• Spend some of your spare time increasing your income.
• Pay off any consumer debt or loans as quickly as possible.
• Don’t buy anything you don’t need or can’t afford.
• Don’t spend a lot of money on depreciating assets, like cars.
• Pay your bills promptly and in the most efficient manner.

Saving & Investing

• Invest at least 10% of your net, before you pay anyone else.
• Buy your own home as soon as you can comfortably afford it.
• Study all types of investments, even the ones you don’t own.
• Never invest in anything you don’t understand completely.
• Properly diversify your investments, including real assets.
• Never give up control of your accounts, even to an advisor.

Life & Finances

• Have written financial goals and review them regularly.
• Make sure you are fully insured and protected from loss.
• Create a will and instructions for those you leave behind.
• High savings and low debt can mitigate a financial crisis.
• Sound finances can greatly reduce the stress in your life.
• After you save 10% and pay your bills, enjoy your money.
• People are the reason for money, not the other way around.

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For some, it’s hard to admit they need help with their finances.  For others, they are happy to delegate this responsibility.  No matter how you feel about your finances, it’s critical to retain control.

      If you turn over control, you risk losing everything.

You are Responsible

You can seek advice from friends and family, hire professionals to assist you or even take stock tips from cab drivers, but you need to be the primary decision maker.  Your future depends on the money you save and it’s far too important to trust to anyone but yourself.  Even if you’re not a financial genius, you must step up to this responsibility.

      Keep accounts in your name and review them regularly.

Protect Your Assets

There is a lot of publicity surrounding the recent fraud by Bernard Madoff and Robert Stanford.  But, this happens in America all of the time, on a much smaller scale.  Financial planners and investment advisers are sometimes incompetent or dishonest, with a devastating effect on people’s assets.

Financial professionals are often very well respected within a community.  This gives them a lot of flexibility and places them above suspicion.  Often, by the time fraud has been discovered, it has been going on for years.  There are rarely any assets to recover and investors lose everything.

      Don’t let your investments disappear with your adviser.

Avoid the Conflict

I have posted many times that there is a conflict of interest in the financial services industry.  The way advisers are compensated by commissions often gives them incentive to act in the best interests of investment providers or their employer.  Whenever they act in your best interest, they may leave some commissions on the table.  It’s best to avoid this conflict entirely.

      When advice and commissions mix, you pay dearly for both.

Get Good Advice

You may think from reading this post that I am against financial advisers.  That’s not the case at all.  I believe people should always try to get the best advice available to them.  If you need financial advice, consider hiring a fee-based planner and pay for this valuable service.  If your planner provides good financial advice, the benefits should far outweigh the costs.

      Paying for financial advice may be a very wise investment.

The Bottom Line

The bottom line is that it’s easy to become a victim of the financial services industry.  The more you know about the industry and the more you make your own decisions, the less likely this will happen to you.

“The first and worst of all frauds is to cheat oneself.”

Philip James Bailey – English Poet

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Everyone seems to have an excuse these days for not saving any money and most are based on this argument of “I can’t afford to save”.  Americans can afford luxury cars, designer clothes, shoes & handbags, exotic vacations, dinners out, booze, cigarettes and $4 cups of coffee, but they just can’t afford to save any money.

The truth is that saving isn’t a priority for most Americans and that’s unfortunate.  Because saving money is the surest and most reliable way for building wealth and changing your future.  It’s one of the few things people have some control over and yet, they act as though they are helpless.  Money isn’t kryptonite.  You should have power over your money and not the other way around.

“I’m Going to Win the Lottery.”

This morning, I went surfing with a childhood friend of mine.  We were out in the water talking about our lives, when he mentioned that he often bought lottery tickets and dreamed of winning one day.  I gave him a hard time and told him that he was more likely to die in a car wreck driving to buy the tickets, then he was to win the lottery.  On a more supportive note, I told him that it is much easier to save up a million dollars then it is to win the lottery.  I could tell from the look on his face that he thought I was the one who was dreaming.  The concept of saving a million dollars is way beyond most people’s imagination.  But, it’s actually very easy, once you are committed.

Some people get lucky and they actually win the lottery.  And, it has been well documented these people are rarely happy after winning.  The dream is usually much nicer then the reality.  Not only are they unprepared for dealing with the sudden wealth, but it brings a host of new problems.  By accumulating wealth over time, savers are much happier with their lives and more comfortable managing their wealth.

“My Finances are Outside of my Control.”

Last weekend, another childhood friend of mine called to say that he wanted to come and visit me.  But, he couldn’t tell me when he could make it, because he wasn’t sure of his finances.  In almost the same breath, he wanted to tell me all about the new truck he had just bought.  So, he has a shiny new truck, with a $628 payment, but he can’t afford the gas to drive to the beach.  Normally, I’m not judgmental of others or their finances, but my friend is 43 years old and he still lives with his parents.  For over 20 years, he has been telling me that he is thinking of moving out, but he’s not sure that he can afford it.

Now, this is a pretty extreme example.  But we are all guilty of this to some extent.  We can always find a way to afford the things we want, like a new truck or a nice dinner out.  But, we make excuses when it comes to affording the things we need, like gasoline or a retirement account.  Until people take control of their finances, they are living on the good graces and whims of others.  And, they are limiting their future choices, much like my friend.

Saving a Million Dollars

It’s easy to save a million dollars.
(Credit to Marshall Brain)

• Save $5 per day in an IRA or a 401K plan.
• Earn an average 10% annual return.
• You will be a millionaire, in 42 years.

For the cost of lottery tickets, cigarettes or a daily cappuccino with tip, you can become a millionaire.  It really is that easy and much more likely then wining the lottery.  Although 42 years is a long time, that 42 years will pass whether you decide to save or not.  Will you be wealthy in 42 years or will you be poor?  It’s completely up to you.

The Bottom Line

The bottom line is that almost anyone can afford to save at almost any level of income.  Yes, there are some Americans with dire financial circumstances, but they are few and far between.  Most Americans have created their own financial circumstances and they will continue to struggle, until they accept the consequences of their actions.  Dreams won’t pay the bills, just as excuses won’t make you wealthy.

If you ever want to have a sound financial future, you must begin to save money right now and continue to save throughout your earning years.  Start the habit of saving and the future will belong to you.  If you fail to save, someone else will decide your future.

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When I started out with my very first investment, I was “recommended” a mutual fund with an 8.5% front-end load.  For those who aren’t familiar with a load, this meant that for every $100 I invested, only $91.50 made it into my account.  The other $8.50 went for sales commissions and to the fund company.  On top of this, the fund that was “selected” for me had a poor long term track record, high volatility and very high annual fees.

I was pretty naive at the time and I didn’t realize that there were some great no-load mutual funds, where my entire $100 contribution could go into my account.  And, they had good long-term track records and low annual fees.  Of course, my friend and “Advisor” would never tell me about these no-load funds, because they didn’t pay any commissions.

Lesson 2 – No-Load may mean Hidden-Load

It didn’t take investors long to catch on to such obvious skimming of their contributions and soon even novice investors began to demand no-load mutual funds.  The financial services industry quickly responded with new “Advisor Class” funds, that had no front end load.  Instead, they have much higher annual fees and a “Redemption Fee”.  So, the longer you stay in these funds the more of a “load” you pay.  And, if you try to leave the fund you have to pay to get out.

So, although the fund is technically ”No-Load”, the Advisor is assured of a commission, the fund company collects higher fees and you get to pay for all of this.  An extra percent per year may not sound like much, but it definitely adds up over time.

Lesson 3 – Commissions can Affect your Investments

Another thing I realized very early on, is that most of the Financial Services industry works based on a huge conflict-of-interest.  Often, Advisors are paid the highest commissions for selling clients the riskiest or worst yielding investments.  From whole life insurance, to limited partnerships and variable annuities, some investments pay much bigger commissions to your Advisor than others.  And, you can bet your assets, that it’s not in your best interests to buy these investments.

Another huge commission-based issue is the subject of churn.  Your Advisor usually gets a paid a commission every time you move your assets into a new investment.  The more your investments get moved, the more your Advisor gets paid and the less your investments are likely to yield.  A good investment advisor would never churn their client’s accounts.  But, it definitely happens.

Lesson 4 – Investment Advice is Rarely Objective

Back in the stone ages, when I started investing, the Internet wasn’t around for investors.  There weren’t any blogs and statistics weren’t available with the click of a mouse.  Back then, it was hard to get good investment advice.  You either had to buy an expensive newsletter or you had to buy one of the financial magazines or newspapers.  And, the recommendations of these financial papers closely mirrored the products of their advertisers.  Biased advice can cost you a lot.

Another thing that happens frequently, is that investors get a “hot tip” about a hot stock from their investment advisor.  But, when they purchase this stock, it turns out to be a real dog with poor fundamentals.  The reason this lousy stock was recommended to you, is because it is underwritten by the brokerage.  Advisors push these stock and analysts give them good reviews, because the brokerage makes a lot of money on the underwriting fees.

Lesson 5 – Taxes and Inflation are Part of the Equation

When calculating your investment returns, don’t forget to subtract taxes and inflation.  Investment decisions are never accurate without taking these into account.  A 12% return is closer to 4% after taxes and inflation.  And, you are probably losing money on anything yielding less than 7%.  I base these calculations on 5% inflation and 25% taxes.  And, this doesn’t include currency fluctuations.

Feel free to disagree with me.  Feel free to  plug in your own numbers.  But, make sure that you take this into account or you may be over-estimating the returns from your investments.  More importantly, you may be under-estimating the risk involved, for the return you receive.

Lesson 6 – The Market Moves in Cycles

One of the most obvious ways to profit from the stock market is from the cycles that occur regularly.  The market goes up and down with the economy.  Also, money moves between large cap and small cap stocks and between growth and value positions, as they change in popularity.  Even some types of stocks are considered cyclical.

The first lesson of market cycles is that it’s very difficult to time the market.  I still own a home-builder stock that I held onto just a little too long.  So, I don’t have any great advice, except don’t fight the trend.  If the market is moving solidly in one direction, going with it is usually more profitable then going against it.  And, if it has been moving in one direction for a long time, the cycle may be nearing an end.  So, take some of the profits before the direction changes.

Lesson 7 - I’m Not Smarter than the Market

Recently, I have thought a lot about the failure of Long-Term Capital Management.  In case you aren’t familiar with the story, LTCM was a huge hedge fund that failed in 1999.  Some of the most brilliant minds in the industry, including two Nobel Prize winning economists, lost billions of dollars and were forced to liquidate the fund.  They created a financial model that supposedly would require a six-sigma event to fail.  Well, they were wrong and it failed spectacularly.

On a number of occasions, I have been reminded by the market that I am not smarter than it.  In fact, the Market delights in making people look stupid.  The reason no one consistently outperforms the market, is because the market quickly adjusts to any profitable strategy.  So, take advantage of market trends and don’t try to beat the market.  You may succeed at market timing for a short time.  But, sooner or later, you may fail in spectacular fashion.

Lesson 8 – Diversification is More than Stocks and Bonds

Having been through Black Monday and the Tech Crash, I strongly recommend having some real assets, such as real estate and precious metals.  Real assets hedge against inflation and protect you from stock market panics.   I also recommend some International exposure, such as global or international mutual funds.  International holdings help to insulate you from the local economy and currency fluctuations.

Obviously, these types of investments pose some risks and may require some expertise.  But, they will diversify your risks more broadly.  If you are a novice investor or don’t have a lot of capital, you may want to consider mutual funds, REITS and ETFs that will allow you to invest in these asset classes.

Lesson 9 – Look for Value in your Investments

There are many strategies for finding investments.  One of the most consistent strategies over the long haul is to look for investments that trade at a discount to their book value.  This is commonly known as Value investing and it makes a lot of sense.  Just as you should look for value in any of the products and services you buy, you should also look for value in the companies you invest in.

The first lesson of Value investing is that some stocks are cheap for a reason.  That’s why it’s called Value investing and not Cheap Stocks.  The stocks of dying companies are almost always cheap, but they are never a bargain.  Other investors can predict the future of these companies and avoid their stocks.  That’s why they are cheap.  The real secret of Value investing is in selecting good companies that are a good value.  This brings us to the final lesson.

Lesson 10 - Buy Companies, not Stocks

Some of the greatest investors Wall Street has ever seen, became successful with this simple premise; “You aren’t buying a stock or a security, you are buying part of a company”.  Too many investors (including myself) make the mistake of following the stock prices, without understanding the fundamental value of the company.  The value of the company is hard to calculate.  If it is a market leader, with good products and management, it may become very valuable.

If a company is poorly run or it’s products can’t be sold, it makes no difference how the underlying security is valued.  You will lose money on this stock sooner or later.  This is a big lesson I learned from the dotcom era, where earnings didn’t seem to matter.  Trust me, earnings do matter.  And, so do the products and the management.  They matter more than the current value of the stock.

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Many adults have completed a rigorous schedule in college, devised a career path and systematically attend to the needs of their family.  They meticulously plan out weddings, vacations and social events.  What most people have neglected is to create a financial plan.  And, finances are definitely one of the most important things to plan for.  Your entire future depends on it and it may take decades to execute.

Financial Planning is Easy

The great news is that it’s very easy to create a financial plan.  Don’t be intimidated or confused, because it’s lot easier than most of the things you are already doing in your busy life.  Reasons people avoid financial planning is because they either don’t know where to start or they feel helpless to change their current financial situation.  Take control of your finances and I guarantee you will feel a lot better.

Do It Now

The most important thing is to get started Right Now.  Don’t wait until market conditions are perfect or you are making more money.  Time really is money and waiting is always a mistake.  The sooner you start, the more your money will grow and the more experience you will have.

Three-Step Plan

1. Goals - Make a short list of goals you are planning to achieve.  For me, my original goals were to buy a house, accumulate wealth and prepare for retirement.  Later, as I became a family man, I started college funds for my kids.  Start with your goals in mind and the direction becomes obvious.

2. Commitment - Goals and plans are worthless without action.  Step two is to make a commitment to your financial plan.  You need to decide how much you will invest and how much you will spend for debt reduction.  My recommendations are to save 10% and pay 20% toward debt.  But, everyone’s budget is different.  Start with whatever amounts you are comfortable with and increase them as your finances allow.

3. Investment - Picking investments is easy once you have goals and an investment amount.  My recommendation for new investors is a no-load mutual fund.  Pick a fund with low expenses and a good long-term track record.  If you have trouble choosing, pick an index fund.  The reason I like mutual funds is because they are convenient for making automatic monthly investments.  You can also use a brokerage account or sharebuilder, if you would prefer to invest directly in stocks.  I don’t recommend savings accounts, savings bonds or CDs for long-term investors, because they barely keep pace with inflation.

The Bottom Line

The bottom line is that it’s easy to create a financial plan and to put it into action.  Having no financial plan is no way to get on track.  And, taking no action is no way to get ahead.  So, get started today and your finances will definitely thank you tomorrow.  Nothing feels better than confidence.  But, having money put away is a close second.

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Four-Step Debt Evaluation Plan

1. Make a list of every debt you owe.

2. Next to each debt, put a minimum payment amount.

3. Total up all of the minimum payments and write it down.

4. Decide how much you can pay each month and write it down.

If You Can’t Afford the Minimum Payments

You are in real financial trouble and you need to take immediate action.  The longer you avoid this situation, the worse it is going to get.  You need to decide right now if you are willing to make the kind of lifestyle changes that will allow you to crawl out of debt.  My recommendations would include downgrading your lifestyle and getting a second job.  Cutting back on lattes and bagels isn’t going to be enough.  You need to take more drastic action, like a cheaper car and cheaper rent.  You should probably avoid eating any place where you need to leave a tip and put off buying new clothes.

If you aren’t willing to make these types of changes, you should admit this to yourself and consider the consequences of being insolvent.  Face the facts, straight up and deal with it.  There is no fantasy world when it comes to bankruptcy.  It’s no longer easy to discharge debt.  And, you will pay for your indiscretions in many ways in the future.  I recommend bankruptcy only as a last resort.  I think this may be a good time to talk to professionals and I don’t mean those debt services on TV.

If You Can Barely Pay the Minimums

This may not be as bad as it seems.  First and foremost, stop accumulating debt.  Then, consider some of the lifestyle changes listed above.  If you can increase the amount you can afford to pay by only 30-50%, you have a great shot at getting out of debt in a reasonable amount of time.  Start by paying everything on time, so you can avoid late fees.  If any debt is over-the-limit, pay this first to avoid the penalty.  Avoiding these fees and penalties is a big key to dropping the balances.

If You Make Good Money but Can’t Get Out of Debt

There is no income level at which debt stops being a problem.  Often, debt grows even faster with increases in income.  Some millionaires have declared bankruptcy a number of times.  There’s no shame in being in debt.  But, it’s a shame if you choose to remain in debt, when you could be getting ahead and providing for a more secure future.

The problem of debt is three-fold.  First, you pay a lot of money to service the debt that you could use for other purposes.  Second, you greatly reduce your financial security, by increasing your required monthly expenses.  Third, you reduce your ability to save and plan for your future.  It’s a fiscally inefficient and insecure way to live.  And, it enriches the banks at your expense.

The Bottom Line

The bottom line is that crawling out of debt is hard.  I have personally struggled with debt and it doesn’t get any easier as your income goes up.  It takes a dedicated, committed effort, sometimes over a long period of time.  And, backsliding is inevitable, so be prepared for this.  Your car will break or you will face unexpected expenses at the worst possible time.

Keep paying and don’t lose hope.  Try to visualize how your new lifestyle will be, with a debt-free existence.  Calculate the future date, when you will be rid of your debts and pulling ahead financially.  Keep the faith and you will be rewarded.

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Last weekend, I went to the funeral of one of our salespeople, who lived in my town. He was only 49 years old and he left a wife and daughter to find their own way in this world. His daughter is only a year older than my daughter and they go to the same high school. He had a sudden heart attack, despite being athletic, happy and well adjusted. It was all very tragic and unexpected.

Don’t Dwell on Your Problems

Before you start to get caught up with all of your daily problems.  Be very thankful for the some of problems you don’t have.  You can become depressed over how you should be making more money or how you didn’t get the promotion or the raise you deserve.  You can also waste a lot of time and energy feeling sorry for yourself because others have a nicer house and car.  But, there’s nothing productive about wallowing in self-pity or coveting your neighbor’s goods.  In fact, this is probably the most self-destructive kind of behavior you can indulge in.  If you want the raise, the promotion, the big house or the fancy car, then go out and get it.  Dying of cancer is a problem.  Being successful isn’t.

If you are one of the people in this world dealing with a devastating problem, then my heart goes out to you.  I won’t pretend to have some magical answer.  But, I will say that I hope you can enjoy the positive aspects of your life and not become overwhelmed by the negative aspects of the problem.

Be Thankful for What You Have

What I like to do for myself is to take a minute to be thankful for everything I have.  If you have your health, talent and an opportunity, then you can get whatever else you need from effort and ambition.  If you live in the U.S. or another affluent country, then you should be thankful that you live in such a great place.  You can change jobs, start a business and invest in a virtually unlimited number of opportunities.  And, when you earn some money, you actually get to keep 75% of it.  People are dying every day just to get into this country to have the opportunity you may be complaining about.

If you are reading this from a computer screen, then you are probably way better off then the majority of people in this world.  Never forget this.  People who watch a lot of TV tend to feel underprivileged, compared to the characters on The O.C. or 90210.  Don’t fool yourself into thinking you are poor.  An American welfare recipient is actually one of the richest people in the world.  If you have something to eat today and a safe place to sleep tonight, then you should be very thankful.

Be Prepared for the Unexpected

Step 1. Emergency Fund - Having been laid off twice, I can tell you that there is nothing quite as comforting as having some money put away.  Small problems can often be overcome simply with an emergency fund.  Even if you never have to break into it, just the confidence that you have it under control is amazing.  If you don’t have an emergency fund of at least a couple months of pay, then your are exposing yourself to a lot unnecessary risk and stress.  Why worry yourself over small problems?

Step 2. Avoiding Payments - Most people in the U.S. need a place and a car.  What most people don’t need are high monthly payments.  Believe it or not, I survived six months of unemployment with a family of four and never had to break into my emergency fund.  I put about $1,000 on a credit card,  but that was the total damage.  How did I do it?  I got some severance and some unemployment.  But, the key was that my mortgage is small and our cars are paid for.  I think about having new cars, just like everyone else.  I also want to remodel our kitchen with new appliances.  But, I try to keep it on a “pay as I go” plan, in order to avoid payments.  When problems arise, debt becomes your enemy.

Step 3. Being Insured – In order to deal with big problems, you need to be fully insured.  If you are unfortunate enough to experience a real setback, a couple months of salary probably isn’t going to be enough.  Losing everything you have worked for is a tragedy in itself.  Having health, life, home and auto insurance are fundamental to a secure future.  When I was young and single, I used to roll the dice with insurance.  Now that I have a house and a family, it just doesn’t make sense.

The Bottom Line

The bottom line is that tough times can strike anyone at any time.  There is no sure-fire way to mitigate catastrophic problems, like a natural disaster or a fatal disease.  Your goal should be to mitigate common problems, like a layoff or a health problem, so they don’t become catastrophic for you or your family.  Being prepared is a lot more pleasant than being bankrupt.

Almost everyone has heard the above advice dozens of times.  And yet, very few take any steps to prepare for the inevitable problems that arise.  This is likely because they don’t want to spend less now for something that may never happen in the future.  This can be a catastrophic financial mistake.

Are you Prepared?

Oingo Boingo – from the song “Nothing Bad Ever Happens to Me”

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