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Six Figure Salary And Still Broke

July 21st, 2008 · No Comments

Recently I had lunch with a friend who makes six figures per year.  Here in the Midwest that is a fabulous salary.  He has a comfortable desk job that is inside a nice, air-conditioned building.   He and his wife drive new cars and he has an in-ground swimming pool.  He must love life, right?  He must be a happy camper, right?  Most of the world would kill for this kind of luxury.  Now, let me share some more details about his story.

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  He found an ATM that surprisingly allows funds to be withdrawn immediately after a deposit.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

→ No CommentsTags: Banking · Budgeting · Business · Credit Cards · Money

Celebrities Are Not Financial Role Models

June 5th, 2008 · No Comments

Recently the media has been covering the defaulted home loan on Ed McMahon’s Beverly Hills mansion worth approximately $4.8 million. Now, before I comment on Ed’s finances here are some of the most popular highlights of his life:

  • 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.

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Debt Consolidation Is A Terrible Idea

May 30th, 2008 · No Comments

So you’ve gotten yourself into a jam. This credit card was to cover that unexpected car repair. That credit card was to pay for Christmas. Oh and this credit card….well you’ve had a balance on it for eons so it doesn’t count. Now, you see (or hear) a commercial for that magical elixir called debt consolidation. No more piles of credit card statements in the mail. No more interest rates all over the map. No more multiple balances on multiple cards. And best of all… no more of all those different payments – just one! Sounds like a sweet deal, right? Guess again, bucko. Debt consolidation is a terrible idea and here’s why.

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.

→ No CommentsTags: Credit Cards · Money

The Truth About Car Payments

May 26th, 2008 · 1 Comment

Here is an interesting question: Would you still be driving the same car today if you had been forced to pay cash for it when you bought it? Or did you merely look at the monthly payments and justify it by telling yourself you could afford it because you could make the payments? Did you finance the car because of a low interest rate or even a 0% rate? If you had a bill for $20,000 today what would your mood be when you went to bed? If any of these questions make you feel uncomfortable you need to keep reading. First, let’s discuss the several ways that cars are purchased.

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.

→ 1 CommentTags: Cars · Money

What I Have Learned From Dave Ramsey

May 22nd, 2008 · 4 Comments

There are two kinds of people in this world: those who hate Dave Ramsey and those who love him. The interesting thing is that if you listen to him long enough you’re virtually guaranteed to go from the former group to the latter group. Dave claims there is even a support group on the Internet for teenagers whose parents recently bought into Dave’s ideas thus making the teenager’s lives miserable. Before we go on, who is Dave Ramsey? Dave’s entry from Wikipedia:

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.

→ 4 CommentsTags: Money