YOUR DEBT ELIMINATION
Your Debt Elimination
Table of Contents
Start Now 4
Let’s Transform You 4
How This System Manual Is Organized 5
The Four Keys to YOUR DEBT ELIMINATION Success 6
Make the Commitment 7
Frequently Asked Questions About Getting Started 8 Whose Wealth Is It? 10
Who’s Teaching Us How to Use Our Money? 10
The Forces at Work Against Your Financial Success 11
Who’s Scripting Your Dreams? 12
Keeping Up with the Jones Is Insane! 15
Why Get Debt-Free? 16
Till Debt Do Us Part 19 Credit…Your Financial Enemy... 21
Why Are We Obsessed with Using Credit? 21
Dis-Card Your Debt 22
Operate on a 100 Percent CASH Basis 25
How Credit Really Affects You 27
Using Credit Actually Lowers Your Standard of Living 28 A New Financial Attitude 29
New Seeds 29
The Three Stages of Transforming 29
What’s It Like to Operate on Cash? 31
The Monthly Payment Trap 32
Got Change? 37 Debt-Elimination System 40
The Cascading Debt-Elimination System 40
When Will You Be Completely Debt-FREE? 41
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Let’s Get Down to Paying Off Your Debts 44
Watch the Power of Mathematics Working for You 47
Frequently Asked Questions About Debt-Elimination 51 Your Margin ™ 56
Creating Your Margin 56
Finding Margin Money 57
From Snowflake to Avalanche 58
Frequently Asked Questions About the Margin 67 Maximize Your Margin 68
Manage Your Spending to Maximize Your Margin 68
Impulse Buying - The Wealth Destroyer 69
Shrinking Santa’s Stocking 73
Happiness from the Depression 74
The C.I.A. Is Out to Get Your Money 75
Don’t Give Up on Giving 76
A Day in the Life of a Graduate 78
Keeping Car Costs Under Control 80
The Millionaire’s Guide to Buying a Used Car 81
Protecting Your Auto Investment 82
Frequently Asked Questions About Financial Freedom 83 Building Your Wealth 86
The Building Blocks to Wealth 86
Asset or Liability? 88
Dollar Cost Averaging - The Smart Investor’s Way 91
Mutual Funds - My Recommended Investing Vehicle 92
Loads, No-Loads…What Are They? 96
Understanding the Prospectus 97
Mutual Fund Categories 99
Locating and Investing in the Best Mutual Funds 102
Autopilot Investing - Index Mutual Funds 103
Risky Business 107
The “Market-Timing” Question 108
Should You Use an Investment Adviser? 109
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When Can You Retire? 112
Now You Can Help Those Who Need You 114
Frequently Asked Questions About Wealth-Building 115
The Realities of Real Estate 118
Building a Real Estate 119 Building Your Income 125
Career Strategies for Debt-Free Living 125
You’re Not the Boss of Me! 125
The Value of Currency 129
Is a Second Job a Good Idea? 129
What If You Love Your Job 130
Negotiating Skills 131
Develop Creative Solutions 132 Appendix A: Personal Financial Statements 134 Appendix B: More Tools to Help You Succeed 154
Spending Journal 154
Accelerator Creator Quiz 155
Calculating Your Debt Payoff 157
Freedom Fighter Form 158
Debt-Elimination Time Calculator 159
More Tools to Help You Succeed 160
Your Financial Freedom Lifestyle To-Do List 161
Monthly Savings Required to Reach Your Financial Freedom Goal 162
The Truth About Your Mortgage Interest Tax Deduction 163
IRA Growth Table 164
Additional Principal Prepayment Forms 165
A Horror Classic: “The Loan Principal That Wouldn’t Go Away” 165
Secrets, Myths, and Realities of Achieving Financial Independence 167
Notes
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Starting the Program
“Running into debt isn’t so bad. It’s running into creditors that hurts.”
You are ready. You’ve ordered this program, waited anxiously for it to Hundreds of thousands arrive, and the Your Debt Elimination System is finally here. Upon of people have walked opening the box you are presented with a series of audio sessions, down the road you’re starting down today. videos, software, and reading material. You’ve gotten so many items it feels a little like your birthday. It also feels a little overwhelming.
You might be thinking, “Wait a minute. I’m already in debt. Was it such a smart decision to get all this stuff?” That’s a common emotion, but it will quickly fade as you put the system to work and see how the printed, video, software, and audio information reinforce each other. Together they’ll equip you to make the attitudinal and behavioral changes necessary to achieve and sustain a debt-free and wealthy future. Actually, the average family’s investment in this program is usually recovered, in the form of interest savings and future wealth, the first month they put it into action.
The First Step
As the Good Witch told Dorothy, when starting her on the Yellow Brick Road to Oz, “It’s always best to start at the beginning.”
Let’s Transform You
Congratulations! You’ve just made one of the most important decisions you will ever make in your life. You’ve begun a transformation that will take you from owing your life to owning your life … from making your creditors rich to Building real wealth for you and your loved ones.
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You’ve made an investment in this program. And as with any investment, you must be wondering, “What will my return be?” “Was this a wise choice?” Unlike a car or a leather jacket that offers no return, the Your Debt Elimination System (YOUR DEBT ELIMINATION) will be like a stock or mutual fund that reaps benefits for years to come.
If you haven’t yet viewed the Quick Start DVD, please do that before continuing in this manual. The video will show you the most efficient and effective way to use all the system’s materials.
As of today you are as good as debt-free!
What is the goal of the Debt Free System? “To get me out of debt, right?” Partly, yes. This system is designed to allow you to pay off all of your debts and be completely free of financial obligation. But, unlike other debt reduction programs, Your Debt Elimination has another benefit. This program will teach you how and why you got into debt, so you can avoid it in the future. And it will teach you how to build wealth - real wealth ! Building wealth will be an almost unavoidable consequence of following the system to complete debt freedom. You see, when it comes to building wealth, the missing link for most people isn’t a lack of investing savvy, it’s a lack of money to invest. YOUR DEBT ELIMINATION gives you back the money you need to invest for future wealth.
But maybe the most exciting benefit of the Your Debt Elimination System is that it gives you a genuine opportunity to start over - a chance to rebuild your life to your own specifications. How many other programs offer you an opportunity to create a new vision for your life … and then give you the strategy to actually get you there?
Applying the Your Debt Elimination System to your life won’t require an extra penny of income. This system isn’t magic; it’s a rerouting and refocusing of your present income to make it work more effectively for you rather than for your creditors. So you don’t have to look for some get-rich scheme. This program will make you rich with the money you’re already earning.
If you faithfully follow this program, you will be financially independent!
Without having to work for it. In other words, I want to help you achieve, in as short a time as possible , a lifestyle where you own your home, your car(s), and all the other “stuff” in your life - and you have enough money in investments that you can live off the income those investments generate.
Can what you’ll learn in this system manual do that for you? Yes! The Your Debt Elimination System can save over a hundred thousand dollars in interest for the average mortgage-paying American
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family and have them completely out of debt - including their mortgage - in less than seven years. Then it can help them build up hundreds of thousands to more than a million dollars in simple, safe investments by the time they would have normally paid off their mortgage. And the YOUR DEBT ELIMINATION System shows them how to do all this with the money they already bring home!
That’s exactly what the system will do for you.
Your Debt Elimination System : Time, Discipline, Internal Change, and Work.
Time: This icon will designate those areas in the program that you can expect will take some time.
In order to achieve success in this system, you’ll need to spend some time. It takes time to work through the components of this YOUR DEBT ELIMINATION System. It takes time to learn new ways of thinking, to “change your mind” so to speak. It takes time to find all the ways to save money in your unique life. And it takes time to decide how you want to invest … something you probably never had to worry about before.
Discipline: This icon will identify some useful tips for strengthening your discipline to stick with the program.
Some of the elements of this system are going to require discipline. That’s probably not a surprise to you, but don’t worry if you don’t have a lot of self-discipline now. By the time you complete this system manual, you’ll have the motivation and tools you need to discipline yourself to get debt-free and stay that way!
♥ Internal Change : This icon will point out some important inner changes you’ll need to adopt in order to be successful in this program
The only way you are truly going to change your financial life is to commit to changing the thinking patterns that got you in debt in the first place. As Earl Nightingale said, “We become what we think about.” The Bible puts it slightly differently in the Book of Proverbs: “… as a man thinks in his heart, so is he.”
Work: This icon will guide you to the written or action exercises you’ll need to do in order to implement this system.
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If you could simply read a book or listen to a CD and transform yourself from Your Debt Elimination, a lot fewer people would be in debt! It requires a little more effort than simply reading or listening. You have to DO it. This system manual will show you how.
Whenever you see these icons, or see the letters YOUR DEBT ELIMINATION, you’ll remember that Time, Discipline, Internal Change, and Work are the keys to success.
But before we can even begin talking about success, I want you to take a sober moment, reach deep inside, and commit yourself to this process. Then we’ll begin the process of transforming your debt into wealth.
Make the Commitment
It may seem a bit silly to you, but declaring that you are seriously committed to completing this program may be the most important step you take toward achieving personal wealth. You are stating here and now that getting yourself out of debt and becoming financially free is a serious goal to you … more than that, it’s a goal you are passionate about, down to the marrow of your bones.
How many times have you heard someone say…
• I’d like to lose weight? • I wish I could pay off these bills? • I hope to become a professional athlete? • I want a nice car and home? • I should start exercising?
With words such as “like,” “wish,” “hope,” “want,” and “should,” these people are doomed to never achieving their goal. Why? Because a passionate, burning commitment is the most important factor in achieving a goal. Wishing or hoping does not constitute a commitment. In fact, it doesn’t even constitute a goal. A goal is a definite destination, with a solid target date for accomplishment, built on a realistic plan for its achievement. It’s no mere emotion, it’s a fixation!
Do you really want to get out of debt? Are you sure? Are you willing to discipline yourself in whatever ways might be necessary to achieve that goal? Then go ahead. Find the “Open This Envelope First” Information Kit that came with your Your Debt Elimination System . Pull out the Declaration of Independent Wealth certificate and dedicate yourself to a better financial future.
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Frequently Asked Questions About Getting Started
Question: I just use my credit cards during the month and then pay them off as soon as the bills come in. Why do I have to cut them up?
Answer: The truth is that using a credit card - even with the intention of paying the whole thing off when it comes in - causes the average consumer to spend 30 percent MORE than they would if they were writing a check or laying down cash, because plopping down the plastic is too painless and too convenient for impulse buying. Impulse buying destroys your financial health.
Question: Isn’t it true that credit is OK if they give me a low interest rate?
Fact: The credit companies are not giving you anything. The only thing they are giving you is an opportunity to pay more money for items than they are worth . You still have to pay the creditors back with your own money. You simply have to pay more than the price of whatever you purchased. Using credit just makes things cost more.
Question: I can understand paying off my credit cards, but I’ve got a great mortgage rate. Why should I pay my home loan off faster?
Answer: You only pay that “low” interest rate if you pay off the entire loan amount in the first year. Most people obviously don’t. Want to know what your effective interest rate really is? Look on your monthly payment coupon. See what percentage of that payment reduces the principal balance of what you borrowed and what percentage is interest. You’ll likely find the interest component is more than 90 percent of your monthly payment. So you’re not enjoying a 5, 6, or 7 percent loan, you’re enduring a 90 plus percent loan. The result … typically, after seven years, you’ve only paid 8 percent of the balance and still owe 92 percent on your mortgage.
According to the National Association of Realtors ®, most people buy a new home on an average of every seven years, trading up for another mortgage. If you do this three times (for a starter home, step-up home, and your dream home), you’ll still owe 92 percent on your third home mortgage after 21 years. After 21 years on the YOUR DEBT ELIMINATION System, you could own your home outright and have hundreds of thousands of dollars in investments. Which plan would you choose? A lifetime of debt or a paid-off home and lots of money?
Question: My spouse will never go for it. Our lifestyle is too important. What can say to convince him or her?
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Answer: This is one of the most common questions with the YOUR DEBT ELIMINATION System. In the best case scenario, you and your spouse will go through this system together, but more often than not, it is one spouse who “discovers” YOUR DEBT ELIMINATION.
Question: Won’t my kids have a lousy childhood if they don’t get all the latest toys?
Answer: By spending yourself into debt, you are jeopardizing your children’s future. Not only are you giving their inheritance to the credit companies, but you are also teaching them the wrong things about money. You are dooming your kids to a lifetime of debt themselves.
Question: I am going to retire in a few years. Do I really need to do this?
Answer: By following the YOUR DEBT ELIMINATION System, you may be able to retire earlier and have a higher quality retirement than you would by continuing to give your wealth to the credit companies.
Question: Am I going to have to become a miser to make this program work? Will I have any enjoyment in my life for the next five to seven years?
Answer: YOUR DEBT ELIMINATION is not a program of austerity. We aren’t going to tell you to reuse your plastic bags or dry your clothes outside on the lawn to save money. This program is about YOU having control over your finances , about you making informed spending decisions. It’s a managed-spending plan, not a non-spending plan.
Question: Can’t I just pay a little extra on each credit card each month?
Answer: No. If you were the General of an army, you wouldn’t send 10 soldiers to each city to conquer a country. You would mass as many soldiers as possible to go into a city and take it over, gather the resources, and go into the next city. This “massing of the forces” is the best way to win the war on debt.
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Whose Wealth Is It?
Who’s Teaching Us How to Use Our Money?
In many ways, your current financial situation is not entirely your fault. Most people are NEVER taught how money works.
Even though many of us go to college, manage checking accounts, and earn tens of thousands of dollars a year, we are ignorant. We are not taught the basics of:
V Credit Management V Investments V What to do with our paycheck V How to plan our financial life V How to plan for some kind of retirement
Most Americans were never taught - by family or by the educational system - how to manage their financial resources throughout the various stages of their lives. So they’ve become the unwitting students (and slaves) of Madison Avenue advertisers, the Holly- wood culture builders, and the merchants and money-lending companies behind them.
Think about it. Where did you receive your personal financial training? Haven’t you really been trained by TV and other advertising media on how you should live, what you should buy to show that you’ve arrived at a certain status level, and what kind of “American Dream” you should be chasing?
You are being manipulated by the most powerful influencers on the planet. And once these
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advertising wizards manipulate you into spending your income, the credit companies step in to help you spend beyond your income. They want you to charge up and pay down purchases for your entire life! If you don’t wake up and change your spending habits now, you’ll be manipulated into golden- years poverty.
Most of us are in the same boat. Credit is positioned as a boon to the economy. We’re told that it helps the economy when people buy things on credit. And Madison Avenue is right there waving the flag. One car company ran an ad after the 9/11 attack on the World Trade Center. The ad encouraged viewers to “Keep America Rolling.” Not only do the credit companies want you to buy things on credit, but their advertising consultants want you to feel un-American if you don’t.
The Forces at Work Against Your Financial Success
It seems that almost everyone wants to be a millionaire. You find them on game shows, in line for the lottery, and sending in sweepstakes entries. The ironic thing is that many people actually incur thousands of dollars in debt trying to “strike it rich.”
What these people don’t know is that they are most likely already rich. They just don’t see their wealth. What am I talking about? Most people in this country will make more than a million dollars over their working lifetime. So they’re millionaires in the making. Unfortunately, they’ll end up giving most of it away to creditors and merchants because they don’t recognize it for the wealth it really is.
The average household income in America is about $60,525. Multiply this by the average 40-year working life and you’ll see that the average household will make $2,421,000 in a lifetime. You don’t have to be a doctor or a lawyer to be a millionaire. One trucking firm advertises that their average driver earns $56,700 per year. That truck driver will make $2,268,000 over the course of his or her career, and if they manage it wisely, they could end up with a net worth greater than much higher income earners who don’t manage their spending.
What does this mean to you? If you are an average American, odds are:
You Are Already a Millionaire
The question is, will you keep it or give it away? The most common way people give away their wealth is by using credit. Using debt to finance your lifestyle is a prescription for poverty. You might as well burn the money in the back yard. If, however, you eliminate debt, you’ll have the cash flow to rapidly build wealth. That’s the heart of this system: if you just stop giving your wealth away, it can
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accumulate to give you true freedom and even wealth a little later in life. You cannot have everything you want right now and have an affluent life later too.
But a lot of people try.
How many times have you driven down the street and seen a fancy car or a gorgeous home and thought, “Why can’t I own a car or house like that?” The truth is, the “millionaire” with that car or house is probably heavily in debt. He doesn’t really own that fancy car or that large home either. He’s just renting that lifestyle. If, for any reason, he cannot continue making the rent payments, he’ll swiftly be evicted from the lifestyle. Day after day carrying that kind of pressure is no way to live.
The real millionaires, the ones who actually own their cars and homes and have money left over to live, don’t waste their money trying to look like millionaires. They live in regular middle-class neighborhoods, drive several-year-old American cars, shop at Wal- Mart, and work regular jobs … if they still work.
You can never tell who is a millionaire just by looking.
So you have to ask yourself, whose definition of a millionaire are you pursuing?
Who’s Scripting Your Dreams?
Where do your financial goals come from? Are they yours, or are they an ideal that was given to you by the media, the creditors, and our culture? When your wish list is formulated by the lifestyles of your favorite TV characters, and the commercials that run during the shows, you’re simply being a puppet whose strings are pulled by the people who want to sell you all those things. Take a deep breath and think for a moment … what do YOU really want? What would bring you true fulfillment, not just medicate you for another day so you could survive the rat race?
Work It Out: Your Financial Freedom Lifestyle To-Do List
This is not a to-do list in the traditional sense. You are NOT trying to think of all the things you HAVE to do. Rather, you want to create a list of things you’ve always WANTED to do, but for which you never had the time or resources. This is your dream list . It will help you answer the question, “Why am I doing the Your Debt Elimination System ?”
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When you’ve finished your list, either take it out of this system manual or photocopy it and hang it somewhere where you’ll see it all the time - preferably where you sit to work on your bills. Anytime you feel your resolve for staying on the plan starting to flag, run to this list and read it again. And every time you do, just remember that - should you give up - the huge ball of debt you are just barely carrying now will be more than you can bear in your older years . In fact, it may crush you in the end, as it has others.
Take this exercise seriously. You’re literally redesigning your life here.
“If I had all the time in the world, and all the money I needed, I would … “
That was interesting, wasn’t it? Now let’s see what kind of assumptions you based your choices on.
Did your list include a big house? A fancy car? Would you like to take expensive vacations every year? Maybe you’d like to eat dinner out twice a week. That would be a great life, wouldn’t it?
Maybe … maybe not. In reality, you’ve probably never lived that way before and you don’t really know what it would be like. You only think you want those things because we’ve all been conditioned to think that this is what we want. This is the advertisers’ definition of success.
Do you really want to have to clean and maintain that big home? “I’d pay someone to do it for me,” you answer. Oh really? If you spent $1,000 a month on cleaning services, landscaping and pool maintenance, over 20 years that would be $240,000 just to have a clean home. That is not even counting the price of the home, the land, or the increased property taxes you’d be paying.
How about that fancy car? It would be great to impress your friends and family with a fancy car. Then
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again, won’t they be impressed only the first time they see the car? After that, you’re left with higher payments and higher insurance premiums.
Do you really want to take fancy vacations? To go to a resort such a Disneyland, for a family of four it will cost $175 a day just for admission. If you fly, rent a car, stay in a hotel, and eat the food inside the park, you’ll be easily adding on $400 a day. Will it really be the “happiest place on earth” if you are spending nearly $600 a day to be there?
I’m not trying to make these judgments for you, I’m just pointing out the realities that the people selling them to you never will. In the end, you’re going to have to make the decisions … but they’ll be better decisions if they’re based on all the facts … not just the ones the advertisers choose to tell you.
Added together, the “little extravagances” we listed here can cost you over a million lifetime dollars. Do you really want to pay a million dollars for 20 years of big vacations, dinners out, lunch at fast food restaurants, and cleaning services? Consider whether less expensive versions of each item would enable you to do more with the same money, perhaps take two or three vacations a year on the same money as one “extravagant” vacation.
You see, it’s about choices. Your life is the sum of the choices you make, and when it comes to your money, your choices are most likely heavily influenced by advertisers, celebrities and peers, rather than by logic and your own values. The YOUR DEBT ELIMINATION System’s job is to help you learn to count the lifetime cost of various options you face and to help you make reasonable choices that will give you the lifetime experiences of your choice, not the choices that advertisers want to make for you.
Now take another look at your list. Are you sure you really want those things? If your answer is “Yes,” then stick with it. It’s up to you … it’s your money. But by the time you’ve finished this system, you may find that you’ll want to make a few edits. Here’s a story that might hit home …
Don’t get me wrong, I’m not saying you’ll have to drive an old beater car, wear Good Will clothes, and live in a dump to follow this plan. Quite to the contrary. After transforming your debts into wealth, you’ll actually own the car, home, and clothes of your choice … but your choices will be your own rather than those pressed on you by the “consumer machine” operated by the merchants, advertisers, and creditors. And the most important thing about your home, car, and clothes - no one will ever be able to take them away from you because you’ll own them.
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If the merchants, advertisers, and creditors can’t manipulate your behavior directly through advertising, they’ll enlist the help of your peers. Don’t let your neighbors, family, or friends seduce you into making bad financial choices.
Keeping Up with the Jones Is Insane!
Here is the lifespan of Mr. Jones.
He goes off to college at age 18, armed with student loans to pay for it. While in college, he gets his first credit card and uses it to buy the toys he sees his friends buying. This 19-year-old makes payments on a HDTV, video game system, and a nice SUV to take himself from class to class.
He graduates college, gets a modest job and falls in love. He gets married and puts the honeymoon on his credit card. When he returns, they need a place to live, so they buy a small condo. The happy couple can’t sleep on the bare floor, so they go to the local furniture store and buy furniture, appliances, plants, and lighting - all on the “EZ payment plan.”
Soon, they start having children and need “kid things.” A new minivan (with a TV, of course), vacations to Disneyland, and new school clothes every year from the local department store. Dad hasn’t gotten that promotion yet at work, so they put it all on credit. They move into a bigger home every seven years, and trade cars every three and a half years. In 18 years, Mr. Jones’ kids go off to college to start the cycle again, but the kids have to take out student loans just like Dad, because he’s still paying off the debts from his college years.
Eventually, Mr. Jones turns 60 and, like many Americans, he can’t figure out what went wrong. He worked his whole life, earned over a million dollars in his career, and has nothing to show for it. He’s afraid that he and his bride will have to work until they die because he sees no end to the bills and no hope of a retirement nest egg.
Mr. Jones simply did what he thought he should do … what everyone around him was doing. But by following those around him (who were simultaneously following him), Mr. Jones walked right into a prison of financial slavery. Unfortunately, that’s what most people do.
Ninety-six percent of Americans Fail to Achieve True Financial Independence. True financial independence could be defined as having sufficient resources to live your life by your own means - not having to work, get money from charity, or rely on government subsidies. Only about 4 percent of Americans enjoy that kind of financial freedom at retirement age. This means that most Americans -
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the 96 percent who fail to achieve financial independence - are doing it wrong.
That’s why I developed this system … to help you get into the 4 percent.
Why Get Debt-Free?
“Some people use one half of their ingenuity to get into debt and the other half to avoid paying it.” - George D. Prentice
“So what. Who cares if I owe my creditors money? I am living a great lifestyle now.” Many people make the mistake of thinking it’s okay to be in debt. “Everybody has a mortgage and a car payment,” they say.
These are the people who walk around wearing t-shirts proclaiming, “How can I be out of money when I still have checks?” or “He who wins dies with his credit cards maxed out.” While this lightheartedness brings a smile, it produces heartache and pain in the long-run. Because you don’t die. You grow old with thousands and tens of thousands of dollars in debt, and when your body tells you it’s time to slow down and enjoy the fruits of your labors, you have to keep working until you die because your creditors have all the fruits of your labors.
If you’re like most folks, some of what I’m saying is raining on your parade. You’re just trying to have a good time in this life, and here I am showing you how our economy is designed to manipulate you into working yourself to exhaustion over a lifetime - simply to accumulate wealth for the companies you do business with, not for you. You may not have really wanted to know all this, but when it comes to your money, ignorance is not bliss.
There is a concerted campaign being waged against you to take the wealth you will produce over your lifetime away from you.
The most staggering example of this is a home mortgage. If you buy a home with a 30- year conventional or adjustable rate mortgage, you will pay for that loan almost three times . Just multiply your monthly payment times 360 months and you’ll see that the total amount you’ll pay your mortgage lender is nearly three times the amount you borrowed from them.
That means that nearly two-thirds of the total amount you’ll pay your mortgage lender is interest . Interest is the profit the mortgage company makes for lending you the money to buy your house, and
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they obviously feel you should pay them between 150 and 200 percent interest!
Let’s put some real numbers to this.
If you buy a $250,000 home, with a $200,000, 7 percent mortgage, you’ll end up paying $479,016 in total payments over the life of the loan. That’s almost a half million dollars to pay back a $200,000 loan! And nearly three hundred thousand dollars of that is interest!
If we just focus on the $279,016 interest you’ll pay, that means you’ll have to work … week after week … year after year … to earn almost $400,000 gross … so you can net $279,016 after you pay income taxes - just so you can give it to the mortgage company as profit ! Ask yourself … do they deserve $279,016 of your hard-earned wealth more than you do? Are they doing you such a tremendous favor that you should wear yourself out, over three decades, to generate more than a quarter million dollars… that does not go to your wealth or to the value of your home … but directly to their bottom line?
That’s your money. You work for it. You pay taxes on it. Yet they end up with it. It’s not fair, and YOUR DEBT ELIMINATION is dedicated to helping you turn the tide of your wealth-building power to your benefit instead of theirs.
The YOUR DEBT ELIMINATION System is going to help you craft a strategy for you and your family that will keep the maximum amount of the wealth you produce in your hands . Just retaining and investing the money you waste on mortgage interest alone could change your life completely.
Think about that $279,016. If you had it parked in mutual funds that earned an average 8 percent return per year, you could enjoy $22,321 a year in retirement income without ever touching the principal! And the exciting thing is that we’re not even talking about your having to earn any extra money to make this happen. This $279,016 (or whatever it works out to for you) is money you’re going to earn anyway. We’re just giving you control over who ends up with it - you or them.
Work It Out: What was the price you really paid for your home mortgage?
To find out how much you are actually paying because of mortgage interest, do this exercise: Enter your information in the space provided.
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Monthly Mortgage Payment
Multiply by total number of months in the loan x _ (from start) (30 year loan = 360 months)
Equals total amount paid for your home loan = _
Compare to the amount you borrowed.
The difference is dramatic, isn’t it? That’s why you want to pay off your mortgage as quickly as possible. I’m going to show you how to pay it off in just a handful of years. “But I’ll lose my mortgage interest tax deduction.”
If you have an accountant who tells you that you should never pay off your mortgage “because it’s the last tax shelter for the average consumer,” you might want to check out the other accountants in town. Think about what they’re saying. Let me translate it for you. They’re really saying, “Keep on paying a dollar of interest to the mortgage company to save 28 cents in taxes.”
Let’s assume you’re in the 28 percent tax bracket. If you’re in a different bracket, or the government has changed the numbers, just replace the appropriate amounts as you read this.
Each dollar of interest you pay the mortgage company is deductible from your taxable income, which saves you the 28 cents you would otherwise have paid to the government on that dollar as income tax. But think about that. You’re giving up a full dollar to save 28 cents. Whereas, if you pay off your mortgage, you will indeed have to pay 28 cents federal income tax on each dollar not going to mortgage interest … but you’re getting to keep the other 72 cents! Ask yourself, would you rather pay a dollar (mortgage interest) to save 28 cents, or pay 28 cents (tax) to keep the dollar?
In the typical scenario, a full dollar is leaving your life on its way to the mortgage company, and Uncle Sam is giving you a 28-cent break on your taxes to ease the pain. But in the YOUR DEBT ELIMINATION scenario, the only thing leaving your life is the 28 cents. You’re 72 cents ahead on every dollar.
Our way is better because 72 cents will always be more than 28 cents. And you still get the tax deduction while you’re paying off your debts … it only ends when the mortgage is completely paid off.
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Car loans. Next to a home mortgage, the greatest draining away of your wealth is through auto loans. Lenders are willing to give you up to five, six and, in some cases, even more years to pay off a car these days because the longer the amortization, the more the auto loan works like a mini home mortgage. The longer they can get you to stretch out the payments, the more total interest they’ll get out of you for a given loan amount. If car finance companies thought they could get away with it, they’d offer you 30-year loans on cars. They’d love to get three times the price of the car loan back in monthly payments.
Why should you care if you don’t own anything and you owe on everything? The following exercise will help you answer that question.
Work It Out: Take a few moments and imagine you’ve lost your job. You have no income at all. What will happen to you? What bills will keep coming? What will happen to your family? What possessions will you lose? Be as vivid as possible!
If you’re like most people that was a painfully revealing exercise. Imagining that you’ve lost your income - your capacity to play the credit-go-round game - can bring some serious anxiety. Luckily for you this is just an exercise … but it’s not an impossibility. Thousands of people lose their jobs every week in America, and no one’s immune.
Even if a loss of income isn’t likely to cause debt to crush you, it may already be bruising your relationships.
Till Debt Do Us Part
A leading cause of divorce in the United States today is conflict over money.
“Do you promise to love, honor and cherish, for richer or poorer, until death do you part?” While most of us answer, “I do,” the real answer is, “I’ll hang on until it gets too painful.” If you’re having money problems, chances are your relationship is suffering too. More often than not, one partner in a relationship is more conservative with money and the other is more liberal. Arguments over spending habits can escalate into relationship-destroying fights.
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Work It Out: On a scale from 1–10, click [ ✓] the red line in front of the number that best represents your attitude about money, and click [x] the black line in front of the number that best represents your partner’s attitude about money.
Number 1 represents a very conservative saver, while number 10 represents a free-wheeling spender. 1 2 3 4 5 6 7 8 9 10
Saver Spender
Now, describe the impact these money-attitude differences have had (are having) on your relationship. What will happen if you don’t solve this problem?
If you’re not married, just keep these issues in mind when choosing a mate in the future. The closer your views on how money is used in a household’s lifetime, the less chance these issues will drive wedges between you later.
If you are going through YOUR DEBT ELIMINATION with a partner, I suggest you make the YOUR DEBT ELIMINATION journey a family adventure. In fact, there are several exercises that are best worked through with all of the members of your household. If they’re going to share in your wealthy lifestyle, then they need to help build it!
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Credit...your Financial Enemy
Why Are We Obsessed with Using Credit?
Are you not instructed by movies and TV programs as to what kind of car you should be driving to look successful (the same one your favorite character drives)? Are you not shown what kind of house you should live in to be really happy, or what kind of clothes will make you socially acceptable? And doesn’t everybody who’s anybody go on a cruise every year? You’re even shown that, if your life is dull and miserable, you need to go to [a particular restaurant chain] where all the people are ecstatically happy just being there!
All these images are continuously fired at you to make you want the things the people in the movies or commercials have … that make them “appear to be” happy, successful, etc. Then the advertisers come in, offering you just what you need to put yourself in that picture … and it comes with easy monthly payments, or it’s available by using any major credit card.
It’s a lie!
The truth is that having these things won’t bring you near the joy or long-term satisfaction you’re led to believe they will. And buying them on credit will just put financial chains on you and make you a slave to the credit companies. The “American Dream” is freedom and prosperity, not slavery and debt.
You can have many of the things you want in life if you go after them strategically, waiting for the appropriate time - according to your plan, not the advertisers’ and credit companies’ plans.
How seriously you take this advice will likely depend on your age.
When you’re 20, you’re convinced you will be different. You have big dreams and believe you are going to be really rich ! You might even hear yourself say things like, “I’m going to retire by 40.”
By the time you’re 40, you get more realistic. You still have dreams, and you might still be successful someday. But you’re not retired. In fact, you can’t even imagine retirement because you have practically nothing saved up and money is gushing out of your life like Niagara Falls. You start jettisoning some of your dreams because it’s becoming clear that you won’t be able to achieve everything you wanted.
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By the time you’re 50, you are just hoping you can hang on and not run out of money before you die. Retirement is hard for you to describe because you really don’t know what to expect. You wish you had been more serious with your money earlier in life. You are just hoping to survive. This is sad. Millions of ambitious, hard-working people have to give up their dreams and settle for “survival.”
If you don’t want to end up being one of these “survivors,” collecting shopping carts at the Wal-Mart in your sixties and seventies, you need to change your financial behavior now. You have to intentionally leave the 96 percent crowd that’s headed for financial dependency and actively move toward the 4 percent who achieve financial independence.
The obvious first step in that change is to stop making new debt!
Dis-Card Your Debt
The best way to stop yourself from making new debt is to eliminate those little debt- makers you carry around. They’re killing you financially. You have to do it. There is no way around it. It is perhaps the most emotional but crucial component of the YOUR DEBT ELIMINATION System. You’re going to have to cut up your credit cards.
“But,” you protest, “I don’t need to cut them up! I just won’t use them anymore.”
Would you:
• Go on a diet but keep chocolate cake in your refrigerator? • Kick a drug habit but leave a marijuana cigarette on your nightstand? • Quit drinking but hold a martini at a party? • Stop smoking but carry a pack of cigarettes in your pocket?
No you would not. Not if you were serious about eliminating that destructive behavior. Well, if you are serious about getting out of debt and building wealth, you have to take some serious action. If you don’t … well, forgive me, but you’re insane.
The definition of insanity is doing the same thing again and again but expecting different results. If you continue to use or carry credit cards, yet expect to get out of debt and have a prosperous future, you’re insane. It doesn’t work like that. You know it, I know it, even the credit card companies know it. Now it’s time to act on what you know.
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Don’t be depressed about it. Make it a ceremony! Have a retirement party for your credit cards. Gather your family together and share your vision for the future. Tell stories of the dumbest things you ever bought with a credit card. If you can’t think of anything, just take inventory in your garage, basement, attic, and closets. You’ll likely find an embarrassing number of worthless things you bought with credit cards that you just “had to have.”
Get out the scissors and start snipping! Celebrate the fact that you are no longer at the mercy of the credit companies. You are taking back your power!
Discipline Tip: During the debt-elimination phase of the YOUR DEBT ELIMINATION Program it can be a good idea to keep one credit card on hand for emergencies. DO NOT KEEP THIS CARD IN YOUR WALLET. Otherwise you’ll try to convince yourself that a quart of Ben & Jerry’s ice cream is an “emergency.” Instead, take a card that has no annual fee and place it inside a metal can filled with water. Freeze it, and it will take several hours to defrost (you can’t put a metal can in the microwave). By the time it thaws, so likely will you. Even someone who uses credit cards for everything can learn to live a cash-based lifestyle. It’s simply a matter of learning new habits. If you don’t like to carry money, for example, use a debit card. This is a card you get from your bank that looks like a credit card, is accepted everywhere credit cards are accepted, but the money comes out of your checking account. A debit card is a great way to help you build the discipline of spending only what you can afford today.
If you need plastic for business purposes, get a regular, green American Express ® card. It’s a charge card, not a credit card. You’re not allowed to roll a balance from month to month. It has to be paid in full each month. But even with this card, beware of impulse buying because plastic is always easier to use than real money or even a check.
It won’t be long that you’ll have plenty of cash each month, and you’ll wonder why you ever thought you needed credit cards. When you’re done following the YOUR DEBT ELIMINATION plan to complete debt-freedom, most of your paycheck will be yours , to use as you see fit. That will be a lot of money each month.
Zero Percent Interest and Frequent Flier Cards
Two excuses I frequently hear for hanging onto credit cards are low interest rates and frequent flier or other “reward” programs. First of all, if you believe the credit card companies really want to give you something for nothing, I have some beautiful ocean-front property in Kansas I want to sell you. The only reason credit card
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companies offer anything is that they’ve determined it will get them or keep them customers, from whom they can extract interest or other charges.
Let’s look at the zero percent interest myth first. I’ll use one of the best-known brand name credit cards in America as an example. They offer zero percent interest for six months, then it pops up to their “standard” interest rate, which could range from percent to 14.99 percent if you have a solid credit rating. If you make ONE late payment, that immediately jumps to 19.99 percent. Cash advances are charged a 20.99 percent to 22.99 percent rate, depending on which level of card you hold. There’s also a minimum $5 transaction fee for each cash advance, a $15–$35 fee for late payments, and a $29 over limit fee. So much for zero percent interest!
Now, how about those frequency or reward programs? As a marketing professional, I can tell you that frequency programs have only two objectives:
1. To get you to spend more than you normally would on your credit card because it earns points, miles, rebates, whatever.
2. To get you to spend the money with a specific hotel chain, airline, car rental agency, whatever.
If you think any of their planning, in setting up their frequency program, involved real benefits for you, you’re fooling yourself. It’s all designed to get more of your money, over your lifetime, not to give you anything.
I’ve seen people using their credit card at a fast food restaurant because it was earning them miles. And after they digested their lunch, they only had to spend another $24,995 on their credit card to earn ONE restricted continental U.S. ticket.
They buy stuff they don’t even need, in some cases, just to get more miles or points. I’ve seen people spend frivolously because they were going to get back a 2 percent rebate at the end of the year. They wasted 98 percent to get 2 percent.
Believe me, you cannot win in this game. The house (credit card company) always wins.
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¥ Work It Out: How much money would you have left over at the end of each month if all you had to pay for were food, utilities, and taxes? If there were no mortgage, rent, car payments, loans, or credit cards, how much extra would there be?
Monthly Income
Subtract food/utilities/taxes –
Equals extra money left = per month
What could you be doing with this much extra money per month? This is not a fantasy - it is the reality you will be living at the end of this YOUR DEBT ELIMINATION Program. Most people are not living their life’s dream because they have to pay the bills. If you didn’t have the bills, what would you do? Hopefully you’d invest most of it during your strong earning years so you can indulge yourself to your heart’s content when you’re ready to slow down.
Discipline Tip: Whenever you are tempted to spend money on credit, all you need to do is remember how little money you would actually need to live each month if you owed no money! The result will motivate you to stay away from purchases you can’t afford.
The YOUR DEBT ELIMINATION System will teach you how money really works and how most wealthy people get rich … and stay rich.
Operate on a 100 Percent CASH Basis
Starting from Day 1 of your Your Debt Elimination journey, operate 100 percent on cash. This will, of course, be a natural result of cutting up the credit cards.
It may seem difficult, as you sit there right now, to think about focusing your resources on debt- elimination while simultaneously covering all your expenses with cash - but it can be done. You’ll have your frozen emergency credit card to handle any emergency, so just focus on following the debt-elimination plan I’ll be explaining in Session Five, and soon you’ll have a growing amount of available cash each month, as debts are paid off and their monthly payments are recovered.
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Once your debts are paid off, you should never need credit again! Within months of paying off your debts you will become your own bank … your own credit card company. So you will never need to use the other guys again. All the money you had been sending to your creditors each month will be going into your savings after your debts are gone, so it won’t take long for you to save up an amount higher than any credit card limit you might be offered. You won’t need “other people’s money” because you’ll have plenty of your own.
Let’s examine why the cash-based lifestyle is really better than one built on credit.
♥ Internal Change Tip: Credit Is Not Your Friend
Credit does nothing but diminish your lifestyle over time. It just makes everything cost more. Yes, you probably will need a loan to buy your first home. But after you pay off that mortgage and begin saving, moving to another home should involve nothing more than selling your current home and using the proceeds to buy your next home. If you need more to make the purchase, simply take it from your investment savings. That might be hard to imagine right now, but you’re going to prefer a life free of all loans, charge accounts, and credit cards … and you’ll be able to do it. I’ve done it, as have many of those who have followed my system to debt-freedom.
I’ll probably repeat this many times, in many ways, but you must understand that the idea that using credit enhances your lifestyle is a lie. That’s mathematically impossible. Yes, it can appear to get you more stuff in the beginning, but after a while most of your money is promised away to credit payments each month, so you end up living a diminished, not enhanced, lifestyle.
Think about this for a moment: When someone offers you credit, they’re not giving you anything. If they offer you a $5,000 Gold Visa ® card, they are not giving you $5,000. They are not adding a single dime into your life. They’re simply moving up the date at which you can spend money that you will have to earn - and they’re charging you a terrible price for letting you “use” $5,000 of their money.
So, the net effect is that - when someone offers you credit - they will actually reduce, not add to, the money you will have to spend over your lifetime.
Credit does only one thing: it raises the price of everything you buy with it. Credit takes more money away from you than the actual value (purchase price) of the thing you buy on credit. Usually a lot more than you think. And that extra money you’re giving to the credit company is the same money you should be investing to produce your future retirement income.
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People are literally giving away their future wealth - to have a few extra things right now. But the true cost of using credit is much greater than they realize. So they drown in credit interest and wake up one day, old and wanting to stop working, only to realize they can’t stop - because they still owe more and more interest on more and more debt. Debt they used to buy gadgets, trinkets, and other “had to have” junk they’ve long since stuffed into the attic, basement, closets, and garage.
How Credit Really Affects You
Suppose you carry four credit cards averaging 17 percent interest, and they have a combined outstanding balance of $5,200. If you pay only the minimum monthly payment (usually 2 percent of the outstanding balance or $10 minimum payment), it would take you 40 years and eight months to pay them all off. And your payments would total $16,990 over those four decades. That means - in addition to the original $5,200 you borrowed from the credit card companies - you would have paid them $11,790 in interest!
Long after you would have thrown away the things you bought with the credit cards, you’d still be draining your wealth paying for them.
In this example, using a credit card would cause you to pay more than three times the value of whatever you bought! And you’d have to work many extra months to earn the $11,790 - just to help build the wealth of the credit card companies rather than your own wealth. Doesn’t it make you mad when you see these numbers and realize they’re being used against you right now?
But it’s worse than that because research has shown that when you use credit cards, you’ll buy up to 112 percent more stuff … just because it’s so easy to make the purchases. So not only does everything cost more, because of interest, but you buy twice as much stuff, making it a double whammy against your finances.
On the other hand, when you operate on cash, the process becomes its own buying regulator. You’ll think longer and harder about each purchase, so you’ll be a lot less likely to buy things you don’t really need. And when you do buy something, it’ll be only the size or amount necessary - because you’ll be feeling the full payment at the time of purchase rather than in little bite-sized pieces over the next several decades of bill paying.
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Using Credit Actually Lowers Your Standard of Living
Suppose you and I make the exact same income, but you buy most of the stuff in your life on credit while I pay cash. It’s true that, in the very beginning, you’ll be able to get a few things before I do, but this is only a brief illusion of a better lifestyle.
Let’s say we both walk into an electronics store and buy identical TVs. You use a credit card, I write a check. You’re going to pay more for that TV than I do, because you’ll pay the price plus interest. I’ll only pay the price. Now let’s go to a car dealer. We’ll say we both like a $20,000 car. I’ll get it for $20,000, while you’ll end up paying $25,000 or more for it when you add in the interest on your payments.
See what’s happening? You’re paying more than I am for everything. And if we both have the same income … I’m going to be able to buy more of everything, over time, than you will because I’m buying everything cheaper. So, even if we use the materialistic yardstick of “things” as a measure of quality of lifestyle, I’ll end up living a better lifestyle than you because I used cash instead of credit. And while you sweat bullets to pay your bills each month, I’ll have no bills other than food, utilities, and property taxes. Cash wins!
When you’re in debt, you’re forced to live like you make less income than you actually do - because when you made those credit purchases in the past, you committed a portion of the income you are making today to those creditors.
Discipline Tip: OK, you need to get out your scissors and cut up those credit cards! It is the most important step you can take to building your future wealth.
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A New Financial Attitude
New Seeds
The American philosopher Earl Nightingale once said, “You are who you are and where you are because of what you have put into your mind.”
Why? Because what you put into your mind comes out in the behaviors of your life, just like the programming put into a computer comes out in the behavior of that computer. And your behaviors are like seeds you sow into your life. The harvests you reap depend on the seeds you’ve sown into your life. So, if you don’t like the financial crop you’re getting so far, it’s time to sow better seeds.
It’s time to plow up your mind … your attitudes … and plant new concepts, like the ones we’ve been discussing so far. Then watch your harvest improve!
Here’s a seed for you.
You have to take 100 percent responsibility for your life to make the improvements I’m talking about here. If you’re in the habit of playing the victim, this process will be difficult for you. If you feel your life is the result of other people’s actions and decisions, and not your own choices, you’ll have to wait for all those other people to improve your situation because you’re essentially saying that they control your life … good or bad.
But, if you take responsibility, you have “response-ability.” You have the ability to respond to life’s challenges as you see fit, without needing anyone else to line up with your thinking to put it into action. You have the ability, the right, to take action. To plant better seeds. To work toward a better harvest.
That better harvest is going to come in stages.
The Three Stages of Your Debt Elimination
Stage 1: Operate 100 percent on cash - stop using any credit.
The purpose of the YOUR DEBT ELIMINATION System is not only to show you how to get out of
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debt, but to show you that debt is not a useful tool in building a successful life. So the YOUR DEBT ELIMINATION philosophy is based on eliminating the use of credit … from now on. Credit just makes things cost more, so why would you want to use it?
Stage 2: Pay off ALL your debts, including any mortgages.
Simultaneously with your transition to a cash-based lifestyle, we’ll begin eliminating your debts. The first step in that process is the creation of what I call your Margin .™ This is an amount of money I’ll help you identify that will … well … accelerate your debt-elimination.
Stage 3: Focus ALL available cash on wealth-building.
The first step in your wealth-building phase is to create an emergency savings fund. After that, you’ll be concentrating on building long-term retirement wealth.
I’ll teach you about various types of investments and show you how long it will take you to create enough cash flow from your investments to retire. By the end of stage 3, your investments will be earning enough money that you’ll be able to live off the income they generate without needing to work if you don’t want to. Now that is true financial freedom!
There’s also a fourth stage that more and more Americans are choosing. I call it Redesigning Your Life . It might involve leaving the “fast lane,” or even taking the exit ramp. Many people following this strategy are choosing to leave fast-paced, high-pressure metropolitan lifestyles for more relaxed, less expensive, and safer small-town living. But if you’re a confirmed urban person, it might just mean finding ways to lessen the costs associated with living in your favorite metro area.
So … if this escape to a simpler, more affordable lifestyle fits you … Stage 4: Move to a cheaper, safer, more enjoyable location.
By following the three or four stages of this system, you’ll attain real independence in a relative handful of years - and you’ll never need credit again. That’s right. You’ll be a totally cash person. Just imagine!
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What’s It Like to Operate on Cash?
You’ll begin to see the benefits of operating 100 percent on cash long before you pay off your mortgage.
Imagine that you’re four or five months into the program and you’ve paid off a couple credit cards that each had a $50 monthly payment. You now have that $100 a month available to take care of life’s little emergencies. But let’s take it further down the timeline.
Imagine you’ve followed the Your Debt Elimination System and paid off all your charge accounts, credit cards, and car loans - and you’re now paying off your mortgage balance by adding in all the dollars that used to be wasted each month on those credit account payments. Then, one day the washing machine breaks.
Here’s where most people would pull out a credit card to get it repaired, or they’d see an ad in the paper for a new one - with “low monthly payments” - and get themselves deeper into debt. Instead, you should just take the money you were going to add to your mortgage payment that month and use it to pay cash for the washing machine repair or replacement.
Using cash for this emergency would delay your debt-freedom date by one month , but it would not add a penny to your debt. Your washer would be repaired or replaced, and you’d be right back on your YOUR DEBT ELIMINATION plan the next month.
OK, let’s go a little further down the timeline.
Now imagine you’ve paid off your mortgage and you’re putting all the money you used to be wasting on revolving credit debt and mortgage payments into your investments. Then suppose your car dies.
Here’s where most people would crawl to the car dealership’s finance manager and beg for a loan, but you just hold off on your investments for a month or two and buy a good, late-model used car with cash. Or, if necessary, you could pull a little out of your liquid investment account and buy a better car - CASH.
Let’s go for broke. Imagine you want to buy a new home.
Here’s where most people grovel before a loan officer, beg for a while, and show everything but their
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blood tests to prove they’re worthy to pay hundreds of thousands of dollars in pure profit to the mortgage company for the privilege of using some of their money.
But you don’t need a mortgage. You have a paid-off house and money in the bank. So you sell the house you now own, add in the difference from your investment account (if necessary), and buy your new home - CASH. Then, the next month, you go right back to putting the full amount into your investments again.
The opposite of this financially free attitude is a pit constructed by the merchants, advertisers, and credit industry. I call it the Monthly Payment Trap.
The Monthly Payment Trap
Our North American economic system has trained us to think only in terms of monthly payments. When we go to buy a TV, a car, or even a home, we think in terms of how big a monthly payment we can afford - not how much the purchase is really costing us. This thinking pattern gets us in deep, deep trouble.
We don’t ask ourselves even the most basic consumer questions. “Is it good for me? Am I being ripped off? Is it absurd to pay 21 percent interest on a TV, or to pay nearly three times for our home over the course of a 30-year mortgage?” We just say, “I want it. I want it now. It fits in my monthly income.”
And you know why we never think beyond the monthly payment? Because, “Everyone I know is buying with monthly payments, so it must be the right thing to do. Dad bought his cars and the house I grew up in this way, so it must be right. Shucks, everyone pays 30 years for a house. How else could anyone afford one … huh?”
We go into the marketplace to buy something and the only two numbers we consider are our monthly income and the total of our monthly expenses. This tells us how much monthly income is available for new or additional monthly payments. Or we look at a specific credit card to see how much room there is before we go over our credit limit. Whatever room there is between our current balance and our credit limit is seen as spendable credit! It’s almost as if it’s our patriotic duty to keep our monthly payments equal to our income.
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That’s Absolutely the Wrong Way to Look at It.
Merchants and the money-lending companies behind them have us trained to look at the wrong part of the equation. The truth is that it does matter how much the total cost is ! It matters to your future wealth, and it matters more than you probably imagine.
Take a look at your local paper to see how merchants use this technique. I remember examining a furniture store advertising insert in a big-city Sunday paper. For each suite of furniture there were big red numbers giving a “low monthly payment” … with a little asterisk after each payment amount. Well hidden, in tiny black numbers, was the full price. At the bottom of the front page, in big yellow letters in a bright red box, it said, “NO MONEY DOWN.”
This ad typifies how merchants use our monthly payment and “gotta’ have it now” weaknesses against us.
First of all, the meaning of the little asterisk after each bright red monthly payment amount was found in a little patch of ridiculously small print at the bottom of the last page of this mini catalog. The “low monthly payments” were based on an annual percentage rate interest of 31.5 percent! Then, to add insult to injury, the “low monthly payments” also required 10 percent down!
But didn’t they say “NO MONEY DOWN” on the front page? Yep. On the same page where, in bright letters, they said “NO MONEY DOWN,” they showed “low monthly payments” that required a down payment! Of course customers weren’t supposed to really find this out until they were in the showroom, with one of them saying, “Oh, honey, wouldn’t this look great in our bedroom?”
And, if the customer ever got around to reading the fine print on the sales contract, that is where he or she would probably discover the 31.5 percent interest rate. But, by then, they would be envisioning the wonderful furniture in their home, and they would be too psyched up to be stopped by the interest rate on the “low monthly payments.”
Let’s examine one example from this ad, a bedroom set with a “low monthly payment” of “ONLY $54.51 per month.” Right next to that, in itsy-bitsy letters, it says, “SALE …$949.” Well, thanks to their 31.5 percent interest rate, you would end up paying $1,722.22 for that $949 bedroom set - over 23 months. That is an extra $773.22 in interest - just for using their “easy monthly payments”!
The problem is that the average consumer never figures this out. They just pay the payments … and the $773.22 interest … and then wonder why they never have any money to spend (or invest) each
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month.
And it’s not just ads you see in the newspaper or on TV that plant bad financial seeds in your life, or get you to pursue harmful financial behaviors. It’s frequently people, places, and things in our lives that trigger unnecessary spending or credit usage.
People
“Daddy, won’t you please buy me the Betty Noodle doll? Please? I just have to have it!” Pleas such as this are almost impossible to resist. It is so hard to look your children in the face and say to them, “We can’t afford it.” We all want to look like heroes in the eyes of our children.
“Let’s take a romantic weekend vacation to the mountains, honey. We need to get away.” “No, sweetheart, we don’t have the budget for it.” Saying this to your spouse or lover is like splashing a bucket of cold water in their face. Now, instead of appearing romantic , you’re worried you look like a cheapskate.
“Hey! Let’s go out for some drinks and shoot pool!” You want to be included as “part of the gang.” You don’t want to have to say, “I don’t have the money right now.”
It is tempting to give in when you’re confronted with people in your life who are asking for things. After all, you’ve always given in before. But then again, you’ve always been in debt before. The truth is, when you are wealthy you’ll have the extra money to buy the dolls, weekends away, and nights out with the buddies … but you’re not wealthy quite yet.
An effective communication technique that might help you deal with these difficult situations is called “the sandwich technique.” In the sandwich technique you say something positive, something negative, and close with something positive. For example, your coworker is asking you to go out to lunch, although you have already packed a delicious meal. Using the sandwich technique you might say, “Thanks Mary, I’d love to have lunch with you today. I brought my lunch, though, and am really looking forward to eating it. Let’s take a coffee break together later, okay?”
In this case you are letting her know that it is nothing personal. You don’t have to tell her that you are trying to save money, but instead you are telling her that you are really looking forward to a home- cooked lunch. Finally, you’re suggesting an alternative get-together that doesn’t cost any money.
Let’s try another one, but this time with a more difficult subject. Your nine-year-old daughter has
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asked you to buy her an electronic diary. It costs $20 and is not in your budget for this month. Here’s how the sandwich technique might work:
“Well, honey, that electronic diary sounds really great. The thing is, we don’t have any extra money right now, but let’s sit down together and talk about some ways you can earn that $20 and buy it yourself!” Now, your daughter may not be jumping for joy when you tell her this, but you are still saving money and helping your daughter learn the value of working for money. Now it’s your turn.
Work It Out: Practice using the sandwich technique to respond to the people in your life when they ask you to spend money that you have not planned to spend.
1. “Honey, let’s go out for a nice evening of dinner and dancing. I’ll get a babysitter and we can paint the town red!”
2. “Oh wow. Look at that great leather jacket in the store window. Let’s go try it on!”
3. “This warehouse club store has such great deals. Here’s a new grill with a lot more features than our old one. Should we get it?”
Now you have a strategy for dealing with people in your life who are pressuring you to spend money. The most important element of this process is to identify what emotional need the person is trying to fill and to find another way to meet it.
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Places
Most Americans are familiar with the term “malling.” This refers to the habit of going to the mall, with no specific purchase in mind, just to “see what’s there.” Why do people really go “malling”? What need are they filling? Boredom. Shopping as a form of entertainment is one of the most dangerous threats to your future wealth.
Another area where people tend to overspend is on entertainment. By dining out at fancy restaurants, seeing plays and shows on a regular basis, and taking day-trips to amusement parks, many people are entertaining themselves right into the poor house. This is not to say that an occasional outing to a nice restaurant or the theater is out of the question. But it should be a treat, not a lifestyle . And it should be paid for with cash, not a credit card. Everyone desires a nice lifestyle. But by buying that lifestyle today - with tomorrow’s money - you’re dooming yourself to a lot of tomorrows with no money in them.
Oddly enough, many people are able to avoid such obvious traps as the mall or fancy restaurants, but still have money flowing out of their pockets unnecessarily. The grocery store, for instance, is one place where it is all too easy to blow your spending plan. Most markets these days have gourmet items, fine wines, gift baskets, floral departments, and more. It is all too easy to get in the habit of spending your allotted grocery budget on these extravagances before you even begin to shop for food. Why do many people do this? “I like to provide well for my family .” But wouldn’t you say that providing well for your family’s future is more important than gourmet jellybeans?
Work It Out: What are the places that you are most likely to overspend? What need/desire are you filling?
Now that you’ve identified what your “danger places” are, and what need/desire you are filling by overspending, let’s look at some ways you can stay on your spending plan.
V Avoid the danger places altogether until you are debt-free V Pay for fun with cash V Find a way to get the need/desire met in a less expensive way Things
“If you order now, we’ll throw in the special bonus prize for free. But, call now, quantities are limited.” We’ve all been tempted by things we wanted that we hadn’t planned on buying. Advertisers know this and use it to their advantage - and your disadvantage.
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When you feel the urge to buy something you hadn’t planned to buy, your best weapon is delay. Implement a rule that you never make an unplanned purchase the same day you first see it. Even if it’s at a “One Day Only Sale,” stick to the rule. In all likelihood, you’ll rethink the purchase.
Analyze television commercials that motivate you to reach for the phone. Do you truly want the item, or just the feeling that goes with it? If it’s the item you want, then put it in your budget and pay cash for it.
More often than not, in all of these situations - people, places, and things - you’re looking to get a feeling . In the examples mentioned in this module, you might be making purchases to entertain yourself, to feel that you have an abundant lifestyle, to provide well for your family, to feel like a hero, to be romantic, or to feel included. These common human emotions are often the real reasons why we purchase items we don’t really need. Once you’ve identified which emotions are working in your life, you can better control them.
Work It Out: Identify some emotional needs you’ve tried to fill by spending money, and come up with other ways to achieve those feelings. This may be a little challenging, but give it some time and you’ll be surprised at what you find!
Item Purchased Feeling or Emotion Desired Another Way To Get It
OK, we’ve been talking about a lot of behaviors … behaviors that may need changing. So let’s look at what it takes to change a behavior.
Got Change?
What does it take to change your behavior? There are five stages we go through when we truly change our behavior. They are:
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V “Why do I have to change?” Status Quo V “I have no idea what I am doing” Taking the Plunge V “At least I’m not failing every time.” Learning Curve V “This is kind of fun.” Gaining Control V “I did it!” Mastery
Think back to a time not long ago. You were using credit cards freely, making the minimum payments, and living as if you made twice the money you do. You may have thought, “I like living this way. Why should I change?” You were in the Status Quo stage of change.
Then one day you woke up and realized, “This can’t go on.” You were getting deeper and deeper in debt, and you didn’t know what to do about it. That’s when you got the YOUR DEBT ELIMINATION System. It was a real “leap of faith” for you. You made a significant investment in your future. But, in the beginning, you probably thought, “I have no idea what I am doing.” You were Taking The Plunge .
“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.” - Niccolo Machiavelli, The Prince (1532)
Then, you worked through the YOUR DEBT ELIMINATION System and realized that you would be able to do this. You are entering your Learning Curve now, and will develop new ways of living to support your debt-free lifestyle. Right now, you’re halfway through the change process! The hardest part is behind you.
“Often people attempt to live their lives backwards: they try to have more things, or more money, in order to do more of what they want so that they will be happier. The way it actually works is the reverse. You must first be who you really are, then, do what you need to do in order to have what you want.” - Margaret Young, Simple Abundance
As you continue to learn new ways of spending and saving, you’ll start to find that it’s “kind of fun!” You’ll be Gaining Control of your life.
In a few short years, you’ll be completely out of debt. You’ll be on your way to building the kind of wealth you dreamed about when you were younger. You will have achieved Mastery over your finances.
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♥ Internal Change Tip :
“Unless you are prepared to give up something valuable, you will never be able to truly change at all because you’ll be forever in the control of things you can’t give up.” - Andy Law, Creative Company
Work It Out: Answer the following questions about the five stages of change.
1. What was the defining moment when you realized that the Status Quo had to change?
2. How were you feeling when you purchased the YOUR DEBT ELIMINATION System and decided to Take the Plunge ?
3. What do you expect to learn while you are going through the process of your Learning Curve ?
4. How will you know that you are Gaining Control of your life?
5. What will it mean to you when you have achieved Mastery ?
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The Cascading Debt-Elimination System
Let’s discover the power of the YOUR DEBT ELIMINATION Cascading Debt-Elimination System. This is the engine that makes it all work. You’re about to see for yourself that it really is possible to become totally debt-free within five to seven years.
The Plan
1. Prioritize your debts (using the formula you’ll be given here).
2. Make the minimum required monthly payments on all debts except the highest priority debt.
3. Add the whole Margin™ to the regular payment on the highest priority debt. (We’ll cover the Margin in detail in the next session. For now, assume an amount equal to 10 percent of your take-home monthly income.)
4. Continue doing this each month until that debt is paid off.
5. Then, when that debt is paid off, move on to the second debt on your priority list.
6. You will now have an even bigger Margin than before because you can add in the monthly payment of the paid-off debt. 7. Repeat again and again, moving down your debt priority list.
8. On average, people pay off all of their credit cards and cars within the first couple years. After that they are typically able to at least double their monthly mortgage payment. Within four to five years, the mortgage is usually burning in the fireplace and they’re completely debt-free!
Can you imagine that? You could own your car, your house, and be completely debt- free within five to seven years.
Let’s work this using some numbers. In the audio program and on the worksheets you’ll have an opportunity to use your own numbers, but for now let’s just make up an easy- to-follow scenario. For starters, we’ll say you have a $100,000 mortgage and that your payment is $734 a month.
After you’ve paid off all your other debts, we’ll say you now have a $2,061 Margin to apply to your mortgage. That means you’ll now be paying $2,794.73 a month on a $100,000 mortgage. Do the math: you’ll be paid off in 35 months. That’s just four years and four months. Of course we neglected
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the effect of interest here. That would extend the payoff by a few months, but even if it turned out to be 8 months, you’re still paying off a $100,000 mortgage in just five years.
Your next-door neighbor - who has the same mortgage and pays only $734 a month - will still have 26 years left on his mortgage when yours is gone. Even after 24 years of paying his mortgage, he will only have paid a little more than half the principal. You, on the other hand, will be investing your $2,794.73 a month Margin for the 26 years it will take your neighbor to pay off his house. He’ll have a house. You’ll have a house and a debt-free and prosperous life!
When Will You Be Completely Debt-FREE?
To get a rough idea of how long it will take you to get completely out of debt - including your mortgage - we’ll use the Debt-Elimination Time Calculator on page 50.
First, total up all your debt balances. This number, including your mortgage balance, will be an impressive amount. But you’ll be encouraged when you see what happens as we short-circuit the devastating impact of compound interest working against you - by paying these bills off by the shortest mathematical route.
Work It Out : Locate your approximate total debt amount in the Total Debt Amount column, along the left edge of the Debt-Elimination Time Calculator chart (on next page). Then run your finger across to the right until you reach your approximate total monthly amount available for paying on all your bills - including your mortgage. This income amount should include both your Margin and the normal minimum monthly payments on all your bills, but not the money that will go toward non-debt monthly expenses like food, utilities, gasoline, and insurance.
When you’ve located this monthly amount, follow that column up to the line at the top of the table and you’ll see the approximate number of years it will take you to get completely out of debt.
This chart will show you why you want to put the most you can into your monthly payoff Margin. The lower the monthly amount you can muster against your total debt load, the longer it will take you to pay it off. And the longer the payoff takes, the greater the portion of your money that will be going toward interest rather than principal.
Time Tip: Most people can pay off all their debts, including their mortgage, in around five to seven years, and the more you can put into the process the shorter that time frame will be!
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DEBT-ELIMINATION TIME CALCULATOR
Total Debt 1 2 3 4 5 6 7 8 9 10 Amount year years years years years years years years years years
$ 1,000 $ 87 $ 46 $ 32 $ 25 $ 21 $ 18 $ 16 $ 15 $ 14 $ 13
3,000 262 137 95 75 62 54 48 44 41 38
5,000 437 228 159 124 104 90 80 73 68 63
7,000 612 320 223 174 145 126 113 103 95 89
10,000 875 457 318 249 208 180 161 147 135 127
15,000 1,312 685 477 373 311 270 241 220 203 190
20,000 1,749 914 636 498 415 361 322 293 271 253
30,000 2,624 1,371 954 747 623 541 483 440 406 380
40,000 3,498 1,827 1,272 995 830 721 644 586 542 507
50,000 4,373 2,284 1,590 1,244 1,038 901 804 733 677 633
75,000 6,559 3,426 2,385 1,866 1,557 1,352 1,207 1,099 1,016 950
100,000 8,745 4,568 3,180 2,489 2,076 1,803 1,609 1,465 1,354 1,267
125,000 10,931 5,711 3,975 3,111 2,595 2,253 2,011 1,831 1,693 1,583
150,000 13,118 6,853 4,770 3,733 3,114 2,704 2,413 2,198 2,031 1,900
200,000 17,490 9,137 6,360 4,977 4,152 3,605 3,218 2,930 2,709 2,534
250,000 21,863 11,421 7,950 6,221 5,190 4,506 4,022 3,663 3,386 3,167
300,000 26,235 13,705 9,540 7,466 6,228 5,408 4,827 4,395 4,063 3,800
350,000 30,608 15,990 11,130 8,710 7,265 6,309 5,631 5,128 4,740 4,343
400,000 34,981 18,274 12,720 9,954 8,303 7,210 6,436 5,860 5,417 5,067
450,000 39,353 20,558 14,310 11,198 9,341 8,111 7,240 6,593 6,094 5,700
500,000 43,726 22,842 15,900 12,443 10,379 9,013 8,045 7,325 6,771 6,334
550,000 48,098 25,127 17,490 13,687 11,417 9,914 8,849 8,058 7,449 6,967
600,000 52,471 27,411 19,080 14,931 12,455 10,815 9,653 8,790 8,126 7,601
650,000 56,843 29,695 20,670 16,175 13,493 11,717 10,458 9,523 8,803 8,234
700,000 61,216 31,979 22,260 17,420 14,531 12,618 11,262 10,255 9,480 8,867
750,000 65,589 34,264 23,850 18,664 15,569 13,519 12,067 10,988 10,157 9,501
800,000 69,961 36,548 25,440 19,908 16,607 14,420 12,871 11,720 10,834 10,134
850,000 74,334 38,832 27,030 21,152 17,645 15,322 13,676 12,453 11,511 10,767
900,000 78,706 41,116 28,620 22,397 18,683 16,223 14,480 13,185 12,189 11,401
950,000 83,079 43,401 30,210 23,641 19,720 17,124 15,285 13,918 12,866 12,034
1,000,000 87,451 45,685 31,800 24,885 20,758 18,026 16,089 14,650 13,543 12,668
Total Monthly Accelerated Payment Amount
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Let’s see an example of how paying off debts might work:
If your debt, including your mortgage, totaled $200,000 - and the total monthly income (including your Margin) you had available for paying on your debt was $4,100 - you would first locate $200,000 in the far left column, then look across to the right and find “4,152.” This is the amount closest to the $4,100 you have available each month. Then run your finger up to the top of that column and your answer is four years! All your debts - including your home mortgage - would be paid off in just five years.
Be honest with yourself - what plan do you currently have, or have you ever heard about, that could get you totally debt-free in that short a time? To get a handle on how brief that time is, simply think back five years. Doesn’t it seem like just yesterday? Well that’s how quickly you’ll be looking back and remembering how hard it was carrying your heavy debt load through life.
Another feeling you’ll have at that time is complete freedom and “un-vulnerability.” That’s not to say you’ll necessarily quit your job or radically change your life when you’re debt-free. You might … you might not. The point is, for the first time in your life, you will be in a position to make that choice .
Once you’re debt-free, even before you’ve started your investing, no boss will be able to hold your job over your head because you’ll be able to survive without it. You could easily live on unemployment or savings until you found other work. Or maybe you’d just choose to move to a less-expensive area and start a home-based business. The important thing is that the immediate pressure would be off and you’d have options.
Think about how many people (maybe yourself included) spend every day sweating out the economy or their company’s stability. According to a recent NBC television report, America has lost 25 percent of its jobs in just the last 10 years, and it is still losing 2,200 jobs every day!
Layoffs start coming around and people panic because they know they cannot survive without their whole paycheck every month. But when you have no debts, all you need to worry about is eating, utilities, insurance and taxes. That takes a lot less money each month than you’re spending now, so even a small savings account could sustain you for a relatively long period of time. No need to panic.
Once you begin building your investment portfolio — which starts happening the month after your last debt is gone — you’ll quickly build up a more-than-sufficient emergency reserve. After just a few months, you’ll have as much in the bank as any credit card would ever offer you as a credit line — so you can be your own credit card or bank from that moment on. By the end of the first year, you’ll have
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more in your savings and investments than you probably dare to dream right now.
Your Margin
OK. I’ve thrown around this term Margin. You’re probably wondering “What is it, and what part does it play in the debt-payoff process?”
The best way to describe how the Cascading Debt-Elimination System works is to think of rolling a snowball downhill to make a snowman. As you roll, it picks up snow, grows larger, and builds momentum. The snowball in my system is what I call your Margin.
I’m going to help you put together your Margin in the next session, but for now I just want you to understand that this is the money that will drastically accelerate the payoff of each debt. The reason I’m showing you how the Margin works in the Cascading Debt-Elimination System before I actually help you put it together is because I want you to be fully motivated to pursue every dime of potential Margin money before I show you where to look for it.
If I had explained where your Margin money might come from before you saw how powerful each Margin dollar could be in paying off your debts, it would have simply been an academic exercise. But once you see how quickly the Margin can help melt away your debts, you’ll be thinking up your own ways to add dollars to the process.
In this session I recommend you use 10 percent of your monthly net income for your Margin. This will be a workable number for the calculations. It will give you an understanding of how the Margin works and a frame of reference for what could be accomplished by the Margin we’ll put together for you in the next session.
Right now let’s see what it can do.
Let’s Get Down to Paying Off Your Debts
DEFINITION: For the purposes of this system, a debt is an owed amount that can be completely paid off. Ongoing costs, such as food, taxes, or utilities are expenses; and although you want to minimize them, they are not to be included in this debt- elimination program because they can never be totally paid off.
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HELP: The complete Cascading Debt-Elimination System is explained, in detail, on the Quick Start DVD. Please watch the video to get an overview of this process.
OK … let’s get started. The first thing you want to do is get all your debts together. Then write down each account’s name, total balance, and its corresponding required minimum monthly payment in the first three columns of the Calculating Your Debt Payoff form. See the sample form on the following page.
NOTE: When it says “minimum monthly payment,” we mean the minimum payment allowed by that creditor. If you’re in the habit of adding a little extra to certain debt payments, like your mortgage, STOP doing that. Just pay the minimum payment allowed for each debt each month, and put all other available dollars into your Margin.
When you have them all written down, divide the Total Balance amounts by their respective Monthly Payments and put the answers in column 4.
For example: Let’s say you have a Visa ® card with a $500 balance and a minimum monthly payment of $25. You would divide $500 by $25 and get an answer of 20. The answer does not mean anything in and of itself, but it is the first step in determining the proper order in which to pay off all your bills.
Do this for each bill, and record the answer to each division in the appropriate column 4 box on the Calculating Your Debt Payoff form.
Next, starting with the lowest division answer, number the bills from “1” to whatever number of bills you have to pay off. Put these numbers in the Payoff Priority column. For example, if you had two bills (say the Visa ® above and a Department Store charge) - and the Visa® division gave you the answer of 20, while the Department Store came out at 17 - the Department Store account would be Priority number “1” and the Visa ® account number “2.”
These numbers indicate the order in which you should pay off your debts. You would pay off the Department Store first and the Visa ® account second. If two or more debts come out with the same division answer, prioritize the debt with the lower balance to be paid off before the debt with the higher balance.
It is not important which account has the highest interest rate, because this system so accelerates bill payoff that you will not be paying enough months of interest for it to make a significant difference. You
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are going to beat your creditors at their interest game and turn off the flow of money they have been siphoning out of your financial life.
CALCULATING YOUR DEBT PAYOFF BLANK FORMS LOCATED ON PAGE 138
A. Write down your Margin at right.
Try for 10 percent or more of your monthly take-home income: $ ______
B. Write down each debt name in the first column below, its total balance in column 2, and its minimum monthly payment (excluding tax, insurance, or any amount you might typically add to it) in column 3. C. Divide the total balance of each debt by its monthly payment, and put the answer in column 4. D. Prioritize your debts in column 5, beginning with the debt with the lowest division answer in column 4 as priority debt #1, the next lowest division answer as priority debt #2, and so on. E. Column 6 is where you add your Margin (from A. above) to the monthly payment amount for priority debt #1 and put this total to the right under Accelerated Monthly Payment. Now divide debt #1’s Total Balance by this Accelerated Monthly Payment. The answer goes in column 7. F. When debt #1 is paid off, take its Accelerated Monthly Payment (which contains the original Margin and debt #1’s monthly payment) and add this amount to the monthly payment of debt #2. Put the total in column 6 as debt #2’s Accelerated Monthly Payment G. Continue adding each paid-off debt’s Accelerated Monthly Payment to the monthly payment of the next priority debt to accelerate its payoff - until you've eliminated all your debts.
Total Monthly Division Payoff Accelerated Months to Name of Debt Balance Payment Answer Priority Monthly Payment Pay Off 1 2 3 4 5 6 7
Mortgage 100,000.00 733.26 136 9 2,794.73 36
Mastercard® 1 1,700.00 34.00 50 6 1,678.54 2
Mastercard® 2 3,287.00 65.74 50 7 1,744.28 2
Visa® 1,550.00 31.00 50 5 1,644.54 1
Discover® 850.00 17.00 50 4 1,613.54 1
Department Store 1,122.00 33.66 33 3 1,596.64 1
Car 1 12,350.00 671.90 18 2 1,562.98 8
Car 2 7,250.00 491.08 15 1 891.08 9
Home Equity Loan 23,530.00 316.69 84 8 2,060.97 12
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TOTALS 151,639.00 2,394.83 72
H. Total Debt (total column 2): $ 151,639.00 I. Total Monthly Payments (total column 3): $ 2,394.83 J. Total Accelerated Payments (A + I): $ (400+2,394.83) = 2,794.83 K. Years to debt-freedom (total column 7 ÷ 12): $ (72÷12) = 6 years
¥ Work It Out :
Analyze how the debts were prioritized on the sample Calculating Your Debt Payoff form. Note how their Margin was added to the first debt, then how their increased Margin was cascaded down to the second debt, the third debt, and so on.
Watch the Power of Mathematics Working for You
It is time to start rolling the bill-payoff snowball downhill. During this process you will be focusing all your Margin on one debt at a time, paying minimum allowed payments on all other debts.
On the sample Calculating Your Debt Payoff form on page 54, you’ll see the $400 Margin in box A at the top of the form. Add that $400 to the regular payment for the first debt to be paid off (car 2). Now simply divide the Total Balance on this loan ($7,250) by the Accelerated Monthly Payment amount of $891.08 (the regular monthly payment plus the Margin) being paid on the car loan each month. You can see that it will now take just nine months until car two is completely paid off.
That’s impressive! But what’s really powerful is what starts happening in month 10. Since you’ve paid off car two, you have now recaptured its normal $491.08 monthly payment and it becomes part of your Margin. So your Margin is now $891.08. Just like the snowball rolling downhill, you’ll take your now larger Margin and roll it or “cascade” it down to debt number two, the loan on car one in this example. This loan has a regular monthly payment of $671.90, and when added to your new $891.08 Margin, the Accelerated Monthly Payment on car one will be a whopping $1,562.98 every month!
As you can see on the Calculating Your Debt Payoff form, even though car one has a $12,350 balance, it will be paid off in just eight months. This is the power of the Cascading Debt-Elimination System . The growing Margin cascades down from one debt to the next, to the next, until they’re all gone.
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In most cases, people following the YOUR DEBT ELIMINATION System have completely eliminated all their debts, except their mortgage, in one to two years. They then frequently have an Margin 1.5 to 2 times as big as their mortgage payment, sometimes even more. This means they can often triple their mortgage payment every month.
On the sample Calculating Your Debt Payoff form on page 54, you’ll notice that the Margin has grown to $2,060.97 by the time it cascades down to the $733.76 mortgage payment. It’s nearly three times as large as the regular mortgage payment, and when they’re added together the Accelerated Monthly Payment applied to the mortgage is $2,794.73 a month. Even though the mortgage has a $100,000 balance, it’s gone in just 36 months! A mortgage that would have taken decades to pay off is burning in the fireplace in just three years.
NOTE : Contact your mortgage holder directly and ask for specific instructions on how to make additional principal prepayments along with your regular monthly payment. Ask them to mail written guidelines to you if they have them. In most cases, the Additional Principal Prepayment forms in the Appendix B section of this system manual will work.
When you begin paying your Accelerated Monthly Payments on your mortgage, your equity in your home will skyrocket - for two reasons:
1. 100 percent of your Margin is reducing your principal balance (adding to your equity - the portion of the house you own). So your net worth - your wealth - is growing even as you pay off your debts!
2. The portion of your regular monthly payment that is interest will be falling dramatically each month because it is calculated on the “remaining unpaid balance” of the loan. Since your Margin is pounding down this unpaid balance, the interest calculation will be performed each month on a smaller and smaller unpaid balance amount. So more and more of your regular monthly payment amount will also be applied to the unpaid principal balance, further accelerating the payoff process.
IMPORTANT: As soon as you reduce the principal balance to less than 80 percent of the home’s appraised value - check with the lender to be sure they are no longer charging you for Private Mortgage Insurance. This will eliminate the PMI monthly premium, lowering your monthly payment, meaning that even more of your Accelerated Monthly Payment will be going to principal reduction. Let’s go back to the sample Calculating Your Debt Payoff form on page 54. Totaling the figures in column 7 will tell you the total number of months your debt-elimination plan will take. Divide this number by 12 and you’ll know how many years it’ll take until you’re completely debt-free. In the example above, this family would be completely debt-free in 72 months, which - divided by 12 -
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comes out to exactly six years. This is approximately 24 years earlier than they would have paid everything off if they had made the payments the way their creditors had them set up.
NOTE: If you’re a math wizard, and you’re muttering to yourself, “Paying off interest- charging debts is not as simple as addition and division,” take heart. After more than a decade of using and teaching this system, I can assure you that these simple manual calculations come out remarkably close to the results of the much more sophisticated calculations it would require to take into account diminishing balances on all debts, interest charges, declining minimum monthly payments, and so on.
How is that possible? Well, without breaking into mind-numbing algorithms to explain it, let me simply say that a couple of significant factors that my simple manual calculations ignore cancel each other out, and the net effect is that these manual calculations generally produce a total debt payoff timeline within a couple months of the precise calculations for the same total debt load.
If you’re a stickler for precision, fire up my DebtFree ® Software that came with your Your Debt Elimination System package.
Now it’s Your Turn
Locate the blank Calculating Your Debt Payoff form on page 172 in the Appendix B section of this manual. You may want to make a couple photocopies of the blank form before you start, in case you want to try different scenarios later (the software has this capability built-in). Enter your Margin at the top of the form, and each of your debts, their balances, and their monthly payments in the first three columns. From there it’s addition and division. The directions are on the form, and you can review the sample explanation above for additional help. You should also watch the Quick Start DVD for a step- by-step walk-through of this process.
Once you’ve completed the form, you have a plan. A plan that will take you, month-by- month, from indebtedness to total debt-freedom. But you have to follow it.
Track Your Progress
You should track your progress every month against your Calculating Your Debt Payoff form. Use the Freedom Fighter Form (on the next page) to help you do just that. Take it out and post it somewhere prominent. This will help you avoid frittering away money on nonessentials while you think you’re paying off your debts. If you know when a debt is supposed to be paid off - and it’s not - you know you’ve been undisciplined in following your plan (or maybe you had an emergency that required the
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Margin that month). Either way, you’ll know exactly how far off schedule you are.
¥ Work It Out: The Freedom Fighter Form
To keep track of your fight for freedom from debt, use the form on the following page. Take the first debt you are going to be paying off (from your calculations above) and write it in the box called Debt One, then write in your estimated payoff date. Do this for all of your debts. When you actually pay off your first debt, write down that date in the box and create your new Margin. You might want to look at your budget and see if there are any extra sources of money since it’s been a few months since you created your Margin. Maybe you realized you don’t need all those cell phones, and now you have an extra $50 a month. Write your new Margin number in the circle. Now start working on the next debt!
By the time you’ve filled out the whole chart, you will be in a position to say goodbye forever to credit and all the headaches and humiliation that go with it.
FREEDOM FIGHTER FORM
Debt One: ______Debt Six: ______Estimated Payoff Date: ______Estimated Payoff Date: ______
Date Paid Off: ______Date Paid Off: ______
Debt Two: ______Debt Seven: ______Estimated Payoff Date: ______Estimated Payoff Date: ______
Date Paid Off: ______Date Paid Off: ______
Debt Three: ______Debt Eight: ______Estimated Payoff Date: ______Estimated Payoff Date: ______Date Paid Off: ______Date Paid Off: ______
Debt Nine: ______Debt Four: ______Estimated Payoff Date: ______Estimated Payoff Date: ______
Date Paid Off: ______Date Paid Off: ______
Debt Five: ______Debt Ten: ______
Estimated Payoff Date: ______Estimated Payoff Date: ______
Date Paid Off: ______Date Paid Off: ______
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Tip : Don’t let yourself slip into the negative emotional trap that “this is some kind of super-restrictive budget.” This is not a budget - it’s a spending plan or a resource allocation plan that simply guides you in how to best use your financial resources. It’s not a restrictive approach to using money, it’s an aggressive approach to building a future of your own design. Most importantly, it’s making you “un- vulnerable” and eventually … financially independent.
You’re not giving things up. In fact, you are gaining a few important things, like control and ownership of your own life - and freedom of choice about what you do with the rest of that life - not to mention what you’ll do with the hundreds of thousands of dollars of interest you otherwise would have paid to your creditors.
Frequently Asked Questions About Debt-Elimination
Question: I don’t have a mortgage. In fact, I’ve been saving up for a down payment. How does this apply to me?
Answer: If you’re not yet making mortgage payments, you should use the YOUR DEBT ELIMINATION System to pay off all your credit debt (bank cards, store charge cards, gas cards with any balance on them, car loans, and so on). Once your debts are gone, put all the money you’ve freed up each month into a money market account or Certificate of Deposit (CD), to more quickly build up a down payment for your home. As soon as you get into your new house, immediately start the process of paying off the mortgage using the YOUR DEBT ELIMINATION System! Notice that we said pay off all your debts first … then begin saving for your down payment. This is the sequence that will get you into your home the fastest. And it will improve your FICO ® Score and your debt-to-income ratio.
Question: You mean I shouldn’t be saving money all along?
Answer: Every time you get conventional financial advice, it usually includes the instruction to build a little nest egg on the side while you work your way through life. Many authorities will counsel you to save 10 percent of your income as an investment for the future. They call it “Pay yourself first.” I agree with the “Pay yourself first” principle, but not with where they tell you to invest it. If you’re putting money into a savings or money market account at 1, 2, or 3 percent interest … or even government securities that generate 4 or 5 percent - while you are simultaneously paying 15 percent or more on credit interest - you’re moving backwards at a rate of at least nine to 13 percent a year. And when you compound that over several years, it becomes a staggering loss of your wealth.
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If you have any debt, the best, first investment of your money is to pay off that debt because you’ll get an effective Return on Investment (ROI) equal to the interest rate that debt charges. So when I say “Pay yourself first,” I mean pay the money toward debt-elimination. Save second. You’ll be dollars ahead following this approach.
That’s why I even recommend you consider temporarily suspending any savings you may be doing right now, including deductions coming out of your paycheck at work, and add that monthly amount to your Margin. You want to get as much of your income working on the debt pay-down as possible. Your money will do you a lot more good paying off 7 to 20 percent debt than it will earning 2-4 percent in a savings account.
NOTE: As I said above, investing your money into paying off a debt where interest is charged on the outstanding monthly balance gives you an effective return exactly equal to investing the same money into an interest-earning account with the same interest rate. For instance, that means that investing a thousand dollars toward paying off the balance of a debt on which 12 percent interest is charged is the same as investing that thousand dollars into an investment that pays you 12 percent interest.
The main difference is that the Return on Investment for paying off a debt balance is guaranteed to stay at the interest rate being charged on that debt, whereas interest rates in most growth investments fluctuate. So, every dollar used to pay off the balance of, say, a 15.9 percent credit card is earning a guaranteed return of 15.9 percent! And that’s an after-tax return , so an equivalent investment would have to pay around 20 percent before taxes to yield the same after-tax benefit to you.
Question : What about my 401(k)? Should I stop putting money into that?
Answer: 401(k) or 403(b) plans that you have at work are great retirement investment plans, because you’re immediately earning your employer’s contribution, and that can equal as much as 100 percent of your contribution. Plus, the growth of the total investment accumulates tax-deferred until you begin taking distributions in retirement. What I recommend is that you continue investing in your 401(k) or 403(b), but not a penny more than your employer will match . Put all the rest into your Margin until your debts are completely paid off - then raise your 401(k) contribution to the maximum percentage of your pay that is allowed.
Question: Don’t I need a good credit rating?
Answer: You won’t need it to obtain credit because you won’t likely need any credit. You may
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want to check for damaging errors on your credit rating because some employers and landlords use credit ratings as part of their hiring and leasing practices. But, when you finish the YOUR DEBT ELIMINATION Program, you should never again need a credit rating to get credit.
Question: I’m in real big trouble and have been thinking of declaring bankruptcy. If I did this, I could move straight to the wealth-building phase of YOUR DEBT ELIMINATION. Do you recommend this?
Answer : Bankruptcy is sometimes the only option for people whose circumstances have changed to the point where it’s no longer possible to make their income meet their outgoing obligations. It is not , however, a proper debt-elimination tool for someone who can pay their bills. The problem is that some bankruptcy lawyers have encouraged people who could pay their debts to just dump them through the bankruptcy laws - leaving their creditors holding the bag. While it’s arguable that the credit companies deserve to lose some money, considering how they push credit on all of us, the ethics of someone who is mathematically capable of making their monthly payments using bankruptcy as a method for achieving debt-freedom troubles me.
The bankruptcy laws were established to protect people who - through no fault of their own - got into an impossible financial situation. Bankruptcy was never meant as a way of getting rid of annoying bills, as a convenience for undisciplined consumers. If you can currently make your monthly payments, even if it’s tight - the YOUR DEBT ELIMINATION System can help you pay off all your debts in a handful of years. Plus, as soon as the first debt gets paid off, you have more free money each month, and that amount grows as each subsequent debt is eliminated. So the tightness or pressure you feel right now begins being relieved quickly and goes away fast. If you can’t make your monthly payments, and your obligations exceed your income, we have a service that can intervene for you and may be an alternative to bankruptcy.
Question: What about emergencies? Shouldn’t I have a little money set aside for emergencies?
Answer: First of all, don’t forget about that credit card you have in the freezer. If you’re worried that something really expensive is going to happen, you do have that resource. But, you probably won’t need it because when you’re growing your Margin, you can use it in any given month to cover most emergencies.
For example, if the TV breaks down, you just take a small part of your Margin and get the TV fixed. If it can’t be repaired, take a little more money and get a new one. If your car breaks down and you need to either fix it or get a newer car, hold off on your debt-reduction schedule for a couple months and buy a good used one with cash.
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Question : My job requires me to use a credit card. What do I do?
Answer : Sometimes a person’s work or lifestyle requires them to carry plastic. A salesperson, for instance, needs a charge card to rent a car, get a hotel room, and buy a client lunch. There are a couple options here other than holding onto a credit card. Our first choice is an American Express ® card because it’s a charge card, not a “credit card.” You’re supposed to pay the full balance off every month, so it will not allow you to go into debt and start paying interest on a balance. Be aware that we are referring to the basic, green American Express ® card here. Gold and Platinum American Express ® cardholders are frequently offered lines of credit. Plus, they have hefty annual fees.
Another good option is a bank debit card. A debit card looks and works like a regular Visa ® or MasterCard ® credit card, but instead of building up debt (on which interest is charged) the money is taken directly from your checking account. In other words, using the debit card is just like writing a check, but with the convenience of a credit card. The important point about debit cards is that, since they operate like a check, you have to have the money in your account. This will give you the same emotional spending discipline as writing a check, rather than the lack of discipline fostered by true credit cards.
Question : Why should I pay off my low interest rate mortgage when I could make so much more by investing in the market?
Answer : On a typical monthly mortgage payment, 90 percent or more of the payment is interest each month. While the mortgage company made you feel like you were getting a 5.72 or 6 percent mortgage, you’re actually paying 90+ percent of your money toward interest each month. It would only be 5.72 or 6 percent if you paid the entire balance off in the first year.
The other reason paying off your mortgage is a good idea is that paying off debt gives you a guaranteed Return on Investment equal to the debt’s interest rate, so you must only compare paying off your mortgage loan with investments that would also guarantee their return. What investments guarantee their returns? Growth/equity mutual funds do not guarantee their return. In fact, you can lose money in these funds. It’s the same with individual stocks, bonds, real estate, precious metals, and almost all types of securities. The safest investments that do guarantee their return rates are U.S. Treasury instruments, such as bills, notes, and bonds. You’ll find that long-term bonds generally offer the highest interest rate of the three, but this rate will always be less than current mortgage interest rates. So prepaying your mortgage will always give you a higher return on your money than the best comparable, guaranteed-return investment.
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Question : But I am getting a really great tax deduction from my mortgage. Why would I want to give that up?
Answer : Don’t worry about the loss of your mortgage interest tax deduction or concern yourself with any other tax consequences. While you’re paying off your mortgage, you’re still getting your full tax deduction on the interest you pay. If you live in Canada, you know you have no mortgage interest deduction on your home, so that makes the elimination of your mortgage even more imperative.
I’ve already explained why the mortgage interest tax deduction is a losing proposition, but to quickly review: you pay a dollar to your mortgage lender as interest and get back 25 to 40 cents from the government as a tax reduction. That’s paying a dollar to get back 25 to 40 cents. Sound like a good deal to you? If it does, let’s get together, and I’ll trade you 25 cents for each dollar you can come up with!
Question : I heard someone recommend keeping your mortgage and investing what you would call the Margin. Can you explain why someone would recommend keeping a high mortgage?
Answer : No, I can’t explain it. It doesn’t make mathematical sense. Some “wealth- building gurus” advocate mortgaging your home to the hilt and investing the money to get rich! If you do that, you end up paying 92 to 95 percent interest on each monthly mortgage payment, so you can make 10, 20, or 30 percent in the market. And, of course, there are no guarantees in the market, so you could lose 10, 20, or 30 percent.
But beyond the numbers, the Your Debt Elimination philosophy is one of increasing your security, not threatening it. Each month you’re less in debt, and you own more of your stuff. As each debt is paid off, you own those things, and no one can take them away from you. It’s about the emotional security of knowing that your home, your cars, and everything else in your life are YOURS. No matter what comes your way, at least you won’t end up homeless and starting from scratch. That’s important to me, and I think it’s important to a lot of people … all except the folks telling you to mortgage up your house so you can play investment roulette with the money in the stock market.
Your Margin Is the Key
Congratulations! You’ve done it. You have now put your numbers into the YOUR DEBT ELIMINATION System and know when you will debt-free. You have discovered that, if you are like most people, you will be debt-free in five to seven years. If your timeline comes out a little longer, don’t worry that still beats decades or maybe never.
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Five years. That’s just 1,825 days, or 261 weeks, or 60 months.
But to make that actually happen, you need your Margin to be at least the amount you used in your calculations. How can you do that? In the next session we’ll go looking for Margin money in your life.
Creating Your Margin
The average family can save more than $100,000 in interest by following the YOUR DEBT ELIMINATION plan.
Congratulations. You calculated your debt-elimination plan and now know when you can be completely debt-free! Isn’t that liberating? In fact, isn’t it amazing how quickly you can get rid of a lifetime worth of debt? But, as I said at the end of the last session … your Margin is the key to making it all happen so quickly.
“OK,” you might be saying, “I can see all the reasons why I want to pay off all my debts… and I see how rapidly the Cascading Debt-Elimination System can do the job … but where am I going to find the money to do it with?”
Like everything else in the Your Debt Elimination System , there’s a logical set of steps to finding that money. We’ll cover each in detail below, but here’s the basic process. Steps to Creating Your Margin
1. Keep a Spending Journal. (Blank sample on page 170) 2. Complete the Accelerator Creator Quiz on page 171. 3. Use the Spending Journal and the Accelerator Creator Quiz to identify areas for saving money. 4. Complete the Accelerator Finder Forms parts one and two that start on page 70. Once you’ve completed the tasks, you can use the information they generate, as well as the rest of the ideas in this system manual and on the Session Six audio program, to maximize your Margin.
Discipline Tip: Remember that every dollar you put into your Margin for debt reduction will transform itself into MORE dollars in wealth. How this happens is probably unclear to you at this point, but trust me, each dollar you use to pay off debt balance will have babies. It will generate many dollars of wealth.
So how strict do you have to be with yourself about your spending to make this Margin thing work?
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I’m not talking about sacrificing like a Tibetan monk, living off the land and spending nothing. The idea is that there is money flowing out of your hands each month that could get you out of debt faster if it stayed in your life and was focused on debt- elimination. Is it worth it to search out this money? Well, if you found just $100 a month and applied it to a $100,000, 9 percent, 30-year fixed mortgage, you’d pay it off in less than 20 years and save yourself $75,394 in interest. This savings would be accomplished with less than $24,000 of Margin money, so each Margin dollar would produce more than three dollars of interest savings. Does that sound worth it to you?
The power of the YOUR DEBT ELIMINATION System is the focusing of all available money into your bill payoff process. This does not mean that you can never go to the movies or out to dinner. What it does mean is that you must understand the trade-offs. If you go out to dinner that might add a month onto the payoff time for a certain bill - thereby delaying, to some extent, the day when you’ll be completely debt-free, and reducing your eventual total wealth by whatever that amount would have grown to with time and compound interest. If it’s worth it to you to make that trade, go ahead.
On the other hand, beware of the initial urge to shut off all forms of fun completely. You’ll get frustrated and quit your plan entirely. Be willing to indulge yourself now and again — just know what you’re trading, and make sure it’s worth it to you.
How It Works: The Power of One
$1 goes to pay off debt, saving you more dollars in interest, giving you more money to invest, producing even more dollars in interest being paid to YOU!
Finding Margin Money
You may be thinking, “I don’t have ANY extra money at all. How can I create a Margin?” Don’t worry. The YOUR DEBT ELIMINATION System will work for you even if you’re Margin is zero. Eventually you’ll create your own Margin when your first debt gets paid off.
So how much should your Margin be? As much as you can possibly marshal. My rule of thumb is to try to put together a Margin of at least 10 percent of your monthly income. This may sound impossible right now, but hang in there. I’m going to offer lots of ways to find this money.
From where?
Well, it could be leaking out of your wallet or purse and you don’t even notice it. This is the case for
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most people. At the beginning of the week they get cash from the bank, ATM, or by writing a check for “over the amount” at one of their regular shopping spots - and by the end of the week they’re heading back for more. Where did it go? Let’s see if we can find out.
The only way to track the movement of anything is to watch it, and record what happens, so you can analyze what you’ve watched. To watch the movement of your money, we’re talking about keeping a Spending Journal … at least for long enough to see what’s happening.
To find out where your money is going, photocopy the blank Spending Journal on page 170 of this system manual. Every day for a minimum of a week - a month is even better - jot down a note every time you make a purchase. You’ll likely be surprised to see what you spend your money on. If you’re tempted to skip this step, don’t! Remember, in order to see different results, you need to DO something different. Don’t just read about becoming debt-free and wealthy. DO what it takes to actually achieve it.
From Snowflake to Avalanche
As I said earlier, the amount you’re shooting for in putting together your Margin is at least 10 percent of your monthly, net household income. If your only debt is your mortgage, shoot for 25 to 30 percent of your monthly income for your Margin. The more you can put together, the faster the process will work for you.
For example, if you bring home $3,000 a month, you are trying to work up a $300 monthly Margin. If you think you can’t afford that, keep reading and you’ll see ways it can be done. On the other hand, if you can afford more, do it. This is not a game you want to stretch out. The goal is to pay off all debts in the shortest period of time. That is the fastest track to true financial independence.
Once you see how much just a few extra Margin dollars can speed up your debt-elimination, you’ll become ruthless in finding every possible penny. Besides, it’s your money. Why should you give one penny more than you must to anyone other than those with whom you choose to share it?
Look at every expense area you have. For instance, are you really using all the premium (extra charge) cable TV channels you’re paying for each month? Could you brown-bag lunch from home more often? Do you pay someone to cut the grass or shovel the snow, when you could do it yourself? Are you paying $25 to have a quick- lube service change your oil, when you might be capable of doing it for yourself, for less than half that price. Are you paying a premium to eat frozen/precooked meals when you could cook more nutritious meals from scratch - for a fraction of the cost? Are you
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paying full price for all your groceries when your weekly newspaper and the World Wide Web are stuffed with discount coupons?
¥ Work It Out : Get out your Spending Journal and your answers to the Accelerator Creator Quiz .
Take a look at your spending, and come up with 10 ways you could be more efficient and save money for your Margin.
Item I am spending money on: How much I can save:
Add together the money you can save = ______
Your Margin so far = ______
Don’t stop here! Keep going. Enlist your friends and family to help you come up with more creative ways to save money. Every dollar makes a huge difference!
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Accelerator Finder Form: Part One
TOTAL HOUSEHOLD INCOME
NOTE: Round off all numbers to the nearest whole dollar amount.
Income Source Earner A Earner B
Salary (net, take-home pay) $ $
Part-time/Self-employment Income $ $
Home-based Business Income $ $
Investment Income $ $
Social Security $ $
Pension $ $
Veteran’s Benefits $ $
Other income $ $
Individual Totals $ $
Salary (net, take-home pay) $ $
Part-time/Self-employment Income $ $
Home-based Business Income $ $
Investment Income $ $
(Total Income of Earner A) $ ______
+ (Total Income of Earner B) $ ______
TOTAL HOUSEHOLD INCOME = $ ______
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Accelerator Finder Form: Part Two
REDUCING YOUR MONTHLY EXPENSES
List all your current monthly expenses in the Current column below. In the Reduced column write in the lowest amount you can reasonably spend on each expense item. Total up all reduced amounts at the bottom of column 3, then subtract that amount from your Total Income on the previous page. The resulting number is your maximum possible starting Margin. If you feel you need to use a lower Margin to give yourself some breathing room each month, that's your decision. It will just take you a little longer to get debt-free.
Monthly Expenses
Current - Reduced = Accelerator
Retirement plan contributions
Other savings
Going out for lunch at work
Dining out (other than work lunches)
Groceries
Telephone (land line)
Cellular phone
Heating fuel
Water/Sewer
Electricity
Car Costs (gas, repairs)
Parking, Tolls, etc.
Car #1 payments
Car #2 payments
Insurance (Cars)
Insurance (Health)
Insurance (Home)
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Monthly Expenses Current -Reduced = Accelerator
Insurance (Life)
Insurance (Other)
Home Equity Loan Payments
Other Loan Payment
Child Care
Cable/Satellite TV
Movies/Video rental
Other Entertainment
Sports (Golf, Fishing, etc.)
Health Club
Lawn Maintenance
Laundry
Pet Food and Care
Subscriptions
Online Computer Services
Credit Card Payments
Other
TOTAL Margin $ ______
Congratulations! You’ve now developed your Margin.
If you were having trouble seeing savings opportunities as you went through the previous forms, here are some specific places to look for Margin dollars in key areas of your spending.
Insurance . It’s been said that in no other expense area do people spend so much of their income with so little understanding of the value of what they’re buying.
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IMPORTANT: Whenever I suggest you consider canceling any insurance, for which I also indicate a more cost-effective replacement, always get the replacement policy in force before you cancel the coverage you will be dropping.
Insurance companies don’t lose money on their insurance business. Sure, a small number of insurance companies go out of business because they make bad outside investments, but they do not lose money on their insurance programs. When they sell you an insurance policy, they’re gambling (with the odds in their favor) that bad things will not happen to you, and you (silly, if you think about it) are gambling that bad things will happen to you.
Insurance companies never lose at this game. Sure, there are a small number of people who file big claims after paying only a few premiums. But, while it may appear that the insurance company loses money in these situations, the fact is they have thousands of other people paying premiums, to whom nothing bad is happening. So they simply take the profit they’re making on most people and easily cover the benefits they have to pay out to the few unfortunate ones. Insurers know that you are thousands of times more likely to be one of the fortunate ones who cost them nothing … and make them tons of profit!
Now let’s look at the probability of bad things happening to you.
You probably need insurance only to protect you from catastrophic occurrences, where the expense could wipe you or your survivors out. And it is probably cost-effective to assume the risk of insuring yourself from life’s minor illnesses and accidents by maximizing the deductibles on these policies. Buying a policy with a high deductible is most often cheaper than paying an insurance company higher premiums, month after month, to cover minor costs for you should you have reason to file a claim.
I’ve italicized probably because it represents how insurance companies look at the world. They only offer policies to people whom they believe will probably not have the problem the insurance covers. And since insurance companies hire geniuses, called actuaries, to determine these probabilities , I say we agree with the geniuses and believe that these bad things won’t happen to us. Insurance companies only bet on what they believe to be sure things. Which means that, if they’re willing to sell you a policy, it’s only because history and math have proven to them that they’re going to win. Another way to say it is - if they’re willing to sell it to you, you probably won’t need it .
So how does all this apply to your insurance? Let’s see.
Life Insurance. The purpose of life insurance is not to make your survivors rich should you die. It is
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to assure them a continuation of your income stream should you stop producing it yourself. For most people, the most cost-efficient way to accomplish this is to buy term life insurance with a sufficient death benefit amount that, if it were invested in a good income mutual fund, the total return would equal your present monthly income .
In most cases, it’s also best to create a living trust to be the beneficiary of your life insurance (your banker or lawyer can help). The trust would be set up to invest the money from your insurance policy and pay your survivors the interest income as a continuation of your income stream. Making the trust your beneficiary will eliminate public probating of your estate, so the money will be immediately and privately available to your heirs, and the trust may help with some estate tax issues as well. See your lawyer or accountant to get the ball rolling on setting up a living trust.
Will you need to pay life insurance premiums until you eventually do die?
Not necessarily. If we look down the road to where you have a sufficient amount accumulated in your retirement portfolio that its monthly interest income could supply enough for your survivors to live on in reasonable comfort - you probably won’t need life insurance any more. That’s why I suggest term insurance … because you only need it for a certain term, until your investments build up an estate that could care for your heirs. That’s the real purpose of life insurance - to provide a temporary estate for your heirs until your actual estate is sufficient to support them.
However, each person’s circumstances are different, and there are situations where term might not be the optimum answer. Find an insurance agent or financial planner you trust, and ask them to evaluate your individual insurance needs. This evaluation should be repeated every three to five years because circumstances and laws change.
Just make sure you have your adviser explain to you - in terms you can understand - why the course he or she is recommending is superior, in their professional opinion, to buying term insurance combined with separate investments. And ask them to explain the difference in commissions they would receive with one recommendation versus the other options.
Automobile Insurance. If you passively accept all the coverages and deductible levels your insurance agent offers in their “standard package,” you could end up paying hundreds of dollars a year more than you need to.
For example, the medical coverage on your car insurance policy may be redundant with your health insurance or with other coverages within the policy. You likely already have a medical (health
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insurance) policy that covers you and your family both in and out of the car - 24 hours a day. Non- dependents who might be hurt in your vehicle would likely be taken care of by the liability portion of your policy, so if you have a solid health insurance package, the medical coverages on your car insurance may well be unnecessary. You can only get treated for your bodily injuries once, yet if you have health insurance and medical coverage on your car insurance - you may be insured twice, to cover one set of expenses.
Your agent may also recommend road service and rental car coverages, but you’ll likely never even remember you have them should you ever get into the highly unlikely situations in which these coverages actually apply. Most people forget they have road service coverage on their car insurance or - more likely - they never need it. The rental car coverage is of almost no value because it pays so little (at the time of this writing, State Farm pays $10 a day).
Personal Liability Insurance. You are probably carrying two or more separate liability coverages: one on each auto, another on each recreational vehicle (motorcycle, boat, jet-ski, etc.), and another on your homeowner’s policy. The purpose of liability insurance is that - should you or your property injure someone to the point where they could sue you - the insurance would pay them so you don’t have to. Generally speaking, you probably only need liability coverage equal to about twice your net worth. And you want the highest deductibles available, so as to keep the premiums to a minimum.
IMPORTANT: If you have your auto and homeowner’s insurance through the same company, ask about dropping your auto and home liability coverages to the minimums allowed and getting a $1 million (or higher) “umbrella” liability policy that will cover you under all circumstances. The total package will cost you less than raising the liability coverages on your individual policies.
Medical Insurance. If you pay for part or all of your medical (health) insurance coverage yourself, take the highest possible deductible you can stand. Unless you or a family member is particularly prone to illness, all you really need medical insurance for is to protect you from the huge bills that can come from a major illness or injury. Bills that could drain your savings and investments. If you insist on having a coverage level that will pay for every sniffle, you will likely pay through the nose in the form of higher monthly premiums ! In most cases, the increased premiums you’ll pay over a year for a lower deductible will cost you more than carrying a higher deductible and covering your incidental medical expenses yourself.
NOTE : Insurance laws vary from state to state, so before making these changes, discuss them with a trusted insurance adviser.
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Never Take Extended Warranties. Like most other forms of insurance, extended warranty policies are never likely to be needed by the person paying for them. With most modern products, if they’re going to break down, they’ll do it within the initial (free) manufacturer’s warranty period.
If it was likely that your car, stereo, washer, microwave, or TV would have the troubles covered by an extended warranty, they would not sell the warranty to you. But sell they do, and sometimes vigorously, because there’s a lot of additional profit in extended warranties. If a salesperson tries to make it sound like an extended warranty is “free,” ask him or her specifically if there is any charge to you for that coverage - either up front or in your payments. Cancel all extended warranties you’ve already paid for and get refunds for the unused time on them. Most people who purchase extended warranties have never made a claim on one in their entire lives. With savings they would have realized by not purchasing extended warranties, they could have afforded to fix any of the covered products had they broken.
Groceries . Most people spend $500 a month or more on groceries. Using discount coupons and shopping sales can save you at least 10 percent on your grocery budget. That’s $50 to $100 a month added to your Margin.
Eating Out. Just going out to lunch each work day, instead of bringing something from home, can easily cost you $100 a month. That’s another hundred for your Margin.
Movies. We’ve become a nation that feels deprived if we don’t go to a movie or watch a pay-per- view special every week. A movie and pizza for two, once a week, can be draining another $100 from your budget. If you can find alternative, free or inexpensive entertainment, that could be another $100 for your Margin.
Feeding the Kids. Fast food chains have made fortunes convincing American parents that their children can’t live without special fun meals and the toys associated with them. Incessant Saturday morning TV commercials compound the problem. But the point is that taking the kids out to one of these restaurants once or twice a week can cost a lot of Margin dollars. Maybe you could think of satisfying snacks and meals that could be made at home. And if the kids whine … remember … you’re the big person and they’re the little person. OK … in these tips alone we’ve found several hundred dollars a month for your Margin. I’ll bet you can think of more … especially now that you’ve seen how much difference they can make in how soon you could be out of debt.
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Frequently Asked Questions About the Margin™
Question: I don’t have any extra money at all. Can the YOUR DEBT ELIMINATION System still work for me?
Answer : Absolutely. Many people start the YOUR DEBT ELIMINATION System with no extra money. It just takes a little longer to become debt-free. But as long as you stop using credit, eventually your first debt will be paid off and you can use the money you were paying on that as a Margin for your next debt. Chances are, though, that you can come up with a little Margin money each month. Even $25 a month helps.
Question : I am having trouble coming up with my Margin. What do I do?
Answer: Go to page 206. There you’ll find a phone number you can call for a session with your Quick Start Adviser. He or she will be happy to walk you through creating your Margin. You’ll also find some more tips on building your Margin on the Quick Start video of your Your Debt Elimination System .
Question : Do I have to give up everything? It seems like I won’t have any fun at all for five to seven years!
Fact : No. The YOUR DEBT ELIMINATION System is a managed-spending plan, not a non-spending plan. While I do encourage you to minimize your daily expenses to maximize debt- reduction, the essence of the YOUR DEBT ELIMINATION Program is that you learn to make responsible purchase decisions, understanding their impact on your future. Right now you’re likely buying things without any sense of how those purchases are affecting your long-term financial picture. Question : Should I liquidate my investments to use the money for debt-reduction?
Answer : That’s a personal decision. Only you know how badly you want to get rid of your debts. I’ve had students who have used savings to quickly pay off debts, and many who haven’t. The ones who did were glad they did, and those who didn’t still followed the program to debt-freedom. It just took them a little longer.
What I do believe is that you should stop adding to your savings and put whatever money you’ve been sending to savings each month into your Margin. The only exception I’d make to this is a company-matched account, such as a 401(k), and then only continue contributing as much as the company will match. Add the rest to your Margin. Once your debts are gone, maximize your contributions to all qualified investment plans.
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Question : I am thinking of getting a second job to earn money for debt-reduction. Is this a good idea?
Answer : It depends. You’ll need to seriously compare the costs and benefits of getting a second job. Ask yourself the following questions: • Will your expenses increase with things like parking, gas, lunch, or dry cleaning? • Will it negatively affect your quality of life? • Will your income tax bracket be raised due to the extra income? • Are you more likely to indulge in impulse spending because you get an “employee discount” or because you’re so fatigued that your will power fades away? • What do your spouse or other affected loved ones think?
The most important consideration is that you find an intensity level that works for your life. The system is supposed to work for you, not the other way around.
OK. You should now have a handle on creating your Margin. In Session Seven we’ll approach the issue from a different direction. We’ll discuss ways to manage your spending to even further increase your Margin.
SAVINGS
Manage Your Spending to Maximize Your Margin
As I’ve said several times already, Your Debt Elimination is not an Ebenezer Scrooge program. It’s not about “not spending.” It’s about managed spending. It’s about controlling something that has likely been out of control for some time in your life.
So what does it mean to manage your spending? It means that you don’t spend without making a conscious decision to do so. And that such a decision is the result of thoughtful consideration of both the short- and long-term impacts of letting the money out of your life. It means making an informed choice to spend the money today rather than invest it for future spending.
The opposite of this managed approach to spending is the ever destructive habit of impulse spending.
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Impulse Buying - The Wealth Destroyer
It’s been a tough week. The boss was in a grumpy mood, both of your kids were sick, and you gained two pounds. That’s when you hear the little devil voice saying, “I deserve to buy myself a little something at the mall to make me feel better.”
Impulse buying is one of the most wealth-draining habits people give in to. It’s often referred to as “malling” because malls are where it most frequently takes place. And, because it’s so easy and painless to just flop down the old credit card to pay for it, impulse buying drives you deeper and deeper into debt.
When you make impulse purchases on credit, you’re giving yourself a triple whammy. You’re not just paying the price of the item, you are paying the price of the item plus the interest. But the true cost to your wealth is the price of the item, plus the cost of the interest, plus the amount of interest income you would have earned had you invested that money.
Work It Out: List as many of your favorite “impulse buys” as you can in 2 minutes.
The Discipline of Cash
You will find it’s much harder to spend cash on something you don’t really need than it was to just whip out the plastic to buy it. If you really need … or even really want something … you can buy it with cash, but you have to really need it before your hand will reach into your wallet or purse for real money.
Once you’ve paid off some bills and have a healthy Margin each month, it can be redirected in any given month - at your discretion - to make an important purchase. What freedom that will be because you can fully enjoy the purchase without the nagging pressure and guilt of having to pay for it for months and years into the future.
Ask yourself a question. Take your favorite impulse buy from the list above. If you had to choose between having that item now but being forced to stay at your job until you die, versus delaying that
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purchase until you could really afford it and being able to comfortably retire someday soon, which would you choose? Does that sound a little extreme? Well, that’s exactly the choice you’re making by giving in to multiple and ongoing impulse purchases.
A recent study found that many fixed income older people are literally forced to choose between medicine and food. According to a TV news report, when illness strikes and the costs mount, some elderly have resorted to eating cat food on crackers for a cheap source of protein. A “poor man’s paté.”
No one would choose a cat food and cracker lifestyle. But that is exactly what you may well be choosing - in increments - every time you slap down that credit card.
The High Cost of Being a Good Consumer
The definition of the word consume is to expend by using up; to destroy as in burning . Consumers are “Wealth Destroyers.”
♥ Internal Change Tip : It is your WEALTH you are consuming and burning up. Would you take a $10
bill and set it on fire? That is exactly what you are doing every time you purchase something on impulse. It is time to wake up and ask yourself, “What am I doing?”
Good question. Why do people impulse buy? One cause of impulse buying is stress. “I’ve had a tough day, I deserve a little treat.” But the truth is that shopping is no antidote to stress. It only leads to more stress. Learning other stress-management techniques will help both your heart rate and your interest rate.
Discipline Tip: Learn some stress-reduction techniques that you can implement whenever you are tempted to indulge in “retail therapy.”
Money-saving Shopping Tips
The best places to save money are the same places you regularly spend it.
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At the Grocery Store
There is a marketing campaign being waged against you every time you walk into the supermarket. Research has shown that shoppers spend $100 for every 30 minutes they are in the market. Grocers know this, and they do everything they can to keep you in the store. They put displays in the middle of the aisles, play enjoyable music, and often give samples of food to entice you to stay. And if you make the mistake of bringing your children with you or of shopping when you’re hungry, you might be in real trouble.
You go to the supermarket for milk and bread. You walk by the produce section to get to the dairy case in the back. The produce looks ripe and fresh, and you decide that you’re going to make that Eggplant Parmesan recipe you saw in the paper. There is freshly baked bread at the bakery right next to the produce section, so you decide that you’ll want to eat a crusty baguette with the Eggplant Parmesan. You can’t make sandwiches on a baguette, and you’ll still have to buy a loaf of bread, so the baguette is now an added expense you hadn’t planned on. You’ll also need extra cheese and tomato sauce for the recipe, as well as garlic and some spices. The next thing you know, you’re wandering back to the produce aisle for fresh basil leaves and olive oil to go with the meal. Since you are now caught up in planning a gourmet meal, you might as well pick up a nice bottle of Merlot and something for dessert. You’re not even thinking about the prices of these items as you go through the market. When you leave, you’ve spent $75, and you only came in for milk and bread.
How can you fight back?
V ALWAYS make a list and stick to it! V Base your list on the advertised specials in your market that week. V Cut coupons. The average family can save 10 percent off their bill every month. A clever shopper can save 35 to 40 percent. V Shop at a market that offers “double coupons.” This is when the store doubles the face value of the coupon. V Shop at a market that has a “store club.” Then, when the club items go on sale, use a double coupon to buy the item, and it will be practically free. V Buy store brands. Most store brands are just as good and have the same ingredients as their name-brand counterparts. V Leave the kids at home. Grocers place kid-tempting items at kid’s eye level knowing that many parents will give in to avoid a public temper tantrum. V Shop at warehouse or club stores for bulk buys on non-perishable items like bathroom tissue and trash bags.
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V Watch for rebates on name-brand items. Sometimes these rebates can be equal to 100 percent of the price.
Clothes Shopping
Getting good deals on clothes shopping can be downright fun. My wife Lois thinks it should be an Olympic sport. Here are some of her recommendations.
V Shop at outlet malls. Because you are getting such a “good deal,” be careful that you don’t buy more than you planned, though, Spending $300 on clothes still costs $300 regardless of whether you got 2 items or 20. V Head for the clearance racks first. Often you can find what you’re looking for here, and you won’t need to pay full price for anything on your list. V Buy off-season. Rather than doing back-to-school shopping in September when it is still warm, wait until the temperature drops in October.
Here is a general guide to shopping the calendar. You can get the best deals for the following items in:
January: New Year’s Day is a great sale day, After-Christmas sales.
February : Winter clothes, coats, boots, snowsuits, bed linens, dishes, sporting goods, cars.
March : Anything to do with snow, appliances.
April : After-Easter sales, snow skis and other winter sporting goods.
May : Shop outlet stores for the things department stores did not sell in their After- Christmas sales, auctions, moving/estate sales, spring sales, fans and air conditioners.
June : Yard sales, home furniture, car tires.
July : Summer clothes, shorts, sandals, appliances.
August : Department store sales, summer items, sporting goods, linens, school supplies.
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September : Summer items and outdoor things, bicycles, children’s outdoor play sets, trees, bulbs, gardening items.
October : Home furnishings, men’s and boy’s clothes.
November : Stock up on extra turkeys (many stores allow you to get them for free with minimum purchases), luggage.
December : Nursery items, day after Christmas is the best day for buying Christmas items like wrapping paper and ornaments.
Shrinking Santa’s Stocking
“Daddy, I just HAVE to get the Electronic Fib Finder! It is the coolest game.”
If you have ever heard words similar to these, you know how powerful an effect advertisers have on children. There is a veritable media blitz aimed at your children that starts well before Halloween and persists until after New Year’s Day. Nielsen Media Research studies show that the average child will see 360,000 commercials by the time he or she graduates high school. That’s a lot of opportunities for advertisers to influence the attitudes of your kids.
Kids are trained by the media to want to have the same toys, clothes, cars, and lifestyles as the people they see on TV. This indoctrination will continue into adulthood, making them lifetime slaves of those who want to take much of their lifetime income … in trade for a few things they need and many things they don’t. How can you protect them? Limiting their exposure to television would be a beneficial start. Watching ads with them and explaining the manipulations would be another important step.
Why is it so crucial that you arm your kids to fight back? Because kids’ reactions to advertising are very different from grown-ups. When a child sees an ad for a product that is “for kids,” they are more likely to remember it and request their parents to purchase the item for them. In addition, kids don’t have the critical thinking skills that adults have to help them decide if a product is worth buying.
What can parents do to combat advertisers’ influence? Teach your kids to be critical thinkers. As I said, when you are watching television with children and an appealing commercial comes on, highlight the techniques the advertisers are using. “Do you see how they make the toy look like it moves on its own?”
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Come up with holiday traditions that don’t have anything to do with shopping. A trip to the local ice- skating rink followed by hot chocolate is sure to make more lasting memories than the latest toy.
Similarly, for older children at the holidays, get them involved in the budgeting. Say, “Johnny, we have a budget of $100 for you this holiday season. Would you rather have one large gift or several small ones?” Then have Johnny make a list that you can choose from. Let him know that he won’t be getting everything on the list; it’s just a pool for you to choose from. You also might want to take him to the toy store and price his items so that he can get a rough idea of how many things on his list $100 will buy.
Teaching your children to be savvy shoppers is a far better gift than any toy on the market.
Happiness from the Depression
Our grandparents knew how to stretch a dollar. In those days, a chicken would last an entire week and would feed an entire family of four. By learning to be a creative money saver, you’ll discover that you don’t have to spend a lot to be happy.
While some of the following suggestions might sound a bit extreme, these ideas reflect wisdom from years gone by. Here are some ways your grandparents learned to save money (with a modern twist here or there).
V Eat less food. By eating smaller meals, not only will you be healthier, but you’ll also save money. V Go vegetarian (twice a week, at least). Pasta, rice, potatoes, and beans are some of the lowest-priced foods at the market. V Never pay full price. Wait until you can get some kind of discount and then stock up. V Never throw anything away that can be reused or recycled. Cash in your aluminum cans and plastic bottles. Use old sauce jars to freeze leftovers. Get creative! V Hang your clothes out to dry. Not only will they smell better, they’ll last longer, and you’ll save on gas or electricity. If Martha Stewart can do it, you can too. V When you dine out, go early to get the early-bird special. Also, use coupons or dining discount cards whenever possible. V Go to matinees, or rent videos and DVDs. V Shop around for off-season prices on vacations, amusement parks, and other entertainment. V Sew some of your own clothes V Give handmade gifts. These can be more fun to make and more meaningful to receive than
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yet another bottle of cologne or perfume. V Leave the oven door open after cooking to heat the kitchen. Be careful if you have small children in the house. V Use a thermos to keep coffee warm instead of leaving the burner on. You really can taste the difference! V Turn off the lights! By remembering to turn off appliances and change light bulbs to lower wattage, you’ll be saving money and the environment. However, never disconnect a smoke detector or take out its batteries. Those are pennies worth spending. V Open the drapes to let in the heat. Close them to keep it cooler. V Feeling cold? Put on a sweater rather than turn on the heater. Or, better yet, go outside for a nice brisk walk or jog. You’ll use your body’s thermostat instead of your home’s. V Turn off the TV if you’re not watching it. TV sound is expensive company. V Listening to the radio uses a lot less electricity. V Eat at less expensive restaurants, and bring home the leftovers. V Wash your own car. Check your own tire pressure. Change your own oil if you can. V Re-evaluate your telephone needs. Cell phones can be expensive, especially if you are paying for a houseful of users. Get rid of the phones that aren’t absolutely necessary. Look for cheaper plans. Getting rid of your cell phone can save $50 a month. V Pay your bills on time to save on fees and penalties. Credit card companies charge hefty fees for minor infractions. Pay your bill a day late and you could get slapped with a $29 fee. If the fee pushes you over your credit limit, another $29 can hit your account. That’s $58 for nothing. While you are on the YOUR DEBT ELIMINATION debt-reduction plan, make sure all your payments go out on time. V Be kind and fair - you reap what you sow. V Retirement comes faster than you imagine and will last longer than you dream. Don’t put off preparing for it.
The C.I.A. Is Out to Get Your Money
When learning to manage your spending, watch out for the C.I.A. This stands for Convenience, Indulgence, and Appearance. Convenience: In this day and age, everything is done for us. We can get our clothes washed for us, our meals pre-made, and can find someone to perform any kind of service. Is it really necessary to pay someone to do what you can do yourself? Convenience can be very expensive.
Indulgence : An indulgence should be just that — a treat. Going to the mall to give yourself a reward for a tough week, or shopping at the most expensive stores and buying yourself expensive treats, will
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only make you feel warm and fuzzy in the short- term. The long-term price of Indulgence is deprivation.
Appearance : We have learned that buying things to “keep up with the Jones” is insane. Using your hard-earned income to buy status or “cool” is folly. It’s short-term gain, long-term pain.
The truth is, you will earn a finite amount of money in your lifetime. If you give too much of it away in your early and middle years, you won’t have enough left over to live out what should be your golden years. It’s simple math. And if you faithfully follow the YOUR DEBT ELIMINATION plan, it’s very likely you’ll be able to start those golden years earlier than you probably imagined. The key is to manage your spending.
Research has shown that wealthy people spend as if they earned half as much as they actually do, while typical debt-laden consumers spend as if they earned twice as much as they do. They consume their wealth.
♥ Internal Change Tip : The best technique for managing your spending is to understand that if you can’t afford to pay cash for it yet, you can’t afford it.
But know when to ease up for a while.
Since the YOUR DEBT ELIMINATION Program is a long-term plan, you need to make sure that you’re still enjoying your life while working the program. If you get to where it’s too much and you’re ready to chuck the whole plan, take some or even all of your Margin that month and indulge yourself. You’ll be setting your debt-elimination date back by one month, but if you need the break, take it. Of course, no indulgence feels as good as complete debt-freedom, so don’t overdo it. You’ll know when.
“A man’s indebtedness is not virtue; his repayment is. Virtue begins when he dedicates himself actively to the job of gratitude.” - Ruth Benedict
Don’t Give Up on Giving
There is one area that I would not recommend you eliminate … charitable giving. Giving 10 percent of your income to the place where you receive your spiritual nourishment is called tithing. But, tithing does not only include money. The principle of tithing includes money, time, energy, effort, etc.
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Chicken Soup for the Soul series author Mark Victor Hansen said, “Whatever you need more of is what you need to tithe some.”
Mark Victor Hansen is not the only one who has discovered the value of giving. Zig Ziglar, Jack Canfield, Jim Rohn, and Brain Tracy also talk about relying on and trusting God. According to Catherine Ponder, the bestselling author on the subject of prosperity, “Many of this country’s millionaires attribute their wealth to tithing: the Rockefellers, the Heinz people, the Quaker Oats people, the Kraft people.” While you are reducing debt, you need to keep the flow of money going in the right direction. This plan works even better with supernatural favor.
Here’s the ideal budget that incorporates all of the ideas we have talked about in managing your spending.
If possible, each month divide your net income the following way:
V 10 percent charity V 10 percent debt-reduction V 80 percent living expenses
If you have a monthly income of $3,000 it will look like this:
V $300 per month for charity V $300 per month for debt-reduction V $2,400 per month for living expenses
While these numbers may seem big, with creative strategies for minimizing expenses, you should be able to contribute close to 10 percent for both charitable donations and debt-reduction. And, if you believe God loves and blesses a cheerful giver, you’ll trust him to make all the numbers increase over time.
If there’s no way you can do both tithing and debt-elimination, then focus on your debt- elimination first, so you can make even greater charitable contributions in the future. Without a load of debt, charitable giving should not be a burden. If it’s a problem right now, that’s because you’ve been manipulated into an out-of-balance financial condition. Once the YOUR DEBT ELIMINATION System gets your finances back in balance, tithing and beyond should be no trouble for you.
Some who believe strongly in tithing, as I do, may question why I would say that if you have to make
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a choice, put debt-elimination ahead of tithing until you free up enough money to do both.
In the book of Proverbs, the Bible tells us that “… the borrower is slave to the lender.” God does not want his people to be slaves. So debt is a spiritually irresponsible situation. I don’t believe God blesses irresponsibility. I also do not believe God would endorse ignoring your commitments to your creditors. I’ve come to believe he would prefer that you reverse the irresponsible situation, never get into it again, and begin honoring him with your tithe once you’ve freed up enough of your income to do so. If you believe differently, follow your heart.
A Day in the Life of a YOUR DEBT ELIMINATION Graduate
We’ll Start at Home
You wake up in the morning, and instead of heading out to the Coffee House for your morning coffee, you brew a pot at home. Quickly scrambling an egg, you can also skip the trip to the food truck later this morning. Getting dressed, you notice that your spouse has washed and ironed your shirts instead of dry-cleaning them. Great! That’s another couple of dollars saved. Flipping through the channels of your television, you’re proud you downgraded your service to Basic Cable. You really weren’t watching movies like Batman Returns for the fourth time anyway. Picking up the phone to call your sister, you smile remembering that you changed your long distance carrier and are now only spending 4 cents a minute for long distance.
Walking to your new refrigerator, you laugh as you remember the look on the sales- man’s face because you turned down the extended warranty. You knew you would never use it. When you said to the salesman, “Why would I be buying this appliance from you if I thought it would break?” he didn’t know what to say. Opening the door to the fridge, you see all the food you bought with coupons. You are now getting so good at using double coupons and store club cards that you’re saving 35 percent every week on your food bills. You figure your family will save $200 to $300 a month! Heading out to work, you grab your lunchbox filled with the chicken pasta salad you prepared last night. Sure beats that fast food burger you used to waste money on! Turning off the lights, you walk out the door, confident that your home is an efficient, streamlined money-saver.
Your Car
Getting into your car, you remember the money you saved by buying it used. In fact, you were able to get a nicer car for less money because you shopped around. Even though you did need to finance it, you only financed it for 24 months and paid it off early. You also are proud that you changed your car
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insurance to the same company as your home insurance. When you did that, you worked with the agent to raise your deductible, and you only buy the insurance coverages you really need.
You cancelled the road service part of the policy because you have AAA. That multi-car discount really helped too. You drive by the gas station where you used to fill your tank, and go to the station next door. These days you are saving nearly 10 cents a gallon by watching for lower prices. You are also smart enough to know that most cars today don’t need “premium” gas, and you fill up on regular unleaded. You maintain your car and drive the speed limit. All of these things add up to dollars in the bank.
Vacations
Later, driving home from work you begin to anticipate your family vacation next week. In years past you might have racked up the credit cards with an expensive trip to Disney World. This year, though, you did your homework. You did some research on the Internet and found a great package vacation that will still get you to Florida, but for 1/3 the cost of the trips you used to take. And, because you’re paying cash, you’ll enjoy yourself all the more knowing that you can afford the trip.
Personal
Arriving back home you change into your exercise clothes. Canceling your gym membership was a great idea. Now you just go for a power walk with the dog every day and know that you’re saving $35 a month. You’ve given up expensive sports drinks and now drink water. You also quit smoking, which is saving you $150 a month. Not to mention you are feeling healthier and so your co-payments for doctor visits have decreased too.
On your walk you start thinking of your kid’s birthday party next month. A slumber party, rather than a trip to the local party place, is saving you hundreds of dollars. You also saved a lot of money last Christmas by paring down your gift list and making simple, meaningful gifts for many on your list. That visit to old Aunt Mary was better than any bouquet of flowers you could have sent. Returning home, you see the basket of aluminum cans your kids are recycling. You are happy that they’re learning the value of money as well. They’ve learned from your deeds as well as your words.
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Keeping Car Costs Under Control
“A new car isn’t a barometer of how much money a fellow has, but it’s a pretty good indication of how much he owes.” - E.C. McKenzie
“The Ultimate Driving Machine.” Chances are, you know the car maker that uses this slogan. In fact, you can’t watch television or listen to the radio without being told by advertisers that if you want to feel young, sexy, strong, tough, wealthy or distinguished, you need to drive a certain type of car. Car makers create this kind of peer pressure so that you’ll spend more money on a car than you need to. In reality, you can be nearly flat broke and lease a fancy Jaguar, or be a millionaire and drive a used Chevy.
This may be hard for some to accept, but the real purpose of your car is to get you from one place to another. That’s it. Of course, you don’t want a junker that’s always breaking down, or a rust-bucket that may be dangerous, but the important fact is that your vehicle is not an extension of your personhood. Psychological fulfillment or definition of your status does not come through your car.
“My car tells you how successful I am.” Have you ever said or believed that? In all likelihood, the reverse is true. According to the research quoted in The Millionaire Next Door , by Thomas J. Stanley and William D. Danko, fewer than 25 percent of real millionaires own a new car, and fewer than 20 percent lease. Eighty percent of millionaires own American cars.
♥ Internal Change Tip : Trying to look rich only makes you LESS wealthy. Just as most martial arts black belts don’t go around telling people about how tough they are, most millionaires don’t waste money buying things designed to tell people how rich they are. Remember, wealth is not measured by the “stuff” you have, it’s measured by how long you can live without a job.
Obviously, you don’t buy a car every day, but you probably will buy one at some point over the next few years, and what I’m sharing with you is a “Lifetime Strategy.” YOUR DEBT ELIMINATION is a lifestyle, not just a mathematical tool for paying off debts. We are therefore including some tips on how not to buy a car, so when you do … you won’t simply hand over thousands of dollars that should be building your economic freedom. Most car dealers are plenty rich enough without you tossing your hard-earned money onto their pile.
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Here we go:
1. Don’t ever buy a brand-new car. Buy nothing newer than two years old. The reason: a new car loses nearly half its value in the first two to three years. Yet you can buy two- year-old cars that are in “like new” condition, with plenty of life left in them. Plus, the first owner will get any bugs worked out under the warranty. Let the poor soul who bought it new take the 50 percent bath on the car’s depreciation - not you. Buying a brand-new car is simply throwing thousands of dollars down the chute. If you’re hooked on new-car smell, they sell it in spray cans at auto parts stores.
Also, never ever lease a car as an individual. There are few business circumstances in which leasing a car makes sense. But for the vast majority of drivers, leasing a car is the equivalent of paying thousands of dollars to rent a car that you have to give back in the end. The best car purchase is a used car that is two to three years old. And the best way to buy it is with cash.
2. Don’t ever take more than 36 months of financing on a car. I offer this tip with some reservation. My firm belief is that you should try to never buy a car with borrowed money. But if you are absolutely stuck and must take a loan out, do not let it be for more than 36 months. People who take longer loans always owe more than the car is worth, until the last few months.
3. Don’t ever take “Credit Life Insurance” on a car loan, a mortgage, or any other loan. The car dealer, finance company, or mortgage company is asking you to pay for an insurance policy on which they are the beneficiary and on which they make a commission when they sell it to you. Worse yet, they frequently fold the insurance into the financing, so you’re paying interest on the insurance! You can better protect your heirs with a term life insurance policy that will produce enough money to pay off the car(s) and the house. Check all your loan papers to see if you already have Credit Life Insurance. If you do, first make sure you have sufficient life insurance to pay off these loans, then cancel the credit life coverages. When you do, watch how your monthly payments drop.
The Smart Guide to Buying a Used Car V Leave your emotions at home. You need to be thinking critically as you examine your potential purchase. V Dress down. If you usually wear suits, go on a day when you can wear jeans or sweats. You don’t want the seller thinking your other car is an armored bank truck. V Take the car to a reliable mechanic and get it completely checked out. V Inspect the exterior. Do the colors match? Is there hail damage? Has it been repainted? You can look inside the wheel wells or the gas cap to see if the car is its original color. If it’s been repainted, it frequently means the car has been in an accident.
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V Push down on the fender. Bounce it. If the car bounces once or twice, that’s fine. Any more bouncing and it might mean suspension trouble. V If there is a vinyl roof, is it fading or cracking? V Check the tires, including the spare. V Inspect all glass for chipping, pitting, or cracks. Also look at the molding to see if the windshield has been replaced. V Check the interior. Is the fabric in good condition? Are the seat belts wearing thin? Make sure all gauges are operational and the electric systems work. Check under the dash for hanging or loose wiring, and look at the brake pedal for signs of excessive braking. V Check under the hood. Is oil leaking on the ground? The oil should be full and clear brown in color. The coolant should be green. Look for soft or worn hoses. Check the battery fluid. Look at the transmission fluid. It should be clear and not have a funny “burnt coffee” smell. Check the air filter - it should be free of oil. V Take it for a test drive. Go alone or with your mechanic. Turn off the radio! V When you start the car, look in the rear-view mirror and watch for smoke. Listen for noises such as rattling, clinking, or thumping. Turn the steering wheel as far as you can both ways. Try all gears. Do a hard stop. When accelerating, take your hands off the steering wheel for a few seconds to see if the car continues in a straight line. When accelerating, does the trans- mission jerk or delay? Drive on different types of surfaces. Check the gauges for overheating or other warning lights. Test the brakes. Are they soft? Does the pedal go all the way to the floor? If the brake pedal is pulsating, it might mean the discs are warped — unless the car has anti-lock brakes.
Great! You’ve found the car of your dreams. Now it’s time to buy it. Remember, cash talks. You can usually negotiate a better price if you are willing to pay cash. Don’t be afraid to walk away if the price isn’t good enough. There are plenty of other used cars out there to choose from and you can find many of them on the web.
Protecting Your Auto Investment
Now that you have a great car, it’s time to protect your “investment.” The single most important thing you can do to keep your car running well for a long time is to practice preventive maintenance. How can you care for your car? Follow these suggestions:
V Change the fluids regularly. Change your oil every three months or 3,000 miles. You can use a brand name oil and filter, and it will be as good as the ones made by your car’s manufacturer. Run your car for a few minutes before you change the oil so that the sludge
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can drain out with the oil. Replace the drain plug gasket too. V If you drive more than 15,000 miles per year, change your transmission fluid every year. If it’s less than 15,000, miles you can change the transmission fluid every two years. V Use your parking brake. It helps reduce wear and tear on your transmission. V Check your brakes every six months or 6,000 miles. If your brake pedal gets soft or mushy, it’s time to check your brakes. V Drive at a steady speed. Accelerating and then braking rapidly is hard on your car. V Don’t rest your foot on the brake pedal or on the clutch if the car is a manual transmission. V Add water to your battery as needed. If you live in a cold climate, be sure to drive around after adding water so that it will mix with the battery chemicals and won’t freeze. Place petroleum jelly around the terminals if they are corroded. V Change your battery every four years. Get one that has the same CCA (cold cranking amps) as the one in your car now. Avoid buying one that is more than nine months old — you can check the date right on the battery. V Wash your car frequently. Dirt, leaves, and bird droppings damage your car’s finish. Wax it twice a year. V Check the car’s body for rust. It must be sanded, primed and painted, or else the rust damage will spread! V Don’t use your car as a moving trash can. Spills and old food can destroy a car’s upholstery. V Don’t eat or drink or smoke in the car. It’s not safe for driving, and it’s not good for your car’s interior. V Vacuum your car and wash the upholstery and floor mats regularly. V Use a cardboard sun visor to reflect the damaging rays from the sun. V Avoid talking on the phone while the car is moving. Studies have shown that driving while talking causes more accidents than driving under the influence of alcohol.
Frequently Asked Questions About Financial Freedom
Question : I’ve heard the old phrase “You can’t teach an old dog new tricks.” Aren’t I too old to change my ways?
Answer : George Burns reportedly said, “If I knew I was going to live this long I would have taken better care of myself.” Think of it this way. What is it going to cost you financially, emotionally, and even spiritually if you don’t change?
Question : I’ve always lived my life by the motto carpe diem (seize the day). The truth is, no one knows how long they are going to live. Why shouldn’t I live my life to the max, spend my money now,
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and let the creditors pay the price when I die?
Answer : You actually answered your own question. No one does know how long he or she will live. What’s going to happen if you finance your life to the hilt and live to the ripe old age of 99? Who is going to take care of you then? The creditors will have all your money and you’ll be too old to do anything about it. Isn’t it better to take a few years now and get financially free so you really can seize the day without having to worry about paying the bills?
Question : How come everyone isn’t accelerating his or her mortgage payments?
Answer: The reason is that most people don’t know they can! They don’t see anyone else doing it; there is no peer pressure to accelerate payments. The peer pressure is to get the lowest monthly payment possible. Have you ever been at a party and overheard someone bragging, “My house payment is only $950 a month!” Our culture values short-term gain over long-term wealth. The truth is that the days are gone when your house will appreciate to be worth 10 times what you paid for it. According to the National Association of Realtors ®, on average, house prices have recently decreased by as much as 10 percent a year. Note: Average 2006 $265k - 2008 $175k. Wouldn’t you rather invest in the stock market which, over the decades, has averaged a 10+ percent return? Besides, whatever your home’s appreciation, that will likely be a windfall for your heirs, not you. For you - it’s just where you live.
Question : But what about the great tax benefits of my mortgage?
Answer : Most people are taught that the tax breaks they are getting by being able to deduct their mortgage interest outweighs the death grip of having a huge monthly mortgage payment. This is simply not true. Today’s homeowner gets a small break on their taxes, but it only slightly offsets the effect of interest costs.
For example, if you’re in the 30 percent tax bracket, this means you pay up to 30 percent of your gross income in taxes, before deductions. Yes, you get to deduct your mortgage interest from your taxable income, but you have to first pay interest to your lender to get that deduction. Here’s how it works: for every dollar you pay in mortgage interest, you get to deduct that dollar from your taxable income. You would have had to pay 30 cents tax on that dollar, so you save that 30 cents. You are paying $1.00 to save 30 cents, which means you’re effectively losing 70 cents on the transaction. This doesn’t make much sense, does it?
Question : My kids are going to college soon. I want to apply for financial aid. Won’t I look wealthier if I own my home outright?
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Answer : No, you won’t. Houses are exempted from the formula that lenders use to determine your family contribution to college expenses. It is better to pay off your home loan because the equity in your home won’t count against you, but it would if it were sitting in a savings account. In other words, if you own a $200,000 home, the student loan lenders can’t look at that as an asset when they are deciding how much money you should be able to afford to pay for your child’s college education. However, that same $200,000 sitting in savings or investment will be considered. So, from a financial aid or student loan perspective - you are better off putting that money into the shelter of your house than into cash.
Question : Would it be better to rent rather than buy a home?
Answer : No, not at all. There are tremendous psychological benefits to owning your own home, and it is far better than renting. Everyone needs somewhere to live, so you should absolutely buy a house. But don’t think of your house as a great investment; simply think of it as the place where you create your home. If you really want to use real estate as part of your overall investment strategy, choose real estate that is not your primary residence. The Your Debt Elimination plan is for you to live in just the right house for you - not more, and not less. The main financial advantage of buying over renting is that you can pay the mortgage off. Rent goes on forever.
Question : I have the kind of job where it’s very important that I drive an expensive car. I can’t be seen in a used car; it will detract from my image. What do you suggest?
Answer : This is a very common fallacy. Many self-help “experts” advise people to go out and buy a Mercedes so that they can feel wealthy, which is then supposed to attract wealth. What really happens is that people feel great for a month or two until that huge car payment shows up and they have to struggle to pay it. Who can feel wealthy when a large chunk of their income is going to creditors? If you really feel the need to have a fancy car, buy one that is a couple of years old. The bottom line is that “feeling wealthy” comes from your attitude, not your vehicle. The attitude of success is what you project to your clients, and you don’t need an expensive new car to do that.
In these past three sessions, I’ve shown you how to pay off all your debts and how to maximize your Margin to speed up the debt-elimination process.
Once you’re debt-free and have your entire Margin available to you, it’s time to get rich! It’s time to put your now-healthy monthly cash flow to work to build your wealth so you can truly enjoy the fruits of all the labors I’ve put you through. In Session Eight I’ll teach you the basics of investing, as well as my favorite autopilot investing technique.
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Building Your Wealth
The Building Blocks to Wealth
You did it! You are now debt-free. You owe no money at all, and you are sitting on an Margin of several thousand dollars a month. Time to party, right? Right. But, when you get back from your vacation you’ll need to know what to do with your money.
Start with Your Emergency Fund
The very first step you’ll want to take after becoming debt-free is to set up an emergency fund. But assuming you’re reading this section long before you’ve actually achieved debt-freedom, I’ll take a moment to answer the pre-debt-payoff question: “Shouldn’t I have an emergency fund now? Why should I wait five to seven years?”
The answer lies in simple math. Most financial professionals recommend an emergency fund equal to six times your monthly cash flow requirements, so you can go six months without working and still pay all your obligations. Your living expenses right now are greater than they will be when you are debt-free, so you’d need a larger emergency fund before eliminating your debts. To compound the problem, the amount of extra cash you have each month is smaller than it will be when your debts are gone. So, if you have to save up a large amount of money using a small amount of cash each month, it will take a long time to gather your emergency fund.
A Tale
Let’s look at an example. Bill Jones needs $3,000 a month to pay his bills (expenses and debts). Bill is going to need to save $18,000 to equal six months of living expenses. He has $400 a month he can commit to saving, so it’s going to take Bill three and a half years to save up $18,000. Contrast that
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with his next-door neighbor Rich Davis who has decided to follow the YOUR DEBT ELIMINATION Plan.
Rich also needs $3,000 a month to pay for his current expenses, but he’s using his frozen credit card as his emergency fund. It won’t cover six months of living expenses, but it will cover most emergency expense possibilities. Instead of saving $400 towards his emergency fund, he uses it as an Margin to begin paying down debts. In five years, nine months he is debt-free, and his Margin has grown to $2,795. But now, because his debts are gone, he only needs $1,000 a month for emergency living expenses. So his emergency fund requires only $6,000, compared to Bill’s $18,000. Rich will have it fully funded in just over two months! It took Bill 42 months to save his.
It is five years later. Bill has finally saved up his $18,000 emergency fund, and he is just now going to start a debt-reduction program with his $400 a month Margin. It will take Bill another four plus years to become debt-free. Therefore, it will have taken Bill nine plus years to save his emergency fund and then get debt-free.
In the same nine plus years, Rich has gotten completely debt-free, has saved $6,000 in his emergency fund, and has built his investment account up to $138,651, using the $2,795 a month he freed up by eliminating debt payments.
Time Tip: Do not begin saving for your emergency fund until you are debt-free. If needed, you can simply delay the YOUR DEBT ELIMINATION Plan for a month or two and use your Margin to pay for any unexpected need. You also have your emergency credit card in the freezer if you don’t have enough cash. In all likelihood, no emergency will arise, and you won’t have to use these options.
Beyond the mathematical reasons why it’s better to focus on debt-elimination first and emergency fund building second, there’s also the psychological factors. The most important determinant of success in this program is your attitude. If you gain a sense of momentum, you’ll be more likely to continue the program to completion. But, if progress is slow, and you don’t really seem to be getting anywhere, you’ll be more likely to bail.
When you focus on debt-elimination, you begin to see debts disappearing within months … maybe even the first month. This will provide you with the ongoing motivation to stay the course. And, as Yogi Bera would say, you can’t finish what you don’t complete!
Work It Out : Imagine you had a ruptured appendix and needed to take off one month from work. You’ll need to come up with an extra $3500 for living expenses and your medical co-payment. What are five ways you can come up with an extra$3,500 if you need to?
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Now that you’ve finished that exercise, I hope you’ll be confident that you can handle an emergency if it arises. In a few short years you’ll be in a position to simply liquidate one of your investments, if need be, to pay cash for any urgent need. That is the financial reality you are working towards — the ability to take care of yourself without being dependent on your family, friends, or creditors. The faster you pay off your debts, the sooner that financial independence will come.
Before we actually get into investing methods, it’s important we agree on what’s really an investment of your money and what is just spending money. The difference lies in the definitions of the terms asset and liability .
Asset or Liability?
Work It Out : For the following items, identify whether the item is an asset or a liability. Be careful! Think like an investor.
Your Car ❏ Asset ❏ Liability
Your Student Loans ❏ Asset ❏ Liability
Your Teenager ❏ Asset ❏ Liability
The $500 (plus interest) Your Brother-in-Law Owes You ❏ Asset ❏ Liability
Your Antique Doll Collection ❏ Asset ❏ Liability
Your Gold Coin Collection ❏ Asset ❏ Liability
Your Diamond Engagement Ring ❏ Asset ❏ Liability
Your Home-Based Business ❏ Asset ❏ Liability
Your Life Insurance Policy ❏ Asset ❏ Liability
Your House ❏ Asset ❏ Liability
Let’s take the easy ones first. Your Car is a liability because, even if you own it outright, it will not appreciate in value. This may not be true in the case of classic cars or antiques, but the regular car you use to drive to work every day is a liability. Your banker would consider a car you own to be an asset, but we’re talking about an investor’s definition here, not a banker’s. By the way, the reason
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bankers consider cars to be assets is because they usually are … for the bank … because they are producing income (payments) for the bank.
Your Student Loans are also a liability because, even though you used them to get an education that may bring you more income, the money for the loan is benefiting the lender. The education is benefiting you.
Your Teenager , while a great source of joy in your life, is probably a liability as well. Most teenagers are a big source of negative cash flow!
However, the $500 Your Brother-in-Law Owes You may be considered an asset because, if he pays you back with interest, it has produced income.
Your Antique Doll Collection, Your Gold Coin Collection, and Your Diamond Engagement Ring may also be assets because they most likely will hold their value, and may even increase in value over time. However, these kinds of “hard assets” are not the best investment choice for reasons that are detailed later in this session.
Your Home-Based Business , if it is operating at a profit, is an asset. You might have inventory that is valuable, or income from the business. If you own it, and it is generating money for you, it’s an asset. In most cases, though, you physically must continue working in order for your business to maintain profitability.
Your Life Insurance Policy was a trick question. Technically, a cash-value life insurance policy increases in value over time. Technically, you could consider the policy’s death benefit as “income.” The problem is that your family won’t see the income until you are dead. This makes life insurance a liability because, in your lifetime, it’s creating a negative cash flow. There are more effective ways for you to ensure that your loved ones are financially secure after you pass on — like becoming fabulously wealthy while you are still alive!
The most difficult one of all is Your Home . Your mortgage is causing a negative cash flow for the majority of the years you live there. When you pay off your mortgage, your home is still probably a liability when you consider property taxes and maintenance costs. Your house is basically “where you live,” and your goal should be to minimize its costs as much as you can. It’s really only going to be an asset for your heirs.
The test of whether something is an asset or a liability is this: An asset has to produce something that
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will help you to live without working. Does it cause money to flow into or out of your life?
Real Estate can be an asset in your portfolio, if it’s investment real estate that you rent out, or if you’re investing in Real Estate Investment Trusts (REITs). We’ll cover real estate investing later in this session.
OK … now that we agree on the definitions of assets and liabilities, let’s see where you’re investing your money.
Are You Spending Money on Liabilities?
When you spend your money on things like boats and cars that give you no return on your investment, your wealth is reduced in value
Are You Spending Money on Hard Assets?
When you spend your money on hard assets like gold that give you little or no return on your investment, your wealth maintains its value.
Are You Spending Money on Income-Producing Assets?
When you spend your money on value-increasing or income-producing assets like stocks, bonds, mutual fund shares, and other securities that give you a positive return on your investment, your wealth increases in value.
¥ Work It Out : How are you likely to spend your money now that you’ve freed it up from debt payments? Are you prone to invest most of it in wealth-building assets? Or will you spend some of it on fun “toys” that are considered financial liabilities? It’s your money, how do you want to use it? List your choices in the spaces below.
If toys or other liability expenditures rank high on this list, think back about previous toys you “just had to have.” Did they really provide you the long-term joy you thought they would before you got them? If so, they may well have been worth it. But if they didn’t, try to learn from your experiences as you build this list.
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Assuming you’ve decided to focus the majority of your new monthly cash flow on wealth-building assets, let’s focus on investing.
I teach investing, and I do investing. Investing means regularly putting your money into good securities and letting it appreciate over time. The best tool I’ve found to guarantee the regularity of your investing is called Dollar Cost Averaging . Not only does it provide consistency for your investing program, but it actually aids in your assets’ appreciation.
Dollar Cost Averaging - The Smart Investor’s Way
Dollar Cost Averaging is when an investor takes a set amount and invests it regularly; usually monthly. You should plan on doing this with your Margin after your debts are gone and your emergency fund is full. You’ve learned to live without that money in your regular spending, so it makes sense to just keep it (or at least most of it) out of the regular budget and funnel it into rapid wealth-building. That’s the power of YOUR DEBT ELIMINATION. It takes the same monthly money that used to make your creditors rich … and uses it to make you rich.
Dollar Cost Averaging investments are made regardless of whether the market is up or down when the investments are made. This is the opposite of a market-timing strategy. You’re not trying to time your investments to “buy low.” You’re buying consistently, whether security prices are low or high. But this systematic approach actually uses the market’s up and down movement to increase the value of your investments.
Say you plan to invest $300 a month to buy a stock that costs $15 a share. The first month, you’ll get 20 shares. Next month, the market slips a bit, and share prices drop to $10 a share. You’re still investing the same $300, so now you are able to buy more shares. You get 30 shares for your $300. When the price goes back up again to $15 a share, you now have 50 shares of stock worth $750, but you only paid $600 for them. Dollar Cost Averaging causes you to buy more shares when they are on “sale,” so over time you actually realize gains that result from the market dropping occasionally.
The momentum behind dollar cost averaging is that, even though it moves up and down from day to
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day, the stock market average has historically trended upward over time. This is why your investing should be considered a long-term, buy-and-hold process. If you panic, and sell your investments when the price is falling, you’ll likely lose money.
Mutual Funds - My Recommended Investing Vehicle
Although the Dollar Cost Averaging example above used individual stock shares to explain the process, I recommend you use mutual funds as your principal investing vehicle, as opposed to individual securities - unless you’re already a knowledgeable and experienced investor who knows how to analyze risks and potential.
Time Tip: Unless you plan to spend a lot of time and energy managing your investments, a mutual fund is the best option for the “hands on” investor. Investing in a mutual fund is like investing in a company that invests.
What Exactly Are Mutual Funds?
Mutual funds began in Europe early in the nineteenth century, with the first U.S. mutual fund forming in 1924. They’re just what they sound like: a fund created by people “mutually” pooling their money for the purpose of investing it. The people who have pooled their money (bought shares) in the fund are actually the “owners” of a company (the mutual fund), and their company goes out and invests in other companies, in government debt instruments, in money markets, in precious metals, and the like.
The owners of this investing company (the shareholders in the mutual fund) then participate in the profits or losses from these investments, proportionately to their number of shares in the fund. Mutual fund shareholders include individuals like you and me, as well as institutions, such as banks, insurance companies, and pension funds.
One of the great benefits of putting your money into a mutual fund is that the fund’s investments are being coordinated by an experienced fund manager who generally has years of documented success in the market. He or she also has a staff of specialists who continually monitor and analyze all the information that can impact the performance of your fund’s investments. This level of experience and breadth of resources are far beyond what you or I could likely hope to have if we were investing on our own. And the large pool of investment funds at the manger’s disposal allows him or her to diversify or spread the fund’s risk out over a number of individual securities.
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Each mutual fund invests in a diversity of stocks, or bonds, or whatever type of security it’s designed to invest in. The fund is therefore insulated from being devastated by a drop in a single security.
For example, if a fund invests equally in 100 different stocks, five of those stocks could lose all their value, yet your net asset value in the fund would be reduced by only 5 percent because those five stocks only represent 5 percent of the fund’s holdings. Whereas, if you had invested the same amount of money you put into the mutual fund into any one of the five companies that failed — you could have lost 100 percent of your money.
Of course it’s highly unlikely that five companies held by any mutual fund would go out of business. Any fund manager who selected stocks that poorly would be out of a job in a month. What’s more likely is that some stocks in the fund may go down, but other stocks held by the fund might just as likely hold their value or go up. So it’s possible that the overall gains in the stocks that go up could offset or exceed the losses from those that go down.
Most mutual funds are invested in at least 100 securities. For you to accomplish the same amount of diversification would take a considerable amount of money. Even if the average price per share across the 100 companies is just $25, it would cost you $25,000 just to buy 10 shares of each stock. And that’s before considering brokerage commissions. Whereas, you could invest in a mutual fund for as little as $1,000 and get the same 100-stock diversification protection as would have cost you $25,000 when buying individual stocks.
To assure this important diversification for mutual fund investors, government regulations forbid a mutual fund from investing more than 5 percent of its assets in a single company. And the fund cannot own more than 10 percent of any company’s total capitalization. The benefit for the average investor is that single stocks within a fund may rise and fall, but no one company’s securities can represent a large enough percentage of their mutual fund to sink it. This helps keep their money at minimum risk.
Even with diversification, your investment in a mutual fund can go down. If you’re invested, say, in a “high-tech” mutual fund - a fund that invests in leading-edge technology companies - and that entire sector of the market turns downward for a period, the value of your mutual fund holdings will go down. But not nearly as much as you could have lost had you invested the same money in an individual technology company. So the diversification benefit of mutual funds helps even in the down times. Of course, you’d only really experience the “loss” if you sold your mutual fund shares at the lower value. In most cases, unless circumstances forced you to sell, you’d just hang onto the shares and wait for the next market upturn. When you invest for the long-term, as you should, the one thing you never want to do is knee-jerk react to short-term (less than five years) marketing conditions.
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Mutual Funds Live in Families
Most mutual funds are a part of what’s called a family of funds. A mutual fund family is simply a group of separate mutual funds marketed by the same overall management company.
You’ll want to simplify managing your investments and moving money between funds (when the economy dictates) by looking for fund families that offer funds in the Stock, Bond, Precious Metals, and Money Market categories. That way it’ll be simpler to move your money from one kind of fund to another when necessary, without a lot of fees, and with a single phone call. When you move money from one fund to another, within the same family of funds, the movement will be less complicated and cheaper.
Another advantage of investing in mutual funds, versus trying to do your own individual-security investing, is what we could call economies of scale. Since the fund manager is running a big company, he or she saves money on all the clerical, analytical, and other specialty help needed to be successful. And having all these economists, consultants, and other specialists on staff gives the fund manager access to more powerful and timely information than the non-professional investor would likely have available to them.
Yet another advantage of mutual fund investing is that the fund does all the paperwork for you. You’ll get regular statements, either monthly or quarterly, showing your investments and redemptions (buying and selling shares) and any income you’ve received during that time. You’ll be able to compare these summaries with the individual confirmations you received each time you made a transaction.
At tax time you’ll be issued a Form 1099, which shows your taxable growth, from income and capital gains, over the previous calendar year. Be aware that a copy of each Form 1099 is also sent to the IRS, so don’t think you can “forget” to include any gains from your investments on your tax return.
Types of Mutual Funds
There are essentially two types of mutual funds: open-end funds and closed-end funds. Most mutual funds you’ll hear about are open-end funds. Open-End Funds can issue and sell new shares to the public as long as there are people willing to buy them. In other words, the pool of investors can grow indefinitely for an open-end fund. There are both pros and cons to this ability of the fund to grow.
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The main advantage is that a large fund has the resources to increase diversity and, therefore, protect its shareholders from being adversely affected by a drop in any single stock or even a single industry. But that same “larger pie” situation precludes a larger fund from benefiting in a dramatic way from a gain in any individual security or selection of securities within the fund.
For example, if a large fund has 5 percent of its holdings in the healthcare sector, while a smaller fund has 25 percent of its investments in healthcare companies, a big gain in the healthcare stocks would have a much greater positive effect on the smaller fund than the larger one.
Conversely, should healthcare take a beating, shareholders in the smaller fund would feel the impact more keenly than those in the larger fund.
When an open-end fund sells shares, it’s issuing new shares. This is called a primary distribution, and because these are new shares, the Securities and Exchange Commission (SEC) requires the fund to offer all potential investors a prospectus. This is a document detailing data about the fund’s financial soundness, as well as its purpose and strategy. I’ll take you on a tour of a prospectus a little later on.
When you buy shares in an open-end fund, you’re buying new shares directly from the fund. When you sell shares, you are selling them back to the fund, not to other investors. When you invest, you are increasing the fund’s asset pool, and when you sell back shares, the money comes out of the asset pool to pay you back. You’ll generally have your money within a day or two of selling your shares.
Closed-End Funds , on the other hand, issue a specific, limited number of shares. These shares are then traded like stocks, on exchanges, and their value - from day to day - is determined by marketplace supply and demand.
With open-end funds, the value of your shares is determined by the collective value of the underlying investments being made by the fund manager. But the market value of a closed-end fund share is primarily based on the demand (or lack thereof) for the shares in the fund itself.
This can work in your favor if the fund is doing well and demand is high. However, you could also find yourself in a situation where - even though the securities held within the fund are doing well - the demand for shares in the fund is weak, causing the market value of your shares to drop.
The value of a mutual fund share - whether the fund is open-end or closed-end - is its Net Asset Value, or just NAV. The NAV is simply the total assets of the mutual fund divided by the total number
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of shares outstanding. If the fund has assets of $100 million, and there are a million shares distributed, each share has a NAV of $100.
When demand for shares in a closed-end fund is not strong, shares will trade at a discount off the NAV. If demand is high, shares in the fund will trade at a premium above the NAV. Trading closed- end fund shares takes more skill and knowledge than does open-end fund trading. If a closed-end fund is trading at a premium, you must know whether market circumstances justify the higher price. If shares are trading at a discount, you must know if it’s enough of a bargain.
Loads, No-Loads…What Are They?
Loads, in mutual fund terms, are sales fees or commissions you’re required to pay to buy and/or sell shares in a given mutual fund.
Load funds add these commissions or sales charges onto your purchase or, more correctly, they take it out of the money you’re investing - unless you specifically add additional money to cover the load. These charges can be substantial, running up to 8.5 percent. That would be $850 on a $10,000 investment!
But the effect of the load can be worse than just $850 because - when you invest the $10,000 - whoever sold you the shares would take out their $850 first, and actually only invest $9,150 for you in the fund. Not only would you lose the $850, but you’d also lose all the dividends and capital gains you might have realized on the shares the $850 could have bought you. Over the course of 10 years, in a fund netting 12 percent growth, that would cost you $2,805 in future assets because they took the $850 load out of your $10,000 investment.
History has not shown that loaded funds perform any better than no-load funds, so there does not seem to be any redeeming value for the penalty of having to pay the sales commissions. If an adviser recommends a loaded fund to you, have him or her show you - using numbers you can understand - why the fund will likely outperform similar no-load funds sufficiently to more than make up for the load. Paying the load is, in a sense, paying for the adviser’s advice. You, as the investor, must decide whether their advice is worth the cost. If it is, then go with their recommendations.
Most through-the-mail marketed funds are no-load .
When we talk about loads, in most cases we’re talking about front loads, which are commissions that are deducted from your investment before it gets invested. There are also funds that charge their load
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on the back end, when you sell the shares. These redemption fees, as they are often called, can run up to 6 percent. Most commonly they’re reduced by 1 percent each year you hold the shares - so after six years you could sell them without having to pay any load.
But keep in mind that back-end loads or redemption fees are being charged on your money after it grows. This means that while a 6 percent back-end load might seem lower than a 7.25 or 8.5 percent front load, it is most often being calculated on a larger asset and therefore can be quite a chunk of change … your change.
Some funds calling themselves “no-load” charge back-end redemption fees, so read the prospectus.
Some mutual funds will also charge you up to 1.25 percent for what are called 12b-1 fees. These are little more than the fund’s way of charging you to help pay their marketing costs. A true no-load will either not have this charge at all or it will be less than .25 percent. But be careful … some funds claiming to be no-loads do charge marketing fees greater than .25 percent, and because these fees are not legally considered commissions (loads), they get away with using the “no-load” label. Read the prospectus!
A true no-load fund is one on which you pay NO sales fees, redemption fees, exit fees, or marketing fees.
Low-load funds are marketed just like no-loads, except that they charge a 1 to 2 percent fee to cover the costs of advertising, handling your telephone questions, printing and mailing of sales materials, and so on. Some of these funds can be good performers, so do not completely discount them. When you feel more comfortable in evaluating the true value of one fund versus another, you can determine for yourself whether a given fund’s potential might be worth 1 to 2 percent for their overhead costs.
Understanding the Prospectus
In order to answer the question, “How do I know who these people are and what they will do with my money,” you’ll need to understand the basic elements of a prospectus. A prospectus is usually a government-designed information booklet describing a mutual fund. They are always laid out in a specific format, so when you know how to read one, you’ll be able to understand them all. Here is a general description of the elements of a prospectus.
#1 The Key Features of The Fund . This includes the fund’s objectives, automatic investment features, liquidity, costs, management, shareholder services, and reporting.
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#2 Summary of Expenses . These expenses will reduce your profit. It will tell you here if there are any loads for the fund. A load is a sales commission that you pay either upon buying shares or redeeming shares (selling your shares back to the mutual fund). This section will also outline any 12b1 fees, which are charges that are withdrawn from your account to help cover their marketing expenses. The total operating expenses should never exceed 2 percent.
#3 Condensed Financial Information . This is a table of data and ratios that detail a fund’s past performance. Remember that past performance is not a guarantee of future performance, but it’s better than no information at all.
#4 Investment Objectives and Policies . This is the section of the prospectus where you’ll find out how the fund plans to invest your money and what their objective is. For example, if a fund invests in stocks, its objective will be capital appreciation. This is another way of saying, “I want my investment to grow in value.” This section will also detail how the manager plans to handle volatile markets. The term “volatile” refers to how many “ups and downs” a stock, fund, or index experiences. A very volatile stock gains a lot of money in the ups and loses a lot of money in the downs. One that is less volatile has fewer highs and lows, or they are less dramatic. If the policy is to keep the fund fully invested at all times, you can expect significant ups and downs. If the fund moves substantial portions of investments into something safe, like treasury instruments, during market pull-backs, you know that you’ll have less volatility, but gains will also be lower.
#5 Securities and Investment Techniques . This section explains which types of securities the fund can hold and what percentage of each type. It also describes the fund’s authority to borrow money.
#6 Management of the Fund . The record of the fund’s manager is an important factor in choosing a fund. Funds advertise their best performance numbers, and you want to make sure that the fund manager who racked up those impressive numbers is still there. You’ll want to look for a fund where the manager has been there more than three years.
#7 Distribution and Taxes. This section describes how the fund will determine how much money is made or lost, how frequently they make that calculation, and how frequently you’ll get your money. This section also details the fund’s intention as to taxable distribution of income, as well as potential federal, state, and local tax liabilities. #8 Share Price Calculations . This is how the fund determines a share’s Net Asset Value (NAV).
#9 Performance . This section describes how the fund’s marketing people come up with the performance figures that are shown in ads or other promotional material.
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#10 Tax Advantaged Retirement Plans. Most funds offer a service where you can invest your IRA, KEOGH, 401(k) or other retirement money in their mutual fund. This is a good idea because you won’t have to pay taxes on your money’s growth until you take it out in retirement.
#11 General Information . This is general information about the fund company (family) and other mutual funds they offer.
#12 How to Purchase Shares . This section will tell you whether you are required to have a brokerage account with the fund family in order to buy shares. Also, it will outline whether there are any minimum purchase requirements or any ongoing purchase minimums.
#13 How to Exchange Between Funds. This section outlines the process for buying and redeeming between different mutual funds within the same fund family.
#14 How to Redeem Shares . This section explains how to sell your shares back to the fund and how the redemption value is calculated.
You can see that investing in a mutual fund is not as complex as it seems. It is just a matter of having the right information to make an educated choice.
Mutual Fund Categories
There are five basic categories of mutual funds: stock funds, stock and bond funds, bond funds, money-market funds, and specialty funds.
Stock funds are mutual funds that buy stock in other companies. Stock is equity in the company, which means you are a part owner of the businesses in which your mutual fund invests.
Normally stock funds are designed for growth; some are designed for aggressive growth. The more aggressive the fund’s investment philosophy, the riskier its investments will likely be because it will usually be investing your money in newer, smaller, less proven companies. Companies that may have a tremendous upside potential, but may also fail to achieve that potential. Growth and aggressive growth funds should constitute a portion of every investor’s portfolio, but the percentage of one’s assets invested in aggressive stock funds should be reduced with the investor’s increasing age and decreasing capital-risk tolerance.
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Young investors who are looking for large capital appreciation over the long-term, and who have time to recover from possible losses from riskier funds, should consider keeping 50 to 80 percent of their assets in growth and aggressive growth funds. But as the investor ages (approaches and reaches retirement), assets should be shifted more towards income-producing funds, with a small portion (minimum 10 to 20 percent) remaining in growth funds to keep the portfolio ahead of inflation.
International stock funds buy only foreign (non-U.S.A.) stocks. Global stock funds buy stocks from all around the world, including the U.S. These types of funds usually invest conservatively in major, proven corporations.
Stock and bond funds, sometimes called balanced funds or growth and income funds, split their holdings between stocks and bonds. Bonds differ from stocks in that, while stocks are actual ownership in a company, bonds are essentially loans to the company. Stock is equity in the company; bonds are debt instruments where the holder of the bond does not own any equity in the company, but the company (or government body) owes the bond-holder the money … and pays interest on that debt throughout the “maturity” period.
Balanced funds can be good for your retirement years because they offer the security and income production of bonds while still providing some growth through their stock component.
Bond funds have historically been good, solid income generators. However, interest rates have tremendous influence over the market value of bonds.
A rule of thumb: for every point short-term interest rates rise, long-term government bonds lose 10 to 12 percent in capital value. The reverse is also true: for every point short-term interest rates decline, long-term government bonds gain 10 to 12 percent in capital value. Of course, you would only realize that loss or gain if your bond mutual fund sold the bonds they hold while their value was different from when you purchased your fund shares. The prospectus will tell you how the mutual fund would react to such market conditions. Read it.
Many bond mutual funds available today own more speculative, riskier bonds — what some people call junk bonds. The polite term is high-yield bonds . These are simply bonds from less proven companies, which are willing to pay higher interest rates to attract money. The high-yield bond fund investor is lending money to companies that have not yet proven their ability to hang together through tough times. There is at least some risk that some of the companies in the fund may not be able to cover their interest obligations or even pay back the principal when those tough times come. The word is “risk.” If you can tolerate it, there are some good high-yield mutual funds out there. If you can’t
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… leave them alone.
One noteworthy shortcoming of bonds is that, with the exception of junk bonds, most pay interest rates that - after taxes - don’t work out to be much above inflation. That means, to optimize bonds’ performance in your portfolio, you need to time your entry into bond funds to when the prime rate is beginning to fall, so you can benefit from both their income generation and their capital value appreciation.
There are many types of bond funds, such as municipal bond funds, high-grade corporate bond funds, high-grade tax-exempt bond funds, high-yield corporate bond funds, and so on. While defining each of these fund types is beyond the scope of this manual, you can find many good books on mutual funds at both your local library and bookstore.
Each fund type has its own pros and cons, and each fits a different investment circumstance. For instance, if you are in a high tax bracket, you may find that tax-free municipal bonds give you solid returns without adding to your tax woes.
Money market funds invest primarily in short-term IOU’s from banks and America’s strongest, most stable corporations. Some invest in short-term notes from federal, state, and local governments.
Many of these funds let you write checks directly out of your account, but these checks can often be limited to amounts over $500, and there are usually restrictions on how many checks you can write in a month.
Money market mutual funds usually pay higher interest rates than the so-called money market accounts offered by banks and savings and loans. Most brokerage accounts let you select a money market fund in which they will park any money you don’t have currently invested in other funds or securities. These are often called “sweep” funds. So, as you pull money out of one investment, the brokerage company puts it into your “sweep” money market fund. There it stays until you give them another order to buy other mutual fund shares or securities with it.
Specialty funds include such things as sector funds and funds that invest in hard assets like gold and other precious metals.
Sector funds are mutual funds that invest all or most of their asset pool in companies in a single industry or segment of an industry. There are sector funds for energy, technology, transportation, healthcare, utilities, and so on.
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The idea behind sector funds is that, while the stock market overall may be down or listless, a specific industry may be hot. In the mid to late 1990s the technology sector was hot. So, if you had gotten into a technology mutual fund as the sector started its climb, you would’ve enjoyed incredible growth, sometimes exceeding 100 percent per year.
The obvious downside is that, if you poorly time your move into a sector fund, you can lose money just as quickly, as many tech investors discovered in 2000. Most often - by the time the average citizen is hearing about how hot a sector is - it’s already cooling down and the smart money is on the way out.
Gold and precious metals funds are volatile and highly speculative. These funds are closely influenced by commodity prices and political pressures and can be a bad dream for the unprepared investor. The rule of thumb in this investment category is: only invest money you can afford to lose. The truth is that it’s been many moons since gold has been a good investment. In fact, it has been a rotten investment compared with the stock market. Gold may have seen its day as a strong investment - even as an inflation hedge.
Locating and Investing in the Best Mutual Funds
To make wise choices in mutual fund investing, you’ll need a listing of available funds and their long- term performance. And you want this listing to be a comparison of apples to apples.
You’ll find useful mutual fund comparisons in Forbes, Money, Business Week, Barron’s and Consumer Reports , among other publications. Each of these magazines publishes an annual mutual fund ranking, comparing the important indicators of each fund’s costs and performance. Plus the World Wide Web is ripe with investment sites ready to drown you in useful information about mutual funds. Type “mutual funds” in any search engine, and you could spend the rest of your life going through the resulting sites.
Each fund family has its own website, and every brokerage company also maintains a website with information available on every mutual fund or individual security you could possibly consider investing in. These brokerage sites usually require you to have an account with the firm to have full access to the site’s research resources. These mutual fund rankings, whether in print or on the Web, usually look back over the last three- to ten-year period. Just remember that past performance is no guarantee of a mutual fund’s future success.
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Beware of new funds with no track record, even if they’ve had spectacular starts.
To find even more detailed information about various mutual funds, check online at www.morningstar.com.
Autopilot Investing - Index Mutual Funds
My favorite way to invest is through index mutual funds because they perform well compared to all actively managed mutual funds, they have less volatility than most comparable security funds, and they have lower management costs. So what are index mutual funds?
When you’re watching the news and the newscaster says “The Dow Jones Average gained today” or “The S&P 500 lost five points today,” they are referring to indices. An index is simply a measurement of how well a group of stocks or other securities is doing, on average. For example, if the stocks that the Dow Jones Index is tracking went up, on average, then you would hear that the Dow Jones Average posted gains today. If, overall, the stocks went down, then you’d hear that the index posted a loss.
There are a dizzying range of indices you can choose from:
V Tech. Sector - groups of technology stocks V Pharmaceutical - companies that make drugs and medicines V Banks V Transportation V Utilities V Precious metals V U.S. Stock Market indices V International Market indices V U.S. Bond Market indices V Stock By Company Size Indices V Even indices that follow the movement of the indices V And more every day
The S&P 500 Index is based on the combined performance of the 500 biggest companies in America.
If more of these stocks go up than go down, the index goes up. If more go down than up, the index
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goes down. Actually the computations are a little more complicated than that, but you get the idea. The S&P 500 Index is a barometer of how the big-company end of the stock market is doing as a whole. So it’s the barometer against which many stock mutual funds measure their own performance. Unfortunately for most of them, the comparison is not flattering.
The S&P 500 Index is less volatile than actively managed growth funds but out- performs 60 to 70 percent of them! This means that most mutual fund managers, who are actively picking stocks and other securities for their funds, are not doing as well as this broadly based index that simply and mindlessly tracks the performance of 500 companies’ stocks. But the difference in performance is actually more dramatic than that.
When investors’ actual returns are compared to the performance of the S&P 500 Index over a decade or more … the index outperforms ALL MUTUAL FUNDS! That’s right. If you just invested in the exact same 500 stocks the S&P 500 Index tracks - and left your money there regardless of what the market was doing from day to day - you would have beaten the average investor’s returns from virtually 100 percent of all available mutual funds.
The reason investors’ actual returns make a difference is that this measurement takes into account how frequently the average investor takes their money out of various kinds of funds, and when those withdrawals take place. Investors in actively managed funds tend to try to guess at market tops, and they frequently move money from one fund to another. The reality is that these active money movers most often miss-time the market and their returns suffer for it, especially when compared to the steady performance of the S&P 500 Index.
About now you should be saying, “Gee … if only there was a way to invest in all the S&P 500 stocks without having to make 500 transactions.”
Well, there is. It’s through an S&P 500 Index mutual fund.
There are a number of S&P 500 Index funds available. These funds buy and hold the exact same 500 stocks the index tracks. So the performance of an S&P 500 Index fund closely mirrors the index itself. And since there’s no strategy to execute, there’s no need for a lot of management and staff to consume part of your returns from the index fund.
In addition to the cost savings from relatively small management fees, index funds offer a tax advantage. Since very few stocks are sold during the year, the fund generates fewer capital gains (taxable events for you) than an actively managed fund would. These savings, compounded year
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after year within the fund, can make a huge difference in your results.
For example, if you invested $100,000 in a fund that generated just an 8 percent return, after 15 years you should have $330,692. But if your fund’s expenses equal 2.5 percent per year, that, in effect, reduces your annual gain from 8 to 5.5 percent. This means you’d actually end up with $227.758. Management and other fees would be costing you $102,934 over 15 years.
For the sake of this example, let’s say your S&P 500 Index mutual fund also generated an 8 percent return over those 15 years (even though over the past 15 years the S&P 500 Index has actually delivered nearly a double-digit average annual return). If your S&P 500 Index fund’s expenses, including management fees, are 2 percent lower than the other fund - compounded over the 15 years - your effective growth rate would be 7.5 percent, giving you an account balance of $306,945! The index fund’s lower expenses would leave you $79,187 more in your account over 15 years.
Does it really work that well? It sure does … and the big money knows it. Big institutional investors, like pension funds and insurance companies, keep 30 percent of their assets in index funds at all times and in all market conditions. And they’ve been doing that for nearly all of the three decades since index funds hit the scene. Beating more than 70 percent of the market all the time is good enough for the big guys, and I recommend that it’s good enough for you and me.
The financial press agrees:
“Time to face the cold, hard facts, mutual fund fans: over the past 10 years, most people would have been better off trading in their actively managed fund for one that tracks the Standard & Poor’s 500. Use a long-time horizon or a short one - it doesn’t much matter. The results are the same. The indexers cleaned up.” - Barron’s Magazine
S&P 500 Index funds only represent that one index. There are also index mutual funds for all the other popular securities indexes. Whether you want to invest in stocks of big companies, stocks of small companies, the whole U.S. stock market, stocks of international companies, bonds, precious metals, or any number of other securities groupings, there are indexes and therefore index mutual funds ready to help you beat the majority of actively managed funds in that category.
This index fund phenomenon dramatically simplifies the Your Debt Elimination strategy. You could literally pay off your debts, invest in a few index mutual funds, and golf until you’re ready to retire. No watching the markets, no moving money around from “hot” fund to “hot” fund, no trying to outguess
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the experts. Just parking your money in the mutual funds that routinely beat more than 70 percent of their competition - year after year - and not worrying about whether you made the right move.
Mixing Asset Allocation with Index Fund Investing
The only remaining component to this automatic pilot investing system is what’s called Asset Allocation . Asset Allocation simply means the percentage of your investment capital you’re going to put into each type of index fund.
As we mentioned earlier, stock index funds have historically produced the most growth among index funds, but with the highest risk of going down in a bad market. Bond index funds produce lower growth but generate regular income payments, and they’re somewhat less risky than stock funds. Money market index funds are much less risky than either stock or bond index funds, but generate even lower returns than bonds. So risk and reward move in opposite directions.
What this means in terms of Asset Allocation is that - when you’re young, and have time to recover from possible losses - you should accept more risk in order to get the correspondingly higher rewards offered by stock mutual funds. As you age, you should shift more and more of your assets to less risky funds that can produce more and more income for your retirement.
The following graphic depicts the risk level of the various investment types we have covered thus far.
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As your commitment to focusing on higher goals increases, so does your reward.
♥ Internal Change Tip: Understand your risk tolerance. No matter what company, fund, or index you invest in, you are taking some risk in order to get the reward. You should consider your investment portfolio as something for the long-term, not a quick way to make money.
Risky Business
As you’ve been reading this, you are probably forming ideas about which kinds of investment strategies might be right for you. How much risk would you be comfortable with? What will your investment style be?
Take the case of the Garcia twins. These sisters are identical physically, but they couldn’t be more different in terms of personality. Emily is more conservative and prefers to think before acting. Her sister Erica is liberal, not only in terms of politics but also in her view of life. Erica’s motto is “You only live once,” whereas her sister’s motto is “Better safe than sorry.”
Emily and Erica are different in their investment strategies as well. Emily likes to invest in mutual funds that are more conservative. She would rather have smaller gains but less risk that she will lose her money. Erica, on the other hand, likes the ride. She gets a thrill watching her money grow quickly and can tolerate the losses much easier than her sister.
Are you more like Emily or Erica? Do you like to research the company thoroughly, or are you content to let an adviser or the fund manager do that for you? Do you want to invest in funds that support a particular cause, or are you looking solely at performance? Will you rely on past performance as an important measure, or will you rely on your “gut instinct”? Do you plan to re-invest all of your gains, or do you plan to take some out for your lifestyle?
Once you have become debt-free, this is your game. The playing field is wide open, and it’s up to you to decide how to manage your money. Instead of your creditors telling you what to do, you’re in control now.
With all of this talk about interest rates, volatility, loads, prospectuses and indices, it’s easy to lose sight of why you are doing all of this. Were you looking to develop money management as a new hobby? Do you imagine that the movement of the prime rate will make your heart go pitter-patter?
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Probably not. The reason you chose the Your Debt Elimination System was to regain control over your life. You wanted to get out of debt and become financially independent.
Think back to the visualization exercise you did at the beginning of this program. Do you remember the ideal life you were imagining? This is the life you are now working towards. With all the things you’ve learned thus far in the YOUR DEBT ELIMINATION Program, you now have the skills to be an excellent money manager. You have much of the same knowledge and expertise that the wealthiest people in the world possess. Sounds like a dream, doesn’t it? It’s not. Financial independence is a reality because you have learned the important skills to make it happen.
The “Market-Timing” Question
Now you might be wondering, “What should I do to avoid getting caught in a deep market correction like the Tech Wreck of 2000 ?” That’s a good question, and the answer depends on how old you are and how actively involved you want to be in managing your investments.
The age question is related to how much time you have before your expected retirement date for your portfolio to recover from a serious correction like the one experienced in 2000. If you’re young, you can let your portfolio ride through these corrections with little or no intervention on your part. The market historically recovers from corrections and begins to climb again. So, over time, you want to be in the market, not on the sidelines.
However, if you’re closer to your retirement date, you may want to try to get out of the way of significant market retreats. And let me be clear about this. I’m proposing this technique as a defensive measure only. I’m not suggesting you use what I’m about to explain to try to outguess the market. This is not a system I use to make more money; it’s a system I use to try to lose less money.
The indicator I’m talking about is the Federal Reserve’s changing of short-term interest rates. This is because, historically, when interest rates rise, stock values tend to decrease, and when interest rates fall, stock values tend to increase.
If the “Fed” raises interest rates at three consecutive meetings, and especially if some of those raises come between meetings, I seriously consider getting my money out of aggressive stock funds, or even out of stock funds altogether if conditions seem particularly volatile. This would include stock mutual funds, like the S&P 500.
This would have protected the average investor from the worst of the 2000 carnage. OK … so now
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you’re out of the market. When would you get back in? If the Fed drops interest rates at three consecutive meetings, I’d get back into the market, unless some significant factors tell my gut it’s still too risky.
Again, this is not meant to be a money-movement strategy. This is strictly a defensive trigger meant to protect your assets from a major market setback. Trying to time the market to maximize your gains, on the other hand, is a bad idea. The biggest mistake most non-professional investors make is getting in too late, and getting out too soon. They hesitate investing until they’re sure it’s a market upturn. By this time much of the gains have already been realized. Then, because they got in too late, they frequently get to ride the next market downturn … and then, to make matters even worse, they get fed up and bail out just before the next upturn.
If your timeline will allow it, try to select good funds and just stay with them. Be an “investor,” not a “trader.” Traders try to “time the market,” watching the ticker around the clock, on their TV, their computer, their PDA, and whatever other sources they can find. They nervously try to predict exactly when something good or something bad is about to happen, then they jump in and buy or sell accordingly.
Investors, on the other hand, put their money into good securities, hold onto them, and let time increase their value. Over time, the average value of the U.S. stock market has continued to rise, year after year, decade after decade. So investors , on average, come out much better than traders .
And some investors don’t try to figure it all out. They just hire a professional investment adviser to make many of these decisions for them. These investors agree on a wealth-building plan with their adviser, then just Dollar Cost Average money to them, which the adviser puts into investments they believe will best execute the plan. The investor receives regular reports, tax documents, and - hopefully - lots of gains and income.
Should You Use an Investment Adviser?
Do you enjoy gardening? Is preparing the soil, buying the tools, researching which types of plants to grow, planting the seeds, and tending your garden regularly pleasurable to you? Or, do you prefer to hire a landscaper and a gardener to manage your garden for you while you sit back and enjoy the results?
Financial planning is a lot like gardening. You might prefer to be very involved in how your assets are allocated. You need to be aware, though, that it takes a lot of research, planning, time, and energy to
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maintain your financial garden. In fact, one study quoted in Success magazine a few years back stated that 98 percent of non-professional, speculative investors lose money. So, unless you plan to manage your money in a full-time, hands-on way, it may be better to let professionals do the driving.
If you decide to use an adviser, try to get personal recommendations from people you trust. Short of that you can simply go the Yellow Pages or the World Wide Web, but you should look deeper than their pitch or marketing materials before turning your hard- earned money over to someone else’s care. To help you do that, I offer you the best advice I could find on the subject. I can’t say it any better than the United States Securities and Exchange Commission:
“Federal or state securities laws require brokers, advisers, and their firms to be licensed or registered and to make important information public. But it’s up to you to find that information and use it to protect your investment dollars. The good news is that this information is easy to get, and one phone call or Web search may save you from sending your money to a con artist, a bad broker, or disreputable firm.
Before you invest, make sure your brokers, investment advisers, and investment adviser representatives are licensed to sell securities. Always check to see if they or their firms have had run- ins with regulators or other investors.
This is very important because, if you do business with an unlicensed securities broker or a firm that later goes out of business, there may be no way for you to recover your money — even if an arbitrator or court rules in your favor.”
Brokers and Brokerage Firms
You can ask either your state securities regulator or the Financial Industry Regulatory Authority (FINRA) to provide you with information from the Central Registration Depository (CRD). Your state securities regulator may provide more information from the CRD than the FINRA, especially when it comes to investor complaints, so you may want to check with them first. You can find out how to get in touch with your state securities regulator through the North American Securities Administrators Association, Inc.’s website: (www.nasaa.org).
You can go to Financial Industry Regulatory Authority (www.finra.org) to get CRD information, or call them toll-free at (800) 289-9999.
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Investment Advisers
People or firms that get paid to give advice about investing in securities generally must register with either the SEC or the state securities agency where they have their principal place of business. Investment advisers who manage $25 million or more in client assets generally must register with the SEC. If they manage less than $25 million, they generally must register with the state securities agency in the state where they have their principal place of business.
Some investment advisers employ investment adviser representatives, the people who actually work with clients. In most cases, these people must be licensed or registered with your state securities regulator to do business with you. So be sure to check them out with your state securities regulator. To find out about advisers and whether they are properly registered, read their registration forms, called the “Form ADV.” The Form ADV has two parts. Part 1 has information about the adviser’s business and whether they’ve had problems with regulators or clients. Part 2 outlines the adviser’s services, fees, and strategies. Before you hire an investment adviser, always ask for and carefully read both parts of the ADV.
You can view an adviser’s most recent Form ADV online by visiting the newly launched Investment Adviser Public Disclosure (IAPD) website (www.adviserinfo.sec.gov). You can also get copies of Form ADV for individual advisers and firms from the investment adviser, your state securities regulator, or the SEC, depending on the size of the adviser. You can find out how to get in touch with your state securities regulator through the North American Securities Administrators Association, Inc.’s website at: www.nasaa.org and select Contact Your Regulator. If the SEC registers the investment adviser, you can get the Form ADV online from the SEC at: www.adviserinfo.sec.gov or for help contact the SEC at:
SEC Headquarters 100 F Street NE Washington, D.C. 20549-2000 Phone: (202) 942-8088 Email: [email protected]
Because some investment advisers and their representatives are also brokers, you may want to check both the CRD and Form ADV.
Once you’ve checked out the registration and record of your broker, adviser or firm, there’s more to do. For example, you should find out whether the brokerage firm and its clearing firm are members of the Securities Investor Protection Corporation (SIPC) (website: www.sec.gov/answers/sipc.htm).
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SIPC provides limited customer protection if a brokerage firm becomes insolvent - although it does not insure against losses attributable to a decline in the market value of your securities. If you’ve placed your cash or securities in the hands of a non-SIPC member, you may not be eligible for SIPC coverage if the firm goes out of business.
When Can You Retire?
Okay. Now that you know how to invest your Margin once you’ve used it to pay off your debts, the question is, “How long is it going to be before you can retire?”
That depends on several factors. They are: V How much money you are investing each month. V How much monthly income you’re going to need in retirement. V Whether or not you are already settled in your “retirement” home.
How much money you are investing each month depends on two things: how much money you have available for investing and how much you’ve decided to take out of the investing stream to spend on your current “lifestyle.” Only you can balance out your short-term lifestyle desires with making sure you have enough money to invest so you can maintain that lifestyle for the rest of your life.
How much monthly income you’ll need in retirement is also up to you. The figure might not be as big as you think because all you’ll really need money for is food/insurance/utilities/taxes. Whatever you want beyond that for recreation and other incidental expenses is up to you.
How Quickly Will Your Investments Grow?
To give you an example of how quickly your investments can add up, and how soon you could retire on the interest income, take a look at the Wealth-Building/ Financial Freedom Calculator on the next page.
Time Tip: Determine the amount you’ll be investing each month after all your debts are paid off. The ideal amount would be the total of all your former monthly debt payment amounts, including your mortgage payment, plus your Margin.
Now follow that line across to the number of years you plan to continue putting this amount into your investments. There you’ll find the approximate total amount that would be built up in your investment
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accounts. See how quickly you can build it up. Before now, did you have any real plan to retire? Any approximate date by which you’d be able to quit working if you chose? Look how soon it could happen for you now … and this is realistic, not a pipe dream.
One thing that could extend your retirement timeline, however, is your housing requirements. If you are not already in the home you would like to retire in, then you’ll need to either wait until your investments have built up enough to buy or build your retirement home with cash, or you’ll have to take a mortgage on it and accelerate the payments to eliminate that final debt. Either way, it will cost money and will delay your retirement plans.
These decisions are all yours … but at least you will be in a position to make them, rather than simply be swept along by circumstances, out of control of your financial path and destination. Once you’re settled in to your debt-free and prosperous retired life, you’ll be in a rare position to help others who may be less fortunate than you.
WEALTH-BUILDING/FINANCIAL FREEDOM CALCULATOR
Monthly 5 10 15 20 25 30 Investment years years years years years years Amount $ 100 $ 7,744 $ 20,484 $ 41,447 $ 75,937 $ 132,683 $ 226,049 200 15,487 40,969 82,894 151,874 265,367 452,098 300 23,231 61,453 124,341 227,811 398,050 678,146 400 30,975 81,938 165,788 303,748 530,733 904,195 500 38,719 102,422 207,235 379,684 663,417 1,130,244 600 46,462 122,907 248,682 455,621 796,100 1,356,293 700 54,206 143,391 290,129 531,558 928,783 1,582,342 800 61,950 163,876 331,576 607,495 1,061,467 1,808,390 900 69,693 184,360 373,023 683,432 1,194,150 2,034,439 1,000 77,437 204,845 414,470 759,369 1,326,833 2,260,488 1,200 92,924 245,814 497,364 911,243 1,592,200 2,712,586 1,400 108,412 286,783 580,258 1,063,116 1,857,567 3,164,683 1,600 123,899 327,752 663,153 1,214,990 2,122,933 3,616,781 1,800 139,387 368,721 746,047 1,366,864 2,388,300 4,068,878 2,000 154,874 409,690 828,941 1,518,738 2,653,667 4,520,976 2,200 170,362 450,659 911,835 1,670,611 2,919,033 4,973,073 2,400 185,849 491,628 994,729 1,822,485 3,184,400 5,425,171 2,600 201,336 532,597 1,077,623 1,974,359 3,449,767 5,877,269
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2,800 216,824 573,566 1,160,517 2,126,233 3,715,134 6,329,366 3,000 232,311 614,535 1,243,411 2,278,107 3,980,500 6,781,464 3,200 247,799 655,504 1,326,305 2,429,980 4,245,867 7,233,561 3,400 263,286 696,473 1,409,199 2,581,854 4,511,234 7,685,659 3,600 278,773 737,442 1,492,093 2,733,728 4,776,600 8,137,757 3,800 294,261 778,411 1,574,987 2,885,602 5,041,967 8,589,854 4,000 309,748 819,380 1,657,881 3,037,475 5,307,334 9,041,952 4,200 325,236 860,349 1,740,775 3,189,349 5,572,700 9,494,049 4,400 340,723 901,318 1,823,670 3,341,223 5,838,067 9,946,147 4,600 356,211 942,287 1,906,564 3,493,097 6,103,434 10,398,244 4,800 371,698 983,256 1,989,458 3,644,970 6,368,800 10,850,342 5,000 387,185 1,024,225 2,072,352 3,796,844 6,634,167 11,302,440
Example: If you invest $1,000 each month for 25 years, you’ll have $1,326,833 in total principal - and you’ll be able to retire at an income of $11,056 per month for the rest of your life without putting another penny in. Based on an average 10 percent return on investment.
Number of Years until I’m Debt-Free: years (From your Calculating your Debt Payoff form)
Number of Years I Want to Save: years Total Amount of Investment each Month: $ Total Investment Nest Egg: $ (Use the chart, above.)
NOTE: These figures are not intended to be a projection of any investment results, and no assurance of any level of investment return can be provided.
Now You Can Help Those Who Need You
At this point you’re retired, debt-free, with an independent income stream. One of the major benefits of achieving this goal is that you are able to help people in your life who really need it. Whether it’s an aging parent, a sibling in trouble or starving children around the world … you’ll have resources to help.
Many people really want to help others, but they get frustrated because they can hardly take care of their own needs. By following the Your Debt Elimination debt- elimination and wealth-building strategy, you can quickly reach a point where you’ll have the freedom to share as much of your wealth as you please.
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After all, you really can’t take it with you … but you don’t have to leave all your wealth in the hands of credit institutions. You should decide how much of your wealth you want to spend on yourself, how much you want to leave behind … and to whom it should go.
Following this program will get you to that point in the shortest possible time.
Frequently Asked Questions About Wealth-Building
Question: I can’t believe it! I just paid off my very last debt. What’s the first thing I should do?
Answer : I frequently advise people who’ve fought and won a long, valiant debt- elimination battle to take one or even two months’ Margin and reward themselves with a vacation or some other indulgence. It gives you something to look forward to as you slug your way through the debt- elimination process, and it gives you a preview of the lifestyle you’ll be able to live when you build up sufficient investments.
Question : I’m back from vacation now, and my tan is fading. So is my confidence. I don’t have any savings at all. What if something happens?
Answer: It is possible that something unforeseen might come up, like a breakdown in your car or a major appliance, so the first order of business after the debts are gone is to put that six months of required income into a liquid (easily convertible to cash) account, such as a money market account, CD, or an assets management account. This way you can easily withdraw any amount you might need to meet an emergency. Shop around because there are significant differences between interest rates paid by various financial institutions.
Question : Where do I put my emergency fund? Should I just put it under the mattress? I’ve never done this before and I don’t even know how to start.
Answer : Make sure that, whichever type of account you choose for your emergency cash fund, it is both interest-bearing and liquid. You’ll notice, however, that we’ve included certificates of deposit as an option. One consideration with CDs is that you’ll pay a penalty if you withdraw any of the money prior to the certificate’s maturity date. But that penalty is usually just two or three months of interest. CDs usually pay significantly higher interest rates than passbooks or money market accounts. If you’re pretty sure you’ll rarely need to make withdrawals, a CD or several maturity-date- staggered CDs may be a better choice for your emergency fund.
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Many discount investment brokerage companies offer competitive money market accounts along with debit cards, check writing, and other useful financial services. Get a copy of Money , Worth , Kiplinger’s or any other investment magazine, or watch CNBC, CNNfn, or any other financial news programs to see ads for these brokerage companies. Get their free information and decide which one’s best for you. If you’d like some help making these choices or setting up these accounts, seek out a good financial adviser.
Question : Okay, I’ve got my emergency fund all set up. What do I do now?
Answer : Once you have your emergency fund built up, you can begin concentrating ALL your investment money each month into less liquid but higher-growth investments. I recommend you invest through mutual funds. These can be stock funds, bond funds, or other types of investments that are managed by professionals with proven track records. I do not recommend you do your own investing in individual stocks, unless you are very knowledgeable and sophisticated in your abilities to analyze stocks and the companies behind them. You should first invest in these funds through a 401(k), if that’s available to you at work. If you’re eligible, you should invest through an IRA, Keogh, SEP IRA, or whatever tax-sheltered investment vehicle fits your situation. Talk to your tax or investment adviser to choose the best one. Mutual fund companies can also help you with this choice.
Question : I like playing around with investing. You’re saying I can’t pick my own stocks?
Answer : Of course, if you find the research and drama of selecting your own individual security investments rewarding, by all means … do it. But, do it with a portion of your investment portfolio you could stand to lose … because you might. Picking and timing stocks is not for the faint of heart. On the other hand, most folks find that mutual funds can build their wealth without changing the color or density of their hair.
Question : You talked a lot about insurance before. What do I do with it now that I am debt-free?
Answer : Throughout the investment stage of your YOUR DEBT ELIMINATION System you will, of course, maintain the necessary insurance to cover you from catastrophic occurrences, such as a totaled car or open-heart surgery. After you’ve built up an estate that can take care of your heirs in your absence, you may not need to carry much of the insurance you did during your wealth-building years. But have a trusted financial adviser help you make the final decision on what policies you need or don’t need.
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Question : What about taxes on my investments?
Answer : While taxes should never be your primary reason for selecting or not selecting a given investment, you should at least consider the effects of taxes on the growth of your investments. Many experts try to make this sound like an incredibly complex issue, but there are essentially three tax statuses for investments: tax-free (also called tax-exempt), tax-deferred, and non-tax-deferred. Tax- free investments are usually debt obligations of a governmental body. The most popular are tax-free municipal bonds. They are free from federal income taxes, and in some states, municipal bonds issued in that state are free from state income taxes as well (called double tax-free). These investments yield lower returns than taxable investments, but you must consider the value of not having to pay the taxes on your growth. Tax-deferred means letting the interest and capital gains accumulate in your account without your having to pay current taxes on them. But you do have to pay taxes on the money as you eventually take it out of a tax-deferred account. The taxes are not eliminated, they’re just deferred until later. And if you take the money out of a tax-deferred account before you reach the qualified age required for that type of account, you’ll pay penalties in addition to income and capital gains taxes.
Question : What about my IRA?
Answer : The most common mechanisms in the U.S. for tax-deferred investing are the Individual Retirement Account (IRA), the SEP-IRA (for self-employed), the Keogh (for self-employed) and the 401(k) and 403(b) plans offered by many employers. The Canadian equivalent of the IRA is the Registered Retirement Savings Plan (RRSP).
A tax-deferred plan should definitely be a part of your investment strategy because the increased value of having the full interest amount, in addition to the principal, compound each month is incredible. It can make a difference of hundreds of thousands of dollars in your future wealth to have this month’s interest earn interest itself next month - without being reduced by taxes during the process.
When you reach retirement age, you can begin withdrawing money from your tax- deferred account and only pay income taxes on the money you take out - as you take it out.
NOTE : There is a variation of the basic IRA in the U.S. It’s called the Roth IRA. The significant difference in this type of IRA is that instead of getting a front-end tax deferral on the money you put into the IRA, you make Roth IRA contributions with after-tax dollars … but pay no tax on withdrawals. Consult your tax adviser to see if this option will benefit you.
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One of the key benefits of these types of investment shelters is that when you normally begin withdrawing the money at retirement, you’ll need less to live on each month than you do during your income earning years, so you’ll take it out in lower amounts than your current income. This will put you in a lower income tax bracket, so the taxes on the dollars you’re taking out will therefore be lower than they would be if you paid them now, when you’re in your higher income (tax bracket) years. But you can be sure you will pay taxes on the money one way or another - at one time or another.
Investments that are neither tax-free nor tax-deferred are subject to current income and capital gains taxes each year.
Tax shelters such as IRAs and 401(k)s have maximum contribution limits, and when you’re debt-free, you could have more money to invest each month than you can fit into these shelters. You’ll then be choosing between tax-free investments such as municipal bond funds and taxable investments such as growth mutual funds. What you’re looking for in these comparisons is maximum “after-tax” growth of your wealth. So when you compare tax-free and taxable investments, be sure to compare the after- tax gain on the taxable investment with the yield of the tax-free investment. Many times the taxable investment will out-produce the tax-free investment, even after you pay the taxes.
Good luck in your investing!
The Realities of Real Estate
“To be happy at home is the ultimate result of all ambition.” - Samuel Johnson
“Home Sweet Home” “Home Is Where the Heart Is.” “Home Is Where You Hang Your Hat.” There are dozens of adages that speak of the warmth and comfort of home. Everyone wants a nice “nest” to come home to. Have you noticed, though, that the above phrases use the term “home” instead of the term “house”? No one ever said, “There’s no place like house.”
The truth is, your home has nothing to do with the house you live in. You can be gloriously happy in a small one-bedroom cottage or completely miserable in a 15-room mansion. Happiness does not come from where you live; it comes from how you live.
For most people, the purchase of their house is usually the largest single purchase they will ever make. But in this session, we’re not so much looking at the home you live in as we are at how real estate can be an effective component of your wealth- building plan.
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Building a Real Estate
In an earlier session, I said that your house wasn’t strictly a real estate investment because it was costing you money, not producing income. It’s really a liability, and even though it has market value, it’s unlikely you’ll capture its value in your lifetime. You’ll just live there, and your heirs will realize the home’s value when you hopefully move on to your mansion in heaven. But real estate investing can still be a strong part of your wealth-building plan.
There are two ways to do it. One is to own real estate property that provides you with rental income, and the other is to invest in a Real Estate Investment Trust (REIT). Both can produce strong contributions to your wealth-building and to your retirement income.
Are You the Landlord Type?
If you want to buy and own individual properties yourself, you’re going to be a landlord. Do you want to be a landlord? Would you like to manage properties yourself? This means listening to people’s problems, collecting rent, fixing things that break, refurbishing properties when tenants leave, showing properties to prospective tenants, and everything in between. If you have a lot of “handyman” talent, and enjoy solving people’s problems, this might work for you.
If that doesn’t sound like you, another option is to hire a professional property management company. But that’s not always easy. Are good property management services even available in your area? How much will they cost you? And remember that this cost is going to come out of your overall profit from your investment. Does this extra cost cause your real estate investment to give you a lower rate of return than what other types of investments offer? Hard questions, but you have to answer them to make a wise real estate investing decision.
If you can manage them yourself, or get the right people to manage your properties for you, residential and commercial real estate can be a good investment choice. Just remember, you’ll have to pay for good help, and that will affect your net profit.
If you choose to own actual property as an investment, you’ll need a solid understanding of the real estate dynamics in your area. For example, will rental property demand be increasing or decreasing in the near- and long-term future? If you own commercial property, what’s the economic outlook for your area? Will businesses be looking for space or trying to shed it to reduce costs in a down-turned economy?
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If you choose to own residential properties, are people moving into or out of your area. Are employers in good shape so that your tenants will likely remain employed? And how will you buy your rental homes?
Buying Distressed Properties with No Money Down
You’ve seen the infomercials late at night. There are several experts who will sell you their systems that teach you how to purchase houses for no money down and then rent them out or re-sell them for a profit. Some of these systems do work, but you have to understand why.
Old Mr. and Mrs. Smith have been living in their small two-bedroom home for 20 years. The Smiths did not follow the YOUR DEBT ELIMINATION Plan, so they still owe 10 years on their mortgage.
Sadly, Mr. Smith has a massive heart attack and dies, leaving his elderly wife with no means to pay her mortgage. She cannot afford to keep the family home that she has lived in for 20 years. Despite the memories of raising her children and loving her husband there for decades, this widow is now faced with moving to a small apartment. She is grieving and scared.
You drive up the driveway in your shiny car and offer to buy her home for pennies on the dollar. Are you doing her a favor? Maybe. Do you feel happy as you drive away knowing that you got this old woman’s memories for a great price? Probably not. Is this a typical story? Yes and no. Not all no- money-down deals are situations where you’re taking advantage of someone’s hard luck … but many of them are … especially when it comes to residential real estate.
If you have the temperament, and can see that - to some extent - you are providing a solution to the seller, you can find deals out there. You just need to remember that unusual deals result from people being in unusual circumstances, and those circumstances can be unpleasant.
If you prefer to stick to the more traditional approach to buying and selling real estate, there are some things you’ll need to know.
If you have the Your Debt Elimination Deluxe System, you’ll find a much more complete explanation of real estate investing on the real estate session in Volume II, Income Generating Solutions. To order Income Generating Solutions audio program call 1-800-693-7501 .
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Buying a House
V Use a realtor. The realtor will be able to show you the best listings in your price range. If you are looking at houses in the country, be aware that things may be less structured in rural areas — but the people you’ll be dealing with are not simpletons. If you treat them like residents of Mayberry, you do so to your own peril. V If the homeowner is there when you view the house and offers to answer questions, ASK them. “How old is …?” “Have you ever had to repair …?” Just be aware that they will be giving you the most positive “spin” on the answers. V Take notice of the house’s look, feel, smell, and appearance. Does the house have the “feel” you are looking for? V Look beyond the furnishings. You aren’t buying their furniture; you are buying the home. V Remember the old realtor’s adage, “Location, location, location.” Most home problems can be fixed, however most homes can’t be moved. Make sure you like the area. V Get a trustworthy inspector. This is VERY important.
Selling a House
V Use a realtor. In order to sell a house, you need to think like a buyer not a seller. You’ll need to go where they buyers are; and buyers go to realtors. It’s all about marketing. Many realtors charge lower commissions if they sell your home through their web site. V When prospective buyers are looking at your property, be gone! This is not a social call, and the prospective buyers don’t need your help in making a decision. If you have renters in the house, ask them to stay out of the way when the house is shown. V Take care of your house’s look, feel, smell, and appearance. Pay attention to the house’s curb appeal. Make sure the front walk is clear of toys, snow, leaves, the garden hose, or anything else that might impede the entrance into the home. V Put a nice, inviting doormat and maybe a warm wreath at the door. Make sure the key works and is easily accessible to the realtor. V Keep pets out of the house. If they must be inside, they must be as unobtrusive as possible. No pet odors or loud barking! V Make sure all light switches work and are attached to lights only. No Austin Powers disco balls and stereo music! V They will look in the closets. Make sure nothing is perched to fall on their heads. V The kitchen should be clean and free of unpleasant odors. You might bake some cookies, bread, or place a drop of vanilla essence on a light bulb. V Bathrooms must be immaculate and free of leaks.
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V The air conditioner and heater should be wiped off, clean, and functional. V Don’t stack fuses on top of the fuse box. It makes it look as if you have constant electrical problems.
The basic rule is that the better the house looks, the more likely it is to sell and the higher the price you’ll get for it.
Great! You have an interested buyer. There are three responses to an offer to buy your property.
1. You can accept the deal and start calling movers. 2. You can make a counter offer. 3. You can reject the offer outright.
There are very few cases when you will take option #3. More often that not you will make a counter offer. Offers are not that easy to come by, so don’t just dismiss one out of hand.
Consider how much you really need out of the property to move on with your plans. If you really don’t care if the property sells, you’re just trying to cherry pick a great offer if it comes along, then by all means hold fast. But if you want to move on to bigger and better things, and you just want to get your money out of the property with perhaps a reasonable profit for your investment, then negotiate.
Maybe you could get a better price if you offer to carry back part of the price in a second mortgage. That way you’ll be a mortgage lender and the property will still be an asset to you because it will be producing income even though you’ve sold it.
If you decide you want to own real estate as an investment, I suggest you form a corporation or Limited Liability Company and own the property through it. This will help protect your personal assets from any legal or financial complications that might arise from your real estate activities. Operating the business will also give you full tax deductions for many of your regular expenses.
On the other hand, what if all this buying, selling, renting, and managing property gives you the spins … but you still want to include real estate in your investing plans?
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The REIT Stuff
An excellent alternative to owning individual properties yourself is a Real Estate Investment Trust, or REIT (pronounced “ree-it”). A REIT allows you to be a part owner in real estate without the responsibilities of a landlord.
It works much like a mutual fund - except instead of buying stocks, the group mutually invests in real estate properties. As with a mutual fund, there is a trust manager who does the managing. He or she keeps the properties maintained, filled with tenants, and generally saves you the day-to-day hassle of real estate ownership … while bringing in the income. You get all of the opportunities of investing in real estate without much downside. Also like closed-end mutual funds, REITs are traded on the New York Stock Exchange and the American Stock Exchange. Their prices fluctuate every day; they generate regular shareholder reports, and they distribute earnings.
This is not to say a REIT is risk-free. REITs are very sensitive to interest rate changes and a REIT can lose value if the economy dips. But, this is the case with all real-estate investments, not just REITs. If you’re going to invest in REITs, make sure you do your homework. Don’t listen to any salesperson who promises huge gains while saying, “You have to get in now.” Real estate doesn’t work that way. If it’s a good deal today, it’ll be a good deal tomorrow.
REITs should never make up the bulk of your investment portfolio.
The REIT Investment Timeline
There are two types of REITs: those that are designed to grow your investment’s “value,” and those that are designed to maximize your periodic income. Which type you choose is determined by where you are in your investment timeline. If you are fairly young, and plan to have 10 or more years to invest in the market before you retire, you’ll want to build your net worth. If you are later in the investment timeline, you’ll want to draw income out so you can live off of it.
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If you are looking to grow your investment’s value (appreciation), and you can take more risk, invest in REITs that own office buildings, industrial parks, and downtown malls. These are more risky because they are more economy sensitive. In lean times, entrepreneurs stay at secure jobs and don’t branch out on their own, and thus don’t need office space.
If you are looking for income, and can’t tolerate as much risk, you’ll want to invest in REITs that buy blue-collar, recession-resistant properties like smaller strip malls.
Time Tip: Where in your investment timeline are you? How much time do you have to invest in the market? Are you planning to retire 10 years after you become debt- free? Or, do you plan to keep working and investing for the rest of your life? Are you in the home you’d like to retire in or do you plan to buy another home?
Now that you know everything there is to know about real estate investing, there’s one more way you can accelerate paying off your debts and building your wealth. It’s by building your income. And that’s what we’ll discuss in the next session.
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Building Your Income
Career Strategies for Debt-Free Living
Welcome to the new millennium. So far, it’s been a time of downsizing, mergers, layoffs, and recession. Events have happened that no one saw coming, and they have shaken people to their core. How can you cope in such uncertain times? What can you do to protect yourself from being impacted by economic downturns and uncertainty?
The truth is you have very little control over your employer’s plans. You could wake up one day and not have an income. You need to be prepared for this possibility, and that’s one very good reason for becoming debt-free as quickly as you can. Nothing puts pressure on a laid-off worker like having bills pile up. But rather than focus on the negative, I’d like to offer some suggestions to help you avoid losing your income. In fact, let’s look at ways you can not only secure your income, but potentially increase it, and even gain control of it.
You’re Not the Boss of Me!
How can you prevent yourself from being laid-off? There are three options:
1. You can become self-employed. This is different from owning your own business. Self- employed workers are freelance contractors. They are trading time for dollars. If you are self- employed and you’re not working, you’re not making money. 2. You can become a small business owner. This is the best option from a wealth perspective. First, if you own a business, often you won’t need to physically be there to do the work. You can train others to do the work for you, while you manage the profits and the growth in the
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business’s value. Of course, there are the hassles that go with running a business, such as payroll, human resource management, marketing, sales, etc. Second, there are many tax benefits to owning your own business. You can use pre- tax dollars to pay for expenses, rather than after-tax dollars. For example, if you have a home-based cleaning service business, you can deduct part of your mortgage, utilities, telephone, and other expenses that are shared between your business and home. There are specific formulae for calculating this; so contact a tax professional to see if this makes sense for you.
3. Become indispensable at work. If you are going to choose option one or two, you need to be aware that it takes a certain kind of personality to handle being an entrepreneur. There are three keys to being a successful entrepreneur. They are support, planning, and commitment.
Support
If you’re an entrepreneur, you need a solid support system. Working for yourself - whether in a franchise or a home-based business - requires adjustments by every member of the family and needs continual “process improvement” to make it work.
If you work from home, this requires each family member to understand that although you are physically there, you are also “at work.” You need peace and quiet to do your work. It is a common fallacy among people who are considering working from home that they will be able to work and watch the children at the same time. Unless your kids are teenagers and are independent, you will need someone to watch your kids while you work. Communication with clients, balancing the books, and all the other important aspects of running your business will take your full attention. The advantage of working from home is that you and your spouse can often juggle parenting duties so that no outside help is needed.
If you are building a business outside the home, your family will need to understand the long hours you’ll be working. You may want to choose a type of business where the family can get involved and come to work with you at times.
The other element of support is the isolation factor. If you have successfully convinced your family to leave you alone while you’re working, you may find yourself feeling isolated. Unlike an office where you can walk down to the vending machine for a coffee break, working at home on the computer can be lonely. To counteract that, join newsgroups that share your common interests. Having “cyber” friends that you network with regularly throughout the day can break the cycle of loneliness that often accompanies working from home.
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If you’re in an office for long hours at a time, you’ll miss your friends and family. Go home when you can and reconnect with them.
Planning
The next component of being a successful entrepreneur is planning. You need to set up a schedule that allows you to juggle all of your roles. When you work from home, it’s very tempting to “take a break” from work to do the dishes, watch TV, or have a snack. In fact, you may well find yourself wanting to do menial tasks you would otherwise shun, just to avoid a complex or difficult work duty. It takes an immense amount of self-discipline to stay focused on work when there are so many other things that tempt you.
Another reason for careful planning when working at home is that it’s difficult to leave the office. No matter how much you accomplish in a day, you will always go to bed at night with the thought that you could have done more. To make matters worse, you also know that you could very well go back into your office “for another hour or two.” Without set “office hours” and “home time” it can be a nightmare to stay focused.
If you are working outside the home, it will take extra planning to manage your roles as parent, spouse, boss, and friend. You’ll be juggling a lot of responsibilities, and planning can prevent a load of stress.
Passion
Perhaps the most essential quality for being an entrepreneur is passion. You have to love what you’re doing. When you have a passion for your business you won’t mind getting up at 5:00 am to do it. You’ll endure staying up late balancing the books because you love your business. You need a certain type of strength to handle the fact that money doesn’t always come in when you expect it, and your bank balance could get pretty slim at times. It takes commitment to follow through with clients. It takes determination to continually market your product or service. Without passion, you won’t have the commitment and determination to see you through the tough times and on to your full potential.
Work It Out : Do you have the “entrepreneur” personality? Rate yourself on a scale from 1-10 on the following traits. A score of 1 means “This is not me at all,” while a score of 10 means “You are describing me perfectly.”
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Entrepreneur Trait Score Explain Your Score
Solid Support System
Good Planning Skills
Self-discipline
Can Handle Financial Ups and Downs
Passion for Your Work
Make Yourself Layoff-proof
If you decide not to take the entrepreneurial leap, the best way to make sure you don’t get laid off, or “pink slipped,” is to make yourself indispensable at work. Companies lay off employees from the bottom up - starting with those who are least productive and valuable. By making yourself one of the company’s most valuable assets, you have more job security than many, if not most, of your fellow employees.
“But I shouldn’t have to kiss up to my boss! I don’t like to play those political games. Why can’t my work performance stand on its own?” In an ideal world, work performance would be the only measure of success. However, that is not the world we live in.
Think of it this way. Let’s say you’re investing in two different mutual funds. One fund is a high performer. Whenever you invest money in this fund, you can be sure that you’ll see results. In addition to the financial gain, this fund has excellent service, and the customer service department is great to work with. Contrast this with a second mutual fund. This fund is only giving average results. The service is adequate, but nothing really special. If you find yourself with a limited amount of money to invest, which one are you going to pick? Obviously you’ll pick the one that you can count on to give you excellent results. And if times get lean and you need to consolidate your holdings, which fund will be the first on the chopping block? It’s the same with employees.
Build a reputation for yourself at work as being the go-to person. Whenever some-thing needs to be done, offer to do it. Call up your manager regularly and ask, “How can I help you succeed today?” Not
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only will you inspire his or her loyalty, but you’ll also learn valuable skills that will move you in the career direction you want to go. Soon, you’ll have experience and information that no one else has, and it will become increasingly difficult to replace you. You aren’t “kissing up” to the boss; you’re helping your company become more successful, thereby ensuring your own job security.
The famed Earl Nightingale asserted that you should wake up every morning and ask yourself, “How can I serve today?” This attitude of service will bring you untold riches - both financial and non- financial.
The Value of Currency
Perhaps the most important trait you can develop is that of constant, never-ending improvement. Don’t let your skills get outdated.
In the new millennium, information grows at a breakneck speed. Job skills become obsolete in a matter of months as new software programs, laboratory discoveries, and electronic equipment are developed. No matter how old you are, or how good you are at your present job, there are things you could learn to become even better.
Time Tip: List as many skills as you can, which you could learn, that would enable you to stay current in your field. Maybe you want to get into a new career? Start a new business? What skills would you need to do that?
Keep in mind that Nightingale-Conant is the world’s leading publisher of self- development and skill- building programs. If you want to develop your attitudes and skill-sets, to best prepare yourself for personal and professional success, there’s no better place to start than www.nightingale.com, or call (800) 525-9000 and ask for programs on your specific areas of interest.
Is a Second Job a Good Idea?
With all this talk about saving money, creating your Margin, and paying off debts, it might be tempting to get a second job to become debt-free faster. I don’t necessarily advocate you’re doing this.
Whether you work two jobs, or your spouse takes on a job, you might find that the second salary brings in much, much less than you think it will.
According to Jan MacGregor, a financial consultant and former analyst, “There are people out there
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who are expecting to be able to meet their bills better (after they re- enter the work force) and never realize that they are either working for a loss or for something like $4,000 a year (after expenses).”
That may seem hard to believe, but if you consider the many “hidden” expenses of a two-income household it is often the case.
There are, of course, the obvious expenses such as childcare and commuting costs. But there are other costs to consider, like the money spent on lunches, more take-out and convenience food for dinner, dry cleaning bills, and professional clothing. There can be higher medical costs due to increased exposure to illnesses for children who are in daycare.
There are also intangible costs such as the lack of time with your family, less time running the household, less time managing your investments. Many families end up hiring a housekeeper or gardener to keep up on the household work that they don’t have the time to do. Remember - as income increases, spending usually increases. So be sure you analyze what you’ll really gain. Then consider what you’ll be giving up to get that gain.
One significant factor to consider is your taxable income. A second salary can push your taxable income into a higher tax bracket. Because the government takes a bigger bite, you could be working twice as hard without getting twice as much spendable money in your home.
Let’s look at this from the opposite direction. Suppose you’re both already working, and it’s a dream for one parent to stay home with the children. Calculate your income and expenses, taking into consideration the difference in taxation. It may be possible for one of you to stay at home with your kids. It’s certainly better for your kids, and it might just be better for your budget.
What If You Love Your Job?
“But I like working. What if I don’t want to quit my job?” Many parents receive tremendous satisfaction from working. If you enjoy your work, then by all means keep doing it. The Your Debt Elimination Program is designed to give you the life you want - not the life you are forced to live because of economic conditions.
How can you continue working while raising your family? There are several options: V Telecommuting : Some companies will allow you to work part-time or even full-time from home. This arrangement is ideal for families with school-aged children because you can flex your schedule around school hours.
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V Job Sharing: This is when two people share one full-time position. There are many pitfalls with this type of arrangement, but if your job is fairly routine and can easily be done by more than one person, it will allow you to work part-time while still sharing the benefits of full-time work. V Develop a Home-Based Business : There are dozens of legitimate home-based businesses you could start. Do you love music? Perhaps you could give music lessons. Love animals? Start a pet-care business. You might find that you get the satisfaction of working without needing to go to an office every day. If you have the Your Debt Elimination Deluxe System, review the four home-based business explained in Volume II, Income Generating Solutions . V Shift Work : If one spouse has the flexibility to rotate his or her shift, you might consider “tag- team parenting.” This is becoming more and more popular with parents who have young children and don’t want to put them in daycare. One parent stays home while the other works, then that parent goes to work while the first parent stays home. It can be hard on a marriage, but is manageable with good planning and communication.
When choosing from these options, it’s critical to make decisions as a family unit. If you’re married, both spouses must agree on a plan that will benefit the entire family, not just one income earner. Sometimes these discussions take on the tone of union negotiations, so here are a few skills that have worked in those smoke-filled rooms.
Negotiating Skills
Very often in marriages, money issues become a power struggle. Earlier you completed an exercise that assessed the differences in spending/saving style between you and your spouse. Understanding those difference can help you frame your negotiations.
Stay Focused on Your Common Goal
The first key in negotiating with your spouse is to realize that you are both trying to gain the same thing: a happy, harmonious home. While you each might have different ideas on how to achieve that goal, usually both marital partners want things to be better. Ask yourself, “What is my wife/husband trying to get out of this situation? What is their positive intent?” No matter how stubborn, angry, or controlling someone is being, there is always a positive intention behind his or her behavior. Is your husband refusing to help out around the house? What is his positive intent? Perhaps he wants the family to have some relaxation time. Truthfully, you want relaxation time too; you just have a different plan on how to get there. By looking for the positive intent behind your spouse’s words or actions, you can stay focused on your common goals.
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To understand the other person’s point of view, you need to really listen.
Another critical element in negotiations is listening. When is the last time you REALLY listened to your spouse?
“I listen all the time,” you say. Truthfully, while you stand there, looking like you’re listening, aren’t you often just planning what you are going to say back? One great technique to prevent this from happening is called active listening . Here’s how to do active listening. Repeat back what was said to you, but use different words. For example, your wife is complaining that your son won’t clean his room. She’s thinking of taking away his video games. You’re thinking, “Well, I’m not surprised. That kid has been getting away with murder for his whole life.” Instead of letting your mind wander to how you are going to respond, FOCUS on what your wife is saying. Look at her body language. Is she angry? Is she feeling defeated?
Then you can respond to her, “So what you’re saying is that you told him to clean his room three times and he didn’t do it, and now you are thinking of disciplining him?” Make sure this does not come out sounding sarcastic or judgmental, but is simply a restatement of what your wife just told you. This accomplishes several things. First, it forces you to listen to the end of the story so that you can repeat it back. Second, it causes the speaker to feel as if you really hear and understand what they are talking about. More often than not, that is what people want when they talk — just to be heard. Finally, it helps the speaker hear what he or she is saying in an objective way. In the example above, your wife may see that taking away the boy’s Nintendo may not be sufficient. But, she is coming to that conclusion on her own - not because you told her so.
Develop Creative Solutions
Now that you’re focused on your common goal and are really listening to each other, how can you solve the problem? What if one person is committed to a particular solution and the other person is opposed to it? Don’t look for a compromise - look for a creative solution that will give you a win/win.
One strategy to achieve this is through a brainstorming exercise. Sit down next to your spouse at a table. On a piece of paper, write the problem to be solved and each person’s positive intent. Then simply write down as many ideas as you can to solve the problem, not judging the feasibility of the ideas as you are writing them. The key is to come up with as many solutions as possible before critiquing them. Here is an example:
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Problem : Mary wants to stay home with the kids. Jim needs Mary’s income to make ends meet.
Mary’s positive intent: Jimmy will get better grades, we will have less stress in the family, and we will have the time to implement our YOUR DEBT ELIMINATION Plan.
Jim’s positive intent: There will be less stress if there is more money coming in. Mary being at work is not causing Jimmy’s bad grades; if he were more responsible his grades would improve. Mom and Dad working will teach him responsibility, plus bring in money, and the YOUR DEBT ELIMINATION Plan will work better if our Margin is greater.
Brainstorming ideas: Mary could telecommute Mary and Jim could split-shift their work Mary could work from home Mary and Jim could move to a less expensive area Jimmy could get a part-time job Jim could try for a promotion If Mary were to stay home, they could sell her car
GET STARTED!
Now it’s time to really put the YOUR DEBT ELIMINATION System to a full road test - in your financial life! You’ll be amazed at how much you’ll learn and how quickly you’ll see results.
Imagine Living. ..
DEBT FREE!
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Debt into Wealth
Appendix A Personal Financial Statements
Instructions for Completing Personal Financial Statements
Purpose of Personal Financial Statements
These Personal Financial Statements will help you analyze your monthly income and expenses. They will give you and your family the information you need to maximize your Margin, eliminate your debts as soon as possible, and begin building real wealth to achieve true financial independence.
How Do These Personal Financial Statements Fit Into the YOUR DEBT ELIMINATION System
It is not necessary for you to complete these Personal Financial Statements in order to successfully implement the YOUR DEBT ELIMINATION System.
It is possible to eliminate debt, reduce expenditures, and live on cash without clearly seeing where your money is going; but success is far less assured without a continual effort to hold yourself accountable and share financial information with other members of your family.
There are countless other methods of accumulating and summarizing personal financial information in a meaningful way. These Personal Financial Statements represent one such method that you may find useful. And they are designed specifically with the YOUR DEBT ELIMINATION System in mind.
One member of a family normally takes care of most of the financial matters. However, to successfully implement the YOUR DEBT ELIMINATION System and achieve true financial independence it will require the active involvement of the whole family. These Personal Financial Statements will provide your family’s financial manager with information needed to understand your family’s income and expenses and share that information with the rest of the family in a manner that is easy for them to understand.
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These Personal Financial Statements have been designed to allow maximum flexibility on your part. They can be completed manually or are available free as a downloadable Excel workbook from www.Your Debt Elimination.com/online-toolkit.php
Step 1: Get your records together.
These Personal Financial Statements will look at your income and expenses on a monthly basis. We suggest going through the Personal Financial Statement process at the same time that you normally balance your checkbook since you will have most of the needed records at that time. In particular, you will need the following for each month:
Bank statements for all of your bank accounts, check registers, check stubs, or check copies for all of your bank accounts, and detailed statements of charges for all of your credit cards.
You may need three to six months of information to enable you to understand your family’s financial situation; one month’s income or expenses may be unusually high or low for some reason. You may wish to go back that long the first time you do this if the needed records are available. Step 2: Complete Worksheets A-1 through A-11. Record payments, withdrawals, and charges on the appropriate expense worksheets.
Worksheets A-1 through A-11 are for recording your expenses by certain categories. These worksheets and categories will help you and your family understands where your money is going. The worksheets are as follows:
A-1 Household A-2 Restaurants, Food, and Groceries A-3 Autos A-4 Insurance and Medical A-5 Education A-6 Clothing A-7 Major Purchases A-8 Recreation A-9 Other A-10 Cash Expenses A-11 Debt Payments
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Take a few minutes to review these worksheets to see how they are organized. Descriptions have been included on each worksheet to guide you in categorizing your expenses. Feel free to tailor these categories to best fit your particular circumstances; you may find that you will not use some of them. These worksheets have columns for recording up to seven months of expenses. This will make it easier for you and your family to understand where your money is going month in and month out and will help focus your efforts to reduce such expenses.
It is likely that you pay for purchases or pay bills through a variety of ways: cash, check, debit card, check by phone, or direct debit to your bank account. Each of these payments should be identified and recorded on the appropriate worksheet, using the descriptions provided as guides.
Cash withdrawals will be treated as a separate category of expense. For now, no attempt will be made to determine how this money is being spent. Each cash withdrawal (or check written for cash) made during the month should be identified and recorded on Worksheet A-10 (Cash Expenses).
Checks written should be identified through review of bank statements, check registers or check copies, whichever is most convenient for you and assures that every check is accounted for.
Charges against your bank balance (generally referred to by your bank as debits) as a result of debit card transactions, check-by-phone transactions, or other direct debits should be identified through review of your bank statements.
Take care to identify and record every one of your payments. Don’t concern yourself too much with which month to put a payment in if it is unclear to you precisely when the payment was made — pick a month and record it. You will be looking at your expenses over a number of months so it will not make that much of a difference.
Step 3: Complete Worksheet B-1 (Summary of Monthly Expenses).
Total the amounts recorded on Worksheets A-1 through A-10 and enter the totals to Worksheet B-1 (Summary of Monthly Expenses). If you are using the Excel workbook available as a free download from Nightingale Conant’s website, www.Your Debt Elimination.com/online-toolkit.php, this step will be done automatically.
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Step 4: Complete Worksheet B-2 (Summary of Monthly Income).
Review your check registers and bank statements and identify all cash or check deposits, direct deposits, interest income, or other increases in your bank account balances. Record each of them on Worksheet B-2 (Summary of Monthly Income).
Step 5: Complete Worksheet B-3 (Reserve for Infrequent Expenses).
It is likely that you have certain major expenses that are not paid monthly. Examples would be real estate taxes, insurance premiums, and school tuition. It is difficult to develop a clear understanding of your monthly expense levels when these infrequent expenses distort the monthly amounts. Additionally, it would be imprudent to use a month’s apparent Margin to repay debt if it were inflated by the fact that no expenditures were made in that month for infrequent expenses.
Identify these infrequent expenses and reserve for them using Worksheet B-3. Record the expected amounts of such payments and the months in which such payments will be made in the first four columns. Total them across into column five, entitled “Total Infrequent Expenses.” Divide the total of all such infrequent expenses by 12 and record such amount in column six, entitled “Monthly Adjustment.” This represents the amount you must set aside each month to cover all of your infrequent expenses.
The seventh and final column, entitled “Monthly Reserve Activity,” is column five minus column six. If negative (when the amount you must set aside that month for all of your infrequent expenses exceeds the amount of infrequent expenses actually paid in that month), this amount should reduce your Disposable Income and Margin to assure that you hold back sufficient funds to cover future payments. If positive (when the amount you must set aside that month for all of your infrequent expenses is less than the amount of infrequent expenses actually paid in that month), this amount should increase your Disposable Income and Margin because you can use some of the “reserve for infrequent expenses” that you have set aside in previous months to offset the infrequent expenses paid in the month.
Step 6: Complete Worksheet C (Personal Financial Statement Summary).
Carry forward appropriate totals from Worksheets B-1 (Summary of Expenses), (Summary of Income), B-3 (Reserve for Infrequent Expenses), and A-11 (Debt Payments).
Subtract Total Living Expenses and Reserve for Infrequent Expenses from Total Income and record
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the result as your Disposable Income. This is the amount that you will have available on a monthly basis to begin building your retirement wealth once your debts have all been repaid. In fact, once you commit yourself to repaying your debts as quickly as possible, this Disposable Income becomes a true measure of your current wealth-building capacity - any decrease in your debt is an increase in your wealth.
Subtract your current Debt Payments from your Disposable Income and record the result as your Margin.
Step 7: Begin your journey to financial freedom.
If you have reached this step, your chances of achieving true financial independence have improved enormously. Taking these initial steps has provided you with a base of information that will empower you and your family to focus your efforts and give you the tools to measure your progress.
Throughout the YOUR DEBT ELIMINATION System are thoughts and ideas that you will find even more useful when you consider them within the context of your “personal economy” as reflected within these Personal Financial Statements . Use these worksheets to analyze the possibilities.
Set aside a column on each worksheet to establish goals for each income and expenditure item or category. Then measure your future months against these targets. If you are contemplating major life changes that will impact your future income or expenses, use these worksheets to estimate and study the impact on your future Margin. Never again will you have to make such a decision in the dark.
Most importantly, share this information with your family. You will be amazed at how much easier it is to discuss your family’s financial condition and future when you have these simple summaries … and the detailed worksheets backing them up.
Good luck on your journey.
Print out to complete the following forms.
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Worksheet A-1 Household Expenses Month Payee
Checks Written:
Rent
Real Estate Taxes
Electric Company
Gas Company
Telephone
Telephone
Telephone
Water/Sewer
Satellite/Cable Company
Other
Bank Charges:
Other
Other
Other
Totals
Enter Totals onto Worksheet B-1 (Summary of Monthly Expenses)
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Worksheet A-2 Restaurant, Food, Groceries
Month Payee
Checks Written:
Grocery Store
Grocery Store
Grocery Store
Restaurant
Restaurant
Restaurant
Other
Bank Charges:
Other
Other
Other
Totals
Enter Totals onto Worksheet B-1 (Summary of Monthly Expenses)
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Worksheet A-3 Auto Expenses
Month Payee
Automobile #1:
Gasoline
Gasoline
Gasoline
Gasoline
Maintenance
Maintenance
Automobile #2:
Gasoline
Gasoline
Gasoline
Gasoline
Maintenance
Maintenance
Automobile #3:
Gasoline
Gasoline
Gasoline
Gasoline
Maintenance
Maintenance Totals
Enter Totals onto Worksheet B-1 (Summary of Monthly Expenses)
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Worksheet A-4 Insurance and Medical Expenses
Month Payee
Checks Written:
Homeowner’s Insurance
Renter’ s Insurance
Auto Insurance #1
Auto Insurance #2
Auto Insurance #3
Health Insurance
Dental Insurance
Life Insurance
Other Bank Charges:
Medical Insurance Reimbursements (subtract)
Totals
Enter Totals onto Worksheet B-1 (Summary of Monthly Expenses)
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Worksheet A-5 Education Expenses
Month Payee
Checks Written:
Tuition
Tuition
Tuition
Room and Board
Room and Board
Room and Board
Books
Books
Books
Other
Other
Other
Other
Other
Other Bank Charges
Totals
Enter Totals onto Worksheet B-1 (Summary of Monthly Expenses)
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Worksheet A-6 Clothing Expenses
Month Payee
Checks Written:
Other Bank Charges:
Totals
Enter Totals onto Worksheet B-1 (Summary of Monthly Expenses)
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Worksheet A-7 Major Purchases
Month Payee
Checks Written:
Vacation
Vacation
Vacation
Vacation
Auto Purchase
Major Improvements
Furniture Purchase
Other
Other
Other
Other Bank Charges:
Totals
Enter Totals onto Worksheet B-1 (Summary of Monthly Expenses)
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Worksheet A-8 Recreation Expenses
Month Payee
Checks Written:
Other Bank Charges:
Totals
Enter Totals onto Worksheet B-1 (Summary of Monthly Expenses)
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Worksheet A-9 Other Expenses
Month Payee
Checks Written:
Other Bank Charges:
Totals
Enter Totals onto Worksheet B-1 (Summary of Monthly Expenses)
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Worksheet A-10 Cash Expenses
Month Payee
Cash Withdrawal Made
Cash Withdrawal Made
Cash Withdrawal Made
Cash Withdrawal Made
Cash Withdrawal Made
Cash Withdrawal Made
Cash Withdrawal Made
Cash Withdrawal Made
Cash Withdrawal Made
Cash Withdrawal Made
Cash Spent
Enter Cash Spent onto Worksheet B-1 (Summary of Monthly Expenses)
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Worksheet A-11 Debt Payments
Month Payee
Principal and Interest:
Mortgage
Second Mortgage
Auto Loan #1
Auto Loan #2
Student Loan
Payments Made On:
Credit Card #1
Credit Card #2
Credit Card #3
Credit Card #4
Credit Card #5
Totals
Enter Totals onto Worksheet C (Personal Financial Statement Summary)
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Worksheet B-1 Summary of Monthly Expenses
Month
Living Expenses
Household (from A-1)
Restaurant, Food, Groceries (A-2)
Autos (A-3)
Insurance & Medical (A-4)
Education (A-5)
Clothing (A-6)
Major Purchases (A-7)
Recreation (A-8)
Other Expenses (A-9) Cash Expenses (A-10)
Total Living Expenses
Enter the Total Living Expenses onto Worksheet C (Personal Financial Statement Summary)
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Worksheet B-2 Summary of Monthly Income
Month
Take-Home Pay #1
Take-Home Pay #2
Take-Home Pay #3
Take-Home Pay #4
Take-Home Pay #5
Take-Home Pay #6
Take-Home Pay #7
Social Security
Pension
Interest Income
Interest Income
Other
Other
Totals
Enter the Total Income Amounts onto Worksheet C (Personal Financial Statement Summary)
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Worksheet B-3 Reserve for Infrequent Expenses
Infrequent Expense Description (For example: Real Estate Taxes, Insurance, Tuition)
Total Monthly Monthly 2 Infrequent Adjustment Reserve Expenses 1 Activity 3
January
February
March
April
May
June
July
August
September
October
November
December
Totals Totals of amounts from previous four columns. Take the total from the bottom of the previous column (Total Infrequent Expenses), divide by 12, and record the result in each row for each month. This represents the amount that must be held back each month to cover your infrequent expenses. Equals Total Infrequent Expenses (column five) minus Monthly Adjustment (column six). Enter amounts onto Worksheet C (Personal Financial Statement Summary). If the amount here is positive, add this on Worksheet C. If the amount here is negative, subtract on Worksheet C.
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Worksheet C Personal Financial Statement Summary
Month
Accelerator Margin
Total Income (from B-2)
Total Living Expense (B-1)
Reserve for
Infrequent Expenses (B-3)
Disposable Income
Debt Payments (A-1 )
Accelerator Margin
Imagine Living. .. Debt Free
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Debt into Wealth
Appendix B
More Tools to Help You Succeed
YOUR DEBT ELIMINATION SPENDING JOURNAL
Instructions: Make copies of this page. Write down each purchase you make (except regularly scheduled bills). This includes “incidentals” such as coffee, parking meters, and other items less than $1.00.
Date:
Item Purchased:
Method of Payment: ❏ Cash ❏ Credit ❏ Check Amount :
Date:
Item Purchased:
Method of Payment: ❏ Cash ❏ Credit ❏ Check Amount :
Date:
Item Purchased:
Method of Payment: ❏ Cash ❏ Credit ❏ Check Amount :
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Date:
Item Purchased:
Method of Payment: ❏ Cash ❏ Credit ❏ Check Amount :
Date:
Item Purchased:
Method of Payment: ❏ Cash ❏ Credit ❏ Check Amount :
Date:
Item Purchased:
Method of Payment: ❏ Cash ❏ Credit ❏ Check Amount :
ACCELERATOR CREATOR QUIZ
Time to examine your relationship with money. Please rate yourself on the following questions as honestly and truthfully as possible. Don’t spend too much time thinking about the answers, but instead give your “first impression.” Then you’ll be able to compare your answers to the tips and suggestions you will encounter in this program
1. I use coupons and club cards when grocery shopping.
1 2 3 4 5 6 7 8 9 10 (Not at all) (Sometimes) (Consistently)
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2. When I am shopping for an item, I will often buy an unplanned item because “it is only $5.00 more.” 1 2 3 4 5 6 7 8 9 10
3. I examine my insurance policies annually to make sure that I am not paying for more coverage than I need.
1 2 3 4 5 6 7 8 9 10
4. I purchase “extended warranties” on major products like appliances or electronics.
1 2 3 4 5 6 7 8 9 10
5. I am often influenced by my peers when it comes to spending money.
1 2 3 4 5 6 7 8 9 10
6. I eat at restaurants (including fast food) more than once a week.
1 2 3 4 5 6 7 8 9 10
7. I lease my auto, or finance it, for more than 36 months.
1 2 3 4 5 6 7 8 9 10
8. I put 10 percent of my money into a savings account each month.
1 2 3 4 5 6 7 8 9 10
9. When someone I know gets a new “toy,” I want one too.
1 2 3 4 5 6 7 8 9 10
10. I consider my life insurance policy as a part of my investment portfolio.
1 2 3 4 5 6 7 8 9 10
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11. I am proud that I shop at the best stores and purchase expensive gifts for my family and friends. 1 2 3 4 5 6 7 8 9 10
12. I put as much money as I can into my employer-sponsored 401(k) program.
1 2 3 4 5 6 7 8 9 10
CALCULATING YOUR DEBT PAYOFF
A. Write down your Margin at right. B. Try for 10 percent or more of your monthly take-home income: $ C. Write down each debt name in the first column below, its total balance in column 2, and its minimum monthly payment (excluding tax, insurance, or any amount you might typically add to it) in column 3. D. Divide the total balance of each debt by its monthly payment, and put the answer in column 4. E. Prioritize your debts in column 5, beginning with the debt with the lowest division answer in column 4 as priority debt #1, the next lowest division answer as priority debt #2, and so on. F. Column 6 is where you add your Margin (from A. above) to the monthly payment amount for priority debt #1 and put this total to the right under Accelerated Monthly Payment. Now divide debt #1’s Total Balance by this Accelerated Monthly Payment. The answer goes in column 7. G. When debt #1 is paid off, take its Accelerated Monthly Payment (which contains the original Margin and debt #1’s monthly payment) and add this amount to the monthly payment of debt #2. Put the total in column 6 as debt #2’s Accelerated Monthly Payment H. Continue adding each paid-off debt’s Accelerated Monthly Payment to the monthly payment of the next priority debt to accelerate its payoff - until you've eliminated all your debts.
Total Monthly Division Payoff Accelerated Months to Name of Debt Balance Payment Answer Priority Monthly Payment Pay Off
1 2 3 4 5 6 7
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A. Total Debt (total column 2): $
B. Total Monthly Payments (total column 3): $
C. Total Accelerated Payments (A + I): $
D. Years to debt-freedom (total column 7 ÷ 12):
FREEDOM FIGHTER FORM
Debt One: ______Debt Six: ______Estimated Payoff Date: ______Estimated Payoff Date: ______
Date Paid Off: ______Date Paid Off: ______
Debt Two: ______Debt Seven: ______Estimated Payoff Date: ______Estimated Payoff Date: ______
Date Paid Off: ______Date Paid Off: ______
Debt Three: ______Debt Eight: ______Estimated Payoff Date: ______Estimated Payoff Date: ______
Date Paid Off: ______Date Paid Off: ______
Debt Four: ______Debt Nine: ______Estimated Payoff Date: ______Estimated Payoff Date: ______
Date Paid Off: ______Date Paid Off: ______
Debt Five: ______Debt Ten: ______Estimated Payoff Date: ______Estimated Payoff Date: ______
Date Paid Off: ______Date Paid Off: ______
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Imagine Living. ..
DEBT FREE!
DEBT-ELIMINATION TIME CALCULATOR
Total Debt Amount 1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years (in dollars)
1,000 87 46 32 25 21 18 16 15 14 13
3,000 262 137 95 75 62 54 48 44 41 38
5,000 437 228 159 124 104 90 80 73 68 63
7,000 612 320 223 174 145 126 113 103 95 89
10,000 875 457 318 249 208 180 161 147 135 127
15,000 1,312 685 477 373 311 270 241 220 203 190
20,000 1,749 914 636 498 415 361 322 293 271 253
30,000 2,624 1,371 954 747 623 541 483 440 406 380
40,000 3,498 1,827 1,272 995 830 721 644 586 542 507
50,000 4,373 2,284 1,590 1,244 1,038 901 804 733 677 633
75,000 6,559 3,426 2,385 1,866 1,557 1,352 1,207 1,099 1,016 950
100,000 8,745 4,568 3,180 2,489 2,076 1,803 1,609 1,465 1,354 1,267
125,000 10,931 5,711 3,975 3,111 2,595 2,253 2,011 1,831 1,693 1,583
150,000 13,118 6,853 4,770 3,733 3,114 2,704 2,413 2,198 2,031 1,900
200,000 17,490 9,137 6,360 4,977 4,152 3,605 3,218 2,930 2,709 2,534
250,000 21,863 11,421 7,950 6,221 5,190 4,506 4,022 3,663 3,386 3,167
300,000 26,235 13,705 9,540 7,466 6,228 5,408 4,827 4,395 4,063 3,800
350,000 30,608 15,990 11,130 8,710 7,265 6,309 5,631 5,128 4,470 4,343
400,000 34,981 18,274 12,720 9,954 8,303 7,210 6,436 5,860 5,417 5,067
450,000 39,353 20,558 14,310 11,198 9,341 8,111 7,240 6,593 6,094 5,700
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500,000 43,726 22,842 15,900 12,443 10,379 9,013 8,045 7,325 6,771 6,334
550,000 48,098 25,127 17,490 13,687 11,417 9,914 8,849 8,058 7,449 6,967
600,000 52,471 27,411 19,080 14,931 12,455 10,815 9,653 8,790 8,126 7,601
650,000 56,843 29,695 20,670 16,175 13,493 11,717 10,458 9,523 8,803 8,234
700,000 61,216 31,979 22,260 17,420 14,531 12,618 11,262 10,255 9,480 8,867
750,000 65,589 34,264 23,850 18,664 15,569 13,519 12,067 10,988 10,157 9,501
800,000 69,961 36,548 25,440 19,908 16,607 14.420 12,871 11,720 10,834 10,134
850,000 74,334 38,823 27,030 21,152 17,645 15,322 13,676 12,453 11,511 10,767
900,000 78,706 41,116 28,620 22,397 18,683 16,223 14,480 13,185 12,189 11,401
950,000 83,079 43,401 30,210 23,641 19,720 17,124 15,285 13,918 12,866 12,034
1,000,000 87,451 45,685 31,800 24,885 20,758 18,026 16,089 14,650 13,543 12,668
Total Monthly Accelerated Payment Amount (in dollars)
Payments amounts are based on an average debt interest rate of 9%
More Tools to Help You Succeed
The Your Debt Elimination System contains everything you’ll need to get from where you are to complete debt-freedom and successful wealth-building. All the knowledge is here, and the various forms and formulas will help you construct a debt- elimination plan that will melt a lifetime of debt away in a handful of years. But I do have some additional tools that might make the process even easier for you. These tools are all available by contacting Nightingale-Conant at 1-800-683-7501.
Software
If you like the precision and speed of the computer, you’ll love my DebtFree ™ for Windows ® Software. When you enter your debts, Margin, and other information into this powerful PC program, you’ll get vivid graphs, charts and instant, precise calculations of your debt-reduction timeline. The robust reports include a month-by-month debt-payoff plan, which you can follow precisely to debt-freedom.
You’ll also be able to easily test “What-if” scenarios using DebtFree™ . You’ll instantly see how a small change to your Margin can impact the speed with which you get out of debt, or how quickly you can build up a given amount of retirement wealth.
The next hardest part of accomplishing any important goal is maintaining steady progress. Again, Nightingale-Conant and I have designed a powerful series of sessions for you and your personal coach - to help keep you on course and on schedule. This is a comprehensive 12-week coaching
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program that teams you with one of the finest Personal Development coaches in the world. Together you will look at the thinking and habits that got you into debt in the first place and will develop the skills you’ll need to maintain these changes.
Why do Hollywood stars pay big bucks to have a personal trainer (coach) help them stay fit? Because they know the value of having a personal-development professional pick them up when they need it, push them when they need it, educate them when they need it, and get them to their goal. Well, you may not yet be a financial star… but to become one, you couldn’t make a better choice than to work with your professionally trained Your Debt Elimination Coach.
Now it’s Up to You
In this system manual I’ve given you all the tools you need to become completely financially free. Now your only foe is inertia, the resistance to actually starting to work out your plan and implement it. So let me put it to you in the form of a question. If you’re ever going to get totally financially free … wouldn’t today be a good day to start?
I lived through a financial crash caused by the misuse of credit. I endured the harassment of collection calls and the long, hard climb out of the hole. But I also experienced the exhilaration of finding a shortcut to my financial dreams. Today one of the great joys in my life is seeing that exhilaration transferred to others… to you. I really care if this works for you.
.Your Financial Freedom Lifestyle To-Do List
This is NOT a to-do list in the traditional sense. You are NOT trying to think of all the things you HAVE to do. But rather, you want to create a list of all the things you’ve always WANTED to do, but never had the time to do. Within 15 to 20 years, when you achieve true financial independence following the Your Debt Elimination System , you’ll have more time than you have ever had before! Some people go crazy when they “retire” because they never bothered to think through what they would do with their new-found time. But you’ll be ready because you’ll be able to refer to this list any time you start feeling bored. And you can refer to this list anytime you start losing your resolve to follow your financial plan.
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“If I had all the time in the world, and all the money I need, I would…”
Monthly Savings Required to Reach Your Financial Freedom Goal
Annual Approximate Income Nest Egg — Years Remaining Until Financial Freedom — Goal Needed
(in today’s (in today’s 40 years 35 years 30 years 25 years 20 years 15 years 10 years dollars) dollars)
$10,000 $167,000 $88 $125 $182 $267 $400 $633 $1,101
$20,000 $334,000 $175 $250 $363 $533 $799 $1,263 $2,197
$30,000 $500,000 $262 $375 $544 $799 $1,198 $1,894 $3,295
$40,000 $667,000 $350 $501 $726 $1,066 $1,599 $2,527 $4,396
$50,000 $834,000 $437 $626 $907 $1,331 $1,997 $3,157 $5,492
$60,000 $1,000,000 $527 $751 $1,088 $1,598 $2,397 $3,788 $6,590
$70,000 $1,167,000 $613 $876 $1,270 $1,865 $2,797 $4,421 $7,691
$80,000 $1,334,000 $700 $1,001 $1,451 $2,130 $3,196 $5,051 $8,787
$90,000 $1,500,000 $787 $1,126 $1,632 $2,397 $3,595 $5,682 $9,886
$100,000 $1,667,000 $875 $1,251 $1,814 $2,663 $3,995 $6,313 $10,984
NOTE: The Approximate Nest Egg Needed assumes that you can get a six percent return on an “income” fund to generate the Annual Income Goal desired. The Monthly Savings Needed to Reach Your Financial Freedom Goal assumes an average three percent inflation and 10 percent annual return on savings during investment period. The monthly investment amounts will actually produce a higher accumulated asset amount than shown in the Approximate Nest Egg Needed in the second column because of the inflation factor of three percent. These figures are not intended to be a
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projection of any investment results, and no assurance of any level of investment return can be provided.
The Truth About Your Mortgage Interest Tax Deduction
“Traditional” thinking says that you will benefit by having a mortgage since “the home mortgage interest deduction is the last tax break for the typical American homeowner.”
But let’s take a look how this traditional thinking would affect a typical American family.
With Mortgage Without Mortgage Interest Deduction Interest Deduction Adjusted Gross Income
$47,211 $47,211 Line 32, 1040 $7,138 $7,600 Itemized Deduction Schedule A – 2001 standard mortgage interest deduction Personal Exemptions (family of four)
Line 36, 1040 ($2,900 x 4) $11,600 $11,600 Taxable Income
Line 37, 1040 $289,473 $28,011
Tax (Using IRS rate schedule) $4,271 $4,204
Difference $67 less!
So, by spending $7,138 in mortgage interest payments, a typical American family actually paid $67.00 more in income taxes.
Think what that $7,138 could have produced if it would have been invested in a mutual fund earning just 10 percent.
Note: This example uses 2001 tax tables. For simplicity, this example assumes no other deductions.
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IRA GROWTH TABLE
This table shows the incredible power of compound interest over time. It also shows the dramatic effect of letting interest compound WITHOUT TAXES BEING TAKEN OUT . All the example investors enjoy the advantage of tax-deferred compounding, but the table also shows how much difference it makes to start your tax-deferred investing early in life.
INVESTOR A INVESTOR B INVESTOR C INVESTOR D INVESTOR E Age Year-End Year-End Year-End Year-End Year-End Contribution Contribution Contribution Contribution Contribution Value Value Value Value Value
8 -0- -0- -0- -0- -0- -0- $500 $550 $500 $550 9 -0- -0- -0- -0- -0- -0- 750 1,430 750 1,430 10 -0- -0- -0- -0- -0- -0- 1000 2,673 1000 2,673 11 -0- -0- -0- -0- -0- -0- 1250 4,315 1250 4,315 12 -0- -0- -0- -0- -0- -0- 1500 6,397 1500 6,397 13 -0- -0- -0- -0- -0- -0- 1750 8,962 1750 8,962 14 -0- -0- -0- -0- $2,000 $2,200 -0- 9,858 2,000 12,058 15 -0- -0- -0- -0- 2,000 4,620 -0- 10,843 2,000 15,463 16 -0- -0- -0- -0- 2,000 7,282 -0- 11,928 2,000 19,210 17 -0- -0- -0- -0- 2,000 10,210 -0- 13,121 2,000 23,331 18 -0- -0- -0- -0- 2,000 13,431 -0- 14,433 2,000 27,864 19 -0- -0- $2000 $2,200 -0- 14,774 -0- 15,876 2,000 32,850 20 -0- -0- 2,000 4,620 -0- 16,252 -0- 17,463 2,000 38,335 21 -0- -0- 2,000 7,282 -0- 17,877 -0- 19,210 2,000 44,369 22 -0- -0- 2,000 10,210 -0- 19,665 -0- 21,131 2,000 51,006 23 -0- -0- 2,000 13,431 -0- 21,631 -0- 23,244 2,000 58,306 24 -0- -0- 2,000 16,974 -0- 23,794 -0- 25,568 2,000 66,337 25 -0- -0- 2,000 20,872 -0- 26,174 -0- 28,125 2,000 75,170 26 $2,000 $2,200 -0- 22,959 -0- 28,791 -0- 30,938 2,000 84,888 27 2,000 4,620 -0- 25,255 -0- 31,670 -0- 34,031 2,000 95,576 28 2,000 7,282 -0- 27,780 -0- 34,837 -0- 37,434 2,000 107,334 29 2,000 10,210 -0- 30,558 -0- 38,321 -0- 41,178 2,000 120,267 30 2,000 13,431 -0- 33,614 -0- 42,153 -0- 45,296 2,000 134,494 31 2,000 16,974 -0- 36,976 -0- 46,368 -0- 49,825 2,000 150,143 32 2,000 20,872 -0- 40,673 -0- 51,005 -0- 54,808 2,000 167,358 33 2,000 25,159 -0- 44,741 -0- 56,106 -0- 60,289 2,000 186,294 34 2,000 29,875 -0- 49,215 -0- 61,716 -0- 66,317 2,000 207,123 35 2,000 35,062 -0- 54,136 -0- 67,888 -0- 72,949 2,000 230,035 36 2,000 40,769 -0- 59,550 -0- 74,676 -0- 80,244 2,000 255,239 37 2,000 47,045 -0- 65,505 -0- 82,144 -0- 88,269 2,000 282,963 38 2,000 53,950 -0- 72,055 -0- 90,359 -0- 97,095 2,000 313,459 39 2,000 61,545 -0- 79,261 -0- 99,394 -0- 106,805 2,000 347,005 40 2,000 69,899 -0- 87,187 -0- 109,334 -0- 117,485 2,000 383,905 41 2,000 79,089 -0- 95,905 -0- 120,267 -0- 129,234 2,000 424,496 42 2,000 89,198 -0- 105,496 -0- 132,294 -0- 142,157 2,000 469,145 43 2,000 100,318 -0- 116,045 -0- 145,523 -0- 156,373 2,000 518,269 44 2,000 112,550 -0- 127,650 -0- 160,076 -0- 172,010 2,000 572,286 45 2,000 126,005 -0- 140,415 -0- 176,083 -0- 189,211 2,000 631,714 46 2,000 140,805 -0- 154,456 -0- 193,692 -0- 208,133 2,000 697,086 47 2,000 157,086 -0- 169,902 -0- 213,061 -0- 228,946 2,000 768,995 48 2,000 174,995 -0- 186,892 -0- 234,367 -0- 251,840 2,000 848,094 49 2,000 194,694 -0- 205,581 -0- 257,803 -0- 277,024 2,000 935,103 50 2,000 216,364 -0- 226,140 -0- 283,358 -0- 304,727 2,000 1,030,814 51 2,000 240,200 -0- 248,754 -0- 311,942 -0- 335,209 2,000 1,136,095 52 2,000 266,420 -0- 273,629 -0- 343,136 -0- 368,719 2,000 1,251,905 53 2,000 295,262 -0- 300,992 -0- 377,450 -0- 405,591 2,000 1,379,295 54 2,000 326,988 -0- 331,091 -0- 415,195 -0- 446,150 2,000 1,519,425 55 2,000 361,887 -0- 364,200 -0- 456,715 -0- 490,766 2,000 1,673,567 56 2,000 400,276 -0- 400,620 -0- 502,386 -0- 539,842 2,000 1,843,124 57 2,000 442,503 -0- 440,682 -0- 552,625 -0- 593,826 2,000 2,029,636 58 2,000 488,953 -0- 484,750 -0- 607,887 -0- 653,209 2,000 2,234,800 59 2,000 540,049 -0- 533,225 -0- 668,676 -0- 718,530 2,000 2,460,480 60 2,000 596,254 -0- 586,548 -0- 735,543 -0- 790,383 2,000 2,708,728 61 2,000 658,079 -0- 645,203 -0- 809,098 -0- 869,421 2,000 2,981,800 62 2,000 726,087 -0- 709,723 -0- 890,007 -0- 956,363 2,000 3,282,180 63 2,000 800,896 -0- 780,695 -0- 979,008 -0- 1052,000 2,000 3,612,598 64 2,000 883,185 -0- 858,765 -0- 1,076,909 -0- 1,157,200 2,000 3,976,058 65 2,000 973,704 -0- 944,641 -0- 1,184,600 -0- 1,272,930 2,000 4,375,864 Less Total Invested: (80,000) (14,000) (10,000) (6,750) (110,750) Equal Net Earnings: 893,704 930,641 1,174,600 1,266,180 4,265,114 Money Grew: 11-fold 66-fold 117-fold 188-fold 38-fold
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Additional Principal Prepayment Forms
Make as many copies of these coupons as you will need to pay off your mortgage.
Apply this amount $ Check # To prepay the bala nce of loan number ______
NOTE TO FINANCIAL INSTITUTION: Extra payment is to go on the principal of the next (not the last) payment and sequential adjacent payments until all of the extra payment is used.
Names(s)______on Loan ______Address City State______Zip If you have questions, call me at
Apply this amount $ Check # To prepay the balance of loan number ______
NOTE TO FINANCIAL INSTITUTION: Extra payment is to go on the principal of the next (not the last) payment and sequential adjacent payments until all of the extra payment is used.
Names(s)______on Loan ______Address City State______Zip If you have questions, call me at
A Horror Classic: “The Loan Principal That Wouldn’t Go Away”
WARNING: The following information is not for the squeamish. If you’re faint of heart, please turn the page.
Look at the chart below to determine how much of your principal is remaining on your home mortgage. You’ll see that, in most cases, you’re well past the half-life of your mortgage before your payments begin to whittle away appreciably at the principal amount. Almost all of your payments for the first half of your mortgage term go toward paying interest (profit) to your friendly lending institution.
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Loan Remaining After
Interest Rate 5 years 10 years 15 years 20 years 25 years 30 years
Life of mortgage - 30 years
7% 94% 86% 74% 57% 33% 0% 7.5% 95% 87% 75% 59% 34% 0% 8% 95% 88% 77% 60% 36% 0% 9% 96% 89% 79% 63% 39% 0% 10% 97% 91% 82% 66% 41% 0%
Life of mortgage - 25 years
7% 91% 79% 61% 36% 0% 7.5% 92% 80% 62% 37% 0% 8% 92% 81% 64% 38% 0% 9% 93% 83% 66% 40% 0% 10% 94% 85% 69% 43% 0%
Life of mortgage - 20 years
7% 86% 67% 39% 0% 7.5% 87% 68% 40% 0% 8% 87% 79% 41% 0% 9% 89% 71% 43% 0% 10% 90% 73% 45% 0%
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Secrets, Myths, and Realities of Achieving Financial
Independence
Financial Independence … What does it mean? Well, Webster’s dictionary defines the terms this way… Financial : pertaining to the science of managing money. Independence: freedom from assistance by others.
So, apparently, financial independence means the ability to manage your money in such a way that you have sufficient funds to live your chosen lifestyle - without assistance from others . In other words, sufficient money to meet all your needs whether you work or not because a job is really assistance from someone else - your employer.
Notice that this definition doesn’t mention amounts of money or the symbols of having money that we often attach to financial independence. The truth is that if you suggest financial independence to most people, they immediately think of a materially rich lifestyle - but if you dig deeper, you’ll find their personal definitions of financial independence to be as different as snowflakes. What does it really mean to you?
To some people financial independence might mean yachts, mansions, and expensive foreign cars; while to others, financial independence might simply mean never having to worry about bills again - knowing they will always have a comfortable home and the time and resources to enjoy their interests and hobbies. Yet to others, not having to work a second job, or maybe just having sufficient income so their spouse could stay home with the children, might seem like financial independence from where they sit.
Before we get into what I think financial independence is, and how it can be achieved, I’d first like you to think about what financial independence would mean to you. What would it mean to your life? How would your days and nights be better if you knew you had the resources to meet all your obligations - for the rest of your life?
Please take a moment and really picture that lifestyle in your mind before you continue reading. The easiest way to begin framing this picture in your mind is to think of a typical day. Not a special day, where you do something you might only do occasionally, but an average day. A day that would only be filled with what you’d be doing most days once you’ve achieved financial independence.
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• What time would you wake up? • Would you be awakened by an alarm clock or by your body’s clock? • How quickly would you get out of bed? • Once you arose, what would you do first? • What would you do next? • With whom would you spend this time? • What would they be doing? • When would you eat? • What would you eat? • What would be the main activity of your day? • How would you spend the evening? • What would determine when you went to bed? • What would your home look like? • What kind of vehicles would be a part of this typical day?
See what I’m getting at? You’re playing a movie in your imagination. A movie of you navigating through a typical day in your “retirement.” Of course, retirement by my definition simply means the time after that part of your life when you had to work every day for a paycheck. In retirement you may be as active as you ever were during your “working” years, but you’re active at what you decide to do.
So … spend a few moments in that daydream … in a typical day in your retirement life.
Are you ready to be financially independent?
Assuming you’ve painted a clear picture of how your life would be, and what resources it would take to live that life every day, I need to ask you: “Are you ready to make the changes to your present life that will allow you to achieve that kind of independence?”
What changes?
Let’s face it … if no changes were necessary for you to achieve financial independence, you’d already be there, wouldn’t you? I mean … if what you’ve been doing with your life so far was the proper strategy for attaining financial freedom, you’d be on your way, or maybe even there already. Are you? Be honest with yourself.
If you are there, you can put this manual down. You don’t need it. If, on the other hand, honesty
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forces you to admit your prospects for true financial independence are cloudy at best, then let’s get on with figuring out how to blow those clouds away.
Reality
Let’s start with your present reality.
Forget the past … and don’t worry about the future. Let’s deal with the “right now.” Ralph Waldo Emerson once said, “What lies behind us, and what lies before us are small matters compared to what lies within us.” What you have to determine is whether financial independence lies within you.
That’s right … you either have what it takes or you don’t. You’re either made of the stuff that yearns for self-direction and self-support or you’re not. Only you can examine the true you and answer this challenge.
In the late ’80s I had to take the same inventory of myself. I had to be honest with myself about where my life was going - and where it was likely to end up. I had a growing business, yet I knew, deep down inside, that if the income ever stopped (or even dipped significantly), my lifestyle would collapse. I was, like most Americans, living up to the maximum of my income - and with the help of Uncle Visa and Aunt MasterCard - a little beyond my income.
When I stared it right in the face, I knew it was a house of cards and that when my working years ran out, I’d be in a real mess. Unfortunately, circumstances didn’t even allow me that much time. My business was reselling another company’s product, and when that company suddenly went out of business, it pulled us down with it.
My personal income dropped from really good to really zero, almost overnight. That began the worst two years of my life. Panic-filled days, sleepless nights, relationship stresses, and the seemingly endless scramble to save my home and find another income source.
That nightmarish experience caused me to seek the TRUE path to financial security and freedom. Not the hype baloney you read or hear from the pushers of what I call “The Solution Lies.” Those are the people who tell you the answer to your problem is to make zillions of dollars - and you can do that by just buying their magical money- making scheme.
I knew there had to be a realistic way … a system for achieving true financial independence. And I knew that such a system would have RULES. Rules that are laws, like gravity.
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Well, I found those rules, and I’ve listed them for you in this manual. They’re not magic or even rocket science. But, like gravity, they are in force at all times, and work without question every time.
Most of the true principles of financial success are not widely known. I call these secrets . Some of the principles we’ve been told throughout our lives are simply not true. I call these myths . And finally, there are some basic, inescapable ingredients to achieving financial independence. I call these realities .
Once I uncovered these financial facts of life, the money map of my life sharpened from an indistinguishable maze to a clear route to my goal. I developed a plan for my life based on these rules and road signs, and I put that plan into action.
One year later, I had all my bills other than the house paid off. Less than four years after that, the 26- year balance on the house mortgage was eliminated. And less than 5 years after that we began living 100 percent off the proceeds from our investments. Working is now optional!
The incredible thing is that we accomplished all this with the same amount of money we had been bringing home each month all along - our regular paychecks. If we had added more money into the system, we could have been out of debt faster - and ended up with even more retirement savings!
The purpose of this manual is to help you reach the same destination - by exploring with you some of the things I learned along the way so you can bypass mistakes I made and get to your goals even faster. This manual is for and about YOU.
Now, let’s get into the rules - the rules that cannot be violated. If you believe you can circumvent one of these rules, you’re wrong. If you try, you’ll crash. If I sound sure about this … I AM!
Secrets
Secret #1: I consider this secret to be the foundational key to all success. It is the ABILITY TO TAKE ACTION.
If you can’t make yourself DO the things that could improve your life, your life will likely end up right alongside the other 95 percent of the financial failures in America. It’s that simple. You can have the best opportunities, the best plans, and the best tools - but if you can’t put all that into ACTION, it’s all
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wasted! And so is your life. You’ll be like the husband lounging in a recliner who said to his wife: “I’ll think about cleaning out the garage in a little while, hon. Right now, I’m thinking about mowing the lawn.”
I can’t make this point too strongly. You must find in yourself the resolve to ACT, otherwise your thinking won’t amount to anything. Some of the world’s greatest failures died “thinking” about what they were going to do.
Secret #2: The level of success you will achieve in your life is directly proportional to your willingness to accept full responsibility for your life.
Josiah Stamp said, “It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities.”
There are many people in this country who are trying to push the responsibility and blame for the condition of their lives onto the government, or their union, or their spouse, or their parents, or their neighborhood. If you really think about that, it’s rather pathetic.
If everyone else is responsible for your well-being and your chances for success, then there’s nothing YOU can do to help yourself. You have to sit there and hope that, by some miracle, the government, the union, your spouse, your parents, and your neighborhood just happen to line up right someday so that your life can be better.
If, on the other hand, you have the courage and honesty to say, “If my life is going to be any better, it’s one hundred percent my responsibility to make the necessary changes,” you have a much better chance of making it to real financial freedom, or any other success you seek.
First of all, you won’t have to wait for everyone else’s cooperation. You can just go out and start making things better. Secondly, when success comes, you won’t have to share the credit with the government, the union, your neighborhood, or anyone else. The Bible says it pretty clearly: “… whatever a man sows, that he will also reap.” You won’t reap what someone else sows - but what you sow. And if you don’t sow, you don’t reap. It’s YOUR responsibility.
Secret #3: Failing to execute a plan for financial independence is the same as planning to fail.
This seems pretty self-evident, but most North Americans just float through their financial life, hoping
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it will all just work out somehow. This is, of course, a form of insanity. It won’t work out. The federal statistic I’ve already stated shows that it doesn’t work out for 95 percent of Americans, and it’s the same in Canada.
It won’t work out unless you make it work out. But the problem most people face is that they can rarely think about getting ahead when they can hardly keep up. They dig a hole of debt, jump in, then spend month after month dragging dirt in on themselves, wondering why they’re getting financially buried.
The fact that you need a financial plan to reach financial success is really not a secret. But most people don’t know where to start. Well I do. And I’ve worked the whole plan out for you in the Your Debt Elimination system. This 12-session program will show you, step by step, exactly how to eliminate ALL your debts, including paying off your home - and it’ll show you how to rapidly build retirement wealth.
Secret #4: A home-based business - you can invest work instead of money, you can make more money than a job would likely pay you, and Uncle Sam will help you pay for everything.
Let me answer the obvious question first: can you achieve financial independence without having a business, with just the income from your job? Yes. Could you achieve financial independence faster and build up much greater wealth by building a business of your own? Yes. It’s really up to you. Some people are happy doing what they’re doing and would never think of taking the entrepreneurial leap. Others dream of having their own business and they’ll leap and leap till they succeed. This secret is for them.
While owners of franchises and other traditional (storefront or industrial) businesses put in tens of thousands to hundreds of thousands of dollars to start their businesses, I started with nothing but a personal computer, working at home - and my monthly costs ran like pocket change compared with the thousands of dollars it costs traditional business owners to meet their rent, payroll, and other monthly obligations. I didn’t have any of those costs.
I kept my job until my business was making more than my paycheck, so I didn’t starve the business by taking too much out too soon. And the tax breaks I received from operating a business in my home made it much easier to make a profit. Uncle Sam was sort of a partner, and he helped pay for a lot of the things I was spending money on anyway, like my telephone bills, my car, my home, travel, and entertaining. The tax savings alone may make starting your own business a good idea.
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And, with the World Wide Web available today as a business tool, it’s possible to build an income with even lower operating expenses than when I started. Marketing costs can be dramatically reduced. Just don’t fall for the seduction of SPAM e-mailing to build your business. That’s like opening a brothel to raise money to build a church.
Before you go looking for a business opportunity, be sure to restrict the candidates to things you would enjoy doing, day after day, for decades. Because that’s just what it will take to achieve any business’ full potential. I’ve counseled many a person considering a business opportunity to think about the work involved and decide whether that work would be enjoyable, on a daily, weekly, annual, and lifetime basis.
The money potential is never the primary reason for picking a business. If you end up hating the work, no amount of money will be enough to make it worthwhile.
Secret #5: Residual vs. linear income
Most people work on a linear income scale, which simply means they work an hour, for which they get paid an hour’s wage. Or they sell one widget, and they get paid the commission on one widget sale. But if they work less, they get paid less. And if they want to get paid any more, they have to work more. There’s a limit to how much they can make because there’s a limit on how much they can physically do.
Residual income, on the other hand, is cumulative and continuous. Let’s say you sold a widget … and instead of getting paid a one-time commission, you got paid an ongoing commission on that one sale every month. That would mean that if you sold a second widget, the commission for that sale would now add to the monthly commission you are already receiving on the first widget, so your total monthly commission would be twice as high. This concept allows you to build a substantial income one step at a time. Plus … with a residual income stream, you could take a month off … and the income would continue.
Another way to build residual income is to build a business where you’re receiving income based on the work of others in addition to yourself. You’ll notice I said in addition to yourself because there is NO business where you get paid without doing any work. You know it, I know it, and the liars who tell you they can show you how to do it know it too.
But the fact is, if you can build a business where you have employees or a sales force of some kind multiplying your business’ ability, you can create a residual income nuclear reactor. And your income
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is the result of a chain reaction rather than a single flame flickering in the dark.
With residual income, you can literally take extended vacations or work reduced hours - AFTER YOU’VE BUILT YOUR INCOME STREAM - and it will keep flowing in.
Secret #6: Multiplex income
Residual income deals with the issue of time and money, in that your income becomes independent of the time you personally expend generating it. But to really multiply your income potential, as I mentioned above, you can concentrate on building a business where you also receive income from the efforts of others, such as a sales force.
This is multiplex income and it’s the advantage enjoyed by the national sales managers of all the large companies in this country. They have regional or district sales managers under them, then area sales managers under those people, then local or store sales managers under those people, and finally, hundreds, even thousands of sales people under those people. And every time one of the front-line sales people makes a sale … the store sales manager, area sales manager, regional sales manager, and the national sales manager each get an override or bonus from that sale. What a great deal - and it’s one you can enjoy - right from your own home.
Many direct-selling businesses pay compensation based on the multiplex model. The key to choosing the right kind of multiplex-income business for you is finding something YOU can be excited about selling, because retailing the product is the heart of any business. While retailing, you’ll come across people who will want to do the business, and you can begin building your sales force. But, for them and you to make money, they too must be focused on selling the products. All income in legitimate multiplex-income businesses comes from selling the products to end-users.
Owning commercial or residential rental real estate is also a form of multiplex income because the effect of your efforts is multiplied by the efforts your tenants are exerting to produce the incomes necessary to pay you rent. Rent is also a residual income stream.
Now, if you’re not an entrepreneur or sales person, you may be intimidated by Secrets 5 and 6. So let me reiterate, you don’t have to build a business to achieve financial independence. It can be accomplished with your regular income. A successful business would likely accelerate your journey, but it’s not a requirement to get to your destination.
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Secret #7: I call it PMA squared
Many people have heard the term PMA. It stands for positive mental attitude. I used to think that this was the key ingredient of achievement and that if I maintained a positive mental attitude, success was sure to follow. But it didn’t always work that way. In fact, I’ve known people who could crank up such a positive mental attitude they’d glow in the dark, but they were still financial failures, and the reason reverted back to Secret #1 - they hadn’t developed the ability to take ACTION.
You see, attitude without action is worthless. So I developed an idea where I encourage people to develop a positive mental attitude - but then I tell them to multiply that by another PMA - productive meaningful action, and that produces PMA squared - positively massive affluence. Try it.
Thomas Henry Huxley said, “The great end of life is not knowledge but action.” How true. Knowledge without action is a waste of gray matter. Such knowledge will never benefit a person, nor the world around them. Your attitude is critical. Attitude determines altitude. But without turning that attitude into action, it’s worthless. Just start. You can always make midcourse corrections. But you can’t correct your course at all if you’re not even moving.
Take action. And if you really want massive results - take MASSIVE action!
Secret #8: The power of compound interest
Albert Einstein was once asked what was the most powerful invention he had seen in his lifetime. His answer: compound interest.
Why did the man whose theories unleashed the power of the atom consider compound interest the most powerful thing he had ever seen? Because compound interest literally develops a life of its own. The interest from this month earns interest next month, then the combined interest itself earns interest the third month, and so on.
For example, if a teenager were to put $2,000 a year in a typical IRA account each year from ages 14 through age 18 (just $10,000 over five years), compound interest would grow that $10,000 to $1,184,600 by the time he or she was 65 - without a single additional dollar being invested after age 18. That’s $1,174,600 in compounded interest!
The problem for most people, however, is that this powerful compound interest system is working
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against them. They’re not earning interest, they’re paying it. You can’t get ahead while simultaneously moving backwards. The first thing I teach in the Your Debt Elimination system is precisely how to pay off all your debts - including your home mortgage - in just five to seven years - using nothing more than the money you already bring home!
Thousands of people have achieved this complete debt-freedom, and the system can help you do it too. Imagine having NO BILLS besides your normal monthly living expenses. Nearly all your paycheck would be yours to do with as you choose.
Myths
Myth #1: You can use money the same way everyone around you uses it - and still end up financially independent.
The United States Department of Health and Human Services regularly conducts an extensive study of what happens to the average worker in this country by the time they reach conventional retirement age (U.S. Department of Health and Human Services study, June, 1990, publication #1311871). The pitiful results fully show that 95 percent of the people in this country DO NOT achieve financial independence by age 65, but rather they end up DEPENDENT on the government, or charity, or their families, or they have to keep working until they die.
95 percent! That’s almost everybody!
These are working people just like you and me - people who went through their lives believing the myth that if they were just good employees and good consumers, they would be rewarded in the end. Instead, most of them end up struggling to survive on a Social Security check and/or a pitifully small pension. It isn’t pretty. If you know anyone living on Social Security, visit with them for a day and see if that’s how you want to spend the “Golden Years” of your life.
The truth is inescapable. If you’re using money like most Americans - buying things on credit, making monthly payments, trying to put away a few bucks each month, etc. - you’re doomed! Face it: 95 percent of Americans DO NOT achieve financial independence, and they are buying on credit, making monthly payments, trying to put a few bucks away each month. What makes you think you are somehow immune to the consequences of doing things this way? If you do what they do … you’ll end up the same way they will: BROKE!
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Myth #2: The responsible use of credit can enhance your financial well-being.
This may be the single most dangerous lie told to the North American consumer. Only the merchants and the lenders benefit from your using credit. You DO NOT! All credit does for you is raise the price of the things you buy. And if you pay more for everything, over the years you’ll be able to buy FEWER things than people making the same income as you who pay cash instead of using credit. So using credit will actually diminish your lifestyle, not enhance it. The people using cash will be able to afford a better lifestyle than you.
Consider this: The only true measure of wealth is net worth. Net worth is how much you own MINUS how much you owe. So owing money on assets you supposedly “own” reduces your net worth, thereby reducing your wealth. The only way to really achieve true financial independence is to own everything in your life and owe nothing. That’s real wealth.
And if you think you can afford to put off the decision to start getting completely out of debt, consider this. We’ve calculated that for the average American household, each day they delay beginning a debt-elimination plan costs them $423 in lost future wealth!
Myth #3: Pay yourself first.
This is a myth because of the way it’s applied. The false belief is that you can carry a load of debt and otherwise use money like everyone else around you - as long as you first put a little aside in some kind of savings or investment each month, thereby “paying yourself first.”
The truth is that you should PAY YOUR DEBTS OFF FIRST. Then pay yourself - AFTER your debts are paid off. So paying yourself second works better. It’s the only way to dramatically accelerate your journey to financial independence.
If you think about this it just makes sense. When you’re carrying a debt load, you need to have a lot of money in savings to cover your monthly expenses should you lose your job or your ability to work. But, when you’re carrying a debt load, you don’t have much to put away in savings each month because most of your disposable income is going to debt payments. So you need a lot saved up … but you don’t have much to save each month. Therefore, putting a little aside each month (paying yourself first) will take you years to save a significant amount.
But, when you pay off your debts first, you then need less to live on each month because you’re only paying for food, utilities, taxes, insurance, and any other minor expenses. Leaving you with a lot of
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savable money each month. So it will only take months instead of years to save up a sufficient emergency fund. After that, your retirement investments will build rapidly because you’re funding them at a high level each month.
Myth #4: You can get out of debt by putting a little extra on each bill each month.
To effectively eliminate your debts you have to use the military principle of “massing of forces.” This means you concentrate all available resources on ONE bill at a time. This way you pay the target bill off quickly, thereby recovering its monthly payment. Then you add that payment each month to the amount you’re paying on your second bill and so on.
In my Your Debt Elimination system, I teach a powerful method for applying this principle. It shows you exactly which bill to target first, second, third, and so on. And it will tell you specifically where to find money that is literally leaking out of your life right now - so you can mass it toward eliminating your debts. It’s the most powerful debt-elimination system available anywhere.
Myth #5: You need to learn how to “manage” credit.
You need to learn how to ELIMINATE credit from your life. Once you’re debt-free, you’ll never need credit again. If you want to move up to a better house, you’ll just sell the one you own free and clear - maybe take a little additional money out of your swelling investment account - and buy your new house with cash.
That’s how it works when you eliminate debt. When you just manage debt, you stay in the 95 percent group along with all the other financial failures.
Myth #6: To be successful, you have to work “smarter not harder.”
Everyone I’ve ever met who has achieved financial independence will tell you that - at least in the early days - you have to work smarter and harder. The price of success must be paid in full … and it must be paid in advance. There are no shortcuts.
This is particularly true if you’re going to try to build a business, even a home-based business, as part of your financial independence plan. Building a business takes more work than a job, at least in the beginning. It also offers greater rewards than a job - both financial and emotional. But you should never be fooled into thinking that building a significant revenue stream can be effortless. If you see that kind of promise in a business’ advertising literature - they are lying to you!
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It takes hard work to succeed, which is probably one of the primary reasons why 95 percent of people don’t achieve it.
Myth #7: It takes OPM (other people’s money) to make money.
This idea comes from the school that says you have to find venture capital, or you have to mortgage every dollar of equity out of your home, or - worse yet - you have to use credit cards to get the tens of thousands of dollars necessary to start a business, so that you might achieve financial independence. I’m sorry, but that is simply not true. I built a three-time Inc. 500, multimillion dollar a year business starting with less than a $100 investment, working out of a spare bedroom. (By the way, this was accomplished AFTER my wife and I had achieved debt-freedom using our paychecks.)
The most dangerous result of this myth is when borrowers realize too late that “other people” expect to be paid back - WITH INTEREST! Using other people’s money, or leveraging as it’s frequently called, puts you at great risk. Like most shortcut-to-riches illusions, using borrowed money to build financial independence frequently has the opposite result. It accelerates your financial ruin.
Go back and reread Myth #2. Borrowing money is NOT the way to achieve financial independence. Making yourself increasingly vulnerable, in hopes of cashing in on some big gain to pay off the “leveraging” debts with enough left over to make you financially independent, is a fool’s game. For every person who might succeed this way, a hundred lose their shirts … and the houses those shirts were hanging in.
Myth #8: The more education you have, the more likely you are to be successful.
If you study a little history, you’ll run across names like Thomas Edison, Albert Einstein, Henry Ford, and others who achieved great success, but who were educational failures. On the other hand, you can go to any university campus and find hundreds of what I call “professional students” who collect degrees like some people collect stamps - yet they’ll go through their whole lives making no significant contributions to the world. And the world, in turn, will make no significant contributions to their financial well-being.
The skills that really do help you achieve success and financial independence are simply not taught in schools, yet each year millions of high school graduates trek off to college. Why? Well … because that’s what you do after high school … isn’t it? That kind of attitude is not the self-directed mindset that produces achievement. Going to college because all your friends are doing so is the same drive exhibited by a log that floats downstream with the rest of the debris.
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Don’t get me wrong. An education can help you get a good job … and having a job is a noble thing. The income from a good job, focused through a system that turns that money into wealth, will get you to true financial independence. But a good job alone will do nothing more than help you pay the bills as you (along with the rest of the 95 percent) are swept toward financial failure in your “retirement” years.
It does take knowledge to achieve financial independence. It’s just not the knowledge they teach in school. And, quite frankly, the $50,000 to $250,000 it takes to get a college education these days could make you rich by itself, if invested even in mediocre mutual funds from the typical college age of 18 to the typical retirement age of 65.
If you put that $50,000 into a tax-sheltered S&P 500 index mutual fund (assuming an average 10 percent annual return) for the 47 years between ages 18 and 65 - and never saved another dime your whole life - you’d still retire with $5,391,332! You could work at McDonald’s the whole 47 years and still retire with more money than all the college graduates in your neighborhood combined! See what I mean?
Myth #9: Putting your money in a bank, in CDs, and money market accounts will earn you financial independence.
The only people who get financially independent when you put your money in the bank are the owners of the bank. Now I’m not saying you should put your money in your mattress. A bank is an OK place to keep money you’ve made - so you can write everyday checks and pay your monthly expenses, but it’s not a strong place to grow money.
There are many superior investments to those offered by most banks - including investing in yourself. In fact, investing in educational materials and courses that teach entrepreneurship, marketing, or starting a business of your own can return much higher growth of your income than can any investments you make in someone else’s business.
The next best investment is usually in growth mutual funds, and the simplest for the long-term investor are stock index mutual funds like the S&P 500 index fund I mentioned in Myth #5.
By the way, many banks offer investments. These may be good investments or under- performing investments. You’ll only know by shopping around. Pick up a few investment magazines and call some of the mutual fund companies advertising in them. Ask for prospectuses on their best- performing funds. Then compare these to what your bank is offering.
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Realities
Now let’s look at the realities of attaining financial independence.
Reality #1: If you’re not already financially independent - or well on your way - you must change your financial behavior to succeed.
There are only two ways you can leave this message - changed or resigned. You will either take 100 percent responsibility for changing the financial course of your life, or you will resign yourself to staying with the 95 percent who are headed for financial failure. It’s up to you. Only you can decide your future.
Please don’t put your head under the pillow and pretend things will just sort of work out somehow. They won’t. You must take action. That is a REALITY.
Most people never quite figure out that life is simply a matter of choices. Nothing really forces us to be who we are or where we are in life. We have made all the choices that put us exactly where we are at this moment in time. Even those bad things that happen in life offer us a choice as to how we will react to them.
If you’re not happy with where you are or where you’re going - CHOOSE TO CHANGE. It’s really that simple. You’ve probably heard the old Chinese proverb, “The journey of a thousand miles begins with the first step.” It’s true, and the first step is choosing. Choose to apply all the secrets, myths, and realities you’re learning in this manual. See where you may have been operating on the wrong side of the truths and CHOOSE to do it the right way as you move into the future.
Reality #2: You have to be willing to put forth effort.
WORK may be a four-letter word to some people, but it’s a necessary ingredient to achieving any kind of financial independence. But you don’t have to work hard at it forever. It’s much like taking off in an airplane. When the plane starts down the runway, it must have full power to free itself from the earth and climb to cruising altitude. But once it reaches that elevation, altitude and cruising speed can be maintained with a much lower power setting.
That’s how it is in achieving financial independence. You have to put in the most work up front. Then, after a while, you can relax into a wonderful lifestyle and spend a lot less time and effort maintaining that lifestyle and income … giving you time for your loved ones, hobbies, and maybe even dreams
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you have long since let go.
Effort and wealth are much like opposing lines on a graph. When you first start out, it takes a lot of effort, but you have little or no wealth, so effort is high on the graph and wealth is low. But over time, wealth increases and effort can decrease. Until one day, wealth is high and effort can go to zero. There’s no other realistic way to do it. The only place success comes before work is in the dictionary.
Reality #3: If you are planning a home-based business to accelerate your journey to financial independence, you must build that business around something in high demand … or at least something that most people will want.
One of the biggest mistakes new business people make is that they charge off trying to build a business around a product or service that tickles their fancy - but for which there is no strong universal demand or desire in the marketplace.
The most important thing you’ll need to build a successful business is CUSTOMERS. And the only way you get customers is to have something they’ll want so much they’ll give you some of their hard- earned money to have it. Notice I said want, not need. There are many things people need , but won’t pay money for. But find something they really want , and they’ll get an extra job to find the money.
Your personal taste is irrelevant. Only the customer’s taste matters.
Reality #4: You must develop and maintain a long-term view.
This means you must be willing to make some short-term sacrifices to achieve your long-term goals. You must develop the ability to postpone gratification. In other words, you may have to give up the new projection TV, an occasional golf game, or a fishing trip now, so you can do the extra work necessary … to put you in a position where you can eventually do all the TV watching, golfing, or fishing you want. You simply cannot have it both ways. You can’t do whatever you want now AND have all you ever dreamed of later. You’ll have to choose, and you’ll have to make that choice now. The clock is ticking, and every day you waste thinking about it diminishes the level of wealth and independence you can have later.
If you hear yourself saying, “ I really should pay off my debts and start building a retirement fund, but there are a few more things I want first,” translate that to, “I want to continue wasting my life, taking no action to build a better future, and I’ll RISK the consequences later …”
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Let’s face it, there are only two ways you can respond to this financial challenge. You can think about it , and eventually die from paralysis of analysis - OR - you can start doing the things required to pay off your debts and build retirement wealth. If you sit around thinking about it and never really get underway building a financially secure future - my estimate is that it’ll cost you about $423 in retirement wealth every day you wait to start!
Reality #5: This is critical - it takes more than a few weeks to build true financial independence.
My debt-freedom plan took just four years and seven months, and five years later I could live off my investments. Now that may seem pretty fast to you. It does to me. But it did not happen overnight. It wasn’t magic. I didn’t find the goose that lays the golden egg. I just rerouted the money already moving through my life into a plan that allowed it to accumulate for my family’s benefit, rather than the benefit of my creditors.
Beware of people telling you it can be done overnight. The world doesn’t work that way, and only the naïve or the foolish waste time searching for the magic they think will overcome a lifetime of poor financial management in a moment. That’s the lack of wisdom that feeds lotteries … and lotteries are just a tax on people who don’t understand statistics.
You have a statistically better chance of being struck by lightning than you do of winning a lottery. Even the few who do win frequently end up broke because they never learned how to manage their finances, so their lottery winnings only compound their errors and they end up even further in debt … living beyond their artificially expanded means. Unfortunately there are a lot of folks living like that, including doctors, lawyers, and even plumbers. High-income people who haven’t accepted the fact that they can either get rich OR live like they’re rich right now - never both.
And to get rich does take some time. My Your Debt Elimination system shows you how to do it in the fastest time possible, but it still takes time. Accept that fact and you’ll enjoy life more, while you get rich.
So Let’s Summarize…
Here are some of the things I’ve learned over my years of building financial independence. See if any of it makes sense to you.
I learned that …
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V I needed a financial independence. I had to go through a lot of difficult times to learn what I teach in this program, so why not learn from my mistakes instead of experiencing them for yourself?
V I had to get out of debt … completely out of debt, so I would own everything in my life and interest would no longer be siphoning money out of my life. That way I could put nearly all my income to work to EARN interest and thereby build retirement wealth. I knew I’d never be able to stop working if I did not do this.
V I had to take action … change the day-to-day operation of my life … DO something different! I learned that the path I was on, the same path as the other 95 percent of Americans, led to financial doom. Look around you. If you’re living your life pretty much like most of the people around you … YOU’RE ALL IN THE 95 percent group!
V If I was going to attempt a home-based business of my own, I wanted a business that produced residual, cumulative income. And I wanted a business I would enjoy doing every day.
V I also looked for a business that produced multiplex income, so I could benefit from my own efforts, plus the efforts of others. By the way, that’s how the owners of the place where you work right now are building their financial independence. They are benefiting from their own efforts - as well as YOUR efforts.
V I needed to be willing to pay the price of success in advance. And I learned that I had to be willing to work at it … maybe even sacrificing some TV or other recreational time to get it done.
V I needed a long-term vision. I needed to be able to ignore short-term pain in order to be able to achieve long-term gain. And I needed to learn to delay gratification. I couldn’t buy everything I wanted - the minute I wanted it - and ever hope to achieve financial independence.
V I needed PMA squared - that’s a positive mental attitude multiplied by productive meaningful action, and it produces positively massive affluence.
Well, if you’ve got the PMA squared, a plan to get out of debt, and an income stream that will get you to your goal - you have all you need! Don’t wait. Don’t sit around thinking about it. Do it!
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Just think what it could mean to your life …
V No more pressure from bills. V No risk of losing your home, car, or anything else … because you’ll own it all. V Being able to work, if you want to - or not work, if you don’t want to.
What would your typical day be like if you didn’t have to think about where the next dollar was coming from? That’s true independence - and you deserve to be enjoying it.
I do hope that the principles I’ve shared with you here are helpful to your life. They are as true and real as the law of gravity, and I’ve learned many of them the tough way. I hope you have the foresight to learn them the easy way - through my experiences and not your own.
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