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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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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:
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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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