Financial Education: Leverage Part 2, Using 401(k)

Don't listen to soul called guru when it comes to investing. I refer to someone like David Bach, the author of "Automatic Millionaire", Robert Kiyosaki, the author of "Rich Dad Poor Dad", and Donald Trump, the author of "Why We Want You to Be Rich". Read a review here of Donald Trump's book by WSJ and you might understand why. I would rather recommend shows of Suze Orman or Carmen Wong Ulrich for their financial advices. It is easy to write about how much money you could make. I can also write a similar book about how options can make you rich, but I will also tell you it can make you homeless. After reading it, you would be scared and I won't make the best-selling list.

Robert Kiyosaki said in 1996 that he started an oil company, a gold-mining company, and a silver-mining company. Big question mark popped in my head when I read this. The reasons are all three scenario required massive amount of capital to get started. It isn't every day Exxon, Shell, or Conoco Phillips see a new competitor. The same goes for gold and silver mining company where cost of a Caterpillar machine runs in a million. On top of that, there are political unrest in gold and silver mining countries. I am not calling Mr. Kiyosaki a liar, but I am skeptical. Mr. Kiyosaki called himself as an investor and talk of writing put options on gold, but when I searched for his name on Bloomberg there was no result.

The truth about money is, it's hard to make and easy to spend. Anyone trying to tell you otherwise is attempting to sell you something. Two ways of making money: use either sweat it (physical) or think it (brain). There are some concepts to take away when reading investment books, but I see it as motivational speech.

Kiyosaki stressed the importance of leverage or using someone else money. I urged you to read my first posting on leverage.

For people who have the 9-5 job with 401(k), the path to wealth isn't as hard as the "guru" suggested. It takes discipline but it can be done. Let me demonstrate.

Let's say you work for a company that match 30% to your 401(k) contribution. Let's assume you contribute $100 every month and invest that in a relatively safe 5% AAA corporate bond. Given this scenario, you would have $1,602.90 after one year. Your return on equity after one year is 34% because contributed $1,200 which returned $1,602.90. The leverage here is from your company matching of 30%! If you calculate the return on capital, it would be only 3% (1602.90/1560 - 1).

After five years, you would have invested total of $6,000 and received $1,800 from your company matching. Given a 5% rate of return, you would have $8,877.63 or 48% return on equity.

Unlike real estate which allow you to leverage up 80%, 401(k) matching is limited to certain amount. Take advantage of what is available to you and don't be greedy. Remember the old story of "The Rabbit and the Turtle"? Investors are equivalent to the turtle. Gamblers are equivalent to the rabbit.

Art

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