If you live like no one else today – you will be able to live like no one else tomorrow
Money – we all
want it, but few of us are willing to sacrifice to get it. Those that have it
generally don't understand it, and those that don't have it come up with
excuses why they can't get it. If this sounds confusing – it is.
For all that we
have accomplished in the United States in the last 200+ years we have failed miserably
at teaching our children the basics of money management. I am not talking about
stock and bond portfolios but rather the basics of spending less than
you make, understanding of credit, and how to balance a check a book.
We are inundated
daily with credit card commercials that show how great life can be – just
charge it. We are enticed to buy things that we don't really need though the
use of zero percent financing – but only while it lasts. We are motivated to
consume anything and everything in pursuit of the American dream but no one
ever talks about the consequences of our actions.
The Secret To
Wealth
I could literally
be kicked out of the financial community for divulging the one secret that has
been so closely guarded by the credit card companies, the mortgage companies,
the banks and Wall Street for so many years. This secret, of course, is the true
road to wealth and happiness. It is irrefutable, undeniable and absolutely
achievable. If you implement this one secret in your life – you will be rich
and you won't be able to stop it.
The Secret: Spend
Less Than You Make
That's right. This
is the one secret that no one wants you to know because the more you save – the
less the credit card companies make. The more you save the less in
fees that Wall Street makes. The more you save the wealthier you get.
The 10 Laws Of Money
1) Money Doesn't
Grow On Trees
My father used to
always tell me several things – all of which I am beginning to find out weren't
exactly true – such as; "When I was your age I had to walk uphill
to school in the snow – both ways!", "I could go to a double feature
and eat all the popcorn and soda I wanted for a nickel and have change left
over!" and, of course, my personal favorite; "Where
do you think that comes from – money doesn't grow on trees!"
What my father was
trying to teach me was to respect the effort that goes into making money in the
first place. My whole life my father worked two jobs, and sometimes three, to
support me and make sure that I had everything I needed – not always everything
I wanted – but always what I needed. As a young boy, of course, I didn't fully
understand the impact of what he was trying to teach me until I got a family of
my own.
People generally
work very hard for their money but then squander it by making bad financial
decisions. You must learn respect for the money you make and one of the best
ways to do this is by using an "envelope system" for
a few months.
The "envelope
system" is easy. Simply cash your paycheck and put all the money
into envelopes for rent/mortgage, car notes, food, utilities, entertainment,
etc. Then go ahead and begin living your life. What the envelope system will
show you is where you are squandering your money and help you focus on the
areas of financial distress so that you can cure the problem.
Oh, by the way,
there is no borrowing from one envelope to cover a shortfall in another, when
the envelope is empty then you are out of luck until next month...so make sure
you don't spend too much of your "food" money eating
out.
2) Wants Always
Exceed Needs
It is always
surprises me when I council people on financial planning the shear look of
horror that comes across their faces when I mention the word "budget". It
is almost as if I have just asked for them to amputate both arms.
However, a budget
is the only way to achieve financial success in your life - you have to
spend less than you make. I hear all the time; "You
don't understand – I needed a new car", "...we needed a bigger
house" or "...we just have to have our annual vacation."
The difference
between a "want" and a "need" can
sometimes be small and insignificant, but, most of the time they are on
different planets. Did these people need a new car – maybe, but they could have
bought a 2-year old car that looks great and saved 30% on depreciation. Did
they really need a bigger house or could they have gotten by in the one they
are already in. These are all the questions that you have to ask yourself.
· FOOD
· SHELTER
· UTILITIES
· TAXES
These are your
needs – everything else is a "want". Keeping the "wants" under
control is a huge first step in your financial wealth. So, before you buy
something tomorrow – stop and think about it – is it a "want" or
a "need".
Your Life Is Worth
60%
In planning your
life, and spanning the gap between "wants" and "needs",
build a budget after analyzing your spending patterns keep your committed
expenses at or below 60% of your gross income. That's right – that leaves 40%
of your gross income just hanging out in the wind, but more on that in a
moment.
Now, 60% is not a
magic number but it is a realistic goal to work toward and, at any rate, it's a
good place to start. However, once you start using this method, you really
won't need to track your expenses because your checking account
balance will generally be equal to the amount of money you can spend. The
key is keeping a lid on those committed expenses.
What About The
Remaining 40%?
That 40% is what
you paid yourself, and your family, with first. Let's look at an easy example:
Joe makes $100,000 per year and is in a 25% tax bracket. Once he is paid, $17,500 goes into his company retirement plan, pretax, OR 17.5% of our 40% goal. Joe is already almost halfway to his goal.
Joe then deposits $458.33 per month, ($5,500 annually) into a Roth IRA for himself and an additional $458.33 each month into a Roth IRA for his wife. Since these are AFTER-TAX investments we need to adjust upward by adding the taxes back in which would value the total of the $11,000 in annual contributions at $13,750. So far Joe has already saved 31.25% of his goal of 40%.
Joe then deposits $730 into an investment account each month, via automatic deposit, which is an additional $8,760 a year making up the balance of the savings goal.
Joe then has a final net paycheck he deposited into his bank account which is equivalent to 60% of his gross pay after all deductions. Each month Joe spends everything in his bank account. He doesn't have to worry about saving anything because it has already been done and Joe learns not to miss the money piling into his savings accounts because he never got to see it in the first place.
The real secret to
building a budget that really works isn't tracking what you spend any more than
counting calories is the secret to losing weight. The key is creating a
sustainable structure for your finances, one that balances spending and income,
and leaves enough room to handle the unexpected.
3) The Poor Are
Debtors
This is a simple
rule – "You can not borrow your way to wealth ... period."
You will never see a late night infomercial on how to build your way to wealth
by swapping debt between low interest credit cards.
For a lot of
people, part of the difficulty in reducing committed expenses comes from the
need to make big monthly credit card payments. If you're carrying a substantial
amount of non-mortgage debt, I'd suggest using the 20% that would otherwise go
to retirement and long-term saving to aggressively pay down your debt -- but
only after you cut up those cards.
Every dollar in
interest that you don't pay is just like getting a guaranteed risk-free, and
tax-free, return on your money equal to the interest rate on the debt. When
your debts are paid off -- and it won't take long using 20% of your gross
income -- immediately redirect that money back into savings.
Here are 15 signs
that indicate you are not managing your financial life correctly and are
hindering yourself from becoming wealthy:
1) Your credit card balances are rising while your income is decreasing.
2) You are only paying the minimum amounts required on your accounts, or maybe even less than the minimums.
3) You're juggling bills. For example, you apply for another credit card and use cash advances from it to pay an existing card.
4) You have more credit cards than a successful gambler has poker chips.
5) You are at or perilously near the limit on each of your credit cards.
6) You consistently charge more each month than you make in payments.
7) You are working overtime to keep up with your credit card payments.
8) You don't know how much you owe and really don't want to find out.
9) You have received phone calls or letters about delinquent bill payments.
10) You are using your credit card to buy necessities like food or gasoline.
11) Your credit cards are no longer used for the sake of convenience, but because you don't have money.
12) You are dipping into savings or your IRA to pay your monthly bills.
13) You are hiding the true cost of your purchases from your spouse.
14) You're playing the card game by signing up for every credit card that sends you an unsolicited offer.
15) You have just lost your job, or are fearful that you are about to, and are concerned about how you will pay all your bills.
The first step in
becoming wealthy is to quit using credit cards – of any type, for any
reason.
The Credit Card
Rollup Solution
If you want to get
rid of your credit card debt – no matter how large – the following method will
work in no time. You just have to get serious about doing it.
Step 1) Sit down and cut up all of your credit cards – ALL OF THEM.
Step 2) List the balances for each card from LARGEST to SMALLEST and the minimum payment for each.
Step 3) Pay the minimums for each card on the list and 5 times the minimum for the smallest card balance.
Step 4) Repeat each month. Don't worry about paying off the debt with the highest interest rate first. This approach gives you some quick wins. It's like losing five pounds in the first week of a diet.
Step 5) When the smallest credit card has been paid off ROLLUP all the money you WERE paying on the smallest credit card and apply all of it to the next card on the list INCLUDING the minimum payment you were already making on the previous card. By the time that you get to your last credit card – which will be the one with the highest balance you will be putting huge chunks of money on the card each month. Before you know it – you will be debt free.
Step 6) When you are finally free of all of your credit cards – reward yourself. Take the next two months of payments you were using to pay off your last credit card and buy yourself something.
Step 7) After you reward yourself – it is time to get back to saving. ALL OF THE MONEY that you used to pay towards the credit cards – now goes into savings. You have a lot of ground to make up and this is a good way to get there.
4) Moral &
Physical Hazards Don't Apply
I remember
watching "Fear Factor" and realizing
that people will do anything for "quick and easy money" – "Sure,
Joe, I will eat those South American Hissing Cock Roaches for $50,000."
Yet, these same individuals won't do the financially smart things, and
sacrifice their "wants," in order to save that same
$50,000.
In America we have
been raised to be financially lazy. We are unwilling to do what is necessary to
become rich yet we will play the lottery, which is nothing more than a poor
man's tax, in hopes of becoming a millionaire. Yet the sad statistic is that
80% of lottery winners are broke again within 10 years because of bad financial
management.
Like David
Letterman, I should start a segment on "Streettalk with Lance
Roberts" called"Financially Stupid Human Tricks" and
highlight some of the things that we are enticed to do by lenders in the name
of "financial management" such as;
Borrow From Your
401(K)
Companies don't
have to offer a loan feature with their 401(k) retirement plans, but according
to the Employee Benefit Research Institute, most of them do. Eighty-three
percent of American workers covered by 401(k) plans can borrow against their
accounts, and about two in five participants have an outstanding loan.
People who borrow
from their workplace retirement funds, meanwhile, love to think it's a smart
move, since when they repay the loan they're essentially paying interest to
themselves rather than to a credit-card company or other lender.
This is true, but
401(k) borrowers also could be putting their retirements at risk. If they lose
their jobs or get fired, the loan must be repaid, typically within 60 days. If
that's not possible, and often it's not since people who lose their jobs don't
tend to have a lot of cash sitting around, the outstanding loan balance is
taxed and penalized as a premature distribution. That can equate to a penalty
of up to 40% or more, depending on your tax bracket, in taxes and penalties in
addition to the amount that you borrowed.
It gets worse,
since you can't put that money back. Whatever the money your borrowed might
have earned in future years is gone forever. If you had borrowed $7000, the average
outstanding loan balance, and assume an 8% return, that loan could cost you
more than $75,000 in future retirement funds.
Never touch your
401(k) plan – like your home equity. If you screw everything else up in
life you will have a roof over your head and food to eat.
Stretch To Buy A
House
Beware,
homebuyers. Everyone around you is conspiring against your financial best
interests.
Your real estate
agent wants you to buy the most expensive house you can: the higher the price
tag, the bigger their commission. Why do you think they always show
you a house that can't afford first? This is because when they show you
the house you CAN afford – you will only remember all the nice things that were
in the house you couldn't afford. The next thing you know you are stretching to
buy a home way out of your price range.
Your friends, and
family also may get into the act, telling you it's okay to stretch for
that mortgage, since rates are so cheap and your income will eventually
rise. Maybe, maybe not, but anyone who's been house-poor knows the
emotional, psychological and financial stress of stretching too far.
Buying too much
house should mean giving up other things you want: vacations, eating out, a
college fund for your kids, a sufficient retirement kitty. However, what it
means to most, intentional or not, is piling on ever more debt, as you borrow
to try to maintain your lifestyle.
5) The Best
Things In Life Are Free
Too often we
equate spending time with a loved one, or with our family, with going somewhere
and doing something that can quite quickly become very expensive. However,
isn't the purpose of the outing just to spend time communicating and
interacting with those that we care about the most?
Learn to be
creative. Board games at home, sports in the front yard, water balloon fights,
$0.99 cent movie rentals and homemade popcorn, theme nights such as "Stay
up as late as you can" or "Slumber party" –
it really doesn't matter what you do, you can still have a lot of fun and in a
lot of cases – it won't cost you a dime.
Laugh At Your
Neighbors' Overspending - Petty? Yes! Helpful? Definitely!
After all, trying
to keep up with the Joneses may be what got you into financial trouble in the
first place. Realizing that the Joneses aren't as well off as they seem -- and
are struggling with debt-related stress as well -- can make keeping up with
them a little less attractive.
The average family
of four has $100,000 of debt between mortgages, credit cards, car loans, etc.
That means that 50% of all families have even more than that in debt.
Currently, consumer debt, not including mortgage debt, is at historic highs
while personal incomes fail to increase fast enough to cover the
shortfall.
So, using your
neighbors financial stupidity as a measuring stick for your own successful
money management is a great way to keep you on track for your goals. Go ahead,
deride the neighbors for financing everything they buy or feeling superior for
winning a better mortgage rate, thanks to lower debt loads.
Never
underestimate the power of bagging on someone to make yourself feel better –
just not to their face. You do still want to be invited to dinner every now and
then.
Remember that your
peace of mind is, ultimately, what living frugally is all about. You are living
today for what you want tomorrow. So, whether you're paying off debt, saving
more or simply living within your means, you're trying to avoid the fear and
stress that plague people who aren't in control of their spending. Remembering
that can help you avoid burnout, stick to your plan and get you to your goal
that much quicker.
6) Money Can't
Buy Happiness
That ole' cliché
is only spoken by those that don't have money and are unwilling to go get it.
It is true, however, that "Money can't buy happiness" but
it sure can buy a whole lot of whatever comes in second.
7) There Is No
Such Thing As Five Easy Payments
Don't get sucked
in by finance schemes. To many times people try and rationalize that they will
use this credit card or that financing plan because it has zero percent
interest. It doesn't matter. If you can't afford to pay cash for the item
immediately, on the spot, then you have no business buying it. Most
likely it is a "want" anyway.
Debt is debt in
all shapes, forms, and fashions. Ultimately, it is the fine print
that traps you and pushes you further away from attaining your
financial goals.
8) A Wad In Your
Pocket Is Better Than Your Pants In Wad
Unfortunately, 50%
of all marriages in America end in divorce. The number one reason is financial
distress. We all want the good things in life and we generally make emotional
decisions versus logical ones. If you want to get out of debt, and be free of
the financial stress that comes along with it, here are seven radical realities
to get your pants out of a wad and put a wad in your pocket.
Reduce Housing Costs. Do you really need a pool in the backyard? Do you really need two extra bedrooms that are being use to store clutter and junk? People generally buy way more house than they need. Reducing your monthly mortgage payments by dropping the size of your house can put a lot more cash into your pocket.
Drop A Car, Gas, Maintenance, and Payments -- imagine the money you could save if you gave up one household car, or found other ways to commute and run errands. Or trade in your car on a two or three year old car to reduce your monthly car notes.
Get (Another) Job. You don't have to work nights and weekends forever, but if a part-time job gave you an extra $300 a month, that's $3,600 you can put toward debt this year.
Quit Your Vice. Your indulgences can add up fast. Giving up your smoking habit can save you thousands of dollars a year. Eating out can add up fast too – so brown bag your lunch and start cooking at home. It isn't convenient – but it's the financial smart thing to do.
Live moderately. Shifting priorities, and locations, can help downsize your lifestyle. .
Let the kids go public. According to the Council for American Private Education, the average cost of private elementary and high school is about $4,689 a year. You are already paying for public school in your annual school taxes – might as well get some bang for your buck. Don't think your child will learn as well as they would in a private school? How about taking some time out of your schedule to work with them at home – it's free and you will create a lot more with your child than just a smart kid.
Tap Your Crap. Garage sells, EBAY and a host of other avenues these days offer you outlets to get rid of all that crap you have accumulated over the years – and it may just generate a few extra bucks towards paying off debt.
I understand your
initial reactions to most of this but once you start adopting some these
guidelines you will begin to discover other avenues to begin to live within
your means and begin to take the steps required to live a happy and wealthier
life.
9) Dress For
Success
All too often I
see people driving expensive cars, dressing in $1000 outfits and wearing enough
jewelry to make Mr. T jealous – yet they don't have a penny saved to their name
and enough debt to declare themselves a federal deficit.
If you ask those
who've already become millionaires what their lives are like, you might be
surprised. I highly recommend the book, "The Millionaire
Mind," by Dr. Thomas J. Stanley, author of the best seller "The
Millionaire Next Door." He surveyed nearly 1,000 of the nation's
millionaires, and what he found may surprise you.
First, he sorted
out those who were "balance-sheet" millionaires and
those who simply lived an affluent lifestyle while burdened with debt.
Balance-sheet millionaires tended to own their homes without a mortgage, while
those who merely lived a wealthy lifestyle carried jumbo loans. Millionaires
with assets between $2 million and $5 million live, on average, in homes that
are valued at $355,000 (based on the Internal Revenue Service database
figures).
The millionaires
in his survey tend to have started businesses, and have built their wealth by
finding a profitable niche. They tend to love what they do and are motivated by
building the business, not by building wealth.
They live
comfortable lifestyles, but are not wasteful. In a fascinating example, most of
the millionaires in the survey report they buy expensive shoes, but almost all
have them resoled. For the most part, they remain married to supportive and
responsible spouses who run economically productive households -- from clipping
coupons to buying household supplies in bulk. Bottom line: They spend
less than they earn.
When it comes to
investments, these millionaires look to the stock market primarily as a place
to grow capital once their businesses have matured. They are not
speculators in the markets, rarely visit a casino and almost never buy lottery
tickets. Of course, you might figure that they don't need to
speculate, since they're already wealthy. But perhaps these stable qualities
are the reason they got wealthy in the first place.
However, if you
put a pair of pantyhose on your head and ask for money – that generally works
as well.
10) Live Like No
One Else Today
As Dave Ramsey
often states: "If you live like no one else today – you will
be able to live like no one else tomorrow." Rich is good.
Retiring that way is easy. You just have to commit to a lifestyle of being
financially smart and of being a good saver. This, of course, will cause you to
be a sworn enemy of the credit card companies, a villain to the banks and
ultimately ostracized by the "Jones'" for not keeping up with them.
But in the end it
will be you that is laughing all the way to the bank with a wad of cash in your
pocket, an emergency fund in the bank, a steady income from your investments to
live on and not a worry in the world. Now, wasn't the
sacrifice in the beginning worth it?
No comments:
Post a Comment