Darrow Ascending To Shield

(This guest post is from one of our readers, Darrow Kirkpatrick, a life-long rock climber who also became financially independent and retired at age 50. In addition to a 25-year career as a software engineer, Darrow has climbed widely throughout the United States including  Yosemite Valley. Take it away, Darrow…)

Do you have a defining moment or metaphor for your life? An event or accomplishment that set your personal bar and taught you more than any classroom ever could about the line between success and failure?

A defining moment in my life came in the summer of 1981, when I climbed the Shield route up the 3,000 foot vertical face of El Capitan in Yosemite Valley, California. My partner and I spent 5 days on the rock face, hauling every life-sustaining necessity along with us, sleeping at night on hammocks or small ledges. It was the adventure of a lifetime.

El Capitan is known to climbers as a “big wall.” Failure rates are high: many parties retreat far below the summit. So what is the line between success and failure ?

As it turns out, there are a few factors that make all the difference. And they are the same factors that lead to success in other areas of life, including building wealth and achieving financial independence….

Commitment

The single most important factor for success in climbing, finance, or in life is commitment to a meaningful goal. You simply must be highly motivated to achieve anything substantial. Why? To maintain the focus and energy you’ll need for the long and difficult work required, and to overcome the serious obstacles you will encounter.

Some obstacles will be constant annoyances — like a stressful work environment, or the thirst you get from climbing in the hot sun all day on rationed water supplies. Other obstacles will be momentous — like saving your first $100,000, or climbing past the 30 ft. long overhang we encountered half way up El Capitan.

The small, continuous obstacles demand your best in patience and perseverance. The large ones require focused energy and skillful action. And the root factor in developing all of these qualities is commitment. You develop that commitment by choosing a worthy goal, preparing for success, and believing it is possible.

In building wealth and financial security you will be committed when you internalize this principle: living on less than you make and investing the difference wisely WILL make you financially independent. Once you fully understand that this applies to YOU, and that, with the right behaviors in place, wealth is the only possible outcome, you will be 100% committed. And that motivation will carry you through the inevitable challenges. Believing in your goal will keep you on course and away from energy and attention-sapping detours.

On El Capitan, we were totally committed to reaching the top. Every ounce of mental and physical energy was focused on completing the climb. It was the only option we talked about, or contemplated. There was enormous momentum from feeling “we are prepared, we know what to do, we are going to do it, and it’s going to be awesome!” And that momentum gave us the energy to climb through the inevitable obstacles.

Such commitment doesn’t appear out of thin air. Nor is it blind faith. It is built on essential preparation….

Practice

Realistic commitment is built on supporting behaviors or habits you develop through practice. The specific domain doesn’t matter. It could be athletic, financial, or personal. The essential point is that the recurring behaviors you manifest are what will create results in your life, for better or worse. Because unlike wishes, dreams, or even goals — your habits are what you actually do.

In building wealth, the first habit is learning. You must educate yourself about money matters as a continuing, long-term process. Early on, you will make many small financial decisions that add up to significant results over time. Later you will be involved in larger and more substantial transactions. Every decision counts. But the world changes, and you change. So never stop learning.

On El Capitan, well-trained behaviors gave us the ability to do the safe and efficient things automatically, without the need for conscious deliberation, and to keep going even when we didn’t feel like it.

Another key financial habit is saving. Plan to save and invest a portion of every dollar that comes to you. Don’t consume all the resources put at your disposal: you, or somebody you love, may need them later. Living below your means and investing the balance wisely is an essential habit for financial success.

On El Capitan, we were rested and fit, in the best physical condition of our lives, fully prepared with the finest equipment of the day. The resources we had stored up gave us the confidence to commit to our ultimate goal.

Another key financial habit is demanding value. Every dollar that leaves your hands should return at least a dollar in actual life value to you. There are many experiences and things in life, too many to count, that would be “nice” to have, but are simply not worth their cost. Being well versed in your own personal valuation metrics, and using them instinctively, is essential.

Success on a big wall is about persistence and endurance, but, with thousands of vertical feet to cover, efficiency is at the heart of the process. Getting full value from every motion, every minute, every calorie of energy is key. Just as in personal finance, activities or possessions that don’t contribute to upward progress simply hold you back.

On El Capitan the essential ingredients for success were in place, but we had to deploy them effectively….

Structure

The world offers seemingly limitless options. Almost any substantial endeavor must first slay the complexity monster. There will be a host of data, tools, technologies, techniques, products, services, systems, instructors, and institutions. You must sift the essential from the unimportant, then organize and focus.

In the financial realm it’s important to keep your investments, your relationships, your tools, as simple as possible. Accountability, feedback, and control are fundamental. A common mistake is accumulating a mishmash of unrelated investments — often based on recommendations from friends, family, or media — until you don’t know what you have, or how you’re doing. Managing less, choosing the few right priorities and tracking them regularly, will optimize your attention.

Organization is an essential habit for success on a big wall too. On El Capitan we carried more than 300 individual pieces of climbing gear, every one of which was critical to upward progress at some point during the climb. Without a good system for organizing and handling that equipment, efficiently transferring it from one partner to another as the climb advanced — progress would slow and burn out altogether.

One of the most important organizational tools for personal finance is to monitor your progress. Begin by knowing your net worth: add up your assets including bank accounts, investments, and real estate equity. Then subtract any debt. Update this number several times a year. Also calculate and understand the performance of your entire investment portfolio, annually. These metrics provide essential feedback on your progress, so you can make course corrections as needed

Teamwork

Life is a team sport, and finance is no exception. I credit my wife, son, parents, friends, colleagues, and mentors with much of my own financial success. The fact is, I simply couldn’t have done it without them.

The same was true on El Capitan: teamwork was critical. A strong, dedicated, enthusiastic partner was a key ingredient to success. A good partner shares the often severe physical and psychological strains of living and working in the vertical environment, contributing to efficiency and morale.

Off the rock, a long-term, committed relationship pays enormous dividends in both happiness and financial well being. Two can live cheaper than one by sharing expenses such as housing, and vehicles, and buying in bulk. They can also combine resources. In our case, I had the high-paying job, but my wife had the more reliable health benefits. A good partner also provides accountability for financial goals. You can encourage and cheer each other on when the going is tough.

Not just any partner will do. Unspoken connection and communication are essential. On El Capitan, we were often out of view and out of earshot, separated by a hundred feet or more of windswept rock, connected only by a thin rope. My partner and I had to know and trust how each other would react to a broad range of conditions. A climbing partner’s judgment must be beyond reproach: they literally hold your life in their hands. A similar level of trust is required of a financial partner.

Though we didn’t have a personal guide on El Capitan, we did reap the wisdom of those who had gone before us. In financial life, I did have a personal guide. Early on, I subscribed to an investment newsletter that taught me the virtues of patient, low-cost, diversified, value-oriented investing. That was foundational to my financial education and eventual success. A guide, mentor, or financial coach can play a critical role in helping you anticipate and avoid the most serious dangers encountered when pushing your limits….

Safety

Big walls, and financial markets, are foreign, potentially hostile environments. Risk can never be fully eliminated. Seemingly small moves can result in large losses. But many of the techniques used to stay alive on a big wall work equally well at staying safe in your financial life. To survive and prosper, you can rely on time-tested principles of testing and redundancy.

Frequent testing is the safest way to get feedback. A key principle is to fail small and fail fast. For example, El Capitan required thousands of feet of difficult aid climbing — using ultra-thin pitons hammered just fractions of an inch into the rock to support body weight for upward progress. Any one of those placements could potentially fail at a moment’s notice. You can bet we carefully tested each one, and backed it up with solid anchors below, before fully trusting our weight to it!

“Failing small and fast” applies to finance as well. Don’t bet your life savings on a complex annuity or a technology start-up. If you feel compelled to try something new, do it with a small amount of money, over a short time frame. That way you get quick feedback on your decision, and can learn from it, before it takes on wealth-threatening proportions.

Redundancy is another time-tested safety principle. Never trust your entire success to a single point of failure. Climbers learn to build anchors so that loads are evenly distributed and single points of failure are eliminated. They check, and re-check, critical knots and connections. When it comes to life-saving systems, or large sums of money, always review the details!

In personal finance your emergency savings are an essential backup. Without it, unexpected events could leave you short on operating cash, forcing you into selling investments at distressed prices, losing a home, or declaring bankruptcy.

For investing, redundancy means diversification thru asset allocation. You distribute your holdings over a range of uncorrelated asset classes. So if one of your investments under-performs for a time, another will likely step up to take its place.

On El Capitan we carried extras of all essentials. We planned on 5 days to complete the climb, but carried 6 days of food and water. We had extra layers of clothing and rain gear, to endure any kind of weather. And we carried spares for the most critical pieces of climbing gear, so that dropping or damaging something couldn’t stop us.

Success – Topping Out

When you reach the summit of El Capitan the view is breathtaking. You see the entire length of Yosemite Valley, from the heights of Tuolumne Meadows and Half Dome to the East, past El Portal and out to California’s San Joaquin Valley in the West.

Standing there for the first time, after successfully climbing the Shield, I realized a new vision of life’s possibilities. There was no doubt in my mind then, or now, that any goal, no matter how grand or ambitious, could be achieved, with commitment and dedication.

I no longer climb as hard, or as often, as I once did. But I still apply the lessons learned on El Capitan to my life. The teachings received long ago in Yosemite’s granite crucible benefit me to this day.

You don’t have to be a dedicated climber, or even an athlete, to get the same benefit. You can apply these lessons to any life challenge large or small — in the gym or on a hike, raising a child, getting a degree, starting a business, or building wealth.

It’s not the size of the goal that’s important, but committing to it and leveraging your own gifts and talents through practice, structure, and teamwork. In the end you will find it was the personal journey that mattered, more than the destination. Success begins with a commitment and behaviors that are available to everyone. Just like on El Capitan, there are many routes to the summit. See you at the top!

About the Author

Darrow Kirkpatrick is an author, software engineer, and investor who participated in several technology start-ups and retired at age 50. He is married to a schoolteacher and the father of an amazing artist and engineer. He is an experienced rock climber and enthusiastic mountain biker, and writes regularly about saving, investing, and retiring at CanIRetireYet.com.

(Note From Todd: I would love to see more reader’s share their experiences and insights related to investing and building wealth. Larry Weber shared his insights about distance running and building wealth a few months back. It doesn’t have to be extreme athletics – any insight that has helped you is fair game. The premise I’m trying to teach on this site is the principles of wealth building and smart investing are universal and apply to all aspects of life. We’re embarking on a much bigger truth here and life leaves clues on every stage we play – including big wall rock climbing and endurance running. What stage have you learned your lessons on and how do they apply – motherhood, war, acting, zoology? Who would like to be next and share their insights??? I want to hear from you!)

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Financial Mentor Around The Web…

• Financial Mentor also appeared in Investopedia.com, Carnival of Wealth, Totally Money, Carnival of Money Pros, Carnival of Financial Camaraderie, Financial Simplicity, Carnival for Young Adults, and Carnival of Financial Planning.

You will inevitably confront this question in your pursuit of financial security.

The problem is the answer is far more complex and confusing than generally understood.

The intuitive response is to get out of debt. We all want the security of owning our castle free and clear with one less expense to deal with. The prospect of making monthly payments for the next 30 years is antithetical to freedom.

However, there are times when intuition and finance disagree.

The decision to pay off your mortgage early isn’t just about getting out of debt because complicated equations involving return on investment, time-value of money, and inflation are involved. Remember, this is finance. You can end up with “Alice in Wonderland” scenarios where debt is the cheapest solution and a dollar paid tomorrow might actually be preferable to debt freedom today.

Curiouser and curiouser…

In this article I pull back the curtain exposing the many dimensions to paying off your mortgage early. The objective is to balance your intuition with financial savvy so you can make a smart decision. The correct answer is not cookie-cutter but must be custom fitted to your personal financial situation.

Let’s explore how this complicated process works…

How To Pay Off Your Mortgage Faster

If you decide to pay off your mortgage early there is no shortage of advice on how to get the job done. Unfortunately, it all boils down to the same three little words – “pay more principal”. There is no magic secret. The only real difference is form, not substance.

Paying mortgage principal early is a powerful money saver because small debt reductions compound dramatically over the life of the loan thus eliminating many times the payment in interest.

For example, this mortgage payment calculator shows you that a 30 year, $100,000, 6% mortgage has a monthly payment of 599.55 with only $99.55 going to principal in the first month. If you add just $100 to that monthly payment you literally double the principal paid in the beginning, eliminate 108 payments over the life of the loan, save $64,751.46 in interest costs, and shorten the payoff time from 30 years to 21 years.

Not bad for an extra $100 per month…

If that sounds appealing then here are the various strategies for early mortgage payoff starting with the simplest and moving toward the most complex…

• Add Principal to Your Current Monthly Payment: Assuming your mortgage doesn’t have a prepayment penalty (check first) the simplest early payoff strategy is to just add principal to your monthly payment. You could try a one-time lump sum where you put the proceeds from selling a boat, motorhome, or unused jewelry to good use. Alternatively, you can add a little extra every month by sending your raise or bonus directly to the mortgage company. The concept behind this strategy is you got by just fine without the money before so you’ll never miss it if you never see it.
• Biweekly Payment Schedule: Rather than make one mortgage payment per month, try making half the payment every two weeks. Since there are 52 weeks in 12 months that causes 26 half-payments or 13 full payments instead of the usual 12 – one extra payment per year. Depending on your situation this can cut up to 6 years off the life of your 30 year loan. Check out the details first because some mortgage holders offer this payment schedule without charge and others will hit you with a fee. I suggest you try using this bi-weekly mortgage calculator with extra payment capability to test both this early payoff strategy and the previous one to see how fast you can be free and clear!
• Refinance to a Lower Interest Rate: Another strategy is to refinance to a lower interest rate mortgage while keeping the term (pay off date) the same. The key is to not take any money out or extend the term when you refinance. Your new loan should offer a lower payment due to the reduced interest cost so that when you keep making the same payment as before all the extra will go to principal payoff. The nice thing about this strategy is it doesn’t require any additional money out of your pocket to achieve the desired result (unlike the two previous alternatives) because all the savings comes from reduced interest costs.
• Refinance To A Shorter Term: Rather than pay over a 30 year amortization try reducing the term to 15 years. The monthly payments will be higher but the interest rate is usually lower thus offsetting some of the monthly outflow. Another variation on this theme is to keep your 30 year mortgage but make your payments as if it were a 15 year amortization. You won’t get the reduced interest rate of a 15 year term, but you also won’t pay refinancing costs either. Some people prefer this variation for its increased flexibility and reduced cost while others prefer the enforced discipline of the required monthly payment. Either way, you can use this mortgage payoff calculator to estimate the monthly payment required to be free and clear for any date you choose.
• Downsize To A Lower-Cost Home: Changing homes isn’t for everyone, but I would be remiss as your financial coach to exclude this strategy. You could move to a lower cost area or buy a smaller house in the same area. The smaller mortgage principal means you can be debt free faster using the same monthly payment.

The key point to notice about all these early payoff strategies is how they aren’t mutually exclusive. You can combine them in various ways to turbo charge results.

For example, you could downsize your home while financing that less expensive home at a lower interest rate on a biweekly mortgage. Then you could sell that boat and jewelry you never use putting those lump sums toward the mortgage while also dedicating this year’s raise to additional monthly principal payments. You will be amazed how fast you can get out of debt following this prescription.

The only limit to how fast you escape the bondage of mortgage debt is your creativity and dedication to this noble cause.

Pay Off Mortgage Early – The Pros…

Now that we know how to pay off your mortgage early let’s look at the benefits to following this strategy…

• Save Money: The first and most obvious reason to pay off your mortgage early is it can save you tens of thousands of dollars in interest costs.
• Peace of Mind: The second reason is peace of mind from owning your own home. It gives you a warm-fuzzy to know you have a secure place to live and you won’t be put out on the street at the first temporary setback in employment.
• Reduced Cost Of Living: For most people, mortgage payments are your biggest monthly expense after taxes. Without a mortgage payment you can save more, work less, or take that dream job you always wanted but couldn’t afford because of the lower salary.
• Get Rid of PMI: When you accelerate paying down principal your home equity will reach a threshold where PMI should no longer be required. This saves you money long before the mortgage is paid off and allows you to accelerate the principal pay-down while still making the same monthly payment.
• Asset Protection: Many states have laws that protect home equity in the event of lawsuit or other legal proceeding. Homestead rules can provide substantial home equity protection. Also, retirees sometimes use home equity as an estate planning strategy to protect assets for the surviving spouse should one partner consume all available resources in a prolonged illness or nursing care facility. In short, there are many situations where home equity can represent a more secure asset with special legal privileges when compared to other investments.
• Retirement Planning: A free and clear home takes on additional significance for near retirees. If you are entering retirement with a fixed income (Social Security, pension, fixed annuity) then it can be a real benefit to pay off all debt rather than put money in fluctuating investments. This allows you to reduce financial variables and more reliably match forecasted income to expenses. Additionally, after retiring, that mortgage payment can require pulling money from tax deferred accounts when that money would be better off left to grow. Finally, if your taxable income is reduced in retirement it can reduce the benefit of the mortgage interest tax deduction tilting the equation in favor of payoff.
• Guaranteed Return On Investment: With the stock market and real estate going up and down like a roller coaster, it is comforting to put your money toward your home and know with certainty what the ROI will be. You get the imputed rental value of a place to live and the immediate return of eliminated interest expense. The certainty of this return stream is a huge benefit for investors who feel beat-up by unreliable financial markets that supposedly will pay more… but may not.
• Achievable: Paying off your mortgage feels more motivating than most financial goals because it is concrete. It is big enough to get excited about yet tangible enough that you can wrap your head around it. It is achievable and will make a significant difference in your life. Contrast this to retirement planning which feels more ethereal and hard to grasp for most homeowners.

In short, there are many benefits to paying off your mortgage early – and some are very compelling!

Payoff Mortgage Early – The Cons…

Before you break out the champagne and burn your payment book it is important to consider the downside to paying off your mortgage early. This isn’t the slam-dunk decision it appears at first glance because of some complicated financial issues…

• Lose The Tax Break: I start with the tax break issue not because it is the most important but because it is the most commonly cited and misunderstood. Yes, mortgage interest paid is generally deductible on your tax return if you itemize, but there are some important “caveats” to this deduction worth considering: (1) The rules are complicated and may cause you to lose some of the deduction you thought you were getting. (2) In certain circumstances you may get as much value by taking the standard deduction as by itemizing deductions meaning your mortgage interest payments merely replaced the standard deduction and provided no real savings. (3) Even if you get the deduction you are still paying $1 to get a 35 cents (or comparable) tax break – not a very good deal. (4) And the effective value of the deduction diminishes over time as the loan matures and you pay less and less interest with each payment. In short, there are many tax rules and situations where you won’t be able to fully utilize the mortgage interest deduction. The rules are complicated so talk to your tax professional if this issue is important to your decision.
• Low Return On Investment: A home mortgage is likely the cheapest money you will ever borrow – and the interest is usually deductible further decreasing the effective cost. For example, if you are in a combined state and federal tax bracket of 35% then a 6% mortgage could have an effective cost under 4%. This means two things: (1) Higher cost, non-deductible debt should be paid off first and (2) long-term investment returns will likely provide a higher return on your capital as evidenced by Ibbotson and Associates research showing a diversified portfolio returning in the 8% range.
• Savings Are In Cheap Dollars: A key point to consider is how all the savings you are expecting only come after the mortgage is paid off meaning those savings must be discounted for inflation. For example, let’s assume you pay off your mortgage in 25 years instead of 30. Using this present value calculator you’ll see that $1,000 saved 25 years into the future is only worth $375.12 in today’s terms at a 4% inflation rate. In other words, you have to discount all savings by inflation because the payments you avoid will be in depreciated dollars. This is quite important.
• False Sense Of Security: You’re not going to like this idea, but you never really own your property – even if it is mortgage free. This is a throwback to feudal times where the king (“royal = real” relating to the latin for “king” connecting real estate to royal estate) was the owner of all land and received “tax” for the right of possession. Today, our local governments are the modern equivalent to feudal lords who collect property tax annually. In other words, you always pay rent to someone whether the bank is out of the picture or not. If you are not completely clear about this truth just stop paying property tax for a few years and see what happens. The truth is your monthly payment is merely a question of degree and to whom – not whether it exists or not. This ugly truth makes the idea of true mortgage freedom an illusion.
• Lost Diversification: This one is “the biggie” so pay close attention… Most investor portfolios are denominated in their domestic currency and thus carry the risk that inflationary government policies will depreciate their investment purchasing power over time. A residential real estate mortgage is the only practical way for most people to short their domestic currency and hedge against inflationary economic policy.

  In other words, the way mortgage financing works is you borrow (short) your currency and use the proceeds to buy an inflation adjusting asset (real estate). Few people understand how conventionally financed real estate is little more than a leveraged play on inflation. That is why it’s such a powerful wealth building tool more than 90% of the time, and it blows up horribly when the rare deflationary event strikes (i.e. 2008).

  When you pay off your mortgage you are unwinding your short currency hedge. This means you lose the ability to be short today’s more valuable dollars and repay them with depreciated dollars in the future. The importance of this financial fact cannot be overstated given today’s record government indebtedness and overt government policy directed toward creating inflation.

  I repeat… this is a HUGELY IMPORTANT factor in deciding to pay off a mortgage early or not! It is critical.

  But don’t trust me on this issue. Consider these two facts…

  1. This inflation calculator (which likely understates inflation’s true impact) shows you how the Federal Reserve has destroyed more than 95% of the U.S. currency’s purchasing power since they began monetary policy. If that time period is too long, then look at various 30 year time periods (the life of a mortgage) for similarly dismal stats.
  2. In a February interview with CNBC, Warren Buffett called mortgaged real estate “as attractive an investment as you can make”. He further stated, “If I knew where I was going to live for the next 5 years or 10 years, I’d buy a home and I’d finance it with a 30 year mortgage. It’s a terrific deal… If I had a way of buying a couple hundred thousand single-family homes… I would load up on them. And I would take mortgages out on them at very low rates…”

  Did you get that? Read it twice! Warren is a pretty successful investor who has some clue on these matters so strong statements like this are worth listening to. He’s telling you about the value he sees in locking long-term, low cost interest financing on an inflation adjusting asset. The last time this strategy paid off was in the inflationary 1970’s when the Savings and Loan industry went bankrupt for being on the wrong side of the transaction and homeowners literally laughed all the way to the bank with ridiculously cheap mortgage payments on appreciating real estate.

  Are you going to be able to do the same on this next time around?

  When you prepay your mortgage you give away that advantage so tread carefully on that decision.

• Interest Rate Below Expected Inflation: Given record low mortgage interest rates as of this writing, it is entirely possible that the interest rate on a fixed rate mortgage (forgetting the fact that it might also be deductible) could turn out to be lower than the inflation rate. If that ended up being true (nobody has a crystal ball) then a bizarre financial situation is created where you are literally paid to borrow money in real terms (after inflation) even though you are paying interest every month. In other words, you make more by owing than by owning. Strange but true. When you prepay your mortgage you give away that financial advantage.

What’s important to note about this entire list of negatives is how they aren’t intuitively obvious. 

The list of positives to paying off your mortgage discussed earlier are easy for anyone to see, but the negatives require a fair degree of financial sophistication – from esoteric tax strategy to long term inflation effects, short hedges on currency, and discounted present value equations. It is heady stuff – financial geekism – yet it is every bit as valid to your bottom line as the more intuitively obvious reasons for paying off your mortgage early.

That is why there is so much misinformation on this subject. The concepts are complex and sophisticated once you get past the obvious reasons for wanting to get out of debt.

In short, the decision to pay off your mortgage is an intellectual battle where the emotional-intuitive desire to be debt free is matched against the intellectual realities of modern finance.

Unfortunately, this makes the decision process complex…

How Do I Make The Right Decision For My Situation?

If you are somewhat confused right now then you are in the perfect spot. You get it, and that is a good thing. The confusion results from the tug-of-war between emotion and intellect trying to sort through the complex factors explained.

The next step is to give you a structured way to sort these issues so you can make order out of chaos and formulate a well-reasoned decision whether paying off a mortgage early is the best decision for your situation – or not.

The key is to realize there are two steps to this decision process…

1. Personal Finance Considerations: This is a decision between paying off your mortgage early or taking care of other personal finance issues first that better reflect your personal values. This decision is prioritized ahead of any investment considerations.
2. Investment Return Objectives: This is a decision between paying off your mortgage early or investing the difference. This decision only comes into play after the personal finance issues in the previous step are satisfied first.

Let’s take each of these steps one-by-one…

The First Step Is To Figure Out What Is More Important Than Paying Off The Mortgage

I’m a firm advocate of getting your financial foundation in place before pursuing more advanced financial strategies. Your wealth can only grow as high as your financial foundation can support (similar to how a skyscraper’s height is limited by the depth and strength of its foundation).

Below is an order of priorities for building your financial foundation that may take precedence over paying off your mortgage…

• Guaranteed 50% Return: Many employers still offer 401(k) retirement plans that include employer matches – typically 50% of every dollar you put in up to 6% of annual pay. This guaranteed 50% return on investment is pretty hard to beat so it usually makes sense to make sure you are maximizing this benefit before prepaying your mortgage.
• Maximize Tax Deferral: Even if your company doesn’t offer a 401(k) plan it may make sense to maximize tax deferred and tax free retirement savings before paying off your mortgage. Granted, tax issues are complex and vary based on individual circumstances so it’s impossible to make a blanket statement, but every tax deferred savings opportunity you don’t use is lost forever and can never be recovered because annual limitations apply. In other words, use it now or lose it forever. The investment math often tilts in favor of maximizing every tax deferred investing opportunity available… before paying off the mortgage.
• Pay High-Interest Debt First: Even after maxing out all your retirement savings options it still may not make sense to pay down your mortgage early when you have other debt. The reason is most other debt will be at a higher interest rate – particularly credit card debt where the interest is much higher and not deductible. Use this debt snowball calculator to figure the fastest way to get out of debt. The order of precedence is to pay off the highest interest/non-deductible debt first followed by low interest/deductible debt (i.e. mortgage debt) last.
• Financial Stability: Once you’ve maxed out your retirement plans and paid down your high-interest, non-deductible debt you may want to consider building a 3-6 month cushion should unemployment strike. Some naysayers claim a home equity line of credit serves the same function making this step unnecessary. The thinking is that mortgage prepayments increase equity thus providing a positive return while you don’t need the funds but can still be withdrawn through a line of credit should you fall on tough times. Either way, developing a safety cushion for difficult times is a prudent step in building your financial foundation.
• Insurance and Financial Security: One of the main goals for paying off your mortgage early is financial security, but there are many dimensions to financial security beyond just being out of debt. For example, medical bills are a primary cause of bankruptcy so does it make more sense to increase your medical insurance coverage before paying off your mortgage? That’s a tough question because each choice manages risk – but in a different way. Similarly, the Council for Disability Awareness claims you have roughly even odds of being disabled for 3 months or more at some point during your career with 1 out of 7 workers being disabled for 5 years or more. Would disability insurance give you more financial security than prepaying your mortgage? Again, an interesting question to consider…
• Kids College Funds: Do you have kids? Then funding a 529 college account, prepaid college tuition, and/or Coverdell IRA are additional ways to maximize tax deferred savings that should probably take precedence over paying off your mortgage.
• Underwater Mortgage: If you are upside-down on your house (owe more than it is worth) then really think twice about throwing good money after bad. I’m not going to get into a big discussion about strategic defaults here, but suffice it to say there may be more secure assets for you to invest in than a house that is underwater.

Should I Pay Off My Mortgage Or Invest?

Once you’ve built your personal financial foundation (maximized tax deferred savings both for college and retirement, paid off high interest debt, and properly insured) then the question becomes, “should I pay off my mortgage or invest?” Notice how this question only becomes relevant after the prior issues are handled.

The answer to the “pay off mortgage or invest” question is actually quite simple – whatever gives you the highest after tax return on your money is the right decision.

Financial advisers will quickly point to research showing long-term historical returns for a low cost index portfolio around 8% (+ or – depending on assumptions) and match that against much lower mortgage rates (as of this writing) and proclaim immediate victory… but it’s not that simple.

Investment returns are highly variable with periodic “lost decades” where even pathetic mortgage interest rates represent a superior return over a traditional investment portfolio.

The problem is the future is not the past and returns vary, but mortgage interest saved is a bird in the hand. With that said, you would be hard pressed to find 20-30 year periods (the life of a typical mortgage) where an investment portfolio would not provide a higher return than recent mortgage interest rates.

The problem with any investment return comparison is nobody has a crystal ball. Unless you have a direct connection to the Higher Power then you are stuck right back where you started with a decision between a guaranteed (but low) return for prepaying your mortgage versus an unknowable but potentially higher return for investing.

In other words, you are left deciding between the certainty of mortgage payoff versus the uncertainty of investing. While financial science provides a relatively clear answer (investing should provide the higher return over the long term), this is really an emotional decision about your risk tolerance, confidence in the future, and belief in the science of investing.

It is why so many prefer to get out of debt despite the relatively compelling math.

Final Thoughts – The Human Variable…

With all that said, there is still one very important element missing from this conversation…

Life doesn’t usually go as planned. We humans are not computers who implement our brilliant plans with mathematical precision. Life throws obstacles our way, plans change, stuff happens, and that is just the way life works.

It is foolish to make long-term plans in an intellectual vacuum that fails to account for the random nature of life.

With that in mind, below are some fun ideas worth adding to this discussion…

• Flip The Logic: If you choose to invest instead of paying off your mortgage then consider this question – would you be willing to refinance the equity out of your mortgage (thus increasing your debt) to add to your investment accounts? If not, then you are logically inconsistent. (BTW, I write this with a wry smile because it is describing me perfectly – see below…)
• No Discipline: For every 10 people who claim to be making the minimum mortgage payment and investing the difference I would hazard a conservative guess that more than half fail to follow through on the investment part of the equation. The road to financial mediocrity is paved with the best intentions. In other words, an optional savings program that requires self-discipline is frequently no savings program at all. Contrast this with someone who places a 15 year, biweekly mortgage on their home thus creating enforced discipline. One happens with certainty regardless of life’s wrinkles… the other is optional.
• Expect the Unexpected: Nobody expects to lose their job, have a major medical problem, become disabled, or invest in a fraud; yet, over the course of a 30 year mortgage the odds that you will experience one or more of these admittedly rare and unfortunate events are far greater than you would like to believe. When your home is paid off it is easier to weather these storms with a minimum of personal adversity. Plan for the unexpected because eventually it will happen.

Conclusion:

I suppose the best way to conclude this lengthy analysis is by sharing what I’ve chosen to do with my own mortgage(s).

The truth is I used to be in the pay-off mortgage early camp. I hate debt and have a high value on freedom. In the late 1990’s I paid off my mortgage only to watch my investment portfolio double the next year while all that capital was tied up in my house.

Ouch! That was expensive…

Admittedly, things could have worked out very differently. I could have paid off the mortgage in 2007 instead and seen a decline in investment values the following year. However, in general, my investments outperform mortgage interest so it generally makes sense for me to prioritize investment capital.

With that said, I also find that I’m not fully rational on this issue. I would never refinance my home and invest the equity to pursue those higher returns. From a pure logic standpoint that makes no sense: I’m not willing to liquidate investments to pay off the mortgage, and I’m not willing to increase the mortgage to fund investments. Hmmm…. I guess I’m not as rational as I would like to believe.

The truth is the decision to pay off your mortgage is quite complex.

Fast forward to current times and I’m several years into a 30 year mortgage on my current home that, prior to writing this article, I would have refused to pay off. The interest rate is pathetically low, tax deductible, will likely end up below the inflation rate over the life of the loan, and it gives me some measure of inflation protection with a small short position against the dollar.

So I’ve been at both extremes – pay it off fast, and never pay it off – only to now end up somewhere in the middle of the road going forward.

I now firmly sit on both sides of the fence as follows…

• Because my retirement and kid’s college are fully funded I don’t need to prioritize those accounts.
• I have no debt besides the mortgage so no issue about paying more expensive debt first.
• I have all the insurance I need.
• Which means the discussion literally comes down to paying off the mortgage or investing.
• The math is clear that my highest return is with investing, but I’m also emotionally connected to having no debt and love the freedom of minimizing my cash flow needs. For that reason, my decision is to funnel a portion of increased revenues from this business toward prepaying the mortgage even though it is technically irrational from a return on investment perspective.
• In summary, I’m not willing to dedicate any of my investment capital to paying off my mortgage, but I’m also not willing to leverage my house to increase investment capital. This is irrational, but it is the honest truth where I stand on mortgage vs. investing. Regarding new income production, I’m fine with dedicating a portion of the revenues from this business toward paying off the mortgage rather than perpetually building investment capital while retaining debt. I guess the logic is that I’m getting a diminishing emotional return on more investment capital when compared with less debt. For economics geeks, it means I have a higher marginal utility on debt reduction than capital increases.

 I would like to declare this a balanced perspective in that I’m comfortable with my portfolio “as is” so I’m willing to “diversify” and lower risk by paying off mortgage debt with extra income, but in the end I know the truth… it is my emotional desire to be debt free and reduce risk that is driving the decision. I know the math and I should be investing – exclusively.

So there you have it – I’ve personally lived at both extremes of the decision and now stand firmly in the middle. The decision doesn’t have to be either/or: you can pay a little to debt reduction and save for investing at the same time.

Like everything in life, happiness is often found in the balance. I guess paying off your mortgage early is no exception.

So now that you know my situation, where do you stand?

How has this analysis helped you sort through the decision and what conclusion did you reach? Which issues hold the greatest sway in your decision? Please share in the comments below…

You Might Also Like…

• Mortgage Payment Calculator With Amortization Schedule: How much will my mortgage payment be?
• BiWeekly Mortgage Calculator: How much interest can I save by making biweekly payments or extra payments?
• Debt Snowball Calculator: How fast can I become debt free?
• Debt and Credit – The Only Guide You Need: Another in my “complete guide” series where I fully analyze a subject giving you a one-stop source for the information you need.

Financial Mentor Around The Web…

• My writing was featured in several blog carnivals including the Carnival of Financial Camaraderie, Totally Money Blog Carnival, Carnival of Wealth, and the Financial Simplicity Carnival.

In 1998 I sold my hedge fund business and foolishly traded a sizable income stream for a chunk of capital. It was one of the dumbest financial decisions I’ve ever made.

But every cloud has a silver lining…

In the same year Roth IRA conversions began, and that created a situation where I could convert that lemon of a decision into lemonade.

Let me explain how the process worked so you can apply the same principle in your own life…

A Brief Primer On Roth IRA’s

Let’s begin with a quick primer on Roth IRA’s so that we are all starting on the same page:

• The Roth IRA is a special retirement savings plan under U.S. tax law.
• There is no up-front tax deduction for contributions to a Roth IRA.
• However, all the income and capital within a Roth IRA are tax free for the rest of your life (or until the government changes the rules).
• When you convert money from a regular IRA or SEP IRA to fund a Roth IRA you must pay income tax at ordinary rates on the amount converted in the year it is converted.
• Roth IRA conversions and contributions are subject to income and maximum annual contribution limits.

In a nutshell, the big distinction separating a Roth IRA from other retirement savings vehicles is you don’t get any tax deduction up-front but get tax-free withdrawals during retirement instead. Keep this key distinction in mind as I explain how you can apply this characteristic to grow your wealth using the following wealth building principle…

The “Jigsaw Puzzle” Principle – Revealed!

Opportunity strikes every day – frequently in unexpected ways.

Most people fail to advance in life because they either don’t recognize opportunity when it is in front of them or fail to act on it. It is never for a lack of opportunity.

There are many ways to recognize unusual opportunity when it comes knocking, but one of my favorites is the jigsaw puzzle principle. Here’s how it works…

All the activity that surrounds your life forms a massive jigsaw puzzle where certain pieces fit together perfectly and others don’t match at all. Your objective is to identify the unique attributes that specifically characterize any investment or business situation (similar to looking at the image on a puzzle piece) then find the matching puzzle piece in your life that corresponds to those attributes. When you successfully match the pieces together you’ve identified a valuable opportunity.

In other words, each characteristic of an investment or business situation implies an opportunistic way to exploit that characteristic to your advantage – but only when your life situation matches.

For example, I’ve coached clients where one spouse is a realtor. Because real estate is an inefficient market (attribute) there is a competitive advantage to being in the middle of deal-flow every day. A realtor will often see incorrectly priced deals way ahead of the public because of their network and daily communication.

This advantage only goes to people in the middle of deal-flow and only exists because of the unique characteristics of real estate pricing and sales. Some of my financial coaching clients have successfully built wealth just from fitting that one jigsaw puzzle piece into their overall plan. Notice that this strategy uniquely fits realtor’s lives – not mine and probably not yours.

Similarly, my financial coaching business only exists today because I correctly identified the unique attributes of the internet as a cost efficient, high-leverage, worldwide marketing platform that perfectly fit promoting a narrowly niched service business. If I had to rely on local customers and/or traditional advertising to promote my business it would fail. My life goals and the unique attributes of the internet fit perfectly together.

Returning to Roth IRA conversions, the unique attribute for this puzzle piece is all converted monies are taxable up-front in exchange for tax-free withdrawals for the rest of your life. Some life situations are hurt by this characteristic (elderly, high tax bracket filers, etc.) but other life situations spell opportunity.

Can you figure out what life situation will particularly benefit from a Roth IRA conversion?

Hint: look at how I changed my financial picture by selling my business.

How I Turned A Lemon Into Lemonade…

When I sold the hedge fund business in 1998 my financial situation changed on a dime.

I went from a high income earner in the top tax bracket saddled with deduction limitations to no earned income. I also had substantial assets accumulated over many years in both regular IRA’s and SEP IRA’s.

My financial situation was relatively rare but the unique characteristics spelled opportunity for aggressively converting my IRA’s and SEP IRA’s into Roth IRA’s while paying little or no tax. It was a no-brainer! The puzzle pieces fit together perfectly.

In other words, normally the decision to convert is quite complicated involving a variety of tax issues. (Use this free Roth IRA calculator to help walk you through the decision.) However, when your income falls through the floor and you have tax deferred IRA assets then the decision is a no-brainer.

My situation is not an isolated circumstance. It happens as a result of job loss, selling a business, temporary layoff, downsizing, and more. It can easily happen to you some day so make sure you file away this strategy for future reference. It could be worth a fortune to you!

And don’t just get hung up on the Roth IRA part of this story either because that is merely one illustrative example.

Instead, the real golden nugget here is the principle being taught. You can bang your head against the wall trying to force success, or you can fit the jigsaw puzzle pieces of life to together so that you effortlessly flow toward your goals with a minimum of difficulty.

In Summary…

In summary, there are two essential ideas to learn from this example…

1. If you have little or no taxable income you can get the benefits of a Roth IRA (tax free growth and income for life) by converting existing SEP’s and regular IRA’s without suffering any of the negative tax consequences. It is a no-brainer strategy when the situation is right. Just convert enough savings to use up your deductions so you come out with minimal taxable income.
2. Don’t limit this thinking process to Roth IRA’s. Instead, develop the habit of looking for any opportunity implied by the unique characteristics of every investment and life situation. Use this thinking process to regularly find competitive advantages that help you build wealth. I’ve used the jigsaw puzzle principle in widely disparate fields including commodities trading, commercial real estate, and business as well. It is universally applicable.

Fitting the disparate puzzle pieces of your life into a single harmonious picture is the golden goose in this discussion: Roth IRA’s are just an illustrative example to drive home this essential wealth building principle.

Please let me know what you think about the jigsaw strategy and maybe share a quick note about how you’ve applied it in your life using the comments below…

You Might Also Like…

• Roth IRA Conversion Calculator: A simple calculator to help you compare the tax consequences of keeping your regular IRA vs. converting to a Roth IRA.
• How Much Do I Need To Retire?: A brief ebook that demystifies retirement planning and provides unconventional yet practical solutions.
• Are Safe Withdrawal Rates Really Safe?: An 8000 word, highly detailed expose revealing the dangerous myths behind the 4% rule and how to solve the problem.

Financial Mentor Around The Web…

• This post is part of the Roth IRA Movement organized by Jeff Rose to bring more attention to Roth IRA’s as a unique retirement savings vehicle.
• Financial Mentor was also featured in the Totally Money Carnival, Self-Directed Investing For Retirement, Carnival of Retirement, Canadian Finance Carnival, Carnival of Wealth, Totally Money Carnival, and the Carnival of Financial Planning.

Retirement planning isn’t the precise science you would like it to be…

Surprisingly, most people don’t “get” how the process works. Several myths have earned conventional wisdom status despite being wrong. These myths can be very expensive and undermine your financial security.

The truth about retirement planning is startlingly simple because the essential principles can be reduced to just 2 basic formulas.

In this article I’ll reveal several retirement planning myths while also diving deeper into these 2 critical wealth building formulas so that you have the tools necessary to secure your financial future – but first a quick story…

Missing The Forest For The Trees…

Let’s start with the basics…

Financial freedom (or retirement security – same thing) occurs when your passive income exceeds your expenses.

Notice how there are just two variables to this equation – passive income and expenses. That’s it – nothing complex!

The financial freedom game is about building passive income and controlling expenses. When income exceeds expenses you are financially free. Simple enough.

There are three broad asset classes to build passive income – business, real estate, and paper assets. None is better than the other although each offers distinctly different characteristics.

Amazingly, if you look at most retirement calculators you would never know there are three asset classes to build retirement with. They usually assume only one asset class – paper assets. They provide no mechanism for adding additional income streams from businesses or lump sum payments from selling real estate holdings. Instead, they just model the growth of paper assets.

Can you guess why? Look at the advertisers and services that support these free online calculators… brokerages, financial planners, and others in the business of selling paper assets. Not a coincidence.

Forgive me if this all seems painfully obvious, but the masses don’t get it! They’ve bought into the single asset class myth. Let me give you an example…

The other day my Ultimate Retirement Calculator was reviewed on a popular and respected blog and the readers came up with a variety of well-intentioned but petty criticisms. The site owner demonstrated his solid knowledge by noting how he used the calculator to develop retirement scenarios, but his readers couldn’t see the forest for the trees…

• “It doesn’t include separate inputs for each spouse.” (Answer: Who needs the complication? Just aggregate both spouses together. It’s called community property for a reason.)
• “It doesn’t provide separate tax rates before and after retirement.” (Who cares? Different tax rates would only be meaningful if your taxable income fell dramatically after retirement. Unless financial freedom equals poverty this added detail would only introduce meaningless complication.)
• The comments continued with little criticisms about minute details that had little practical bearing on the final calculation. They were focused entirely on the wrong thing!

More importantly, they completely missed the unique value of this calculator. Nobody provided positive comments about the important features that set this calculator apart from the competition…

• It is simplified down to only the essential numbers so that it is acceptably accurate without being excessively complicated.
• It allows you to change any input and hit “recalc” so you can test a variety of combinations efficiently and quickly.
• It allows you to include a future lump sum payment so you can model an inheritance, selling investment real estate, or selling a business at a future date.
• It allows you to set up three separate income streams so you can model income from real estate, Social Security, annuities, businesses or whatever unique plan you develop to make passive income exceed expenses.

The sad reality is these critics were stuck in the minute details of forecasting a mythical magic number for paper asset accumulation and never noticed the important points. They were distracted by detail issues and it led them in the wrong direction. Sure paper assets are important, but they are only one of three asset classes.

So that is the first mistake in retirement planning – undue focus on a single asset class… namely paper assets.

It is a myth perpetuated by a financial industry that has a vested interest in convincing you to spend your hard-earned retirement savings on the paper assets they sell (stocks, bonds, mutual funds, ETF’s).

The truth is there are three viable asset classes for retirement planning and your modeling should include all assets appropriate to your life situation.

With that said, most people’s retirement plans are dominated by paper assets so let’s go deeper into this subject by examining several other mistakes commonly made when planning retirement using this asset class…

Retirement Planning Done Right Is About Scenario Analysis – Not The Mythical Magic Number!

The next mistake is to believe in the mythical magic number – that amount of savings the retirement calculators’ claim you must accumulate to enjoy financial security.

The primary symptom of the magic number myth is a desire to apply increasingly detailed analysis in a futile effort to increase your retirement number accuracy.

Don’t waste your time! It doesn’t work that way…

Victims of this myth ask questions like the critics above because they believe every little number, tax rate, and detail is somehow marginally relevant to their goal of knowing how much money they need to retire.

It’s not!

The reason is because all those details are completely dwarfed in significance by one or two critically important numbers that will make-or-break the analysis. Get these big numbers right and all the other details are just that… details.

Conversely, if you get these important numbers wrong then you will fail completely no matter how detailed your analysis.

It’s as simple as that.

Let’s look at how these critical numbers monopolize the retirement planning process when using paper assets so that you don’t make the same mistake…

Savings Growth As A Percent of Spending

The first critically important number when planning retirement with paper assets is the percentage of income saved versus spent.

In my recent article – How Anyone Can Retire in 10 Years (or Less!) – I demonstrated how a super-aggressive savings rate would allow you to skip all the calculators by reducing retirement planning to one simple ratio that forecast with scientific precision how long it would take to become financially independent. The numbers were as follows…

• 10% savings rate = 42 years
• 20% savings rate = 32 years
• 40% savings rate = 21 years
• 50% savings rate = 17 years
• 60% savings rate = 14 years
• 70% savings rate = 10 years
• 80% savings rate = 7 years

(Ed. Note: These numbers are only scientifically valid for very high savings rates (i.e. 60%-80%) because longer time horizons introduce complication from compound returns and inflation as explained in the next section of this article. Lower savings rates (or longer time horizons) are shown for illustration only. See the full article for all the details…)

This is not some crazy math theory. It explains exactly how I retired at age 35. I saved roughly 70% of a substantial income and never allowed spending to rise with income. It didn’t take long for my assets to grow sufficiently large to support my lifestyle.

It is a brain-dead simple, scientifically accurate way to achieve the goal.

One of my favorite quotes is, “If you want to know how long it will take anyone to achieve anything just look at how much of their resources (time and money) they dedicate to the goal”.

This savings formula is saying the exact same thing. If you want to know how long it will take you to achieve financial freedom just look at the percentage financial resources you dedicate to the goal. Remarkably simple… and effective. It just plain works.

[FMCenterQuote]Principle: If you want to retire faster then reduce your spending and/or raise your income so that your savings as a percent of income grows. The higher the percentage, the faster and more reliably you’ll reach the goal.[/FMCenterQuote]

Again, don’t get hung up on distracting details. Keep it simple and focus on one thing – maximize your savings – in any form.

The goal is to direct income away from consumption and into the asset column. Once you have assets then the next critically important set of numbers enters the picture…

Return On Investment Minus Inflation Determines Amount Of Assets Required

The amount of savings you need to support any given level of spending is a function of your return on investment minus inflation.

This is the BIG ONE! Nothing else comes close when planning retirement with paper assets.

All the picky little details that arise when people seek to perfect their magic retirement number are dwarfed by this one ratio – ROI minus inflation.

The reason is simple – compound returns multiply little differences into HUGE differences over long periods of time. This isn’t about turning mole hills into mountains: this is about turning grains of sand into the Himalayas!

I’ve worked with these numbers all my adult life and it still amazes me when I work through the process with a financial coaching client and see the effect. Seriously, try it for yourself.

Go to my Ultimate Retirement Calculator right now and punch in your best guesstimates to figure how much money you need to retire. Seriously, do it right now before reading any further. Don’t worry about perfection. Your best estimates are good enough for this exercise.

When inputting expected lifespan use age 100 unless you have known health issues. Why age 100? Because research already shows high odds of a healthy couple at age 65 having one spouse live past 90. Additionally that number increases every decade so just use 100 as a round number.

You will get a lot more value from this if you do the exercise right now! Please, don’t trust me. Prove it for yourself. It will only take two minutes and could be the most eye-opening two minutes you spend all week.

Once you fill out the calculator with your base level numbers then write down the “magic retirement number” that it provides.

Next, try perfecting your magic number by “tweaking” a few variables like tax rate, retirement age, and other details similar to the critical comments cited earlier recommended. The only rule is you can’t touch the two key inputs highlighted in this article – return on investment and inflation. Everything else is fair game.

Notice that your magic number changes with each variation, but the changes are only fractional. Your estimates for how much money you need to retire remain in the same ballpark as your original number. The calculation is relatively stable.

Now, using the exact same inputs as before, raise your inflation rate by 2% while simultaneously reducing your return on investment by 2% (but make sure you’re sitting down first )

See what I mean? For most people this small change will literally multiply the amount you need to retire several fold. It should knock your original estimate right out of the ballpark, over the river, and into the next state.

That is why I call all the other variables “details” and label these two ratios “critical”. It’s just the way the math works.

[FMCenterQuote]Principle: Small changes in a few key numbers multiplied over long periods of time have HUGE impacts on your ability to retire with financial security. Therefore, focus on those key variables and don’t worry about the minute details.[/FMCenterQuote]

Focus On What Matters And Forget The Rest

Now let’s take this lesson a step further…

There is a little problem with this analysis that I disclosed in the previous section (showing how anyone can retire in 10 years). I explained that long periods of time introduced variables that could not be reliably estimated.

In other words, this key ratio (ROI – inflation) cannot be forecast with any accuracy. It is another myth of retirement planning because nobody knows what their inflation rate or return on investment will be (within 2%) over the next 15-30 years. It’s a complete guess – total fiction. Yet, every retirement calculator requires you to estimate what it will be. If you estimate wrong then your whole calculation is wrong.

Seriously, Ph.D. economists who study the subject extensively can’t reliably predict inflation one year into the future. It is an absurd joke that you are expected to bank your retirement plan on a layman’s guess for 30 years into the future when trained experts have no clue.

This problem should be intuitively obvious to anyone who can remember back to 1980 (interest rates were in the “teens” and stocks had gone essentially nowhere for 25 years). How many people back then forecast the beginning of the greatest stock market rise in history with long term interest rates declining to historic lows? I was working on the sales side of my hedge fund business meeting with CEO’s and retirement plan fiduciaries and I can tell you with certainty almost nobody saw it coming.

Still not clear that ROI and inflation can’t be predicted? Then remember back to the 2000 bull market top and recall how many soothsayers warned you about the coming decade of flat performance, record volatility, and artificially low interest rates? You could count them on one hand and still have fingers left over.

Similarly, at the top of the real estate bubble in 2007 how many forecasters correctly took defensive action and got out of the way before the bubble burst? I did and I can tell you it was a very lonely position. (If you need more evidence proving the fallacy of forecasting see a complete analysis here.)

Given these facts, what makes you think the next 15-30 years will be any different? The future is unknowable; yet, a retirement forecast built on the mythical magic number requires you to forecast all these variables accurately. If your forecasts are wrong by just a little bit then your entire retirement estimate isn’t worth the paper it’s printed on.

In plain language, the magic retirement number is a myth. That is why retirement planning done right requires scenario analysis – not creating a mythical magic number.

The truth is small errors in key estimates cause such large errors in the amount you need to retire that the whole idea of relying on the calculation is essentially foolish.

Shocking, but true!

Now you understand why I literally laughed when someone criticized my retirement calculator for not allowing individual input for each spouse. They missed the whole point. Detail like that is meaningless complication – totally irrelevant. It is equivalent to arguing whether a right or left turn is better for getting out of a railroad crossing when a freight train is heading toward you at 70 miles per hour.

Retirement calculators are useful but only for scenario analysis – not determining your magic number.

• Use retirement calculators to model a wide range of variables to produce a confidence interval.
• See what happens if you add 10 years of additional income – part-time work, consulting, or whatever might interest you to take the pressure off savings and allow your assets more time to grow.
• Try modeling real estate rental income that adjusts for inflation and rises when you pay off the mortgage.
• Try modeling what happens when you receive a lump sum inheritance, sell a home or business.
• Try modeling the difference between a conventional asset allocation and a dividend growth portfolio.
• Try modeling if it is better to delay Social Security or start payments early.
• Try modeling several factors together.

In other words, use the retirement calculator to put numbers behind different life plans for your financial future. Each example will teach another principle just as the examples in this article teach principles.

That is how you use retirement calculators properly, and that is why my Ultimate Retirement Calculator is designed specifically to facilitate a simple process for scenario analysis.

The Ultimate Retirement Calculator is designed with three specific objectives in mind…

1. It omits meaningless complication and non-essential detail thus reducing barriers to you completing the calculations. It is more important to plan retirement roughly than not do it at all. It is also important to not get so caught up in minute details that you deceive yourself into believing the output is scientifically accurate.
2. It provides a simplified platform so that you can model various real-life scenarios using all three asset classes (not just paper assets like competing calculators). No other calculator allows that flexibility which is essential for the way modern retirements are planned.
3. It allows you to quickly and easily build confidence intervals by varying single inputs and seeing how it affects overall output.

In short, this calculator is designed for scenario analysis – not mythical magic numbers.

[FMCenterQuote]BTW, if you appreciate this retirement calculator and this explanation about how to use it right then please “like”, link, and +1 both these pages. It helps get the word out about these important principles.[/FMCenterQuote]

Scenario analysis is how you blend life planning with retirement calculators to produce a realistic road-map to achieve financial security. It is a practical approach for retirement planning that avoids the myths and traps that have unfortunately become conventional wisdom.

In Summary

Building wealth for retirement is not complicated. The process is governed by strict mathematical principles that imply certain clear objectives.

Starting with the basics, the goal is financial freedom which is defined as passive income exceeding expenses. This focuses your financial plans on just two objectives – grow passive income and control expenses. Simple enough.

Second, most retirement calculators implicitly assume there is only one asset class (paper assets) and preach the magic number myth. Neither is true. That is why I designed the Ultimate Retirement Calculator so that you have a tool that works with the “New Retirement” reality – multiple asset classes, phased retirements, and much more.

Finally, when modeling paper assets as part of your retirement plan it is essential to focus on the two big ratios that account for the bulk of variation in the output…

• Your savings as a percent of your income.
• Return on investment minus inflation.

The key is to not fall prey to the magical number myth and don’t get caught up in excessive detail. The truth is retirement planning is essentially a bet on an unknowable future that requires assumptions about inflation and return on investment that cannot be accurately predicted. That is why excessive detail is a fool’s errand.

Even though the magic number myth taught by most other educators is wrong, you should not conclude that retirement calculators are a waste of time. They are not.

Studies by Employee Benefit Research Institute demonstrate that people who estimate how much money they need to retire take more effective actions toward saving for retirement and produce greater results.

Retirement calculators should be used for scenario analysis and to model different life plans for retirement. They provide a framework that is immensely valuable. They will teach you essential principles that will positively impact your financial decisions and have practical application for how you invest, manage your money, and design your life.

Just don’t mistake the map for the territory by believing the magic number produced is even remotely accurate.

Calculators are best used for mapping a path and putting numbers behind your life plan. They are indispensable for seeing the financial impact of “what if” scenarios so that you can make better informed decisions about the future.

With that said, always remember to treat the output with caution and never confuse mathematical science with art.

The future cannot be forecast with scientific precision… and neither can your retirement.

Finally, if you got value from this article please let me know by liking, linking and +1 this article and the retirement calculator resource page here. I appreciate your support and welcome your feedback in the comments below…

You Might Also Like…

• Retirement Calculator – 10 calculators to choose from to help you model every aspect of retirement planning.
• How Much Money Do I Need To Retire – A brief (46 page) ebook that teaches you the three valid approaches that actually work.
• Are Safe Withdrawal Rates Really Safe – A complete expose unmasking the controversy behind safe withdrawal rates and providing a step-by-step solution to estimating your personal safe withdrawal rate.
• 5 Reasons Why You Can’t Trust Retirement Calculators – Unmasks the magical number myth – warts, blemishes, and all.

Financial Mentor Around The Web…

My writing was featured in several blog carnivals over the past two weeks including…

• Canadian Finance Blog Carnival , Festival of Frugality, Carnival of Financial Camaraderie, Carnival of Personal Finance, Carnival of Wealth, Carnival of Retirement, Self Directed Investing For Retirement Carnival,  Carnival of Financial Camaraderie again, and Carnival of Financial Planning.
• Media mentions this month included SmartMoney.Com and Yahoo Finance. I also had several guest posts published on other quality financial web sites throughout the month.
• Please “like” my Facebook Page or follow me on Twitter here so you can stay up to date on all current developments. There is more going on than I can mention in this brief round-up and that is the best way to stay in touch.

Yet, it has become the biggest personal finance problem most people face.

How can something so simple create so much difficulty in people’s lives?

In this article I explain the deceptive nature of debt problems, the simple rules to keep you out of trouble, and the best way to solve any debt or credit problems you already have…

The Real Problem Isn’t Debt…

First off, debt is a symptom – not the problem.

Tracing the problem back to its root cause works like this…

• Your money problems result from excessive spending or insufficient income.
• Excessive spending and insufficient income problems are caused by life habits.

That is why debt and credit problems are so difficult to resolve for most people. It is a personal life problem masquerading as a financial problem. You look for financial solutions but they don’t exist because you’re looking in the wrong place.

Everybody knows the cure for debt and credit problems is to make more money or reduce spending. Duhh! So what? Getting it done is the surprisingly difficult part because the solution looks financial but is actually personal.

That is why extremely popular blogs exist on this topic. We want to believe there is a missing “secret” or “insider tip” that will solve our problems so we continue to search for more information. Unfortunately, more information won’t solve anything.

The real problem is inside you – money is just the symptom. There is no magic solution because you are a complex human being.

As a money coach I used to accept get-out-of-debt clients and it was a fascinating journey. With few exceptions the client’s financial problems were a mirror reflection of the underlying habitudes (habits and attitudes) that governed all of their behavior. Money problems were merely reflecting those habitudes financially just as other aspects of the client’s life (poor relationships, health, unhappiness) were reflecting the same habitudes.

In other words, people who ended up with credit card debt through overspending (as opposed to being caused by catastrophic events like medical bills, divorce, accident, etc.) shared some or all of the following common characteristics…

• Misplaced Priorities: They chose consumption and current lifestyle over investments and freedom. Their consumption decisions reflected the underlying belief that happiness was connected to more-better-different stuff. It’s not.
• View Credit As Money: They used credit to extend purchasing power. It doesn’t work that way (except in the short-term).
• Instant Gratification: They chose instant gratification over delayed gratification. They generally operated from the perspective of “today” and ‘this year” but failed to connect those actions to results 10-20 years later.
• Procrastination: Instant gratification leads to putting off the hard stuff until tomorrow. This multiplies short-term inconvenience into long-term disaster.
• Victim: They don’t own the source of their problems as caused by themselves. Someone else or some unfortunate event did it to them.
• Emotional Spending: They buy for ego and emotional satisfaction instead of utilitarian value. Self is emotionally connected to stuff.
• Entitlement: They are entitled to the good things in life. Why shouldn’t they have designer clothes, a big screen TV, and a nice car… everyone else does? (Answer: they can’t afford it – that’s why – but neither can most of the other people.)
• No Plan: Spending and earning are disconnected. There is no budget, no system for growing assets, no tracking of numbers, no plan for leverage, and no strategy for increasing earnings. In short, there is no discipline.

What’s amazing (and obvious in hindsight) is you can flip every one of these characteristics upside down and you have a short list of habitudes that produce wealth. In other words, my wealthy coaching clients had one set of habitudes and my debt clients had the mirror opposite.

I was amazed! But this was not a coincidence.

As I said earlier, debt is a symptom… not a cause. The cause of your financial problems is not financial (with the sole exception of unusual circumstances such as medical, catastrophe, etc.)

Now that we understand the root cause of debt and credit problems (your habits and attitudes), let’s look at some simple rules for habits and attitudes that cut through all the information clutter so you can avoid debt problems…

Proper Use Of Debt

Debt isn’t all bad.

Let’s start by looking at two acceptable forms of debt – financing large capital purchases and income property acquisitions.

For example, a perfectly viable wealth strategy using debt financing (a mortgage in this case) is to purchase a rental property that produces more income than expenses (positive cash flow).

Similarly, it can be a very smart wealth building strategy to leverage a business using debt as long as the income produced by what you purchase with the debt exceeds the cost of the debt.

These are both intuitively obvious examples of “good debt” because they put more money in your pocket than they take out while growing a valuable asset. The income produced by the asset exceeds the cost of servicing the debt. It is a straightforward application of financial leverage to multiply wealth.

The analysis gets confused when large non-consumption capital expenditures are purchased where no income is produced.

For example, debt is acceptable for buying your home. The reason is because you need housing so you either throw money away on rent in perpetuity or pay a mortgage and build equity. The key distinction is the asset has enduring value and isn’t “consumed”. It is not like a car that you use up and dispose of. It is a capital item that produces a utilitarian good (a place to live) without being used up (assuming you maintain it). It can even increase in value over time (except during a credit deflation).

These two situations (large capital expenditures that are not consumed and income producing property) are the two situations where debt can make good business sense.

These are both examples of good debt.

Now let’s look at bad debt…

3 Rules To Never Get In Debt

Bad debt is when you use credit to increase consumption beyond what you can afford to pay. The key point is the spending is for consumption – not an asset.

The rule is simple when spending on lifestyle: if you don’t have enough money in the bank then you can’t afford it.

That means the only acceptable function of credit cards is for transaction convenience. They should never by used to extend purchasing power.

In addition, you should pay your cards in full every month. Never roll a balance over from one month to the next.

Your objective is to be a credit card “deadbeat” by paying off your balance every month and incurring zero fees for the privilege of using the card.

Another advantage to credit cards are the various incentive programs that give free airline tickets, trips, hotels, and even cash back. Again, the rule is simple: only use these cards for spending you would already be doing anyway. Never increase your spending to get bonus awards.

You should never spend a dime more than you would if no credit was available and you should never carry a balance or incur monthly fees. Only then can the benefits of incentive credit cards exceed the costs (the annual fee).

I don’t promote credit cards on this site because my focus is building wealth, but if readers are interested in finding the best credit card promotions, offers, and deals I encourage you to look over these links from several friends in the financial blogosphere who “eat their own cooking” and consider using the same cards they recommend…

• FreeMoneyFinance has researched the best cash back credit cards and uses the top choices from this list for his own purchases.
• PT Money keeps both the Chase Freedom card and the Chase Business card in his own wallet.
• Ben Edwards over at MoneySmartLife likes the American Express Blue Cash card for his personal use.

Finally, always look first at the fees charged so that you can determine if the incentive program will give you more benefit than the costs of owning the card.

In summary, the three rules to avoid getting in debt trouble are as follows…

• Debt should only be used to finance income producing property or large, non-consumption, asset purchases.
• Debt should never be used to extend purchasing power for consumption. Lifestyle should never be bought on credit.
• Credit cards should only be used as a transaction convenience and never to extend purchasing power.

That’s it! Those are the rules that will keep you out of trouble (if you follow them) – 3 simple rules that convert the complex world of debt and credit into straightforward, actionable guidelines.

Unfortunately, for many readers it is “too little, too late”. They are already in debt. If that is you then below is an equally simple, step-by-step guide on the best way to get out of debt and start building habitudes that will take you to wealth…

How To Get Out Of Debt

If you are in debt bondage then your starting point to freedom is you must create a positive spread between how much money comes in and how much goes out.

It is an inescapable fact. You must live on less than you make. There is no way around it. It is not negotiable because debt is paid off from the income leftover after expenses are paid. You can’t pay off your debt if you spend more than you make.

The way you start this process is by fully owning responsibility for your financial problems and developing a plan for solving them.

You must be proactive. Don’t bury your head in the sand because the problem won’t go away on its own. You must take serious action. The longer you wait the worse it will get.

There are two ways to achieve the goal of living on less than you earn – reduce spending and/or increase income. Seriously, I know this sounds obvious when written but this is literally all there is to it. It is not rocket science and there is no greater complication or missing secrets than what is described here.

Let’s start with a five step process for reducing spending…

5 Steps To Reduce Spending…

Step 1 – Stem the Bleeding:

Contact your creditors immediately and try to negotiate special terms. You may be surprised how helpful they can be if you just ask. It costs you nothing and the worst that can happen is they refuse.

If your existing lender won’t work with you then look into balance transfers and consolidate all loans onto the lowest interest card. Just be careful of balance transfer fees and other hidden costs. Examine the fine print first to make sure it’s really a benefit.

Your objective is to negotiate reduced rates and favorable terms to stem the bleeding. Eliminating fees and reducing interest on current debt can go a long way toward helping you ultimately payoff the debt.

Next, you must stop adding to the debt by cutting up the credit cards, locking them out of reach, or freezing them. You have already demonstrated a spending control issue so you must eliminate access to the vehicle that allows you to spend excessively – easy credit. The objective is to put obstacles between you and credit so that it is inconvenient.

Do it now before moving onto the next step. This will force you to live within your means – now!

Step 2 – Raise Awareness Through Tracking

Once credit is inaccessible and you’ve done everything possible to reduce the bleeding, the next step is to track your spending. This is not a budget. You are simply tracking where the money is going to raise your awareness…

• Is it to entertain yourself when you are bored?
• Is it on spontaneous purchases instead of planned needs?
• Is it on the latest gadgets?
• Is it on fees or interest because you are in debt?
• Do you spend for personal collections (curios, music, etc.) that you enjoy but aren’t necessary?
• How much goes to recurring expenses (rent, car payment, utilities, etc.) that can be reduced or eliminated?
• How much is wasted on fees for unnecessary convenience (ATM fees, advance ticket sales, etc.)
• Do you spend on expedient solutions that are little more than a convenience such as going out to dinner or expensive coffee instead of cooking at home (see our Latte Factor calculator for the true cost of these expenses)?
• For ego gratification (expensive clothes, latest trends, to show off to friends)?
• Name brands instead of generics?
• Processed food instead of whole food?
• Full price items instead of seasonal or sale discounts?
• New instead of used?

When you track your spending it raises your awareness about where your money goes and what your patterns are. This will point to a personalized solution that exactly fits your individual needs. Look at every aspect of your spending to figure out what is truly necessary and what isn’t.

And if you are looking for a budgeting spreadsheet to help with the process here is great list of free budget templates and spreadsheets so you can find just the right one to suit your needs.

Step 3 – Reduce Your Spending

Now that you are living within your means and tracking your spending, notice how every dollar you spend either takes you toward your goals or away from your goals.

You simply decide what priority you make certain goals – like financial freedom over current lifestyle. Remember, debt is caused by choosing the opposite. In fact, every day you are making literally 100s of these decisions that will make or break your financial future.

Your spending is a reflection of your values (once you become aware of your money). You want to align every dollar spent with your goals so that all spending moves you toward what you want most. You can’t have everything so you must decide what the highest priorities are.

The truth is you need far less than you think. The goal in this step is to get your spending down to your true “baseline” required spending so you can move away from lifestyle and toward financial security. The amount you save each month will determine how fast you can get out of debt so it is critically important.

Cut your spending ruthlessly. All excess and waste must be eliminated. Look at the big ticket items like housing and transportation first to make the biggest impact fast. Consider moving, getting rid of a car, using public transportation. Don’t assume any item is sacred no matter how entrenched, and at the same time don’t overlook any item no matter how inconsequential.

It all adds up.

Step 4 – Accountability To Supercharge Results:

Tell the world about your goal to be debt free. Pick a date, form a plan, and tell those closest to you.

Your objective in this step is to literally build a box around yourself that doesn’t allow squirm room so that you enforce your new spending patterns until they become habit. Enroll a parent, spouse, coach, or friend as an accountability partner so you have someone to report your results to. Create the tracking system.

Heck, go whole-hog and tell all your friends and enroll them to support you. This might mean they don’t invite you to eat out or go shopping but that’s okay. They shouldn’t tempt you with high cost adventures. You could even email them monthly on your results, blog about it, or report it on Facebook. Seriously! Why not? Do you want the goal or not?

Accountability is a magically, powerful force for shaping human behavior so use it to your advantage. The whole reason we resist accountability is because we intuitively recognize its power.

The question is – do you want to get out of debt or not? Accountability gets results. Use it!

Step 5 – Get The Right Attitude:

Don’t think in terms of sacrifice and all that you are giving up. Instead, think in terms of the peace-of-mind, freedom, and security you are heading toward. This is essential.

The cup is either half full or half empty. You choose the reality you live under. When you focus on where you are headed (peace of mind, security, and fulfillment) the reduced spending never feels like a sacrifice. In fact, it can be positively addicting because you are moving toward your financial goals – finally!

The Other Side Of The Coin – Increasing Income…

Now that you’ve reduced spending as far as possible the next strategy to getting out of debt is to look at all the ways you can increase income…

• Can you work overtime temporarily to get your financial situation under control?
• Is there seasonal, freelance, or part-time income you can add?
• What new job skills or education/certifications would increase your salary?
• Can you convert a hobby into income?

There are fundamentally two approaches to increasing income – short-term quick fixes and long-term permanent solutions.

The short-term quick fix is to increase the hours you work either through overtime, freelancing, or similar. This can be helpful to provide an immediate injection of cash but can lead to burnout over the long-term.

That’s why you also want to look into ways that permanently increase your income without having to work 24-7. This involves launching some type of business that begins as a sideline but can transition to full-time, or it involves gaining new job skills or certifications to increase salary in your current occupation (or possibly changing occupations).

A Few More Tips To Help Your Savings Grow Faster

Getting out of debt is a serious goal meriting serious action.

Below are a collection of additional tips in no particular order that can help you wage war on the debt monster…

• Debt results from a pattern of behavior (habitudes) so examine all patterns causing the problem and break them. This might involve changing friends or spending less time with the spendthrifts in your social circle. Any habit that results in unnecessary spending should be reconsidered.
• Don’t overlook radical measures that can make a huge difference. Rent is one of your biggest expenses. It may not be fun but moving in with friends or family, or living in your motorhome for a period of time can make a huge difference in your budget. Radical? Yes, but no more radical than putting up with the noose of debt strung around your neck.
• You absolutely must put a barrier between you and overspending. That means getting rid of your credit cards and other sources of easy credit. I said it before but I’m repeating it here because it is critically important. Cut them up or lock them away. You must live on less than you earn.
• Consider selling anything you don’t regularly use and apply the proceeds to your debt – fur coats, jewelry, a boat, motorhome, extra car. Craigslist, Ebay, and garage sales can convert an amazing amount of stuff into serious cash that can make a dent in your debt. Sure it is a short-term solution to a long-term problem, but it can also give you a jump-start while simplifying your life at the same time.

Putting it altogether, this gives you a four pronged attack for making forward progress on getting out of debt…

• Start by reducing spending to produce immediate results.
• Increase the spread between income and outflow by adding overtime or freelance work to provide a short-term income boost.
• Sell your stuff for a quick payoff.
• Add new job skills or start a business for long-term income growth.
• Rinse and repeat until you are out of debt.

While this sound simple on the surface (because it is), I also want to acknowledge how difficult many people find these action steps to implement even though they intellectually understand the process. After all, you already know what you should be doing. The problem isn’t knowing what to do: the problem is getting it done. Again, that’s because the problem appears financial when it is really personal, and there is no simple solution to personal issues like discipline, determination, and prioritization.

I encourage you to seek out support systems and apply all accountability tools at your disposal. Unfortunately, there is no royal road to the destination. Your success or failure will depend on your commitment and clarity to getting out of debt.

You wield the power to get yourself in debt; therefore, you also have the power to get back out of debt. You just have to complete the steps.

Once you create a positive spread between income and expenses the next step is applying the right debt payoff strategy to become debt free in the fastest way possible. There are two similar but distinct strategies that I will cover below…

Debt Snowball vs. Accelerated Debt Payoff

Start the debt payoff process by making a list of all your debts. You’ll find this information on the monthly statements your get in the mail.

Note the creditor’s name, interest rate, amount owed, and monthly payment. Enter all the information in this debt payoff calculator to help manage the process and estimate how long it will take you to get out of debt.

You can order your list of debts in two separate ways…

• Debt Snowball: Order the debts from smallest balance at the top to largest balance at the bottom. This gives you greater emotional satisfaction because you see results much faster. The small debts get eliminated quickly giving you immediate positive feedback and reinforcing discipline. This costs you a little more in interest than the alternative below but many consider it worth the price because the emotional satisfaction results in a higher probability of sticking with the process long enough to succeed.
• Accelerated Debt Payoff: The other alternative is to order your debts with highest interest rate at the top and lowest interest rate on the bottom. This is mathematically the best way resulting in the fastest, lowest cost payoff because it targets the highest interest rate debt first. The problem occurs if you have a large debt that is also high interest because it can feel like it takes forever to make any progress. This causes many people to give up.

There is no right/wrong answer to which debt ordering system is best. One is financially superior and the other is emotionally superior. The key is to decide what will work best for you so that you stick with the process long enough to succeed.

Next, enter the amount of income leftover each month that can be applied toward paying down debts in the box at the bottom of calculator. You get this number from the 5 step exercise above where you figured out how to spend less than you earn.

What this calculator will do for you is apply the minimum monthly payment on all debts except the top listed debt. That one gets the additional money from the step above to help pay it off as fast as possible.

Notice how the size of this additional payment determines how long it will take to get out of debt. I encourage you to play with different numbers and see how much difference it can make. It might be motivating to go back to the previous section and figure out how to increase your monthly savings so you get out of debt faster.

As the first debt is paid off you dedicate 100% of the money that went to that debt to the next one on the list. You repeat this process creating a snowball that concentrates an increasing amount of your total monthly payment to fewer and fewer debts until they are all paid off – in full. Yay!

Go ahead and punch your numbers into the calculator and give it a try. You might just be surprised how fast you can be debt free.

In Summary…

There are many ways to slip into debt. You might become underemployed, suffer a salary reduction, divorce, high medical bills, or simply lack good money management skills.

These life problems don’t necessarily translate into debt. Good money management skills combined with the following three rule system can save you from financial difficulty…

• Use debt only to purchase assets that increase in value or produce more income than expenses. Debt used this way leverages your balance sheet which can be a valuable wealth building strategy, but it can also increase your risk so be careful.
• Never use credit to increase consumption. If you don’t have the money in the bank to pay for lifestyle expenses then you can’t afford it.
• Credit cards should only be used for transaction convenience and should be paid in full each month.

These three simple rules will keep debt and credit problems from occurring regardless of life circumstances.

Credit is an expedient, short-term solution to life’s difficulties, but it is usually not the lowest cost or best solution in the long-term.

Once you have a problem the only way out is decisive action to solve the problem: it won’t solve itself. There is only one way to get back out of debt. You have to do the work. There is – unfortunately – no magic fix to debt and credit problems.

From the moment you commit to taking action until the day you are debt free will likely require many months or possibly years… so plan accordingly. Set yourself up to win.

• First you must stem the financial bleeding by reducing expenses. This involves tracking all expenses and aligning your spending with your values so no money is wasted. It may also require cutting up credit cards or freezing them so you eliminate easy access to credit. (Did I say that before?)
• Second, you must increase income to widen the gap between how much you spend and how much you earn. This can include both short-term strategies such as overtime and long term strategies like adding career skills or starting a business.
• Next, take the amount saved each month and dedicate it toward paying down debt using either the debt snowball or the accelerated debt payoff method.

The key point is to realize that debt and credit issues are a personal problem masquerading as a financial problem. This deceit is why so many people have trouble managing debt and credit. They look for financial solutions when the answer is personal – not financial.

Always remember the financial strategies for getting out of debt are simple to understand and implement. The personal obstacles that stand between you and debt freedom are far more complex and difficult to overcome.

This is the nature of the debt beast. That is why slaying the debt dragon is the greatest path of personal growth for anyone who has the problem.

So commit to your growth and freedom! Make this year a time where you finally break the bonds of consumerism and debt slavery.

Get out of debt and begin the journey to financial freedom.

It may not be easy… but it certainly beats the alternative.

You Might Also Like…

• Payoff Debt Or Build Wealth – Which Should I Do First? Explains the critical differences between the art and the science of paying off debt.
• 6 Steps To Recover From Financial Disaster: If you are suffering from a serious financial setback don’t worry – you’re not alone and there is a solution.
• The Minimalists Guide To Financial Planning: Financial planning is so simple it can be explained in two sentences. The principles and habitudes that lead to wealth are the mirror opposite that result in debt.
• Debt Snowball Calculator: A simple calculator that does all the heavy lifting. Just punch in your numbers and it will show you how fast you can be debt free!
• Faster, Better Results Now – A Boring Tool That Really Works! A step-by-step guide to using accountability to achieve any goal faster and with less effort.
• Are You Living In Financial Integrity? You can never be happy as long as you live out of integrity with your values. It’s a major cause of debt and financial mediocrity. Discover the solution…

Financial Mentor Around The Web…

I recently began entering my writing in financial blog Carnivals (think of  a carnival as a competition among financial bloggers where best posts are selected and celebrated.) I’ve only entered a few and you can see the results below so expect to see more of this in the future…

• Ken Faulkenberry runs the “Self-Directed Investing For Retirement Carnival” where my writing on investment strategy topics won placement in October, November, and December.
• The Best of Money Carnival elected my one and only submission, a guest post titled “The Complete Guide To Building Wealth In 2 Sentences” as the best financial article for all of 2011! Wow! Nice acknowledgement for a first effort.
• If you want to keep up with all my educational efforts that don’t appear on this site make sure to like my Facebook page here for future updates.

Oh yes, and please share your thoughts and ideas about this article in the comments below. BTW, it is a new comment system so try it out and tell me what you think!

Thanks!

It strikes me as the height of consumer insanity.

Truncating my holiday family gathering to rush out at a ridiculous hour in the morning so that I can join frenzied crowds of other insane people battling to spend money they don’t have on things they don’t need makes no sense to me.

But hey, maybe I just don’t “get it”.

I don’t believe that’s what the holidays are all about or what makes this a joyous season.

Below is my brief take on trying to keep sane during the holidays and find some happiness in the process.

First Off – What Do You Stand For?

I’ve taken a stand…

The holidays are first and foremost about family gathering and spending time together. They are about experiences – not stuff.

If you put Christmas and Thanksgiving in competition and asked me to pick which one brings more joy for the effort I’ll tip my hat to Thanksgiving all the way. Why?

• I love the spirit of giving thanks as the root of the holiday. I love a celebration that is based in gratitude.
• I love the turkey dinner with all the trimmings. Yum!
• I love gathering the family in celebration for all that is good.
• I love that there is no consumer oriented mental clutter – just giving thanks.

Christmas offers many of the same benefits but is encumbered by consumerism through gift giving. I have personally battled with this issue over the years trying to find a reasonable solution that balances all the conflicting needs while honoring my values. The following is as close as I’ve gotten to sorting it all out…

How To Shop Less And Enjoy More

My first rule for Christmas is to eliminate.

No, not the holiday, but anything that doesn’t add joy to the holiday.

For example, both sides of my family agree that Christmas is about family gathering and not consumerism so we have created a variety of gift giving guidelines:

• Gifts are for children only (through college graduation). Adults don’t exchange gifts. It just gets to be too much cost, work, and none of us really need anything anyway.
• My wife purchases gifts throughout the year based on inspiration in finding something that speaks to that person and their unique interests. She then stores it until Christmas eliminating the rush “to find something”.
• All remaining shopping is based on lists so there is no emotional buying “because it is an insane deal” or whatever.
• Any and all shopping that can be done online is done online (see my note about Amazon below). This reduces time wasted battling crowds, eliminates emotional buying, eliminates cost of gas and wear and tear on the cars. It is usually the lowest cost solution when everything is added in (even if the price isn’t the lowest).

Besides controlling the gift giving frenzy, we also eliminate wherever possible in other areas of the holiday celebration.

For example, we always decorate the house to create the festive mood in the household, but the tree is variable depending on where the holiday will be celebrated. Some years we get one and some years we eliminate this step. When we choose to have a Christmas tree we make it part of the holiday tradition by getting a cutting permit and hiking into the mountains nearby to cut the perfect tree (with hot chocolate in tow).

(Side Note – 2 years ago my daughter and I had a great time creating our own Charlie Brown Christmas. We found the scraggliest, most pathetic, little tree in the forest and built a Snoopy dog house out of boxes to place under the tree with our stuffed Snoopy Santa on top. We created an entire Peanuts Christmas scene out of the tree in one corner of our living room. It remains one of my favorite Christmas trees )

Online Shopping

One of my favorite retailers is Amazon. It is where much of my Christmas shopping will occur this year – all with the convenient click of a mouse and no crowd headaches.

I like Amazon because the search and ratings abilities make product selection a snap while giving me a no-brainer, low cost provider for nearly everything on my list. When I shop locally (computers, television, etc.) Costco provides the same no-brainer solution (best value for money without requiring tons of research).

Amazon is not actually a retailer because it acts as the middleman for an amazing number of retailers. That’s why the selection and availability of products is unparallelled. In fact, I will soon be one of those retailers as I move my ebooks to the Amazon Kindle marketplace early next year.

Another development for next year is I will be offering my first group coaching course (yes, I know it has been long anticipated and awaited). I haven’t named this new course yet (more on that in future emails) but it is all formatted and ready to go. What I will tell you now is the premise behind the course: It teaches the habits and attitudes that create wealth automatically as part of your daily living so that your financial success becomes a matter of “when” – not “if”.

The reason I tell you this now is because it ties into the Amazon shopping discussion above and the fact that readers have been pestering me for years to post a recommended reading list.

I’ve been putting off getting the recommended reading list done despite repeated requests because there always seemed to be some other priority. I’m finally making time for it now to coincide with the holiday shopping season.

What you can expect over the next several weeks is the addition of several reading lists organized by specific topics in investing and wealth building. Each will be announced in this newsletter throughout the holiday shopping season. This first list provides the recommended background reading for my upcoming course on the habitudes (habits and attitudes) that build wealth. Get a jump on 2012 and pick your favorite book today…

I’m trying to be a smart businessman by giving you value through the recommended books and giving you a chance to support this site through a shopping strategy I use myself. When you click through one of my book recommendations (which are all affiliate links) I get paid on every purchase you make at Amazon (whether it is the book or not) while you are there.

So anyway, these are wonderful books to give as gifts because you are giving the gift of financial knowledge. Books are your best value in financial education and every purchase made while shopping at Amazon (after checking out one of these books) supports this site so I can continue to bring you all the high quality financial education I provide at no cost.

It is a great way to give “thanks” and is a win for everyone.

So thank you for your support during this big shopping weekend and throughout the holidays. I hope you get value applying some of the same principles my family uses to keep the holidays sane, affordable, and most importantly – joyous.

Have a wonderful Thanksgiving (and a peaceful Black Friday with online shopping instead)!

In retirement planning the quintessential example is the safe withdrawal rate myth.

Everyone needs to know the answer at some point in their lives: How much can you safely spend from your retirement account without running out of money before you run out of life?

Excellent research exists on this subject yet it gets dumbed down by media and other bloggers into an oversimplified 4% Rule. It is a neat, clean, and tidy answer – well researched, simple to understand, and easily actionable.

It has great sales appeal… and it is also dangerously wrong.

Safe Withdrawal Rates Revealed

That is why I just spent the last two weeks researching and writing this article unraveling the truth behind safe withdrawal rates. Seriously – two weeks! That is how important I consider this subject to be for your financial future.

Why would I take that much time on a single article for a subject many of you don’t even know about? Let me explain…

• Critically Important: Because safe withdrawal rates are critically important to you – whether you know it or not. They define how much money you need for retirement and how much money you can spend from savings during retirement. This knowledge can make-or-break your financial security.
• Dangerously Wrong: Because there is a ton of misinformation and dangerous half-truths about this subject. I wanted to dig deep into it so that you had the knowledge you needed to make the right decisions.

Why Safe Withdrawal Rates Are Critically Important To Get Right

A lot of people don’t understand why this information is so critically important so let me explain…

Every new retiree needs an answer to the same question – what is the maximum retirement income I can withdraw from savings without going broke before I die?

It is the single most common question I get from retirees and near retirees.

The reason is because safe withdrawal rates impact every aspect of retirement planning – from the lifestyle you can afford to the amount of savings needed to fund it. Small errors in safe withdrawal rates multiply over many years causing huge financial impacts…

1. Lifestyle You Can Afford: Few people realize that a mere 1% safe withdrawal rate change makes a big difference in spending during retirement. It seems counter-intuitive because the number is so small. However, a 1% variation from the industry standard 4% assumption will increase (or decrease) your income in retirement by 25%. That can make the difference between a world traveler lifestyle or living at home on hot dogs. In other words, it pays to calculate your safe withdrawal rate as accurately as possible because small changes equal huge changes in the lifestyle you can afford.
2. Savings Required: The amount you can spend each month from savings and the amount of savings you must build to support your retirement are flip-sides of the same coin. One implicates the other mathematically. For example, the “4% safe withdrawal rate” is mathematically equal to the “Rule of 25” (you need 25 times your first year spending in savings). Similarly, a 3% safe withdrawal rate equals roughly 33 times your first year retirement spending in savings. Using the two examples above, a mere 1% change in safe withdrawal rate when spending $100,000 per year in retirement is the difference between building a nest egg equal to $2.5 million vs. $3.3 million – obviously a big deal. Conversely, knowing you can safely spend 6% would knock the savings requirement down to $1.7 million. That’s why it is so important to figure an accurate safe withdrawal rate: It can change the amount you need to save for retirement thus shortening the time it takes for you to reach your financial goals.
3. Risk To Financial Security: If you withdraw just 1% more than your actual safe withdrawal rate you will go broke before you die. It is a mathematical truth. A mere 1% less would have allowed your nest egg to last a lifetime. That’s why accuracy is critical – because the razor thin margin between 1% too much and getting it right is literally the difference between poverty and financial security.

Like Goldilocks, there is a sweet spot in retirement spending somewhere between “too much” and “too little” that is “just right”. In an ideal world you would exhaust your last penny from retirement savings as you exhaled your last breath. That is the theoretical objective of safe withdrawal rates.

It is a high-stakes game where the quality of your life during retirement is dependent on getting the answer right. For that reason, there is probably no question more important in retirement planning.

That’s why I spent two weeks writing this article for you explaining how it works.

How Conventional Wisdom Got Safe Withdrawal Rates Wrong

Common sense would dictate that a subject so important would have been well researched.

In fact, the truth is that it is well researched but mass media and casual bloggers have somehow dumbed the conversation down into a dangerous 4% Rule that is not consistent with quality research conclusions. It is dangerous and you need to separate the fact from fiction to make well-informed decisions.

What You Should Do About It

Simple. Read this article.

The only price you pay is time. I’m giving you this knowledge for free.

The price of admission is you just have to care enough to read it and leave a comment. Nothing for sale – no pitch.

The information in this article is critically important to your financial future. It can help you avoid falling prey to the over-simplified, conventional wisdom.

Please leave a comment at the end of the article and let me know how it affected your thinking. Did I achieve my objective? Did it make sense? Did you learn something of value?

I really want to know…

The link to the article is here – Are Safe Withdrawal Rates Really Safe?

Humans are motivated by many different things: money, prizes, power, praise, recognition, prestige, ego, time off, sex, and much more.

But on a more basic level our motivations can be broken into two categories – intrinsic and extrinsic – and this distinction is critical according to Dan Pink in his new book, Drive.

Extrinsic is the old carrot-and-stick approach – the hope of gain and the fear of loss. This includes payroll and bonuses.

Intrinsic motivators are more powerful and can be broken down into 3 categories:

1. Autonomy – Control over your own work and destiny.
2. Mastery – Continual improvement.
3. Purpose – Honor personal values and be part of something bigger than just yourself.

In a throwback to Maslow’s hierarchy of needs, Pink points out that when a worker feels fairly compensated then intrinsic motivators may have a more powerful influence than traditional extrinsic motivators (more money). When your basic needs are taken care of then self-actualization and esteem become a higher priority than additional financial compensation.

My own life experience and working with so many money coaching clients supports this theory. In addition, workplace research corroborates this finding with studies showing monetary rewards designed to increase performance may have the opposite effect. This is particularly true for autonomous workers in jobs requiring innovation and problem solving but less true for workers completing repetitive tasks.

Why “Drive” Is Essential Reading…

The “New Retirement” is a huge issue in today’s workforce.

The crux of the new retirement is that lifespans have increased 30 years in the last 100 making the old retirement financially difficult to obtain and not very fulfilling. Most people can’t save enough to support 30-40 years of leisure and even fewer define happiness as working like a dog for 40 years so you can do nothing of substance for the last 30 years while health declines.

Instead, the new retirement is following Pink’s prescription to perfection.

Once workers satisfy their basic need they become less motivated by money and more motivated by intrinsic factors. This causes early departure from traditional careers into part-time work and encore careers.

Employers would be wise to wake up. Employees are moving on when their basic needs are met and it is needlessly costing companies a fortune. Life is short and employees want fulfillment during their brief journey on this earth.

The Pursuit Of Fulfillment Above Maximum Wealth

The call for fulfillment usually occurs around the time a prospective client is marginally financially independent. They are typically a little short of obvious financial freedom but close enough to be driven by intrinsic motivation to make the call. They are restless and don’t understand why. They’ve worked a good career, built a solid nest egg, and now something is different but they don’t know how to put all the pieces together.

Sound familiar? Many of you can probably relate. I know that was my experience in my early 30′s.

It was a very confusing time because I “had it made” by everyone’s standard – except my own. I was making good money yet there was something missing… something more. I knew I wanted to change careers but couldn’t sort the issues out. If it was about maximum wealth I would have happily stayed in the investment management business. Blogging and coaching has always been driven more by fulfillment than making money.

Unfortunately, Pink’s book didn’t exist back when I sorted these issues out. It could have helped me understand what was going on and maybe saved me a lot of trial and error. It took me years to work through the issues because there was nobody to show me the ropes. I fumbled through by intuition alone.

I recommend the book. It is a smarter, more efficient path to the knowledge.

What This Means To You…

In a nutshell, if you are financially successful (which all my readers will eventually become, of course ) then you will transition from extrinsic motivation to intrinsic motivation. It is as inevitable as night and day.

You may not realize it now, but when your basic needs are met for the lifestyle you feel comfortable in then the issues discussed in this book will raise their heads and demand attention… whether you like it or not.

Get Pink’s new book, Drive, and it will help provide a basic understanding of the landscape.

I hope you get good value from this resource, and I welcome your thoughts in the comments below…

Good investments make a profit, of course.

But this glib answer avoids the real issue…

Today, everyone wants to know if precious metals are a “good investment”, 5 years ago it was real estate, and 15 years ago it was technology stocks. It’s the same mistake over and over again – everyone thinks in terms of product.

If you want to become a great investor forget about looking for a “good investment” and start focusing on risk management, timing, and strategy. Stop thinking in terms of “product” and start thinking in terms of “process”.

This distinction is critical to your long-term investment success.

Let’s see how it works…

What’s The Difference Between Product and Process?

Bob the broker calls up Johnny Customer with the latest hot tip from his research department.

“Johnny, stock XYZ is undervalued. Our research shows good things coming down the road for this company and we recommend buying it”,  says Bob.

Bob is selling a product – not a process.

Notice there is no discussion of the investment process involved (in this case – active stock selection). Instead, the focus is on the stock which means critical questions will be overlooked…

• Where is the long-term research showing a positive mathematical expectation for prior recommendations?
• How will you know if the recommendation is wrong and what criteria do you use to decide when to exit (risk management)?
• What percentage allocation is appropriate to any new position (risk management & strategy)?
• Assuming the research department is right and the stock rises then how do you decide when to sell? What do you replace the position with and why (strategy)?

In short, what is the investment process and how does it work? That is the relevant question.

Surprisingly, few people focus on that question.

Instead, everyone wants to find the next good investment. They want a magic pill. They want to find the next Microsoft or Google in it’s infancy.

Sorry, long-term investment success doesn’t work that way.

It is a process.

3 Ways To Profit By Getting Just One Thing Right

For example, at the height of the real estate debacle in 2008-2009 everyone agreed houses were a bad investment. Investors were going broke and prices were in record free-fall.

However, you could still make a great investment if you had a strategy that bought foreclosures and abandoned property at 20 cents on the dollar. At the right price any asset can be a tremendous investment – including an asset where the price is declining rapidly.

In this example, the product (real estate) was a terrible investment, but with the right process (a risk management strategy) it could be an excellent investment. How? Because you can convert a declining asset into a good investment without regard to market conditions when the margin of safety built into the intrinsic value of the price justifies the risk.

The key principle is the risk management process – not the investment product it is applied to. It is about process – not product.

Similarly, most people lose money trading options. The stats are abysmal. Few investment expert‘s would disagree that options are a lousy investment product for most people (except gurus selling options trading courses, naturally ).

However, a viable, low risk strategy is to sell out-of-the-money puts on new positions you seek to acquire so you can add current income to your portfolio while potentially acquiring new stocks for cheaper than they are selling today.

Again, a generally “bad” investment product for most investors can be turned into a low-risk source of income when the right strategy (process) is applied.

The truth is there are no bad investment products. They are neutral and have known characteristics. However, there are bad strategies applied to investment products.

Continuing with examples, gold has been in an 11 year bull market. Gold is not an inherently good investment product as anyone who owned it during the ’80s and ’90s can attest; yet, every now and then it has a day in the sun.

What is relevant is a valid timing process that can keep your capital out of the long-term bear markets and in the long-term bull markets. Again, it is about process – not product.

So, what can we learn from these three examples…

3 Things To Notice About Good Investing

From all the above examples there are three ideas you want to note…

1. If you get the timing right you can be wrong about valuation and strategy yet still come out with a profit.
2. If you get the valuation right you can be wrong about timing and strategy and still come out with a profit.
3. If you get strategy right (have a positive mathematical expectation with good risk management) your profit is assured over time even though any single investment can fail on timing and valuation.

The key is to realize there is no such thing as an inherently good or bad investment.

Successful investing is all about process – risk management, strategy, and timing. It takes work and effort.

Everyone want to know, “What is a good investment?”, but it’s a fundamentally flawed question that sends your thinking in the wrong direction. It is the myth of the magic pill – a one stop solution.

Good investing is all about risk management, strategy, and timing.

It is all about process.

So please share your thoughts on this subject. Did you gain new insights or am I missing something. I would love to hear what you think and thank you for joining the conversation…

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Nowhere is this more true than with investment research. Every day another trading system or sure-fire way to riches gets published.

It always looks good on the surface – impressive statistics, testimonials, lots of social proof. You will find them in best-selling books, or published by an authority figure (like a professor), or endorsed by a trade journal.

None of that matters. It can’t be trusted.

There is still a good chance it can be total hogwash so you must do your own due diligence. You can’t blindly invest your savings based on third party research no matter how legitimate it appears on the surface… unless you are willing to lose your money.

How Investment Research Creates Fiction From Fact

Any time humans interact with data there is opportunity for error. Below are the 5 most common ways problems occur…

1. Data Errors: Investment research requires data sampling to keep the project from becoming unwieldy. Unfortunately, sampling introduce bias – by definition. Do you exclude or include companies that have gone out of business (survivorship bias)? What time periods do you test (cyclical bias)? Big cap, small cap, or micro-cap? End of day data, intra-day, weekly, or monthly? Every decision will affect the results – some quite dramatically. Just because an investment strategy appears to work on one time period does not imply it will work on another time period… or even in the future (which is the only time period that matters).
2. Undisclosed Assumptions: How are transaction costs accounted for? Did the system assume reasonable fills during the 2008-09 decline or the 1987 crash? What are the assumptions for the bid/ask spread? Commissions? Depending on trading frequency these small details can completely invalidate an otherwise stellar investment strategy.
3. Judgment vs. Mathematical Rigor: Beware of any “research” that allows room for interpretation, vagary, or judgment. The human mind can and will deceive (both in love and investment research). If the study isn’t mathematically rigorous then skip it. It’s either quantified or it’s fiction.
4. Interpretive Bias: Marketers use statistics like a drunkard uses a light pole – for support instead of illumination. You can’t understand a person’s opinion until you know the shoes they stand in. What are they selling? Did they build a business around this research? Who paid for the research? Do they have an axe to grind? All these things can pervert the science of statistics into supporting biased opinion and business expediency. Always analyze the source of the research and their financial motivations.
5. Algorithmic Errors: Some researchers simply screw up. They publish results that include blatant algorithmic errors or data errors. Seriously, it happens with surprising frequency. Worse yet, the flawed conclusions then get repeated throughout the blogosphere creating social proof and authority making the work appear indisputable.

The Devil Is In The Details

These concerns may sound like a bunch of financial geek details reserved for propeller-heads with thick glasses and pens in their pockets… but it’s not.

These concepts can make or break your financial future. They are critically important.

Think about it – you must base your investment decisions on something. If the logic and research behind those decisions is flawed then the outcome will likely be expensive. Knowing the difference between valid and fictitious investment strategy is critically important to your financial security.

The issues discussed above are not reserved for data freaks: they are relevant to every investor… including you.

The essence of investing is to only put your assets at risk for a positive mathematical expectation. Anything less is gambling. The only way you can know if your investment strategy provides a positive mathematical expectation is solid research. Period.

And if I’m sounding like a curmudgeon please understand this is based on decades of actual research myself and digesting other professional’s research. The process is far more tenuous than anyone who has not personally dug deep into this subject can be expected to understand.

I spent a decade of my life verifying and testing published trading systems for a hedge fund. Surprisingly, almost none of them worked as published. Seriously! The models were riddled with flawed assumptions and data issues that made them unusable for real-time investing.

Granted, I did this research a decade ago so you could argue the market is more sophisticated now… but I doubt it. See this post by the Empirical Finance Blog on  The Magic Formula for current evidence. If you think this is an isolated circumstance then remember the infamous “Beardstown Ladies” fraud and how their published track record was complete nonsense.

These are best-selling books by major publishing houses offering questionable research conclusions.

I know it shouldn’t be this way and you should be able to trust what you see in writing, but it’s not the way the game works. Sorry.

It all boils down to a simple equation – small errors in investment research compound into HUGE errors in results. It is the nature of compound returns. The equation is multiplicative – both for growing wealth and compounding errors in research.

The devil is in the details.

2 Ways To Solve The Problem

So what’s an investor to do? How can you determine what investment strategies are sufficiently trustworthy to justify putting capital at risk?

1. Verify the research yourself: Yes, it is a lot of work and probably not a viable solution for most, but it is an acceptable alternative if you have a passion for this subject.
2. Find independent, third-party verification: If you won’t verify it yourself then you will have to find someone else who did. Fortunately, with the growth of the internet this is frequently a viable alternative. Third party bloggers and competing authors often corroborate claims.

That’s it! Those are really the only two ways to resolve the issue. Either verify the research yourself or find someone else who did. Either way, it must be verified and deeply understood before putting capital at risk. Anything less is gambling.

In addition, I like to see two more pieces of evidence before putting capital at risk on investment research…

1. Real-time track record: I prefer the track record be independently audited and to include data periods that represent adverse conditions for the investment strategy. For example, if it is a trend-following strategy I like to see how the strategy managed risk during sideways markets. This is critically important.
2. Market logic: I avoid any investment approach that is rooted in data-mining instead of market logic. In other words, the math should quantify an exploitable inefficiency in market price behavior and not just be a statistical aberration of the data.

I understand this is all a painful inconvenience. Investing should be easier and you should be able to trust published research. Unfortunately, historical fact disagrees.

The reality is money is hard to save and easy to lose. It may take extra effort to complete proper due diligence, but I guarantee it will be far less effort than having to replace investment losses from earned income.

So what do you think? Maybe you can cite some more examples of bogus research in the comments below? What ideas did I miss and what thoughts would you like to add? Please tell me your thoughts in the comments below…

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