Saturday, July 31, 2010

Tier 3: Debt Reduction

This seems obvious but a lot of people tell me they will start investing when they get out of debt. All debt should be eliminated as soon as possible, especially short term obligations (everything but mortgage & student loans). However, it is important that you put your family first; both their present situation and future. It's a principle I call Pay Yourself First. After paying yourself, and God tithing, you can use what's left to pay down debt. I want to emphasize AS FAST AS POSSIBLE. If this mean you'll be eating rice and beans for a couple of years so be it. Maybe you can't handle just rice and beans, but Roman Noodles are cheap and so is pasta. Many soups can be made very cheaply as well. The point is that you won't be eating out, you won't be buy pre-made dinners or name brand anything. If you can put off buying something, put it off. It won't be easy and I never said it would be, but it will be worth it. It's time to separate the men from the boys, the rich from the poor, etc.

As far as debt settlement, consolidation, etc. Be very weary of any program you find because there are a lot of companies that prey on the weak and desperate. They'll show you what looks like a way out, and it may be, but not necessarily the easiest or fastest. Any kind of settlement, consolidation or bankruptcy will not change behavior. It will only mask the symptoms. If you cannot change the behavior that got you into debt then any program like this is worthless. If you don't think your behavior got you into debt, think again. At minimum you were not saving enough into an emergency fund to avoid debt. Just think about where you went wrong and try to learn from your mistakes.

0% interest. I know it's tempting. Especially when you need a car for work. I am even tempted when the dealer offers me an amazing deal on the jeep of my dreams. Avoiding is done for many more reasons than just avoiding interest costs. Debt is literal imprisonment. It creates an obligation that must be met and is trades for freedom. Instead of working because it right or you enjoying it, you end up working because you have to. I know people that were severely underpaid, but were too afraid of not being able to meet their obligations in order to search for other employment. Debt also creates risk. If something goes wrong the debt snowball can roll the wrong way and before you know it you're in a whole world of hurt. That 0% can easily turn into 12% when you miss or are late on one payment. Suddenly your payment has doubled so has your obligations.

Even mortgages and school loans need to be eliminated as soon as possible. Yes you can probably get a rate of return somewhere else that's high enough to offset your interest costs, but life is not a mathematical equation. Even those long term obligations enslave you in a way you don't know until you're free. Being debt free empowers you to make bold decisions that lead to success.

Friday, July 16, 2010

Tier 2: Protection

As I spoke before the first part of a building that has to be built is the foundation. Can you imagine if someone started building the walls to their house without a foundation. What if someone moved into their house before the roof was built? Can you imagine what would happen to their stuff when a storm came? Financially speaking a person's nest egg is the stuff they move into the house. But a nest egg isn't just a chunk of money. It's all their hopes and dreams, everything they want for the future. So even though they are moving into their dream house, they still have to wait for the foundation to be built, and they have to wait for the roof to be completed.

Tier 2 is the roof to our building. Protection includes auto insurance, home owners insurance, property insurance, life insurance, disability insurance, health insurance and any other type of insurance that may apply. The fact is few of us get through life without a little bad luck, and some of us have a lot of back luck. Instead of crossing our fingers and hoping nothing happens why not prepare for it?

When an unexpected event happens that causes a liability, it is absolutely essential that the proper protection is in place. If the proper insurance is not in place, assets are used to pay the liability that is created. With decreasing assets it also puts a strain on the family's cash flow.

You might say, but I won't become disabled, or I'm young I won't get cancer. I met a 22 year old man yesterday that is disabled for life because of a car accident. I have family and friends that both contracted cancer before the age of 23. Life happens. But when you are young, you feel invulnerable. As you get older you will understand that you are not invulnerable. I simply hope that you take the proper steps to protect your hopes and dreams from the rain.

Tuesday, July 6, 2010

Tiers of Investing: Tier 1

How many people do you know who have a 401k or IRA? Almost everyone right?! Would it surprise you to learn that I do not have either of these accounts. I don't even take advantage of the matching through my employer. The reason why I choose not to contribute to either of these accounts is NOT because I financially am incapable. It is because just like in construction there is a certain order in which you must build, in investing there is a proper order in which you should invest. Investing out of order is like building out of order. No one would start building the walls to their house before the foundation is built. At the same time no one would move into their house before the roof is built. Can you imagine what that would be like. Yet every day millions of Americans build their investment walls with no foundation and move into their investment house without a roof. Then financial storms rain on their nice things inside, and financial earthquakes come and knock down their financial house. Then they are left wondering what happened.

Tier 1: Savings

The first place someone should invest is in themselves. You should always pay yourself first. Even if you have some debt, pay yourself and then your debtors. It is important that you stay out of debt, but without any savings unexpected expenses will come along and create debt or exasperate debt you already have. Especially if you are working to eliminate credit card debt, and you have cut up all your credit cards. If you don't have any personal savings and your car breaks down you can put yourself in quite the bind. A good amount to shoot for is 3-6 months of your expenses. The following are tips to help you save the way you should:

1. Create a budget (shoot for 50% needs, 30% wants, 20% savings, but everyone is different)
2. Save 10-20% depending on circumstances (i.e. debt & other obligations)
3. Make it automatic (automatic transfers)
4. Treat it like a bill

The other question is where to put your savings. Good savings must be liquid, safe and consistent. What ever you do, do not put your savings into a normal savings account. My savings account at Wells Fargo pays .01% each month which means I earn an APR of about .12%. That's nothing. However there are online banks like ING that pay almost CD rates. Right now their savings account is paying an APR of 1.1%. That's almost 10 times Wells Fargo! (Email me @ and I'll give you a link for a $25 bonus with a new account. I will not add your email to any mailing list or share it with anyone). There are other options. I help a lot of my clients set up automatic savings plans that pay 4-5% annually. You can email me if you want more details on that as well.