Why Few People Should Be Allowed to Have Anything to Do With Managing Their Own Money Until They’ve Received Financial Coaching…
Only Three in 100 Americans is Ready For Retirement. A Financial
Coach Will Keep You from Being One of the 97 Other People Who Just
Doesn’t Get It.
Have you ever wondered why you can’t get
your debt completely under control? Or why you can’t manage to save
anything for retirement? Or why you feel confused and frustrated about
how to invest in the stock market? Do you ever find yourself thinking
that you’re missing important information that would make your finances
come together and finally make sense but don’t know where to find it?
You’re
not alone. Millions of people feel hopelessly confused about how to
manage their money. That’s because they have never been taught the way
to truly master their finances. It isn’t taught in schools or at home,
and it certainly isn’t shared by the gurus on Wall Street. Most of the
financial world preys upon your ignorance and frustration, taking
advantage of it by selling you investment, insurance, or debt reduction
products that sometimes alleviate some symptoms, but don’t address the
real underlying problems.
To get to the heart of those
problems, you need a coach. Athletes, top executives, and Hollywood
stars all use coaches to help them perform at their absolute best. A
personal financial coach can help you discover what your strengths and
weaknesses are and give you the perspective you personally need to put
all the pieces of your financial puzzle together so it makes sense to
you.
A Money Mastery Coach is the Secret to Piecing the Puzzle Together
There
are many financial advisors, gurus, and experts out there who are
willing to share pieces of that puzzle. But unfortunately, many of them
do not understand how to put all the pieces together so it makes sense,
or to use another analogy, they do not know the proper “recipe” for
true financial mastery. Some advisors provide all the ingredients for
this recipe but don’t tell you in which order to “bake” them. Others
know the order, but don’t know how much of one particular ingredient to
include. In addition to those who don’t know the recipe for success,
there are those who know it but are unwilling to share it because they
are intent on making you dependent on their advice and in selling you
expensive financial products rather than giving you the principle
ingredients that will allow you to manage your own money. While these
products will often earn the sellers of them a hefty commission and
seem to help create a perfect outcome, they rarely solve the overall
problem and can sometimes make finances worse.
Money Mastery
coaching is different. Our financial experts know ALL the ingredients
required to get in complete control, increase cash flow, and begin
building real wealth and prosperity. They are willing to teach you
about each of those ingredients, what order they will need to be added
to your financial life, and how much of each ingredient you will
personally require to eliminate your debt, control your spending,
maximize your savings for retirement and protect your wealth from over
taxation and market downturns. Our coaches are committed to educating
and training you so YOU can take charge of your own money.
Personal
coaching with a Money Mastery mentor is a powerful alliance. Our
coaches aren’t biased by commissions or dollars earned from selling
products or investment advice. They are motivated by a desire to teach
you correct principles that will allow you to govern yourself, play
complex financial games on an even playing field with others, take the
emotional confusion and frustration out of your financial decisions,
empower you to make lasting and significant changes, and help you make
your money work for you so it can generate much, much more.
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How Much Are You Really Spending?
What You Don’t Know Can Hurt You…
When was the
last time you wrote down every stick of gum you bought, or every soda
or car wash you purchased? If you’re like most people, you’ve probably
never even thought of doing such a thing. Too tedious, right?
That’s
what many of our Money Mastery clients think, too, so when we ask them
how much they are actually spending each month, they can’t give us a
straight answer. They offer a ballpark figure, but usually they’re way
off the mark. “I have a general idea,” they say for example, “but how
much could candy and soda really be costing me anyway? It’s just small
change.” The problem is that when people don’t keep track of their
actual spending, they end up wasting hundreds, even thousands of
dollars they had no idea they were spending.
Take for example
Stan and Arlene Harbrecht*. They desperately wanted to keep their
daughter in college, but on their modest income, couldn’t find a way to
do so. The Harbrechts came to Money Mastery for help. When Stan began
tracking his spending, the results were shocking! His daily routine of
stopping in 7-11 to talk with his trucking buddies and buy a Big Gulp
was costing him more than $80 a month. When he combined this cost with
all the other junk food he was buying, he realized he and Arlene could
save as much as $154 a month if he quit hitting the convenience store
every day.. Tracking changed the Harbrechts’ lives.
Multi-billion
dollar sports associations know the value of tracking. The NBA, the NFL
and other organizations keep very close track of each athlete’s playing
statistics so that when it comes time to trade or negotiate contracts,
they will know the exact value of that player. They also make these
playing statistics known to the public to heighten awareness. This
awareness creates interest, which in turn creates profits. A system of
tracking is vital to any major corporation or organization that wants
to stay in business. It should be absolutely necessary for you, too.
Besides
feeling (without cause, we might add) that tracking is too tedious,
people also resist tracking because they’re afraid to find out just
exactly how bad their spending habits have become. Instead of really
looking at themselves, they play mind games:
Game #1: Avoid balancing their checkbooks.
Game #2: Blame employers and/or think there isn’t enough money coming in.
Game #3: Claim they never dreamed anything could go wrong when emergencies hit.
If
you’re playing any of these games with yourself, now is the time to
take responsibility by having the courage to look at your real
situation and face it head on.
Those who have become financially
successful find power in tracking. That’s because they become aware of
where they really place their priorities. They discover things about
their spending habits, their emotional needs, and their actual monetary
losses that they never knew before.
Does tracking have to be tedious or time-consuming? The truth is no. Here’s why:
- A good system of tracking can take as little as seven seconds to record each transaction.
- Examining
your habits by recording every expense for a 30-day period will reveal
your priorities and values. Rather than being tedious and boring, the
experience will be highly emotional and will actually motivate you to
make some serious changes that you wouldn’t have felt compelled to do
otherwise.
One final thought on tracking. If you think you’re
already living on a tight budget and therefore don’t need to track your
spending, we strongly encourage you to put that notion aside. If you
aren’t tracking the small purchases as well as the big expenses, you
cannot get a real feel for how much money you actually have.
A
good system of tracking is like a rudder on a boat. It helps steer you
in the direction you want to go, not in the direction that mindless
spending will take you. A good system of tracking helps you eliminate
the “spend as you go” and “month-to-month” attitudes that stamp out
financial freedom. We cannot emphasize enough the power that tracking
your spending will bring into your life.
Adopting a system like
the one Money Mastery offers will bring huge rewards both financially
and emotionally. Learn to love keeping track of your money. For more
information on tracking, register for a free account to download the
full text of MONEY: What Financial "Experts" Will Never Tell You.
* Names have been changed to protect privacy.
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Why There is No Such Thing as Savings
If you’re like most Americans, you’ve probably had the following
conversation with yourself, “I’ll begin putting some serious money away
just as soon as I get my debt paid off and I have some extra cash on
hand.” Sound familiar? Sure it does, especially if you’re struggling to
pay the bills.
But
isn’t it funny how the debt never seems to go away and the “extra cash”
is never on hand? You can’t possibly be expected to put money in
savings under those conditions, right? Well, you can’t if you believe
the notion that “saving” is something you do after everything else has
been taken care of or if you have “extra” cash.
Many people
think “saving” is something only the wealthy can do because they have
lots of extra money lying about. But most of America’s affluent were
not born with silver spoons in their mouths. According to the book The
Millionaire Next Door, eight out of 10 wealthy Americans accumulated
their riches themselves and they were largely able to do so because
they learned early on the art of paying themselves first. As George
Clason teaches in his book The Richest Man in Babylon, the rich get
wealthy and stay wealthy because they have learned how to keep a part
of all they earn for themselves. Before a wise man pays his creditors,
before he buys goods and services, before he indulges his children, he
pays himself first.
How does a person learn such an art? It may seem hard when debt is looming, but it’s easier to apply than you might think.
First,
you must change the way you look at the idea of “savings.” At Money
Mastery, we teach that there really is no such thing as “savings.”
Savings is actually just “delayed spending,” because after all, all
money will be spent, either now or later. If you begin to look at
savings in this way, you will realize that saving is not a special
thing that you do “if you have enough extra money left over” but a
monthly obligation you must pay to yourself, just as you would pay any
other debt you owe. Since savings is a form of “spending,” you must
treat it as seriously as you would any other kind of spending.
Second,
you must track your money carefully so you can see where you are
wasting money. The Harbrechts* came to Money Mastery desperate to keep
their daughter in college, complaining that they were very frugal and
could not find the extra $200 a month they needed to help her stay at
the university. As they began tracking, they found they were wasting
$187 a month on junk food. Once they made that discovery, they
immediately changed their spending habits and were able to send their
daughter the money she needed to continue her education.
How
much money will you find you’re wasting when you begin seriously
tracking your spending? We can guarantee it will be at least 1 percent
of your monthly income.
Pay Yourself First...It’s Simple.
Step 1:
Set up categories for spending for such things as groceries,
transportation, and debt. Be sure to create a category for “self pay”
or “savings.”
Step 2: As you track your spending look for wasted or “found” money.
Step 3:
Before you make a debt payment or buy food or other items, deposit this
“found” money in your “self pay” or “savings” account. Anybody can find
at least 1 percent they can set aside immediately. For more help in
tracking your spending, register for a free account and download free
documents and software. You can also visit our store.
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Why Budgets Just Don't Work
Most people get a sick feeling when they hear the word “budgeting.”
That’s because most money budgeting programs make people feel
restricted and tied down. But “budgeting” your money doesn’t have to be
a drudgery. Now is the time to change the way you think about keeping
track of your money.
Did You Know...
National
statistics reveal that 83 percent of the millionaires in the United
States are self-made. The common thread linking these money-savvy
individuals is...you guessed it....a system for keeping track of how
much money they spend. The average self-made millionaire only spends 87
percent of his or her income, thereby saving 13 percent each year.
The
secret, however, to these millionaires saving 13 percent is that they
don’t actually restrict themselves to “staying within a certain
budget.” Instead, as Money Mastery teaches, they spend money in the
areas of their life that they have given the highest priority, then
they carefully track how that spending affects both their daily needs
and emotional wants. This is not budgeting.
Tracking vs. Budgeting
How
do tracking and budgeting differ? Budgeting dictates which areas to
cut, while tracking indicates the most meaningful areas in which to
spend. Budgeting is difficult to force oneself to do. But tracking is
an exciting adventure so long as you are spending in the right areas of
your life. Budgeting is depressing, while tracking is uplifting and
encouraging when it is done with specific goals and dreams for now and
the future in mind. Budgeting is argumentative, while tracking helps a
person make a decision in advance of the moment, leaving no room for
impulsive behavior or arguments with self or spouse.
The best way to become your own self-made millionaire is to look at the way you spend money:
- Review all your cancelled checks, credit card purchases, bank statements, cash receipts, etc. for the past year.
- With
a clear picture of your own spending patterns in mind, gather your
family members together to set goals for the way you want to spend
money in the future.
- Create spending categories that reflect
these goals. Don’t forget to create a category for savings and for
recreation, vacations, and other fun activities. But be sure these
activities do not take money from other areas that must be attended to
such as debt and mortgage payments. Be open and discuss, compromise,
and negotiate the importance of each spending category with your family.
- Allocate
enough money from your monthly income to sufficiently meet the needs of
these spending categories. Write these spending categories down, then
refer to them as spending decisions are made.
Here are some guidelines for how much money you should allocate for certain spending categories:- Payments on housing debt should be under 25 percent of your income.
- Transportation
costs eat into a huge part of your income. Add up all your expenditures
in this category and divide by your monthly income. If the amount is
over 15 percent of your income, you are paying too much for
transportation — make plans to change.
Spending and tracking
can be both pleasurable and rewarding when you know where you need and
want to spend and when. You will be able to predict how much money you
will need to retire, how much you will need in case of emergencies, and
how much you can spend for fun. Tracking vs. budgeting puts the focus
on the positive aspects of our financial lives and helps us feel
confident in the future.
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The Disease of Consumerism
Why the Majority of Americans are Sick and What You Can Do If You’re Ailing
Martine
Osterhoff* is on her way to the mall for the fourth time this week.
She’s going back to get shoes she saw earlier while shopping with her
daughter. Martine admits she’ll have to use a credit card to buy the
shoes, a card she’s already pushed to its limit, but as she tells her
husband with a laugh, “I can’t help myself, it’s like a sickness with
me.”
Martine’s problem is no laughing matter. She, like so many
other Americans, is in the habit of getting what she wants, even if she
doesn’t have the funds to cover her cravings. “With all the choices, I
just get so caught up in the possibilities,” says Martine. “Besides, I
work and pay for all my own things, so I feel like I’ve earned it.”
Gary
Praxton* feels the same way. “Last year I spent $4,000 on electronic
equipment for my home, simply ‘cause I wanted it and I’ve earned it,”
he says. “My wife was screaming at me by the end of the year, but even
then I saw ads for a CD player I wanted for my office and snuck out to
buy it.”
Martine and Gary are not alone in their relentless pursuit of clothes, electronics, music and other material goods.
The Disease of Consumerism:
Today’s
product-oriented society screams at us for attention and demands that
we buy. Americans have caved into the emotional media hype, becoming
so accustomed to spending and borrowing in order to answer
Consumerism’s siren call that they never question whether something
should be purchased. Like Martine Osterhoff, they only ask themselves
if there will be enough money to make the minimum monthly payment.
Even if there aren’t enough funds, many Americans will buy a product
anyway, driven to consume by a taskmaster of their own creation — one
born of guilt, greed, pride, materialism, and expectation. We call
this reckless spending the “Disease of Consumerism.”
This
disease stems from a lack of respect towards money, a respect that’s
been lost as a whole from our society since the ending of the Great
Depression 60 years ago. The Depression taught people a profound
respect for money and its power over life. It also taught them the
importance of self-denial and the danger of over-indulgence.
Unfortunately, as America came out of that great economic trial into
the most prosperous time in all of history, it did not teach subsequent
generations to fear and respect money as it ought. Instead, it taught
its children to hold their hands out in expectation. Because of that,
we now live in a time of great self-indulgence and very little
financial self-control.
Today’s generation, instead of fearing that it will not have anything, fears it will not have everything.
Many
people today spend money as a way to feel powerful and capable of
meeting any and all desires. The Disease of Consumerism is apparent in
our nation’s personal saving rate, which has hovered around a negative
.02 percent in recent years!
If the Disease of Consumerism is making you sick, you can do something about it:
- First, ask yourself if you may have a problem with excessive spending. Awareness is the first step.
- Second, examine your feelings about spending money. Ask yourself why you need or want and item before you purchase it.
- Third,
begin to TRACK your spending. Examine your habits over the last 12
months by looking at receipts and other expense records. These will
reveal your priorities and values. The experience will be highly
emotional and may cause you to ask, “why did I spend money for that?”
Once
you have a clearer picture of the way you feel about money and on what
you like to spend, you are better prepared to make conscientious
decisions about where money ought to be spent. Those sick with the
Disease of Consumerism don’t feel the need to make a choice, but
remember, you can have anything you want, you just can’t have
everything.
*Names have been changed to protect privacy.
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The Emotional Impact of Spending
The answer to the math equation below is simple, everyone knows it:
1 + 1 = 2
Now
suppose we represent that same equation using oranges instead. If we
add one orange to another, how many oranges will we have? Again the
answer seems simple — it should be two. But let’s suppose for a moment
that we don’t add the second orange for a while. In two years when we
come back to add it, how many will we have? The answer isn’t so
obvious. In that two-year period what could happen to the first orange?
It might rot. Maybe it will be eaten. Perhaps it will be stolen. There
are so many things that could happen to the orange.
The same can
be said of money. If you have one dollar and add another to it, you
should have two. But what might happen to your money over time? Could
it be spent, stolen, lost or ill-used?
Contrary to popular
belief, money is not a mathematical problem as simple as adding or
subtracting dollars — rather it is an emotional issue that must be
handled as such. Think back to the last time you spent money. Was the
item you bought something you needed or just wanted at that moment?
Will this spending decision have a big effect on whether you’ll be able
to purchase other things in the future? Did spending the money make you
feel guilty or did it give you pleasure? One of the most important
questions you can ask yourself is: “How does spending money make me feel?”
The
reasons people spend money often have more to do with a person’s
circumstances and the way they feel about those circumstances than with
whether there is, or is not, enough money to spend.
Following are the three most significant reasons people spend:
Impulsiveness
We
live in a world full of emotional media messages. These messages often
play upon our deepest psychological needs, pointing out all the things
we may lack. Responding to this supposed lack, many individuals spend
money without thinking, as a way to meet unfulfilled desires. The
Haywood* family are a perfect example of how emotions can trigger
impulsive spending. They loved to shop at All-A-Dollar, a bargain chain
store which sells every bit of stock for $1 or less. Purchasing little
items like candy or inexpensive toys for the children gave the Haywoods
pleasure without making them feel guilty. But once the family kept
track of their spending, they were shocked to find they were wasting
over $300 per month at the store. Most people are like the Haywoods,
trapped in an impulsive mentality that prevents them from keeping their
money.
Economic Hardship
A financial
disaster is another thing that can greatly affect feelings about money
and how it should be spent. Have you ever lost a job and had to come
home to your spouse with the bad news? What kind of an emotional impact
did that have on your family? When an economic disaster hits, spending
money can be a highly emotional issue that causes friction in marriages
and personal unhappiness.
Daily Financial Obligations
The
struggle for daily survival can also affect why and how we spend money.
Even those who are frugal and don’t spend impulsively have heavy debt
loads and excessive taxes and are impacted emotionally by the sheer
effort of just making ends meet from day to day.
Whether we end
up with anything to show for all our hard work has less to do with the
math behind the money, i.e., how much we make, but rather with how well
we understand how to deal with the emotions behind the events that can
affect our money over time.
Many people mistakenly assume that
if they only had a job where they “made the big bucks,” they wouldn’t
have to deal with these emotional issues. But a Gallup poll reveals
that all income groups from factory workers to physicians believe that
they need about 10 percent more to survive. From this we can see that
individuals making more than $300,000 a year are just as likely to be
financially stressed as those who make a modest income. That stress is
not caused from a lack of pay, but from not understanding the emotional
reasons for spending money.
When we do not understand the
motives behind our spending decisions, we are pulled in a variety of
emotional directions, spending money for all the wrong reasons and
putting a lot of pressure on our family. The secret to true money
mastery comes from defining our own needs and desires and learning how
to meet those needs appropriately. Once we do, we can then create
surplus to help others. That surplus is the absolute emotional thrill —
ultimately more meaningful than the brief excitement that comes from
impulse spending, and certainly more joyful than the terrible feelings
of fear and guilt that come from spending more than we have.
*Names have been changed to protect privacy.
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Case Study : Stan & Arlene Harbrecht
"We’re Already Tight...We Won’t Find Any More Money"
Stan
and Arlene Harbrecht were from Tennessee. Stan was a truck driver,
making a modest income of about $24,000 a year. Arlene was a
schoolteacher. The Harbrechts had a daughter in college who was in real
need of some money, but Stan was concerned because he just didn’t feel
they had anything to send her. The daughter’s housing had come due and
they needed an additional $110 a month to cover this expense. The
Harbrechts had come to Money Mastery for some basic coaching, but Stan
was only mildly interested, and as their coach explained Principle 2,
Stan said “I know how tight we are with our money. I can’t believe that
you think tracking our spending is going to help us find extra cash.
That’s bologna!”
Their coach promised the Harbrechts that they
would be able to find the extra money they needed and then told them
that on average, Money Mastery clients find one percent of their annual
income each month that they are wasting on unneeded items. That means
that a person making $30,000 annually will easily find $300 per month
extra if they will learn to track their expenditures. Because Stan was
making $24,000 a year, his coaches knew he could easily find the $110
he needed for his daughter.
Stan and Arlene agreed to give it a
try and his coach committed Stan specifically to this challenge. She
asked him to send her a copy of his expenses once a month so she could
review his progress. Stan sent in his first month’s spending, but it
was only partially filled out, so his coach challenged him on it. “I
just think this is really boring and time consuming, and frankly, I
don’t want to do it,” said Stan. The coach then reminded him of his
need to come up with an additional $110 for his daughter’s college
expenses and Stan reaffirmed that he desperately wanted to keep her in
college. His coach promised him again that if he would keep track of
his spending faithfully, that he would find the money he needed. At
this point, he replied, “well, what if I don’t find the money?” The
coach promised the Harbrechts that if, by tracking their expenses, they
couldn’t find an additional $110 in wasted money, that Money Mastery
would make up the difference. Surprised, Stan said “you’ve got a deal!”
Once
Stan had given the coach his full attention, she explained to him again
that he would have to keep track of his spending very carefully every
day. He agreed. It was only two days later when Stan called the Money
Mastery offices. He was excited about a discovery he had made. He had
pulled into a 7-11 store for his daily visit to buy a Big Gulp and some
snacks while he talked with other truckers. He paid $0.84 for his
32-ounce drink, and as he had promised, recorded the expense. He had
been keeping track all day of his spending and when he totaled his
expenditures, they came to $11. Stan quickly realized that it was $11
of miscellaneous money that he didn’t need to spend. He was clearly
shocked at the amount, and realized that he had been spending that kind
of needless money for years. He said “I can tell you right now, I know
I am going to find that extra money I need for my daughter.” As he
meticulously kept track of his spending the Harbrechts found that Stan
had spent $78 that month just on Big Gulps alone. As he proceeded over
the next two months to carefully track his money, he found well over
$180 a month that was being wasted on Big Gulps, Twinkies, and other
junk food. Containing this unnecessary spending kept the Harbrecht’s
daughter in school.
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You Can Have Anything You Want… When You Use the 60/20/20 Savings Rule
“Saving money has always seemed like a total impossibility to me,” says
Laura Preston*, a customer service rep from St. Louis. “I live for
today and putting money away for the future just didn’t thrill me
because I wanted to see immediate rewards for all my sacrifice. Then I
learned about Emotional Savings and that has made all the difference.”
Preston
is referring to the 60-20-20 Rule, a method of saving that makes the
necessity of putting money away more realistic and enjoyable. Emotional
Savings is part of that 60-20-20 Rule and it can change the way you
feel about saving money too.
Here’s how it works:
We have
found that when people track their spending, they will find on average
at least 1 percent of their gross income they are wasting. This money
can then be used for savings by putting it into three categories:
Emergency, Emotional, and Long-term (Investments). Using the 60-20-20
rule, you should allocate 20 percent to Emergency savings, 20 percent
to Emotional savings, and 60 percent to Long-term savings.
Why
split savings up in this way? Everyone knows they need money for
long-term security and a solid retirement and that this will require
the most amount of money to fund. So setting aside 60 percent of
savings for this purpose is obvious.
Most people also realize
that emergencies do happen, but few are prepared with available funds
that they can immediately access when trouble occurs. However, with a
specific category of say 20 percent set aside for this purpose, it’s
more likely that a person will have the money available when problems
arise.
The value of Emotional Savings is not so obvious, but
we have found this to be the most rewarding category that people can
spend money into. At Money Mastery, we teach that money is more about
emotions than it is about math, so it goes without saying that we will
often spend money for purely emotional reasons. This, in and of itself
is not a bad, thing. It is simply something we should plan for, just as
we would an emergency or for our retirement future. In today’s
product-oriented society where we are often enticed to make impulse
purchases, we will often spend money for things we want whether we have
the funds or not. Saving money for emotional spending takes into
consideration that there are many times we need to spend money for
reasons that go beyond the categories we have assigned for basic daily
survival. Tracking money will help you balance your spending to your
income, but it will not be enough when an emotional event occurs. You
must put aside even more money so that you will be prepared when these
emotional events arise.
What are some of the emotional needs
for which you should be saving? Typically they include such things as
family vacations, holidays, or new recreational vehicles. Some people
use their emotional spending money to purchase clothing for a special
occasion, to buy novelty decor or to treat a family member with a
surprise gift or getaway. Whatever the money is used for, it is
important that it be spent on something fun, and not for routine, daily
sustenance. When you have the desire to buy a new DVD player, or take a
quick trip for instance, wouldn’t it be wonderful if you could fulfill
those desires by dipping into a savings account that has money you have
actually put aside expressly for that purpose? Preparing for the need
to spend money for purely emotional reasons eliminates reckless
spending of the money that has been set aside for daily survival or
long-term investments. It helps curb debt, and it brings wonderful
psychological rewards immediately into your life and the lives of your
family members.
How to Save Using the 60-20-20 Rule
Let’s
suppose that Hayden and Rose have a combined gross monthly income of
$6,000. After tracking their spending, they find an extra $60 a month
(or 1 percent of their gross monthly income) that they can use for
savings. Hayden and Rose could do the following:
- Emergency Spending:
Deposit $12 per month (which is 20 percent of $60) into a low-risk fund
such as a certificate of deposit, money market account, etc.
- Emotional Spending: Deposit $12 per month (which is 20 percent of $60) into any type of savings or investment account.
- Long-term Investments: Deposit $36 per month (which is 60 percent of $60) into any long-term retirement account such as a 401(k), Roth IRA, etc.
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Compound Interest: Is it Working For You or Against You?
Every year, we help people who are losing the battle with debt by
teaching them the Power Down principle of prioritizing their debts for
quickest payoff. One couple I worked with, Dan and Alene* are well on
their way to eliminating all of their debt, including a mortgage, in
just over eight years by applying Money Mastery’s Power Down principle.
Powering Down their debt freed them from paying compound interest to
their creditors and made it possible for them to collect it for their
own benefit instead.
By
taking the money they had been paying on debts and putting it in a
savings plan, they are accumulating interest that will allow them to
retire with just under $1 million! Seems almost too good to be true
doesn’t it? But Dan and Alene aren’t the only people who are doing it.
Thousands have become disgusted by the crushing burden of compounding
interest and have determined to make it work in their favor instead —
by eliminating all of their debt.
Most people are successful
at some sort of orderly approach to paying off debt, and are usually
vigilant enough to stick to that system until at least one debt is paid
off. But without understanding the full impact that compound interest
has in their lives, most people lack the discipline it takes to remain
committed to debt elimination and are tempted to spend. That kind of
mindset forces them to pay three times the amount they actually borrow
— three times!
What happens when we let interest expense silently multiply?
Situation:
The amount owed on a credit card is $3,100; the credit card company
charges an interest rate of 19.9%; cardholder only pays the minimum
monthly payment of $51.43.
Consequence: It will take 39.4 years
to pay off the card. Only 29 cents will be paid in principle on the
debt in the first year. And it will take $21,216.10 in interest to pay
off the card!
Every person in debt must realize they have to
be just as committed to eliminating compounding interest as compounding
interest is committed to take their hard-earned money. Interest’s
relentless pursuit is evidenced by this insightful statement made by J.
Rueben Clark Jr. at the height of the Great Depression:
“Interest
never sleeps nor sickens nor dies. Once in debt, interest is your
companion every minute of the day and night; you cannot shun it or slip
away from it; you cannot dismiss it; it yields neither to entreaties,
demands, or orders; and whenever you get in its way or cross its course
or fail to meet its demands, it crushes you.”
While
compounding interest is relentless for those who are a slave to it, the
beauty of it is that it can also work in our favor if we understand how
to harness its power. Dan and Alene are a perfect example. Using
compound interest in their favor required a complete change in the way
they thought about and dealt with money. And it didn’t just start when
they began eliminating debt. It began the day they applied the other
Money Mastery principles they had been taught previously.
First
they got their emotions under control and began tracking and
controlling their spending. This led them to find money they had been
wasting. But rather than immediately consume that extra money the
minute they found it, as most people do, they began thinking about the
future. Instead of being seduced into believing that they could have
everything they wanted at that moment and everything they might want in
the future, they realized that they had to make a choice. People who
refuse to make a choice foolishly believe that they can spend all their
money on consumable goods and high-interest credit card purchases right
now and still have everything they want later, including a comfortable
retirement. This just isn’t so.
At some point we all have to
make a choice: We can either prioritize the way we spend and pay down
debt so that we can take advantage of the power of compound interest or
we can continue to recklessly spend and remain in debt and have nothing
for the future.
Remember, you can have anything you want, you just can’t have everything you want.
One
of the greatest minds of our time, Albert Einstein, looked upon
compound interest as the greatest discovery of the 20th century. We
like to point out that compound interest can also be the greatest
opportunity of this century for those who understand how to use it.
If
compound interest is still working against you rather than for you, we
encourage you register for a free account and download the full text of
MONEY: What Financial "Experts" Will Never Tell You. Learn more about how to eliminate compound interest before it eliminates your future!
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How Consumer Credit Counseling Services Actually Hurt, Not Help Y ou
People in serious debt are often enticed by the claims made by consumer
credit counseling services that they can help solve all their borrowing
problems. But relying on these services may not be any better than
declaring bankruptcy. To understand why, let’s take a closer look at
the history of credit extension in the U.S.
In
the 1970’s credit bureaus wanted to make money, so they began gathering
information on people’s payment histories and charged banks and other
lenders for this information. This seemed to be a violation of privacy,
but since people could not get a credit card or borrow money for a car
without allowing banks and creditors to use this information, they
couldn’t very well sue the bureaus for this violation.
In
addition, credit agencies that purchased the debt history from the
bureaus could change anything on the credit report at will. Some
agencies cheated, by offering to delete black marks by accepting money
from borrowers wishing to improve their credit report. These black
marks could be erased with a simple arbitrary, yet bogus “explanation.”
In order to combat this arbitrary change to the credit report, credit
bureaus created a separate corporation called the Fair Isaac Credit
Organization (or FICO). Because credit agencies can still alter the
report, lenders have come to rely completely upon the FICO score, which
can not be altered.
All of this history and the dilemmas caused
by it converge into one main problem for the consumer. If you don’t
control your spending, you will eventually end up with a bad FICO
score. This allows all your creditors to automatically increase
interest rates, fees, and renewal charges. Sometimes rates can get to
be so high that consumers are no longer able to pay even the minimum
balances on their cards and seek help through credit counseling
services. But there can be danger in this.
Because credit card
issuers want to be warned when a person is in trouble and might file
bankruptcy, they helped establish government-sponsored non-profit
consumer credit counseling agencies. When a person goes to a credit
counseling service to get help, they can actually get hurt. How? The
credit counselors have, in advance, received permission to drop
interest rates to zero and work out partial payments. All this is in an
attempt to help the person in financial trouble and to discourage them
from filing bankruptcy. In turn for this service, the credit counseling
agencies get compensated by the lender. Seems like a good deal right?
Not
really. As Dave Anderton of the Deseret News reported in his August 29,
2004 article on consumer credit counseling services, “What most credit
experts don’t tell you, is that the use of a consumer credit counselor
or debt management program is reported as a black mark on your credit
report. And that black mark could stay in place for seven years —
nearly the same length of time as a bankruptcy filing — even after late
payments and debts are brought current.” Anderton further reports that
according to Blair Drazic, a former assistant public defender for the
city of St. Louis, creditors “run a system of extortion and blackmail,
where they can legally take the food from your children’s
mouths...through late fees and usurious interest rates. Drazic said
high interest rates and exorbitant late fees are compounded when
working people seek out the services of credit counselors in order to
pay back their debts, only to find in the end that their credit rating
has been dashed. ‘The problem’, says Drazic ‘is that oftentimes these
counselors lead you to believe that you’re going to have great credit
when you get done, and we’ve found the opposite. In the eyes of
would-be lenders, credit counseling can damage your credit rating and
borrowing power just as much and sometimes more than bankruptcy.’”
In
our experience at Money Mastery, it seems best to go directly to the
lender and negotiate an interest-free, penalty-free payment instead of
trusting in these consumer credit bureaus, or these wolves in sheep’s
clothing, as it were.
Fortunately, there are consumer credit
laws in place to protect the consumer. If you use an attorney, they can
threaten credit issuers with huge fines if requests for help are not
answered and can even force that inaccurate black marks quickly be
dropped off a report.
While this information is helpful, the
best advice and the secret to true money mastery is to prevent getting
into this kind of bad debt in the first place. The best way to do this
is to track exactly how you spend and why. This will go a long way
towards keeping unnecessary debt off your back and th |