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  He found an ATM that surprisingly allows funds to be withdrawn immediately after a deposit.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.

Lost items at work or home

I’m a Type A personality. I’m obsessive-compulsive when it comes to keeping my stuff where it belongs. As a result, I rarely lose things at work or home. Yes, it’s slightly more work putting my keys and wallet in the exact same place every night, but for me it beats the alternative. Placing items down in random places throughout the house (slippers, keys, etc) makes finding them that much more difficult. If you spend one to two minutes searching for your keys every time you leave the house plus the same amount of time at work that adds up to twenty or more hours per year just searching for your keys. Do you know how many books you can read in twenty hours?

The bottom line cost: losing track of your belongings causes you to waste hours of time looking for those belongings. This time can be better spent elsewhere if you were more organized.

Failure to keep a calendar or datebook

Have you ever sent a gift to a loved one with an added overnight or expedited shipping cost due to you forgetting their important date? If you have relatives out of town and you send them gifts on their birthdays or Christmas this is something should know about every year. It should come as no surprise to you each year that Mother’s Day occurs in the middle of May. If you find yourself shipping Mom her gift via FedEx overnight each year then you are wasting your money. Set up a Google Calendar reminder email or use an old-fashioned FranklinCovey planner to let you know well enough in advance each year that this date is coming.

The bottom line cost: procrastinating or forgetting important dates costs you wasted time, money and effort than can be avoided by a little calendar planning.

Late fees on payments

How many of us put the day’s mail on a desk or table once it’s opened and read? Have you ever amassed a pile so large that bills get buried under the stack? I’m guilty of this lack of organization now and then. I’ve even paid a late fee on a utility bill as a result of this. If your system for paying bills is place them somewhere and then come back to them hopefully before the due date then your system stinks. Put them in a visible place that reminds you daily or weekly to get this done. Paying a fee for late bills is essentially a “slob tax” for not finding them in time.

The bottom line cost: losing bills and other important documents with deadlines causes you to spend extra money on late fees and finance charges. Get a system for finding and remembering bill due dates.

The time “black hole” known as your email inbox

Have you ever wanted to find an important email at work or home? Have you ever spent more than twenty minutes looking for it? And then did you get distracted reading another email you had not seen in a while. It has happened to me. Also, tt never ceases to amaze me how folks have hundreds or thousands of emails in their inbox. How can these people find anything in a pile of 500 items? Create some email folders to separate the categories and find items easier. Or do what most time management experts recommend. Do, delegate or delete. In theory, practicing this principle will keep your inbox nearly empty each day. Do - an action item for you. Delegate - someone needs to do this. Delete - this does not apply to me or it’s information that useless to me.

The bottom line cost: an unorganized email inbox costs you extra time to find, respond and act on items sent to you.

Is being organized an innate talent or can it be learned? Or we all wired one way or the other? If you are an unorganized person take a self-assessment of the true cost of how much this character trait costs you each week in lost money, time and effort. If you are already an organized person, I’m sure you can attest to the peace of mind knowing how simple like becomes when you get organized.

So we get the first (and will be the last) bill from Macy’s and it comes in two separate envelopes. So I think this is odd. Then I noticed something terrible. This card not only allows purchases in Macy’s stores like all department store cards, but is also functions as a full-fledged Visa (or in some cases Mastercard). My wife could probably recite the exact choice words I elicited from the dining room when I discovered this. Apparently this is a joint effort between Macy’s and Citibank. Others have reacted the same way I did when discovering this fact:

From Joe’s Journal:

Well, this summer Macy’s announced their plan to “flip” 3.5 million dormant store charge accounts to new Citibank MasterCard accounts. Apparently, this is legal under the fine print of the original Hecht’s and Macy’s store charge card agreements, though the agreements refer to this activity as “information sharing” between the store and the bank, rather than something more obvious like “giving you a seemingly unrelated all-purpose credit card many years from now when you least expect it.”

From a finance blog at the Washington Post a reader submits his similar story:

Looking for savings, Marc naturally took advantage of such an offer from Macy’s. But a few weeks later, he was surprised when he received a store-branded Visa card–not a private-label card that could only be used at the store–with a $10,000 line of credit. Since he had more credit cards than he needed, including one from Visa, he called to cancel and get what he wanted in the first place–a more limited store card.

Macy’s said it makes it clear in the credit application that the store will first consider you for a Macy’s Visa card and that’s what you’ll get unless you don’t qualify for it or you opt out at the cash register when you sign up for the card. But the credit card application is so full of fine print that you may not spot that caveat even if it is in bold capitalized letters. And in the haste to sign up for the discount, you also may not realize that you have a choice of a Macy’s Visa card or a more limited store card.

Does this sound sleazy? Does it sound like Citibank does not care about you? Well, hello!! They don’t. Keep in mind that most big-box retailers are doing everything in their power to make it easier to spend more money. A credit card does just that. Why limit your purchases to just Macy’s? Why not give everyone another card to add to the pile of potential consumer debt. Sears did this so well in the 80s with the Discover card that they ended up spinning off the whole division into another company.

The bottom line: getting the “added convenience” of your Macy’s card being a credit card also is neither convenient, nor a wise move.

1. When you pay cash for things, the chances of identity theft are zero. Now, I mean actual cold, hard, green cash not a debit card. If you are worried about a problem with your purchase be sure and keep the receipt. I’ve never once heard of a merchant basing the return policy on the method of purchase. All purchases by reputable retailers allows returns regardless of the purchase method.
2. Reward or loyalty points are a great deal from all the products I get from using my card. Wow, let me walk through all of the flaws in this arguement. First, if you are a person who carries a balance, those reward items are free! Your interest charges are paying for those “free” products. If you are someone who never carries a balance you may think the rewards are still a sweet deal. What if an Act of God happens one month and a bill does not get paid on time? Wham! Finance charge on that card with the “free” reward points. Also, what if the bank makes an error on your account? If you don’t have an account you won’t EVER get a bill or an error on that bill!
3. A credit card is good for emergencies. Well, I see two ways out of emergencies; your main checking account and a savings account/emergency fund. Do you want to know another saying for emergency credit card purchase? Poor planning. If you have a big enough emergency fund, how bad is the emergency that it will wipe out the account? A simple rule is that the bigger the emergency fund, the lower the chances of it being wiped out by any emergency.
   1. Home repair - maybe $2000 - $4000 if it’s really bad. Hopefully insurance covers something which is not your fault. Any other repair bigger than that may have been looming since you bought the house or you ignored the repair for too long.
   2. Car repair - maybe $2000 or so. Any more than that and it should be covered by insurance due to an accident or it’s time to look for another car.
   3. Health problem - maybe $500 - $30,000 for serious health problems. Any $30,000 medical bill may have been caused by no medical insurance or experimental treatment. These are certainly possible, but rare for most people.

   If you are like me, a credit card creates a false sense of security to help you out of financial jams. However, when paying that emergency expense with a credit card you now essentially created another emergency (albeit a long-term one) with a new, large, unexpected debt. An emergency fund can solve many emergency financial problems. Living without one is like an acrobat flying without a net.

4. I’m young and I want to build up my credit rating. As I detailed in The FICO Score Flaw a credit rating is basically a loser’s game. All it shows is how well you manage the revolving door of debt. A young person just entering the workforce likely has two major purchases on the horizon. A car and a house. Ideally you’d pay for both with cash, but that’s not in the cards for all of us. For the car purchase, most lenders will recognize that you have a steady income and approve you for a loan. For the home purchase, I’d strongly recommend the following: 20% down payment on a 15-year traditional (not adjustable rate or interest-only loans) mortgage. This shows the bank that you are a conservative borrower who takes this loan very seriously. Building up a 20% down payment and choosing a higher payment (the 15-year loan is a higher payment than the 30-year loan, but it’s paid off twice as fast) shows that you have commitment. If the bank balks at your loan application with no credit rating ask that the loan be manually underwritten.
5. Credit cards are safer online that debit cards. First of all, if your bank tries to pin the unauthorized charges on you for either kind of online fraud, credit or debit, mention to them that they are violating federal law. The Electronic Funds Transfer Act (EFTA), which applies to debit cards, specifies your liability for fraudulent transactions is $50 if you notify the bank within two days of a lost of stolen card and up to $500 if you notify after two days. The Fair Credit Billing Act, which applies to credit cards, specifies your liability for fraudulent charges is no liability if the unauthorized use involved just the credit card number, and only $50 in the case of a lost or stolen card. So, it literally would take an Act of Congress to occur before your bank rightfully holds you responsible for unauthorized charges.
6. I like paying only bill per month. I have many friends who put everything on the credit card and (claim) to write only one check for all their bills per month. Many times these are the same folks who use rewards loyalty points on their card. First of all, if you pay cash for all face-to-face transactions you pay no bills per month. For online purchases use a debit card only and either keep the receipt or record it in your checkbook. Now, back to the paying only one bill per month. Dunn and Bradstreet did a study that shows consumers spend 12-18% using credit cards than paying with cash. Exactly like poker chips, no emotional involvement occurs when swiping a plastic card. However, when you are pulling out ten $10 bills to pay for something, you feel the pain.
7. I travel and hotels/rental cars won’t take debit cards. Um, time to change hotels. Ask to speak to the manager on why this policy exists. If you are traveling with a company credit card, keep in mind this is affecting your credit rating, not your employers. Even if the card is in their name.
8. Credit cards are more convenient than cash. Smart personal finances are rarely about convenience. Convenience is what gets most people into debt over their heads. Impulse buys, payday loans, cash advances and credit cards are like everything else convenient….they’re expensive. It would be convenient for a limo driver to bring me to work everyday, but very expensive. It would be convenient to eat out for every meal, but expensive. You get my point.

The bottom line is that eliminating all of your credit cards is a trade-off. You may give up some convenience, but the peace of mind and better sleeping at night will make the trade far worth the effort.

A FICO score is between 300 and 850. According to Fair Isaac, the median score is 723 (half of scores above and below) whereas according to Experian (using the Fair Isaac risk model) the average credit score is 678 (lowest scores are farther from the median than the highest scores). The weighting of the score is broken down as follows:

• 35% — punctuality of payment in the past (only includes payments later than 30 days past due)
• 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
• 15% — length of credit history
• 10% — types of credit used (installment, revolving, consumer finance)
• 10% — recent search for credit and/or amount of credit obtained recently

You can see many components make up a FICO score. It can take six months or longer to improve or worsen a score. If you file for bankruptcy it can take seven or even ten years to wipe your FICO slate clean and even then it will often be asked on loan applications. The score is similar to a financial report card banks use to determine your risk of defaulting on a loan. The lower the score, the higher the risk of you falling behind on the loan.

So, what’s the flaw with the FICO score?

Before I answer that question, let me tell you about one of my goals. This goal pertains to my FICO score. My goal is for my FICO score to become zero. You may be saying WHAT? Is this guy nuts? Why would anyone want to ruin their credit rating? Plus, the rating only goes down to 300…why shoot for zero??!!

The flaw in the FICO score is that it’s a loser’s game. It is merely an indicator of how well you manage the revolving door of debt. Just like getting bad grades on a report card, you’d really prefer that no one has to see this private matter. If your score is high, you apparently don’t need to borrow money because you consistently pay it back promptly.

The flaw in the FICO score is that it shows you have debt. It might be well-managed or it may be poorly-managed. Either way, you have debt.

My goal is to have no debt. In the next month or two, my family will have no debt except the house and even the terms of that loan are being re-evaluated by me. My plan is to go as long as I possibly can without borrowing any money. Not from a friend, not from a relative and certainly not from a bank. If someone goes years and years and years without borrowing money eventually that person will have no no track record for a FICO score. Banks will have no clue about your ability to pay back a loan and that’s a good thing. I realize that this could be a decade away or more for me to get a FICO score of zero.

Here’s the ironic part: a millionaire who has not borrowed money for many years would also have a credit score of zero. Yes, a person with a net worth of millions of dollars cannot get a loan from a bank due to our financial culture based on that score. No track record, no loan.

The next time someone discusses the concept of the FICO score mention that this is a score you’d rather not even have.

Well, I have a tip that can save you even more time than trying to decipher the envelope. Check the return address. If it says Wilmington, DE then I can tell you with certainty that it’s from MBNA (now Bank of America). Other big offenders include Chase, Capital One, American Express and many other large financial institutions. I started the process of filing for an LLC for myself in 2003 (but never did) yet I still get direct mail and small business offers from American Express four years later.

This entry from Wikipedia explains when and why Wilmington, Delaware became a credit card behemoth.

Wilmington has become a national financial center for the credit card industry, largely due to regulations enacted by former governor Pierre S. du Pont, IV in 1981. The Financial Center Development Act of 1981, among other things, eliminated the usury laws enacted by most states, thereby removing the cap on interest rates that banks may legally charge customers. Many major credit card issuers, including Bank of America (formerly MBNA Corporation), Chase Card Services (part of JPMorgan Chase & Co., formerly Bank One/First USA), and Barclays (formerly Juniper Bank), are headquartered in Wilmington. The Dutch banking giant ING Groep N.V. headquartered its U.S. internet banking unit, ING Direct, in Wilmington. In 1988, the Delaware legislature enacted a law which required a would-be acquirer to capture 85 percent of a Delaware chartered corporation’s stock in a single transaction or wait three years before proceeding. This law strengthened Delaware’s position as a safe haven for corporate charters during an especially turbulent time filled with hostile takeovers.

Although the credit card industry has created an economic boon to this city of 72,000, that same industry has wasted millions of Americans time sifting through their junk mail.

Bottom line: If the envelope says Wilmington, DE on it place it in your circular file.

After reading the Millionaire Next Door three times (I currently own five copies and give them as gifts to friends and family when they graduate from high school/college) it had a profound impact on my life. I think following the seven principles of millionaires covered in that book can drastically increase your odds of becoming FIRE [Financially Independent Retired Early.] They are:

1. They live well below their means.
2. They allocate their time, energy, and money efficiently in ways conducive to building wealth.
3. They believe that financial independence (the FI in FIRE) is more important than displaying high social status.
4. Their parents did not provide economic outpatient care.
5. Their adult children are economically self-sufficient.
6. They are proficient in targeting market opportunities.
7. They chose the right occupation.

The book explains in full detail each of these principles and how they achieved their net worth. And by the way, Fools, the back of the book lists the professions of those interviewed for the book. Among some of the surprising careers on the long list:

Accountant, ambulance service, auctioneer, citrus fruit farmer, geologist, horse breeder, janitorial services contractor, lecturer, meat processor, oversize vehicle escort service, trader, timber farmer.

Also shocking–> the impression I got from the book is that doctors and lawyers statistically have the odds stacked against them of achieving great wealth. This is due to their expected high lifestyle and status artifacts they are expected to own. The more I think about this, my son’s pediatrician is probably only in her 30s and she drives a Lexus. Good luck, becoming a FIRE.

Anyway, the whole reason for this post is that I wanted to share with my fellow Fools a simple formula I’ve developed to evaluate how “on track” you are to becoming FIRE. Here it is…

At what age in life did you (and your spouse) achieve a net worth equal to that of your household income?

For example, if your household income is $60,000 per year how old were you when you had that much built up in your 401k, IRA, stocks, home equity, etc?

For some of us, it happens in our 20s, others in our 30s and so on. For some of us, it happens in our 50s/60s and some of us never build up a net worth equal to our household income.

For me and my spouse, we hit it at age 27.

Now, what’s amazing about this formula is that it has ABSOLUTELY NOTHING to do with your income, career or starting net worth. If you make $200,000 per year imagine how long it will take you to build up a net worth equal to that amount. Obviously LBYM and maximizing your investing will drastically speed up hitting that goal.

Here’s an even neater concept I love sharing with co-ops/interns/recent grads in our office:

If you stick 15% of your salary per year under the mattress you will have saved up an ENTIRE YEAR’S salary in 6 years, 8 months. Plus, you will be accustomed to living off 85% of your income (from saving 15% per year). So, in theory, you could quit your job for a year at age 29 (assuming graduating at age 22) and have a BETTER lifestyle than to which you are accustomed (you’ll have saved up 100% of your income, but you’re used to living off 85%, remember?). Pick any age for yourself and this still works.

Now, here’s where it gets really fun:

-invest it in stocks with a 9% annual return
-get a raise at any point during those 6 years, 8 months
-have a company that matches your contribution in any way

…and you can very easily reduce that build-up-a-year-of-income goal to a mere 4 or 5 years. Of course, in a retirement account you can’t touch it until until 59 ½ or thereabouts, but you get my point.

Remember……..two quotes by which I live my life:

“It has nothing to do with how much you make, it’s how much you save.”

“Invest until it hurts.”

And talk to my wife….she claims we’ve burn hurting for quite a while now!

Just my .02

Matt

Note: the original post on that well-known website can be found here.

1. Eat anything you want. Yes, you can have cheeseburgers for breakfast and donuts for lunch and dinner but it’s not recommended. Weight Watchers is based on the points system and those burgers and donuts will burn through your daily point total allowance in about three minutes. For a man my size (5″10′, 35 years old) I have a daily points allowance of 24 points. You can use these points any way you want. Once you hit 24 points during that day, you stop eating. If that’s too challenging for you, rest easy they thought of that. You also get 35 weekly points to use on any days that you go over your daily point total. Family barbeque where you struggle to discipline your eating? Not a problem. Have a couple beers (lite beers are only two points) or some chips and take those from your weekly reserve.
2. Attend the weekly meetings. This is where you either a) strut your stuff in front of the crowd and get applause or cheers or b) put your tail between your legs and recognize that other normal people like you are having success with this thing - it can’t be that difficult. During my last meeting I announced that I had crossed the ten-pound-loss threshold and the crowd applaused for me. Granted I feel like Brad Pitt compared to some of these poor souls, but it still boosts your ego to get that applause. The major points of the 30-minute meeting are announcing new promotions to keep you motivated, hearing stories or anecdotes from the instructor, hearing other members announce their success, hearing other members mention tips and ideas and seeing other folks like you wanting to better their lives.
3. Find some zero point foods and eat them. For me, this has been pretty easy. Nearly all vegetables are zero points and most fruits are one or two points. I make it a habit to have the recommended four to five servings of fruits and vegetables. Plus, there is something psychological about the brain thinking it is eating when in reality the body is consuming zero-point foods that have no affect on weight. The brain is trained to see food, activate the salivary glands, move the arms and hands to bring the food to the mouth, chew the food and digest it. This psychological motion is identical whether consuming a slice of chocolate cake or a bowl of grape tomatoes and carrots. My success has been in “tricking” my mind into thinking it is still getting that chocolate cake when in reality it is getting plenty of healthy veggies.
4. Exercise. Being an avid jogger, I used to be of this mindset. “Hey I just ran four miles, I can have two bowls of ice cream and a Snickers bar.” Um - WRONG! For a person of my size, running four miles is the equivalent of five points. That Snickers alone is six points! The ice cream is probably another ten points. You can see why it’s just easier to eat less than pig out after exercising. Exercise does a couple things for your body, none of which including letting you pig out. First, it slowly changes your metabolism over time. Eventually you could eat a Snickers and it would have no effect on your weight. Ever. That may take months or years of intense physical activity. Second, it gives you leeway on your daily point totals. Days that I allowed myself a little snack after dinner were also days that I jogged in the morning. Before bedtime I realized I still had four points left for day and realized that it was from the early-morning jogging.
5. Learn the hunger scale. A large part of my problem was binging when I was starved. Weight Watchers has a hunger scale similar to this:
   1. Totally full
   2. Ate a little too much
   3. Pleasantly satisfied
   4. Will be hungry soon
   5. Completely famished

   The idea was to always keep yourself around three or four. For me, that meant eating every two to three hours. Yes, it meant snacking at my desk throughout the day, but it prevents those level-five famished fire alarms for me where I could eat a row of Oreos (and have before).

6. Stay away from red-light foods. A red-light food is one that you know you won’t stop when you eat just one. For me this includes pizza, cookies, cereal, some bread products and chocolate. Eventually I will have the discipline to eat these types of foods, but for now I am staying away from them like an alcoholic stays away from bars.
7. Develop a plan for red-light situations. Red-light situations are the same concept as above, but limited to places instead of foods. For me, red-light situations include family picnics and barbeques, employer-purchased meals (”Hey, work is paying for it. I can eat as much as I want!”), and anywhere where I had a couple drinks and thus lowered my judgment and critical thinking. I make a mental plan before leaving the house. I fill up on water, zero-point foods and a game plan for how to stay away from the pizza table or the beer cooler.

The list above is just one man’s observations on how to have success with Weight Watchers. Your success will vary, but hopefully it will be as plentiful as my success has been.

Finally, here are some quotes I heard at one of our meetings that stood out:

• Nothing will ever taste as good thin feels.
• All that matters are the first couple bites. Beyond that it all tastes the same.
• If I am going to eat it, make sure it is worth it. Crappy chocolate is not worth it.

Good luck in your healthy living endeavors.

The envelope budget system works like this: take about five or six envelopes and label them for your discretionary spending accounts. This would include groceries, eating out, vacations, entertainment, household items and gift spending. I would not recommend setting up envelopes for your utilities or house payment since you do not have much control in affecting those monthly amounts. Plus, it is not realistic or convenient to pay your electric bill in cash. Next, go through these discretionary categories and break down how much you need to put into each envelope per month (or per paycheck).

Sample paycheck of $2000 take-home pay per month:

• Approximately $1200 per month of the paycheck goes to the mortgage, utilities and loans. This leaves $800 for the envelopes
• $400 per month for groceries
• $50 per month for gifts (weddings, birthdays, etc.)
• $75 per month for eating out (this could be merged with the groceries account if you wish)
• $75 per month for vacation
• $100 per month for household items (home improvement items, landscaping, home repairs, etc.)
• $100 per month for clothing

Here’s how it works. Every paycheck you go to the ATM and withdraw $400 in cash (and drive home very carefully!) and do that twice per month to get the $800 in the above example. Once you get home you deposit half of the amounts above (example above was monthly amounts) into each of the envelopes. Then as you spend money during the week you take it from each envelope. Each one acts as sort of its own bank account. I’d recommend recording the amount you removed from the envelope on the envelope itself. Two things will begin to happen to you over time:

1. You will control your money. Not the other way around. Who wants your money (how much or little you have) to control you? Not me.
2. Instead of having too much month left at the end of your paycheck, you will have plenty of your paycheck left over at the end of each month.

A perfect example of the envelope budget system in action occurred to me this weekend while replacing our broken mailbox post near the street. The “household items” envelope at the time had about $60 in it. I took that cash and headed to the hardware store. As luck would have it, the mailbox I found and liked cost $52. That left me with $8 to put back in the “household items” envelope. The way most people do it would be to buy any mailbox regardless of what’s in their bank account or even worse put it on a credit card. My envelope system sent me home with leftover cash in my pocket and control of my finances (only having $60 for this category forced me to keep in within the limit).

My wife and I did the envelope system right after we were married in 1995 and now I’m pleased that we’re back on the system. Another benefit of the envelope system is that you pay cash for things. Paying cash for big ticket items has a bit of a sting to it. Imagine buying a new $900 refrigerator and shelling out nine Benjamins one by one by one to the Best Buy salesman. Believe me…it’s painful watching that cash go out of our wallet.

Another benefit of the envelope budget system is that you enjoy the items for which you’ve saved your money. Most consumers charge their Disney trip and then spend months, interest and frustration paying it off later. With this system you are depositing $100 per month into an envelope saving for that vacation. Imagine how much more fun Mickey Mouse or Space Mountain become when you know the trip was paid for before you ever entered the park or hopped on that airplane.

One final benefit of the envelope system is that it forces you to have a front-row view of where your spending is going. Watching one envelope continue to get cleaned out or seeing another build up over time reminds you of your spending habits. For us personally, the grocery envelope gets tattered and worn in about two months of use, but the “Christmas” envelope is still fresh and crisp like the bills in it.

Bottom line: the envelope budget system makes your money work for you, not the reverse.

The Lifestyle Of Actors And Actresses

People in Hollywood live a lifestyle beyond most of our wildest dreams. They are well-tanned and well-groomed. Most of the biggest name celebrities have figures and physiques of athletes or models. They drive expensive cars and live in expensive homes. Jennifer Aniston singlehandedly created an entire cottage industry for hairdressers wanting to give their customers her exact hair style and look. Mark Wahlberg in the early 1990s (back then he was called Marky Mark) singlehandedly became the most successful Calvin Klein jeans model in the history of the company. He sold more jeans by posing shirtless on billboards and magazines than any other marketing campaign could ever hope to achieve. Bottom line: the more you become ensconced with the lifestyles of the rich and famous, the more likely you are to spend your money on their income. That’s a bad thing.

The Barrage Of Commercials

In the 1960s a typical one-hour show had nine minutes of commercials. Today it is twice that at 18 minutes per hour of programming. A thirty-minute show today now has eight minutes of commercials. Put another way, when you watch ten hours of television you are watching nearly three hours of commercials. If scientists put you in a room and made you watch products pitched to you for 180 minutes it would be very likely that you would want to buy those products either immediately (think pizza when you’re starving) or the next time you are in the store (basically anything by household consumer giant Procter and Gamble). Over time, the mass marketing of these products begins to sink into your subconscious mind. In my opinion, the brands with the least risk of consumers buying generic competitors are Coca-Cola, Kleenex, Jif peanut butter and Wonder bread to name a few. The decades of brand recognition and advertisements dumped into our minds makes the decision to purchase that product a no-brainer. Bottom line: the commercials do affect your spending habits over time although you probably don’t feel it during each commercial.

In another Sears incident, one blogger details her story at length about how she had extreme difficulty getting her money back from a Master Protection Agreement that failed to provide coverage for her digital camera. The long and the short of it is that she paid for part of the MPA with a gift card and part of it in cash. When she went to get it refunded (due to Sears not even servicing digital cameras after all!) the store manager required her refund be given in the form of a store credit.

A former Sears appliance salesman basically created a Master Agreement Manifesto detailing the dubious nature of these offerings. Among the highlights I found unbelievable:

• the company holds weekly meetings to discuss MA quotas and techniques to sell them
• the salesmen are told to not give up selling the MAs until the customer says “no” at least three times
• a mathematical diagram called the bathtub curve which display high failure rates for products either in the first days of use or many years later thus making a curve the shape of a bathtub. Sears uses this curve to maximize profits on the MA by making the warranty end right when failures become more likely (in many products after three years)
• for many people the MA ends up being a waste of money because they lose it or forget to use it

As many of my posts stress, remember the following tips when buying from a major retailer. First, using their in-store credit card significantly increases the chances of you getting taken to the cleaners on interest charge if you miss a payment. Second, the extended warranties are a rip-off that transport cash from your wallet to the retailer’s pocket and end up providing you little and the merchant a lot. Third, loss leaders will often get you into the store for a free or cheap deal, but often you are enticed to buy more once in the store. Remember these tips for maximum savings for you.