Introduction: What the rich know and what you need to know

I’m writing this in May 2010 and in the last 24 months everyone’s understanding of finance has had to change dramatically. But the process of knowing the right things and making the right financial decisions is the same whether the economy is booming or busting. Taking my home of Ireland as an example: we had close to 20 years of unprecedented economic growth (remember the Celtic Tiger?) and yet, it seems that few people actually added much to their personal wealth. They drove nicer cars and changed them more often; they traded up their homes; they took better holidays. They look better off, but they are not. In a recent speech in Dublin, I made the following comment: ‘We have just had 20 years of economic growth that we may never enjoy again, and yet the vast majority of people I meet have come out of that period with only debt to show for it.’ My remark was met with grumbles and the nodding of heads. This is the simple truth, a truth that has been experienced throughout the western economies. Does it apply to you?

What’s my story about knowing the tricks of the rich?

I’ve worked in the financial services industry since leaving school in 1980, but you may be surprised to learn that I really only began relatively recently to understand money, and how it can be used to create what I call ‘financial freedom’. I learned this fairly late in life, but financial freedom is what the rich know, and this is what you’re going to learn about in this book. Some of that new-found understanding came from reading books but much more came from the lessons learned as my partners and I, through Financial Engineering Network Ltd (the financial advisory business I established in Dublin with two friends in 1996), helped our clients to achieve financial freedom for themselves.

For nearly as long as I can remember, I had an ambition to be rich. I can trace that ambition back to 13 February 1971, the day before decimalisation was introduced in Ireland. I was 9 years old and my grandmother owned a sweet shop close to the beach in Portmarnock, north of Dublin city. The next day all of the currency we had been using up to that time was to become obsolete. My grandmother had a pile of halfpennies on her kitchen windowsill and my younger brother, David, and I eyed these coins for quite some time, considering whether we might get away with taking one or two. Our courage grew and eventually we swiped one each and transported our ill-gotten gains to the competitor sweet shop close by. Our reward was two cigar chewing gums, which we chewed on the steps to the beach until our jaws ached, then we returned to the windowsill and repeated the exercise. This went on for most of the day, until the pile of halfpennies was gone and David and I could hardly speak for pains in our faces. That was the day when I learned that the more money I had, the more nice stuff I could buy. From then on, I stated an ambition to be rich.

Whenever I mentioned my new ambition, the adults around me would smile and tell me that as long as I worked hard, one day I would achieve my goal. And I believed them. Later, I was told that, to achieve my ambitions, I not only needed to work hard, but I also needed to work for myself. And I believed that too. After 12 years of working hard for other people, I eventually set up my own business and worked even harder. Three years later I had lost a large amount of money and was poorer than I had ever been. It seemed that the advice I had been given was flawed in some way. I had worked harder than most people I knew; I had set up my own business so that I would be the master of my own destiny, and 15 years after leaving formal education I was a pauper!

This is when I learned the point that I want you to understand – it’s what the rich know and what you need to learn: the financial advice system that prevails in the western world is fundamentally flawed. Most people, no matter where in the western world they earn their income, end their working lives as relative paupers.

To take an example from Ireland: in the recent global recession Ireland Inc was hit particularly badly, with tax receipts falling to lows that no one had predicted or expected. Following the fall in tax income, the Irish government was left with a giant hole in its finances and had both to cut spending and raise taxes. One of the areas in which they sought to cut spending was the health service. During the two decades of growth and prosperity that preceded the recession, Irish citizens over the age of 70 had been granted free medical care and it was suggested that this would be removed. To ensure that this was implemented fairly it was decided that a means test would be introduced, so that only those who could afford to provide adequate care for themselves would lose the benefit. The results of the means testing surprised everyone: 95% of free medical care recipients would keep their benefits. Put another way this means that 95% of Irish citizens over the age of 70 need state handouts to keep themselves alive.

Is this what awaits the vast majority of us? Once we stop earning, we face relative – and, for many, real – poverty. This is true whether we work hard or simply do enough to get by, whether we earn a lot or a little, whether we work for ourselves or are employed by someone else, and whether or not we take the financial advice that is on offer.

So, how can it be that the vast majority of us end our working lives with a lifestyle that is frugal and unfulfilling? When there is so much wealth in the world and, frankly, so many opportunities to create long-term financial security for ourselves, how is it that so few of us take advantage of them?

What the rich know, what you need to know and how this book is going to help you

For me, the first step to creating my own financial freedom was the realisation that what I had been told about the route to financial success, both by the adults in my life when younger and by the so-called financial advisers as I entered the world of employment, was fundamentally wrong. As I met and dealt with more and more ‘rich’ people I came to understand that they deal with their money in a very different manner from most of us – after all, they are getting a very different result, so they must be doing things differently.

Throughout the book I share with the reader many of the lessons I have learned (some of which have cost me dearly), so that you can avoid the mistakes I have made as you attempt to reach your financial freedom.

This book is going to teach you what the rich know – the tricks of the rich. It’ll give you the financial intelligence to begin to understand and then take control of your money. Your time will be needed, not only to read the book but to take the actions necessary to move forward on your journey towards financial freedom. It is the time that you are willing to give to your money, and managing it, that will make the difference in the long run.

In addition, I hope to impress upon you the fact that much of what you think you know about money is incorrect. If you are happy with the financial results in your life, then you may have no need to read this book or no need to alter the way you do things. However, if you are unhappy with the results and if, when you look into the future, all you see is a retirement of sacrifice and relative hardship, then recognise that only you can make the changes necessary to deliver a different result.

Who owns the money?

You may have heard the statments that ‘97% of the world’s wealth is controlled by 3% of the world’s population’. While this is a modern statistic, it struck me that it would have been just as true had it been written a year ago, 10 years ago, 100 years ago or even as far back as when the Pharaohs sat on their thrones in ancient Egypt. Throughout human history, the vast majority of the world’s wealth has been owned and controlled by a tiny minority of people.

In ancient times, the way the wealthy maintained their grip on the wealth is well documented: they used violence and fear. While most of you reading this book are no longer exposed to the threats of this type of violence, we have to recognise the simple fact that, whatever methods the people with all the money are using to maintain their control, they are just as effective as those of the Pharaohs. Could there be a great financial conspiracy that keeps the riches firmly in the grasp of the elite few and ensures that we, the masses, spend our lives fighting over the financial crumbs from their tables?

The answer to this question has to be ‘Yes’. To maintain the disproportionate distribution of wealth throughout millennia, those with all of the wealth must be acting in a manner to maintain the status quo. Surely it would be impossible for the inequitable distribution to have been maintained for so long without such effort?

Money, of course, is an extremely important part of our lives and, because it is so important, a massive and powerful industry has been built up around it. One of the ‘Eureka’ moments of my financial life came when I realised that the institutions (banks, insurance companies, fund management companies, etc.) that have been built up around this vital commodity are, in the first instance, there to make profit for themselves and their shareholders, not to make profit for their customers. I say this neither as a criticism nor in an attempt to discredit these institutions but to point out a simple fact. If you were a shareholder in any of these businesses, this is what you would expect of them – to deliver profit to you and not to concentrate on making their customers money. Sure, if clients become well-off by investing with, or borrowing from, the institution, you would have no objection to this but, as a shareholder, your first concern is profit for the institution and for yourself. These institutions have a vital role to play as you attempt to create your own financial freedom, but only when you learn the tricks of the rich.

This does not mean that we should not use the services of these institutions, but it does mean that we should avoid taking their advice! Since the primary objective of such institutions is their own profit, you can immediately see that they have a conflict of interest when attempting to give advice that makes you profit. Their financial products are designed with the institution’s own margins to the fore, with client value for money necessarily in no better than second place. Unfortunately, for most of us, such institutions (and their agents, whether they work directly for the institution or are independent agents paid by the institution) have, to date, been the sole source of financial advice. Thus, it is no wonder that so few people ever reach financial freedom.

Consider this for a moment. While money is an extremely important part of modern life, we all go through an average of 12–20 years of formal education and are taught little about the subject.

While in more recent times a number of subjects dealing with economics, accountancy and other financial matters have been added to the curriculum, these concentrate on broad financial topics and teach students little about how to manage their money to create financial security. The introduction of Economic Wellbeing and Financial Capability to the National Curriculum for English and Welsh secondary schools recognises the need for greater financial awareness.

So we leave formal education and enter a financial world for which we are woefully ill-equipped. This lack of preparation is what drives us to seek advice, and the manner in which that advice is given ensures that the profit and wealth of the owners of the advisory businesses is put before our own.

When I gave the first draft of this book to friends and colleagues to read, most were very surprised by the comments on the subject of financial advice. As you read on, questions will be posed as to whether you have ever received genuine advice and some of my early readers thought I was being too tough on the financial institutions.

So, to avoid any demonisation of these institutions, let me say it again loud and clear, such institutions are fantastic product-providers and, in my view, nobody can work effectively towards financial freedom without using their products. However, they are not fantastic advisers (no matter how much they purport to be) and you should not be taking advice from them. The reasons for my views will become very clear as you read on.

It is noticeable that the rich learn about money themselves and never depend upon large institutions for advice. They pay professionals to give them impartial advice, but there is no doubt as to who the professional is working for.

What the rich do, and what you’ll need to do

In my experience, despite the importance we attach to money, we give very little time to the subject. We grab a couple of minutes here and there to concentrate on our own finances – but usually only when some form of problem has become apparent.

We all recognise that, to succeed in any walk of life – whether in sport, business, the arts, etc. – requires dedication, knowledge and/or talent and we all acknowledge that to hone these skills requires practice and diligence. Creating the very best financial future possible from your circumstances can only be achieved with the same dedication of time, the same knowledge accumulation, the same passion and ambition that you bring to so many other areas of your life. The simple fact is that, other than through blind luck (and, in my experience, there is as much bad luck out there as there is good), financial freedom cannot be achieved without effort and knowledge. This book will, hopefully, give you much of the knowledge – but only you can supply the effort. Good luck!

Paul A. Overy
May 2010

We have taken great care to ensure that the tax rates and examples given in this volume are in line with up-to-date legislation. However, tax law changes regularly so you need to check, in advance of taking any action, the tax rules and regulations that apply at the time.

Please note that throughout the book ‘his’ and ‘him’ have been used to apply to both genders for the sake of brevity and is not intended to exclude female readers.