Control Your Cash’s 6 Axioms For Building Wealth And Thus Saving You The Trouble Of Buying Our Book.

June 22, 2012

 

Why is he smiling? No debt. You should be so diligent.

 

We’re going to go an entire week without writing about what a waste a college education (almost always) is. Don’t worry, we’ll beat that drum again soon enough, probably next Wednesday.

It’s time for us to embrace that old standby of the uninspired blogger – the list post! 5 Ways to Save At The Grocery Store. 8 Financial Mistakes First-Time Parents Make. 17 Cheap Graduation Gifts. 432 Tired Ways To Write A Blog Post.

We’ll call this one Control Your Cash’s 6 Axioms For Building Wealth And Thus Saving You The Trouble Of Buying Our Book.

1. Don’t Have A Budget, Have A Ledger.

Creating a household budget is a waste of time. If you earmark $423 for groceries in a given month, and you’re at $454 with 2 days to go, are you going to starve yourself just to prove a point?

Or, if you happen to be under budget as the month is ending, then what? Do you replace the tilapia in your cart with Chinook salmon just because your numbers allow you to? Even if you’d rather eat tilapia?

We hear this constantly: “I can’t believe how big my VISA bill is. What happened? There must be some sort of mistake.” But VISA didn’t make a mistake. You did. You bought too much and you didn’t think about how you were going to pay for it.

Have a ledger means be conscious of every dollar you’re spending. Track them. There are smartphone apps for this, Mint has a good one. Don’t have a smartphone? Buy a pocketbook, they’re like 49¢ or something. Doing this eliminates the possibility of seemingly insurmountable expenses “creeping up on you”. They can’t, not if you know that they’re coming. Even if you’re not so meticulous that you enter every expense in said app, that monthly credit card statement should never, ever make your jaw drop.

2. Stop rationalizing.

You really wanted that Croatian vacation and/or theme wedding? You feel like you’re entitled because you hate your job and your mom’s being a bitch? Wow. It’s like you and we are different species.

Your finances should be the least emotional facet of your existence. Save the emotion for the non-financial parts of your life.

It’s fine to want (and even to buy) extravagant stuff. An otherwise prudent friend of ours dropped $2,462.35 for a couple of nosebleed seats to Game 4 of the Stanley Cup Final. A lifelong L.A. Kings fan (a legitimate one, not a bandwagoner), it was perhaps his only-ever chance to see his team clinch the Stanley Cup at home.

They lost. No big deal, they ended up winning the Cup anyway, but our friend didn’t get to watch the clinching moment live. (Had he wanted to, he could have spent a similar amount, probably a little more, for tickets to Game 6. And flown across the country for Game 5, just to cover every base.)

Was that a waste of $2,462.35? Maybe to us, but not to him. This story isn’t an argument for spending extravagant amounts on ephemeral things. Our friend is a smart guy with a big cushion who could withstand the loss. He weighed the risk of the New Jersey Devils winning, paid cash, and still enjoyed 3 hours’ worth of Stanley Cup Final action. He’s not going to be spending the next 7 years financing his tickets at 19.9% interest, which would be unequivocally dumb.

3. Unless you’re going to major in the hardest of hard sciences, pure or applied, or possibly in corporate finance, don’t go to college.

Sorry, we had to mention it. We’ve broken it down in greater detail before, but not only is college a colossal financial expenditure, it’s an enormous time commitment. 4 years of your life and tens of thousands of your (or your parents’, or the taxpayers’) dollars? So you can spend decades paying off the loans? Which brings us to our next point:

4. Only incur debt if you have a plan behind it. A plan that pencils out.

Borrowing $200,000 might sound like a bad idea in and of itself, but what are you borrowing it for? To have a stable place to live for a fixed period (and simultaneously avoid paying rent)? Going into debt to buy a house makes sense, most of the time. Look at the alternatives. Borrowing money might set off a frugality switch in your head, but would you rather spend 30 years renting and knowing that you won’t recoup a penny of your housing costs? While enriching the person who does own the place where you live?

And that’s shelter: as high as #2 on the hit parade of necessities behind food, maybe #3 behind clothing unless you live in the tropics.

Incurring debt for other reasons is – we’re running out of synonyms for “idiotic”. All your life, you dreamed of having a storybook wedding. Great. Do you want to spend the next 10 years paying off one memorable afternoon?

Some people are going to take that literally. Of course no one wants to spend an extended period paying for something fleeting (and that has a 50% chance of ending in failure), but if you incur the expense, you have to pay it. We come out of the womb understanding this inherently, but the sophisticated and rationalizing brain knows better.

5. Look at each transaction from the other party’s perspective.

Your humble blogger had a (dumb) high school finance teacher who believed that for someone to make money, someone else had to lose money. Were that true, it would mean that all of human civilization has been one big zero-sum game. And that the accumulation of wealth in the world today – all the ocean freighters, skyscrapers, communications satellites, power plants etc. – is no greater than it was when the only items of value in existence were Smilodon pelts.

Not to turn this into an Economics 101 lecture, but exchanges benefit everyone. However, they don’t necessarily benefit everyone uniformly. Sometimes you run into a seller who’s desperate to do a deal, or a buyer with the same problem. In that case, enjoy your bargain. Other times, the one who needs to make a deal and has time or other circumstances working against him is…you. Don’t be that person.

6, the big one. Buy assets, sell liabilities.

Do this consistently and you’ll build wealth no matter how stupid or lazy you are.

401(k) contributions are assets, defining them as we do as something that will help your wealth grow. Extravagant dinners are liabilities.

We should elaborate. You can’t sell extravagant dinners unless you own the restaurant, but from a consumer’s perspective you can avoid buying them.

That doesn’t mean you shouldn’t cut loose and enjoy what life has to offer, every once in a while. It just means that if you do so, you’ll be forgoing future wealth and investment potential. You need to weigh this stuff, assess it intelligently. Don’t buy what you can’t afford, which is so fundamental it barely counts as advice. Mark Zuckerberg gets to spend more than you do. No offense, but at least at this point he’s entitled to more Caribbean cruises and country club memberships than you are.

But don’t fret. In turn, you get to spend more than that hobo who stands on the street corner every morning.

Unless you’re in debt. Then the hobo (assuming his net worth is 0) gets to spend more than you.

STOP.

If you read that last couple of paragraphs and your internal monologue is:

“Who are they to tell me what to do? I deserve it. Life’s too short”,

send us a request and we’ll fix it so that your IP can’t access our site anymore.

There are a million analogies we could make here, but people hate to face reality. If you want to spend profligately, and then complain about your financial situation, you’re no different than a chain-smoker who considers it a random tear in the cosmos that he’s the unlucky stiff who ended up with lung cancer.

One more time: build assets. Sell liabilities. Get in the other person’s head. Attack debt like the household pest it is. Don’t take on expenses with only an unformed (and uninformed) idea of how you’ll profit from them. And buy our book.

Filed Under: Consumer Debt, Economics, Making Smart Choices, Net Worth Tagged With: , , , , ,

How To Stay Poor In However Many Easy Steps

June 15, 2012

My mom's doing tequila shots at Coyote Ugly right now. Thank God I can spell.

Take a vacation. You earned it!

You need to get away. You also need to spend less than you earn and invest the difference, but Carnival Cruise Lines doesn’t stop at the Port of Personal Responsibility. Nor are there daiquiris.

Yes, everyone needs to get away once in a while. Or spend on something beyond the basics. Money is meant to be enjoyed, at least some of it. But what a lot of people forget is that there’s still a window you have to operate in, contingent on your net worth and cash flow. This is not opinion. Concentrating on the result (your senses experiencing something pleasant) without paying attention to the effort rendered to achieve it (a commitment of your money) is insane. Rich people pay attention. It’s not why they’re rich, but it’s a leading indicator.

Rich people don’t want to commit a lot of their money, either – relative to what they have. No one in the top quintile of net worth is going to spend 3% of that net worth on an extravagance. People in the lower quintiles do it all the freaking time. That’s why they’re there, and the rich are where they are.

Here’s another way to cloud reality: justify an indefensible expense as being “for your kids”. For instance, “We’re taking our kids to Disneyland.” Congratulations, you painted yourself into a virtuous corner. Now, if you don’t take your kids to The Happiest Place On Earth, failing to do so would make you a parent who doesn’t love her (you’re probably a woman) child enough. Other people do it, why not you?

Number 1, screw other people. Number 2, what are you working for? If you have to choose between a smile on Junior’s face today and not having to move in with him 45 years from now, what are you going to pick? If you refuse to answer that question, or say “the smile”, you should find a less demanding blog. Here are four of them.

Here’s another handy phrase you can use to explain away your inability (REFUSAL) to build wealth:

“(Name of your indulgence) (present tense of positive verb) me.”

For instance, “My BMW 7-Series excites me. It makes me feel good.” The rest of my life sucks, my job is torture, but these 544 horses know how to snap me out of my funk.

Good for you. They’re probably also impoverishing you, if that’s the kind of thing that concerns you. Maybe it doesn’t, and if so then why are you reading this site?

Every time we say something heretical like that we have to spend undue time explaining it, because some readers aren’t that bright. Maybe reading the explanation will make them smarter. Here goes:

We’re not saying you shouldn’t buy a luxury car. Or a trip to Disneyland. Or whatever it is you want to buy. The only thing you should do is know your place. Michael Jordan gets to squander $300,000 in one night in the high-roller salon at Caesars Palace. You don’t. Why? Because he’s Michael freaking Jordan, that’s why. Alright, maybe that’s still not clear. Because he has a net worth somewhere in the 9-digit range. There, is that better? Gambling is still stupid, and indeed Jordan was dumb enough to lose half his fortune in what was simultaneously one of the most sadistic and masochistic divorce settlements in human history, but he can still withstand the losses. You can’t.

Your neighbor bought a boat, you say? Good for him! Did you see the bill of sale? How about the financing agreement?

Doesn’t matter. I want a boat I want a boat I want a boat.

Well, you’re also getting knowledge, whether you want it or not. You can pay $30,000 for a standard deck boat. Most people don’t have that kind of cash lying around. But if they do, and are also the kind of people who fancy themselves mariners, they’re probably not going to buy a $30,000 Tahoe. They’re going to buy a $140,000 boat and spend the next however many years paying interest on it.

“However many” doesn’t mean 3 or 4, either. It means 5, 8, 10, “or even 12 is not unusual.”

Not to focus on boats, that’s just one example. Swimming pools, jewelry, even (relatively inexpensive) expensive clothes. If you can find a merchant who’ll sell it to you on credit, and it’s not a necessity (and thus, by definition, a luxury), it’s not that you can’t afford it. You can’t, that’s not the point. The point is that you’re committing tens, hundreds, thousands, or tens of thousands of future dollars to whatever item it is you just can’t say no to, beyond its listed price. This is so simple that observing it hardly counts as conscious thought, but you know that credit card bill that you pay the minimum balance on every month? The one that’s going to take you 17 years to pay off at your current pace? It’s not just a uniform morass of cash. It’s that 99¢ iTunes download, now $1.78 with interest. It’s that $5 Quizno’s sub you didn’t think anything of at the time because, you know, $5. Even though it’s ultimately costing you $8.69. Some people justify the big purchases (see above), but no one even bothers to justify the everyday ones that make up the bulk of your total spending.

We’re not going to say that building wealth is the easiest thing in the world, but it’s far less complicated than many people make it out to be. If you can’t get ahead, look within first. Not to quote ourselves, but are you buying liabilities? Selling assets? Assuming that your opposite number in any transaction has your best interests at heart? Not putting the math you learned in the 4th grade to use?

If you’re struggling, you can get out. Easier and with less pain than you think. But you’ve got to want it. If you don’t, that’s fine, but you’re probably going to hate it here. In the meantime, buy our book and get started. Don’t say we never do anything for you.

Filed Under: Bad Examples, Consumer Debt, Credit Cards, Estate Planning, Finance Tagged With: , , , ,

Preventative Maintenance, Your New Best Friend

May 9, 2012

WARNING: Never mind the graphic images. Once this gal’s voice enters your head, it ain’t coming out anytime soon.

 

When your humble blogger was a Cub Scout, his pack watched an anti-smoking film that contained his first exposure to tracheotomy. The video featured a guy smoking a cigarette through a hole in his neck, which was followed by a helpful if nauseating cross-section diagram that showed how surgeons somehow detached the patient’s windpipe from his blackened larynx and had it connect to the outside world at a point of contact somewhere near his Adam’s apple. If the description sickens you, you should have seen the video.

The happy result is that no one in that church basement ever lit up a cigarette.

Which of course is a lie. Most of those kids ended up becoming high school classmates, and several turned into pack-a-day smokers. One of the adults in charge of the Cub Scout meeting smoked during the video, never reasoning that a) maybe it’d have been better to have instead smoked after the kids went home and b) him lighting up in front of everyone sent a louder message than did the recorded image of a cancer patient.

This is a personal finance website, and this isn’t an anti-smoking screed: hell, the more you smoke the more elbow room the rest of us eventually enjoy. But there’s a point to be made.

Look at our cover girl, Terrie, 51. Doing a 180º isn’t going to make a difference at this point. She can lead the healthiest lifestyle imaginable: eat a whole foods diet, drink nothing but ionized water, run 5 miles every morning (notwithstanding that she now has the lung capacity of a web-footed salamander), and it won’t matter. Nothing’s going to regrow the hair, or the lower jaw, or the throat flesh. She’s a casualty waiting to happen, and might even be dead by the time you read this. People who are dumb enough to smoke, largely don’t care.

For another example, this one from personal knowledge, here’s a family friend who smoked himself to death. His house had more full ashtrays than ours has electrical outlets. The end came a few months after the picture was taken, but 3 years after he’d had the first lung removed. (They don’t remove a second lung.) A fresh start, such as it was, and this was how he expressed his gratitude to the surgeons who prolonged his life.

The same problem of exacerbation applies to finances, too. Making a $900 payment on the credit card you owe $19,489.34 on means next to nothing. It’s like coughing up something black one morning, seeing the face of God in the mucous, then deciding that from this day forward that you’re only going to smoke menthols.

Lot of help that is, jerkface. I already have a $19,489.34 balance on my VISA card. (But only $8,593.32 on my MasterCard! Why can’t you look at the positive instead?)

Depending on your attitude, you’re going to find the following advice either patronizing or useful: You won’t get your hand bitten off the 20th time if you don’t put it in the leopard cage the 1st time.

Yeah. Habits start off annoying, and eventually become effortless. Whether it’s 20 minutes of yoga every morning, taking your dog for his daily constitutional, even something as mundane as brushing your teeth; you do it because you should, and soon enough you don’t think twice about it, to the point where omitting the repeated behavior becomes more of an inconvenience than performing it does.

You see what we did there? Substitute something negative (smoking, beating your kids, financing everyday purchases) in the list of habits in the preceding paragraph. If you habitually incur credit-card debt, or habitually squander a fixed ratio of your salary on gambling, it’ll feel awkward to start not doing so.

The number of 50-year-olds who overcame decades of financial stupidity to build lasting wealth is virtually zero. Gaining realization is something the younger and more impressionable folks do. So can you change? Probably not. But if you’re sincere about wanting to, the patented secret method is to simply do it. While financial trouble isn’t easy to dig out of, it’s at least possible to do so – unlike turning black lung tissue into pink.

If any of this resonates, or hits uncomfortably closely, congratulations! You’re a test case. Downsize. It’s only temporary, anyway. The luxury townhome you’re renting and can barely afford? Suck it up and take on a roommate. Don’t think of your lifestyle being cramped, think of the few hundred dollars a month you’re now receiving and weren’t before. Same goes for the Target “retail therapy” and peer pressure group dinner dates at restaurants you’d never frequent on your own.

No one wants to lay the foundation, but everyone wants to live in the penthouse. You can’t get there without the necessary intermediate steps. Building wealth, employing leverage, compounding your net worth – none of that works unless your net worth is positive in the first place.  Otherwise you’re just making a bad situation worse.

You can cut expenses. Not like that kook at The Simple Dollar who counts the thousandths of pennies it costs him each time he opens his fridge, but rather in large and impactful ways. You can find masses of cash in your portfolio that are just sitting there instead of being put to work – e.g. the savings account that you could easily turn into a money market account or a mutual fund. What the hell is stopping you?

Filed Under: Bad Examples, Capitalism, Consumer Debt, Education Tagged With: , , , ,
« Previous Page
Next Page »