations are your age, gender, standard of living, income, race, qualifications, medical history, and even your parent’s medical history, etc. Taking all of this into consideration they predict, based on history, what your “chances” are to live to a certain age.

The flaw with these life expectancy predictions is the fact that you have a 50% chance of dying before the predicted age as well as a 50% chance to live longer than your life expectancy.

And each year that you live longer than anticipated will have an effect on your retirement planning.

What this means is that if you take the life expectancy of a 25-year-old male with a specific profession, hobby, degree, and income you will find that his life expectancy, according to statistics, is a further 48.568 years and that of a female 52.799 years. Old Mutual. (1994)

That means on average a male of 25 will live to the age of 73.568 years. But if you take his life expectancy at the age of 73 you will find that according to statistics a male’s life expectancy at that age is a further 8.916 years!

In other words, the statistics change as we get older. But does our financial planning keep up? Mostly, no, hence the statistics. And if you raise this issue, your friendly financial consultant delivers another myth when he says “You should save more in case you outlive the predictions.”

In other words, it takes money to make money. Save more and get more. It’s a myth that covers up the flaws in the conventional financial planning system and adds to the confusion and also violates The Formula For Riches, as you will see.

What does this have to do with The Formula for Riches?

Contrary to popular financial planning techniques, you cannot take into consideration the age of a person and then base the capital and interest requirements on life expectancy.

As we have seen, the older you get the stronger the probability that you are going to live longer than your previous average. If your retirement plan is based on capital with interest that will last you a certain number of years and you live that long, then you will find that according to mathematical averages, you still have many years to live, but your capital (that supplies the passive income) is depleted!

It’s crazy! What this means is, if you get to the age as predicted by the financial institutions, you will live longer! But you will have run out of money! By the time you are 73 years old, the statistics say you have another 8 years to go. And you know what! When you get to 81 you’ll find there are a few more years for you still. But your financial institution has not planned it this way even though these are their figures!

So the bottom line is, in order to determine whether you are financially independent you cannot base your calculations on life expectancy. This will give you a false sense of security because you have a 50% chance of living longer than your life expectancy.

Here’s another problem – projected values. Projected values are another popular way to do financial planning. No one can predict the future and yet this is what every economist and actuary tries to do.

What they should do is calculate the risk and growth based on past performance. The performance of different financial investments must then be compared to one another to see what investment class has performed the best over a ten-year or longer cycle.

The mainstream financial products, available to the average investor, usually represent only one type of asset class and that is paper assets.

What is a paper asset? A paper asset is usually some kind of “investment” product offered to you by a financial institution in the form of a retirement annuity, an endowment policy, mutual funds, shares, and fixed deposits.

If you compare one class of paper asset with another class of paper asset, there will be a difference in growth but in essence, the difference is usually not spectacular over a long period of time.

If you compare the same asset with other asset classes, like tangibles and business assets, it is possible to outperform the growth of paper assets in a very big way.

But here is another very serious challenge: most investors cannot calculate the growth on their investment.

Many investors think the capital growth on the asset is real growth.

This is not a true reflection of growth because in real estate, for example, capital growth is only one in 27 variables that you need to take into consideration in order to determine the real growth of your investment.

Another problem with capital growth and property for example is that the capital growth can fluctuate wildly. And it is very sensitive to mass emotions, the kind of buying fever that pushes prices up and even creates a “bubble”. People who rely on capital growth can really get hurt when the bubble bursts.

But depending on what kind of investor you are, you may argue that capital growth counts more than interest rates or income tax, for example, therefore on weighing averages, capital growth plays a more important role than the rest.

If you study my “Property: The Road To Riches” DVD Course you will know that this is simply not true. The reason why people believe this nonsense is that mostly they do not know how to calculate the growth of their investment in real estate investments.

Another common mistake often made, is to base the calculations on the assumption that a person will get a specific interest or growth on his capital. This is speculation – and it is how fingers get burned if the market turns.

To my mind, and according to The Formula For Riches, if the financial planning is based on paper assets then it cannot work for the simple reason that the investor has no control over the interest that he receives on the investment. This means he is incapable of taking responsibility, which is central to the formula.

If the investor receives more than what was projected all is well but the moment the investor receives less, he is in trouble because of the cumulative effect on his capital.

Passive income is defined as generating income without having to work for it. In general and for most people this is known as a pension. Normally passive income is associated with having a lot of capital with the idea that the capital will generate a return in the way of interest or dividends. Typical examples would be a pension fund, provident fund, 401(k) plans, retirement annuities, etc. All of these can be classified as paper assets.

The reason why I classify them as paper assets is that they are not “real” assets.

Paper assets are a piece of paper or a contract, stating that you have a right to a portion of an investment that is managed by someone on your behalf.

The return on this investment then supplies you with an income (passive because your capital is working for you and you receive a portion, a percentage return yearly on your investment). This percentage depends on where you invested and what the economy is doing in general.

In order to calculate how much you need, you must take into consideration all your living expenses as well as tax.

Unfortunately, if your expenses exceed your income you cannot retire. Not at 40, not at 80 – you will have to carry on finding an income somewhere. And if you want to escape this fate, what do you do? A lot of people cash in their pension and put it all into a business, in the hope of beating the odds.

But they know nothing about running a business, and in a year or two’s time, it is all gone. I don’t like seeing this happen, but I understand that people are desperate. This is why I developed the formula and why I want as many people as possible to benefit from it.

As a financial planner, I often queried why so many people would never be financially independent when they reach retirement age. I worked hard to find a formula that could lead the route to wealth.

It is a direct result of the flaws of paper assets and the conventional method of financial planning that I was led to develop The Formula For Riches.

By asking the question, “What keeps me poor?” I began to find the truth. It took me a long time to find the answer and to figure out what The Formula For Riches was, but once I had the guidelines, I applied the formula in my own life with spectacular results.

I then shared The Formula For Riches with others, with even more astonishing results. I also successfully applied The Formula For Riches to other known forms of investment, business, and entrepreneurial enterprises. I found that unless you know The Formula For Riches it is very difficult, if not impossible to become rich.

Although The Formula For Riches applies to business as well as other types of investments, it is only in the application of the formula that there is a difference between the entrepreneur and the investor. In other words, you need to put the formula to work – not just to measure, but to actively grow your money and minimize your risk.

Remember I asked the question “What keeps me poor?”

I thought that if I could find out what keeps me poor it would be a lot easier to avoid doing the wrong thing than to find out what I must do to become rich. Without knowing it I was preparing myself to discover The Formula For Riches.

Let’s look more closely at why people stay poor.

For more information the the Formula For Riches book;