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Posts Tagged ‘Debt free’

The Lost Art of Small Talk or Dealing with Fair Weather Friends

How many friends do you have? Thirty? More? Ten or less? It’s an interesting question because it determines a great deal of our happiness.

Loneliness is feared as much as the night. Losing a spouse or loved one cuts deep as we know how much we’ll miss the dearly departed.

Age can bring on acute loneliness. I wrote a Christmas post a few years back about a client who died shortly after I visited her Christmas Eve. Her name was Sophie. She died many years ago. I visited her because I understood how alone she was. Sophie was a client for many years and she spent the last years of her life in unrelenting isolation. Every time I think of her it brings tears to my eyes. I can still feel her weak hand squeeze mine all those years ago.

“One is the loneliest number that you’ll ever know . . .” is a familiar ballad that resonates because we all know how easy we could find ourselves alone. Deep down we all fear the emptiness.

The worst punishment in prison is solitary confinement. Cutting a human being from the stimulation of other humans is considered punishment. It’s really torture and any human forcing another into isolation deserves the death penalty. Isolation destroys the mind; destroys the human and any intelligent person undertaking such activity is the lowest form of life.

Personal Finance and Friends

It might seem strange for a personal finance blog to cover isolation as a topic. However, there are several correlatives between avoidance of isolation, the types of friends you have and wealth.

Some people like a certain kind of isolation. Personally, I like quiet time walking my farm and working with my animals. This is radically different from the kind of isolation Sophie lived through.

Isolation in a confined space is maddening. Sophie couldn’t get around those last years of her life and needed people to visit her. To the best of my knowledge she only had one friend who visited on a regular basis.

People are so desperate to avoid being alone they start to consider acquaintances as friends.

I have a lot of acquaintances, but very few real friends. I bet you’re the same.

Business owners tend to have a larger list of acquaintances. I meet people from all walks of life and learn very intimate and personal things about them. It’s my job! I have to know my client to advise wisely and prepare an accurate return. Even digging into a client’s life doesn’t guarantee I will not miss something. As I write, a client of many years emailed to ask why he didn’t get certain credits. He never answered the questions in the organizer so it was missed until he said something that triggered me to ask the question verbally. Good thing the returns are still able to be amended.

In my life I also have employees. They are acquaintances, not friends! Employers who are friends with employees are asking for trouble!

Then we have this blog. I meet loads of people due to this abstract. Some people I meet at conferences and many more via email, phone or the comments section.

You are probably different. Your acquaintances might be a group of people you socialize with at the bar. You might consider these people friends, but they are almost certainly only acquaintances.

Who constitutes a real friend then? Mrs. Accountant is top of the list for me. Deep down she is my only true friends. My daughters and extended family are friends in a way, but family is family. I get along well with my blood relatives. We don’t chum around, but make no mistake, we will defend our own vigorously. At best I maybe have two real friends outside my bride.

Life is like that. Our true friends are limited while our circle of acquaintances is vast. This is an important understanding to have if you value living a debt-free lifestyle with ample helpings of wealth.

The Lost Art of Small Talk

Valuable time is wasted on small talk. A typical greeting goes something like this:

“Hey, how’s it going?”

“Great. Haven’t been better. You?”

“Happier than a whore on her day off!”

We say it with incredible choreography. We say these things so often we don’t even know we are saying it. We even think we’re a comedian with our witty repertoire.

But nobody is listening.

If you answered a “How’ya doin’” with a “Worst day of my life” you’d probably here the same rehearsed reply of “Good to hear it.”

Small talk is wasted breath! Small talk is something acquaintances engage in. Friends are much deeper.

A simple greeting can waste irreplaceable minutes of your finite life. Added together over a lifetime and you might be surprised to know the average person wastes 4 years and three months uttering and replying to meaningless greetings (I made up that statistic).

Unchecked, you can waste massive parts of each day in empty banter with people you are only acquainted with.

There is a way to tell if you are dealing with a real friend or a fair weather friend. Think for a moment what would happen if you left the group. Would these people stay in touch at a significant level or would it dwindle in a hurry?

My experience tells me most people will evaporate like the morning mist. Staying in touch via social media doesn’t count either! When I meet people at conferences we sometimes end up connected on social media platforms. But once time passes the “likes” decrease and the interaction stops. Sure, you can keep an eye on what your acquaintance is up to, but that’s nothing more than satisfying your curiosity about how things have evolved for a prior acquaintance.

 Dealing with Fair Weather Friends

Fair weather friends can suck the life out of you. As long as you’re buying they are willing to lift a glass with a cheer.

In a manner of speaking clients are the ultimate fair weather friends. They are good people, don’t get me wrong. I love the people I serve. I also have no illusion we are not close buds.

Clients are similar to an employer/employee relationship. As long as you do good work and they keep paying for said work the relationship is golden. Do crappy work for a week and see how long the friendship lasts? Don’t get paid and see how long you feel friendly?

Fair weather friends are not bad people! Few people have what it takes to be a true friend. Most people wander through life focusing on the minutia and looking for drama. People who gossip are a perfect example of who will not make a real friend for anyone. They’ll cut you lose in heartbeat for their own petty dramas. And don’t worry. There is always something to feel righteous indignation about.

Before we deal with fair weather friends further we should discuss the interpersonal relationships between real friends.

It can be hard to look in from the outside and tell if the friendship is real or a friendship of convenience. Greetings between real friends happen all the time. Every night when I return home I inquire into Mrs. Accountant’s day. She asks about my day. Some days are only mildly informative. Some days we sit and talk for hours.

You can share a beer with a true friend as easily as with an acquaintance. You probably mix acquaintances and true friends at the same time.

True friends stick around when the going gets tough even if you are in the wrong. Real friends hold each other accountable but never dismiss the relationship over a disagreement.

Real friends have deep and meaningful talks. Talk is 99% superficial with acquaintances.

For people who enjoy traveling, tell me your stories. How deep are the relationships when you’re passing through? Your spouse or significant other is the only real friend you have in the room.

Even when people meet with common interests the friendships are superficial. How many people have you met at personal finance conferences? How many do you stay in touch with? How many are a deep and meaningful relationship? I understand.

Meaningful Relationships

Jim Rohn said you are like the five people you spend the most time with. I think this excludes to a minor extent people you work with and might include people you read and follow.

Deep, intimate relationships are built on more than casual nights to the movies or tavern. Real relationships have emotional attachments. If the relationship were to end you would feel pain.

Conversations in deep relationships are far more personal. Two guys (they don’t have to be gay and if they are, they are) can have a deep relationship built on trust, sharing and understanding. Think of the depth between soldiers in the foxhole. It gets real mighty fast or everyone is dead. There is no doubt when I see retired military guys meeting several decades later on a regular schedule to catch up they are real friends, even if the friendship was created by circumstances. When trust is that great it can’t die!

Research has shown if a skinny person has all obese friends the skinny person will put on weight instead of the obese group trimming down.

Heading to the shopping mall with crazy people friends who like to spend and you are more likely to overspend as well. I’ve even noticed this in the frugal FIRE (financial independence, retire early) community. The same people keep attending every conference as fast as they are organized. At some point you have to say enough.

Meeting with people of like mind is a wonderful thing to do in moderation. Time spent with people sharing similar thought patterns can be invigorating and FUN! But it is superficial! Most of these people are acquaintances only. You can learn a lot from them and teach a bit, too. But friends are what matter in life.

Everything in moderation. It’s not healthy for your favorite accountant to whine about traveling because I prefer to cocoon. Stowing away on my ten acres isn’t healthy either! I still need to get out. It’s a work in progess.

My preferred method of communication is writing. In the office plenty of verbal communication takes place too. But can you imagine if I only wrote letters to Mrs. Accountant and never verbally told her the depth of my love? Letters are special because most people don’t take the time to write them. I, on the other hand, need to assure I nurture the relationships that matter in my life with verbal confirmation. (I actually framed love poetry I wrote to Mrs. Accountant twenty years ago. It was my best attempt at a sonnet. She stayed so it must have worked.)

Fear

The things you read and study, the people you hang with, family and true friends play an outsized role in your success in life. Reading powerful leaders is important. Also read the classics.

The time you spend with people will influence your thinking more than you anticipate. Take the challenge. If you are deep in debt start reading debt-free blogs and books. Ask to hang out with people who save and invest a lot. Before long you’ll brown bag lunch because in your worldview people no longer have huge debts or spend like drunken sailors.

The opposite applies, too. Have too many people around you, even mere acquaintances, who are spendthrifts and within no time you’ll have some serious credit card debt to contend with. At least you’ll have an 8-mile to the gallon Hummer as a wasting asset in your driveway.

Don’t settle for friends or acquaintances who don’t share your values to avoid loneliness. Work hard to be a real friend and you will find true friends of your own.

Choose your friends wisely. The kind of life you live will depend on it.

Stalking the Accountant: Tax Planner for the New Tax Laws

Tax season is here with concerns about tax law changes effective this year while we still use the old rules for preparing the 2017 return. Several new tools are available to help you determine how the tax code changes will affect you.

Drake Software, the program I use in my office, has developed a Tax Planner incorporating the changes in the TAX CUTS AND JOBS ACT. If we prepare your return you will get a copy of this diagnostic automatically at no additional cost showing what your taxes would have been if the changes applied to 2017. No more guessing.

I am also officially opening my doors for additional tax clients! This is important. This summer will be busy as serious planning is needed for all taxpayers with rental properties or business income. Past advice is out the window as new rules mean new advice! Some people will need to consider different entity structures to take advantage of the new rules. Regular clients will have first pick of consulting sessions. If slots are available after serving clients I will open the doors for non-clients. I’ll keep you informed.

If you prepare your own return you should consider Drake’s DIY program with the link below and in the right column. You will receive the same diagnostic tax professionals using Drake provide.

 

If your tax professional uses software without an effective planner or you prepare your own return outside this blog you might consider the Tax Proposal Calculator offered by the Tax Policy Center. I’ve played with the calculator and find it helpful.

[After I published, Jeff from Maximum Cents (a blog you should consider reading) left a comment with a link to an even better tax calculator than I provided above.

https://www.maximumcents.com/tax-reform-calculator-much-will-save-pay/

This is what I love about the blogging community. Our group intelligence blows away anything I can do on my own. Thanks for sharing, Jeff.]

 

The stock market has been on a tear. Now is the time to consider monitoring your wealth building with Personal Capital. The easy money has been made with the massive market run-up. Having a plan and clear visual of where you stand financially is a powerful resource. Clicking the image below takes you to Personal Capital. Remember, you can’t manage what you don’t know.

 

Concerns over the market also have people thinking about different places to invest their money. Lending Club and Prosper were a great alternative until issues arose a year or so ago. I’m currently withdrawing all my funds from Lending Club and Prosper due to the high level of risk compared to the declining returns. This is a slow process, but nearing the end.

A similar investing model backed by real estate is offered by Peer Street with comparable returns. Lending Club and Prosper are unsecured loans with a higher level of risk. Peer Street isn’t a perfect answer, but certainly a consideration for a limited percentage of your portfolio. Clicking the image below takes you to Peer Street. Kick the tires and let us know what you think in the comments.

 

Student loans came up in the comments this week. Debt is the number one enemy of wealth and student loans are structured with serious risks to the borrower. I’ve pasted a link below to SoFi. At the very minimum kick the tires. Before interest rates climb higher you want to get your loans under control.

 

Before we get to the fun stuff, remember next week is our drawing for $100! The drawing is open to all subscribers. Check the Where Am I page calendar for more drawing dates and details.

 

Now for the fun stuff to enjoy the rest of your weekend!

 

What I’m Reading

Richard Branson has made a name for himself doing business differently and having fun in the process. I bought several of his books a few weeks ago and cracked open The Virgin Way: If It’s Not Fun, It’s Not Worth Doing.

Richard’s style is different and it resonates with me. I fell in love with the FIRE community for their frugal ways. Early retirement always sounds nice, but retirement in its traditional form isn’t for me. Enter Sir Branson.

Branson convinced with his words and lifestyle you can have the best of both worlds: free time with family and doing the things you enjoy, plus keeping the business. He also provided me with ample evidence I need to listen more and better. I tend to talk too much. (If you’re reading this dad do not comment. We, ah, you can laugh about this at the card table.)

Branson has a refreshing style I enjoyed more than I originally thought. If you want a fun, entertaining and informative read, I recommend The Virgin Way.

 

What I’m Watching

Natural history and science are common threads in my viewing habits. My guess is you’ll enjoy as much as I did this YouTube video on how the Earth’s landmasses moved over millions of years. [240 million years ago to 250 million years in the future]

 

Professor Brian Cox is a favorite. In the video embedded below Cox explains The Biggest Threat to our Civilization.

 

All that serious talk requires balance with a humor piece. Jim Jefferies is a riot. His humor reminds me of George Carlin with an Australian accent. Here Jefferies explains the situation between North Korea and the U.S. Enjoy.

 

What I’m Listening to

Talking about Australia, here’s a song from Midnight Oil I listened to this week. [Beds are Burning]

 

Finally, I rarely listen to recent music releases. The following video of Somebody That I Used to Know played at the gym ad nauseam a while back and YouTube must have heard about it. Now I can’t get the darn tune outta my head. I’m passing the blessing on to you.

 

Enjoy your weekend, kind readers! Can’t wait to get back with you again Monday.

When Maximizing Gains are a Stupid Idea

There are times thinking like an accountant determines how much of your hard-earned money you get to keep and how well your investments perform. Money isn’t the only thing accountants think about either. Time is more important than money by a long shot and plays into the equation every time.

This past week my oldest daughter asked if I would be helping with her tuition for next semester. I lollygagged as I didn’t want to think about it at the time. My daughter persisted, finally mentioning she wanted me to know about her tuition if I wanted to use a credit card to accumulate bonus miles or cash back.

Every year I generate cash and miles equivalents of around $10,000 per year. The whole family knows my love of these bonuses since they are tax-free and nothing motivates a tax guy like a five figure tax-free benefit.

I shrugged at the suggestion of getting another credit card for a bonus. Yes, tuition is nice spend to generate lots of cash back or miles. I did just that earlier this year.  But I didn’t feel like it anymore.

Another credit card with a required spend would be a nice added bonus. However, I only undertake the process when I feel like it. Some days I am in full hack mode and other times I could care less. Since I don’t need more miles and the kitty is full, my desire is based solely on thrill.

It comes down to time. Tracking spending on a certain card takes a small amount of time. The rate of return is high, but I don’t want to do it! Call me a spoiled child (in the comments, please), but there are times my time is worth more than another $400 tax-free.

Earlier this year I went crazy on the system. I used several new cards to generate thousands in cash, free hotels rooms and miles. I hate traveling and business travel will take years to consume all the benefits I amassed this year. Like I said, I went ape.

I also discovered selling tradelines a year or so ago and decided that looked like fun (if not tax-free). After mild research (and a few hiccups) the ride started producing a revenue stream. The numbers were nice, even if taxable income.

Selling tradelines requires more time tracking each card involved and assuring you have at least something on each card involved. It started becoming a pain in the tail real fast. The money wasn’t worth it after a while. (My attitude changes over time. When I stop enjoying the process I go do something else; when my deviant nature bubbles to the surface I am all in. Until it grows old again.)

Danger Zone

There is a danger in the FIRE (financial independence, retire early) community. We tend to research to the nth degree as we seek to maximize results with minimal risk.

But minimal risk may not be acceptable risk! As I went crazy on selling tradelines I ended up with one credit card cancelled. (Don’t cry for me. Plenty more where that came from.)

The danger part of tradelines was wasted time. Owning a business means I have plenty to spend on. Putting a few transactions on a dozen cards started being a real time consumer, however. If I didn’t have a tax practice and blog to manage I might find the time expenditure acceptable.

With tradelines you need to track when an authorized user is added to the card and when to remove them. More time is needed to track your payment so you get paid for the hassle  investment of time.

The money is good, no doubt. Selling tradelines on a few cards can add a few hundred to the mad money account. A dozen cards can reap up to a thousand every month; sometimes more.

A good accountant would milk this thing for all it’s worth. I’m not every accountant.

A bird in the hand is worth two in the bush they say. And they are wrong! Free money from credit cards is a lot of fun, but your time is more precious! I will still harvest tradelines and credit card bonuses when I feel like it, but this is the boy in me playing. It isn’t maximizing results.

Or maybe it is! Picking every bone clean that happens in your path is insanity! Not only is time precious, but what you could do with that time can easily make more. Life is too short to waste on every hack. You must be careful which hacks you pick and choose.

Blood Letting

Harvesting credit card rewards and selling tradelines at least makes you money as long as you don’t increase spending. The real danger comes when you only consider maximizing rewards in other areas of life.

Drugs might provide lots of utility as long as you realize it costs money and a piece of your soul with every purchase/use. An alcoholic drink now and again is fine for most people. But if you get confused with mild stimulants you can get in deep quickly. The jails are full of people who maximized pleasure without concern for long-term consequences.

Not to mess with your head, kind readers, but sex is good a few times a week, too. Seven times a day might sound funny, but you can do real damage. You don’t want to milk every last ounce of utility before you end the activity. (Bad choice of words.)

And now we get to the real risk of maximizing results applicable to everyone in the FIRE community. Every accountant knows (or should know) leverage is the best way to spike results. Public corporations do it all the time. XYZ, Inc. adds a pile of debt, buys back stock and watches earnings per share skyrocket.

Until it doesn’t.

Leverage is a double edged sword with the edge cutting you enjoying the advantage. You see, leverage has a built in cost. Interest is owed on each leveraged dollar, win or lose. Break even is a loss with leverage.

Investors figure this out early on. A thousand dollars can buy $2,000 of most listed stocks. If the stock increases 10%, your return is 20%, minus interest owed on the borrowed money.

Here is where it gets bad. If the investment declines the loss is also magnified! A 10% decline is a 20% loss on your original money, plus interest owed on the borrowed funds.

The worst part is staying power. Everyone knows broad market declines happen. Everyone should know the market always comes back given enough time. When you use leverage you don’t have unlimited time. Interest is accruing every day you have an outstanding balance on the loan. The market can outlast you when you use leverage.

Without leverage, all you need to do is wait. An individual stock might go down for the count. It happens. But the overall market is a reflection of the long-term growth trends of the whole economy. In time the market will reflect the continuing growth in technology, productivity and economic growth.

And only the unleveraged can outlast Mr. Market.

Hidden Leverage

Most people use leverage at a far greater level than what is allowed to buy stocks, bonds and mutual funds.

I can hear your screams of innocents. You don’t buy stocks or mutual funds on margin* (good to hear), sell your tradelines (maybe you should) or use credit cards with or without rewards and bonuses (why not?).

However, I bet you borrowed money at least once in life on an investment virtually guaranteed to lose money: a vehicle loan. Ah, but that’s different, you say. No it’s not, says your favorite accountant.

Leverage is leverage. And leverage accentuates gains and losses. An auto loan creates the same leverage a stock investment does. The only difference is the size of the loan and the guarantee the asset will decline in value.

There is another leverage I bet most readers have used: the mortgage. But how can you afford a home without a mortgage, you protest? You might not. I’m not even asking you to buy your first (or any) home without a mortgage. What I want you to think about is the amount of leverage you are taking on and the potential consequences.

Real estate tends to be a good investment, except for 2008. As bad as the housing market was in 2008 and thereabouts, the only people who lost their home to the bank had a mortgage. Usually leveraged to 100% or more.

Some leverage can be a smart move, but leveraging any asset or investment to 100% or more is begging to have your head handed to you.

Think of it this way. You buy a $100,000 home with $3,000 down. (We will ignore closing costs and other items that muddy the water.) If the value of your new home goes up 3% the first year you doubled your equity in the home. A mere 3% decline and your home has no equity. None. Zero.

In most cases you are okay as long as you are current on your payments. That is a whole different issue. What does happen when you have no equity in your home is it requires you to come to closing with cash to sell the darn place. It removes the selling option for many people.

Massive leverage is common historically in real estate. In my office landlords are the number one group to declare bankruptcy. They are also the same group who has the highest net worth. What’s up with the dichotomy?

It all comes back to leverage. Those who abuse or overuse leverage find themselves in too deep to wiggle. When you lose the ability to move financially you are in death spiral. Even if you survive there will be significant damage done.

The Efficient Frontier

I hear business owners and those willing to cheat on their way to FI brag about a method they discovered to generate massive income and net worth growth. Before the words are out of their mouth I know they read a news article on using leverage to spike returns. The article probably highlighted a major corporation using leverage to maintain and grow returns.

With rare exception it ends badly and our victims need to start over or at least re-walk part of the path toward FI.

Accountants love to talk about efficiency and maximizing returns. And it is true I want you to think like an accountant. But just because thinking like an accountant is a good thing doesn’t mean accountants never have stupid ideas. Abusing leverage is one of these ideas.

I would never, repeat, never recommend a client to borrow funds to invest in the stock market. This includes option strategies to spike investment returns.

(Side bar on options: Options are not bad in and of themselves, but most people use them wrong. I have no problem using an option to buy a stock a lower price and collecting premiums or replacing a sell order with a covered call. However, if you use an option to buy stock you must have all the cash on hand. Otherwise you are only disguising massive leverage. The bad kind.

If you don’t understand options you have no idea what I just said. That’s okay. Someday I’ll write a post on options and the incredible risks to the foolish as well as using options as a hedging tool for your own investments. Stay tuned.)

Back to our show. A car loan is leverage and not the good kind either. I understand a loan is sometimes necessary. When this is the case you must make your leverage a DEBT EMERGENCY! When you have debt on a wasting asset all nonessential spending stops until the debt is gone.

The home mortgage is a bit different. I make exceptions to the rules for mortgaging a property, but only after careful consideration. Once again, remember 2008. It never happens until it does.

If your accountant tells you to leverage your business or investments, take caution. When he (a woman would never recommend such a stupid strategy) explains how leverage maximizes your gains, grab your wallet and run like the wind. Your accountant didn’t lie, but the risk assumed to take such a strategy is insane.

If your accountant, or anyone else, encourages excessive leverage on real estate or business, or any leverage on an equity (stocks, mutual funds, et cetera) position, remember the words of the dearly departed George Carlin:

“Do you know how you can tell if you have a stupid kid? Take him to the curb in front of your house and stand him there. If you come back in two weeks and he is still there you have a stupid kid.”

And a stupid accountant.

 

* borrowed money

Debt Collector’s Suicide Bomb

This blog post is part of the Suicide Prevention Awareness Month blog tour in partnership with Debt Drop. If you are feeling suicidal, please call the National Suicide Prevention Lifeline at 1-800-273-8255 or text HOME to 741741.

 

In the waning days of the second millennium of the Common Era I found myself in Austin, Texas advising a hedge fund in the charge-off receivables industry. There was no way I could know that within five years I would be running my own hedge fund and then a second. There was no way I could foresee my responsibility in a suicide and the contemplation of my own.

It started in the most unassuming way. Via letter I was introduced to the charge-off receivables industry by a Tennessee hedge fund that used a Texas firm to handle their collections. The hedge fund put me up at a 5-star hotel on a PGA golf course. I wasn’t impressed by the largesse. I prefer more Spartan living even when traveling.

The charge-off receivables industry is a dirty business. Charge-off receivables are delinquent debt sold to a third party for pennies on the dollar. As an example, credit card accounts 180 past due require banks to either book a 100% loss on the account or sell the bad debt, whereas, they can use the sale price as a partial offset.

Credit card companies never lose. An account in default frequently brings 15% or more as “fresh” debt for the charge-off receivables industry. The debt buyer scrubs and grades each account. Some are slated for legal action, others for simple phone calls and letters.

Within an hour of buying a package of debt a LexusNexus report tells us everything we need to know on every account we bought. The report tells us where the debtor works, what bank accounts they have and balances, assets owned, and more. Armed with this information we let our dogs loose demanding payment. In short order many of these debtors have suit filed against them. I was called in for a reason. I know how to collect; to hell with the consequences.

Two years later I was burnt out due to the traveling. In my mind this would be the last I saw of the charge-off receivables industry.

Big Shot Hedge Fund Manager

Two years later one of the insiders I consulted with called. He wanted to start his own hedge fund in the charge-off receivables industry and he wanted me as a partner rather than advisor. After plenty of arm twisting I agreed.

Three years into our very own hedge fund throwing off a 28% average annual return my partner had a personal issue requiring him to leave the fund. A new fund was organized. Investors of the old fund could walk with their 89% gain or roll funds into the new fund where I was the sole manger.

There is a slight head rush to being the top dog at a hedge fund. I had ideas which could turn past performance even higher, as if 28% were not enough.

The Benevolent Debt Collector

Packages of debt can get large. I always dealt with less than fresh debt. We always bought from other third parties who already worked the debt. Buying straight from the bank is expensive. Older debt can be more profitable. Many times the debt we purchased was a nickel or less on the dollar. This meant $1 million bought $20 million face value of debtor accounts. Million dollar purchases were common.

So far the old and new hedge funds looked identical. My network of collectors and law firms around the nation were the same with new additions as I vetted them.

Once I got my feet set in the new hedge fund I discovered Dave Ramsey. I wasn’t an endorsed local provider (ELP) of Dave yet, but I loved what he was saying. It made so much sense and some of my tax clients and all of my hedge fund accounts could use this advice.

When debt packages were purchased I was curious who was on the list in my state. Periodically I’d see the name of someone I knew or a client. Clients showing up on the list were a conflict of interest so I sold those account to another firm similar to mine.

As I reviewed and scrubbed packages I started noticing patterns. One pattern included people who did fine with money all their life and then fell off the cliff. Another pattern included the same names showing up multiple times. If I bought three large packages this month of mixed bank accounts I might find some people listed five or more times. Somebody’s life went bad fast!

It’s a no-no in the debt collection industry to call a debtor if you are untrained; the rules are immense and the penalties for breaking them immense. I was the numbers guy, not a collector. But I felt my idea would benefit the debtor while spiking my returns so I did it anyway.

I bought large volumes of Dave Ramsey’s book The Total Money Makeover. Around this time I contacted Dave’s organization, was vetted and accepted as a tax ELP which allowed me to buy Dave’s book at a large discount. I bought boxes.

When the hedge fund bought a package of debt there could be 20,000 or more accounts involved. We bought packages on a regular basis. I scrubbed the accounts for special cases. I was looking for people who did well for a long time and had a life event that caused financial/debt issues.

I also looked for people with a lot of bad accounts. People with a large number of delinquent accounts were hard to collect from so I wanted to do a good deed.

I sent a copy of Dave’s book to select debtors in our files with a letter encouraging them to use the book to improve their current financial situation.

Later I would call these accounts. The rules require certain disclosures when you call to collect a debt. I never called to collect the debt; I called to encourage usage of Dave’s philosophy to get out of debt.

I informed these people they could resolve debt issues if they were serious about changing a few habits in life. Most of the time I got a story. There is usually a good reason why they failed and will keep failing.

The rest I reminded did not have to pay in full. It is common in the industry to pay less than the full amount to satisfy the debt. I encouraged people to work a payment plan to pay half the debt and have the rest charged off.

The goal was simple. If people were too far in to work their way out I would give them hope and a way back to normalcy. This was good for them and good for me. I paid a nickel on the dollar for this debt and if I collected even a fraction of the face value I made a huge profit.

Not What It Looks Like

My plan was working like a well oiled machine. Profits were up and I was helping people in an industry notorious for chewing people up and spitting them out.

One day a week I dedicated to calls. Many times the calls lasted much longer than anticipated as the debtor finally found someone to tell their story to who cared. Some weeks I called thirty people, some weeks only five. Either way I was making a difference and adding serious money to the funds bottom line.

Medical issues were a common problem with people who were good all their life and only recently had unpaid bills. Sometimes they even had insurance. It broke my heart. I took whatever time was needed to help them.

One day I called a debtor I sent Dave’s book to a few weeks prior. He thanked me for the book and explained his wife was dying of cancer. The doctors gave his wife a few days to a few weeks to live. He promised after he buried his wife he would start paying his bills again.

He had insurance, but the insurance did not cover an experimental procedure. He was willing to try anything to save his wife. They were only in their 30s.

The stress of his wife dying of cancer and the added burden of medical bills caused him to mortgage the house to the hilt and max out credit cards to cover medical bills. (The hospital would not proceed without payment.) He was in over his head and he still lost his wife. The next LexusNexus pull on the packages that included his debt showed his wife had passed away a few weeks later.

I ordered his account to be marked PIF for paid in full. I couldn’t collect from the man. I would not add to his burden and grief.

His accounts were still on file. Two months later a LexusNexus pull indicated he too had died: suicide.

My stomach turned. I couldn’t do it anymore. Something broke inside me that day. No matter how good my intentions I couldn’t do it anymore.

Most people dig their own debt hole and it is hard to feel sympathy at times, but many, many more also are deep in debt due to circumstances outside their control.

At the time I felt like it was my fault this client (and by now I felt he was a client, not a debtor account) took his own life.

It was early autumn, the time of year when I struggle with seasonal affective disorder. The shorter cloudy days dropped the curtain like never before. It was so bad I had the gun in my hand. I did not want to live anymore. Not in a world like this.

Finding Peace

I lived, of course. I eventually understood it was not my fault. It was still over for the hedge fund. It dawned on me I was part of the problem as a part of the debt collection industry. The industry is like a pit bull sinking in his teeth and never letting go.

My intentions were honorable, but misplaced. I thought I could solve someone else’s problems. It doesn’t work that way.

Debt is so caustic. It destroys so many marriages, ruins so many relationships and causes so much pain.

I came to realize people who created their own mess on their own still deserved an opportunity to get their life back, an opportunity the debt industry in uninterested in. The goal is to get you in debt and keep you there. They want your money, including interest. Interest is money paid where you get nothing in return. Sellers of debt have virtually no costs and keep all the profits. To hell with people and their families.

The hedge fund was wound down and disposed of. We didn’t do so well with the second fund. The 2008 financial crisis coupled with my wakeup call hurt results.

Responsibility

I beg you, if you are in the debt industry, consider the people you come in contact with. People who commit suicide are 8 times as likely to have debt issues. It can’t be a coincidence. You are the front line in protecting these people standing at the edge. You must never push them over. Ever!

And you, kind readers, you must be vigilant as well. You have friends, family and co-workers suffering under a burden of debt. Offer gentle words of encouragement. Maybe buy them a copy of Dave’s book. It does help. The Total Money Makeover is for people with serious debt problems. Readers here generally don’t have these problems, but people you know probably do.

If someone you know is distraught there is help. Call the Suicide Hotline at the opening of this post. Check the link to Debt Drop. There may be financial help available, too. Never allow anyone to navigate the darkness alone.

Finally, share this post. It might save a life.

Spending versus Cash Flow Meets the Debt Bomb

“It’s not working.”

A long time client started reading this blog and subscribed wholeheartedly into the idea of saving half her income. She discovered the blog early so she had nearly a year of effort under her belt. Student loans were the worst part of her debt, but credit cards and a mortgage also weighed heavily on her financial plan.

Saving half your income is the floor, not the ceiling. In this case, my client and her husband earn nearly $100,000 a year. They wanted to cut their spending to my levels using my yardsticks for spending. They are down to the mid 40s, a very good sign. The lament, however, has me concerned.

The only way this works is to be consistent. Years of hard work can be destroyed by a short-term spending binge. A new expensive car, a cottage up north, a trip to the casino and a new set of furniture can all be spent in a single month. The penalty will take years to fix.

All Between the Ears

Financial success and early retirement are all mindsets. There is no special ingredient needed. Patience and persistence is all you need. Responsible spending cannot be a chore; it must be an ingrained part of who you are.

My client is nearly in tears as she tells me it is not working. But it is; she just isn’t seeing it.

I question her on why she thinks it is not working. She confesses they are still broke even though they reduced spending. I ask where she thinks the money is going. She says they are putting every spare dime they have into reducing debt.

Ah, the debt bomb!

Digging out of debt takes work. Fixing decades of bad financial habits takes a few years. One year is only the beginning.

The Difference Between Expenses and Cash Flow

There are several things that drive accountants crazy. One of those things is how people have no idea what the differences are between a profit and loss (P&L) statement and a balance sheet. This lack of understanding causes clients significant pain.

A new loan, for example, is a liability, not income. People get that. You don’t pay tax on loan proceeds. They correctly place the loan on the balance sheet as a liability. When payments are made they list the entire payment as an expense on the P&L. Wrong!

My client cut her spending and plowed the excess cash into debt reduction. In her mind she was still spending, putting all the excess cash flow on the P&L when the principal part of the payment belonged on the balance sheet.

Keith’s Rule: Interest on debt is new spending. The payment to reduce principal comes from current cash flow to pay for prior financial indiscretions.

My goal is to get you to think like an accountant. You need to understand where the money really goes on your personal financial statement so you can eliminate debt and build wealth.  Let’s walk through the process.

Every transaction in accounting has two sides. We will not bog down on terminology or train you in handling complex accounting transactions. I just want you to understand there is always two sides to every transaction, whether in business or your personal finances.

We will start with taking out a loan. Let’s say you bought a home for $100,000 and took an $80,000 mortgage. How will the money look on our financial statements?

You now have a $100,000 asset on your balance sheet. The other side of the transaction is a reduction of $20,000 from the checkbook for the down payment and you also have an $80,000 liability. The entire transaction takes place on the balance sheet.

You can consider the home purchase spending. In a way it is. However, accountants don’t look at it this way. The home is still worth $100,000 and can be sold, converting it back into cash. Normally a property is depreciated. That is not the issue with a home purchase used for personal purposes. Therefore, I don’t include a home purchase as spending. The insurance, taxes, mortgage interest and maintenance are current expenses only.

When the first mortgage payment is made, what happens? Part of the payment is interest and the rest is principal. In our example the payment is $1,000 with $800 going to interest and $200 going to principal. The second mortgage payment will have less interest since part of the loan has been paid off by the prior payment and the principal portion therefore increases.

The mortgage payment looks like this on the financial statements:

Personal checking account: -$1000 (balance sheet: asset)

Interest: $800 (P&L)

Principal reduction: ($200) (balance sheet: liability)

Notice how the $1,000 coming out of the checkbook is matched exactly by the principal and interest parts of the transaction. We call that having the books balanced.

Why is all this important? Our simple illustration outlines how money moves. My client felt she was not getting traction from all her efforts when in fact she was. Each reduction in spending was used to retire debt. The less debt you have, the less interest accrues, meaning you are further reducing your spending with each principle payment.

Interest expenses are current spending! Reduce debt, and hence interest expenses, and you reduce current spending without any sacrifice!!!

Our example also reveals a bitter truth about money: spending and cash flow are two different animals. If you reduce annual spending to $30,000 a year, about what the Wealthy Accountant household spends annually, you will need MORE income to cover cash flow needs.

Accelerated debt reduction hits cash flow. All the money is still gone, but debt is reduced while you still retain the asset. Your net worth is unchanged! That is what hurts. You moved money from cash to reduce a liability. The bottom line is still the same.

Where you win is next month. The reduced debt means less interest accrued before the next payment is made. Less interest means less current spending. (And what did you get for that interest expense? Use of someone else’s money. That’s all.) The next payment pays off more principle because there is less interest to pay. Before long the debt is gone.

People planning on early retirement (or retirement at any age) need to understand they live in a cash flow world. The bank does not care what your expenses are. They want to know if you have cash flow to pay them back with interest. In our example, the person taking out an $80,000 mortgage will need $80,000 of excess cash flow over spending. Debt is painful and it should be. As painful as it is, people still are too excited about saddling themselves with loads of it.

Debt-Free Cash Flow Needs

Once you are debt free you can live on your income alone. If you have $30,000 in annual spending you only need $30,000 in income to cover those expenses. No excess cash flows is needed to cover liabilities.

Investments are nothing more than moving money from cash to the investment category, both of which are assets. You are just shuffling what you own.

 

Warning

How I think about my finances is slightly different than generally accepted accounting principles. For example: A car purchase is an asset paid for with cash. In my business I would list this on the balance sheet and depreciate it. Same with any furniture or equipment. In my personal (mental) books, a car is current spending—the hell with depreciation—listed in a footnote. I consider most spending core spending. Cars, a home remodel and other major expenses I list separately. In the back of my mind I consider a car a current expense. But I also know it makes it look like my spending is lumpy so I list the car as a footnote so I can track my core spending more accurately.

Great care must be taken when making large purchases. If it doesn’t show up in core spending it might be overlooked. Overlooked spending can get out of control. Remember, a large asset purchase shifts money from an income producing asset (investment) to a wasting asset in many cases. (Cars are wasting assets. They drop in value until the day they hit zero.)

I explained the cash flow issue to my client. She seemed to perk up as I showed her how her efforts were reducing spending (less interest) and how each month her income was now building her net worth a bit faster each month. The student loans really had her down. But she was making progress. In a few short years the debt will be gone and investments will be sizable as long as she stays the course.

Another way of thinking of cash flow is this. You need excess cash flow (income over spending) to fund investments. With rare exception, you are either spending more than you earn or investing excess cash flow, even if in a checking account. Expenses rarely match spending exactly. You need enough excess cash flow over time to fund investments before you can retire.

Understanding the difference between a balance sheet and a P&L will help you reach your financial goals faster with fewer crises. Knowing where each transaction goes on the financial statements allows you to build your net worth faster. Once your assets over liabilities (hopefully there are few, if any, liabilities) reach an appropriate level you can chose the life you live. We call that retirement around here.

 

Here is How You Can Piss Off Donald Trump

Disclaimer: This is not a political rant! The time is ripe for this message and Trump happens to be President. It is meant as satire wrapped around a serious message you must follow or suffer the financial consequences.

Nothing is more fun than good times. The recent run in the stock market in nothing short of incredible. After years of slow growth economy and low inflation coupled with a rising stock market, the stock market has exploded. The chart has gone parabolic! But this is not a story about investing or the stock market, however. This story is about pissing off Donald Trump.

Promises of faster economic growth and more high paying jobs face reality after Election Day. President Trump has hitched his wagon to a promise of hyper economic growth, in the neighborhood of 4% or higher. Depending on the day, a lot higher. I’m guessing if things go well we can see wages double every three, maybe four, years. And the best part, no inflation while the government pays off the national debt and increases spending across the board. Such are the promises of politicians.

And in these “best of times” you think it will last forever. Think 1929 or 1987 or 1999. Oh, for the heady days on 1999 when broad stock indexes sported triple digit P/E ratios. How can you lose? The future is clear to the horizon. Life is good, just ask the government.

But you don’t like President Trump. Even those two words together turn your stomach. How can a misogynistic scoundrel, Russia loving, Mexican wall building, China hating, swindler like that be President? He said nasty things about your mother and you are not having it. You want to hurt the bastard (without going to jail). How dare he win an election without winning the popular vote! It isn’t fair! Do I have to write every sentence with an exclamation point? Guess not.

There has to be a way to rip the façade off the man who insults women and every known ethnic group. The only (somewhat) sacred demographic is white middle aged men and it is starting to look like a gay pride parade around here. Which, when you think of it, is another group the Trump camp hates! Your blood boils as you plot your revenge. You can hurt him. You can hurt the whole crowd of miscreants in the White House.

You begin to formulate a plan. A plan so devious they would give you the chair for it. (Actually, it might be a very nice, custom-made chair perfect for the sitting room, but I digress.) You can’t shoot the guy. They whoop up on ya pretty bad when you do stuff like that. Besides, the guy is too stupid to suffer as he goes so it is a nonstarter. You want something that hurts the bastard day after day with grinding and gnashing of teeth where he burns in hell forever and ever, suffering and screaming and . . .  ahhhhhhh!!!

I scared myself.

Revenge is a Dish Best Served Frugal

Then it occurs to you. You know exactly what you will do to punish the man who insulted the woman who brought you into this world. What you have planned is so devious even the devil himself will quake in your presence. You finally figured out how you can piss off Donald Trump daily till his dying breath.

President Trump prides himself a deal maker, an uber-successful business owner. Take away the one thing he prides himself in and you rip his identity from his skull and trample it in the gutter of flowing raw sewage. (Wow. Even I am impressed by my contorted words of bitterness. Look out Stephen King, you have competition.)

The plan is simple and costs less than nothing. All you do is stop spending. Only the most basic of needs are satiated. Debt is retired, bills are paid and then spending grinds to a halt. You start biking to work and preparing your own meals. The massive pile of cash you accumulate needs a home so you invest it in index funds. (You thought of buying gold, but your tax guy told you gold is not a good long-term investment so you took his advice and bought Vanguard index funds, you sly dog you.)

Your solo efforts are too small to dent the economy so you enlist an army to march to war against or the orange haired menace. You start a blog and preach early retirement, saving, investing, legal tax reduction and frugality. It starts slow at first, but before long the message spreads. Soon thousands, then tens of thousands, then hundreds of thousands, nay, millions of faithful followers heed your message of responsible spending and saving.

It becomes a cult for fucks sake! God help us all.

Only a few years into his Presidency, Donald Trump faces economic headwinds like never before. The economic effects were impossible to ignore. Household debt declines to levels not seen since the 19th Century. Yes, 19th Century. Interest rates and inflation remain low with the newfound frugal habits of respectable men and women the world over.

Jobs growth slows; GDP declines. You achieved your goal. You managed to piss off Donald Trump without breaking a single law. Not a one! (Well, okay. Except for the time you spray painted an orange mustache on a Trump election campaign poster. But, hey. It’s only illegal if ya get caught. Right? Oh, piss off, as our good friends in the UK would say.)

You grin with inner pride as you single handedly mount a worldwide army to destroy the menace from 5th Avenue. You secretly rejoice as the Republicans in Congress buzz like bees over the economic catastrophe.

Then the best part of all starts: 3 a.m. tweets! President Trump is so mad he can spit nails. The government is so pissed at you they forget about Snowden and put all their efforts against you. Trump demands you be brought before him.

People either love you or hate you. Half the world wants to protect you and crown you king while the other half want to mails little, itty-bitty pieces of you to the White House as a gift to the commander-in-chief.

Reaching your goal of pissing off Donald Trump sounded a lot more fun until he issued a fatwa against you via a Twitter storm. Why is he so pissed at me? you complain. All I did was tell people to pay their bills, retire debt and live the good life. I’m the good guy!!!

Run as hard as you may, the masses of faithful found you tucked away in your hole behind the farmhouse. They dragged your sorry ass into the sunlight to be exposed for the fraud you are. They stuff you into an SUV (a fucking gas-guzzling SUV!) and drive you to the capitol.

It is a long drive from Wisconsin to Washington D.C.  Crowds line the road all the way cheering their support. As you recount all your actions your heart sinks lower and lower. This is how it ends, you think to yourself. All you did was tell people to spend less than they earn, save, invest and act responsibly. Why do you have to suffer the consequences for your actions? Why?

The Big House

The brainwashed followers of President Trump grab you by either arm and direct you into the Oval Office. You are not getting away. When you see the great orange haired narcissistic demagogue you fall to your knees and start bawling, “I don’t wanna diiiiiiiie!” You inch forward on your knees until you are at the President’s feet.

You reach out and hug his left leg like a dog greeting his master coming home from a long day of work. You contemplate kissing his shoes, but decide a long painful death was more palatable than kissing Donald Trump’s loafers. It was a close decision, yet one you were still fully capable of making and adhering to.

Your world and life was at an end. A sort of calm came over you as you realized how quiet the room was. You stop sobbing, out of tears to shed. You accept your fate. It is then you realize you deserve everything you get. Telling people to save and pay off debt. Really! What the fuck were you thinking? It’s un-American!

New York Times

Special Edition

March 3, 2217

 

Today is the 200th anniversary of one of the most bizarre events in American history. A wealthy accountant from the backwoods of Wisconsin started a war against then President Donald Trump. He built an army of followers who cut their spending, saving and investing the difference.

President Trump knew his plan to build walls and raise tariffs would never work. When it looked like all his plans would fail, a savior rose from the backwaters of this great nation making America, yes, even the world, great again.

The message of this accountant resonated with the masses sick of living under the yoke of debt and poverty. He taught the people spending was the problem, not income. People started living better than ever before in history after his campaign of terror set the world free at last.

President Trump had no idea where the money would come from for his massive infrastructure rebuilding plans. More public debt or Federal Reserve money printing would only make matters worse. Then this crazy accountant came out of nowhere and saved the whole thing from collapse. All the saving people did provided the funding for the programs to make the human race great again.

Never before in history did people bike so much and eat healthier. People worked less and had more. The economy purred like a kitten. Before long debt collapsed around the world as people and nations discovered a new economic model that was sustainable. The world changed that day for the better.

Today we remember an American hero who showed us the way 200 years ago. Today in history, a wealthy accountant received the Presidential Medal of Freedom.

[Footnote: Conspiracy theorists claim the wealthy accountant was sobbing and groveling at the President’s feet prior to receiving the highest honor a President can bestow upon a civilian. This journalist finds that to be the crazy talk of radicals trying to sully the good name of a wealthy accountant who happened to live in Wisconsin 200 years ago. Never forget what he did for us.]

Serious endnote: I am writing this as the stock market roars higher and the promise of accelerating economic growth is in the air. This is a dangerous time. I’m not talking about the stock market; I am talking about your spending habits. Don’t drink the Kool-Aid. Going back to old spending and consumption habits will come home to roost later. If anything, now is the opportunity to double down on your wealth building program. Pay down debt if you have any. Max out tax advantaged accounts. Don’t worry about the current level of the market. There will be a times when it goes down a lot. As always, it will also rebound to new highs. Excess spending is a 100% loss you never come back from so keep a tight lid on consumption.

Finally, if you are in or near retirement, now is the time to fill the short-term fund to maximum. You should have at least two years of spending minimum in a safe short-term fund. Money markets, guaranteed bank deposits and short maturity Treasury bills will do the trick. Enjoy the ride.

The Easy Way to Wealth: Deferred Gratification

 

Sometimes it is hard to wait.

Instant gratification is the hallmark of a good economy according to the government wonks and marketers. It is also the hallmark of the impoverished souls forced to work forever in a soulless job to cover the debt payments.

Watching clients for decades has made it clear there are only a few golden rules to wealthy. Automatic investing is one; deferred gratification is the other. Deferred gratification is what funds the investment account so I think deferred gratification is by far the more powerful of the two traits.

Instant gratification is sometimes hard to see. Today I will point out all the signs you are satiating your lusts a bit too quickly for your own good. By recognizing your overzealous spending habits you can delay gratification to your benefit. You give up nothing, but gain plenty of freedom, less (or no) debt and financial independence. It is a stress-free way to conduct life.

Signs You Are Not Delaying Gratification

Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway, said in a recent CNBC interview, he believed in “deferred gratification”. Munger is 93 years old. And he still believes the best way to live life is by deferring gratification. Does he know something most of us miss? Perhaps the secret to wealth AND happiness is delaying gratification, if not outright ignoring certain gratification permanently.

Even frugal people are guilty of instant gratification. The most obvious tell-tale sign someone is not deferring gratification is debt. Spending more than you earn is a direct result of satisfying lusts without proper thought. Every pretty trinket draws your credit card from its nest without regard for consequences.

Then we have the so-called “good debt”. Try to run that one past Dave Ramsey. Common practice says business and mortgage debt are good debts, along with student loans. Wrong! Debt is the acid which destroys the vessel which holds it.

Before anyone goes and accuses the friendly accountant writing these words of hypocrisy, I confess I have a small loan on my personal residence. Let me give you the excuse first. I have the cash to pay it off and the interest rate is so low my investments earn more. Now let me tell you a story about why my theory is 100% wrong.

Back in 1978 inflation was rocketing higher. Banks convinced farmers borrowing more money was wise because interest rates were lower than inflation and commodities were moving higher. (Interest rates would soon catch up to reality.) It’s the same argument I make today with my home. Inflation is 3% and my mortgage rate is 2.375%. Back then inflation was 8% and interest rates 7.5%. Same BS story when you think about it. Heck, dividend yields were darn near as high as the interest rates around 1980.

My family bought the line. We were dumb farmers and dumb farmers go broke. Interest rates moved higher, the economy stalled and commodity prices collapsed. The family farm went into bankruptcy in 1982. Here is why.

No matter how bad things get you can always cut costs. You can grow your own food, sew your own clothes, turn down the heat and eliminate any spending not 100% necessary. You can live on almost no money if you really have to. The one thing you can’t cut the cost of is debt. Those payments are due each month and there is no way to reduce the cost without coming up with the cash to pay the debt in full. And the money to pay the debt off in full has been spent long ago on something you don’t care much about anymore.

Student Loans and Mortgages are Required

No they are not! I understand most people starting out can’t pay cash for a home. I get it. However, once a home is secured, mortgage retirement must be a priority. No one ever lost their home to the bank without a mortgage. It sounds like a stupid comment, but I keep making it at the office and people keep ignoring the advice and losing their homes. Trust me, it’s not a crime to retire your mortgage. And don’t get me started on the tax deduction argument. I do not have to explain giving the bank $10,000 in interest to get $3,000 back from the IRS is industrial strength stupid.

Student loans are the other popular debt today. Gotta get a student loan so ya can get smart and earn mo money. It’s just another error in judgment and refusal to heed Munger’s advice: defer gratification. Spend today to pay it back later with interest. Dumb.

The first test of going to college is getting there. Putting it on the credit card is not earning the right to attend. Scholarships would qualify.

Stop! Think about what you are doing before going into debt.

Debt as a Cash Management Tool

By now you must think I am cold and callus. I get it. My attitude can rub some wrong.  But I have watched for too many decades client after client suffering the consequences of not following this simple advice, to live debt-free.

But debt can be a tool. Short-term use of debt in business frequently makes sense. If the money is there but using it would cost more than borrowing, then debt is the proper course as long as you retire the debt in short order.

Just like a mortgage, cash management debt is acceptable if a shoulder is put into killing the debt as quickly as possible. The same applies to student loans. If a modest amount of debt is needed to finish a degree it is usually the proper course to do so. But if you have no scholarships or personal cash to fund the bulk of your education expense you are engaged in instant gratification at the future’s expense. Student loans lingering five or ten years later is a problem. If you have to change your lifestyle to deal with the debt you might need to rethink the reason behind acquiring the debt.

Don’t get suckered into the leverage argument either. Of course leverage increases the rate of return on an investment. It also magnifies the losses when thing head south.

Defer Without Pain

Deferred gratification only hurts if you let it. Munger is 93 and still talks about delaying gratification for something he will never live long enough to see. That is the mindset that made him rich, mentally well adjusted, happy, and never feeling like he missed out on anything. Munger has enough money to buy anything he wants. But as Buffett said, more homes would not make him happier. In fact, it probably would make him less happy.

The only path to wealth is deferred gratification. If you buy everything you want when you first want it you will be broke. And miserable! Use an old trick when you see something you want. Sleep on it for three days. If you still want the item you at least can rest assured you want it enough to use it for an extended period of time.

Practice poverty, as Cato and Seneca recommend. It’s not that bad. Spending every penny you earn is the part that causes lasting pain and loss of freedom. You will find owning less stuff an important part of freedom. It’s not only the debt and lost opportunity cost of money you could have invested, it’s also the burden of storing, using, protecting and managing all the stuff you have. The weight of buying every trinket the moment you see it is quite a stressful lifestyle.

And you will not miss the stuff you don’t buy! All the toys and electronics are a distraction at best; a distraction from the truly awesome things life offers. When you buy something you also feel an obligation to use the item at least for a while to justify the purchase. Instant gratification is a harsh mistress. She demands your soul long after the transaction is finished.

Happiness is in less. The only time more is better is when basic human needs are unfulfilled. You need a minimum amount of quality food and water, clothing to keep warm and shelter. The shelter does not need any fanciness; the clothing can be old and plain to meet your basic needs. If you are not happy at this point more stuff will not fill the void as marketers would have you believe. After the basics, additional stuff is a job weighing you down. Only you can decide how much of a load you plan on carrying around for decades.

Charlie Munger still preaches deferred gratification for the country and himself. He refuses to buy just because he can. He knows buying will not make him happy or feel better. Munger enjoys good books daily and prefers a good deal over crazy spending even though it would make no difference to his wealth at this stage of the game.

I hope CNBC keeps the article up for a long time. You can read it here if they do. Munger’s comments were about the nation preserving natural gas resources while waiting for other parts of the world to exhaust their supply. His advice will not come full circle in his lifetime. It does not matter to him. Doing the right thing does.

This is an important topic people must hear. Please share, like and comment. Your small effort could make a difference in our modern world.

Credit Card Secrets

We think of credit cards as those things which allow us to manage our financial lives without carrying money around. Bills are easy to automate with credit cards and paying the card at the end of the month is a simple, one-time, setup online and it is paid in full on the due date without any further action on your part. Even if you don’t record your spending, a credit card has a nice list of all your spending in one neat, compact location for future review.

Those crisp pieces of plastic come with a dark side also. Without constraint, you can dig a financial hole difficult to crawl out of. Make no mistake; credit cards are debt, even if you pay them in full monthly. Debit cards serve the same purpose and are not debt because it comes out of your bank account; when the money runs out, the purchases are declined.*

Previous posts discussed bonuses, cash-back credit cards, and interest free/fee free loans. I consider those the easy benefit of credit cards. Debit cards offer limited bonuses and cash back, but credit cards take it to a whole new level.

There are a lot more benefits to credit cards most people either don’t know about or never take advantage of. I seek to end that problem now. These benefits are worth anywhere from a few hundred dollars a year to thousands, depending on your level of spending and the items/services purchased with the card.

The Fine Print

I carry several cards at one time. I use a specific card for certain purchases depending on the underlying benefits the card offers on such purchases. You should have received a booklet describing your benefits when you opened the account. If you tossed it because it was all fine print, you can review the benefits online for most cards.

This review is with a credit card I currently use. I will not name the bank/credit card because benefits can change and differ between products. The benefits are similar across credit cards with a few notable exceptions. These exceptions are generally used as an inducement to acquire more card holders for the bank. I will focus on the common benefits. When you are done reading this post I encourage you to print out a copy of all your credit card’s benefits and keep them with you. They are money in the bank.

Auto Insurance

picardwiningMost credit cards include some form of rental auto insurance when you use their card to rent the vehicle. Read the fine print! There are a few exceptions. Really expensive cars, like a Bentley, are excluded. The insurance on the card I am using covers physical damage, theft, loss-of-use charges assessed by the rental company, and towing. If you have auto insurance for a personal vehicle, check if your liability protection covers you while driving a rented auto. It usually does.

The car rental companies push hard to get you to buy their insurance. It’s a good deal for them with a high profit margin, frequently more profitable than renting the car! The insurance at the rental company is very expensive for what you get and because you may already be covered. By checking with your regular auto insurance company and reading the credit card fine print you can save a bundle.

Before I move on I want to point out a few caveats. If you buy insurance at the rental company that insurance pays before credit card coverage. The credit card does not cover injury, items not original to the vehicle, war, impaired driving (drugs or alcohol), off-road use, or loss of personal belongings. Long term rental periods (31 consecutive days or longer) are frequently excluded, also.

Purchase Protection

Here is one benefit you have passed on without knowing it. On the card I am reviewing they cover theft, damage or involuntary and accidental parting. Purchase protection replaces, repairs, or reimburses you at their discretion. The maximum is $500 per claim and $50,000 per account. Think of the value! The kids get a new toy and break it accidentally or it is stolen. You file a claim and should be covered if the terms of the agreement are met. Of course, you had to buy the item using the credit card you file the claim with.

A few things are generally excluded, and include: animals/plants, antiques/collectibles, boats, cars, aircraft, computer software, items purchased for resale, mysterious disappearance, fraud, abuse, war (this shows up a lot, it must be an issue), medical equipment, and perishables. As always, a few minutes of reading the fine print and keeping it handy when needed can be financially rewarding.

Extended Warranty

My card extends the manufacturer’s warranty of three years or less for an additional year without cost. The maximum claim is $10,000 with a lifetime cap per account of $50,000. This includes gift purchased with the card! Once again a few items are excluded: cars, boats, aircraft, items for resale, computer software, medical equipment, or used items. The manufacturer’s warranty applies first.

The extended warranty covers a lot of stuff. Cell phones come to mind. The fear of loss, damage, or defect is a major concern if it is not covered by the manufacturer. Most smart phones have a one-year warranty. They try to sell you expensive insurance with fear factors (broken glass or theft) which your credit card covers under the purchase protection and extended warranty benefits. No need to worry about a financial hit if you pass on the insurance which rarely, if ever, gets used. That is why credit cards offer it as a free benefit. But if you are the lucky winner, the coverage is a real benefit if you know to file a claim.

Trip Cancellation

When you purchase a vacation package or tour they always encourage trip cancellation insurance, except it is unnecessary since your credit card probably covers you for free if purchased with their card. It also covers family members on my card in review. The cancellation coverage is up to $5,000 per trip on my card. The part I like is you are covered if the trip is one or more miles from your residence. Really! Just one mile? A trip to the store doesn’t count?

There are a few restrictions as with any insurance. “Change of plans” is one excluded item, which makes sense. I’ll let you read the additional details in the fine print of your card which is similar to the coverage offered by trip cancellation/interruption coverage offered at the travel agency.

Price Protection

QuestionsBet you missed this one. Many cards, including the one reviewed here, offer price protection. On my card I am covered if I find an advertised price lower within 90 days of original purchase. This includes non-auction online sites like Amazon.

The limits are $500 per item for an annual limit of $2,500 per account. You are even covered for $50 per item/$150 annual for cash-only advertisements, close-outs, liquidation, and going-out-of-business sales! With my card you only need to pay for part of the purchase to be covered. Nice.

There are a few restrictions. Advertised items excluded are: flea markets, fire sales, limited quantity promotions, season sales, and auctions. Seasonal and discontinued items are also excluded, including: holiday decorations, clothes, and costumes.

Lost Luggage

After you get done tearing the airline a new one you might want to check with your credit card. The benefit reimburses you for repair or replacements costs. The nice thing about this coverage is that my card’s benefit is up to $500 for jewelry, watches, cameras, camcorders, and other electronic devices, with a $3,000 limit on all covered items for each trip. Money, securities, tickets, money orders, traveler’s checks, and furs are not covered.

Delayed Luggage

A perfect vacation can be ruined by lost or delayed luggage. My card says if my luggage is delayed more than six hours I will be reimbursed for emergency purchases of essential items. The benefit extends to family members and frequent flyer travel rewards when some portion of the trip is paid with the credit card. My card reimburses up to $100 per day for three days maximum. After six hours, go enjoy your vacation. It’s covered.

Trip Accident Insurance

This animal is really an Accidental Death and Dismemberment policy. My card provides $500,000 of life coverage if I die while traveling with the common carrier and $100,000 if I die within 24 hours of an accident on the carrier.  I’ll save you the morbid details of the benefits if you suffer loss of speech or body parts. My guess is if you ever need this benefit you will not care much about the lost/delayed luggage benefit. (Bet you were waiting to see how long it would take me to be a smartass.)

Travel and Emergency Assistance Services

Traveling is stressful so I avoid it like the plague. When I do travel it is nice to know I have a help line at my fingertips. There is a list of services attached to this benefit, including: emergency message service, medical referral assistance, legal referral assistance (you would think a crazy accountant could use this fairly often), emergency transportation assistance, emergency ticket replacement (a real stress reducer), lost luggage locator service, pre-trip assistance, and prescription and valuable document delivery arrangements.

Roadside Assistance

My auto insurance automatically covers me for this if I have collision on the car, which I don’t. They also charge for the benefit. Not my credit card! They love me. They give me the toll-free number of a motor club I can call 24/7 for help. If you are driving a rental car you need to call the rental company first.

Parting Shot

The cross-section here is only the start. Your credit card may offer more or fewer benefits. Your lifestyle will determine the right credit card for you. These benefits are often unused. That is too bad. Lost or delayed luggage is stressful, but if you knew you were covered it might make the situation a bit more bearable. Price protection and extended warranties are also valuable benefits.

When is the last time you filed a claim with your credit card company? Thought so. Bet a dollar to one you never filed the claim because you were unaware of the benefit. That needs to change. Credit cards offer a wide range of value. The bonuses, cash-back, and travel rewards are only the beginning. Come to think of it, traveling seems more appealing all of a sudden. Think I’ll book a flight for the missus and me.

You can review and compare the litany of credit cards here.

 

* Some banks and credit unions have decided it is okay to let people overdraw their account rather than decline a purchase to maximize overdraft fees. Financial independence requires discipline on your part regardless the method of payment you choose.

 

Note: Check the TWA Recommends page for all the latest best credit card rewards programs.