Debt is a product that is bought and sold, NOT a tool to build wealth. I know some of you, especially those who have been classically trained in finance or similar fields, think I'm nuts by suggesting this. I'm sure your professors taught you that debt is like a double-edged sword, wielding power as a tool, or cutting you if used incorrectly. Or it's described as a lever to use in order to do things that we could otherwise not do, like buy a car, house, or go to school. I've heard it broken down by category: good versus bad debt. While all of these explanations and metaphors are nice they still don't change the fact that debt in any form represents risk. 100% of the homes foreclosed on have a mortgage (or two or three) on them. 100% of the cars repossessed have a car payment. The vast majoriy of the wages garnisheed are because of delinquent debts of some form or another. In case you're wondering, no I'm not trying to be a wise guy or make fun in any way, but let me remind you that debt never sleeps, it never goes on vacation, it never goes away until it is paid.
Debt has been very well marketed, popularized and accepted over the last half century. This is particularly true over the last thirty years. At first debt was a way to buy a house or possibly a car that we couldn't pay for all at once. Then came the student loan and the credit card industry. Now days you can't turn around without being hit with 'buy now, pay later' ads for everything. So let's talk about the different packaging debt is sold in. You'll notice that I didn't include 'good' in my description of debt. This is because of the reasons I stated above. I'm sure you all agree that some forms of debt are just flat out ugly. This includes payday loans and of course IRS tax debt. The interest rates of payday loans are notoriously high and breed a horrible dependent cycle that is very difficult to break. If you think that is ugly, try owing the government money. IRS debt is probably the worst kind of debt to be in. This is simply because without notice your checking account can be raided if you don't pay. While the government will work out payment plans if you go to them, they are unforgiving if they have to find you. This is the only kind of debt that you can literally be thrown in jail for not paying. If you are self-employed or a contract worker don't fool around with this and pay your taxes.
If that was 'the ugly', what do I consider 'the bad'? This would include all other consumer debt, credit cards, car loans, student loans. Again most of you would agree that credit card debt is bad. Some of you may be wondering why I lumped the ever popular car loans and student loans into the bad. Well, because of the mind set that is associated with them, that they are necessities of life. "You can't have a car without a payment." And "you can't go to college without student loans" are the mantras of the middle class. These two things hold you back from achieving real wealth on an average income. The average car payment in America is almost $500 per month. Simply by deciding to keep and invest that money, instead of paying it to the finance company over your working lifetime, you will amass some serious coin. Watch this for a more thorough explanation. It will totally blow your mind! Now as for student loans, I consider them bad for a few reasons. Like IRS debt they are not bankruptable. They are with you until either you pay them off or die. The other hidden dangers are that they are very easy for young college students to get and the delay in repayment while you're in school acts like a bubble that bursts with a vengeance six months after you graduate. I'm not going to go into all the details because that is a whole other topic by itself.
Last but not least, and the one area I will probably get the most flack for, the 'not so good' debt. This is of course the home mortgage. I know some of you are baching at the idea that mortgage debt is not good, after all the interest is tax deductible. While the idea doesn't make it entirely bad or ugly, doesn't make it good either. It is debt after all, and to be totally debt free is exactly that- FREEING. Again this is a big topic that I will cover in more detail another time. For now, I want you to stop and think for a moment. What would your life be like if you didn't have a mortgage payment? What would you use that money on? Dream a little bit. It's hard to imagine, but think of all the money you spend, give and save.
This process of getting out of debt isn't something that happens overnight. It takes hard work and dedication to achieve these things. I can tell you that having tasted the freedom of having nothing but a mortgage payment, it is worth the time and energy. I now look forward to the future to being completely free of the mortgage too. No matter where you are in life, you too can break the shackles of debt. I'm here to walk with you on your journey, one step at a time.
Friday, June 25, 2010
Tip & Quotes of the Week June18-25
Life Insurance
Life insurance is probably the one thing that most everyone needs but many people think they can't afford or never bother to think about until it's too late. Basic human instinct is to procrastinate doing things. Insurance is easily one of those things that we say 'oh, we'll get around to it someday'. Well guess what someday might be too late. Be responsible to those you love and get it!
Homework:
Now if that wasn't blunt enough, try this. If you die today, would your family be prepared financially to handle the storm? These things happen every day to someone, we just never think it will be us. Please take action and make sure you have the right type of insurance and of course, enough of it.
"It is unwise to hope for the best without preparing for the worst." Anonymous
Friday, June 18, 2010
The Basics of Life Insurance
Ahhh insurance... the thing we all love to hate. Since the topic of insurance is too massive to cover in one week, right now I'm only going to talk about life insurance. For some reason life insurance is one of those things that people love to procrastinate getting. This is especially true if you are in your twenties or even thirties. This is just irresponsible, to say the least. You might think, "but if I get life insurance, I'm going to die." Well guess what, we are all going to die someday. When (not if) you die, do you really want to leave your loved ones in a pinch? I shouldn't have to brow-beat you too much because I'm sure you all agree that this is something that the vast majority of people need. As a disclaimer, I am not an insurance expert and don't pretend to know all the nitty-gritty of writing policies. This advice is for educational and informational purposes only. Please see your trusted insurance provider for personal quotes and service. If you live in Utah and are in need of reliable, honest insurance help, I know some highly qualified agents who could help you.
Insurance, simply put, is transferring risk from you to the insurance company. Whether it's home, auto, life, health, disability, identity theft, liability, or long-term care; they all do the same basic thing- transfer risk. Because of this, insurance is not meant to be an investment vehicle- avoid these types at all costs. The fees are typically very high and the returns usually mediocre at best. So keep in mind, there are many types of life insurance, some good and some not so good.
Let's talk about the many types of life insurance available. It can be quite confusing if you don't know the terminology. There are two basic types of life insurance, temporary or term level and permanent or whole/universal level. Whole, universal or cash value policies are all pretty much in the same boat of permanent insurance (yes, they do have differences), but as a whole they are very expensive, and horrible investment products. The only people who think these are a great idea financially, are those who sell them. Typically the first few years of premiums that you pay go straight to the agent as commission making them highly profitable for agents, so beware. These policies are typically sold as a way to save and invest in your future, because over time they build cash value (after the first few years that is). Here's where the big problem comes in, when you die, the money that you 'saved' in your insurance policy goes away. The insurance company pays the face value of the policy and your built up cash value is null and void, yes, they keep it! It does not get passed on to your heirs. For these reasons steer clear of them. I've never heard any financial expert or guru independent from the insurance industry endorse this type of insurance. There are very few instances that I would even consider keeping or getting such a policy. My exceptions are if you can't qualify for any other type of life insurance because of a major health event in your past or if you are in a profession that is considered too high risk to be insurable. Again check with your trusted insurance agent for specifics about what you qualify for.
On the other hand, term insurance is the way to go. Here are some of the benefits. First, you can choose how many years you want or need coverage for, anywhere from 10-30 years. Second, the premiums are dirt cheap (especially compared to whole life policies). A 20-30 year policy with 8-10 times your income is usually adequate in replacing you, financially speaking. In general, whole life policies are so expensive that you can't afford to buy the full 8-10 times your income so not only do you end up with a crumby product, but you're under-insured at the same time. Lastly, I recommend getting coverage outside of your work. It's usually cheaper and if you leave or lose your job for any reason you still are covered.
That said, let's talk about who needs it and how much you need. If you are single with no one depending on your income (ie children, parents, siblings), you are in the small group of people who don't need to carry substantial amounts of life insurance. Chances are your work even pays for a minimal $10-50k policy for you. This would be enough to cover any medical and burial expenses you leave behind. If however you have children, a spouse, or anyone else who depends on your income to survive, YOU NEED LIFE INSURANCE. Your death would be hard enough to deal with emotionally for your loved ones, why would you leave them in dire financial straits as well? A word of warning, don't think that you stay-at-home moms or dads won't need life insurance simply because you don't bring a paycheck home. Think about all the costs of childcare, cooking, and cleaning. They cost a considerable amount to hire out. Even though I'm a stay-at-home mom, I still have a $250k policy that would help my husband with our children in the event of my death. Also, as a side note (and this should really be a no-brainer) don't buy life insurance for kids. It's not a good way to save for college. Just get a child rider for your term policy. This will cover any expenses in the event that heaven forbid something did happen.
One last thing just to drive the point and importance of life insurance home. I heard a story of a young man in his late 20's, who had been married for a few years. He and his wife were expecting their first child. Sadly, he was diagnosed with a brain tumor and passed away mere days before that child was born. In his final days, he was at peace because he knew his wife and baby would be taken care of, all because he had taken the time to get a term life insurance policy in place a few years earlier. Please, you never know when you will die, so be prepared for when it happens.
Insurance, simply put, is transferring risk from you to the insurance company. Whether it's home, auto, life, health, disability, identity theft, liability, or long-term care; they all do the same basic thing- transfer risk. Because of this, insurance is not meant to be an investment vehicle- avoid these types at all costs. The fees are typically very high and the returns usually mediocre at best. So keep in mind, there are many types of life insurance, some good and some not so good.
Let's talk about the many types of life insurance available. It can be quite confusing if you don't know the terminology. There are two basic types of life insurance, temporary or term level and permanent or whole/universal level. Whole, universal or cash value policies are all pretty much in the same boat of permanent insurance (yes, they do have differences), but as a whole they are very expensive, and horrible investment products. The only people who think these are a great idea financially, are those who sell them. Typically the first few years of premiums that you pay go straight to the agent as commission making them highly profitable for agents, so beware. These policies are typically sold as a way to save and invest in your future, because over time they build cash value (after the first few years that is). Here's where the big problem comes in, when you die, the money that you 'saved' in your insurance policy goes away. The insurance company pays the face value of the policy and your built up cash value is null and void, yes, they keep it! It does not get passed on to your heirs. For these reasons steer clear of them. I've never heard any financial expert or guru independent from the insurance industry endorse this type of insurance. There are very few instances that I would even consider keeping or getting such a policy. My exceptions are if you can't qualify for any other type of life insurance because of a major health event in your past or if you are in a profession that is considered too high risk to be insurable. Again check with your trusted insurance agent for specifics about what you qualify for.
On the other hand, term insurance is the way to go. Here are some of the benefits. First, you can choose how many years you want or need coverage for, anywhere from 10-30 years. Second, the premiums are dirt cheap (especially compared to whole life policies). A 20-30 year policy with 8-10 times your income is usually adequate in replacing you, financially speaking. In general, whole life policies are so expensive that you can't afford to buy the full 8-10 times your income so not only do you end up with a crumby product, but you're under-insured at the same time. Lastly, I recommend getting coverage outside of your work. It's usually cheaper and if you leave or lose your job for any reason you still are covered.
That said, let's talk about who needs it and how much you need. If you are single with no one depending on your income (ie children, parents, siblings), you are in the small group of people who don't need to carry substantial amounts of life insurance. Chances are your work even pays for a minimal $10-50k policy for you. This would be enough to cover any medical and burial expenses you leave behind. If however you have children, a spouse, or anyone else who depends on your income to survive, YOU NEED LIFE INSURANCE. Your death would be hard enough to deal with emotionally for your loved ones, why would you leave them in dire financial straits as well? A word of warning, don't think that you stay-at-home moms or dads won't need life insurance simply because you don't bring a paycheck home. Think about all the costs of childcare, cooking, and cleaning. They cost a considerable amount to hire out. Even though I'm a stay-at-home mom, I still have a $250k policy that would help my husband with our children in the event of my death. Also, as a side note (and this should really be a no-brainer) don't buy life insurance for kids. It's not a good way to save for college. Just get a child rider for your term policy. This will cover any expenses in the event that heaven forbid something did happen.
One last thing just to drive the point and importance of life insurance home. I heard a story of a young man in his late 20's, who had been married for a few years. He and his wife were expecting their first child. Sadly, he was diagnosed with a brain tumor and passed away mere days before that child was born. In his final days, he was at peace because he knew his wife and baby would be taken care of, all because he had taken the time to get a term life insurance policy in place a few years earlier. Please, you never know when you will die, so be prepared for when it happens.
Tip & Quotes of the Week June 11-18
The Irregular Income
Those who are self-employed or have irregular incomes due to commissions or seasonal work have a real challenge. You are most at risk for not having a plan (aka a budget) because you either don't know how to plan or you think it can't be done. Not having a plan in the short term can be detrimental to your long-term goals. For this reason it's more important for you to have a budget. It's not necessarily harder, it's just requires a different approach.
Homework:
No matter where you are in your budgeting ability, start today to make little changes. Remember, if you can't learn to live on a budget, building wealth will be very difficult if not impossible.
"Budget: a mathematical confirmation of your suspicions." AA Latimer
"The poor man's budget is full of schemes." Proverb
"For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it?" Luke 14:28
Friday, June 11, 2010
The Irregular Income Earner
I have briefly mentioned this in a previous post a few months back (go here to read it) when I talked about budgeting in general. Today, as per request, I want to go into more detail about budgeting when you have an irregular income. As I've said earlier, it's actually more important for you to have a plan because your income can vary so widely. Whether you are paid on commission or seasonally this post is for you.
So here's what I suggest. Start by calculating the base income that you need to meet all you basic needs and minimum payments. Then go over your last year of earnings. What is the lowest amount you earned in a given month? If this amount is lower than the minimum you need, start here. I suggest having a savings account specifically for the 'hills and valleys' you see in any given year. This is separate from your emergency fund. Consider it a reserve account for those months you don't make enough. On months that you make more than enough, you would replace money that was taken out in a previous month.
You might be thinking, what do I do if I have several low months in a row and my account runs dry? In this case, you have two choices. You can find another source to boost your income or you can reduce your outgo. If you find yourself still with not enough, be sure to remember the four walls principle. Prioritize food, housing, utilities and transportation- the basics. You might face the reality that not everyone will get paid. Draw a line where the money runs out that month because that's all that you can do. Obviously, this is a temporary measure because you could never go on like this indefinitely. If things get that bad, you need to solve your income crisis. No amount of budgeting will make up for a lack of income. There's only so much you can sell or cut back on. You'll certainly need to make a plan for the short term, but long term you'll need to plan for what you want to do with your life. Does this involve further training or schooling of some sort? Make a plan and do it.
Now let's look at the times of plenty. The natural tendency is to get sloppy during these times. These are the times to build that reserve account and pay down debt aggressively. Don't fall into the 'we need it' or 'we deserve it' mentality. I'm reminded of the story of Joseph and The Pharaoh of Egypt in the Old Testament. Remember there were 7 years of plenty before there were 7 years of famine. Egypt was the only nation prepared and were able to share with their neighbors because of it. Preparation is key, especially if you have an irregular income. It can be a little more challenging, but it is doable. Neither good times nor hard times last forever. Chances are you will experience both many times throughout your life.
So here's what I suggest. Start by calculating the base income that you need to meet all you basic needs and minimum payments. Then go over your last year of earnings. What is the lowest amount you earned in a given month? If this amount is lower than the minimum you need, start here. I suggest having a savings account specifically for the 'hills and valleys' you see in any given year. This is separate from your emergency fund. Consider it a reserve account for those months you don't make enough. On months that you make more than enough, you would replace money that was taken out in a previous month.
You might be thinking, what do I do if I have several low months in a row and my account runs dry? In this case, you have two choices. You can find another source to boost your income or you can reduce your outgo. If you find yourself still with not enough, be sure to remember the four walls principle. Prioritize food, housing, utilities and transportation- the basics. You might face the reality that not everyone will get paid. Draw a line where the money runs out that month because that's all that you can do. Obviously, this is a temporary measure because you could never go on like this indefinitely. If things get that bad, you need to solve your income crisis. No amount of budgeting will make up for a lack of income. There's only so much you can sell or cut back on. You'll certainly need to make a plan for the short term, but long term you'll need to plan for what you want to do with your life. Does this involve further training or schooling of some sort? Make a plan and do it.
Now let's look at the times of plenty. The natural tendency is to get sloppy during these times. These are the times to build that reserve account and pay down debt aggressively. Don't fall into the 'we need it' or 'we deserve it' mentality. I'm reminded of the story of Joseph and The Pharaoh of Egypt in the Old Testament. Remember there were 7 years of plenty before there were 7 years of famine. Egypt was the only nation prepared and were able to share with their neighbors because of it. Preparation is key, especially if you have an irregular income. It can be a little more challenging, but it is doable. Neither good times nor hard times last forever. Chances are you will experience both many times throughout your life.
Tip & Quotes of the Week June 4-11
Spoiled Children
When I think of spoiled children I think of the kid screaming and throwing a fit in the grocery store. We've all been there and heaven knows my older daughter has done it. The old adage, 'spare the rod spoil the child' is often mis-interpreted. Spoiling your children is not good in terms of worldly wealth. No, I'm not advocating using 'the rod' on children, that's down-right ridiculous. I take it to mean spoiling them with love, time and attention. Things that money won't buy. Giving a child everything they could possibly wish for, leads to adults who can't stand on their own and whose lifestyles are still subsidized by their parents. Stop the cycle today!
Homework:
By now you are probably sick of me talking about kids and money. I just can't help myself because there are huge problems facing the rising generation today. Developing character in your child is probably the hardest part about being a parent, especially if you weren't taught by your parents. If that is the case, teach your children the lessons you didn't learn.
"My father didn't tell me how to live; he lived and let me watch him do it." Clarence Budinton Kelland
"Some children are spoiled and it is not their fault, it is their parents." Roald Dahl
"Teach your children values and do not give them everything they want." Peter Buffett
Friday, June 4, 2010
A Parenting Lesson From Warren Buffett
I know, I know you're probably thinking, "another week of children and money? enough already!" I couldn't help myself because I saw a very interesting and informative interview with Warren Buffett and his son Peter. It got me thinking, how do you successfully raise children, when you have money?
We all know Warren Buffett is one of the wealthiest people in the country and currently ranked 3rd in the world, worth an estimated $47 Billion. At the age of 79, he is The Oracle or Sage of Omaha. He is world renown for his savvy investment firm Berkshire Hathaway, his philanthropy and of course his frugality. While I'm not endorsing anything he has done or said, when it comes to children, he did a great job in my opinion. He raised 3 children (although he was only a millionaire at the time) to be successful adults in their professions. I heard him say that when it comes to children, you should give them enough money to do something, but not enough to do everything. That's just what he did with his children.
When his youngest son Peter was in college he was given 600 shares of stock in Berkshire Hathaway. At the time, in the 70's, this was worth about $90,000 and a proverbial drop in the bucket compared to the Buffett fortune. Peter, who wanted to be a musician, used this money to start his very successful music career. Oddly enough, if he hadn't done anything with the stock, it would be worth several million today, but Peter doesn't regret that fact at all. His father taught him how to work and follow his passion in life. Above all the Buffett children were taught the core values that money is just money and not everything. As a result, they have the character and independent identities to withstand the immense weight of their father's fortune.
Another great example of this was in the mid 90's Warren announced he was going to give away his fortune before he died. To jump start that, he gave each of his children a billion dollars (yes, with a B) to give away to whatever charity they wanted.
Now obviously we aren't Warren Buffet and it's not likely than anyone reading this will amass the kind of wealth that he has. The lesson, however, is the same, just on a smaller scale. Teach your kids to have the character to withstand the responsibility of their inheritance, whatever the size. If you don't they will crumble under pressure and it will be a curse instead of a blessing.
We all know Warren Buffett is one of the wealthiest people in the country and currently ranked 3rd in the world, worth an estimated $47 Billion. At the age of 79, he is The Oracle or Sage of Omaha. He is world renown for his savvy investment firm Berkshire Hathaway, his philanthropy and of course his frugality. While I'm not endorsing anything he has done or said, when it comes to children, he did a great job in my opinion. He raised 3 children (although he was only a millionaire at the time) to be successful adults in their professions. I heard him say that when it comes to children, you should give them enough money to do something, but not enough to do everything. That's just what he did with his children.
When his youngest son Peter was in college he was given 600 shares of stock in Berkshire Hathaway. At the time, in the 70's, this was worth about $90,000 and a proverbial drop in the bucket compared to the Buffett fortune. Peter, who wanted to be a musician, used this money to start his very successful music career. Oddly enough, if he hadn't done anything with the stock, it would be worth several million today, but Peter doesn't regret that fact at all. His father taught him how to work and follow his passion in life. Above all the Buffett children were taught the core values that money is just money and not everything. As a result, they have the character and independent identities to withstand the immense weight of their father's fortune.
Another great example of this was in the mid 90's Warren announced he was going to give away his fortune before he died. To jump start that, he gave each of his children a billion dollars (yes, with a B) to give away to whatever charity they wanted.
Now obviously we aren't Warren Buffet and it's not likely than anyone reading this will amass the kind of wealth that he has. The lesson, however, is the same, just on a smaller scale. Teach your kids to have the character to withstand the responsibility of their inheritance, whatever the size. If you don't they will crumble under pressure and it will be a curse instead of a blessing.
Tip & Quotes of the Week May 28-June 4
Teach Them to Fish
In keeping with what I talked about last week, teach your teenagers about money. If you don't want them always coming back to you for money, teach them how to fish for themselves. This is a very important principle to learn before they leave home. Teach them how to work, earn and manage that money. Build those financial muscles at home!
Homework:
Even if you have young teenagers, they can still work and earn money by babysitting or cutting grass. This isn't to say that you will never give them money. I believe that you should give them the money that you would normally spend on them for clothes, gas and anything else that you feel generous to give. They then have to learn how to budget that money throughout the month. They will learn pretty quickly that money is finite and will have already practiced its management before they enter 'the real world'.
"If you want to recapture your youth, just cut off his allowance."Al Bernstein
"Little children, headache; big children, heartache." Italian Proverb
"When I was a boy of fourteen, my father was so ignorant I could hardly stand to have the old man around. But when I got to be twenty-one, I was astonished at how much he had learned in seven years." Mark Twain
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