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Word Gems
What is a man but the
sum of his thoughts?
Personal Statement #58
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Wealth Creation and Preservation:
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Part I:
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Yes! You Can Be Debt
Free!
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How The Average American Family
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Can Wipe Out All of Their Debt
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- Credit Cards, Car Loans, and Home Mortgage
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In Only 7 to 9 Years!
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return to Personal Statements home
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May 15, 2010
Wayne Becker's
HIGH CASH-INCOME INVESTING
Building a
Retirement Income that You Can't Outlive
with Securities Offering Cash Yields of 7% to
17%!
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How the
Average American Family Can Wipe Out All of Their
Debt - Credit Cards, Car Loans, and Home Mortgage - in Only 7
to 9 Years!
Many years ago someone recommended that I
read a little book - The Richest Man In
Babylon, by George Clason. This classic changed my thinking and,
probably, my life.
It's the story of the elderly Akad, the richest
man in Babylon, with wealth so great that even the King envied him.
Akad’s childhood friends could not understand how their old
schoolmate had risen to such stature and riches. They chalked it up
to dumb luck: “You, Akad, are more fortunate than we. You have
become the richest man in all Babylon while we struggle for
existence. Yet, once we were equal.”
Akad chided them with: “If you have not
acquired more than a bare existence in the years since we were
youths, it is because you either have failed to learn the laws that
govern the building of wealth, or else you do not observe them.”
This is a book that you'll want to purchase
(get a used copy on Amazon for only $1.41!). Akad tells the story of
how he learned his “laws of wealth” and how anyone can put them into
practice.
For our purposes here, I’d like to focus on
Akad’s first law of wealth. Let’s listen in on his
advice:
“A Part of All I Earn Is Mine To
Keep”
“A part of all you earn is yours to keep. It
should be not less than a tenth no matter how little you earn. It
can be as much more as you can afford. Pay yourself first. Do not
buy from the clothes-maker and the sandal-maker more than you can
pay out of the rest and still have enough for [living expenses],
live upon less than you could earn.”
There’s an old saying, “big doors swing on
small hinges.”
In other words, some big problems can be solved
with simple actions. When it comes to getting a grip on one's
finances, some people might expect only complicated formulas to
help – certainly, nothing quite so mundane as:
“Cut your expenses,
spend less than you earn,
save 10% of your income.”
Yet, in these few and simple words, we have the
seeds to grow one’s financial independence; indeed, in this
avuncular advice, if the truth were known, we have the basis for
most great family fortunes in this country; and even the bedrock
start-up philosophy for most of today’s Fortune 500
companies.
Why do I say that?
Because odds are, 50 years ago, 100 years ago,
150 years ago, someone decided that he or she was tired of being
poor all the time. That person began to cut expenses – something
that, in the history of the world, has never been easy – and that
person began to save, maybe just a few coppers in the beginning, but
that small nest-egg grew, and was invested, which increased
capital. And many of these "financial pioneers" also started
businesses, maybe in a garage, barn, or home office, and they
began to provide a product or a service, and their capital began to
grow and grow.
If you look at the early history of many big
businesses today, you will find this pattern of humble beginnings
repeated over and over again – whether it was Bill Gates starting in
his dorm room (Microsoft); Steve Jobs in his garage (Apple); Warren
Buffett managing money in his bedroom office (Berkshire Hathaway);
or, going much farther back, Henry Wells and William
Fargo providing goods and services to the California
gold-rush miners (Wells Fargo & American Express).
How Can 10% Savings Be So
Important?
You might be thinking:
“I have so much debt – my credit cards are in
hock to the tune of many thousands; plus other installment loans;
plus over a hundred thousand on my mortgage.”
How can saving a mere 10% put a dent in all
that?
Despite what you might be thinking now, I want
to encourage you to know that the average American family can get
rid of all debt – credit cards, car loans, and mortgage – in only 7
to 9 years.
How Much Debt Does the Average
American Family Have?
My recent research (2008) indicates that the
average American family has the following financial
situation:
·
Median family income is $43,200
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$1.22 is spent for every $1.00 earned
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Credit card debt is $8,500
· Other loans of $10,000
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Median house value is $150,000
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Average credit card interest rate of 15%
· In a recent year, 2 million Americans sought
debt counseling to avoid bankruptcy
Your situation might
be different. And maybe you earn more than $43,200, but still have a
lot of debt -- but the principles outlined below will apply and can
help everyone.
There are many reasons why large numbers of
people are plagued with debt. But here’s a major one:
Debt is seductive, something that “sneaks up”
on its victim.
“it’s just $56 a month - let’s buy
it”;
“only $159 a month - we can afford
that”;
or, “just $29.95 in 4 easy monthly
payments.”
This last one should be written on the
tombstone of many of us because it’s the kind of thinking that
destroys people. And after racking up all of those “easy payments”
we find ourselves under a mountain of debt.
In my other articles I have stated that the
average person does not understand the power of compounding – we
don’t understand how compounding is the most important factor in an
investment program; we don’t understand how compounding destroys
purchasing power through inflation; we don’t understand how
compounding juices the debt we incur – and, we don’t understand how
compounding, once we make it our ally, will help us to get rid of
debt and build financial independence!
The “10% principle” is more potent than
generally understood. The power of this simple strategy is greatly magnified and supercharged by
the "magic" of the compounding process. And I think that when people clearly see how the
“10% principle” works, many will no longer feel hopeless about their
financial situation and will put this plan into action to get rid of
debt, once and for all.
Let’s look at the basic plan in
detail.
This average
American family has:
* $8,500 in
credit card debt @ 15%;
* a $10,000
car loan @ 11% for 36 months;
* an 8%
30-year fixed rate mortgage with a balance of
$135,000.
Total debt is $153,500.
Total monthly payments equal
$1,565.
Total family income is $43,200 or $3,600 per
month.
Here's the Most Important Item on
This Chart...
It's what I call the Freedom Factor
(FF).
This is the engine, the energy
source, that will power your financial future. I give it
this name because it is the heart of your financial plan,
one designed to set you free.
The initial FF is $360 or 10% of monthly
income. For the moment, let's set aside concerns about whether one
can actually carve out this $360 from one's budget -
I'll address that later. For now, let's see how the process
works.
Ok, you've cut monthly expenses by
10% and you have a FF of $360 to work with.
What do we do with this $360?
Let's start at the bottom of the
chart and move up. We begin with the gas card which has a balance of
$200. With glee we slash and burn this $200 debt!
But wait! We still have $160 of
ammunition left. Let's use it to hack away at the $300 dept. store
card #1 balance - which leaves a reduced balance on that card
of $140!
Not too shabby for one month's work.
We've knocked out the gas card and chopped the next card almost by
one-half.
But here is where the real fun
begins...
Next month, do we have only $360 in our FF? No,
no! We are now living the exalted life of one possessing a FF of
$370! How did we manage such a coup? Piece-a-cake. When we
deep-sixed the gas card, we also picked up an extra $10 a month in
our budget; because now, of course, we no longer have the gas card
payment. Hurray!
So, in month #2 we face our debts, now on
the run, with renewed vigor. Here's how $370 helps us in our 2nd
month. We finish off the $140 balance on dept. store card #1. We
still have $230 to allocate and we move up the line with dept. store
card #2 in our sights. We apply $230 to the $400 balance, leaving a
mere shadow of its former self, only $170!
We're starting to learn the
routine.
In month #3, our FF now expands to
an ample $380 as this dept. store card no longer bothers us.
This $380 FF is directed toward the remaining $170 of dept. store
#2. We still have another $210 to use, so let's apply it to bigger
game, the $1,200 Discover card bill.
In month #4 our FF swells to $390 as we no
longer need put up with dept. store card #2. We apply the entire
$390 to the Discover balance. We do the same next month; and in
month #6 mighty Discover falls before our advance. In fact, we have
$180 left over and we send it with love to Visa!
Our FF becomes even more interesting in month
#7 - a portly $414! Discover's demise has added $24 a month to our
FF debt-crushing machine! With joy we attack Visa with an extra $414
a month - until month #9 when Visa capitulates and is no more. We
have an extra $122, more than enough to do in Visa, so we send this
amount to Mastercard (MC) #1. This is a biggie with a balance of
$2,200.
However, our forces are growing
too.
In month #10 we find our FF at the
respectable level of $440, having picked up an extra $26 a month
when we got rid of Visa. For the next few months we pound MC #1 with
extra payments of $440; and in month #14, MC #1 expires; again, we
have an excess amount, another $122, which we fire off to MC #2.
Our FF grows to $484, which we employ to
eviscerate MC #2 for the next 5 months. Finally, in month #19, we
eliminate MC #2!
In Just a Year and a
Half...
In just about a year and a half, this
average American family has totally wiped out $8,500 of credit card
debt! But the best is yet to come.
With the credit cards gone, we have built up an
FF war-chest of $542. We can do some real damage with that now. And
we do. In just 6 months the remaining part of our car loan is
gone!
This no-small victory massively boosts our FF
by $393 - now $939 a month.
And when we send an extra $939 a month
with our regular mortgage payment, we can plan our mortgage-burning
party in just a little over 7 years!
A Freedom
Factor of 10%
Will Get Rid of All Debt in 9 Years!
but...
A Freedom
Factor of 20%
Will End Your Debt in Only 7 Years!
In other words, if you can reduce expenses to
create an FF of 20%, you will be set free 2 years
earlier!
Creating financial independence for
oneself requires a two-pronged strategy:
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the second part is to
use that hard-won FF, now, to begin investing, which will
create a growing income stream that can last for your
lifetime.
This second part I have addressed in a separate
article, Yes! You Can Save $1 Million!
There, I explain how the power of compounding can make any
average-income investor a millionaire over time.
In fact,
if we use our
above FF example,
the average
American family,
once debt is
gone, can reach
the $1 million net-worth level
in 15
years or less!
This statement will be shocking to many of you
reading this; but, as I said earlier, many of us do not understand
the "magic" of compounding.
"So, Wayne, if
all of this is possible,
why are so many people
broke?"
Many years ago, one of my college instructors
made the provocative claim:
"You have to
understand,
being in debt
has very little to do with
money!"
He went on with:
"You'll find people who are broke
on all income levels - from the six or seven-figure
jet-setters, to those below the poverty line.
"I know people who make more
money in a month than most do in 10 years - but they're broke! Why?
He can't give up his race horses, and she can't give up her
expensive art.
"And I know people whom you would
consider to be from 'the wrong side of the tracks,' with very
modest means, but they're saving money and are getting ready to move
up in the world.
"The
secret to financial success and independence can be reduced to very
simple terms: Spend Less Today So That In
The Future You Will Have Some!"
Though this was over 30 years ago, I still
remember this man speaking to us, a stunned crowd. (He was no ordinary college instructor, but had
been successful in business earlier in life. I once flew across the
country, from Toronto to Seattle, just to hear him speak.
I wasn't disappointed. Thank you, Art Mokarow.)
And why are we stunned by this
plain-speaking?
We are not used to this kind of straight talk;
instead, daily, suffering under an incessant barrage of media ads,
we are taught to be smiling little consumers; that debt is a good
thing; indeed, almost a civic duty in order to stimulate the
economy. I was more than annoyed to find, in conducting research for
this writing, someone blathering about every "red-blooded American"
should have debt.
This is all propaganda. There are those
who will try to convince you to drown yourself in debt - to buy
and buy, more and more, things you don't really need or even want,
in order to meet someone else's
definition of "the good life."
It doesn't need to be that way.
Success begins with deciding to
live life on one's own terms; it begins by defining, for oneself,
what "the good life" means - and not letting corporate America
fill in those blanks for you.
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EDITOR’S NOTE: Here is an example of the
principles under discussion: JUNE 6, 2008, LOS ANGELES (AP)
-- Ed McMahon blames the possible
foreclosure of his multimillion-dollar Beverly Hills
house on a set of problems all too familiar to many
Americans: a foundering economy, health problems and poor
planning. "If you spend more money than you make, you
know what happens," McMahon said… "You know, a
couple of divorces thrown in, a few things like that, and, you
know, things happen." … [McMahon and his wife] are $644,000 behind on their mortgage
payments and are in negotiations with lender Countrywide Home
Loans Inc. to set a foreclosure date… McMahon bought the
six-bedroom, five-bathroom, 7,000-square-foot house in January
1990. The mansion, which is listed at $6.25 million, is in a gated
hilltop section off Mulholland Drive called The Summit. Britney
Spears is among his neighbors. Asked why a millionaire couldn't
make house payments, Pamela McMahon said the couple had less money than people may think and
suggested they could have done a better job managing their
finances. "We didn't keep our eye on the ball. We made mistakes,"
she said. "It's embarrassing to say the
least..."
Our Spending Habits Reflect Our
Values
Before you purchase something, ask yourself
this:
We all have things that we must buy for our
living - but many of us spend and spend for things that will take us
nowhere but deeper in debt. And when you are tempted to buy those
things, just remember that you are trading trinkets for the golden
prize of financial freedom.
And lest some attempt to trivialize the quest
for financial freedom as a flight of greed, allow me to stop you
right there by reminding everyone that, just as debt, in terms of
psychological process, has little to do with money, so too does
financial freedom - because freedom isn't about money per se;
freedom is about having the resources to be able to fulfill one's
destiny in this world, and all that that means.
It really comes down to this: Most everyone can
reduce debt and build capital - but are you willing to discipline
yourself to make it happen? Do you value the prospects of freedom to
come; or do you prefer insolvency-death by inches, on the
installment plan?
Big Mac or Big
Whack?
StarBucks or
MegaBucks?
I said I would come back to the Freedom Factor
(FF) and how to cut expenses by that 10% to 20% a
month.
For those of you who are serious about getting
rid of debt and building a new life, here's what I
suggest:
Many of us do not know where our money is
going: We have several holes in our bucket, and we need to plug
them.
Plugging the
Leaks
How many $4 lattes do you buy each month? One
or two a day? every other day? This could be $50 or $100 or more per
month.
Why not brown-bag it? Do you really need to
spend $5 a day for lunch? How much is this per
month?
Do you really need to buy that CD?
or rent that DVD? How about getting a DVD or book from the library?
What about your car? Do you really need one?
Most of us do, but do you need an expensive one? How about trading
down and resolving to drive a schlock-car worth a couple
thousand for awhile? Don't think it hasn't been done by those who
are intent upon getting rid of debt.
Have a look at your kitchen cupboards and
fridge. Ready-to-eat, highly-processed foods are not only less
healthful but more expensive than "cooking from scratch." Think
about it.
Get new quotes for all of your
insurances. Consult an independent insurance agent who has access to
many carriers. Go with higher deductibles to lower your payments.
Avoid duplicate liability-protection coverage among your policies.
This exercise can save you many hundreds of dollars per
year.
Conserve energy, which is expensive.
Turn off the lights when you leave a room (just like your mother
told you). Your TV consumes a lot of electricity so don't leave it
on for background noise if no one's watching it. Reduce gasoline
consumption by taking care of several errands with one trip, rather
than running to the store whenever the spirit moves
you.
Use discount coupons for your
groceries. Stop the pizza deliveries. Rent tools instead of buying
them, whenever possible. Don't take credit life insurance when
offered at the bank; instead, get low-cost term life from an
independent source to protect your family. Avoid "recreational
shopping."
Family members should agree not to buy each
other expensive gifts - avoid that consumerism trap. (I told my children, instead of buying a gift
for me, to write a poem or draw something for me; and if they
must spend money, send a gift to the kids at BoysTown. My son
actually did this!). Get your kids involved with this debt reduction
project and reward them with something nice when goals are
reached.
How much do you spend on going out to dinner
each month. This can be a budget buster. Make some popcorn and
watch a movie at home; and while you do this, feel good, because,
daily, you are moving closer to control over your financial
life.
Could you take on a Saturday job? maybe make a
hundred bucks each weekend, or even every other weekend? Why not?
This extra income can help you to be debt-free years
earlier.
Analyze every area of your life and search for
ways to cut costs. You'll be surprised at what you find. Think of
yourself as the new CEO of a floundering corporation - you've been
called in to "restructure" the business, to get things back on
track, before Chapter 11 strikes.
Even one dollar of cost-cutting is meaningful.
Consider the following:
Save $3 a day, invest @ 12% = $1
million in 40 years!
I doubt if you were taught this in
high school; or in the latest TV ad. No, instead you heard about why
you should borrow more money and become a happy little consumer
stimulating economy.
When you buy trinkets, this is what
you are giving up!
Is that what you really want to do?
And when you buy trinkets on credit, and pay
15% interest, you are creating these future values for your
corporate sponsor. Think about
that:
No wonder they encourage you to
be a happy little consumer.
"Wayne, what
about when
my car breaks
down or
my kids need
braces?
How can I stay
on my
debt-reduction program
then?"
Well, we all know that stuff happens; and we
can know that things will come up to
throw us off-track. But try to handle it this way: You will have a
growing FF, starting at $360, maybe more, (for the average
family), and this will be increasing somewhat rapidly. If you
suddenly need new brakes for the car, use your FF to pay this off
first, and then continue with your plan. You might be set back a
couple of months, but that's life. Again, your FF will be growing
steadily, so it will be harder and harder to disrupt your
strengthening finances.
I challenge you to review every
expenditure - and ask yourself: "Am I trading trinkets for freedom?"
"Wayne, you're a
fanatic!"
And proud of it.
Some of you, especially those under age
35, are thinking that all of this sounds a bit austere and
Klingon-like, slightly draconian and fanatical. Yes, I know,
what would your friends and neighbors think if you drove an
older car? And, maybe you like going to the mall, it's
entertainment for you. And how can you possibly wake up in the
morning without your $4 coffee?
Well, allow me to suggest that if you are
tempted to minimize what I say here by labeling it as fanaticism, I
will forthrightly say that what you've just read is not fanatical
enough!
You Can Be Young Without
Money,
but,
You Can't Be Old Without
Money.
Do you remember the proverbial grasshopper
fiddling while the ant prepared for the winter? If you think you
have plenty of time to get rid of debt and to build your finances -
and even if you don't, so what? - I would like to encourage you to
pay a visit to a local state-supported nursing home.
I know someone, age 91, in one
of those institutions. When I visit, I always find it a disturbing
experience. The first thing I notice is the stale-sweet aroma of
warmed-over death that pervades the environment. The person I am
visiting is functionally blind. She once was an avid reader, but
that's not possible now. She has no money to pay someone to read to
her; she cannot watch television, and she battles boredom and
loneliness every day. Mentally, she is fairly lucid, but the other
lady in her room, and some others in the wing, are unbalanced and,
periodically, unexpectedly, begin shouting or wailing, day or night.
She cannot go to the bathroom by herself and must wait for an
attendant to come to help her. She has learned the hard
way that she cannot keep any valuables - jewelry,
coins, treasured mementos - in the few drawers assigned to
her; this is so because things "disappear." And we cannot forget the
food in the dining room - it reminds one of plastic bananas: highly
processed, made-from-powder-mix, institutional fare.
She doesn't like to be around "old people";
doesn't like to live in this human warehouse; doesn't like the food,
the lack of privacy, and the many mentally-ill others. If she had
financial resources, she would much prefer still to be in her own
home, with a live-in nurse taking care of her; and maybe most of
all, someone to read to her.
I suggest to anyone who might easily dismiss
the subject of this report to consider my 91 year-old friend -
because, if you grow old without resources, she is your
future.
In fact, given the trajectory of Federal
unfunded mandates and entitlements, with the great numbers of
baby-boomers aging, it is doubtful that our country, bankrupt as it
is, will be able to provide even these current services in the
coming years.
Such is the end of the road for the consumer
society.
But, for you as an
individual...
Yes, you can get
out of debt... and Yes, you can go on
to save $1 million.
It will take a disciplined, thoughtful, and
purposeful approach to life. But financial freedom can be yours if
you are willing to receive it.
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