A constant risk I see new investors take is their unwitting belief that wealth should be measured in nominal currency, such as United States dollars or British pounds sterling, instead of purchasing power.  In the end, purchasing power is the only thing that matters.  It is the only thing that counts - how much stuff you can buy or give away to help others.

In To Guard Against Inflation, Focus on Purchasing Power Not Dollars, we look at some of the specifics of why this is so important.  By taking a net-of-inflation approach to your portfolio, you can opportunistically look at the returns from investing in bonds or other asset classes and realize that what looks like a good return might actually be a money-losing proposition!

Those of you who are new to investing need to know that your journey to wealth is not going to happen as one gradual, gently sloping incline.  It's not comparable to getting an education, where you enroll in kindergarten and follow your way through the various grade levels until you are handed a piece of paper and a congratulations.  You can toil away for years, spending less than you generate in income, investing the surplus in stocks, bonds, real estate, mutual funds, private businesses, or whichever other asset classes interest you, and suddenly find a big payoff or, alternatively, wake up one day and realize just how much money you've amassed.

The first type of experience happens most often when someone builds a business and sells it.  This is called a liquidity event in industry lingo.  Although the person isn't technically worth any more money, suddenly they have gone from having all of their resources tied up in property, plant, equipment, payroll, working capital, and investments to seeing a giant pile of cash, which they will most likely park in short-term Treasury bills.

The second experience is often the result of living responsibly for most of your life.  Several times a year, I visit an old friend in the Midwest who is enjoying her retirement.  She lives in a modest house.  No one knows she has money except her banker.  Her net worth lies in the 7-figure range.  Whenever we go over her holdings, she remarks, "I just don't know how I amassed this much money.  I never made more than $50,000 or $70,000 in a year."  Today, she routinely writes checks to buy rental properties to add to her portfolio, paying cash to buy a house lock, stock, and barrel.

When you factor in the inflation rate and taxes, you cannot grow your net worth smoothly like a savings account.  You can only do intelligent things, manage your risk, invest in what you know, and let time do the rest.  Fluctuations - peaks and valleys - are part of the equation.  For a disciplined approach that is adhered to and wisely structured, these represent opportunity.

The Buffett Rule, as the media has taken to calling President Obama's tax proposal, is simply a way to say that anyone who earns over $1,000,000 per year must pay a personal income tax rate of at least 30%.  It is designed to make sure a hedge fund manager or other financially savvy earner that knows the tax code can't dodge paying the same rate a successful baseball player or television personality would on their paycheck.  It should come as no surprise that The Buffett Rule was named after legendary value investor Warren Buffett, who has been a proponent of the concept.

The downside of The Buffett Rule is it is not as simple as it sounds.  Frankly, it's not entirely fair when you factor in that many people paying so-called "low" rates have already paid taxes once through their holding entities.  It also doesn't solve the fundamental, structural issues in the tax code and could inevitably lead to the same sort of monstrous results and unintended consequences things such as the Alternative Minimum Tax (AMT) did in the end, hitting middle class families over the years instead of solely the high-end, rich tax payers it was designed to ensnare when it was conceived.

The Consumer Expenditure Survey from the U.S Department of Labor and U.S. Bureau of Labor Statistics has released the 2010 report, which pulls from 2009 data, and here are some highlights of how the average American family lives.

• Average age: 49.4 years old
• Number of vehicles owned: 2
• Percentage who own a home: 66%
• Number of persons in unit: 2.5
• Number of earners in unit: 1.3
• Pre-tax income: $62,857
• Expenses per year excluding taxes: $49,067

Leaving aside that "average" is meaningless because a person with $0 and Warren Buffett in a sample would have an "average" net worth of $30 billion (instead, we should be focused on median, the point at which 50% are above and 50% are below), what are some ways that $49,067 gets spent?  Here is the breakdown:

• Food: $6,372
  • $2,619 is spent on food away from home
  • $3,753 is spent on food at home
• Insurance and Pensions: $5,471
• Entertainment: $2,693
• Healthcare: $3,126
• Transportation: $7,658
• Apparel and Services: $1,725
• Housing: $16,895
• Other: $5,127

The sad part about it all is that the average American family is foolishly spending far more on transportation than they do on funding a 401(k) or Roth IRA.  To spent $15 to $16 out of every $100 you make after taxes on a car is inexcusable.  You cannot become wealthy by throwing away that much precious capital on a regular income.