Special Report for Spark Plug PLUS Members The Top 12s Abstracted from the 12-CD Audio Album True Wealth – Your Values and Your Money by Joe Tye Introduction True Wealth – Your Values and Your Money is a 12+ hour audio CD program on values-based strategies for money management and wealth creation. The impetus for creating this program was my observation that money troubles are a significant barrier between many people and the fulfillment of their dreams and living of their values. One CD in this album is entitled The Top 12s. This is essentially a summary of some of the salient points included in the entire album. These 48 points include: The Top 12 blunders that people make with their money. The Top 12 best ideas for values-based cash management. The Top 12 best ideas for values-based investment strategies. The Top 12 innovative concepts from 12 great books on money management. This special report, published exclusively for Spark Plug PLUS members, features a more in-depth profile of these 48 key points (plus several bonus items). The information in this special report is drawn primarily from: library research (including many of the books in the bibliography at the end); study of online and print financial publications; interviews with a variety of professional in the financial field (including several Spark Plug PLUS members); as well as my own personal experience. This is a presentation of information, ideas, and inspiration. It should in no way be construed as being specific financial advice, for which you are encouraged to consult with an appropriate financial professional. Note: While this special report will be a very helpful stand-alone item for most readers, I hope that it will also encourage you to purchase the True Wealth audio CD program, which covers a much broader waterfront. Since about 80% of your financial success is determined by perspective, attitude, and behaviors rather than specific knowledge, the audio format is far more effective at bringing about desirable changes. The retail price is $89; for Spark Plug PLUS members we are holding open the introductory rate of $49 (plus $3 shipping; $5 international shipping) for the balance of 2004. Important Assumption: This report is not tailored to the “sophisticated investor” who needs complicated financial strategies, high-risk investment The Top-12s from True Wealth – Your Values and Your Money Page 2 of 18 options, tax sheltering techniques, or other complex financial vehicles. Rather, it is for the average citizen who is struggling to get ahead financially, probably worrying about retirement and other upcoming financial burdens, and quite possibly struggling to get out of debt and stay out of debt. The Top 12 Money Blunders Money Blunder #1: Not taking money matters seriously, and exhibiting symptoms of learned helplessness when it comes to budgets, taxes, investments, debt, and other aspects of one’s financial life. This includes abdicating financial affairs to investment advisors, tax preparation experts, knowledgeable relatives, or in the worst case, nobody. Several years ago, The Wall Street Journal ranked this as number one on their list of money mistakes that people make, and it commonly shows up on virtually every other list. Part of the problem is that people are intimidated by numbers and calculations, and might have an acute sense of their own inadequacy in this realm. Another part of the problem is that, while money is the quintessential left-brain (rational and linear) subject, most people deal with it on the right side (emotional and non-linear) of the brain. This accounts for a great deal of self-sabotaging financial behavior, including on the part of otherwise mature and sophisticated adults. This topic is addressed in much greater length on CDs 1-3 of True Wealth. Money Blunder #2: Excessive spending relative to income. This is a serious problem, as reflected by the fact that the national savings rate has plummeted from near 10% to approximately zero over the past decade, while over the same time consumer debt has skyrocketed. In other words, not only are we spending everything we earn, we are borrowing in order to spend even more. At a personal level, this often results from people confusing their debt capacity with their spending capacity. Since lenders are willing to loan money that borrowers would be foolish to borrow, this is an easy trap to fall into. Another reason for this syndrome is that our definition of “essential” consumption is increasing at a faster rate than income (including such “essentials” as cable or satellite TV, microwave ovens, CD/DVD players, GPS equipped autos, cell phones, internet connections, etc.). Beyond this, the average American home is now 1/3 larger than it was a quarter century ago. Because income growth has not kept up, these “essentials” have been funded first at the expense of saving, and then through borrowing, often with expensive credit card debt. This syndrome is what I refer to in the audio program as “Maslow’s Mistake.” Money Blunder #3: Carrying credit card balances. Credit card debt (and the tactics of collection agencies going after that debt) is the number one cited cause of bankruptcy in America. The average American The Top-12s from True Wealth – Your Values and Your Money Page 3 of 18 family carries nearly $9,000 in credit card debt spread out across ten different cards. Assuming an interest rate of 18.9 percent with minimum monthly payments being made, it will take more than 27 years to pay off that debt, and approximately $12,000 in interest would have been paid. This assumes, of course, that no additional charges are made during this period, and that no late finance charges are incurred (both very fragile assumptions!). The human consequences of what Robert D. Manning in his book Credit Card Nation calls “the consequences of America’s addiction to credit” are appalling. I wish I could share with you some of the emails I’ve received in scholarship requests for the True Wealth program; many of them would break your heart. What is perhaps most frightening about credit card debt is how quickly someone can get in over their heads, and how terribly difficult it is to get out. People can use credit cards responsibly for years – paying in full every month, and perhaps even earning frequent flyers miles in the process. Then after loss of a job or medical emergency, the credit card becomes their safety net and debt spirals out of control. It becomes a burden that is dreadfully difficult to escape because it must be paid off with after tax dollars, and interest and finance charges can actually increase the balance faster than it can be paid off. Additional facts on America’s credit card debt are included as Appendix 1. Money Blunder #4: “Shoot the moon” expenditures. The average family that goes to Disney World has saved for 2 ½ years to make the trip (and will probably run up additional credit card debt on top of the savings). A trip to the Rocky Mountains can be far more rewarding than a trip to Space Mountain, and much less expensive. The typical new car depreciates 20% in the first four days, and 60% in the first four years. That is why Thomas Stanley, co-author of The Millionaire Next Door, says that most self-made millionaires don’t waste their money on new cars, choosing instead to purchase reliably used cars. These constantly inflating expectations are further fueled by the “lifestyles of the rich and famous” media (e.g. the MasterCard TV as promoting the “priceless” wedding event that will leave the father of the bride penny-less). Harvard economist Juliet Schor calculates that every 15 hours per week spent watching television (about half the national average) results in an additional $3,000 in consumer expenditures. Money Blunder #5: Not starting soon enough. In his book Straight Talk on Investing, Jack Brennan (CEO of the Vanguard Mutual Fund company) shows that a person who invests $1,000 per year at 8% between ages of 30 and 39 and then never invests another penny will end up with $127,000 at age 65. A second person who begins investing $1,000 per month at age 40 and does so through age 65 will have put in $25,000, but will have only $78,000 at age 65. The essential message here is that it is never too early to start, but also that it is never to late to start. With saving and investment, time works for you in the form of compound interest and capital gains; with spending and debt, time works against you in the form of compounding interest and lost opportunities. The Top-12s from True Wealth – Your Values and Your Money Page 4 of 18 Money Blunder #6: Not being patient. Warren Buffet is one of the most successful investors of all time. He says that his investing strategy is about as exciting as watching paint dry. In our instant gratification society, we want outsized returns, quick and easy riches, and insider strategies. For most of us, however, the surest way to build wealth is to patiently adhere to reasonably low-risk and low-cost strategies such as those described later in this report. Money Blunder #7: Not having a rational conception of risk. One of the many sad stories I read about in my research for True Wealth was about a physician who, through many years of careful and deliberate investing, accumulated a nest egg of nearly $2 million. After attending a seminar promoting “high return” investments strategies, he put his entire life’s savings to work in pursuit of those high returns. Within a year, he was wiped out, and facing the prospect of never being able to retire. As a general rule, the higher the desired return, the greater the risk will be. Because people tend to be irrational about risk, however, even low return strategies can carry excessively high risk. For example, keeping money in a coffee can during a period of high inflation probably has much greater risk than investing that money in a stock market mutual fund. As another example, because people fear risk more than they desire gain, they tend to buy stocks when the market is nearing a peak, and to not sell until it is reaching a trough. Any third grader knows that "buy high, sell low” is not a very smart investment strategy, but because they inappropriately deal with risk, millions of American’s follow precisely this strategy. Money Blunder #8: Trying to time the market. You don’t have to be sucked into a sophisticated market-timing scam in order to be a market timer; almost everybody is, in fact. Anyone who does not invest in a disciplined, consistent manner is in effect timing the market. This is why the recommendations below for such strategies for dollar-cost averaging are so important. To highlight this, one study showed that between 1991 and 2002, a $10,000 investment in the stock market would have grown to over $27,000, for an increase of 10.65%. However, had the investor missed out on the ten best market days (one per year) the return would have dropped to $17,800, or 5.9%. Had the investor not been in the market the best 30 days during that period (3 per year) he or she actually would have lost money. Inadvertent market timing can be very costly. Money Blunder #9: Not taking care of yourself physically. This is important for two reasons. First, it takes energy, strength, and stamina to do the sort of excellent work that results in optimal income. Furthermore, because regular exercise, reasonable nutrition, adequate sleep, and other factors of good physical health also promote emotional stability, which is essential for making effective investment decisions. On a longer term basis, such behaviors as smoking, overeating, and sedentary lifestyle can result in significant healthcare costs, wiping out the savings that were intended for “golden years” retirement. The Top-12s from True Wealth – Your Values and Your Money Page 5 of 18 Money Blunder #10: Having the wrong vocation. For his book The Millionaire Mind, Thomas J. Stanley interviewed nearly 1,000 self-made millionaires. He states that the single-most important determinant of their financial success was “vocation, vocation, vocation.” People who find work that they can love to do, and then do that work with great passion and commitment, are far more likely to prosper financially than those who simply slug away at a job, hoping to hang on until they can cash out their retirement. Money Blunder #11: Not appreciating what you have. A fundamental premise of the True Wealth program is that mere financial riches do not make one wealthy. Quite to the contrary. One excellent definition of true wealth is having enough money to be able to spend your time doing work that is meaningful and rewarding, while having sufficient time to appreciate the things that really matter in life, including family, nature, and the blessing of good health. Money Blunder #12: Retiring before you retire. Millions of Americans have retired while still on the job. Their bodies show up everyday to do the same work they have done everyday in the past, but they have stopped learning, stopped growing, and stopped dreaming. A leitmotif of the True Wealth program is that people should not look forward to retirement (re-tire: to get tired again). Rather, they should think in terms of re-treading. One of the best ways to do this is to start long before actual retirement by developing a hobby into a business. The Top 12 Cash Management Ideas Cash Management Idea #1: Do not confuse debt capacity with spending capacity. Of all the applications I received for scholarships for receiving the audio program True Wealth – Your Values and Your Money, this one was an almost constant theme. One of two things (and sometimes both) typically happened. First, the individual used a credit card for shopping therapy or used other consumer debt for a big ticket item, then was unable to keep up with payments, so debt continued to escalate (often in consort with continued spending), always with the expectation of some future windfall somehow coming through to pay it off. Second, some unfortunate outside event such as loss of a job, divorce, or medical problem caused a sudden reduction in income. Rather than immediately cut back on standard of living so as to live within the reduced income level, the individual used debt – including especially credit cards but also home equity loans and other debt – to maintain things, again with the expectation of quickly paying it off when things turned around, an expectation that at least in these cases has not yet panned out. The Top-12s from True Wealth – Your Values and Your Money Page 6 of 18 Since few of us know ahead of time when such events might turn our lives upside down, it is wise to prospectively analyze your debt capacity versus your spending capacity at various income levels. Banks and (especially) credit card companies will often loan people more money than they can truly afford to borrow. Cash Management Idea #2: Cut up and cancel all credit cards. Read Appendix 1 for all the gruesome details. Today, debit cards and check cards allow you to do virtually everything you can do with a credit card – so long as there is sufficient money in the underlying account. As one financial expert put it, a credit card in the wallet is like a loaded gun: liable to be used in a crime of passion (a spending binge) or a crime of desperation (running up credit cards in order to maintain a lifestyle after being laid off). Cash Management Idea #3: Calculate real cost and use DDQs. Any time you purchase something, there is likely to be more than one type of cost. Direct cost is the sticker price; indirect cost includes sales tax, credit card interest charges, etc.; operating costs include cable hook-up for a TV, maintenance for an automobile, etc.; opportunity cost includes the loss incurred by not making alternative expenditures (for example investing in a mutual fund instead of a television set); time cost includes the time required to obtain, use, maintain, and perhaps dispose of the item (e.g. watching television); and emotional cost which includes the very real burden of buyer’s remorse, anxiety, depression, and other emotions associated with the consequences of unwise spending. Appendix 2 includes a worksheet showing how, over a complete life cycle, the real cost of a $1,000 television set could actually exceed $100,000. One excellent way to control spending is to calculate the real cost, and then to ask a Direction Deflection Question such as: “If the sticker price reflected the real cost, would I still buy it?” Or, “Is spending this money now going to help me achieve an important long-term goal?” Cash Management Idea #4: Don’t buy big-ticket items new. I’ve already mentioned the lack of wisdom in buying a brand new car, but the emergence of eBay and other online auction services makes it possible to save money purchasing everything from pickup trucks to paperback books. As just one small example, I can often obtain a used book that looks almost like new for a small fraction of the retail price. Cash Management Idea #5: Employ the 3-Bs of Beg, Borrow, and Barter. This is classic bootstrapping, but can be taken to much greater lengths. As just one example, virtually every home in a suburban neighborhood has its own lawn mower, which sits idle for 99 percent of the year. A cooperative approach could both reduce collective expenses and increase the sense of community. The Top-12s from True Wealth – Your Values and Your Money Page 7 of 18 Cash Management Idea #6: Substitute your way to solvency. Replace home-delivery pizza with the frozen variety; check out movies from the library instead of Blockbuster; go to the Rocky Mountain instead of Space Mountain for vacation. If you really must go out and buy something, do it at the local Goodwill or Salvation Army store. You can get your “shopping therapy” fix, it won’t cost very much, and you’ll be helping the people who work there help each other and help themselves. Before you go, be sure to make a sweep through your house or apartment for things that you really don’t need or use so you can make a donation on your way in. And while you’re there, take an extra moment or so to have a conversation with the person behind the counter – that is, if they’re not too busy helping all the other people in line. Cash Management Idea #7: Cancel you way to solvency. Cancel magazine subscriptions, book and record club memberships, cable or satellite television, and other routine and habitual expenses that you can live without. See Appendix 3 for an exhibit showing how a small daily reduction in expense can add up to significant amounts of money at retirement. Cash Management Idea #8: Be a status contrarian. Sam Walton drove a battered old pickup truck, and Warren Buffet lives in the same house in Omaha that he’s always lived in. Read about the difference between “income statement millionaires” and “balance sheet millionaires” below for further understanding of this point. Cash Management Idea #9: Turn time into money. This is the subject of several 80-minute CDs in the True Wealth program, but briefly almost everyone can find a way to make a little extra money doing something they enjoy doing. Referring again to Appendix 3, if through a combination of reduced spending and enhanced income you can invest $20 per day earning 8% (both very reasonable and conservative assumptions) beginning at age 40, by age 65 you will have more than half a million dollars in your retirement account. Cash Management Idea #10: No shopping therapy. Going shopping because you are depressed or bored is every bit as stupid as going to the grocery store when you’re ravenously hungry (if you can’t live without shopping therapy, see #6 above). Cash Management Idea #11: Do not confuse frugality with poverty. As the poet McZen said, “broke is a state of wallet; poverty is a state of mind.” I’m not taking about taking all of the fun and joy out of your life, but rather advising that you make choices consciously with full understanding of the long-term implications of each one. The Top-12s from True Wealth – Your Values and Your Money Page 8 of 18 Cash Management Idea #12: Increase your giving. This is one of the great cosmic paradoxes which has been proven out time and again, that as you increase your giving, it eventually comes back to you greatly multiplied. The Top 12 Values-based Investing Strategies Investment Strategy #1: Use dollar cost averaging with automatic withdrawal. This means that on a regular basis (say every month) you invest the same amount of money in an appropriate investment vehicle, such as a mutual fund. Let’s say it’s $100 a month: when the market’s up, you invest $100; when the market’s down, you invest $100. Over time, you will make more money this way than investing $1,200, even if it’s done at the beginning of the year. Using automatic withdrawal so that you never see the money removes the temptation to skip a month (and perhaps miss one or more of those top days mentioned above). Investment Strategy #2: Use no load index mutual funds. These are funds that do not charge a sales commission, and are not aggressively managed to try to beat the market, but rather simply try to match the market. Since three quarters of all managed funds actually do worse than the market, this turns out to be the most reasonable approach for the average person who is not a sophisticated investor. Based on endorsements from people as diverse as Warren Buffet and Geoffrey Colvin (senior editor at large for Fortune magazine), the only specific investment advice in True Wealth is that the Vanguard corporation has the highest reputation for integrity in the mutual fund industry – and it is among the lowest cost. Investment Strategy #3: Be patient and don’t panic. I’ve already mentioned that watching Warren Buffet invest is like watching paint dry. Study after study has shown the financial payback of long-term investing. Likewise, the ability to not panic is essential to investing success. In Ric Edelman’s book mentioned in the bibliography, for example, he shows how several days after most traumatic world events the stock market is substantially down, yet one year later it is substantially up even before pre- event levels. In other words, people who sold out in a panic lost big time. Investment Strategy #4: Invest in what you know, and know in what you are investing. People in Dallas are disproportionately likely to invest in Dell, while in Minneapolis they invest in Medtronic. This is the Peter Lynch factor I discuss in CD #1 of True Wealth – that anyone can make money in the stock market by paying attention and investing in what they know. Likewise, it is important to know what you are invested in. For example, if you own shares in a mutual fund you could be at higher risk than you know if the mutual fund manager is investing in high risk stocks. The Top-12s from True Wealth – Your Values and Your Money Page 9 of 18 Investment Strategy #5: Be clear on your own risk profile and preferences. The greater the expected return, the more likely it is that there will be more risk. One of the biggest mistakes investors make is not being clear in their own minds how much risk they are willing to take. This results in the classic self- sabotaging behavior such as that of the doctor who saved prudently for decades, only to be wiped out by investing in a high-risk “sure thing.” Investment Strategy #6: Get help. You can find an incredible array of financial advice, ranging from the excellent to the dreadful. This includes hundreds of books and magazines, information on the internet, and professional financial planners, advisors, and brokers. Two important first steps when selecting an advisor are to check references and to be clear upfront about potential conflicts of interest (such as advisors who earn commissions by selling you products – not necessarily a bad thing, but certainly something to have a clear mutual understanding about from the very beginning). Investment Strategy #7: Never take a flyer. If it sounds too good to be true, assume that it’s too good to be true. For more on this, listen to the track about avoiding scams and rip-offs on CD #4. This includes an interesting after-the-fact analysis of an internet promotional scam. Investment Strategy #8: Reinvest everything. Reinvest all interest, dividends, and distributions, and beyond this any other windfall such as inheritance, year-end bonus, or other unexpected income. Investment Strategy #9: Once you have the basics taken care of … credit card and other consumer debt paid off, an emergency cash fund for 3-6 months of living expenses, and other expenses under control, consider using an appropriate percentage of your investment funds (perhaps 5-10%) to purchase individual stocks. For example, if you think that Amazon.com will be the Wal-Mart of the online world, you might invest in this. NOTE: This is not specific investment advice! However, if you want to invest in individual stock, the Fortune magazine article referenced in the bibliography with Ten Questions for Investors is a good place to start. Investment Strategy #10: Invest in a small business. There are thousands of possibilities for low-cost, low-risk part-time businesses that could yield very attractive returns, both emotionally and financially. These include internet business, self-publishing, multi-level marketing, consulting, and many others. Investment Strategy #11: Invest in yourself. Instead of watching TV, take night classes, read the Wall Street Journal, listen to the True Wealth CDs, and anything else you can do to enhance your financial literacy. The Top-12s from True Wealth – Your Values and Your Money Page 10 of 18 Investment Strategy #12: Plan on living a long time. Spark Plug PLUS member Jim Seifert is a financial planner and wealth manager. He advises his clients to plan on living to the age of 102. The Top 12 Concepts from 12 Great Books Being in business is not about money, it’s a way to become who you are. (Paul Hawken: Growing a Business.) Money is something you trade your life’s energy for. (Joe Dominquez and Vickie Robin: Your Money or Your Life.) A dream moves closer to reality when you put numbers on it. (Bob Proctor: You Were Born Rich.) Treat money with respect and it’s more likely to flow into your life. (Suze Orman: Nine Steps to Financial Freedom.) Put together a ‘master mind group’ to brainstorm about important business, career, and financial issues. (Napoleon Hill: Think and Grow Rich – NOT Grow Rich and Think!) Pay yourself first – invest 10% of everything you make, which can be readily done by reducing your expenses by that amount. (George S. Clason: The Richest Man in Babylon.) Track every dime that comes into or goes out of your life for at least a month, because not having a handle on money flow can be an incredible source of fear and cause self-sabotaging behaviors. (Jacob Needleman: Money and the Meaning of Life.) Income statement millionaires are people who make a lot of money and spend it on big houses and flashy cars, but live paycheck to paycheck; balance sheet millionaires are people who might make less money, but invest in real assets instead of rapidly depreciating status symbols. (Thomas J. Stanley: The Millionaire Mind.) Rethink your definition of an asset: your home is not an asset until you sell it, before which it is a source of expense. An asset is something that generates cash flow. (Robert Kiyosaki: Rich Dad, Poor Dad.) Get the biggest home loan you can afford over the longest time period possible, and invest the money you’re not spending on paying off that mortgage more quickly into more liquid mutual funds, stocks, or bonds. This will give you the greatest flexibility in the event of a downturn, such as economic recession or you loosing a job. (Ric Edelman: Financial Security in Troubled Times.) Worry is a money repellant; an abundance mindset always precedes affluence,, not the other way around. (Richard Carlson: Don’t’ Worry Make Money.) The reason to increase your standard of living is so that you can increase you standard if giving. (Charles Ross: God’s Plan for Your Financial Success.) The Top-12s from True Wealth – Your Values and Your Money Page 11 of 18 Appendix 1 Facts on America’s Credit Card Debt I am seriously alarmed… … by the implications of what Robert Manning, in the subtitle to his book Credit Card Nation, calls “America’s Addiction to Credit.” Here are some sobering facts: The typical American household has nearly $9,000 in credit card debt spread across an average of ten different cards. This typical family pays over $1,000 per year in interest and finance charges on that debt. As one financial expert put it, “people are spending money they don’t have to buy things they don’t need to impress people they don’t know.” Adjusted for inflation, the average family’s total debt increased by 46% between 1990 and 2003. Much of this new debt is in the form of home equity loans taken out to pay off high interest credit card debt. Unfortunately, many of these people are running up their credit card debt back up to the previous levels, and are now at increased risk of losing their homes (for example, should a job fall through). Our national savings rate has dropped to near zero (lowest in the developed world). So not only are we spending everything we make, we are borrowing to spend even more – to the tune of $1.7 trillion (yes, that is a “t,” not an “m” or a “b” in front of the “rillion”). The great tragedy is that compound interest – which we should have working FOR us – is now working AGAINST us. Financial planning experts tell us that 9 of every 10 baby boomers are not saving adequately to fund anywhere near the type of retirement to which they aspire. And as a nation of spenders and borrowers, we are creating an enormous collective debt that is likely to become a hideous problem for our children’s generation – who will be called upon to pay that debt. One of the main culprits is that our definition of “essential” is expanding faster than our income is growing, and we are financing the gap with “plastic surgery.” Things that didn’t even exist within recent memory – microwave ovens, CD and DVD players, cable television, cell phones, internet connections, bottled water, low-fat lattes, family nights in Las Vegas – these thousand little things are being purchased “on credit,” adding a continuous infusion of new plastic straws (credit card charges) to the backs of our already overburdened financial camels. People can use credit cards responsibly for years, paying off their balances every month and even getting rebates or frequent flyer miles, but when a misfortune such as losing a job or serious medical problem comes up, end up using credit cards as their “safety net.” As a consequence, they accrue debt that grows at 20% or more every year. I’ve worked with people who are paying all they can pay every month, The Top-12s from True Wealth – Your Values and Your Money Page 12 of 18 and are still seeing their total debt increase each month because finance charges are being added at an even faster rate. For every “success story” of a start-up business that was bootstrapped on credit card debt, there are dozens of horror stories of businesses that are saddled with crippling high-interest debt that precludes investment in product development and marketing. The business owners are typically on the hook personally for these credit card debts, and many have lost everything as a result. We have become a nation of suckers for what appears to be a free lunch, but is in fact is a very expensive room service dessert. As just one example, for years General Motors has been offering “zero percent” auto financing, yet nearly 100% of that company’s profits come from finance charges on new car sales. One study showed that fully 88% of people who buy things “90 days same as cash” end up converting to debt payments at 25%-35% interest rates. We are raising a generation which lacks any genuine understanding of the link between working for something and getting it. Several years ago, Sony promoted its Citibank card with an ad asking the question, “Who says hard work never killed anyone?” The answer was: “Some dead guy.” The ad went on to position the Sony card as “the official currency of playtime.” Credit card ads play on our basest desires and guilt feelings. As just one example, the ads encouraging fathers to charge an expensive wedding for their daughters on a high-interest credit card by calling it “priceless” neglect to point out that it could also leave you penniless (and in many cases, has). Today’s number one target market of credit card companies is children, and these dreadful campaigns are working. The average college student has nearly $2,000 in credit card debt – on top of his or her school loans. I’ve seen too many horror stories of students who begin post-college life with a level of debt from which they have no realistic hope of escaping in anything like real time. Credit card debt (and threatening tactics of collection agencies that go after credit card holders when they fall behind on payments) is the #1 factor cited in personal bankruptcies, which last year exceeded 1.5 U.S. million households. Americans today declare bankruptcy at ten times the rate during the worst year of the Great Depression. The credit card industry (where executives refer to people who pay their bills on-time without running up finance charges as “deadbeats”) has pushed legislation to make it even more difficult for people to escape credit card debt through bankruptcy. The fastest-growing segment of the population to declare bankruptcy, however, is not real deadbeats; it’s single woman struggling just to get by. The median annual income of people filing for bankruptcy protection in 1998 was just $22,000. The Top-12s from True Wealth – Your Values and Your Money Page 13 of 18 Credit card debt is a major factor in many divorces (and in making many of those divorces so bitterly contentious). Although we have an unprecedented standard of living (for example, the average home of today is more than one-third larger than those of the previous generation), surveys show that the gap between what we have and what we think we want is actually increasing. So the problem of credit card over-extension is probably going to get worse before it gets better (assuming the financial roof doesn’t cave in first). The most terrible influence of credit card debt is its baleful impact on our values and moral character. This effect is so insidious that we’re often not even conscious of it. We are participants in the most grossly materialistic and self-centered culture since the late Roman Empire, but we rarely stop to think about the overarching moral questions when we slap our plastic down to buy the latest of life’s “priceless” necessities with money that as a result is not available to invest for retirement – or to contribute to helping others who are lacking the genuine basic necessities. I have recently started asking my speaking audiences for a show of hands by people who have a problem with credit card debt. Especially considering the fact that some are too embarrassed to publicly admit it, I’m appalled by the number of hands that go up (well over half in every case). The first step to overcoming an out-of-control addiction is to acknowledge the problem in the first place. I fear that at some point in the not-too-distant future there will be a reckoning. You and I might not be able to prevent that reckoning from occurring at a global level, but we can each take effective action to protect ourselves and our families from its worst impact. There’s a classic old song that says, “tomorrow never comes.” Well, tomorrow will come. I hope you will be ready for it. “Millions of Americans today are in serious financial jeopardy because they have confused, and continue to confuse, borrowing capacity with spending capacity.” -- Joe Tye My immediate advice to you is to… 1. Cut up your credit cards. All of them. Right now. Instead, use a bank debit card, which will not allow you to borrow from tomorrow to pay for yesterday. I have not had a credit card for over three years (and never will again). I travel extensively for my business, and have virtually no problems checking into hotels, reserving airline tickets, or renting cars (through Budget Fast Break) using my bank debit card – so long as there is money in the underlying account. 2. Stand in front of a mirror and forcefully repeat the following: “Read my lips: No New Debt! If you need to buy a car, save enough to pay cash for an old clunker if you can’t afford to buy a good used one outright. Remember, zero percent is not zero percent, and there is no free lunch. The Top-12s from True Wealth – Your Values and Your Money Page 14 of 18 3. Be a status contrarian and stop spending money on things you really don’t need. Thomas J. Stanley, author of The Millionaire Mind, has studied thousands of self-made millionaires, and found that they buy used cars, knowing that spending good money on a new car that will depreciate 20- 30% when you drive it off the showroom floor is financial idiocy. 4. Teach your children the virtues of frugality and saving. Above all, pound into their little heads that they are the number one target of what Dave Ramsey calls “immoral” marketing programs of credit card companies; that the only reason they might need a credit rating is so they can borrow even more money; and that “stupid” is far too kind a word to describe someone who borrows money at 18.9% to pay for clothes and computer games. The Top-12s from True Wealth – Your Values and Your Money Page 15 of 18 Appendix 2 The Real Cost of a TV Set Retail Price $ 1,000 Sales Tax $ 50 Credit Card Interest $ 433 Actual Cash Outlay $ 1,483 Additional Earnings Required to Replace Cash Outlay $ 742 Cable/Satellite Connection $ 2,400 Incremental Consumer Spending $12,000 Foregone Investment Income, 4 years $ 4,051 Total Cost, Four Year Life Cycle $20,676 Monetized Value of Time Spent Watching TV $24,585 Total Cash, Opportunity, and Time Cost $45,261 Television versus Mutual Fund as Investment for Retirement (excluding additional consumer spending and time cost) Television Mutual Fund 1 $600 $ 1,846 2 400 2,318 3 200 3,151 4 50 4,051 20 0 25,863 The Top-12s from True Wealth – Your Values and Your Money Page 16 of 18 Appendix 3 How Much for a Coffee Break? $5 a day $10 a day $20 a day Year 1 $ 1,898 $ 3,796 $ 7,592 Year 2 $ 3,948 $ 7,895 $ 15,791 Year 5 $ 11,135 $ 22,682 $ 44,539 Year 10 $ 27,495 $ 55,597 $109,981 Year 15 $ 51,535 $103,961 $206,138 Year 20 $ 86,856 $175,022 $347,424 Year 25 $127,611 $279,435 $555,019 Notes: Assumes 8% annual interest earnings. Since historical stock market returns average 12%, this is conservative. Assumes that the daily amount saved was foregone cash expenses; if credit card interest is involved, savings would accrue even faster. Financial advisor Jim Seifert advises his clients that for retirement planning purposes, they should assume a life expectancy of 102 years, so it is never too early to start and it is never too late to start. Things I can do to save ($5, $10, $20) per day: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. The Top-12s from True Wealth – Your Values and Your Money Page 17 of 18 Appendix 4 Recommended Books on Personal Finance and Money Management Andy Mayer: Where Does All the Money Go? – a helpful little handbook (costs $3.95) for tracking expenses. Jerrold Mundis: How to Get Out of Debt, Stay Out of Debt & Live Prosperously – uses the principles and techniques of Debtors Anonymous to help you manage overwhelming debt. Joe Dominquez and Vicki Robin: Your Money or Your Life – a very human and spiritual approach to gaining a new perspective on money and its role in your life. Ric Edelman: Financial Security in Troubled Times – written in the wake of 9/11, offers eight specific action steps for insulating your finances against the turbulence of the world. Thomas J. Stanley: The Millionaire Mind – whether or not you are a millionaire, or even aspire to being one, this book outlines the habits of self-made millionaires that can help anyone do a better job of managing their money. Eric Tyson: Personal Finance for Dummies – an excellent overview of basic personal finance, and despite the title, there is nothing dumb about this book. Tyson is also author of Investing for Dummies, also highly recommended. David and Tom Gardner: The Motley Fool Personal Finance Workbook – more than just a workbook, a real guide to getting a handle on your money. Dave Ramsey: The Total Money Makeover – Ramsey is also author of More Than Enough, and has a down-to-earth philosophy that the world needs more of today. David Bach: Smart Couples Finish Rich – this can be a great book to help head off one of the leading causes of divorce – money troubles . Back is more recently author of The Automatic Millionaire. Suze Orman: The 9 Steps to Financial Freedom – this book can really help you think about money in a more responsible and realistic way. Orman has a number of other books and a financial planning kit in bookstores. Richard Carlson: Don’t Worry, Make Money – despite the rather tacky title, this book does have some good suggestions on how to reduce expenses and increase income (by the author of Don’t Sweat the Small Stuff). Charles Ross: God’s Plan for Your Financial Success – a Biblically-based approach to money management, though much of the advice is comparable to that in secular books on the topic. Robert T. Kiyosaki: Retire Young, Retire Rich – this book (by the author of Rich Dad, Poor Dad) is definitely not for everyone, and contains very aggressive The Top-12s from True Wealth – Your Values and Your Money Page 18 of 18 advice concerning debt leverage that is appropriate for very few people, but this book can help you identify mental blocks to your own prosperity. Also good in this regard are Bob Proctor: You Were Born Rich and Mark Victor Hansen: The One Minute Millionaire. George Kinder: Seven Stages of Money Maturity – a more philosophical treatise on the role of money in life, which includes strong reliance on Zen wisdom. Janice Revell: “Ten Questions Every Investor Should Ask Before Buying a Stock,” Fortune, December 22, 2003. Katrina Brooker: “Just One Word: Plastic,” Fortune, February 23, 2004.
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