What Makes a Man Rich?

by Dan on February 21, 2010

I suppose I should give James Arthur Ray some royalties if this blog ever starts bringing in the big bucks.  He’s been a rather large source of content since the Sedona sweat lodge incident, and even before then, when I saw him give a speech.

An interesting news story circulated this week, regarding the case.  As you may have read, James Ray is being held on $5 million bail.

If you’re like me, you were expecting he’d just plop it down and have some relaxation on the Carlsbad, California beach while preparing for his trial.  After all, he owns a $4 million house, sells tons of products, and holds very lucrative seminars at close to $10,000 a head.

Not so much.

According to the recent news reports, http://ktar.com/?nid=6&sid=1265206, James Ray actually has a negative net worth of $4.2 million.  Considering how many assets he owns and how much money he has coming in, this means he must be in a crushing amount of debt.

I know there’s the possibility he’s actually much richer than this and is hiding his assets from a slew of incoming lawsuits, but let’s put that issue aside for now.  Let’s assume he’s telling the truth.

If he really is millions of dollars in debt, does that mean he was lying about his wealth?  After all, he did regularly use his money as a credibility point in his seminars and products.

When discussing another speaker on The Secret at the free talk I attended, he said “This guy was talking about how great it was that he could manifest a parking spot on demand.  Really… parking spots?  I have a $4 million house!”

I thought at the time he was just mentioning his house on the fly, but it turns out he was telling just about everyone and their mothers about his new crib.

Additionally, he was proud to mention his inclusion in the Inc. 500, as well as his company’s annual revenue of $10 million.  http://www.inc.com/inc5000/2009/company-profile.html?id=200904790

Now he’s in handcuffs and not only is the (admittedly large) bail too much for him to pay, but his lawyers are saying, “Despite misconceptions perpetrated in the media, Mr. Ray is not a man of significant assets and certainly not the millions reported in the press.”

It seems very contradictory, of course, but I’m going to suggest you consider an alternative: that he’s broke AND rich at the same time.

How is that possible?

The more you get into the business world, the more you see that wealth is not so easily definable.  It’s not “How much money do you make?” or even “How much money do you have?”

Wealth comes in three dimensions:

1.    Net Worth
2.    Cash Flow Amount (or Income)
3.    Cash Flow Automation

James Ray’s lawyers are, for the benefit of their client, defining wealth by Number 1.  If you look at how much money James Ray has and subtract from it how much he owes, he’s clearly one of the poorest people in the United States.

Donald Trump was once $1 billion in personal debt.  It wasn’t his company in debt, but his personal debt to creditors.  A story of his is how during this hard time, he walked by a homeless person and thought “This man is $1 billion richer than I am.”

If you didn’t feel compelled to pity Mr. Trump in that story, you’re not alone.  The fact is that while on paper he was broke, he still had a ton of toys and money in the bank to use for whatever he wanted.  He didn’t have to live in a tiny apartment in the ghetto or switch to eating top ramen at night.

The same is with James Ray.  How can you be broke and still have money to spend?

Cash flow.

If you have money coming in on a regular basis, you can still maintain your lifestyle.  It’s why young lawyers can be $100k in debt in student loans and still live in the nice part of New York City.

In fact, I’d say wealth is important ONLY in how it affects your lifestyle.  I don’t think debt is a good thing to build up, but the fact is that utilizing debt, while having enough cash flow coming in can allow you to live as a richer person than your bank statement would say.  If you’re not stressed from the debt and not being irresponsible to the point that it’ll catch up with you, there really is no functional difference.

When someone leases a car to you, sells a TV, or rents a house out, all they care is if you’ll be able to pay the bill on time (or if they’re a Credit Card company, they actually hope you won’t).  Money coming in consistently gives you all the credibility you need when making a purchase.

There is a third dimension of wealth that most people overlook, which is the automation of the cash flow.  James Ray is quickly finding out how easily your income can stop once you’re unable to personally run your business.  While Ray probably does make a good deal of money off his products and book sales, I’m betting most of his revenue comes from his live events.  In a typical year, he’s on the road almost every week, teaching his philosophy to large groups of people paying $800 each, and small groups of people paying $10,000 each.

That’s tough to do behind bars.

This example is actually a bit tainted because there’s such a stigma attached to his inactivity that his product sales will, no doubt, decline.

Let’s say he was hospitalized from a skiing accident instead, and couldn’t go on the road.  His product sales would now be the main source of revenue.  Depending on what percentage of his income the products brought in, he could actually be ok.  This is because product sales can be automated, with Ray not being there.

The third dimension of wealth, automation, is becoming more talked about lately.  Tim Ferris wrote a great book called the “Four Hour Workweek,” in which he discusses the ways of automating your income so you can take long vacations, or simply just expand your free time.

There are few things more liberating than knowing that no matter what happens to you, your money will still come in.  The main ways it can work this way is for artistic royalties, hands-off businesses, or investments.  It’s an issue that really paints how “rich” doctors, lawyers and executives actually are slaves to their salaries or contracts.  If a doctor stops operating, the money stops.  In fact, for much of a doctor or lawyer’s career, if he decides he wants to work 40 hours a week instead of 60-80, he could be out of a job altogether.  If you’re on a salary AT ALL, then no matter how much money you’re making, it still stops the moment you leave the job.

Of course, you can use these jobs to build enough net worth to put into hands-off businesses and investments that WILL bring you the passive income.

Ideally, you’ll be rich in all three areas.  To be honest, having $50,000 coming in a year with no work sounds better than $100,000 coming in a year with a full work week.  You have to pick what your priorities are.  Just make sure to not get hung up on any one aspect of wealth as you increase your money power.

{ 2 comments… read them below or add one }

1 Stephen February 24, 2010 at 12:55 pm

Dan, in a friendly and avuncular way I can demolish your entire blog post by pointing out that the US dollar today is worth less than the Marks of Weimar Germany (c 1920s) in real terms, because today’s US government AND the fake “wealth” of Americans are now bankrupt exponentially more than Weimar Germany was.

Why measure “wealth” in US dollars, when US dollars are already worth less than nothing?

2 Tony December 29, 2012 at 9:37 am

that’s great,please send more of your write ups through my gmil acount.thanks

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