The attorneys I can understand as profiled in the Millionaire Next Door.  They can be under pressure in their field to consume, wear and exhibit high-status artifacts.  Whether they have the means to do so or not is irrelevant.  

Now, college professors on the other hand is a different story.  My inclination is to believe they are so educated in their chosen field or area of research that they may not have learned basic money skills.  If you think about it, a college tenured position is recession-proof, layoff-proof and has nearly guaranteed annual raises.  A professor may be inclined to have no fiscal restraint in tough economic times because he or she knows a pay increase will be coming each year regardless of the economy.    The longer you are in that “ivory tower” environment the less knowledgeable you become on the perils of high-interest loans and spending more than you make.  

My experience in meeting people in life is that advanced formal education although generally helps your money skills, it’s no surefire way to accumulate wealth.  As a matter of fact, for most college graduates the degree itself is initially a significant hindrance to the graduate early in life.  Also, I have met plenty of business owners who exceled financially with no college degree and barely any other formal education.  

Bottom line:  formal education is no guarantee of financial success.

Accounts receivable funding firm:

We will help you if your business is…..Fast Growth, Startup, Financial Loss, Seasonal.   (sounds like companies with a solid future to me!)

We offer unlimited A/R funding, No Financial Covents, Advances Up To 90%, Free Credit Checks

Our approval process has NO financial statements needs, NO dependency on personal credit, NO normal three years of tax records, NO lengthy approval process, NO denial for IRS problems, NO denial for tax liens.  (sounds like they don’t say NO to anybody!)

Now, of course they paint traditonal banks as the enemies of small businesses with all of their requirements, paperwork, risk assessment, yada yada yada.  

So, let me summarize:  Accounts receivable funding firms apparently will loan money to anyone who claims to own a business.  A quote from Wikipedia’s definition of this practice (called factoring) says this:

Factoring is a method used by a firm to obtain Cash when the available Cash Balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs.

A method to obtain cash when the cash balance is insufficient to meet current obligations.  Well, yeah.  That’s pretty much what a loan is, no?  A loan is what you get when you have no money.  Duh.  But here’s the rub with the firms that offer this “factoring” or accounts receivable loans.  The fee structure is exorbitant.  They take 10% (or more) right off the top of your outstanding accounts receivable.  Then they pay you back the the remaining 10% based on how much they collect from your debtors.  Less any of their fees, of course.  Now, what’s the incentive for the factoring company to lower that 10% to 8% or 5%?  If I’m the owner of that factoring company, I’m thinking “um, we tried to collect from your clients but they were down on hard times.  We weren’t able to collect back that 10%.”  These folks get a 10% return on their loan to you nearly right off the bat.  

But wait, it gets better.  The Wikipedia article goes on to say that the risks of this industry include fake invoices (by the loan applicant), direct payments to the loan applicant from his customers (without telling the factor company) and clients being billed twice (once by factor company and once by original debtee).  This sounds like a recipe for disaster to your business.  

What is the solution to this need for cash by small businesses?  It’s the exact same one I’ve preached to you on this blog for years – keep large amounts of cash in the bank.  If you want to stack the odds of business success in your favor, pay cash for as much as possible and stay away from these awful loans.

Just like a store that sells products and keeps them on the shelves with an inventory, car dealers are no different.  Basically, all of the cars you see on their lot is their inventory.  And just like other retailers they buy the cars from Honda, GM, Toyota or whomever and then sell them at a profit.   So, how can a dealer possibly make a profit on a car they just sold for “factory invoice” meaning the price the auto manufacturer charged the dealer for the car?  Well, here’s how.  Dealer incentives.  When General Motors notices one of their latest models is not selling very well, they give the dealers “incentives” (i.e., cash rebates to the dealer directly) to start unloading these vehicles.  GM may charge a dealer $19,000 for a new Chevy Malibu.  Let’s say in a slow economy that dealer is having a hard time selling those Malibus for much higher than $19,000.  What does GM do?  They may send the dealer $3,000 per Malibu sold just to jump start their numbers of that model.  Dealer paid $19,000, sold it for $0 profit but received $3k back from GM and the consumer thinks he got the car at “dealer invoice” price.  Everyone here is a winner, right?  Wrong.  GM, as usual, is the financial loser here.  By giving back that $3,000 to the dealer they may have actually lost money on that car.  So now you can see why General Motors has been in such a financial quagmire for so long.  

In addition to the car company incenting the dealer to sell those cars, the dealer and/or the car company often give cash back, 0% financing or other perks to the consumer directly.  Why is this?  It’s because they will always have a continual need to sell model-year cars.  Do you really think GM gives cash incentives to dealers to sell used cars?  Of course not!  The car companies are always under tremendous pressure to hit certain sales figures per year.  Why do you think the Ford Taurus and Honda Accord battled so long for the title of “best selling car in America”?  That whole thing was a sham as well because Ford included fleet sales to car rental companies in their sales figures and Honda doesn’t even sell many to rental companies.  

So the next time you or a friend think you just got a steal by getting a car at dealer invoice, think again.

The more transactions you put on your card per month (and especially the more dollars on the card per month) the more likely the store is to make extra profits when and if you don’t pay off the balance each month.  Now, hopefully most readers of this blog pay off the cards each month or, better yet, don’t use cards at all.   But if you are in the majority of consumers who do not pay their cards off each month, happy days for Kohl’s!  They also know the age-old Las Vegas secret that not seeing your actual green money leave your wallet drastically increases your odds of spending it.  Kohl’s isn’t stupid, folks.  I have not even read Kohl’s annual report to shareholders, but I guarantee the credit card division is among the most lucrative division of the whole company if not more profitable than the whole company itself.

So, the next time you consider opening a charge account just for the initial 10% off your first purchase remember….if you play with snakes, eventually you’ll get bitten.

Well I’m here to tell you that that college loan debt is crippling your ability to accumulate wealth.  One of the best financial advice quotes I have ever heard is “it’s not how much you save, it’s how long you save.”  The 22-year-old can begin saving $100 a month and stop at age 30 whereas the 30-yr-old can start at age 30 saving that same $100 a month and NEVER catch the 21-year-old’s snowball growing into a avalanche of cash by retirement.  

Other money moves that a recent college graduate should not do include:

• buying a brand new car (this will absorb a decent portion of your precious new income from your first job)
• financing new furniture or electronics for your apartment
• charging up big clothing bills

Many students take the attitude that “I worked so hard in college I deserve this purchase.”  Well, guess what?  You don’t deserve that purchase.  Is there really a time when you are allowed to make bad money decisions?  Going into debt right when you are starting out in life is not a good time to go into debt.    Frankly, I cannot think of any good time to go into debt.

Develop a game plan to pay off the typical ten-year student loan in half the time or even sooner.  You’ll get a huge jump on accumulating wealth very early in life.

• had more credit cards (we have none)
• had more balances on those credit cards (no cards = no balances)
• had any other consumer loans over the past recent years (we have none)
• had borrowed money more regularly

I completely understand how a FICO credit score works.  The lender needs to see some kind of track record showing how good you are paying back your loans.  Who wants to take a risk on an unknown quantity, right?  I guess what really sunk in for me was how completely obsessed society is with debt.  This credit score would have been higher had we swam with the sharks more often.  This in itself is almost a paradox.  Put more risk to your credit score by financing more purchases and it will go up assuming you pay them in full all the time.  However, if you put more spending on credit your actual risk of paying it back is higher.  So, by risking your credit score more it could go up…or down!  Sounds like gambling to me and that’s why I continue to strive to reach a FICO score of zero.

You know you have a problem in convenience stores if

• The clerk knows you by name
• You buy your beer there….by the can
• You buy your saline solution there
• You go there more than twice a week
• You are there on lottery day
• You do “mini grocery shopping” there

If you find yourself doing one or more of the above items then perhaps you should read The Cost of Being Unorganized

1. After God, my family is the most important thing in my world.  Subtract your money, house, career, health and “stuff” and tell me what you have left.  I still have everything I need when you take those five things away.  Actually, not much changes for me when you take all of those away.
2. Your kids really don’t care one bit about that big promotion at work.  Your kids don’t care about a $10,000 raise.  Or a $20,000 raise.  Or a $50,000 raise.  I am 37.  I have never met a person whose favorite childhood memory was their parents buying a bigger house.  Or their parents getting a new Lexus.  Or a vacation to Hawaii.  I enjoy all of those things.  But they do not matter at all to your kids.
3. A college degree is no guarantee of career success in this world.  A mere high school diploma is no guarantee of lower career success.  One increases the odds of financial success.  One increases the hours to reach financial success.  I know a man who completed his four-year degree at age 37.  I am 37.  He spent 15 years completing that four-year degree.  He took one class per semester.  Slow and steady wins the race.  He had a wife, three kids and a house on a large property to maintain.  He did not complain.  He was the lowest paid employee in his department.  If you continually do more than you are paid to do, eventually you will be paid more for the work that you do.  Where is my friend now?  He is the boss of that same department.  He has 20 people working for him.  He says he is the most financially successful of his six other siblings.  When the previous manager was asked who should replace him, he replied “Eric is my number one choice.  Numbers two and three are so far down the list they should not even be considered for this promotion.”  Eric didn’t care what people thought of him.  He still doesn’t.
4. Why is it that I have met near-genius-level people whose personal lives are in shambles?  They cannot manage money, marriage, family or career.  These people have IQs nearly twice mine.  Are they smart?  No, they are not smart.  They know mountains of information about everything, yet they know nothing about life.
5. At the end of the day and the end of your life, all that matters is your relationships with those you love.  See item #1.  Take away all the peripheral “stuff” in your life and who loves you?  Do your kids love you?  Does your spouse love you?   If you and your family had to sleep on park benches at night, would your relationship change?  Do you make your loved ones happy by buying them “stuff” or buying time with them?  Quality time is a term created by those who have no time.  It’s the quantity of time that matters.
6. If you take parenting seriously, it’s hard work.  If you have to bribe your kid to do something you have a problem.  I do not believe in “choosing your battles” because that is a cop out.  Consistent rules and consistent behavior get consistent attention from your kids.  If you scold your child for lying about his homework, but then have that same child tell the phone caller you are not home, you have a real credibility problem.
7. “When I was a boy of fourteen, I was embarrassed to have my father around.  By the time I turned twenty-one I was amazed at how much the old man had learned.” – Mark Twain. I am still not smarter than my dad.  I am 37.  He is 62.  Every time I think I know more about a topic in life, he proves me wrong.  Just when I think I have him figured out, I learn what shaped him to think that way.  It was not at all what I thought I knew.  I would not change one thing about the childhood he gave me when I was growing up.
8. My mom should be part of the Greatest Generation, but she’s stuck in Baby Boomer clothing.  She is 60.  She does not complain about anything to me, ever.  She is not a whiner.   She has held the two most important jobs on this planet.  She ended one at 37 and began the other at 37.  I am 37.  My mom ended the job of stay-at-home Mom to begin the job of school teacher.  My brother and I now realize that she chose to give us that life because it was important to us and important to her.  I would not change one thing about the childhood she gave me when I was growing up.
9. My brother had more major life experiences in a few years than most of us have in one life.  I had originally typed all the up and downs of his life in his 20s, but I’ll let him share that with you should he choose.  From his 20s to his 30s, he found a solid career.  He found money.  Plenty.  He found religion.  Plenty.  He found himself.  And best of all he found love.  Now, that he’s found love he can see steps #1 and #5.  And I need to find myself writing one amazing best-man speech for his wedding in eight months. 
10. The difference between optimism and looking through rose-colored glasses is that the latter becomes the former if you do it long enough.  Whoever came up with the expression “rose-colored glasses” must have been a pessimist.  People say that because they are frustrated that the person keeps seeing everything in life in a positive way.
11. Breaking off an engagement is much easier than breaking off a marriage.  Two of my childhood neighbors are each experiencing one of those right now.  One got hurt before decades of marriage, one after.
12. If you say someone’s name enough times while passing them, eventually they will learn yours.  Sometimes they ask your name instantly.  Sometimes it takes longer.  I once said “Hi, Amy” to a woman in my office for three years before she finally said “Hi, Matt.”  That is a lot of fun.  I guess I can make people want to learn my name.  It’s exactly like the first chapter of How to Win Friends and Influence People.  Dale Carnegie was right.  A person’s name is the most important thing in the world to them.
13. Working for a bad boss can make your life a real pain.  Of the bad bosses I’ve had, all were divorced and had very few friends.  Is that a coincidence?  Maybe, maybe not.  If you don’t care about the careers of your employees, you should not be the boss.  If you have never exercised compassion or care for your employees you should not be the boss.  If you have lied to advance your career or to hurt your employees, see step #5.  If you are stuck with a bad boss for more than 12 – 18 months, it’s time to change jobs or talk to the bad boss’s boss.  Well-run companies let their managers spend 25-50% of their time developing the employees.  I had one boss for three years who spent 0% of his time developing his employees.  He has since been been demoted from manager back to employee.
14. You are wasting your time if you are dating someone you would not marry.  In a healthy dating relationship the ultimate plan would be to wed.  I realize it can take months or years to learn if this person is the one, but as soon as you are sure either way make the move.  Upon graduation, that’s why so many couples break up or get engaged.
15. Extroverts have it much easier in life.  I feel sorry for folks who are so shy that they cannot even say “hi” to someone in the grocery store, library or church.  I am an extrovert.  I use a person’s name every time I talk to them.  I would rather get the name wrong than use no name at all.
16. I spend around zero minutes per day worried about what you think of me.  Life is easier when you don’t care what people think.  That does not give you permission to be a jerk, but it allows you to make decisions based on your personal situation at that exact moment in your life.  I made two major life decisions in the last several years that are not popular at all.  Two major media outlets wrote up my story and millions of readers read those stories about my wife and I.  You can read both of those life decisions under the “about Matt” part of this website.  I am 37. During the next 37 years, I will probably make more decisions that are not very popular at all, but they are the best decisions for my family.
17. I believe in personal responsibility.  You are the result of how you’ve responded to the cards you’ve been dealt.  Personal responsibility defines my views on finances, politics, health and a host of other things.  Most of where you are today was your doing.  It’s not your childhood’s fault.  It’s not your parent’s fault.  It’s not your spouse’s or children’s fault.  It’s not your boss’s fault.  It’s not your government’s fault.  You are where you are today because you put yourself there.  Good, bad and everything in between.

I hope you have learned something, too.  Time for some birthday cake.

Black Thursday  (1929-1932)  340 point drop or 89% of the Dow over three years

Black Monday (1987) 508 point drop in the Dow or 22.6% in one day

September 11 (2001) 684 point drop or 7.1% the week after the attacks

As shown above, three of the largest financial crashes over the past 80 years have become less and less damaging to the U.S. economy.  Each one has become diminishingly less destructive to the overall market.  With the advent of halt-trading systems and the advancement of overreaction mitigators, the U.S. remains a very robust economy.  With some estimates at 20 million illegal immigrants, can any other country claim the long waiting list to share this great wealth?

Most economists would agree that the best politicians propose economics that are best long-term for the country, not the politician’s political party or personal career.  It is unfortunate that the U.S. is less than 50 days from a presidential election now because the politicians are spinning the causes of this economy more than a merry-go-round.  When these supposed financial disasters occur, lawmakers will throw out knee-jerk reactions such as bailouts or more regulation.  What did America’s financial system get from the September 11 attacks and a few scandal-ridden companies?  Sarbanes-Oxley financial “safeguard” legislation that arguably emasculated New York City as the world’s financial capital and transferred that title to London.

I have several thoughts about politicians who choose the bailout option for self-inflicted ill companies.  I think of judges giving multiple-DUI offenders their driver’s license back.  I think of a parent letting a child off the hook for misbehaving when he or she absolutely knew better.  How can a CEO, upper management or the board possibly learn any lesson if they are granted a “do-over” when the company implodes?  Capitalism flourishes in its purist form for one basic reason:  free markets work.  Communist and socialist economies will always fail over time because the government cannot permanently “prop up” businesses that should not be strung along.

Failure is part of the natural cycle of business.  Companies are born, companies die, capitalism moves forward. -Fortune Magazine

If I haven’t put you to sleep on this financial and economics topic, I highly suggest you check out Thomas Sowell’s Basic Economics which is the best book on economics I’ve ever read.

Why did you pay off the mortgage early?

Chris:  Intuitively, it just felt right.  For a few years there, we were a bit flush with cash, with two of us working and zero to one kids.  Looking forward, I knew eventually the economics would dictate that one of us should stay home.  I like to keep things relaxing, and counting on the market to grow our wealth while carrying debt was calculus that made me uneasy.  Maybe you can boil it down to a low degree of confidence in corporate America, which I knew pretty well.

Marta:  The plan originally was to pay off the mortgage while we still had two incomes, before our first child was born.  That way I could quit and be a stay at home mom and with the loss of income we would also have less debt.  Yes, I grew up with Depression era parents who always encouraged saving, and I’ve never liked any kind of debt hanging over my head.

How long did it take from the time you decided to do it and when it was paid off?

Chris:  It’s a bit hard to remember, but I’d guess about the 5 year mark, we started to see that we could do it if we really wanted to.  I think we had it paid off by the 8 or 9 year mark.

Marta:  I bought our first house in 1992, on just my income, even though we knew we were getting married soon.  We didn’t want to have too much of a house to pay off.  We got married in 1993, and every month put extra on the principal.  Also around that time my mom gave me a sum of money from my late father’s estate that I put on the principal and we refinanced to a 15 yr mortgage.  We continued to pay a good amount on the principal every month and in January 1998 we paid that mortgage off.  John (Marta’s first child) was born in April 1998 and I quit my job.

Did any friends or family members think you were nuts?

Chris:  There were probably people who thought we were nuts.  But if they knew me well, they knew I was nuts already.  I think after the fact when people found out (and we didn’t really advertise the fact) they’d say ‘man, wouldn’t that be nice.’

Marta:  My brother-in-law especially thought we were nuts.  He thought we should invest the money we got from the other house.  But then we would still have had a house payment.  And also he doesn’t have any kids and I tried to explain how my situation was different from theirs, and that the peace of mind from no mortgage was priceless when you want to stay at home with your three kids.  I also told him that if, for some reason, Nick (Marta’s husband) lost his job, it wouldn’t be so devastating financially.  Ultimately he didn’t understand my point of view.  My mother was very supportive, she thinks it’s what everyone should strive for, since they never had a mortgage!

Would you do it again?

Chris:  In my mind, life without debt is a better life.  So yes, we’re always going to be working to lessen or eliminate our debt load.

Marta:  I would definitely do it again.  It made it easier for me to stay at home.  And we were able to save for the kids college and retirement and just in general, because we didn’t have a house payment.  I’m very glad for my parents influence.

Themes From Their Answers

Chris and Marta touched on so many themes with their responses.  I think they’ve covered all the major topics on this blog just in one interview with me!  Debt, paying cash for things, savings, living below your means and more.  Some highlights from Chris and Marta:

“I like to keep things relaxing”  – I interpret this to mean that Chris does not like unexpected, financial disasters.  Neither do I.   By being mortage-free, few emergencies in life could really “rock the boat” too much.

“low degree of confidence in corporate America”  – I interpret this to mean that Chris or his wife could be out of a job at any random point in today’s economy.  By having no house debt, he didn’t have to worry about dragging himself into a job he disliked just to pay the mortgage.  Ultimately,  Chris did quit his job to be at home with the kids, but that’s a whole separate story.

“grew up with Depression era parents” – Marta implies that she knows the importance of living life with no debt, paying cash for purchases and other habits we learned from her parent’s generation.  Today’s youth could learn more from Marta’s parents (and Marta!) than any personal finance book anywhere.

“John was born … and I quit my job” – well how many of you out there *wish* you could do that?  Quit your job to be at home with your kids.  It’s a positive step for nearly all families that do it.  Sadly, most couples think they need two incomes to get by today.  My wife and I took a 50% pay cut for her to stay home with the kids and we never looked back.  Smartest thing we’ve ever done.

“My mother …. never had a mortgage”  – this is totally incredible that Marta’s mother never had a mortgage.  Do you hear what I’m saying!!???  Her parents paid cash for every home they owned.  That is truly remarkable.  And although it may have occurred more  in the 1930s, 40s and 50s it’s still an impressive feat.  I would not say it was a common thing to pay cash for your home then or now.

“Life without debt is a better life”  -  Chris could not have said it any better.

“I would definitely do it again” – Marta knows where she stands in this hyper-materialistic society in which we live and she still would do it again.  But, Marta, what about you driving nicer, newer cars or taking more exotic vacations?  I already know her answer:  this plan works for her – her family and financial future.

Thanks, Chris and Marta, for letting me profile you on MattHutter.com!

He filed for bankruptcy eight years ago and apparently has not learned any lessons from that ordeal.   Filing for bankruptcy is very similar to debt consolidation.  You are basically using your Get Out Jail Free card with little consequence or learning involved.  It’s like a grownup’s version of a “do over” from childhood.  With no pain involved what’s from stopping it from happening again?

On a more day-to-day note, he lives paycheck to paycheck.  Actually he does not quite make it to the next paycheck.  Once he told me how he writes himself a check for cash the day before payday.  He found an ATM that surprisingly allows funds to be withdrawn immediately after a deposit.  When money runs tight, he’ll withdraw the funds from this “deposit” to make ends meet before payday.   It gives him the much-needed cash infusion before he gets his paycheck.  Some of you might have heard another term for this act:  kiting checks.  It is classified as check fraud and playing the “float” between the time of the check being cashed and the deposit of the check itself is illegal.   In some instances, he did not make it in time and had to pay overdraft fees.  He was on the phone complaining with the bank so many times they almost knew him on a first-name basis.  If he just built up an emergency fund none of these cash shortages would have come into play.

Next,  I’ll discuss his car purchase fiasco.  He went to buy a minivan for around $20,000.  Unlike most car purchase stories, negotiating with the dealer does not even come into play here.  When he went to trade-in his old car, he learned that he was $5,000 in over his head on that one.  The dealer also somehow managed to tack on $8,000 more in an extended warranty, underbody rust protection and a bunch of other junk.  Bottom line:  he paid $33,000 for a $20,000 minivan.  This is quite remarkable.  Just on that deal alone he came out $13,000 more in the hole than needed.

If he woke up today and decided to fix his money problems where would he start?

• Make some big lifestyles changes quickly.  Sell both cars and pay cash for very cheap cars.  Or live with one car.  Driving a junker car is only temporary to get him back on the saddle.
• Cease to use credit cards – permanently.
• At each job change or pay raise, bank that money.  Do not change the lifestyle.
• Recognize that these changes today will make for a much happier tomorrow

I’ve oversimplified the remedy for his issues but the above items are great starting points for my friend to begin to enjoy that six-figure salary.

• He was Johnny Carson’s announcer for 30 years (1962-92) on The Tonight Show
• He was host of the talent show Star Search from 1983 – 1995
• He became the well-known pitchman for American Family Publishing arriving at your doorstep to announce your winnings in the sweepstakes
• He has co-hosted the Jerry Lewis Labor Day Telethon
• In the 70s and 80s he helped anchor NBC’s coverage of the Macy’s Thanksgiving Day Parade

So, in essence, he’s had more career success than many folks experience in ten lifetimes. I enjoyed watching Ed on television and I like him as much as any other regular American. However, seeing this recent coverage announcing that he’s $644,000 behind on his mortgage payments on a $4.8 million house made me wonder quite a few things. (He did break his neck 18 months before the home foreclosure problem so that certainly affected his income generating ability.) According to one source, Ed was once worth $200 million in real estate holdings in Malibu, but the same source neglects to mention one key fact: how much did he owe on that real estate? At age 26, financial phenom Dave Ramsey had $4 million worth of real estate but he owed $3.5 million on it and ultimately went bankrupt. OK, back to Ed. He peaked with a potential net worth of several hundred million dollars. He was beamed into our living rooms for over 40 years. He was arguably one of America’s best emcees and announcers and co-hosts. But when you take away all the glitz and glamor and career success he’s experienced, he’s just another Joe Six-pack getting pinched in a foreclosure mess. Although his mistakes have a couple extra zeros on the end of them in size.

Lessons Learned from Ed McMahon’s money problems

• If you have no savings, all your material possessions are useless when your income stops
• Massive financial success in your career does not guarantee financial success managing your money (see M.C. Hammer, Michael Jackson, Mike Tyson, Burt Reynolds, etc.)
• Relying on future income exclusively is not a financial plan (see Ed’s broken neck)
• Having multiple divorces destroys net worth real fast

At the end of his career and life, will Ed wish that he had done things differently? Would any of us trade his life for ours? For some, the cost of a huge income is all of the huge problems that sometimes go along with that huge income.

First of all, does Weight Watchers work over night? Do you just show up for the class and the next day you’re skinny? No, of course not. If I had to sum up Weight Watchers in one phrase it would be a lifestyle change. You are not going to be successful if you go for a “quick hit” to lose 10 lbs and then go back to your old eating habits. Debt consolidation ropes you in by tricking you into thinking “this is just what I need. A clean slate. A fresh start. One lender. One bill. Goodbye complicated life, hello simple one!” It sounds very similar to the feelings people get from filing bankruptcy. However, here’s the big question: What are the odds of you developing (or breaking) the bad habit of overspending in one fell swoop? Do you just wake up the next day and you’re cured? It’s not Nicorette gum for credit cards!

Now, let’s get a bit psychological about this. Why would a (supposed) financial company be able to help you cure your problem hundreds or thousands of miles away without ever seeing you face-to-face, teaching you good money habits or most importantly getting inside your head to fix your root problem – overspending! Your debt problems will not be cured by getting it down to one payment! Yes, they may lower the interest rates. Yes, they may get late fees waived. Yes, they may better at bullying the creditors better than you. But they won’t be getting inside your head to help you make a lifestyle change like Weight Watchers does.

A Lifestyle Change

It’s been said that to form a new habit (both good and bad) it takes approximately 21 days. That’s three weeks of exercising at 6am or reading pages from a good book daily or quitting smoking or controlling your sweet tooth daily or practicing disciplined financial habits or whatever your new habit you wish to form. A debt consolidator only helps with the debt, not the problems with the person in your mirror. Your problems with credit card debt will be gone when proper spending and saving habits have become part of your subconscious mind. You don’t even need to think NOT to buy that new, expensive electronic item at Circuit City.

Bottom line: attacking your debts, one by one, in snowball fashion, smallest to largest will accomplish far more psychologically than any debt consolidator who hasn’t even met you or seen you in person.

1) Financing: Blame Billy Durant

Billy Durant was the founder of General Motors. When the company began to really grow in the early 1900s he proposed the concept of “installment loans” to finance the purchase of cars for which folks did not have the cash. Mr. Durant created the General Motors Acceptance Corporation (GMAC) which at the time was the largest non-bank source for financing auto loans. His chief rival, Henry Ford, was vehemently opposed to the idea of installment loans and this one decision by Henry Ford cost him the lead in the American automobile industry. So, it could be argued that GM became the world’s largest company in the world partially by allowing customers to buy cars they could not afford! This speaks volumes about America’s obsession with driving cars they cannot afford – even back in 1919 when GMAC was formed. Financing a car is generally done by people who cannot afford to pay for the whole car at once.

2) Leasing:The Sacred Cash Cow of Auto Companies

Many struggling and even profitable auto companies make most or all of their profits from their financing division. Exactly like the story of Sears at one point being a finance company with some goods out front, auto companies are often in the same boat. Below are just brief snippets of recent news stories about the auto industrie’s profits:

“Ford Posts Profit as Finance Unit Offsets Auto Losses”

“DaimlerChrysler said Thursday that fourth-quarter profit rose 84 percent on gains in vehicle financing and sales of Chrysler cars…has counted on earnings growth at Chrysler, commercial-vehicle and financing divisions to more than offset declining profit at Mercedes.”

“Ford Profits Surges On Strength of Financing”

The above headlines demonstrate that these car companies are basically making products that lose money year after year, yet consumers that finance or lease through these company’s in-house leasing divisions contribute to the only profits of the companies. So, it could be argued that certain car companies only make profits from customers who lease. They do not even make money on their chief product: cars! Leasing is not only a rip-off for consumers, but it artificially inflates the profits of companies that otherwise would be going out of business if they exclusively stuck to their core industries.

Another reason that leasing is so popular is that it lets you drive a car you cannot afford. Otherwise, buyers would be stuck getting cars within their means and within their budgets which would likely be older, cheaper and less of a status symbol.

3) Paying Cash: The Epitome of Weird

How many people do you know who pay cash for their cars? I can probably count that number on one hand. Paying cash for a car is just plain weird. But borrowing or financing the car is normal, right? Who wants to be weird? Well, those “weird folks” have learned the truth about car payments. The truth about car payments is this: car dealers, on average, make $1200 on leased cars, $700 on financed cars and $72 on cash-purchased cars. Yes, you read that correctly. $72 profit on customers who pay cash for their cars. So, if you are a car salesman which financial product are you going to push?

If paying cash seems out reach for you, then ask yourself this question: have you ever missed a car payment? Has it ever been a stretch to make the car payment each month? If the answer is no, then why not discipline yourself to make a “virtual car payment” each month (say, $350 per month) even when it does not go to a real car payment. Take that cash of $350 per month, save it for 3 years and you’re at $12,600 which can buy a decent used car. You don’t spend a time on financing interest, you can negotiate better with the dealer and you reach a financial goal you set for yourself. This is something on which a price cannot be put.

The Dave Ramsey Show is a three-hour, self-syndicated radio program and podcast that airs Monday through Friday from 2-5 EST. It is primarily broadcast from Brentwood, Tennessee, though often during the summer it is broadcast via remote from Ramsey’s lake house.[2]

Ramsey takes numerous live calls on the theme of finance and, occasionally, money-related Christian philosophy as it pertains to tithing, etc. During the show, Ramsey discusses various life and money-related issues with callers. One notable difference between his and other financial shows was that Ramsey attempts to go beyond the mathematical mechanics and reach his callers through an emotional and spiritual level.

Dave is also a New York Times bestselling author and has his hand in many other financial endeavors including a 13-week course called Financial Peace University. Rather than have you listen to him for over 18 months like I have and read all of his books I will summarize each of his key points in this blog post.

1. Dave is very, very averse to debt. He has become a multi-millionaire twice. He built up a portfolio of real estate in the 1980s worth several million only to be crashed and burned literally by an act of Congress. The Tax Reform Act of 1986 began to negative affect the real estate business and he had to file for bankruptcy. He then vowed never to borrow money again. He began consuming as much information on consumer finances as he could until he eventually offered to do a radio show for free in Nashville for a near-bankrupt station. Throughout the 90s his show became popular and his books sold very well. He now preaches on the many perils of borrowing small amounts of money and large amounts. He is very opinionated, but like most successful radio hosts that stubbornness has garnered him over three million listeners. Some highlights of his views on debt:
   1. When buying a house get a 15-year mortgage with 20% down. Few Americans do this, but as Dave likes to say “why be normal? Normal is broke! We like to be weird around here!” A basic financial calculator will tell you that regardless of how much you borrow on a 30-year loan you will pay back 150% of the borrowed amount (plus the borrowed amount) over 30 years. On a 15-year loan you will pay back 66% of the borrowed amount (plus the borrowed amount).
   2. Do not use credit cards. Period. I have heard just about every single excuse you could imagine from callers on his show on why they use credit cards. They build up your credit score – nonsense! Use them as an emergency fund – nonsense! – have cash saved up instead. They are safer than debit cards online – nonsense! – what bank in their right mind would let you be on the hook for a criminal cleaning out an account run by their company! More convenient than cash – nonsense! – see my experiment with cash article.
   3. Don’t borrow from family or friends. The fastest way to ruin a friendship or relationship with a family member is to borrow money from them. The list of reasons why not to do it endless, but let’s just say you don’t want to spoil Thanksgiving dinner for the next 20 years.
2. Dave doesn’t care one iota about what you think of him. He is a guy who is comfortable in his own skin. How many times have you bought clothes, a car or any other status symbol to look “cool” for your friends? Just further re-enforce this point Dave once had a show where white-collar workers called in who took a second job as a pizza deliverer just to pay off some debt. Now, those are some folks who don’t give two hoots about what their colleagues think of them.
3. Follow his “baby steps” to get your financial life in order. They are
   1. Build up a $1,000 emergency fund.
   2. Pay off your debts smallest to largest using a “debt snowball.” Throw out conventional wisdom that says to pay off the highest interest rate first. Personal finances is 80% behavior and 20% head knowledge. Having some “small wins” paying off the little debts will build up some momentum for the larger ones.
   3. Build up 3 – 6 months of expenses in an emergency fund. This will get you through the majority of life’s emergencies.
   4. Maximize your retirement savings at 15% of your pay in 401ks, retirement plans and Roth IRAs.
   5. Invest in a college savings plan like an Educational Savings Account (ESA) or a 529 plan.
   6. Pay off your home early.
   7. Build wealth, have fun and give some of your money away
4. Pay cash for everything. This may take some convincing for many of you. As I said above, he’s heard every excuse in the book on why using credit cards is better. He de-bunks every single one of them. Dave claims (and I agree) that there is something different about the way you behave when you are debt free. When you are debt-free you make different decisions with your family, your career and your future. How many fights over money have you had with your spouse? When you pay cash, you owe no one anything. There is never a late fee, a penalty or a type on your statement when you pay with cash.
5. Dave strongly encourages personal responsibility. He gets plenty of callers asking if they should file bankruptcy. I have never heard him recommend filing for bankruptcy. He is a big promoter of “cleaning up your own mess” and “acting like a grown up” at all times. If the behavior does not change, a person who files for bankruptcy will be back in the same situation within years due to not having learned anything from the last bankruptcy. Sometimes Dave gets female callers worried that the payments on their husband’s boats or motorcycles are wrecking the family budget. He’ll mention that the man should “step up and act like a man” or “quit acting like a four-year-old in the cereal aisle” having a fit over keeping the boat/motorcycle even though it’s decimating the family finances.
6. No one ever got rich on “reward points” with their credit card. Occasionally Dave will get a caller who thinks he can beat the system and continue to charge thousands a month on a credit card, pay it off each month and reap the benefits of the points accrued. Dave’s answer consistently is that “if you play with snakes, eventually you will get bitten.” This means that there may come a time when you cannot pay off the monthly balance, the credit card company screws up or some other disaster occurs on your credit card. He often cites a Dun and Bradstreet study that claims people spend 12% to 18% more when using plastic.

Dave’s Famous Expressions

• The Stupid Tax – learning something after the fact on why it was a bad financial decision
• If you live like no one else eventually you’ll live like no one else – this essentially means that if you continue to live below your means for a long period of time you will financially “outlive” the Jones and their status artifacts like BMWs, Caribbean vacations and designer clothing. While you live below your means it is a test of your discipline, but after years of doing it you will reap the monetary fruits of your labor.
• Winning with money is 80% behavior and 20% head knowledge – this is arguably the most used line he says to callers who think they can beat the system by investing large sums of cash rather than paying off their mortgage debt. He’ll turn the tables to these callers and say “if your house was paid for would you borrow against it to invest in stocks? Of course not, but it’s the same thing.” He also uses this 80%-20% line on callers who think paying off their credit card debt by paying the highest interest cards first, then the lower interest ones is smart because the math works in favor of paying the higher interest cards off first. Consistently his answer to this is “if you were following math principles you wouldn’t have gotten into to this debt in the first place!”
• We act the same way your grandmother would….only we keep our teeth in! This advice refers to the fact that the Greatest Generation (those in the U.S. born between 1901 – 1924) worked long hours, never complained, paid cash for everything (including houses and cars!) and kept life simple with spending and saving.

Dave Ramsey is among the top tier of personal finance gurus and will continue to positively influence the financial lives of millions of people everyday.