Watson Inc

Why We Seek Security Versus Freedom

2012-01-25T05:00:00.000-05:00

By: Roshawn Watson

The traditional path of going to school, getting good grades, and obtaining a nice secure job is all too familiar. It is hard to be at odds with a path that has lifted millions out of poverty and provided sustenance for their needs. Moreover, not everyone is best suited to become full-time entrepreneurs. The challenge is not to demonize traditional employment but rather to have an honest discussion of the perils of focusing on job security instead of financial freedom. Here are three reasons why we seek job security instead of freedom.

We Seek Job Security Instead of Freedom Because We Lack Role Models

The most important single influence in the life of a person is another person who is worthy of emulation- Paul D. Shafer

The examples set before us serve as powerful influences of our behavior. All many of us know is how to make linear income with traditional jobs because that’s all that we have seen modeled. With linear income, you work and get paid once. Many can get by with this strategy, but the challenge arises when you can’t work (such as with a job layoff or sickness) or want to expand your income. I suspect when faced with this scenario, the proteges of successful businesspeople respond differently from most people.

Incidentally, that was the case for actress and producer Tori Spelling. After getting a relative pittance from her late father’s estate, she decided she was going to create for her family the lifestyle she had become accustom to. For example, she wanted to purchase their dream home, but it was out of their budget. Her husband said they needed to find a more affordable home, but Tori’s response was certainly a product of watching her late father create wealth. She said, “I’ll start a business....I’ll start several if I have to, but I want this house.” Did you catch that? She didn’t say “let me call my contacts so that I can find a job,” borrow more money, or shrink her vision to accommodate their budget. Her response to financial lack was to create systems that siphoned wealth into their hands.

We Seek Job Security Instead of Freedom Because Of Fear

Fear is pain arising from the anticipation of evil. - Aristotle

Fear is another reason why we seek job security rather than freedom. Fear is believing in the ability of something to harm you. That’s important because often our fears are much worst than reality. We sometimes give up on dreams because of the fear of falling flat on our faces. I remember about 13 years ago, I told an authority figure what my plans were, and he laughed. However, after a few short years, he was no longer laughing. His inability to see me excelling in that area and his fear of my failure were immaterial. What was important was that I was willing to stretch myself into unfamiliar territory and dared to achieve my dream anyway.

Likewise, I encourage you to strategically step out of your comfort zones and prove the naysayers wrong. Sure, this will require faith and courage, but faith and courage are necessary to fulfill great dreams, high goals, and strong passions anyway . Often, our worst concerns are never even realized, and if they are, we will survive and emerge stronger. By eliminating (or at least controlling) our fears, there will be more opportunities to obtain freedom because we have already dealt with one of the biggest thieves of success: fear.

A coward dies a thousand deaths. A soldier dies but once

We Seek Job Security Instead of Freedom Because We Feel Trapped

Man is the only kind of varmint (that) sets his own trap, baits it, then steps in it. John Steinbeck

Another big stumbling block in pursuing freedom is being trapped (or at least our perception of being trapped). Here are some startling examples of how we become financially trapped:

We have a culture of debt. The government even gives you tax breaks for being in mortgage debt. Currently, the average US household debt to income ratio is about 1:1, meaning we collectively borrow just about as much as we take in. Many people must have jobs to service their debts in addition to meeting their daily needs. Moreover, since student indebtedness exceeds credit card balances, these loans represent additional financial burdens plaguing even some of the most highly educated and productive professionals.
Of course, there are also tax concerns as well. We’re taxed when we earn, save, spend, and invest. Many of the tax laws do not work in favor of traditional employees, and taxes typically represent our largest household expenditure. Being ignorant of the tax laws could mean that you are ignoring more tax-advantaged sources of income and other tax benefits that could help you escape the rat race more quickly.
Lifestyle inflation is another culprit. The McMansion may be nice, but freedom is much better. Be mindful that conspicuous consumption and significant wealth building are often diametrically opposed, particularly in the beginning. You should fulfill your dreams, but just don’t go broke trying to do so.

The point is there are many factors that can cause us to feel trapped seeking job security. Often, our own choices are substantially, and perhaps unknowingly, impacting our plights. Merely attempting to change our circumstances, such as obtaining new jobs, while ignoring the underlying contributions our own decisions have on our bondage is futile because we’ll inevitably end up in similar predicaments.

For freedom, an expansion of our thinking is typically needful. For example, you don’t have to leave your job to become a skillful investor; many people can successful analyze investments, deals and transactions in their spare time. You can likewise be an accomplished business owner without leaving your job. Leverage your education, skill sets, and network to serve additional people. For example, consider creating and/or selling a product, becoming a speaker in your chosen area of interest, or freelancing. The biggest resource for most business owners during the start-up phase is typically personal capital anyway. Entrepreneur Daniel Lapin argues that employees need not be wage slaves. What a powerful revelation!

Closing Thoughts

In summation, there is nothing wrong with using a job as a means to fulfill your life’s vocation and to provide for your family. However, focusing on job security is dangerous because in these tumultuous business and economic climates, your only security is your ability to produce. Strategically adding other sources of cash flow to your household income can decrease your risks, allow you to explore untapped gifts and passions, and accelerate your financial goals. Don’t settle for the tenuous promise of job security. Seek your freedom today.

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The Architect Round Up

2012-01-25T04:40:00.000-05:00

By: Roshawn Watson

It's been a few weeks since I have done a round up. Here are some uncommon articles and carnivals that I have participated in.

Thanks to all of my readers, subscribers to this site, and followers on twitter (all 6100 of you!). I also thank the sites that have featured posts from here in their round ups and those that accepted my two recent guest posts. I’m so appreciative to all of those who have supported me for some time now and to my brand new readers. Thanks for helping me champion financial literacy!

Uncommon Round Up

Be The Architect of Your Own Life (Pick The Brain) - This empowerment post quotes Leonardo Di Vinci, career coaches, and much more. It resonated with many, and several stated that it was insightful, so I naturally want to share it with you.
In God We Trust: Your Money And A Higher Power (The Simple Dollar) - This is a high-level, thought-provoking post. All too often people are so used to providing excuses for their lack of productivity, that they will convincingly justify doing nothing for a prolonged period of time in the name of religion.
Let There Be Light (Money Cone) - This scholarly article is an easy pick for me. In addition to being well-researched and including figures and tables, it presents the data for incandescent, CFL, and LED bulbs in an accessible way. If you are looking for an authoritative article on the subject, this is a very good choice.
Consumer is King, Believe It or Not. Now Act Like One (One Cent At a Time) - Did you realize that consumers are royalty? To be perfectly honest, we often forget just how much power we hold. If we change our conduct to be more kingly, you’ll be surprised by the response.
31 Days to Improve Your Financial Life (PT Money) - Philip had put together exhaustive posts all month long on improving your finances. I was so happy that he included December’s unrealistically high goals post in this edition.
5 Jaw-Dropping Financial Advisor Interview Questions (The Free Financial Advisor) - Average Joe present five good questions to ask when hiring a financial advisor. I think these questions actually apply to other professionals as well.
The 10 Steps Between a Vague Idea and Definite Success (The Money Principle) - I enjoy posts that make me think. Lately, I’ve been discussing many success principles. In this article, Maria outlines the how to move into success from a non-specific idea. It is an interesting read.
Retiring Abroad — A Few Things to Ponder (101 Centavos) - This post prompts the reader to work through some of the practical issues of retiring abroad. Unfortunately, it is not all palm trees and hammocks.
5 Signs You May Be Trapped in a Dead-End Job (Invest It Wisely) - Being professionally trapped can be disheartening and mentally and emotionally damaging. If you feel trapped, then consider the steps to get unstuck. I certainly don’t want to sound trite, but I also don’t want to advocate staying at a job you hate for 40 years.

Other Honorable Mentions: Thanks to Barbara Friedberg, Net Worth Protect, and Debt Blackhole Thank you for your support as well.

Carnival’s I have recently participated in:

Best of Money Carnival
Best of Money Carnival #133 @ One Cent At A Time (Editor’s Pick)

Carnival of Personal Finance
Carnival of Personal Finance #340 @ Financial Success for Young Adults
Carnival of Personal Finance #341 @ Money CactusCarnival of Personal Finance #342 @ Sweating The Big Stuff
Carnival of Personal Finance #343 @ Wealth Pilgrim
Carnival of Personal Finance #344 @ Diva In Debt (Editor’s Pick)
Carnival of Personal Finance #345 @ Matt About Money (Editor’s Pick)

Carnival of Financial Camaraderie
Carnival of Financial Camaraderie #12 @ My University Money
Carnival Of Financial Camaraderie #13 @ Christmas Edition @ My University Money
Carnival of Financial Camaraderie #15 @ Boomer and Echo
Carnival of Financial Camaraderie #16 @ My University Money
Carnival of Financial Camaraderie #17 @ Financial Success for Young Adults

Festival Of Frugality
Festival of Frugality #310 @ Help Me To Save
Festival of Frugality #312 @ The Magic Penny (Editor’s Pick)
Festival of Frugality #320 @ Squirrelers

Yakezie Carnival
Yakezie Carnival @ MJTM
Yakezie Carnival @ Broke Professionals
Yakezie Carnival @ Prairie Eco Thrifter
Yakezie Carnival @ Little House In The Valley

Totally Money Carnival
Totally Money Carnival #46 @ Help Me To Save
Totally Money Carnival #48 @ Help Me To Save
Totally Money Carnival #49 @ Mother Miser (Editor’s Pick)
Totally Money Carnival #50 @ Family Money Values

Do You Have The Courage To Be Wealthy?

2012-01-18T07:44:00.001-05:00

By: Roshawn Watson

Many of the activities required to become a self-made multimillionaire involve forsaking conventional wisdom and overcoming adversity. The path to great wealth is often the road less travelled because the journey can be uncomfortable and lonely. It often requires bucking societal norms on spending, indebtedness, investing, and vocation. One must have resolve and courage to follow such a path. Let’s explore three ways courage can be instrumental in building wealth.

Courage Is Important Because of the Risks

One key area that shapes many of our financial and professional decisions is risk. Lacking courage when facing risks can be detrimental. Most millionaires are self-employed, business owners, and/or fastidious investors. Some have navigated the professional or corporate jungles to achieve high levels of responsibilities. Accordingly, millionaires deal with risks that would unnerve many.

I recently learned points from a Morgan Stanley managing director regarding professional risks. She was very bullish on gaining additional levels of responsibilities and taking on new challenges on the job. She advised young professionals to adopt a similar mindset. She questioned the wisdom and safety in ducking for cover during an adversarial situation. In her own words, if the bullets are flying, ducking will not necessarily spare you. By keeping your eyes open, you can at least see what’s coming your way. She recommended being comfortable with F.E.A.R. (False Evidence Appearing Real) and thriving. Her words ring true, perhaps more so in the current climate than ever before.

It’s hard to gain a competitive advantage by always playing it “safe.” Taking strategic risks is often necessary to dominate a market or even a small niche. Regardless of whether you are contemplating starting your own venture, increasing your positions in paper assets (such as stocks and bonds), or exploring an unconventional career path, remember a) there’s a reward for merely trying and b) there are also risks involved in “playing it safe.” Have a reality check regarding risks. The wealthy don’t avoid risk, and neither should you.

Sometimes the greatest risk is not taking one

Courage Is Important Because The Path Is Lonesome

Sometimes people are so fickle. When watching the Tudors, one thing I noticed was how quickly the public and royal sentiments changed towards “noble servants.” It didn’t matter whether you were Cardinal Wolsey, the Duke of Sulfolk, or Anne Boleyn, you could go from saint to trash in Henry’s court in a matter of days without changing your activities, faithfulness, or your beliefs. Even today, we’re just as capricious. The same people who are criticized and ridiculed for their differences become celebrated as innovators and visionaries after a little success.

With respect to wealth accumulation, dealing with the discomfort of being different and criticism is particularly important. First, a high-consumption lifestyle is at odds with accumulating and maintaining high levels of wealth. Most millionaires do not get huge paydays each year.

Fewer than five thousand of the nearly 100 million US household will earn $5 million in a single year.
The majority of millionaires earn a small fraction of $5 million in a year.
Approximately, two-thirds of millionaires are worth less than $2.5 million.

The point is, it is the tortoise’s approach (consistent investing over time and frugality), not the the hare’s approach, that leads to prosperity and wealth accumulation for most millionaires. Second, paucity of vision or lack of care may cause the people around you to not appreciate the difficulty in decisions you must make. Standing alone in the truth is perhaps one of the most challenging aspects of becoming successful, especially when those who disparage your efforts continue to play with little thought of tomorrow. Somehow, broke people afford everything!

When broke people make fun of your financial plan, you’re on the right path.- Dave Ramsey

When you feel lonesome, remember that 1) your dream does NOT require the approval of everyone you love, and 2) the same people who malign your priorities and assassinate your character may become your allies tomorrow. People are fickle that way.

Courage Is Required Due To Adversity

A gem cannot be polished without friction, nor people perfected without trials. Chinese proverb

Some people seem to feed off of the havoc they create, and the more successful you become, the bigger the target is on your back. I’m convinced that poisonous people sometimes cause trouble to distract attention from their own lack of accomplishment. Most productive people I know don’t have time for drama.

Regardless of whether it’s dealing with a critical person, failing to meet ridiculously high expectations, facing outright lies, or competing with the nonfriendly, when you attempt to do something great, you will face adversity.

Let me give you an example. Sylvester Stallone was a struggling actor and writer when he became so inspired by the Muhammad Ali fight with Chuck Wepner, where Wepner refused to quit against perhaps the greatest fighter of the world, that Sylvester reportedly wrote for 20 hours straight. The product of this period was the script to Rocky. He pitched his script to movie producers, and they loved it, BUT they wanted to cast another actor as the lead. In fact, they raised Sylvester’s payout to $325,000 to sell the script and NOT star in his film. At the risk of losing the script, the producers finally settled on paying him $35,000 for the script AND casting him as the title character. This occurred during the 70s, so in inflation-adjusted dollars, the original payout that Sylvester walked away from would exceed $1.3 million.

What value do you attach to YOUR dream?

Today, Sylvester Stallone’s main movies have grossed upward of $2.6 billion. Imagine if he had given in to the negativity regarding his abilities, looks, and chances of making it amongst the rich, famous, and beautiful. Instead, he held on to his convictions and excelled admirably. It was passion and courage that allowed him to reject every deal involving relinquishing his dream.

Your conduct under pressure will reveal the true measure of your character.

Closing Thoughts

Courage is defined as mental or moral strength to venture, persevere, and withstand danger, fear, or difficulty. Courage is important to wealth accumulation because it takes strength to defiantly proclaim that the culture of debt is ridiculous, to resist conspicuous consumption, to start businesses when pundits argue “9 out of 10 businesses fail,” and to invest in the markets during “the worst recession since the Great Depression.” It take strength to tell relatives NO when they try to set YOUR financial priorities. Indeed, wealth researcher Thomas Stanley listed courage as amongst the most common and important characteristics of millionaires. I may not know the value of your dream, but I admonish you not to sell yourself short. Take courage, live well, and PROSPER!

Related Posts

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Goals Are NEVER Enough: 3 Reasons You MUST Cultivate Your Desires

Through the Looking Glass

Editor’s Note: If you want to learn more about SOPA and PIPA, head over to Stop American Censorship.

Goals Are NEVER Enough: 3 Reasons You MUST Cultivate Your Desires

2012-01-11T04:00:00.000-05:00

By: Roshawn Watson

The proof of desire is pursuit!

Don’t tell me what you want. Show me what you want. Your actions will reveal your true desires. We all know people who talk about becoming debt-free, losing weight, going back to school, or building a business. In fact, they may mention it repeatedly, yet their actions don’t reflect their stated goals. Often this misalignment is because we are used to discussing what we think we should want rather than what we really want. I’m convinced a strong desire towards high goals is a phenomenal way elevate your performance. Here are 3 reasons to cultivate your true desires.

Desire Determines your Longevity

Persistence is often not the product of energy but rather a representation of your passion. Passionate people can endure tremendous pain, failure, embarrassment, and scorn. It was passion that drove Thomas Edison to complete ~1,000 failed experiments before he performed one that worked. When discussing his “failed” experiment, he commented that he didn’t fail 1000 times; rather he just proved that those 1000 ways did not work. Likewise, it was passion to prove the skeptics wrong that caused Roger Bannister to run a mile in less than 4 minutes when doing so was considered unreachable and even dangerous by physiologists at the time. Passion will cause you to persist in a worthy endeavor, even when the experts doom your effort to failure.

Ironically, what is particularly precarious is to not have a strong desire for your work, goals, or dreams, according to Jerry Porras. This is because for every person who is pursuing something half-heartedly, there is someone else who loves what that other person is half-hearted about. The person who has passion will work harder and longer and will ultimately run circles around the those lacking the same enthusiasm and dedication. Passion is a competitive imperative.

“Only by loving what you do will you actually do more and do it better than the person sitting next to you.” - Larry Bossidy

When you face adversity upon attempting your dreams and goals, what is your position?

I’m convinced that if your desire is worth emptying yourself into, it is also worth persevering through adversity to attain. All too often, progress is stagnated over slight hick-ups. Rather than coming up with creative solutions, the obstacles serve as the perfect excuses for meandering and for being unproductive. There’s nothing wrong with changing course if you are convinced a different path will get you to your objective. However, if you are constantly wiped out when it is time to work and pursue your dreams, then perhaps it is time to question whether your “pursuits” truly inspire you.

The only place where you find success before work is in the dictionary.” - Mary V. Smith

Desire Determines your Persuasion

You can do things that appear beneficial and may give you temporary advancement or movement along your path, but unless it’s something you really believe in, it’s not going to, in the long run, succeed. - Senator John McCain

You can never rise above your persuasion. When you describe what you are attempting, what do you hear? Are you apologetic? If so, it is perfectly possible that you don’t believe your goal has much merit or aren’t persuaded that YOU should be pursuing it.

When you describe your goal, do you sound excited or terse? Again, what you hear when you describe your desires is a portrait of your passion. Passion is an intense desire, and passionate people have enthusiasm for their dreams. When they speak, they are often animated and engaging. Moreover, they are inspiring. In Tribes, Seth Godin argued that not only are leaders charismatic, but they also transform “the shared interest (of their tribe) into a passionate goal and desire for change.”

It’s what you are persuaded about that you will sacrifice for. It’s what you are convinced of that you will share with others.

Abraham Lincoln stated that “if I am wrong, 10,000 angels telling me that I am right won’t change me, and if I am right, then 10,000 demons telling me that I am wrong won’t change things.”

Desire Determines Your Hunger

When you see a child playing with his or her food, you know he or she isn’t particularly hungry. Are you similarly dabbling in your dream? Achievers recognize the importance of staying in the center of their passions. If your dream isn’t exciting enough to attract your attention, maintain your attention, and warrant your continual focus, then perhaps you should ask yourself why.

Lately, I have had a renewed focus to stay in the center of my passions. This often means I will turn down a lot of opportunities. They don’t deserve my attention, not because they are not worthy endeavors but because they don’t excite and inspire me.

Similarly, there are many valid causes that may not qualify for your focus. A primary challenge for the achiever is distinguishing between what others can do and what he alone can do. It’s hunger for that calling that drives you to excellence when mediocrity is so pervasive. It’s hunger that eliminates the unnecessary appointments to make time for YOUR true priorities. It’s hunger that inspires you to LIVE. In fact, I agree with author John Maxwell: dreams are at the center of our souls.

Most men die from the neck up at age twenty-five because they stop dreaming. - Benjamin Franklin

Closing Thoughts

Porras Principle: “Don’t believe in words-only believe in behaviors.” - Jerry Porras

Don’t think for one moment that it stops with setting goals. Setting the goal is merely the beginning, but passion and action are needed for manifestation. I hope that you are inspired to take the next step. Achievers do not have a disconnect between their words and their actions. Resolve to not waste another moment on goals undeserving of your passion. Resolve to advance from simply goal-setting and take ground also. Find what dreams you desire, and pursue them today!

“Death is not the greatest loss in life. The greatest loss is what dies inside of us while we live.” Norman Cousins

Through the Looking Glass

Setting The Course For The Impossible

3 Reasons to Focus on Household Cash Flow

2012-01-04T09:08:00.000-05:00

By: Roshawn Watson

Cash flow matters. In fact, cash flow is one of the most important principles in personal finance. Business trainer Brain Tracy says that 46% of businesses fail due to poor cost containment. Similarly, many homes have fallen victim to cash flow problems due to illness, lifestyle inflation, misplaced altruism, and poor money management (simply not paying attention). The sad truth is a whopping 62% of people live paycheck to paycheck. There is clearly a significant disconnect between our knowing the importance of cash flow and our actions. Here are three reasons for a renewed focus on cash flow.

Cash Flow Is Important to Capitalize on Unique Opportunities

Last year, I had the pleasure of seeing how a successful venture capitalist (VC) structured his personal finances. Since he’s in the business of assessing and funding the latest and greatest opportunities, I was curious to see if he was a risk junkie like many other Wall Street types (he’s a former ex-Morgan Stanley managing director). Surprisingly, he only devoted 10% of his personal income towards “speculative” investments. He had profound insights pertaining to personal and professional risks. For one thing, he repeatedly stressed the importance of positioning oneself to take professional risks. He indicated how he never could have made the leap from employee to owner of his own VC firm without a solid financial foundation. For him, appreciation of acquired assets was his business’s bread and butter, but without proper cash flow management, he wouldn’t be able to wait out long periods for massive paydays.

He also indicated that one of the things that he personally looks at when he is fostering new business relationships is financial statements. He called it “due diligence” to intimately know all the financial details of everyone he is doing business with, as much as allowable, and invited anyone to do the same with him. He stated that there were plenty of people who he turned down because they were “too leveraged” and thought that he would personally be financing their lifestyles rather than thriving business ventures. I certainly believe him. Career coach, Dan Miller, suggests that VC firms fund a mere 1% of the ideas that come their way.

Regardless of whether you are looking for investors to fund your next idea or are willing to bootstrap it yourself, one of the primary reasons to pursue cash flow streams and financial independence is to be able to take advantage of unique opportunities, including pursuing dreams and passions that require some time to get off the ground. The old saying is that success happens when preparation meets opportunity. How unfortunate is it when that opportunity finds us wholly unprepared.

To every man, there comes in his lifetime that special moment when he is figuratively tapped on the shoulder and offered a chance to do a very special thing, unique to him and fitted to his talents. What a tragedy if that moment finds him unprepared or unqualified for the work which would be his finest hour. Winston Chruchill

Cash Flow Is Important to Fulfill Your Obligations

Being able to meet your obligations is a critical aspect of any financial plan. Again, over 60% of people live paycheck to paycheck, meaning an unscheduled interruption in your job salary can cause financial crisis in the majority of households. This is unfortunately a repeating cycle too. It’s painful, for instance, to see someone work for 25 years and only have a gold watch to show for his many years of faithful sacrifice. In such cases, when something comes up, he is practically no better off than when he was hired decades ago. Alas, old habits die hard.

Security is the ability to produce. General Douglas MacAuthur

Personally, when my income from my then primary employer practically ceased for 3 months nearly 2years ago due to a “clerical error,” I gained much insight into and first-hand experience of the power of having multiple income sources and adequate liquidity. As I reflect on the numbers, my primary employer (40+ hours per week) was no longer my main income source. Thus, what should have been a struggle wasn’t. The ability to stay afloat during financial adversity is why maintaining good cash flow and financial solvency are critical: one can withstand substantial fluctuations or even interruptions in job income while remaining solvent. That is obviously an inherently less risky scenario. There’s power in focusing on building cash flow streams and diversifying income.

Cash Flow is Important to be Able to Retire Early

Financial freedom is important, even if you decide to work.

I can only speak for myself on this point, but retirement doesn’t excite me nearly as much as having the ability to retire. Personally, I believe work should fulfill your life’s vocation and purpose, which goes infinitely beyond a job or even a career. While I can’t tell you how I will feel in 15-20 years, I suspect that I will constantly be “working” on something regardless of my financial situation. For example, there was a family member who was out of work for a brief period last year, so I bid on some online jobs and “hired” her to perform them. My “work” was merely checking and occasionally editing her work, where necessary. It was a win-win scenario for all parties involved in many ways. As long as my work is an authentic fit (in line with my skills and abilities, my personality, and my dreams and passions), my personal bias is that work is good.

We all want “to live, to love, to learn and to leave a legacy.” Stephen Covey

Perhaps you are wondering, if I am such a proponent for work, then why would I stress financial freedom? Briefly, financial independence means you write your own script. You decide your priorities, your growth, your pace, and your risks. You are a king of sorts because you exercise great control over your destiny. The decision of whether you can send “junior” to college is no longer based on whether a shareholder who doesn’t even know your name sees you as fixed overhead. In short, financial independence and work, even at a conventional JOB, are not necessarily competing priorities depending on your income, your strategy for managing your finances, your career advancement opportunities, and your ability to create income outside of your job.

Closing Thoughts

Proper cash flow management is amongst the most important concepts in personal finance. The true marker of financial intelligence is not how much money one makes but how much one keeps. While there are plenty of competing interests when it comes to personal finance and personal development, let me suggest that instead of clinging to the trappings of life, the illusion of job security, the possibility of a promotion, or the pedigree of certain academic institutions, cling to solvency, cash flow management, and financial security. If you resolve to do anything related to finances, resolve to make cash flow your priority today.

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Like it on Facebook, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

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Home Mortgage Leverage SUCKS!

2011-12-28T04:00:00.000-05:00

By: Roshawn Watson

An article was circulated last week where the author lamented losing the leverage benefit of having a home mortgage; he paid off his mortgage in less than 2 years and regrets his decision. He wishes he would have invested the money instead, so it would have doubled like his other investments. Now, from my few interactions with the author, he really seems like an insightful guy who has done some wonderful things in his former career and currently as a money coach. I’m also a subscriber and a personal fan of the blog that it was published on, so I have some inherit bias. Nonetheless, my reason for writing this post is simply to provide you with a counter-perspective: home mortgage leverage sucks!

I Would Have Paid Off My Mortgage Rather Than Invest More Because Opportunity Costs Are Part of The Costs Of Doing Business

Barb Friedberg made a particularly insightful comment on 4 Things To Stop Doing With Your Finances. She wrote that it’s important to “ignore sunk costs,” as they are “part of doing business.” With that framework coupled with one of the most important lessons in Rich Dad, Poor Dad, which is “Mind Your Own Business,” there is a powerful and relevant takeaway: since your household finances are your business, there will likely be some opportunity costs necessary in order to ensure sustainability. Thus, these lost opportunities are indeed expected in most healthy businesses, including your household. This is the very same reason it is pointless to bemoan maintaining an adequate emergency fund (EF). Yes, it is true, keeping an EF means you forgo the opportunity to put those dollars to work (i.e. in the market), but the EF also provides you a better foundation to withstand the storm.

I Would Have Paid Off My Mortgage Rather Than Invest More Because I Consider Risks When I Compare Returns

If you are going to use a hypothetical scenario as a basis to justify keeping a mortgage so that you can invest more aggressively, then why wouldn’t you incorporate the risks associated with indebtedness into the model? It’s only fair because a paid off home is inherently less risky than a mortgaged home. Without a mortgage, there’s less concern for foreclosure, fewer issues with cash flow, significantly more money to invest, etc. Thus, financially speaking, risk matters, so it should be mathematically accounted for (i.e., a risk-adjusted rate of return). That’s certainly how insurance companies do business, and they don’t lose money. It’s a numbers game, while one policy may be “costly,” in aggregate, there are thousands more policies that more than make up for the few times the insurance company pays in excess of the premiums they take in for any given policy. Additionally, this is why companies have risk management divisions (for a great movie example of how important Risk Management is to a business, watch the new movie Margin Call). Properly accounting for risks means that one would have to downwardly adjust the rate of return if he or she chose to keep a mortgage so that he could invest more. This isn’t pessimism as much as it is due diligence. Eighty percent of families WILL have a major financial expenditure within the next 10 years. Now, imagine the risks incurred by keeping that mortgage for 30 years. A plan that only works if everything works out well, is not much of a plan anyway.

I Would Have Paid Off My Mortgage Rather Than Invest More Aggressively Because I Don’t Know the Future

There’s an old saying that if you want to be rich, figure out where everyone is trying to go, and get there first.

Depending on when you run the numbers, the market could have easily been significantly up or down. This lack of reproducibility is perhaps the biggest limitation of using a single case study to substantiate a point, such as using mortgage leverage to invest more aggressively. There’s a preponderance of evidence suggesting decreasing your debt-to-income ratio will improve your overall financial health, but is there solid data supporting short-term speculation in growth stocks? Moreover, any perceived advantage obtained using debt as leverage is often mitigated once risk and taxes are accounted for.

I would also argue the market is getting hard to predict, as the volatility index has increased in recent years. The cyclical and volatile nature of the market are the reasons investments are for the long-term. It’s always easy to say in hindsight that if I would have invested in stock XYZ, I would have tripled my money. That doesn’t mean that it was a mistake to avoid stock XYZ. Your total financial picture is relevant because you don’t know what stock XYZ will do, and it is your responsibility to allocate your resources to the best of your ability. You may suspect outcomes and be armed with your best data, but in the end, there’s no certainty about stock XYZ’s future performance. In contrast, one could say with certainty that nearly all homes that are foreclosed on have a mortgage (or at least a lien).

Being clear about what I do and do not know, my values, and what financial stress I do not want in my life makes paying off the mortgage an easy choice for me.

Other Considerations

If your cash flow is large enough that you can eliminate a pay off your entire mortgage in less than two years, 1) the mortgage likely represented a small part of your financial world and 2) since the mortgage payoff period is relatively short, you have a long time to financially recover from the alleged “mistake,” assuming your income doesn’t decline. During this recovery period, you can invest mortgage free!
The “mistake” paying off one’s mortgage is easily rectifiable. If you want a mortgage on a paid off home in a nice area, there are plenty of bankers who would be more than willing to oblige. While you did miss a bull market or two, there’s surely another one coming alone.
There’s no guarantee that the money used to pay off the mortgage would have gone into investments anyway. While we have the best intentions, sometimes having an unrealistic goal, such as paying off a mortgage in a ridiculously short time, is enough to correct behavior that would otherwise not be as disciplined.

Closing Thoughts

In summation, regardless of whether you are a traditional worker, self-employed, or a business owner, you are in business for yourself. Minding your own business doesn’t just mean investing for growth, it also means controlling risks, including debt. Leveraging yourself for the next 30 years, which for most people represents 25-33% of their income, is a decision that has serious financial implications. In fact, housing expenses of those with mortgages are approximately 3.5 times the expenses of those without mortgages; that affects opportunity too!There’s a reason it’s emotionally difficult to go from a paid off home to a mortgaged home with a volatile portfolio. Your heart is leading you to prosperity and safety. Are you listening?

Related Post

Is a 15-year Mortgage For Everyone?

Should You Pay-off the House?

Should You Buy A House Outright?

Is Home Ownership A Good Investment?

4 Reasons You Should Set Unrealistically High Goals

2011-12-21T04:00:00.000-05:00

By: Roshawn Watson

Goal setting is extremely powerful and can have a dramatic impact on your personal finances, productivity, career, relationships, health and life. Motivational speaker, Zig Ziglar, often admonished salespeople to set goals to achieve their peak performances. In fact, he reportedly went as far as saying “a goal properly set is halfway reached.” However, sometimes setting large lofty goals may seem like a waste of time, or worst. After all, shouldn’t goals have a strong basis in reality? Let’s delve into this issue. Here are 4 reasons you should set unrealistically high financial goals.

Setting Unrealistically High Goals Raises Your Performance to the Level of Expectation.

When you are around the best, read about the best, think about the best, eventually you begin to expect the best in your own life. Even if it is entirely subconscious, there’s something that will click internally and begin to move you towards excellence. This is why your associations matter. Your environment influences your expectations about yourself. How many would-be entrepreneurs, scientists, physicians, and peacemakers have failed to realize an authentic utilization of their gifts, personalities and passions because they never became aware that THEY could do great things. Greatness was never modeled by their associations. Eagles who hang out with chickens too long may forget how to fly! By setting phenomenal goals, you are intentionally focusing on the best, and your behavior will follow suit.

Setting Unrealistically High Goals Encourages You To Draw On Your Creativity

Success for you is dependant on your capacity to believe.

If you are placed in a situation that forces you to draw on dormant potential, your performance will change accordingly. In addition to normal goals, I personally advocate setting stretch goals: goals that will deliberately pull one out of his comfort zone. With respect to finances, I have seen people adopt this in various ways, such as a recent pledge by many online bloggers to make $30,000 online in 2012. Perhaps you’re trying to get your business in the black or are up for a big promotion. Don’t just settle for a common “been there, done that” mediocre goal. Choose something that inspires awe in your observers, and then develop a creative plan to MAKE it happen. Remember, the Rich Dad, Poor Dad lesson for those who desire to be rich: the quintessential question isn’t “can I afford it?” but rather “how can I afford it?”

One contemporary business example of this point is beautifully illustrated in Crush It by Gary Vaynerchuk. He writes about how he was challenged with redefining the wine industry, an industry that is known for being stodgy and conservative, as he took the helm of his dad’s company. He was a rule breaker, was passionate, and he enthusiastically embraced technological advances that allowed him to spread his message, virally. Consequently, he found his unique voice, established a loyal following, and tremendously built that brand to heights few expected and in record time. His goals helped him prove the skeptics wrong.

Setting Unrealistically High Goals Motivates Yourself

I read that the median response for a recent Gallup poll was that a person would need to make at least $150,000 per year to be considered rich, which caused me to reflect on when I was most recently challenged on my definition of rich by Felix Dennis, founder of Maxim. He claims that a household with a net worth of less than $2 million is uncomfortably poor. He was one of the few people that I know of who would classify someone with a net worth of $1.7 million as not just “poor,” but “uncomfortably poor.” Something about that is revolutionary and motivating.

While we can argue over arbitrary classifications, such as who is rich or who is middle class, a more productive use of time is to determine what goals inspire you. What is worth spending the next 3-5 years realizing? What goals are worth emptying yourself into, fully? When I wrote about the senior and founding partner at a law firm who only made $30 his first month in his practice but now earns $30 million per month, I am speaking about someone who emptied himself into his practice. It is very likely that had he given up on his goal to be in business for himself and fight corporate conglomerates, he would not have realized considerable success. When I listen to him describe the high-stakes litigation that he was involved in and the many obstacles he had to overcome, I can tell that he not only had a strong sense of self but also knew precisely what his objectives were. Otherwise, it would have been too easy to waiver, fold under the pressure, or settle before he it pay dirt. Quite honestly, he still has even loftier goals (beyond his Gulf Streams). That’s what keeps him striving for excellence. It keeps him relevant.

When you set goals that are beyond what you think are realistic, you are bringing those enormous dreams into the reality of your mind. You are speaking to those dreams and declaring that they have deadlines to be realized in your life. This is significant because whether you think you can or think you cannot, you’re right!

Give more consideration to what pursuing grand goals effects in you. Jim Roth said it this way

The major reason for setting a goal is for what it makes of you to accomplish it. What it makes of you will always be the far greater value than what you get.

Setting Unrealistically High Goals Motivates Others

Of all the things I've done, the most vital is coordinating those who work with me and aiming their efforts at a certain goal. - Walt Disney

Lame goals don’t inspire!

Has anyone tried to motivate you to achieve an uninspiring goal? Me too. Did it work? I didn’t think so. Daniel Burnham said “make no small plans; they have no magic to stir men’s souls.”

There’s something very powerful when someone sets a goal so awesome that it causes you to reevaluate what’s possible in your own life. In Your Do Over Guide, I shared the story of a venture capitalist who by his mid-twenties had already retired twice, was one of the youngest CEO’s of a publicly traded company, and was making phenomenal investments that returned more in a day than most people got in a year. When I heard his next goals, I got motivated for myself. I began to remove limits that I didn’t even know existed in my own life. Moreover, I began to enlist the help of like-minded individuals, and they were kind enough to oblige me. Now, their help was fully voluntary, so what was the draw for them? It was the goal: the goal was big enough engage others meaningfully.

Let’s be very serious: if your goal is so small that you can achieve it on your own, then it’s likely not big enough. However, if you dare to dream bigger, you stand to accomplish a fraction of your potential.

Closing Thoughts

People often caution dreamers. They tell us to “get back into reality. It’s not that simple. We haven’t accounted for all of the variables. What if we FAIL?” Here’s my response to every Eeyore:1) ”I love and believe in the beauty of my dream,” 2) in fact, the only way that I will achieve my dream is to stop being realistic, 3) everyone starts somewhere, 4) over-analysis can create paralysis, 5) failure is a matter of opinion, 6) failure is temporal, 7) failure is instructive, and 8) failure unleashes creativity. I’m not afraid of trying and failing. I’m afraid of not trying. Sometimes the greatest risk is not taking one.

He who refuses to embrace a unique opportunity loses the prize as surely as if he had failed. - William James.

Through the Looking Glass

The Impossible Question: Just Who Is The Middle Class?

Your Do Over Guide: What Would You Do Differently?

4 Things To Stop Doing With Your Finances

2011-12-14T07:33:00.001-05:00

By: Roshawn Watson

Often personal finance writers discuss what we need to do, particularly with respect to saving and investing. However, it is also what you are willing to walk away from that will determine your future prosperity. After years of providing advice, comforting friends, and dealing with my own issues, here are 4 disastrous behaviors to stop doing with your finances.

Obsessing Over Reasonable Purchases

You have worked hard. You have your emergency fund. You have eliminated consumer debt. You have invested aggressively over the years. In fact, you are on track to be financially independent 15 years earlier than the experts said was possible, so why do you obsess over minutia?

I advocate fiscal responsibility, but I don’t support deprivation for bragging rights. Recall when you began your financial journey and decided your priorities. Remember when you decided that financial abundance was worth pursuing. Remember why you started to save to begin with. Self care is not selfishness. In fact, one of the best gift you can give someone is a better you. That’s because you can help them from a position of strength rather than one of weakness.

Last week’s discussion of value-oriented purchases is particularly relevant here. When purchases that are in line with your core values give you pause because of sticker shock, remember that if you have built a solid enough foundation and have performed due diligence, such occasional splurges can enhance you by improving your productivity, your motivation, and your overall quality of life.

My fellow frugal readers, if you’re in this position, simply ask yourself the following question: “Why do we save anyway?”

Trivializing Pathology

Debt is not the Problem. Debt is the symptom of the problem.

The suspicious gambling charges on the credit card may be a clue to something sinister, and I don’t mean identity theft.

Beneath the surface, smiling facades, and Under Armour sportswear, there could be someone dealing with pain. I wish there was a quick answer for every money problem, but sometimes there are real emotional, psychological, and even biological issues that require professional help, such as a financial counselor, a therapist, a psychiatrist, etc.

This is not about creating excuses for financial misbehavior but getting to the root cause. Money problems often mask other pathology. For example, reckless spending could be used to compensate for negative self-worth. Cutting up the credit cards without addressing the disconnect leading to the budgetary malfunction may only provide a temporary reprieve and prove ineffective. That’s because addressing the misbehavior while ignoring the underlying problems prolongs the sickness.

Simply put, the essence of every financial problem is NOT financial mechanics. In fact, over 80% of money problems are BEHAVIORAL. When there’s dysfunction, get the help that’s needed.

Comparing Yourself to Others

There are numerous reasons that may account for someone else’s apparent prosperity, and I sincerely hope that you will concern yourself with none of them (unless you are just looking for ideas to improve yourself). Quite simply, you do not know the circumstances of others. Just because you may be able to approximate their earned income doesn’t mean you know what their passive income, portfolio income, and expenses are like. For example, the person who some may shake their heads at for taking two luxurious vacations annually could own 10 rental properties outright and be completely financially independent. The coworker with the McMansion may have delayed (or decided against) having kids. The friend whose second home is Neiman Marcus could be receiving financial help (economic outpatient care) from the bank of mom and dad. Often you just don’t know.

What I can tell you though is that most financial “short-cuts” lead you down a road that you don’t want to go. Additionally, comparing yourself without taking action to improve your life is a futile exercise at best.

If the people you compare yourself with truly have their acts together, simply wish them well, glean all the wisdom you can get from them, and reassure yourself that there are plenty opportunities for you to achieve the life of your dreams. Don’t let jealousy and envy rob you of enjoying your journey or the opportunity to learn from someone who possibly is operating at a higher level.

Don’t hate, congratulate!

Berating Yourself Over Past Financial Mistakes

Regret is usually a waste of time.(Thomas Crown)

Don’t berate yourself over past money mistakes. If you are over 18, you have made money mistakes. We all have. That doesn’t justify being miserable over what decisions were made 20 years ago. To be perfectly honest, this section is a little bit of a challenge for me to write. I am certainly a fan of a do over. I firmly believe that we can learn, draw inspiration, develop resilience, and create remarkable change all from yesterdays’ mistakes. However, drawing wisdom from the past is not the same as punishing oneself because of regret. Yesterday is in the tomb. Tomorrow is in the womb.

Letting go may be emotionally difficult, especially if you are analytical or really did your absolute best at the time. However, being a slave to past mistakes can rob you of future victories and joys. You are destined to do greater things, but if you refuse to open your hands to let go, you are simultaneously blocking your ability to receive.

Closing Thoughts

In summation, the comfort in holding on to some behaviors is not worth the danger. The power in relinquishing the familiar can be just as revolutionary as more traditional personal finance advice. Recognizing when professional help is necessary and letting go of envy, jealousy, regret, obsessive comparisons to others, and overly scrutinizing reasonable purchases will increase our financial peace as we develop healthy relationships with money.

What you are willing to walk away from that will help effect a significant change in your life. Decide what you will release today!

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

Why Do We Save Anyway?

Broke People Afford Everything!

Your Do over Guide: What Would You Do Differently?

Great Attributes Round Up

2011-12-14T07:29:00.000-05:00

By: Roshawn Watson

It's been a few weeks since I have done a round up. Here are some uncommon articles and carnivals that I have participated in. Interestingly, two of these 11 articles were written in direct response to content published here.

Thanks to all of my readers, subscribers to this site, and followers on twitter. I also thank the sites that have featured posts from here in their round ups and those that accepted my three guest posts last month. To be perfectly honest, I'm overwhelmed by your faithful support and appreciate all of you so much. Thanks for helping me champion financial literacy!

Uncommon Round Up

1. Trent from The Simple Dollar wrote a nice article on the seven attributes that matters. The premise is that great people share common characteristics. This is interesting to me because one of the things that I appreciate about great people is that they typically are different! They often march to a different beat. This would fall in line with Trent’s observations that great people have Self-Belief and are Self-Reliant.

Reader Question: What qualities do you think make someone great?

2. Amanda Morrall wrote about 5 money themed mistakes. Financial mistakes have been a recurring theme of mine lately. I’m convinced that failure is only temporal. Don’t discount your future based on past mistakes, but do learn from them. One example that she gives is particularly concerning to me. My next post is also on a similar topic.

Two Fabulous Readers Wrote Posts Responding to Articles Published Here
3. When the Former Banker read my post entitled Too Frugal For Your Own Good, he was all ready to set me straight. However, as he read the post, he found that we agreed more than we disagreed. Read his passionate response here.

4. In response to one of my post entitled Young People are Avoiding Investing Their Money in Record Numbers, Kevin from Invest It Wisely wrote an interesting article about his own financial education. His post is: I Didn’t Know Squat About Finances When I Was In College.

Other Interesting Reads
5. Money Cone asked a provocative question: “If you are happy with your big bank, should you still switch to a credit union?” The old saying is: “if it isn’t broke, then don’t fix it.” Will you feel like your big bank is “broken” after reading this post?

6. “When is there a right time to do the wrong thing?” That was the question that Andrew (101 centavos) once asked a potential candidate for employment. I found the examples used in this career tip post insightful.

7. Does $150,000 per year or $1,000,000 net worth make you rich? I don’t think so. Neo from Net Worth Protect intentionally stirs the pot with this post regarding recent Gallup poll findings.

8. Many people agree that real estate is a great long-term investment, particularly if you are receiving passive income (i.e., you are a landlord). Miranda (at Free From Broke) asks a very relevant question though: Are You Cut Out To Be A Landlord?

9. If you decide to become a landlord or a business owner, one important skill needed is knowing how to read financial statements and basic ratios. Otherwise, how can you really say you understand your solvency, cash flow, cost of goods sold, etc. Betty Kincaid highlights a cautionary tale of a young baker who lacked those very fundamentals and decided to offer a Groupon deal. It wasn’t pretty.

Honorable Mentions
10. Emily Starbuck Gerson wrote about how successful women she knows have trouble finding men who are not intimidated by their money, beauty, and brains. Thanks for the link!

11. (bonus) Suzanne highlighted the 3 S’s of the holidays: spending, splurging, and stress. Since I just wrote on decreasing financial stress last week, there was a natural connection with the content. Thanks also for the link.

Carnivals
Best of Money Carnival
Best of Money Carnival #130 (Editor’s Pick!)
Best of Money Carnival #132

Carnival of Personal Finance
Carnival of Personal Finance #333 (Editor’s Pick!)
Carnival of Personal Finance #334 (Editor’s Pick!)
Carnival of Personal Finance #335 (Editor’s Pick!)
Carnival of Personal Finance #336
Carnival of Personal Finance #337 (Editor’s Pick!)
Carnival of Personal Finance #338
Carnival of Personal Finance #339

Festival of Frugality
Festival of Frugality #307
Festival of Frugality #308 (Editor’s Pick!)
Festival of Frugality #309

Yakezie Carnival
Yakezie Carnival (No edition specified)
Yakezie Carnival (No edition specified)
Yakezie Carnival: Just Another Day Edition
Yakezie Carnival: San Diego Edition
Yakezie Carnival: Might Ducks Edition

Carnival of Financial Camaraderie
Carnival of Financial Camaraderie #7
Carnival of Financial Camaraderie #9
Carnival of Financial Camaraderie #11

Totally Money Carnival
Totally Money Carnival: Thanksgiving Edition
Totally Money Carnival: Building Wealth Edition

3 Powerful Ways To Decrease Your Financial Stress

2011-12-07T04:00:00.000-05:00

By: Roshawn Watson

These days people are fraught with economic stress. The mere thought of aspiring to financial peace seems radical and even delusional for some people. Sixty-one percent of people live paycheck to paycheck, meaning it does not take much to push them to the brink of financial cataclysm. It certainly doesn’t have to be this way, but somehow we have been convinced to accept this foul bag of goods. Here are 3 powerful ways to decrease your financial stress.

1. Decrease Financial Stress By Knowing What You Really Value

What do you really value?

All too often we pursue and stress out about financial matters that don’t matter, at least not in meaningful way. That’s because they don’t reflect our true values. There is nothing wrong with wanting nice things, but things don’t define us.

In fact, if your contentment is based on materialism, then money is the least of your worries.

Focusing your resources on items, experiences, and relationships that compliment your core beliefs and values is infinitely more fulfilling than simply buying stuff. That could mean taking the trip of a lifetime over buying the dress or flat screen of the minute.

In your quest for great wealth, remember that there are many things that you may value that cost little to no money, such as a warm embrace from a loved one; a phone call from an old friend; kind smiles from your children, nieces, or nephews; attending a religious service or a motivational conference; playing with your puppy etc. Indeed, Thomas Stanley’s data suggest that millionaires are consistently more likely to participate in “cheap date” leisurely activities emphasizing relationship building and wealth building versus more “costly” activities. While I would never suggest that this is always the case, this correlation hardly appears incidental.

In short, by focusing our money on value-oriented spending rather than keeping up with the ~~Kardashians~~ Joneses, we decrease stress by relinquishing the constraints of materialism.

2. Decrease Financial Stress By Stopping The Insanity

Recognize that when someone gives you a loan, he or she is NOT doing you a favor.

We must break the self-defeating cycle of consumer debt in our lives. Borrowing one’s way out of trouble is extraordinarily difficult. People can go on about “good” debt and “bad” debt. After all, labeling debt to make it more palatable is quite common.

My primary concern with debt, particularly consumer debt, is that with it comes risks that typically nullify any leverage advantage received by using the debt in the first place.

Earlier this week, I read about someone thinking that getting a $500,000 loan to purchase 8 rental properties with nonexistent cash flow was a good idea because he was “getting over on the banks through the power of leverage.” With the numbers he shared, he would be a bankruptcy waiting to happen. Remember, a plan that only works if everything goes right is hardly plan at all.

Without belabouring this point, let’s keep it simple:

Debt equals risks.
Risks cause stress.
No debt equals decreased financial stress!

A major shift happens when we stop trying to use debt to solve our problems. The choice is yours, but when I made the decision to live debt free, my financial life instantly simplified and my stress decreased precipitously.

3. Decrease Financial Stress By Rethinking Budgeting

Budgeting is NOT the enemy.

Personally, I used to think of budgeting as limiting, but I now see it as liberating. That’s because budgeting enhances economic productivity, which is something we can all used more of. Regardless of whether one makes $40,000 or $400,000, he can still be broke if his money is mismanaged. This is ignored by those who only focus on the income side of the equation. Perhaps this is the reason most millionaires budget. Budgeting is the tool that helps you reign in your income.

However, I can certainly appreciate that some people find budgeting stressful. Dealing with money can be inherently unpleasant. The very act of budgeting forces acknowledgement of money’s limitations and possibly confrontation of misbehavior. Additionally, despite the fact that we deal with money on a daily basis, there is a lack of personal finance education. Some of the very courses that supposedly aim to increase our financial intelligence are little more than cleverly packaged marketing tools for companies that are far more concerned about their profit margins than serving us well.

Given those facts, it is unsurprising that many find proper money management particularly difficult. If you fall into that category, then perhaps it’s time to rethink budgeting. See it as a mechanism for your freedom, and use it to your advantage. Here are some tips to help you do just that:

Pay yourself first. Even if you simply create an artificial sense of economic scarcity by “paying yourself first” and using the remaining money to cover all other expenses, that would be a great improvement over ignoring budgeting altogether. At least this way, your savings and investing would be taken care of.
Use technology to assist you. Consider employing tools to make it easier, such as using automatic drafts into your savings and brokerage accounts and using the "envelope system" for groceries.
Eradicate the idea of a “perfect” budget. Let your budget change as your life changes. Perhaps you are not yet in a position to allocate funds to every single line item. That’s perfectly okay. Few are.
Note, a more detailed discussion on the power of budgeting is available in my FREE eBook.

I think the old adage of “don’t throw the baby out with the bath water” is particularly relevant with respect to budgeting. Embrace a system that works for your household and use it prudently.

Closing Thoughts

Financial peace are two words that typically do not go together. That doesn’t mean that it’s unachievable. When your purchases are aligned with your values rather than the values of clever marketers, when you free yourself from the madness of robbing tomorrow’s prosperity for today’s pleasures, and when you develop and live by a sound spending plan that works for your household, you are taking ground financially. You are on the road to prosperity. You are reclaiming your financial peace!

Related Posts

Labeling Debt To Make It More Palatable

Good Old Middle Class or Wealthy, You Decide

Is it Possible To Live Without Debt?

How Much Money Does Kim Kardashian Make?

Is it Possible To Live Without Debt?

2011-11-30T05:00:00.000-05:00

By: Roshawn Watson

I recently received the following comment regarding living debt-free.

“Well, it is almost impossible to live without some debts and practically everyone has some debts in finance except maybe very rich people. We need to take it easy and watch them and try to control them as much as we can. This is the best way not to be buried under them and of course hard-work for sure.”

Of course, this comment begs the question: is it possible for people of average means to live without debt?

Renewing Your Mind to Be Debt- Free

Perhaps one of the biggest obstacles in living a debt-free lifestyle is overcoming the ingrained tendency to use debt to solve problems. There was a time when debt wasn’t so ubiquitous, and households of various income levels still lived and thrived. Just because debt is currently the most aggressively marketed financial product does not mean that it is impossible to live without it. In fact, the preponderance of debit cards, discount sites like Groupon and Living Social, and the return of layaways programs¹ have made it easier to resist the urge to use credit now than perhaps even a decade ago. Remember, debit cards and layaway plans exist so that no debt is incurred in making purchases. Moreover, the same patience required to purchase a new flatscreen on layaway can be used in budgeting for the upgrading of a wardrobe, purchasing furniture, or even buying vehicles. The process may be more lengthy for bigger purchases, but one would be less likely to do financial damage by planning purchases in this manner than by incurring debt. One reason for this is that people who purchase items with cash tend to spend less overall. According to recent research, we spend between 12-50% more when we make purchases using credit versus paying cash (depending on the venue).

It’s no wonder a whopping 75% of the Forbes 400, the 400 richest Americans, said the best way to build wealth is to become and stay debt free. Notice that they didn’t say, “I got wealthy first and then lived a debt-free lifestyle.” No, they freely attributed a major part of their financial success to being debt-free, partly because it gave them control over their most powerful wealth-building tools: their incomes.

If you renew your mind to the facts that 1) it is feasible to live without debt even in our modern society, 2) using debt causes you to pay more, and 3) using debt obligates your future income, then you may be able to suppress the desire to purchase items before they can fit within your budget.

The Relationship Between of Liquidity and Debt

A second weapon in your arsenal against the temptation of using debt is your liquidity. Traditional recommendations are to keep at least 3-6 months of expenses in cash as an emergency fund (EF). Of course, this is important because it is not a matter of if it will rain but when it will rain. A recent study suggests that 78% of families will have a major emergency within the next 10 years. A deciding factor as to whether families will need to borrow to stay afloat during such emergencies is often whether the EFs are fully funded. In the middle of a crisis, a loan is often the last thing one needs.

Since 2008, I have agreed with Suze Orman’s recommendation of having eight month’s worth of expenses as an EF is pretty reasonable, given some of the things going on in the world economy. As one continues to build wealth, he or she will hopefully continue to build liquidity.

Liquidity is your defense against debt.

What's Your Debt-free Strategy?

If one freely acknowledges that the cultural deck is stacked against him being debt free, and he values being debt free, then he should have a strategy to remain debt-free. For example, why would someone deliberately wait until his car runs down before financially preparing for its replacement? That’s like waiting until you have frost bite before you buy a coat.

Using the money that you already earn, you can take actions to reduce your costs and enhance the financial productivity of operating your household. It may seem counterintuitive, but despite having more means, most millionaires run economically productive households. The majority of millionaire households budget, and nearly two-thirds know how much they spend on groceries, housing, and clothing within a given year. Forty-nine percent regularly use coupons for grocery shopping versus 37% of all US households. (Interestingly, usage of coupons actually decreases with income.)

Perhaps coupon clipping is not your cup of tea. That's fine because your debt-free strategy can be a simple or as elaborate as you want. Recently, I read where one blogger limited his Christmas spending to only money that he could earn within a week. Similarly, you could limit your blow money to a fraction of what you earn in either portfolio or passive income. When I did this, I became VERY motivated to increase my “non-earned” income.The point is to enhance your economic productivity (regardless of whether that means saving more money, increasing income, or allocating some of your income towards items that you would otherwise use debt to purchase).

Your debt-free strategy is another line of defense against our culture of debt.

Delayed Gratification To Be Debt-Free

You can have it all, but you can’t have it all it once.

I think there is always an underlying assumption when anyone rallies against the dangers of materialism and poor money habits, as we discussed last week in Broke People Afford Everything, that he or she is against people having nice things. That’s certainly not the case. The issue is how one pays for nice things rather than having nice things.

I know plenty of people with comfortable six-figure incomes who struggle to spend money on designer clothes, luxury vehicles, vacations, toys, and anything else most people would deem remotely fun. This isn’t because of their irresponsible money management either; it’s because they are all so careful to limit their lifestyle inflation and to remain on their budgets. I know others who have purchased Maserati's but have to work two jobs in order to support their lifestyle. Sure they look nice on the few occasions they’re available to hang out. The truth is that the car could have happened a little later in their lives with much less of a financial impact. Instead, they have purchased the luxury vehicles now while in the middle of repaying student loans and mired in credit card debt. YUCK! Delayed gratification isn’t denial. It’s just timing purchases for when they make sense in your financial world.

If you master delayed gratification, you can own the best without compromising your financial foundation.

Closing Thoughts

Yes, it is possible to live debt free; in fact, I’m convinced when paired with consistent investing over time, living debt-free is part of a path to build significant wealth. Henry Ford commented that debt was the lazy’s man method of purchasing items. The translation is that there is work involved in becoming and remaining debt free. No one said it was easy, but if it was easy, everyone would do it. Nonetheless, if you’re willing to go against the cultural indoctrination encouraging us to worship at the altar of the almighty FICO, 1) you will have control over your income, 2) you will pay less than you credit-paying contemporaries, 3) you will be prepared for emergencies, and 4) you may just find yourself richer than your wildest dreams!

Related Posts

Broke People Afford Everything

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Some Thoughts on Delayed Gratification (The Simple Dollar)

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¹Layaway plans let you pay a deposit (and perhaps a nominal fee) to secure an item for a later purchase. The store will hold the item for you until you pay for it in full.

Verification Code: CJYZCNYWN944 (please ignore)

Broke People Afford Everything!

2011-11-23T08:04:00.001-05:00

By: Roshawn Watson

“Hello Baller. I need to holla at you for minute.”

I got a question for you because I just can’t figure out how you do it all. Your clothes and toys are nice. Everyone’s envious of your whips. You frequently eat at restaurants that most people only dine at on special anniversaries or birthdays. We always appreciate your twice annual post cards from the likes of Paris and Bora Bora. Your lifestyle is pretty impressive, except for the fact that you’re a financial fake. I just want to know one thing: how do broke people afford EVERYTHING?

Different Priorities

This bankruptcy thing is too stressful, so I’ll deal with it when I get back from vacay!

It’s tough work being broke nowadays. The broke used to be able to proceed through life unnoticed (or at least with limited social pressure to overextend themselves), but now they’re expected to keep up with the Joneses, who are broke too by the way! I guess it’s always easier to display artifacts denoting financial superiority than to actually be a financial champion.

One of the biggest challenges is prioritization. Apparently, financial security, comfort, and abundance are secondary to social acceptance and lifestyle elevation. While interesting, this is not surprising because building wealth generally takes significant work and time. It’s using the crock-pot approach rather than ordering fast food. Thus, when the new Ipad comes out, one may not think to check his budget. Doing so would crimp his style. Marketers love him. His friends and family think he’s the most fun and generous. The problem is long-term: how does one get ahead financially if he is always focused on immediate desires?

Priorities (goals) determine the direction of your life. One way broke people are seemingly able to afford everything is that they have different priorities, so their is no internal pull to do things that you may deem financially responsible.

Prosperity On Credit

“Your labels may say you are rich, but your accounts tell a different story!”

There is no prosperity on credit, yet one would never know it by looking at people’s lifestyles. This is the very reason when I see most Mercedes or BMWs, my first thought is not “what a nice car!” but rather “what is the payment?”

Researcher and author Thomas Stanley noted that fancy zip codes are typically a better predictor of large credit availability than net worth. It is no wonder that the average millionaire lives in a neighborhood where his net worth dwarfs that of his neighbors by 6-fold. It would be prudent to realize that the only people who get rich from most loans are the lenders: how do you think they are able to be the lender in the first place?

Also, keep in mind that using credit to support lifestyle often extends the cycle of poverty, especially if you are broke. That’s because the debtor is obligating tomorrow’s income today. Thus, someone who makes the same income but lacks the debt will have more means to achieve his or her goals than the person in debt. I see this all the time with people on tight budgets. They are working hard and have very little room for error. That’s why they live paycheck to paycheck: they never can “afford” to build an adequate buffer because they are too busy “affording” everything else.

Broke People Depend On Support From Others

It really doesn’t matter whether it is the bank of mom and dad, legal protection (i.e., bankruptcy), or the government, someone IS paying the bill. There are so many adults who are almost completely economically dependent on others nowadays. We surely live in strange times. Because of higher unemployment, adult children are more likely to return home after school. Such children are known as the boomerang generation, but how long must parents provide for their capable adult children? I ask this not be be mean, but at some point, one has to be concerned about enabling misbehavior. For example, I’m a huge believer in second chances, but one of the biggest limitations of bankruptcy is that all too often, people don’t learn the necessary lessons. In these cases, the filers are not helped. The bankruptcy has just delayed their day of reckoning rather than helped them move past it. Their freedom is temporary, and they are likely to repeat their past mistakes. Requiring education is a step, but more is clearly needed if the goal is truly to encourage proper money management. That’s why it is okay to feel financial pain. As I told my Tweeps recently...,

If you only learn by hitting bottom, the faster you get there the sooner your salvation.

Final Appeal To The Savers

If you are a frustrated saver, take heart that your efforts are not for naught. Think of the cautionary tale of Teresa Giudice, of the Real Housewives fame. In the Phony Rich, I highlight how she and her husband were almost $11 million in debt with an annual household income of $79,000 according to CBS News. She was in the public eye selling their lavish lifestyles and couldn’t keep up the facade. I heard that she recently withdrew her bankruptcy petition. Bravo! [excuse the pun] I hope she will use her next season to display some growth rather than flaunting fake status.

In short, many broke people can afford the good life because they have decided to allocate their money and credit to different priorities and enlist the help of others to support their lifestyles. If you are financially responsible, don’t be grieved by the pace of your progress. The tortoise wins the race every time!

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

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Are You Your Portfolio's Biggest Enemy?

2011-11-16T07:30:00.000-05:00

By: Roshawn Watson

You work hard. You research companies. You even gather expert opinion and public sentiment regarding your investment choices, yet your returns are not commiserate with your effort. In fact, your long-term returns are dismal compared to market averages. This is the world of many investors today. Despite the increasingly lauded financial literacy programs, investors are struggling with two primary problems: their own nature and a well-polished Wall Street machine that loves ignorant investors.

Is Your Gut Leading Your Investments Astray?

The investor’s chief problem—and even his worst enemy—is likely to be himself. (Benjamin Graham)

A large data set analyzing household investing found just how damaging gut-driven trades can be to our wealth. Over 66,000 households with accounts at large discount brokerage firms between 1991 and 1996 were evaluated. The average household annual return during this period was 16.4%, and portfolios typically turned over around 75% of their stocks annually. The market (NYSE/AMEX/Nasdaq) returned 17.9% during that same period. However, the households that traded most frequently had an average annual turnover of 250% and only earned a 11.4% annual return whereas those who traded infrequently earned 18.5%. The obvious implication of such findings is that most individual investors were better off investing and taking a nap rather than playing the trading game.

Another study evaluated 10,000 brokerage accounts over a seven year period found intriguing differences in returns between buyers of stock and sellers. The investigators wanted to see who did better, the sellers of a stock or the buyers. On average, the shares investors sold did better than those they bought, by a very substantial margin: 3.3 percentage points per year, in addition to the significant costs of executing the trades comparing two stock. Thus, the data, opinions, and hunches leading the purchasers to think that it was a good time to buy XYZ stock were clearly wrong!

Trading typically has deleterious impact on wealth-accumulation.

The key question is if our ideas are so golden, then why doesn’t the data back them up? Often overconfidence plays a strong role in high trading levels and the corresponding lower returns by individual investors. Many times our forecasts are little better than blind guesses. While this fact alone should give us pause, often the dismal quality of our predictions has very little impact on our future judgments. Frequently, our “strong yearnings” and “informed decisions” are our the biggest threats to our portfolios.

Ignorant Investors Beware

All that shines is not gold.

Nevertheless, there is another dangerous offender that can seriously hurt investors. Investors must know that the polish and veneer of sophisticated analyses, wonderful academic pedigrees, complicated products, and A-list clientele associated with Wall Street wealth advisers often obscure the reality: few stock pickers possess the skill required to beat the market consistently, year after year. A 2009 Morningstar, a Chicago-based research firm, study focusing on individual investors reported that just 37 percent of actively managed U.S. stock mutual funds beat their respective Morningstar indexes after accounting for risk, size and fund style. Your odds of picking an actively managed fund that beats the market for more than a couple years are pretty small. For most individual investors, it is generally better to “easily avoid underperformance” rather than pursue the “futile chase of market-beating performance.”

Nonetheless, a recent good performance history and an endorsement from an advisor can be remarkably seductive to investors hungry for returns. This isn't to say that many advisers aren’t hard working and highly experienced professionals who genuinely believe they have what it takes to pick the next winners. In fact, many believe they are providing value to their clients. However, what they are typically offering are merely educated guesses at best. The problem is that these guesses tend to be no better than chance and are repeatedly beaten by the market benchmarks.

Along this same vein, the correlation data is also pretty convincing with respect to the role of chance in our returns. A correlation is a way to see the relationship between two variables. The stronger the correlation, the stronger the relationship. Thus, if a year-to-year return showed a strong correlation, then that would suggest that these two returns are strongly related to each other. Perhaps if both returns were good, you could even assume that whoever designed the portfolios (or picked the stock) yielding those returns is the most important variable. In other words, he or she possesses some special knowledge or resources yielding a competitive edge in the market. Moreover, if he or she was able to replicate these results over a longer time frame, such as 20 to 30 years, you would have a much more robust data set. Such data would be considered more valid compared with an incidental finding. This is important because a group of researchers recently looked at 28 year-to-year correlations for 25 anonymous wealth advisers and found that there was ZERO correlation between their returns. In other words, there wasn’t any discernible pattern, despite the superstars advisers being the common denominator. The most reasonable interpretation is that the differences were due to chance not the skill or educated guesses of the talented investors. By the way, if you think this consistency criterion is too stringent, consider this same metric has been used successfully to quantify the existence of skill among “golfers, orthodontists or speedy toll collectors on the turnpike.” Thus, if skill was involved in producing the sporadic market-beating returns, the correlation data should support it.

Show Me Your Financial Statement

In no way am I writing this to put down advisers but rather to educate investors. There are some investment advisers who are very informative, such as Robert at DIY Investor, and endeavor to serve their clients extremely well. However, there are many others who are mostly smoke and mirrors. They have clever sales pitches that don’t consistently translate into market-beating results for their clients, after you adjust for risk, fees, etc. Perhaps, this is why when one of the decamillionaires profiled by Tom Stanley in his famed Millionaire Next Door series was approached by a wealth adviser, he told the adviser that he would only obtain his business after his review of the adviser’s financial statements. The decamillionaire wanted to make sure that the adviser was able to generate significant returns off of his own investments not off of his ability to sell financial products. The adviser went on to scout another client. The implication of the story is that our concern should not focus on what someone says they can do for us but whether they can get results, particularly results in their own lives. That kind of authenticity is rare. Most people who sell investment products make their living from selling not investing! Being a good salesman has nothing to do with being a great investor.

That’s why Wall Street doesn’t necessarily like savvy investors. Even when Wall Street is involved with well-intentioned financial literacy programs, such as the Mutual Fund Educational Alliance, which has been around since 1971, it ultimately served as little more than an marketing ploy for the fund industry to push their products to willful participants under the guise of educating them.

Let me say this clearly: many financial firms have an uncanny ability to extract considerable sums of wealth from an unsuspecting public. They’re the smart money. Think very carefully before betting against the house!

Closing Thoughts

In summation, between battling overconfidence and an ever-craftier Wall Street, investors are struggling to find their footing in a very tumultuous economic climate. We should not be deceived by either ourselves or others, regardless of professional credentials. If for one second, we let ourselves believe that we got the system beat (or that we can’t invest on our own), we often have already loss. Don’t be a victim of overconfidence in yourself or Wall Street!

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

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Your Do over Guide: What Would You Do Differently?

2011-11-09T07:58:00.003-05:00

By: Roshawn Watson

I don’t truly understand people who say they wouldn’t change a thing in their lives if they could. While I have nothing against contentment, if given the opportunity, I would change several things not because I hate my life but to get the most out of it. If you could press rewind on your life, what would you do differently?

Start Businesses

First, I would have started businesses and have done so early. Nowadays, the barriers of entry into many businesses are lower, including smaller capital and infrastructure requirements. The advantages to owning your own business include: a) your business can be created around your passion, b) you can concentrate your efforts in your chosen areas of competence, c) you would control it and d) you would have tremendous income potential. Indeed, business owners are also five more likely to become millionaires over traditional employees, partly because the financial responsibilities of business operators corresponding well to running an economically productive household including: keeping cash reserves, decreasing unnecessary expenditures, investing for growth, watching revenues and projections, etc.

Of course, there are inherent risks too, but I would rather manage risks over eliminating them entirely. Avoiding risk altogether can be dangerous too. I additionally challenge you to redefine how you consider risk. Rabbi Daniel Lapin argues that we are all in business for ourselves. For example, if you have a traditional JOB, then you are selling your skills, services, time, and knowledge to one customer (your employer). If you are a traditional business owner, you simply endeavor to have more than one customer. This begs the question if it is riskier to have one customer (your employer) or 200 or more?

Adding a side business to your portfolio could literally revolutionize your life. For instance, one kid who grew up very poor decided to create his own video games, since his parents couldn’t afford to them. His classmates saw him playing his games, liked them, so he began to sell them copies (and then their friends). Companies took notice and had him consult on projects before he even reached puberty. Although he was being paid well, he knew that he was worth more, so he started his own company and later sold it. He first retired at 19. Then, he got bored started another business that he also sold and retired again. At the time I heard his story, he sat as a chairman of the board of directors of a publicly traded company, was a well-connected venture capitalist, and traveled the world with his team helping people replicate his success, at the ripe old age of 28!
What potential do you allow to lie dormant?

Quit More Often and More Quickly

In The Dip, Seth Godin challenged the mantra that “winners never quit, and quitters never win.” He argued that winners actually quit frequently and quit swiftly. In other words, winners find what doesn’t work and move on fast. This agrees with advice I heard 15 years ago from a businessman worth nearly a billion dollars. During the conference, he indicated that one of the most important lessons he learned was to “not kid himself. Knowing is half the battle because you can take corrective actions whereas continuing in blissful ignorance sets you up for failure.
My do over would be realizing when I am getting off course faster and to channel all my resources into moving in the right direction.

Investing Earlier and Investing More Aggressively

Does saving and investing 50-80% of your income seem reasonable to you? For most people, the answer is no. However, suppose someone showed you that if you did this for a mere 7 years, you could then retire. I thought that would get your attention. Personal finance expert Dave Ramsey always says “when you live like no one else, you can live like no one else.”

Earlier this year, I asked a simple question “How would you retire in 10 years?” The purpose of the question was to challenge the assumption that it takes a working lifetime to invest adequately for retirement. There are people who never expand their mental contexts beyond that life script who get very traditional results: they slowly build wealth, depend on social insecurity, and may have to choose between paying for some expensive medication or food. This isn’t trivial, it’s a sad reality for far too many people. Investing aggressively and early a) gives your investments a longer time to grow, b) means your source of provision is not dependent on your job, and c) expands your opportunities to reach your potential with limited financial concerns. I challenge you to be the architect of your own life. Don’t allow the complacency of good to rob you of the glory of great!
My do over would be not to allow any slack... fire on all cylinders until I was “done!”

Invest In Myself

If you are frugal (wanting to get the value for your money), it’s possible that you will agonize over things that are good for you. There are several opportunities to advance your career and improve yourself: conferences, seminars, short courses, webinars, certifications, books, but not all of them you will be free or paid for by your employer. I believe there should be at least some room in your budget to invest in yourself.

An author and entrepreneur was recently asked if he regretted wasting money on products and conferences that ultimately provided him little value. For context, he spends an unconscionable amount on educational materials each year: some are several thousands apiece. His answer was a) very few provide absolutely no value (there’s almost always something to pull away from them) b) for ever dud or two, there’s one that helps him completely knock the ball out of the park to the degree that it more than compensates for the costs of duds.

Ask yourself if you are playing it too safe with respect to investing in YOU, Inc.

Avoid Debt

We have a culture of debt: debt is the most aggressively marketed financial product. Entire industries are developed to make us think that we cannot function without debt. However, the borrower is servant to the lender. Sadly, the debtor has obligated tomorrow’s prosperity and limited his ability to build wealth, at least wealth for himself, compared to his contemporaries making the same amount without the debt. For example, if you avoided car notes altogether and invested average car payment instead from age 25-65, you would have an estimated $2,000,000.
Instead, we label debt to make it more palatable by creating trivial hierarchies of debt with all sorts of eloquent rationalizations. Sometimes this involves classifying debts as “good” or “acceptable” or an “investment.” The truth is consumer debt is consumer debt. If you are truly borrowing to invest, I hope your return is substantial, given the amount of risk you are assuming by having debt. Remember, if you have to rename the debt to overcome your misgivings, that may tell you all you need to know right there.

Early on, I would have avoided it like the plague that it is.

Carry Adequate Insurance for Key Items While Avoiding The Rest

It is often said that there is no other expense that people spend so much of their money on without understanding. No one likes insurance until they need it. We all know that insurance companies do not lose money on insurance policies. For every few people who pay a few dollars in premiums and make a big claim, you can bet they have thousands more who pay premiums and have absolutely nothing bad happen to them.
Since you can’t be certain that you won’t be the “unfortunately few” who need insurance, you should judiciously use insurance policies to transfer risks in key areas. After learning this, my whole perspective changed. For example, many people are surprised that I don’t carry an insurance policy on my cellphone. However, cell phone insurance policies tend to be pure profit for the phone companies. My bet is if I replace my phone every 2 years (or so) and make sure that I get a phone that is highly rated, I do not need to pay an extra $120/contract for insurance given: a) the phone’s under warranty anyway, b) I’m not very rough (and don’t lose) my phone, c) and I could cover the cost of another phone within my budget. I also do the same thing for extended warranties (functionally they are insurance): did you know that they often represent a 50% margin, which is almost pure profit. Consider, how much could be saved by carefully analyzing our insurance needs.

My do over would be maintaining adequate coverage for the sensible things at all times and avoiding all others like the financial drains they are.

Is The Struggle Necessary?

Pain is definitely a teacher. It signals that something is wrong, so problems don’t persist undetected. However, learning from pain is also slow and unpleasant. If I was designing my life, I would obtain pearls of wisdom from others experiences via mentorship over learning from my own mistakes. Personally, I would rather someone tell me how dangerous it is to ride without seat belts than learn from first-hand experience.

Well, yesterday is over, and tomorrow is not yet here. However, if you could press rewind on your life, what would you do differently?

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Like It on Facebook, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

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Young People Avoiding Investing In Record Numbers

2011-11-03T07:58:00.000-04:00

By: Roshawn Watson
Last year, a study indicated that those growing up in the 1930s are 3 times less likely to invest than those who grew up during better economic times. Fast forward eighty years, and we have had a series of economic crises collectively known as The Great Recession. What is the impact of the Great Recession on young investors?
Fear

Lehman Brothers, GM, AIG, Chrysler, and the collapses or bankruptcies of many other known businesses; a dip in the stock market by 38%; and home prices in the toilet all form the basis for recent resistance to investing. According to a recent study by Wells Fargo, twenty-somethings are more likely to save for retirement in CDs rather than investing in stock than any age group. Given the outright hysteria at times, concern is certainly a very reasonable reaction because it is unclear what the future holds. Nonetheless, most will at least admit that we have had one of the weakest economic recoveries in recent memory. Of course, there are persistent rumors of a double-dip recession looming, and the European Debt Crisis is certainly taking its toil on the global markets (IMF agreement with Greece or not). The only thing that appears certain, economically, is the uncertainty. However, that doesn’t stop people from fearing an inevitable demise in our economy.
Simply put, fear is driving young people to make some dangerous decisions regarding investing.
Ignorance

Media pundits love discussing the “Lost Decade” of investing; however, the whole hypothesis make a series of assumptions that apply to a fraction of investors. Let’s consider the data. Fixed-income funds have outpaced stock in the last 10 years; small cap investors (Russell 2000) have had an annualized return of 6.3% and MSCI Emerging Markets Index returned 12.3% annually (as of January 2011). Balance investors (typically 60% stock and 40% bonds) saw a 25% decline in portfolio balance versus the 38% decline over the last 10 years. Also, the Lost Decade hypothesis also assumes you invested all your money as a lump sum at the beginning of 2000 in the Standard and Poor’s 500 and assessed your portfolio value on 12/31/2009; most people invest incrementally rather than all at once. If you invested quarterly rather than plopping down say $50,000 in January 2000 without rebalancing, your annualized return would be 1.16% instead of a -1.25% thanks to dollar cost averaging. Note, rebalancing is realigning your portfolio to asset weights congruent with your original risk tolerance (i.e., the original portfolio weighting). Suppose your portfolio consisted of 20% bonds and 80% stock (i.e., rather than 100% stock), and you rebalanced. If you had, your annualized return would be 2.27% (vs -1.25%). If you added small cap or emerging markets, you would get...well, you get the picture. Also, consider that most people require a longer time horizon for investing (i.e., at least most people take longer than 10 years to invest for their retirements). Even if you went all the way back to post World War II, the S and P still returned an annualized, inflation-adjusted 5.8% as of January 2011. That’s significantly less than the much touted 12% but still whole a lot better than what you would get from many alternatives.

Inexperience

A third reason young investors are not investing in the stock market is inexperience: 1) inexperience with the volatility and 2) inexperience with the implications of NOT investing. While younger investors have the benefit of time, older investors have the advantage of perspective. Historically, there have been prolonged periods of economic growth, interspersed with some adjustments, corrections, and recessions; the stock market has been among the best ways to capture that growth over the long-term. Consider that if you went back World War II, stocks have annualized an inflation-adjusted 5.8%, compared to 1.8% for bonds and 0.4% for cash (as of January 2011). That in itself may instill a level of confidence in older investors that escapes anyone who has just entered the market within the last 10 years, which have been plagued by both the dot com and real estate busts. Additionally, younger investors are less likely to have personally experienced the ramifications of not meeting those retirement goals for themselves. Sure the stories of eating Alpo during retirement are unsettling, but if you haven’t personally been in a situation where you have to choose between paying for your medication or eating, then it’s hard to truly appreciate the risks of NOT investing.
Part of the reason your return is so important is because of taxes and inflation; both erode the value of money in a substantial way. While it is currently anyone’s guess where taxation is going, depending on your income, you currently can be taxed at a significantly higher rate (at the rate of earned income) for interest earned from saving money outside of a retirement account than you would if you had received dividend or capital gains income from a portfolio invested outside of a retirement account (assuming the investments were held a sufficient length of time). Inflation can similarly decimate portfolio, considering that $100,000 today will be worth only $31,000 in 40 years. Note this calculation assumes inflation will return to and remains at its historical average of 3%. In other words, just because the balance in your savings account is not declining does not exempt you from losing significant purchasing power. Making more from your money means you can counterbalance these forces.

Parting Thoughts

The decision to forgo investing in the stock market is not trivial. Those who chose to cash out of the market due to the 2008 crash have missed the gains in the market since then. In no way am I diminishing the complexity and volatility of the times that we live in; however, rather than avoiding the markets outright (whether real estate or stock), perhaps a better strategy is to adopt a more conservative stance: one that is congruent with your current risk tolerance. Personally, I want you to dominate financially and take courage. However, if you fear anything, fear NOT investing.

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

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Decamillionaire Tips Round Up

2011-11-02T10:00:00.000-04:00

By: Roshawn Watson

Have you ever wanted to learn personal finance tips from a decamillionaire? I thought so. In my first guest post since the Watson Inc relaunch in September, we'll discuss three decamillionaire-vetted tips that will make you a financial champion on literally one of best personal finance sites around!

Come back on Friday, and the link to the article will be posted right here:

Getting into Financial Shape with the Decamillionaire Next Door

However, since I have sufficiently teased you, let me share with you the rationale right now exclusively (not in post) for why I think this is so important.

Job Security Is An Illusion. No amount of training nor experience can guarantee that you will have a job tomorrow. The change could literally have nothing to do with your performance or likability. That’s why it is critical to expand your knowledge-base, your skill set, and your network constantly. Of course, you should aim at stellar job performance as well. However, don’t allow a false sense of security to lull you into complacency: your family’s well-being depends on it.
Home Values Have Seen Better Days. People became so accustom to using their homes as investment vehicles and savings accounts. The substantial drop in home prices in many areas has rightfully given pause to many of those who employed this strategy. Banks closed lines and made lending criteria more stringent. It is unwise to depend on reserves that you don’t completely control.
Selling Equities During An Emergency? Some people would rather “pay for” emergency expenses on a credit card before selling their precious blue chip stocks, especially if their blue chip equities’ values are down. However, if you use debt to finance your emergencies, you are just digging yourself into a hole. The borrower is slave to the lender. Intellectually, you may know this, but it is hard to get passed the psychology of selling equities when they are down (for some, even when they’re up it’s difficult). This is why having some cash not tied to an investment vehicle is a good idea. At least you’re not fighting against your own nature.
It may be hard to get loans when you need them. Have you ever heard the statement banks want to lend you money when you don’t need it? It’s funny how we will cosign for people who banks, the very businesses who make their fortunes from buying (and sometimes selling) debt, won’t lend money to without our signing for the loan. That speaks volumes. Banks' goal is to make money, like other businesses; a crisis may interfere with that objective. Thus, I wouldn’t consider counting on them in a crisis to be wise.

I can't wait to delve into these issues and much more when I finally share the post with you on Friday!

Also, if you are an investor, aspire to be one, or have turned your nose up at the market, you'll want to come back tomorrow for my forthcoming post regarding the 2008 crash.

Personal Finance (Yakezie and other PF bloggers)

Now, let's get to business, I looked back, and the last Round-Up I did was back in Feburary. What!?! I'm sorry I've been away. There are plenty of uncommon personal finance articles that I want to share, and some of them are written by the same bloggers who help me promote my content via their own round-ups, tweets, votes on social bookmarketing sites, comments etc. I want to highlight their content now and give them a big virtual THANK YOU!

Kris @ Everyday Tips and Thoughts wrote Opportunity Cost Is Not Just About Money. Here's a brief sampling "The making money part of the equation needs to be balanced with the money I save plus my ‘happiness factor.’" Good stuff!!!
Larry @ Krant Cents wants you to be prepared to Ace Your Next Lunch Interview. I changed jobs earlier this year, and a lunch interview was part definitely part of the process.
Joe @ Retire By 40 asks How often do you check your net worth, and does your frequency change based on what the market is doing?
Bret @ Hope To Prosper wrote Spending to Impress as a part of his provocative Money Fail series that you should definitely check out.
Miss T @ Prairie EcoThrifter examines the the Pros and Cons of having a Home Gym versus gym membership; as someone who previously loss 40 lbs in 10 weeks and kept it off, I can personally vouch for the merits of having a home gym (nothing against the memberships though).
Robert @ DIY Investor argues we already know what to do including not allowing anyone to purchase a home without a 15% down payment.
The Grouch @ The Biz of Life compares the consequence of Big Government to the adult baby.
Kevin @ Invest It Wisely discusses the his first time getting laid off and the lessons he took from the experience
Andrew @ 101 Centavos writes about situational awareness and asks whether he's paranoid.
Moneycone discusses his thoughts on doing a 401K rollover and argues that it is preferable to roll your money into a traditional IRA rather than a Roth IRA, leaving it at the existing company, or cashing it out.

Carnivals I Have Participated In (* denotes editor's pick)

Carnival of the Road to Financial Independence

Round-Ups That Included Posts From This Site

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Too Frugal For Your Own Good

2011-10-29T02:00:00.000-04:00

By: Roshawn Watson

There are a plethora of articles telling us to be more frugal. Some tell us to get rid of our lattes and gym memberships. Some even tout “frugality” for “frugality” sake, essentially arguing the perils of consumerism. While I am an advocate for frugality, as I think we should be financially responsible, the dangers of frugality often slip under the radar.

Here’s my question to you (and nearly every author of a frugality article):

When is a $10 coffee worth more than a $10 buffet meal?

Frugality Hindering Economic Productivity

This is perhaps the most salacious out of all the topics that we’ll cover today.To be honest, I’m hesitant to bring it up because it may send a duplicitous message: frugality is good except when it’s not. Huh?

Here’s the key consideration though: if you spend an inordinate amount of time at your job and are extremely economically productive, will slashing your grocery bill by 15% be financially beneficial if it takes you 2 hours a week to achieve? It is quite possible that the two hours would be much better spent polishing that presentation, project, report, etc, so that you can continue focusing your efforts on earning money.

Consider the partner at the law firm or the cardiologist at the prestigious hospital. They can all build substantial net worth even without being particularly frugal. The data show that these careers have a higher income; for example, a whopping 38% and 24% of physicians and attorneys are high-income producers (income greater than $200,000), respectively. They also comprise of a high percent of millionaires if you look at the occupational groups as a whole: 10% of physicians and ~9% of attorneys are millionaires. If people in these types of positions are purchasing certain conveniences that ultimately enhance their economic productivity by advancing their careers, this could potentially be a better financial plan, given their orientation to produce high incomes, than expending extra energy on marginal decreases in expenses.

That’s precisely why I personally struggle with this: sometimes career and financial objectives conflict with each other, at least temporarily. For example, it’s true I can save money by not purchasing membership to some trade publications and organizations, but I would ultimately suffer career-wise by neglecting pertinent intellectual capital important to my vocation. Cutting important expenses in the name of frugality is really just being penny-wise but pound-foolish. I still don’t relish in paying for expensive memberships, but that’s part of being a professional in this knowledge-based economy.

My primary caution is that it is easy to use this same rationale as a license to purchase things that are clearly to one’s financial detriment all in the name of improving oneself. Moreover, some apply this same logic to justify purchases solely for “image sake” instead of improvement sake: if I feel better, I make more. If you are going to become “less frugal” to increase your economic productivity, be careful that the purchases are really necessary and that pendulum doesn’t swing too far in the wrong direction.

Frugality Decreasing Quality of Life

If frugality truly decreases the quality of your life, consider whether the foregone purchases SHOULD be in your budget. I’m not suggesting spending beyond the constraints of your budget. However, there are some conveniences that should be in your life even if they don’t directly increase your bottom line. For example, although some of the data is conflicting, it is generally believed that eating healthy requires more money than eating unhealthy. This is not just about paying premium prices at stores such as Whole Foods either. For example, I know that I get much more food if I get an Angus Burger Extra Value meal from Micky D’s compared with their Southwest Chicken Salad. Also, the grilled chicken sandwich at my local Micky’s D’s is also more expensive than both their fried chicken sandwiches and their delectable Angus burgers. Simply put, the price per pound of healthier options tends to be more, but that doesn’t negate the benefit of the healthier options. Another example is traveling: saving money is less important than other considerations (i.e. time, safety, and comfort). Of course, it makes more sense to fly rather than take a bus from Chicago to LA. The lost time would likely cost you. Also, there is a time value to money, and your time may be more valuable than the money spent on plane tickets. Hence, you fly.

Frugality for Frugality Sake

Some people genuinely don’t like to spend money. The carefully scrutinize their purchases. They derive joy from getting a good deal. It’s like a game. As long as this is healthy, then it’s okay. The danger is when cheap people disguise themselves as being frugal. Frugality is concerned with getting good value for your money. That means you sometimes pay more for certain items because of higher perceived quality. In contrast, cheapness primarily is concerned with final price. It’s really born out of stinginess and miserly behavior. Often cheap individuals have a scarcity mentality: they have to protect what they have because they fear running out. Whereas a frugal individual wants to be a good steward over his money, a cheap person is afraid of losing it all and will spend as little of it as possible.

Cheapness can strain relationships, can cause you to buy inferior products, and can limit your growth all in the name of saving a buck.

Short tangent: Personally, I wish all cheap people would own their cheapness. You don’t have to continue giving crappy gifts, ducking out when it is time to pay for a group meal, making excuses as to why you won’t participate. If you are truly cheap (and not just broke), own your cheapness, and stop giving frugality a bad name.

Parting Thoughts

Frugality when practiced judiciously is not bad in itself. Deciding on whether a purchase is worthwhile relies on your analytical skills as well as possessing a clear appreciation for what you value. However, when frugality is more broadly applied to any form of cost-savings (regardless of value of quality), it can be a double-edged sword.

When is a $10 coffee greater than a $10 buffet? According to J Paul Getty, if he were down to his last dollars, he would rather have an expensive cup of coffee in a swanky hotel with the movers and shakers than go to an all you eat buffet. His rationale is the people that he wants in his future are more likely to be at that hotel.

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Related Posts
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Carnival of Financial Planning - Edition #208 - October 29, 2011

2011-10-29T01:59:00.000-04:00

Welcome to the October 29, 2011 Edition #208 of the Carnival of Financial Planning.

The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. We focus on efficient and sustainable personal financial planning practices that can lead to lifetime financial security.

This edition is arranged by subject heading, so that you can browse efficiently.

Enjoy!

The Skilled Investor, Editor

Budgeting and Economics

Lazy Man and Money presents Reviewing My Necessary Expenses posted at Lazy Man and Money, saying, "Some ask why one would want to review their necessary expenses. I have three reasons:"

BIFS presents Tipping after a Bad Experience posted at Budgeting In the Fun Stuff, saying, "What is the proper way to handle tipping when service sucked but they tried to correct it?"

Roshawn @ Watson Inc presents Did Americans Get Poorer or is USA Today Wrong? posted at Watson Inc, saying, "USA Today suggests the typical American family got poorer, but does the data support their story?

Everything Finance presents 4 Tips to Help You Save Your Budget this Christmas posted at Everything Finance, saying, "Yeah, I know: We’re not to Halloween yet, so why are we talking about Christmas? Well, if you’re like the average consumer, Christmas represents a huge change to your budget. Many of us see things spiraling out of control during the time between Thanksgiving and Christmas."

Mike @ Green Panda presents What Are The Best Ways to Save For Major Purchases as a Married Couple? posted at Green Panda Treehouse, saying, "Are you planning for the major expenses?"

Philip presents It's Okay to Spend Your Money on Things You Really Want posted at PT Money Personal Finance, saying, "A little discipline never hurt anyone, but the thought of depriving yourself of everything, every kind of spending, leads many people to just give up."

Rogan Seager presents Retirement Savings Calculator posted at Retirement Savings Calculator, saying, "Valuable future investment portfolio assets and future investment returns slip through many people's fingers at the checkout stand every day, because they spend beyond their long-term means."

David Leeman presents Envelope Budgeting Software - Best Budget Software for Financial Freedom posted at Financial Freedom Advantage, saying, "Are you familiar with the traditional envelope budget system? Envelope budgeting software takes this successful method into the 21st century, enabling proactive control of spending in order to achieve financial freedom."

Jason@LiveRealNow presents 53 Percent | Live Real, Now posted at Live Real, Now, saying, "Some day, I’ll be out of debt, and that will also be due to hard work, not charity. I love my family. I pay my taxes. I give to charity. I am the 53%."

Estate Planning

DJ presents Estate Planning 101 posted at The Family Wallet, saying, "No matter what your age or the amount and nature of your property, having an estate plan is a good idea. Here are answers to some of the basic questions often asked in regard to estate planning."

Financial Planning

Bill Smith presents Making the Right Decision for Your 401k Investments is Important posted at 2008 Taxes, saying, "One really important thing to consider regarding your 401k investments would be that the IRS, throughout the tax code 401k, deliver all qualifying employees a direct tax reduction alongside an upside market potential for your savings."

Flexo presents What I Learned as a Financial Planner posted at Consumerism Commentary, saying, "Neal provided a fantastic guest post on the life of a financial planner."

Dough Roller presents Social Security Increase (COLA) for 2012–3.6% posted at Dough Roller, saying, "HOORAY! For the first time in three years, social security COLA benefits are on the rise."

Larry Russell presents Identity theft protection and prevention posted at Personal Investment Management and Financial Planning, saying, "As a threat to your financial security, you should take the potential for identity theft very seriously. Identity theft sometimes entails a loss of your money, but whether or not you lose money, it can take a very large amount of your time to rectify. Taking these steps to prevent an occurrence is prudent."

FMF presents Economic Lessons from Chess posted at Free Money Finance, saying, "Chess encourages a long,strategic approach, something that also works well in financial planning."

Frank Knight presents Investment Asset Allocation posted at Retirement Planning Software, saying, "When you are already there and invested in an asset class, you are following a passive asset allocation strategy. Tactical asset allocation strategy advocates suggest that you can anticipate the crowd, but flow-of-funds studies show that almost all tactical asset allocation fund flows are late money flows that chase performance after valuations have already moved."

Dave@50plusfinance presents How To Move Your Checking Account In 7 Easy Steps posted at 50 Plus Finance.

David J presents Top 10 Rewards Checking Accounts posted at CardViews Blog, saying, "With all the banks now that are offering rewards programs, how do you know which one to sign up for? Who offers the best “bang for your buck”? Here’s a breakdown of the top 10 banks and credit unions across the country."

Financing Education

N.W. Journey presents College Savings 529 Plans posted at Networth Journey, saying, "Learn basic and important information about 529 plans."

Charles Chua C K presents 10 Poverty Ways to Avoid posted at All About Living with Life.

Health Care

Money Beagle presents Help!!! Do You Think Families Benefit From HDHP/HSA Plans? posted at Money Beagle, saying, "Looking for insurance advice. What do you think"?"

Income

The Financial Blogger presents What My 6 Yr Old Told Me About Running a Company posted at The Financial Blogger, saying, "What kids can teach us about running a business."

Hank presents How To Make Money With eBay Arbitrage posted at Money Q&A, saying, "Have you ever wondered where people get the things that they sell on eBay or Half.com? Learn how you can make money from arbitrage."

Kevin presents Getting Laid Off for the First Time: What I Learned from the Experience posted at Invest It Wisely, saying, "The first time I was laid off, I wondered what I was going to do for money. It wasn’t even that great of a job, but it was paying the bills and I had made friends there. I felt like I had been punched in the face. However, I learned three important things:"

Matt presents 083 Financial Excellence: Mystery Shopping and Other Extra Income Opportunities posted at Living In Financial Excellence, saying, "Over the last few months I’ve been taking on some side hustles to earn extra income and see if they’re legitimate ways for our listeners to earn some extra cash. Today I unwrap the mystery behind mystery shopping and discuss whether it’s really worth your time."

Marie presents Saving for Your Self-Employment Taxes posted at Money Spending Mommy, saying, "eing self-employed has numerous benefits. But when it comes time to pay taxes, self-employment might seem slightly less attractive."

Investing

Dividend Growth Investor presents Enterprise Product Partners (EPD) – quietly building wealth for unitholders posted at Dividend Growth Investor, saying, "Enterprise Products Partners is a dividend achiever which has increased distributions in every year since 1999. As a unitholder, it pays well to get paid a high yield while also having my income increased over time."

Aussie Investor presents Highest Dividend Paying Shares - The Micro-Caps posted at Australian Investing, saying, "Over the long term dividends make up a large part of a share portfolio's returns. With that in mind, lets see what attractive dividend yields are available to us at the moment. We've already looked at the large caps and the small caps, so now it's time for the micro caps."

Martha presents 12 Must-See TED Talks on the Recession posted at onlinemba.com, saying, "TED Talks have become a go-to resource for finding thoughtful discussion on global issues from some of the world’s biggest and best thinkers."

Intelligent Speculator presents Are You A Forex Trader Wannabe? posted at Intelligent Speculator, saying, "Are you into Forex?"

Janet Russell presents The illusion of superior professional mutual fund manager performance posted at Personal Investment Management, saying, "If investment mutual fund managers were truly skilled at beating the market, then you would expect mutual fund manager performance prowess to persist over time. The effort to find those few supposedly superior money managers willing to sell their services sufficiently cheaply is a costly, time consuming, and futile, “Where’s Waldo?,” searching exercise for the individual investor."

Corey presents What Should Your First Investment Be? posted at 20's Finances, saying, "Asking where to invest your money first may seem like a challenging question, but there is an obvious place to start investing."

Mike Piper presents ETFs vs. Index Funds (revisited) posted at The Oblivious Investor, saying, "As recently as last year, the ETF vs index fund question was about commissions and expense ratios. Now that those are (mostly) moot points, how should investors choose?"

Frank Bertin presents Index Funds posted at Top Index Funds, saying, "Top ten no load index funds that track the Standard and Poors 500 composite index in terms of lowest costs."

Dividends4Life presents 13 Higher Yielding, Lower Debt Dividend Stocks With A Reasonable Payout posted at Dividend Growth Stocks, saying, "New income investors naturally focus on yield, but the highest yielding stocks aren't always the best investments. To find the very best dividend growth stocks an investor must identify companies that will not just sustain their dividends, but increase them every year. To find these jewels in the rough, there are two very important things the investor must look for."

Mirelle Rowden presents Fixed Income Funds posted at Best Bond Mutual Funds, saying, "Vanguard dominates this low cost United States bond mutual funds marketplace for direct purchase accounts with both low and high minimum deposits."

DGB presents Dear Investor, Why Are You Paying Those Fees? posted at The Dividend Guy Blog, saying, "Why pay the fees?"

Managing Credit and Debt

Nathan Richardson presents What is a Good Credit Score: 2011 Range, Credit Score Scale & Chart posted at Deals & Tips, saying, "We've created a consumer's guide to credit scores including what are good scores, how to raise your score, how scores are calculated and more."

Jason Price presents How to Get Your Debt Snowball Rolling posted at One Money Design, saying, "Essential tips to get your debt snowball rolling again."

Paul Vachon presents Personal Financial Ratios Everyone Should Know posted at The Frugal Toad, saying, "Do you now what your household debt ratio is? It is an important factor in determining the amount of credit you are offered and plays an import role in your credit rating."

Glen Craig presents Find the Money to Pay Down Debt posted at Free From Broke, saying, "Debt will make you feel overwhelmed. What do you do? You need to find the money to pay down debt. See this author's story and choices she made to pay down debt."

Odysseas presents Down with Default Rates! posted at Wallet Blog, saying, "Usury laws, which cap interest rates for lenders, completely fail to serve their intended purpose of forcing banks to deliver affordable loans -- but there may be one feature of our contemporary lending industry that could actually benefit from usury laws: Penalty rates."

Chelsea Prescotti presents Is Credit Repair a Do-It-Yourself Job or Not? | CreditScore.net posted at CreditScore.net, saying, "Depending on the individual, credit repair is a task that people may or may not want to take on alone. While the general idea behind a credit score is simple, the exact way a credit score is repaired can be tricky. Repairing damaged credit cannot happen overnight, but there are steps that can be taken today to work toward a better credit score tomorrow."

Miscellaneous

Sustainable PF presents Autumn Home Maintenance posted at Sustainable Personal Finance, saying, "While I wrote here earlier in the year about spring time home maintenance I still consider myself a newbie to home ownership, but I know the key to saving money on costly home maintenance is prevention! Do yourself a favor and check out my suggestions below for fall home maintenance."

Irene Beckerr presents 25 Great Q&A Sites to Learn About Human Resources Careers posted at Business Resource Master, saying, "For human resources students, it's helpful to have resources to turn to when you want more information about the field and various careers. With these excellent Q&A sites you'll learn about HR in various environments, as well as personal insight and expertise from experts themselves."

The Skilled Investor presents Market Timing Does Not Work posted at Personal Financial Management, saying, "Always stay invested to earn risk premiums. You must have your money invested and at risk to get risk premium returns. Jumping out and in or "timing the markets" doesn't work."

Suba presents Steps to Be Your Own Boss posted at Broke Professionals, saying, "Self employment means taking a calculated risk to hopefully make more money, be happier, or both. Here are a few steps to self employment when transitioning from a full time job."

Tripp Danner presents No Load Funds posted at No Load Fund, saying, "There are over 60,000 different mutual fund investment share classes sold worldwide. Some mutual funds and ETFs must be better than others, but which ones are they? How can you tell before the fact?"

Jeri Ford presents 2 Simple Steps to Go from Zero Miles to a Free Business Class Ticket to Europe posted at Help Me Travel Cheap, saying, "Learn how to get a free business class ticket to europe in two easy steps."

Retirement Planning

Roger White presents 401k Contribution Limits in 2011 and 2012 posted at 401k Calculator, saying, "This posts lets you know about your 401k contribution limits for 2011 and 2012."

MoneyCone presents HOWTO Do A 401K Rollover Correctly posted at Money Cone, saying, "When you leave behind your old job for a better opportunity, in your excitement, don’t forget your 401K! Consolidation will make your life a lot easier."

SB presents When is the right time to retire posted at One Cent at a Time, saying, "Every one of us think about retirement. Depending on your age and saving situation you might ponder on taking early retirement. When we work we postpone many good things for post retirement life hence, it's important that you thoroughly plan your retirement to decide on when to start retired life."

Brockton Eaton presents Long Term Investment Strategies posted at Retirement Investment Strategy, saying, "The investment research literature repeatedly demonstrates that a fully diversified, low cost investment strategy is superior."

FMF presents Two Ways You Could Be Sabotaging Your Retirement posted at Free Money Finance, saying, "Two things you could be doing (or planning on doing) that could severely impact your retirement."

Walter Binkle presents Large Cap Mutual Funds posted at Mutual Funds, saying, "Retirees can save a lot by paying attention to mutual fund expenses. Each of these S & P 500 index funds is among the least costly on the market."

Risk Management

Evan presents Is Paying Car Insurance in Full Really Worth the Savings? posted at My Journey to Millions, saying, "One way you can save significant money is by paying your car insurance in full. While this is a much larger up front cost, it can add up to hundreds of dollars in savings over a policy period."

Savings

SavingMentor presents 11 Car Buying Tips To Get The Best New Car Price posted at HowToSaveMoney.ca, saying, "Over the years I’ve learned many car buying tips and tricks from various friends and relatives as well as from my own online and offline research. I have been buying vehicles for about 18 years and these tips can and do work very well. Some are easier to use then others, but if it means saving a few hundred or thousands of dollars, it’s worth it!"

Jonathan presents Six Secrets to Better Coupon Clipping posted at Wallet Watcher, saying, "In order to make the most effective use of your time and stretch your budget, the following are several helpful tips to simplify the coupon clipping process."

Mike Holman presents Long Distance Voice Plan vs Skype With Roaming Data Plan posted at Money Smarts Blog, saying, "I recently got burned on roaming data charges on my iPhone because I used Skype for some long distance calls back home. In retrospect I should have signed up for a long distance voice plan."

Bradson Oakley presents Bond Mutual Funds posted at Best Bond Funds, saying, "Higher bond fund expenses tend to mean lower net returns to individual investors. It is not worth paying higher bond fund fees."

Suba presents Illusion of saving money posted at Wealth Informatics, saying, "Frugality doesn't always save money and not all frugal tips are applicable to everyone. Do the math and do what works for you."

Jonathan presents "Free Money" Frenzy! posted at Frugal Living, saying, "Making that decision is fine at times, but there is a time and place for everything, and sometimes when we save money or get extra money, we need to use it carefully and wisely."

Ciana Locke presents Market Index Funds posted at Best Index Mutual Funds, saying, "The dominant issue in choosing among passively managed index mutual funds and ETF funds benchmarked against the S & P 500 is that securities industry management and trading fees are all over the map from reasonably low to shockingly high."

YFS presents How to shop for the holidays like a boss posted at YourFinancesSimplified, saying, "This shows you how to shop for the holidays like a boss! (debt free)."

Peter presents Perkstreet Financial Is Paying Me To Use My Debit Card Instead Of Charging Extra Fees Like The Big Banks posted at Bible Money Matters, saying, "I signed up for my Perkstreet Financial free checking account earlier this summer. What did I discover once I signed up? Not only is the checking account free of charge – with no fees for debit card usage – but Perkstreet also pays you 2% cash back!"

Jon Elder presents Ultimate Guide to Grocery Store Savings posted at Free Money Wisdom, saying, "So, here are some tips for those of you who are looking to save money every time you go to fill up your pantry"

Taxes

Gemma Flannery presents Your Tax Code For 2011 posted at Tax Codes, saying, "Your tax code is used by your employer to calculate the amount of tax to deduct. Each year this changes with as tax brackets change. This posts explains the tax code for 2011."

Amanda presents More Time from the IRS for Innocent Spouses posted at My Dollar Plan, saying, "If you are filing your deductions and income on the same tax form as your spouse and he/she fudges information, evades taxes, etc. then you are held liable for any taxes and penalties owed due to this mistake. However, you can apply for spousal relief - read on for more info."

Finley Merriwether presents Retirement Planning Calculator posted at Retirement Plan Calculator, saying, "Tax-advantaged retirement savings plans give you the opportunity to make investments with deferred taxes in 401k, 403b, 457, Keogh, Simple, or other employer sponsored retirement plans."

Al Peters presents 4 Things You Should Know About Your Self Assessment Tax Return 2011 posted at TaxFix Feed Update, saying, "There are many things that you should know about completing your tax return but this post higlights 4 of the top things to remember."

That concludes this edition. Submit your blog article to the next edition of Carnival of Financial Planning using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page.

Is Saving More Important Than Investing?

2011-10-19T05:30:00.000-04:00

By: Roshawn Watson

A recent US News article suggests that a) investing is sold as a panaceas to all of our financial ailments and b) that this undermines more important efforts, namely “educating investors on establishing goals and making tough budgeting decisions.” Although the issue is complex, the article made me ask the following question: could we have it entirely backwards - should our efforts center on savings rather than investing?

Saving Is A Lost Art

I want it, and I want it now!

Delayed gratification: two words that few enjoy. In fact, many of us can’t imagine a life without credit. Before you dismiss that notion, consider how many people you know who purchase their cars, pay for tuition, pay large medical bills, and even purchase their homes without ANY debt. All too often, we hear that credit is just how we purchase things while we completely discount the fact that there was life before credit became so abundant.

Let me be clear: Debt is among the most aggressively marketed products in the world.

Thus, it is unsurprising that as a society we tend to a) worship at the altar of the great FICO score and b) have completely disavowed all knowledge of saving. After all, anything less than immediate is far too slow in our culture, or is it? Anyone who offers you debt is NOT giving you a true gift. Along with the debt comes bondage, a nasty little fact that we readily discount all too easily. Moreover, Henry Ford once commented that debt is the lazy man’s method to purchase items. In other words, there can be gain in the struggle, and I’m not just referring to the lessons learned. The process of working through something difficult can actually be more enjoyable than getting what’s you are aiming towards. There’s power in anticipation and focusing all of your available resources on a singular goal: whether it be a car, a flat-screen, a home, or an investment.

Have you deprived yourself of the benefits of the struggle?

There Is More To Investing Than Rate Of Return

One of the reasons learning to plan purchases and budgeting is so important is because the three basic variables that greatly impact the total investment return are:

Amount Invested - Your contributions
Time Horizon - How long you hold the investment
Rate of Return - The percentage by which your money grows

Although these variables are intuitive, I mention them to lay the following foundation: while the financial services industry spends an inordinate amount of time maximizing the return, it may be more meaningful to embrace a more complete approach. Consistent investing over the long term in diversified and solid investment vehicles may ultimately do the masses better than getting an extra half percent. Note, this isn’t to say that a half of percent is trivial, but to emphasize that rate of return is only one part of the puzzle. If you invest in paper assets (i.e., stocks, bonds, ETFs, mutual funds, etc.) over the long term, most of your portfolio will theoretically be growth anyway, provided that you have allocated appropriately for portfolio growth. Since only a fraction of your total portfolio is what you actually put in, adequate time and putting enough starting capital are essential for your portfolio to become sizable. Stated differently, a 30% return on $10 over 5 years is not much.

Most of us Don’t Systematically Invest

That last example emphasizes why financial literacy is so important, which brings me to some very troubling news. However, first let me state the positive. While earlier last decade the savings rate was negative, it has rebounded since 2008-2009 and has been hovering around 5-6% ever since. Retirement assets are up too (10% compared to last year according to CNN Money) and just shy of the all time high in 2007. Anyone making investing a priority should be applauded.

That said, the sad truth is most Americans do not systematically invest, and even when we do invest, many of us are pretty crappy!

Research from a leading human resources firm tracked the financial acumen of the masses. The studies indicated that most Americans don't know what they are doing (USA Today). Moreover, “the general public tends to play up their investing success(es) while ignoring the lessons of their losses..." According to LaSalle St. Securities, “nine times out of 10, investors' long-term performance lags behind the market by a wide margin.” (People wonder why I index!)

Some basic considerations for investors are:

What’s your investment strategy?
What’s your risk tolerance?
What’s your exit strategy?
Are you especially adept to a specific type of investing?
What’s your time horizon?
What are the tax implications of different types of investments?
How will you diversify?
How often will you rebalance?
What kind of lifestyle do you want to live when you retire?
Feel free to add others below in comments :)

Parting Thoughts

My opinion is that both saving and investing are important. Saving is for the short-term: when one needs his or her money within 5 years or less. Investing is for the long-term. One’s investing efforts are aided by the discipline of saving and budgeting consistently. The original article’s comment about financial services’ overemphasis on the rate of return, almost to the exclusion of anything else, seems valid. Clearly, both savings and investing are generally critical elements to healthy financial plans.

So what do you think: which is more important saving or investing?

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

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Did Americans Get Poorer or is USA Today Wrong?

2011-10-05T05:30:00.002-04:00

By: Roshawn Watson

A recent USA Today article suggests that the typical American family got poorer in the last 10 years. They cite the following as their rationale:

According to the Census Bureau, the median household income decreased by 2.3% to $49,445 last year and has fallen 7% since 2000 after adjusting for inflation.
Inflation adjusted-income is the lowest since 1996.
Poverty has risen too. Now, 15.1% of people live in poverty, the highest level since 1993.
This decline in income is particularly prominent among minorities and the young; many have chosen to move in with parents as a result.

My initial impression from reading this article was "Yuck!" However, upon further review, I realized there were some important confounders to the data presented and underlying assumptions being made that I don't necessarily agree with. Let's explore this article critically, and you tell me afterward whether YOU CAN DECIDE WHETHER AMERICANS GOT POORER.

Net Worth Changes?
We love to discuss income; clearly it is important. The size of the shovel determines the speed and efficiency with which one can get out of any hole. However, income is merely a singular component of our overall financial pictures. Net worth is also important: to many, it is more important, especially over the long term. If you don't believe me, consider the median income of the typical American household: $50,000. At this income, a household will bring in approximately $2 million over a working lifetime (not including taxes nor adjusted for inflation). Now if this household invests $900 monthly, it would end up with at least $2 million WITHOUT EVER GETTING A SINGLE RAISE (assuming 10% rate of return and 30 year time horizon). Here's the rub, even if I am half wrong, this household would have a net worth in excess of 11 times the median net worth.

Problem with the USA Today article #1: Why wasn't there any mention of median net worth? Note total household wealth in America increased by $10 trillion (this could be skewed by unequal distribution of wealth).

Investable Assets?
Of course, the net worth isn't perfect. Perhaps, among the biggest criticisms with using net worth as a metric is that it is often inflated (or at least inaccurate): our perceived value of our assets differs from their true market value. For example, if you purchased a house for $750,000 in 2004, that doesn't necessarily mean that you should list the value of the house in your balance sheet as $750,000 today. It is possible that your real estate agent would list the house for $500,000 (or $950,000). Similarly, it is arguably more difficult to determine the "proper valuation" for a privately-owned business. Sentiment and "good will" often obscure an objective valuation. All to often, we hear tales of the illiquid business owner having cash flow problems or the family having to sell their inheritance in order to pay for the death tax due to lack of cash (note the death tax laws have temporarily changed). Thus, this is why I suspect wealth research is increasingly focusing on "investable assets."

Problem with the USA Today article #2: There was no mention of investible assets despite the fact that savings rates are UP (from negative during the pre-recession to 5.7% in 2009; the highest in 14 years).

Debt to Income Changes?
Americans are shedding debt. Debit card usage now surpasses credit card usage. Credit card balances have gone down. Unfortunately, recent news suggests that BOA and Wells Fargo (and other large banks) may reverse this trend by charging a $3-5 fee monthly fee to those using debit cards to make up for the $2 billion loss in revenue from the Dodd Frank bill (necessitates that banks charge businesses less for debit transactions).

Problem with the USA Today article #3: There was no mention of Debt-to-Income (or any other pertinent financial) ratios despite the fact that debt to income ratios have also gone down since 2007. Incidentally, had the article include this ratio, it would have supported their argument (Debt-to-income ration was 100% in 2001 and peaked at 133% in 2007).

Closing Thoughts

My point is the USA Today article may be misrepresenting the issue. The author asks one to assume that income is the only determinant of wealth and poverty. If your income stagnated or went down by 5%, but your wealth increased by $250,000 (certainly possible over a 10 year period), you are poorer according to the article. Is that how you would classify people in that situation? Suppose your income went from $60,000 to $50,000 because you retired: that is you went from earned income to solely portfolio and passive income. Are you worst off financially for doing this considering that your expenses (i.e. gas from a commute, clothes, etc.) likely have also decreased? You can see the flaw associated with their oversimplification. Anyone can cherry pick a few statistics to support a point, which is why an article looking at the aggregate of pertinent ratios (i.e., Debt-to-income, quick ratio), financial statements (i.e net worth and income), and other key metrics (i.e., liquidity) would yield a more fruitful discussion of American finances. Perhaps such an article won't provide you a sensationalistic title or talking points in line with a particular agenda. However, it would be the TRUTH.

More broadly, you should NOT be force fed your opinions about the economy, investing or personal finance in general. I am certainly not representing the current economic climate as anything but challenging. However, the hyperbole surrounding its discussion is thwarting our chances at having an honest discussion about macroeconomics that might effect any real change.

I SIMPLY REFUSE TO FEAR.

Image was adapted from Aldrin Muya

So Tell Me, How Is Your Economy Doing?

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‘The Rich’ Are an Ever-Changing Group... Get Yours!

2011-09-28T05:00:00.000-04:00

By: Roshawn Watson

Death is not the greatest loss in life. The greatest loss is what dies inside us while we live (Norman Cousins)

Most of us rejoice when someone hits the ball out of the park and the cover off of the ball. We know that extreme success, financial and otherwise, requires effort on our parts, sometimes considerable effort. While some appear to have the golden touch (i.e., Steve Jobs), a closer look often reveals their many struggles and costly setbacks too. Thus, just because one is rich today does not guarantee that he or she will be rich next year. The opposite is also true, or is it? There are divergent views on the longevity of wealth and whether inherited wealth (static) will eclipse newly-earned wealth (dynamic). Lets delve into the data..

Who are the "Rich" Really?

There is much confusion over what qualifies for "rich." It largely about perspective. For example, one could effectively make the case that the person on welfare in a rich country is far better off than many others in poverty-stricken lands. Thus, for the sake of this post (and this site in general), I submit to you that when I refer to "the rich," I do not mean your garden variety millionaires. Two-thirds of millionaires in America have a net worth of less than less than $2.5 million. Although that's enough for many to be comfortable, from a technical (i.e., balance sheet) perspective, this level of wealth would make one affluent rather than rich. To qualify for rich, add a 0 to the aforementioned figure (or 3).

The only reason I stress the distinction is because such a small fraction (i.e. around 6%) of American millionaires have a net worth of $10 million or more. In other words, while millionaires are relatively "common," it's extremely rare to actually be rich because it is difficult for most to amass such a high concentration of wealth. The top 1% of earners make about 20% of the income in America, and the top 5% received about 40% of the recent gains in wealth.

Are The Rich Stationary or Dynamic?

Now, that we have defined who are the rich, there are some recent data that are relevant. According to the IRS, the number of filers with incomes of $1 million or more has declined by 39% between 2007 and 2009. In 2009, there were 237,000 million-plus earners, down from 390,000 in 2007. Thus, this decrease may indicate that the income affluent are shrinking in numbers due to: a) economic and market challenges and/or b) restructuring of their businesses or investments (i.e., utilizing loss-carry forwards, taking less income in the form of cash, reinvesting in their businesses, etc.). Interestingly, balance sheet affluent (someone with a high net worth) saw a completely different phenomena. According to Merill Lynch and Capgemini report, not only does the U.S. now has a record number of millionaires, but the number of people worth $30 million or more also increased substantially.Although the income versus net worth data may appear to contradict each other, what likely happened is that those who sold in the panic market drop at the end of 2008 had lots of capital loss carry forwards to offset gains in 2009. Thus, investors made plenty of money, but their reported incomes simply didn’t reflect it all.

More importantly, both income and net worth data suggest that "the rich" change constantly. However, the IRS and Merill Lynch and Capgemmi aren't the only organizations tracking the rich: what about the Forbes 400 list? About 70% of the new Forbes 400 (400 Richest Americans) are purported to be self-made, which is encouraging, yet half of the top 10 inherited some or all of their wealth. If you combine the net worth the Walton family ($87 billion total), as other families on the list are combined, then 60% of the families have inherited their wealth. This begs the questions as to whether it is possible that preserved family wealth may eclipse newly-created wealth?

The implications of this scenario would be substantial. Already, hopelessness has crept into Americans according to a recent CNBC report. A whopping 79% of Americans indicated that it is unlikely they will even have $1 million or more in assets in over the next 10 years. Moreover, 61% said it is “extremely” or “very difficult” to become a millionaire in the U.S. today. Now of course, I don't highlight this data to be negative but rather to point out that if the prevailing attitude is one of despair (i.e., the only people who get ahead are those who hit the genetic lottery), then how likely is someone with this mindset to take the steps necessary attempt the impossible.

Closing Thoughts

In aggregate, while it is possible to get rich in today's economy if you desire, there are certainly some distinct challenges in the present climate (i.e., over a 20 year period [1987-2007], there was strong economic growth, a 20-year-bull market, and huge technological changes and investments). Perhaps the biggest danger though is not the external obstacles one must over come but rather that internal drive may diminish, as dreams are discarded, in favor of reality.

Don't give up on your dream though. It may just be the most valuable thing that you possess.

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

Parasite of Wealth

2011-09-20T08:15:00.001-04:00

By: Roshawn Watson

Perhaps if you are a Kardashian or a Hilton and can somehow monetize your luxurious purchases through endorsements, appearance fees, products, licensing/merchandising deals, and a myriad of other ways celebupreneurs (celebrity entrepreneurs) justify and/or pay for extravagant purchases, then at least there's potential for a financial upside of such expenses. Applying the "glittering rich" standard to see if one can truly afford the lush lifestyle is useful. Those who glitter should have a minimum net worth of $20 million, make at least $2 million a year, etc. (i.e., a very small fraction of the top 1% of households). Yes, they can afford to truly jet set, and the proportion of their wealth spent on looking the part amounts to the cost of a few pizzas to most people.

A Disturbing Trend
However, I have been noticing a disturbing trend for some time now. People will go broke trying to look rich. They may succeed in impressing others they don't know and don't really care about but generally at the expense of their family's financial solvency and preparedness WHEN the poop hits the proverbial fan.

Heidi Montag was interviewed recently and basically declared that she and her husband are broke now post The Hills. She stated that their money was largely spent maintaining a facade of wealth and trying to launch her music career. They created an illusion of prosperity in hopes of gaining riches. She stated that she wishes she was more like Kim Kardashian (reportedly has net worth $65 million; income about $5.5 million annually). She mentioned that when Kim K spends, it is an "investment" in herself (with Kim's earning power being closely connected to her successes at selling her "fabulous" lifestyle, I would say Heidi has a point). However, for every one "lucky" starlet who successfully manages to sell the illusion of her fabulous self, there are countless others who fail miserably. Additionally, even big celebrities can get into trouble living the good life if they are not careful. For example, Nicholas Cage (I'm a fan of several of his movies, so don't hate) got into recent financial hardship, and an ever-increasing number of Bravo's Housewives go bust. I don't glory in their despair; however, their stories need to be told, so that our visions of the palpable risks associated with their lifestyles won't be grossly distorted.

$40,000 Car
Of course, looking rich is not the main motivation for everyone who overspends: some people spend excessively because they either think they are already rich or know they aren't but don't care about the consequences. The following story is a case of the latter A few weeks ago, a friend grilled me for about an hour about her personal finances. I assured her that I wasn't against her living the lifestyle she desires as long as she can afford it (i.e., pay cash for it without sacrificing retirement). Although I tried to encourage her that it got easier with time and discipline, she was very disheartened to hear me outline the risks of borrowing $40,000 for her next vehicle. She lamented that she likes the "nice things." I assured her that many of us do and that she should then make it her goal to AFFORD the nice things. I said otherwise, the things that she buys will be parasites to her wealth.

Saving and Investing
The real problem is NOT the car but her attitude towards her money. The typical millionaire saves at least 15% of his or her income, and his or her income accounts for a mere 7% of his or her wealth. This explains why the average millionaire would survive for over 10 years without working; many could survive for much longer since they are used to living on significantly less than they make and have access to. Also, before you say that millionaires can save because they have more money, let me assure you that one of the reasons millionaires have money in the first place is because they save and invest. Let me explain. Regardless, of whether you make $40,000 a year or $400,000, you can still be broke if you spend all that you make. Thus, for most people to accumulate and maintain significant wealth, some restraint is generally involved and usually prominent.

I'll make this short and sweet: "the true mark of financial intelligence is not how much you make but how much you can keep."

Should You Pay-off the House?

2011-09-13T07:45:00.002-04:00

By: Roshawn Watson

Housing is one of the biggest expenses most of us have. Making the quality decision to greatly diminish one's living expenses through owning a home outright can have reverberations throughout your entire financial world. It could be the single choice that determines whether you will retire with dignity, be able to adequately fund Junior's college fund, give like never before, and live comfortably into perpetuity. Here are some of the reasons you should consider eliminating your mortgage IF you have one.

Liquidity

You should maintain adequate liquidity, especially in today's challenging economic times. Since the Spring of 2008, I have AGREED with Suze Orman: keeping at least an 8 month emergency fund (more on this in an upcoming post) seems reasonable to me AFTER you are debt-free excluding the house.

I submit to you that this IS risk-adverse and also a NECESSARY precaution. Consider the following as the rationale: 1) job-security is an illusion, 2) most real estate values have seen significantly better days, 3) it's hard to convince yourself to sell equities in an emergency (especially if the market happens to be down), and 4) it may be hard to obtain loans from banks when you need it the most (instead they may close your line if they aren't certain they will be paid back).

Paying $10,000 to Save $2500

Perhaps the most absurd reason to keep mortgage debt is to take advantage of the tax deduction. Now, I'm not denying that the tax deduction is beneficial, but I will submit to you that it may not be financially wise to pay the bank $10,000 per year (i.e., your mortgage) in order to avoid paying the IRS $2,500 per year (i.e., the extra amount you would pay in taxes if you didn't have the mortgage). If you really want a tax deduction without wasting money, consider giving some money away to a charity and itemize. Of course, you would have the added benefit of doing some good in the process while increasing your bottom line. I suspect that is a lot better than merely making your lender richer for the privilege of keeping a mortgage around for longer than necessary.

Everyone is in Debt... oh Really

First, to assume that everyone has a mortgage is faulty. According to the US Census Bureau, about 30% of homes are owned free and clear, with the housing expenses of those with mortgages being approximately 3.5 times that of nonmortgage homeowners. Of course, many people rent as well. What I find more interesting is not the fact that people operate without debt but rather who operates without debt. Sometimes there is the presumption that if you don't use debt, you are not financially sophisticated. However, this is an unsubstantiated claim. Consider that, since debt is typically your second greatest expense, eliminating debt often liberates one to build wealth. That's because your income is your most powerful wealth-building tool. Accordingly, it should not surprise you that 75% of the Forbes 400, the 400 richest Americans, say that the best way to build wealth is to become and remain "debt-free." In other words, keep the debt at your family's own financial peril.

But They Approved Me

Some people confuse making enough to obtain a loan with financially winning. All the former means is that the lenders deem you a worthy enough risk to make them rich. Congratulations ...I guess! However, who is making you rich? Just because you can obtain a property doesn't necessarily mean that the cost of maintaining that property won't BURY YOU. Do you know with certainty that your housing costs do not exceed what's reasonable given your income level. Despite more stringent lending standards, some people are still getting taken for a ride. It's simply a fact.

Parting Thoughts

The sooner you get rid of your housing debt the sooner your living expenses shrink and the real fun can begin. Again, your most powerful wealth-building tool is your income, so it would serve you well to not burden your income with loans, especially long-term loans. My fellow savers and investors know what it is like to be able to bank a mortgage a payment or two on a regular basis; if you do this consistently, you will be in a position to GIVE away a mortgage payment! (If you find that statement shocking, this is where the increased liquidity associated with reducing one's housing expenses may come into play)

No house is worth your financial security, nor is that house a badge of honor. It's the paid-for house that is the true badge of honor! Are you going to be (or are you already) a part of the 30% who will make this YOUR reality?

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Labeling Debt To Make It More Palatable

2011-02-24T09:16:00.001-05:00

By: Roshawn Watson

Sometimes facing reality is no fun. Many people realize the implications of being indebted: their debt steals their income and often their lives. They work to make the bank more prosperous but are barely treading water themselves. In general, their money goes towards liabilities and expenses. Wealth-generation may be the goal but is not evident by looking at their financial statements. As a coping mechanism, many people have decided not only that remaining in debt is not that bad, but to refer to such debt as "good." I'm not buying it. Are you?

Consumer Debt Is Consumer Debt
I think many people are fine labeling credit card debt as bad, but we sometimes have an artificial hierarchy with respect to other debt. We elevate student loans and mortgage debt as sacred. After all, we need an education and to live somewhere. We justify car notes because we need to get to work. First, there are ways to get an education, purchase a car, etc. without debt, albeit they are less pleasant. Also, your income statement doesn't really care about these distinctions; all it knows is that money spent on these things is money that isn't going towards your financial solvency, independence, comfort, and wealth. I wholeheartedly believe in the vast majority of situations, the labeling is immaterial and should be treated as such. It's debt and should be avoided and/or paid off. The main exception is that it is reasonable to continue retirement investing while paying off a mortgage. It's really that simple.

Home Mortgages Are Different
Some feel that mortgages are a different beast. They argue that while the mortgage balance is a liability, the value of the home is an asset. That's true, but value is subjective and becomes most relevant upon selling an asset. This is why home equity is increasingly not being included in surveys, such as the annual World Wealth Report, which defines high net worth individuals as "those having investable assets of U.S. $1 million or more, excluding primary residence, collectibles, consumables and consumer durables." Until it is time to sell, the concern should be how the asset is impacting your cash flow and for how long. After all, your income is your most powerful wealth-building tool. If it is obligated via a mortgage (or consumer debt, property taxes, maintenance costs), then you are losing valuable opportunities to invest and for your investments to grow.

Convince people that debt is good
Even if we consider the merits of "good debt," most debt doesn't qualify. If the term "good debt" is legitimate, I believe it would best refer to debt that is producing income now. For example, perhaps if you are earning a significant income from your debt and your leverage ratio is very, very, very small: meaning you can write a check tomorrow and be out of debt, then perhaps you are in debt that some would refer to as "good debt." This is a very conservative view of debt and obviously less preferable than avoiding debt altogether, but I would argue labeling debt that benefits your income statement as good is at least understandable and possibly defensible. However, I fail to see the validity of classifying debt resulting in negative cash flow (before or after accounting for depreciation) as good. I seriously doubt those who have achieved significant wealth would view such behavior positively. After all, 75% of the 400 richest Americans (Forbes 400) believe "the best way to build wealth is to become and stay debt-free." In other words, it is hard to get ahead financially espousing liabilities as assets, good conscience or not. Whatever benefit that is achieved by debt is more than offset by the risk assumed by the borrower. Using debt for investments or businesses puts the borrower at risk of making more mistakes and for the implications of mistakes to be magnified. Indeed, if you looked at your risk-adjusted rate of returns, borrowing money, even for these purposes, would not appear so casual.

If you don't eliminate risk, at the very least minimize it. I was delving into the finances of a big proponent for people building wealth by keeping "good debt." First, he recommends having at least a full year's salary (not expenses) in cash (not equity). He also keeps at least a 75% equity position in his primary home and could pay off the remaining 25% at any moment. Additionally, his income exceeds his expenses (including his debt obligations) by over a 12:1 ratio. Next, he recommends that every real estate deal must yield positive cash flow, from day one. If I didn't know any better, I would say he sounds downright conservative financially, despite shocking statements like "I'm rich because I'm deep in good debt."At the end of the day, proclamations about how you love debt and are rich because of it may be useful to sell books and garner media attention, but clearly being financially-conservative, solvent, and liquid has kept the foreclosure wolves at bay. Generally, anyone who has any sort of longevity in real estate or business cannot remain chronically over-leveraged.

Concluding Thoughts
Spare me the moral posturing or the detailed theoretical calculations telling me why debt is good please! Even the "good debt is alright" gurus don't really drink that kool aid (or they don't last). It's not that I'm mad at you for calling your debt good. I just don't believe you. We're still friends though, and because we are let me share something personal with you. By recognizing the debt for what it really was, a restraint on my cash flow, I was able to focus my efforts on eliminating it. It wasn't easy nor pleasant, but it certainly was simple... and relatively quick! Often the best advice in personal finance works out that way.

If you use your financial statements as your guide, I believe you may come to the same conclusion about debt as I have: debt is generally not a blessing to your finances.