Bad Influence

When you were in middle school I bet your parents started eyeing your friends more carefully. They asked about their parents and how they did in school and what kind of rules they had in their home.  If they saw a group of kids hanging at the mall or on the street corner goofing and smoking, they wanted to be sure none of them were your friends.

Your parents were worried about bad influences. They fretted about Johnny, who you might skip a class with, or Brenda, who might encourage you to drink that first beer – while they remained totally oblivious to the influencers that would torpedo your ability to accumulate wealth.

BMW, Lexus, Infiniti, Rolex, Prada, Dooney &Burke, Ralph Lauren, Sony and Apple are the influencers your parents should have warned you about. These influencers and others like them have helped way too many high earners become low accumulators of wealth.

Wealth is not how much you make and it is certainly not how much shiny, (and rapidly depreciating) stuff you have. Wealth is what you have managed to hold on to.

In The Millionaire Next Door, Stanley & Danko gave this little formula to gauge how you are doing at building wealth.

(Age x pre-tax Income)/10  Should Equal Net Worth

For pre-tax income include all sources, other than inheritance.

This formula is just a quick and dirty estimate of what your net worth should be. To be in the top 25% (where we all should want to be) your net worth needs to be twice the result of the calculation.

If you’re not in the top 25%, it has everything to do with your spending. Having been bombarded your whole life with slick ad campaigns about what purchases you need to make to be happy, you have fallen prey to professional influencers.

I have nothing against any of the companies mentioned. They all make great stuff, and if you are going to have stuff, at least have good stuff. I just want you to think. Just as your parents did when you were in middle school, I’m going to tell you to make your decisions based on what’s right for you and your future. Don’t do something just because everyone else is.

Evil Credit Cards & Brownies

If your progress toward your money objective has slowed, stopped or even reversed, maybe you need to examine your goal and re-commit.

We all struggle from time to time with focus. I know I’m struggling right now with some extra pounds. I can rationalize the why in 10 seconds flat – you know the holidays, the windy colder weather that doesn’t invite a good ride, been too busy to eat right, blah blah blah. The real reason I’ve put on these pounds is that I lost sight of my goal.

Losing weight and paying off debt are both about changing our behavior. If our old behavior did not include overeating and/or under exercising we probably don’t need to lose weight. If we had not over spent in the past, we wouldn’t have the debt. When we get tired or anxious or somebody bakes delicious brownies, it becomes very easy to fall back into our old behaviors of overeating or overspending.

Step 1 – Awareness.

Ok, my knees hurt, my pants don’t fit and the scale is registering numbers I haven’t seen in quite a while.

You pull those credit card bills out of the mailbox and tally them up.

Are you now painfully aware? I know I am.

Step 2 – Give a hoot.

Do I care that my knees hurt and my clothes don’t fit? Yep, I do.

How about you? Do you care that you’ve backslid from your goal?

Step 3 – Give enough of a hoot to do something about it.

This is the hard one. Do we care enough to make the difficult choices to give up something we want right now in order to get something we want later?

It depends on what the later is. You and I both need to clearly define that long-term goal. You gotta make it something worth struggling for.

My long-term goal is to be fit enough to hike the Grand Canyon down and back with my grandchildren. Since I don’t have grandchildren and I don’t have any say in the when; I’ll have to choose an intermediate goal that I can attach a date to.

Here it is. On or before May 1, I will ride my bike on a single trip for 100 miles in less than 8 hours. OK, so maybe this doesn’t sound like a weight loss goal; but it is. There is no way I could do a century carrying extra weight without my knees (and maybe my lungs) exploding. So, to achieve this goal I need to: a) ride a lot in the coming 100 days and b) eat carefully. If I do those two things the weight should take care of itself.

As shorter-term goals I’ll do a 50 mile ride on or before March 5th in under 3 1/2 hours and a 75 mile ride on or before April 2 in under 6 hours.

OK, that was scary; now it’s your turn. What goal are you working on?

What can you do in the next 100 days that will firmly put you back on track to your goal?  What will you accomplish by March 5? And by April 2?

In the coming days every time we feel the urge to backslide, we need to visualize that long term goal. Are we really willing to jeopardize that goal for this immediate want?

OK, now that we’ve got our new goals in place, we need to commit to them. One way to do this is to tell somebody. I think I’ve got that covered; how about you? You could just leave it here in the form of a comment- that would work. Get your friends to log on and do the same. Let’s do this together.

Hope

The world is a better place today. OK, so maybe not the whole world; maybe just this little tiny piece and maybe it’s not really better, yet- but there is new hope.

A very generous and talented friend of mine started her first “real” job today as the teacher of a middle school special needs class.  This is a very hard job. Don’t believe me? Just try and have a conversation with a middle school kid. It takes work.

Morgan has a gift and these kids, who have had a difficult and rocky row to hoe, will flock to her. She will show them that they can live up to the limited expectations that small-minded people have for them or they can overcome their difficulties and be much more.

As someone who has been tested, Morgan has a testimony to give. A single mom with two young children and no money, she has worked and struggled and made-do for years to get her degree. She could have quit and waited to be rescued, but she did not.

These kids, our community and our world will be a better place – because when it would have been so easy to quit, she pushed forward. She has earned the privilege of teaching perseverance to those who need it most.

Winners Quit

Recently I re-read Seth Godin’s book, the dip.  In this little book, Godin writes mostly to business people about knowing when to quit a project.  When he says, “Winners quit fast, quit often, and quit without guilt” it flies in the face of a lot of what we’ve been taught. Godin advises that winners quit when their path leads to a dead end – but to persevere when they are just in a dip.

This concept of winners quitting, is one that also works in realm of personal finance.

The key of course is knowing when to quit and when to stick.

For some situations, this determination is easy. If your income situation has changed for the worse, whether due to job loss, hours cut or a reduction in bonus, I have some no-fail advice for you: QUIT! Quit your old lifestyle – Today! Do not eat up savings or take on debt to maintain a lifestyle you can no longer afford.

Given the doom and gloom pessimistic economic news, it’s surprising that so many people can be so overly optimistic in their personal life. High earners are particularly susceptible to this problem. I get this and I’m also optimistic; but let’s practice a little planning for the worst. Do not let stuff drag you under; unload it and when you land that great new job you can always buy more.

For other situations, the determination is much harder. Here in Florida in early 2011, 46% of homeowners with mortgages have negative equity. Wow! That needs to be said again. Almost half of the people in Florida who owe money on their home, owe more than they could sell the home for.

If you are one of these families, how long do you stick?

People often need to move when they graduate, retire, marry, divorce, get a new job, have children, children move away, or for a myriad of other reasons. At one time as many as 20% of all Americans moved in any given year. Today, the poor housing and poor job markets have been a factor in greatly reducing that number.

Faced with either a legitimate need to relocate or the inability to realistically make the payments, many people choose to stick in their negative equity home way past the time they should have quit.

While I would not advise anyone to default on their mortgage just because the home value has dropped, I also would not advise someone to indefinitely postpone a needed move just because their home is underwater. (The “How you quit a negative equity home” is very important, but not the subject of this post).

In much the same manner as Godin advises business people to figure out if the path they are on is a dip, a cliff, or a cul-de-sec; if you feel stuck in a financial situation you need to calmly and strategically do the same.

Decide in advance when to quit.

The underwater homeowner who can no longer reasonably pay the mortgage may decide to commit “x” number of dollars of their savings toward keeping the mortgage paid while trying to land a better job or short sale the house. When the money is spent, it’s time to quit. Deciding in advance takes the emotion out of decision day and helps prevent quitting in a panic.

Will quitting now allow you to win later?

If a better job, life or family situation is on the other side of quitting, you may need to quit sooner than later. Carefully weigh the cost of sticking – waiting on the market to recover vs. quitting and starting new in a better place. The unknowns of the marketplace make this calculation very difficult but we do know that while you can make more money you cannot make more time.

Recognize the cliff

Be brutally honest with yourself. Put your what-if analysis on paper. Quantify it. Review it with someone you trust. If the path you are on leads to a financial cliff, its way past time to quit.

Remember, there is no prize for not quitting. People will not cheer your dogged determination if the end result is failure.

How to Say No

One of the fundamental principles taught to lifeguards is to protect their own life and health. This same principle is vitally important when a loved one asks you for financial assistance.

Rule 1: Protect yourself – you are no help to anyone if your drowning loved one pulls you under.

One important way to protect yourself is never to co-sign a loan for a friend or family member. This is very easy in theory but surprisingly hard in practice.  When someone you care about comes to you and makes their case about how things will be so much better for them if they could just get this loan; it is very difficult to tell them no. Saying no feels like a vote of no confidence from you to them. As unsure as we are of exactly what our loved one needs, we can be certain they need someone to believe in them.

But, there is a reason they cannot get the loan without a co-signer; the cold hard statistical facts predict that they will default on this loan. Co-signing puts you fully on the hook for the debt and places your relationship in serious jeopardy.

Loaning money to our friend or family member in crisis is likely to have the same consequences as co-signing. They may not be willing or able to re-pay the loan; placing you in the uncomfortable position of playing debt collector to someone you care about. This is not likely to end well.

When faced with saying no to a loved one’s request for money, try one of these strategies:

  • Make your refusal to co-sign or loan money part of your personal code of conduct. This takes some of the sting out of your refusal. You are not refusing to co-sign this loan, you refuse to ever co-sign any loan. Stating this part of your personal code occasionally when the opportunity arises may save you from ever being asked in the first place.
  • Blame it on your financial advisor. No sane advisor has ever recommended co-signing a loan for a friend or family member.
  • Offer something you can do that will help resolve their issue “No I cannot so-sign that car loan, but I could give you a ride to work for a month”.

Your goals need to be to protect yourself, protect the relationship and to leave a door open in case they really need help – not just a quick solution. There is nothing wrong with giving money to someone in need as long as: a) you can afford it; b) you are fairly certain that giving will not just enable continuing their bad money behavior.

If you’re the kind that feels bad for saying no, stop! Chances are you did this person a great favor; a few more no‘s and they might just starting looking inward for the solutions to their problems.

What we need here is an Epiphany

When you were seven you said “Please” and “Thank you” and “Yum, these are the best beets I’ve ever had” to your Grandma – not because you meant it, nor because Grandma’s feelings were important to you; you did it because you were told to.

And somewhere along the growth chart you (hopefully) started  internalizing those behaviors. You began to understand that kindness and manners are a display of respect and consideration for others. You learned that others mattered. But until you got to this level of understanding, you faked it.

Faking it is a perfectly acceptable way to learn wanted behaviors.

An epiphany is the opposite of faking it.

With an epiphany:

The 350 lb woman who, after years of battling the health problems caused by her weight, has an experience that causes  a sudden intuitive leap of understanding that allows her to find the motivation to lose the weight.

Or

The smoker who, for 25 years, ignores the pleas of their parents, their spouse and their children continuing to smoke until one day something said in an ordinary conversation causes a sudden intuitive leap of understanding, and they quit.

Or

The family that happily bounces along acquiring debt and not saving until some ordinary but striking occurrence causes them to realize this is not smart.

You want to be healthy and you want your family to be financially secure; but you just can’t seem to have that ordinary but striking event to bring about a sudden intuitive leap of understanding.

It’s OK. Just fake it. You already know what to do. Eat right, exercise more, live on less than you make. Even without your epiphany, you may find your happiness.

It’s all about what you want

Finally, we get around to your favorite subject. Personal Finance is very personal. What you want and what I want may be quite different.

Winning with money is about using your  earnings to get what you want from life.

As long as you are progressing toward your goals at a pace you are happy with, there is no need to feel guilty about lattes, dinners out or your fancy car. You should spend money in ways that make you happy.  Just don’t make the two fundamental errors that will prevent you from winning.

Fundamental Error #1: Failing to set Personal Financial Goals

This was me, and I bet it is you too. To count, a goal has to be clearly defined, measurable and have a completion date attached.

I want to retire comfortable someday is not a goal; it is a Dream.

I want to retire with a monthly income of $2500 in six years. That’s a Goal.

I want to get out of debt – another Dream.

I want to be completely out of debt, excluding the house, within 36 months. –  Goal.

I want to buy a house – Dream.

I want to save $20K for a down payment on a house by this time next year – Goal.

Ok, you’ve got it. Now take some of your dreams including your “great-big-won’t-happen-for-a-long-time-dreams” and turn them into goals.

Fundamental Error #2: Failing to have a plan

When people make error #2, their behavior does not align with their goal. It is not that they lack self discipline; it’s that they have no plan.

If your goal was, I want to save $20K for a down payment on a house by this time next year, how are you going to do this?

How much a month do you need to save? Do you need to cut back expenses to get there? Can you increase you income? How?

Break your goal down into the little actions required to get there; draw yourself a map. Put in on paper and then tell someone about it. Check back on your progress frequently.

Whether you are on baby step 1 or 7, you need to have a goal if you’re going to win.

The Whole Truth

Do you ever watch the TV program House? You know how he never believes anything a patient tells him?

“Everybody lies”, is House’s line. If people think they are telling the truth, is it really a lie?

In the world of personal finance, everyone is overly optimistic. If you ask almost anyone how much debt they have, unless they have none, chances are their estimate will be significantly lower than the actual number.

Awareness is the first step in initiating any change. Before we can solve a problem (if there is one) we must clearly define it.

Two numbers you should know, that is really know, not guess, are your Debt and your Net Worth.

To determine your net worth draw a line down the center of a piece of paper (or use excel). In the left hand column, we are going to list your assets in the right hand column your liabilities (debt).

Assets-What you own Liabilities-What you owe
Checking Credit Card #1
Savings Account Credit Card #2
401K Credit Card #3
Stocks Student Loan
Home Value (www.zillow.com) Mortgage
Car Value (Kbb.com) Car Loan
Other Owed to friends or Family
Total Total

Now the trick here is to really do it. We are looking for the real truth here, not some optimistic interpretation of the truth.

Look up your balances, estimate your car value using Kelly Blue Book. Don’t go crazy trying to determine your home value just pick either Zillow or use your tax appraiser’s estimate.

Go to Annualcreditreport.com to get a free credit report, did you miss any debts?

Net Worth = Assets – Liabilities

Is you number positive (good) or negative (not so good)?

Either way your number is not you, it’s just a number that’s going to allow us to track your progress towards financial fitness.

The sum of you debt (liabilities) is the other number you want to track every month. As you use your income to pay off debt, your liabilities number will go down and your net worth will go up.

Write down these two numbers: Net Worth and Total Debt, along with today’s date and post them somewhere you can see them. Set yourself a reminder to do this exercise again next month.

If you really did the exercise – “WOO HOO! YEA YOU! CONGRATULATIONS!”; you’ve taken the first step towards financial freedom.

Good Debt vs. Bad Debt

In the world I grew up in there were two kinds of debt, good and bad.

Good debt was debt used to buy things that are going up in value, real estate, home improvement or education.

Bad debt was debt for depreciating stuff like clothes, vacations, dinners out etc.

Cars, even though they depreciate like crazy, got a pass and were ruled ok debt.

This is no longer that world.

In today’s world there is Bad Debt and Worse Debt and Toxic Debt.

Bad Debt is a 15 year fixed rate mortgage on a home that the payments are no more than 25% of your take home pay. How can this possibly be bad? It is debt. It has risk. It costs you money in the form of interest. It is as close to being “good” as a debt can get but let’s call it bad to remind us we want out of it as soon as possible.

Worse Debt is secured debt on rapidly depreciating cars, boats and other toys. In the old world, advisors would say a car loan was fine if paying cash would wipe out your reserves; after all you need a car. Depending on where you live and what you do for a living you might convince me you need a car, but you will have a very hard time convincing me you need a car loan. Buy a car you can afford. Can’t pay cash for a new car? Guess you don’t get a new car. Can’t pay cash for a 5 year old car? Try an 8 year old car.  Maybe you really have to have a car loan but if so, it should be a very small loan on a used car and you need a plan to pay it off really fast.

Toxic Debt paying 12-25% interest on stuff that has virtually no resale value is financial suicide. You did not need the stuff in the first place. If you carry a balance on your credit card it proves you could not afford the stuff. Don’t buy stuff unless you can pay for it.

Another form of Toxic debt is the school loan. This is new world. The price of tuition has gotten so high and the lure of easy loans is so strong that many graduate with huge loans that are totally out of line with their probable earnings.

The Financial Aid Officer sitting across the desk from you is the devil incarnate. You are selling your future. Be very, very, very careful.

Wake up! If you have been living by the rules you were taught and you’re not winning, it’s because the world has changed.

There is no good debt and right now is a great time to assess how you can adapt and win.

Radical Changes

Yesterday, we looked at Dave Ramsey’s 7 baby steps; these are steps almost everyone can follow. If you have an income, a reasonable level of commitment and some patience, you can make some real progress at becoming financially secure.

So what if you really want to go crazy with this thing? If you have a very early retirement as your goal, you might want to read what Jacob Lund Fisker has to say. Mr. Fisker has a 21 day makeover plan to get you on the path to save 75% of your income and retire extremely early. This guy is really smart. His is also way out under the long tail of our graph.

If you are willing to start questioning why we live they way we do; try:

The forest versus the trees Early Retirement Extreme: — written by Jacob Lund Fisker

In this blog Fisker explains how the actions of his deliberate and planned frugality interact.

Dump Stuff is a suggestion that Fiske makes early in his 21 day plan. He contends that a too big, too expensive house or apartment is one thing holding people back from achieving their goals. People buy or rent too much home so they have a place to put their stuff.

Small & Close are the words to have in mind when looking for a place to live.

Save Time & Money – Live close to work, recreation and shopping. You will save time and money on your commute and may be able to get down to one, or no cars.

Be Happy & Healthy – Walk or bike that commute to decrease your stress and improve your health. Spend some of that saved commute time cooking healthy real food.

Each of these actions has a benefit by themselves, but done together a real money saving synergy is created.

If we look at the opposite of the life he describes, we have a huge house in the suburbs, where no one can walk to anything.

Both parents must work to pay the mortgage, insurance, taxes and upkeep of our big house.

Commute times and costs are so high that three nights a week dinner is from a drive through.

The kids spend more time in the car shuttling from school to activity than they do playing outside.

At night the family zones out in front of their 52 inch 212 channel TV. No one has time to nurture relationships and everyone’s health suffers from lack of exercise, stress and poor diet.

How about that, we started off trying to save your money and instead we might just save your life.