Foolish Man Built His House Upon the Sand

This morning I was doing my morning scripture study and read a passage of scripture that I was very familiar with, but never thought of it in the domain of finance before.

In the New Testament, Matthew chapter 7 versus 24-27, it reads:

Therefore whosoever heareth these sayings of mine, and doeth them, I will liken him unto a wise man, which built his house upon a rock:

And the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell not: for it was founded upon a rock.

And every one that heareth these sayings of mine, and doeth them not, shall be likened unto a foolish man, which built his house upon the sand:

And the rain descended, and the floods came, and the winds blew, and beat upon that house; and it fell: and great was the fall of it.

This is such a simple analogy, yet is packed with so much wisdom. As I look back at my financial path it is very obvious to see how fast the house falls when built upon a sandy foundation.

The current financial storm that we are in the middle of has made apparent the fact that it is not IF the storm will come, it is WHEN the storm will come.

Here is the rock of a foundation described above that is surely to withstand the financial storms of life:

1. Pay yourself the first 10% of all you earn

2. Build a 3-6 month emergency reserve

3. Pay off all debt tied to depreciating assets - this includes cars, credit cards, etc. The two acceptable forms of debt are real estate & businesses.

4. Write a will

5. Invest your surplus in wise investments with those wise and experienced in their handling

6. Allow time and the miracle of compounding interest to be aid you

Tomorrow I will explain the process of moving from the sand to the rock. There is a formula that if followed will guarantee a smooth transition.

As the great Warren Buffett said, "You never know who is swimming naked until the tied goes out."

Michael Jackson's Finances Were THE Thriller

Since the death of Michael Jackson last week, I have been interested in the many articles that describe the tangled web that was his financial life. The more I read, the more I realize that the age old financial principles apply to everyone, rich or poor.

Michael Jackson was one of the most prolific earners in the history of entertainment. He sold 61 million albums in the U.S. and had a decade-long attraction open at Walt Disney theme parks. The New York Times reports that he earned about $700 million as a performer and songwriter from the 1980’s on.

As if that is not a lot of money already, his most valuable asset was Beatles' music -- in 1985 he paid $47.5 million for ATV Music, which owned the copyright to 259 songs written by John Lennon and Paul McCartney. According to some estimates, he brought in an additional $300 million in record royalty fees from that deal.

Earning however, is only half of the equation. As Notorious B.I.G. declared, “Mo money, mo problems.”

In 1988, he paid $14.6 million for Neverland Ranch, a 2,500-acre property in Santa Barbara, CA. This “ranch” was complete with a theme park, a steam railway, lakes, a cinema and a zoo with giraffes, lions and tigers. At its peak, it was valued at over $100 million and he had as many as 150 employees running it, costing millions of dollars each year to maintain it.

A couple of years ago he nearly defaulted on the $24.5 million dollar loan tied to Neverland. Thomas Barrack, chairman and CEO of Los Angeles-based real estate investment firm Colony Capital LLC, agreed to bail out Jackson and set up a joint venture with him to take ownership of Neverland, yielding a $23 million loan.

“Michael never thought his personal finances were out of control,” said Alvin Malnik, a former advisor to Michael Jackson and godfather of Prince Michael II, the youngest of his three children. “He never kept track of what he was spending. He would indiscriminately charter jets. He would buy paintings for $1.5 million. You couldn’t do that every other week and expect your books to balance.”

As his income peaked out, his spending did not, forcing him to borrow money to finance his spending habits. In 2001, he used his half of the ATV Music assets as collateral to secure $200 million in loans from Bank of America.

The problem was that his appetite for spending exceeded his cash inflows -- to the tune of $20 million to $30 million each year. Right up to his death, he continued to lead a relatively lavish lifestyle, renting a property for a reported $100,000 a month in Los Angeles.

Whether you make hundreds of millions or tens of thousands, the lessons remain the same:

1. Know how much you earn
2. Know how much you spend
3. Spend less than you earn
4. Don’t borrow money to finance your lifestyle

He Lives Vicariously Through Himself

In watching some NBA playoffs the last couple of weeks, a line in a commercial caught my eye. In this commercial for Dos Equis, they are trying to portray an old(er) man as the most "Interesting Man in the World". He is so cool that "he once had an awkward experience, just to know what it felt like." That is not the line that grabbed my attention but helps you understand the image they were creating. They go on to tell you as he is jousting with someone that "he lives vicariously through himself." Sounds ridiculous at first.

As I have thought about it and reflected on it, I really like it.

Too many in our society are living vicariously through someone else. They do it through Desperate Housewives, American Idol, NBA Basketball (my weakness), US Weekly, romance novels, Guitar Hero and blogs. The list goes on. I speculate that they do it because it is more interesting than their own life and it takes great focus and emotional energy to create a good life for yourself.

The most successful people I know and admire actually do live vicariously through themselves. They do it by spending their hours becoming their best selves. This could be in their career, with their spouse and children, competing physically, and by serving those around them in need.

The very act of watching other people live their "good life" robs us of the precious time we need to create our own. I have begun the process of observing those around me who are successful, interesting and happy to see what percentage of time they spend living vicariously through others and how much through themselves. So far, it is pretty obvious why some peoples lives are far more interesting, fulfilling and more enjoyable to watch.

"Dost thou love life? Then do not squander time, for that is the stuff life is made of." - Benjamin Franklin

Are You Paying or Collecting?

My brother had a very interesting observation the other day. We were having a conversation about building wealth and he said that one of the best gages is to understand your "Interest Collected vs. Interest Paid ratio" (ICIP Ratio...I just made that up). The more I thought about it the more I completely agree that it is one of the best ways of knowing how financially healthy you really are.

Let's compare two different people:

Mr. DooDad is a good earner, 125k year, but really enjoys his toys. As a matter of fact, he has yet to see a toy he does not like. Because of this "DooDad" addiction, his ICIP ratio looks like this:

House $1500/mo interest

Car 1 $250/mo interest

Car 2 $175/mo interest

Boat $475/mo interest

Credit Card $225/mo interest

Interest Paid $2625/mo interest

401k $125/mo

Money Market $12/mo

Interest Collected $137/mo

Mr. Doodad collects a measly $137 a month in interest and pays $2625 a month interest. So his ICIP ratio is 1:19.

Mrs. Wisdom is also a good earner, 100k year, but she has used her cash to buy assets that she can collect interest on. She has been wiser with her money, buying her cars in cash and never using a credit card. Her ICIP ratio looks like this:

House $1000/mo interest

Rental House1 $750/mo interest

Rental House2 $1100/mo interest

Interest Paid $2850/mo interest

Rental House1 $1400/mo interest

Rental House2 $1750/mo interest

401k $1500/mo interest

Roth IRA $750/mo interest

Indexed Fund $2500/mo interest

Money Market $150/mo interest

Interest Collected $8050/mo interest

Mrs. Wisdom collects a whopping $8050 a month in interest and only pays out $2850 a month so her ICIP ratio is 3:1. Over time, as her renters pay off her rental house mortgages, her ratio will climb to 8:1.

Spend 10 minutes and figure out your ICIP ratio. Are you closer to a Mr. Doodad or a Mrs. Wisdom? How long will it take you to retire by following Mr. Doodad's plan? The rhetorical question's answer is probably forever!

Can I Get Triple Insurance Coverage Please?

Fear of loss looms much larger than thought of gain.

In a study by Professor Daniel Putler, a former researcher for the Department of Agriculture, he made a very interesting discovery in an expansive study of all egg purchases in southern California. Economic theory says that price fluctuations should be received with equal intensity whether prices go up or down. What he discovered was something very different. When prices were reduced, consumers bought a little more than normal. When prices were increased, consumers completely overreacted and cut back their egg purchases by two and half times! You can probably validate that if you are the grocery shopper in your home. If prices go up, you decide to cut that product out when at all possible.

We experience pain associated with loss much more intensely than we do with the glee of experiencing a gain.

Taking these findings and relating it to things financial may provide a new lens in which to observe your behavior and how companies use this against you.

Take renting a car. At the last minute before signing the rental contract, they ask if you would like "loss damage waiver" insurance. The threatening phase conjures up all kinds of fear that most people pay for the expensive and redundant coverage.

If you haven't taken the time, do a little research and you will most likely discover that both your current auto policy and credit card will cover any "loss damage" issues that would arise. The offered policy is a easy way to generate huge revenue by playing on humans "loss" aversion.

There is a helpful article titled "Do you really need rental car insurance?" on USA Today.

Pay attention to how sly marketers are using this irrational fear against you to get you to quickly and consistently part with your hard earned cash.

Can You Change Everything?

In a knowledge based economy, one in which knowledge is key to success, not strength or length of time, it is critical to accumulate knowledge at a much faster and more effective rate than before. This means that learning cannot end after college or you will get downsized or outsized.

Every morning I spend an hour a day reading various newspapers, articles and blogs in an effort to learn and to ultimately think differently to produce superior results. One of the great marketers and bloggers is Seth Godin. He had a great post yesterday about changing your situation and gave 45 suggestions of things you can do to jump start your business and/or life. Enjoy!

Can you change everything?

You might not be as permanently stuck in a rut as you think. The rut you're in isn't permanent, nor is it perfect. There are certainly less perfect ruts, but there may be better ones as well. The certain thing is that you can change everything...

1. Buy a competitor
2. Sell to a competitor
3. Publish your best work for free online
4. Close your worst-performing locations
5. Open a new branch in a high-traffic location
6. Hire the best salesperson away from the competition
7. Join the competition
8. Host a conference for your competitors
9. Connect your best customers and organize a tribe
10. Fire the 80% of your customers that account for 20% of your sales
11. Start a blog
12. Start a digital bootstrap business on the weekends
13. While looking for a job, spend 40 hours a week volunteering and freelancing for good causes
14. Go on tour and visit your best customers in person
15. Answer the customer service line for a day
16. Learn to be a killer presenter
17. Let the most junior person in the organization run things for a day
18. Delete your website and start over with the simplest possible site
19. Call former employees and ask for advice
20. Move to Thailand
21. Listen to audio books in your car instead of the radio
22. Sell your cash cow division to the competition and invest everything in the new thing
23. Find more products for your existing customers to buy
24. Become a gadfly and tell the truth about your industry
25. Quit your job
26. Move your operations to another city
27. Become a vegan
28. Have all meetings in a room with no chairs, and everyone wears a bathrobe over their clothes
29. Open your offices only four hours a day
30. Open your offices 24 hours a day for a week
31. Find every project that is near the danger zone (in terms of p&l or deadlines) and cancel it, no appeals
32. Go for a walk during lunch
33. Get an RSS reader and read a lot more blogs
34. Go offline for longer than you thought possible
35. Write five thank you notes every day
36. Stop sending spam
37. Do your work somewhere else. Set up your chiropractic table at the mall
38. Have everyone at work switch offices
39. Give your most valuable possessions to a stranger
40. Go see live music
41. Start a company scrapbook and take daily notes
42. Hire a firm to make a documentary about your organization
43. Buy some art
44. Make some art.
45. Do the work.

Get Compound Interest on Your Side

There is a reason that Albert Einstein declared, “The most powerful force in the universe is compound interest”.

Compound Interest can be your fiercest enemy or your most powerful ally.

Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e., interest is compounded). A loan, for example, may have its interest compounded every month: in this case, a loan with $100 principal and 1% interest per month would have a balance of $101 at the end of the first month.

Here are some examples of the power of compounding:

Credit Card Balance of $15,000 at 29% interest

-          $4350 a year in interest

-          If you never made a payment, would climb to $683,812 in 15 yrs

Latte for $3.50 for five days a week

-          If saved money instead and invested at 6%

-          In 10 years you would have $12,000

-          In 15 years you would have $21,189

Car payment of $300 month from age 22-52

-          If paid for car in cash and saved and invested money instead at 6%

-          In 30 years you would have $284,609

401k at work investing 10% of your $50,000 annual salary

-          If invested with a 6% return

-          Over a career of 30 years you would have $395,290

Keep your first house as a rental property

-          original purchase price of $200,000

-          4% home price (national average since 1942)

-          In 30 years the value would be $648,679

-          …and the mortgage would be paid off now

Rental Income on your first house

-          $1200 when you first rent it out at age 30

-          Assuming a 3% annual increase in rental rates

-          At age 60, rents would now be $2912

-          …and the mortgage would be paid off now

Compound interest is a double edged sword. Great to have on your side and miserable to have working against you.

Where can you swing the momentum of compound interest on your side to create a better future for yourself and your family?

Where Does the Time Go? I Know

Ever lay your head down at night and ask yourself, "Where does the time go?" I have the answer.

A recent report by the Council of Research Excellence revealed an alarming statistic: Adults are exposed to screens - TV's, computers, cellphones, etc. - for about 8.5 hours on any given day. It goes on to say that TV is the dominant medium.

Ball State did a study that found the average American adult was exposed to five hours and nine minutes of live TV each day. 

Do the math.  That is 1879 hours a year or over 46 (forty hour) work weeks per year!

Imagine the impact in a lifetime if you would invest that time into your relationship with your spouse, spending quality time with your kids, reviewing and planning your finances, investing time and energy into your career, working out.

How much more could you get out of life if you made a better investment choice of your time?

You may be thinking, I don't watch 5 hours a of TV a day! I challenge you to track it for a week. Add up the hours, multiply it out over a year and determine if there is a priority change that could lead you down a more prosperous path.

Put Your Money Where Your Mouth Is

Determined to reach my goals in multiple areas of my life, I decided account-ability would provide me the kick I needed. I talked to a good friend and my brother to hold me accountable in different areas.

In the business part of life I committed to being in the office by 7am everyday, planning my night the day before so I have clear, prioritized direction, and lastly I committed to workout everyday this week. I chose a consequence that would be painful enough to get the action I needed. My love language is the Benjamin Franklin. I owe a $100 bill for everyday I do not meet the three commitments I made. 

As you might guess, I am 3 for 3 since our meeting!

My brother and I are meeting in Vegas in 45 days with our families for some sun and pool time. We committed last night to a "fitness duel-off". We will determine the winner by a combination of things like measurements, percentage improvement, and who looks best with their shirt off by the pool. This means I have to lay off of my straight Coca-Cola diet and drink more water and choose healthy meal choices. It means that I will need to really hit it hard in the gym and not just assume that by being around others who are fit and sweaty that it will rub off on me.

At times it seems pathetic that I need to play these games to get where I want to go in life, but I have learned through experience that I am not able to push myself hard enough on my own.

Stephen Covey said it best when he said, "Accountability breeds responsibility".

Is there somewhere in your life that you could work with to push eachother to be your best self?

What the Fish Can't See

I have spent the last few days reflecting on a conversation I had with my mom the other night who just returned from China. She came back with a renewed enthusiasm about the opportunity that surrounds us. She reported that with the recent lift of communism, the Chinese citizens are seeing opportunity everywhere. She commented on the positive energy and vibe in Beijing. They recognize the freedom they have to create the lives they desire. They control their own future.

It is easy to get complacent when we have had it so good for so long. Just as the fish can't see or appreciate the water he swims in, we can't see or appreciate the opportunity that we have. With freedom to work where we want to work, study what and where we want to study, and spend our money how we want to spend it, it is laughable that we whine about our circumstances when we only have ourselves to blame.

We are a sum of our thinking, decisions and actions.

Take that fish out of water for about 10 seconds and I can guarantee that water is all it will think about. Maybe it is time for us to take a quick trip to a third world country to enable us to see the opportunity we are swimming in.

Is it a coincidence that the Russian ancestry group ranks first in the highest percentage of millionaire households per capita? Although the Russian ancestry group accounts for only about 1.1 percent of all households in America, it accounts for 6.4 percent of all millionaire households. It is estimated that approximately 22 of every 100 households headed by someone of Russian ancestry has a net worth of $1 million or more. 

James Allen said it best in As a Man Thinketh, "As a being of Power, Intelligence and Love, and the lord of his own thoughts, man holds the key to every situation, and contains within himself that transforming and regenerative agency by which may make himself what he wills.”

Abe Lincoln's Formula for Prosperity

So much wisdom in this piece. These are great principles to live by when building a company, a family, or a community.

• thrift is the precursor to prosperity
• we all need to work together to be successful
• cannot spend more than you earn
• initiative and independence build character and courage
• teach a man to fish and he will fish for a life time

As I prepare for the birth of my first child in September, these are the lessons that must be taught to provide them any chance of success. Imagine a child raised on these five principles, how different would our world be if we reverted back to good old fashioned common sense.

 

They Are Not Your Friend

The Wall Street Journal reported today that Bank of America is raising interest rates on 4 million US Credit Card customers who are carrying a balance. This means that even if you have always paid your account on time, you can expect your rate to go up if you don’t pay off the balance at the end of each month. WSJ reports:

“Starting with June account statements, any credit-card customer who carries a balance and has an interest rate below 10% will see his or her rate jump into double-digit territory.”

“The bank's move follows similar rate increases that other banks, including Citigroup Inc., JP Morgan Chase & Co., and American Express Co. have implemented in recent months. The banks, facing rising delinquencies, blame the economic turmoil. Many have been tightening the screws on people with less-than-perfect credit, but now they're pinching a broader range of customers who have good credit records, but carry a balance.”

The underlying lesson is that credit card companies are not your friends, even though they lay down the red carpet on your first date. They appear so generous and helpful and always seem to ride in on the white horse at the perfect time. Whether it is at the department store when you have way too much stuff in your arms and they generously offer you a 10% discount for becoming their friend or when a 0% balance transfer arrives in the mail serendipitously to convert your Citi card at 29.99% to a lower rate.

Having spent much of my own life racking up credit card debt, I have a new vantage point now that I have made a commitment to pay for everything in cash. Hindsight is 20/20. If I couldn’t afford to pay cash on the spot, how could I afford to pay for whatever I was buying with 29% tacked on top? The math does not work, but I guess it is because I never stopped to do the math. I was having too much fun shopping.

I once heard a catchy little phrase that helped me to see what I was actually doing,

Buying things I do not need

With money I do not have

To impress people I do not know

Tomorrow I will share a strategy to get out of debt as quickly as possible, because as we have seen, the furnace is only going to get hotter with major credit card companies turning up the heat.

Interesting Way to Save Money...

A Couple of More Ways to Save Money:

1. Bake your own bread by hand

2. Knit your clothing

3. Wash your clothes using a washboard to save electricity

4. Don't wash your car to save water and soap

5. Shave every third day to save cost of razors

6. Use washable diapers if have young children

7. Drink powdered milk

8. Hang your clothes to dry

9. Eat with your hands

10. Cancel cell phone and only use a landline