Managing Your Money (Chapters 4 - 12)

Introduction

Chapter 4 - You Have the Power

The Power of Positive Thinking in Financial Planning

I remember a situation where one of my male friends was doing business with a female client. This was a very nice looking lady and she was gifted by nature in a big way in the right places. Over her fullness she wore a sweatshirt that said, “If you think you can, you can”. The little devil on my buddy’s left shoulder told him it meant one thing. Rather than listen to the little devil my pal knew that this gal was a very positive thinker. She believed that if you thought you could do something or be something in life, then the rest was automatic. So, seeing as how my friend knew this, the little angel on my buddy’s right shoulder won the day with pure positive thoughts.

Thinking you can is not as easy as it sounds. It is particularly hard on those days when you just don’t feel like getting out of bed much less taking on the world with a positive attitude. Getting you up, keeping yourself up, and getting and keeping others up is a major industry. There are daily meditations. People have routines so that they are up and going before they have time to let themselves get caught in the vortex of negative thoughts. People have rituals to get them up and going in a positive frame of mind. People have their faiths to give them direction and keep them believing in their God and in themselves and humanity. There are thousands of books and one in particular that stresses the “Power of "Positive Thinking.”

You can learn from your mistakes. You can even learn vicariously through other people’s mistakes. Through Part II of the book we are looking at many mistakes that can be made and then how to do things right. This is the core problem that people have. They know they are not succeeding. They want to do it right. But they just do not know how. There are lots of books on the nuts and bolts of how to budget and manage and invest. The hardest part is to get through the mental and emotional part of just doing it.

First, you have to recognize that you have a problem. The problem can take many forms. Financial consultants are confronted constantly with people who do not know that they have a problem. They simply are not aware that their balance sheet is in negative territory or they are in denial that it is. Sometimes there is a developmental block. There is a common thread amongst clients of counsellors for people in the 35 to 45 year age group that they are just ready to face reality until that age. Up to that point they just do not seem to be capable of understanding that their failure in life’s endeavours is largely due to their inability to identify and take care of their emotional package. They get wound up, strung out, stressed, frustrated and angry and need to be trained how to manage these normal emotions.

Some of the ones who are not aware of personal finance problems are too busy with careers. Because their career is successful, they are either too busy to know they are not managing their own finances properly or they just assume that their personal finances are also successful. Bill Clinton had his own personal spin on just such a situation.

“I made a C in Joe White’s microeconomics class the first semester. Professor White also taught macroeconomics second semester, and I got an A in that class. I suppose both grades were harbingers, since as President I did a good job with the nation’s economy and a poor job with my personal economic situation, at least until I left the White House.”

It can happen right at the top so if your personal finances need to be rethought you are not alone and in fact you are in good company. Just because you are good at your business or career does not mean you are good at your personal finances. That is undoubtedly why there are separate life goal categories for Career goals and Personal Finance goals. That also means you need separate Career and Personal Home Finance strategies for success.

There are some incredible rationalizations for why people choose not to address their problems with personal finance. There is the Lemming rationalization. “Everybody else is in the same mess.” I am with your mother on this one, “Just because they jump off a cliff doesn’t mean you have to.” There are those who just ignore the problem. However, with personal finances, if you ignore them long enough, the problems tend to come to you in the form of collection mail and phone calls. There is the juvenile, “I can’t”. This one is particularly good because it is so ambiguous. What can’t you do? Do you mean you can’t live your lifestyle on what you make? In this case you have to make more money or change your lifestyle to fit your income. Does it mean you can’t design a budget? There is lots of help in people and books for this one so this is just an excuse. Does it mean that it is too complicated for you? The answer here would be to follow the first rule of business. It is the Keep It Simple Stupid or the KISS rule. It is used by a lot of very simple, smart and very successful people.

Don’t make excuses. Visualize taking control of your situation and structuring it for improvement.

“IF YOU THINK YOU CAN…YOU CAN”

You have the power. Let go of the negative and release yourself to exercise your will power over your personal finances and your life plan. You deserve success.

Chapter 5 - Spending

Control My Spending

When you spend a dollar is that you are actually spending more than a dollar because you are spending your take home pay. For most folks this means that you have already paid your taxes at 3 levels of government, and your pension plans and unemployment insurance. Depending on where you live and what tax bracket you are in, this can account for up to 50% of your earned income. Benjamin Franklin said, “A penny saved is a penny earned.” Now it is more like a penny saved is 2 cents earned.

You have to find a way to capitalize on this fact. Have some respect for yourself. You work hard to earn your living. You have paid your dues to the society in which you are living. Now you are finally down to the money that takes care of you and your needs. Don’t waste it. Make sure that you get the most pleasure out of it that you can. Make sure that you spend it on things that give you pleasure. Make sure you get as much pleasure as you can per dollar spent. Get full value!!!!

Learn about yourself and ask yourself, “What do I really need?” Do you need that 6-carat diamond or do you need true love? After a hard week, do you need to over stimulate yourself with action or is some quiet time needed? Do you have to spend money and race around? Some of the most relaxing things are free or almost free. When you manage your money, you manage your emotions and vice versa. The importance of managing your emotions is that when you use money to make your self feel better or do things you enjoy, you are enjoying the cream of your hard earned money. Get full value!!!!

Control Your Spending

To control spending you first must recognize some of the ways that your 2-cent money is taken from you and you are given little of value in return. On top of paying government necessities, you have to pay for the necessities of life. You do not get through life without having to pay some medical bills. You have to buy the necessities of food, shelter and clothing. As your cash is flowing through the system, the bank takes a little piece of every transaction. The comedian “Gallager” who was famous for his vegamatic sledgehammer did a video called “Money”. He had one line in that routine that is particularly relevant in the context of bureaucracies and banks and your money. It was: “Wherever you leak, they hang a bucket.” They chip away at you for pennies, nickels, dimes and quarters every time you make a transaction. If the bank and the government and don’t forget the cell phone companies, respect the power of pennies, nickels, dimes and quarters, it is obvious that you should be humble enough to respect that dynamic as well.

So as you are enjoying spending your money watch out for those trying to hang a bucket on your wallet. You will recognize them most because they have fees and taxes and hidden charges and paperwork attached. They are there especially when it is an emotionally charged event. They are attached to the most emotional events in life; marriage, house buying, divorce and burial. In all of these cases there is a queue lined up at your wallet for a piece of the action. You will see this queue when you buy any luxury good that would have an emotional charge such as a vintage car or your “dream home”.

A lot of egos are all about flashing money. We have all watched the “big shot” and the “high roller” in action. It is exhilarating for them if they have the money. It is great for the economy that the money gets back out there circulating and creating jobs. However, if you do not have the money to do this, and you do it, you are committing financial suicide. Even some of these high rollers can undo their own wealth by becoming so wrapped in the ego of “high roller” that they lose track of the solid business practices and money management that got them to that status. Entertainers through history and in the present are noted for this. Inheritances are squandered this way. Families are impoverished this way.

Money and emotion are often dangerously interlinked. How many young men lose their minds in the presence of a woman? “The lyric in the Robert Palmer song goes “She’s so fine, there’s no way of knowin’ where the money went”. I remember watching over a 17-year-old group of my daughters teamates doing some fund raising. The young guys didn’t even get close enough to talk to these beautiful young ladies much less ask them what the worthy cause was before they had their hands on their wallet digging out an impressive contribution.

When a penny spent is 2 pennies earned, you must understand just how much you love that pet. One movie that is a Christmas rerun every year is National Lampoon’s Christmas Vacation. Who can forget the character of Cousin Eddy and his dog “Snot”? I don’t like to take the fun out of watching the story or owning a pet, but the scene where he loads up 200 pounds of dog food that he can’t pay for is a stereotype that is far too real not to address. Why are they struggling financially? It is a question of mixed up priorities. How can one in that situation put that much money and ego into a pet? I can understand that one may enjoy the comfort of a pet, but if you need pet comfort can it not be gotten at least from a more affordable animal? Also, like the high rollers, I can understand if you choose to spend your money that way and it gives you pleasure if you can afford it. If that is the case, are you conscientious enough to fulfill the animal’s emotional needs as well or is this a one way street?

Vanity is another very expensive emotion. Status symbols are all bought with 2-penny money. Make up is bought with take home pay. Hair stylists, spas, surgery, and jewelry all are paid for with take home dollars. For some the argument is that after using these products they transform into such a goddess that they motivate men to move mountains. For others, it is an indulgence that renews them after working so hard to be successful. Style and keeping up with it is another indulgence that strokes this emotion. I am not saying abandon these activities and purchases. They are fun. What I am saying is that you worked hard to get them, you are using your take home pay to buy them so make sure that these things are what you really, really want more than anything else that you want to spend your 2-cent pennies on. The manufacturers and retailers of these items and the advertising and promotions they use go after your emotional buttons. They make you feel like you are some kind of irresistible sex symbol if you use their product or an out cast if you don’t. You should be more confident than to be vulnerable to this kind of not so subtle suggestion.

Food is a huge industry. The marketers and advertisers are trying to get their share of your money for their company wherever they can and if they can make you leak a little extra cash, they are waiting with a bucket to catch it. The food conglomerates are trying to produce meals that are supposed to be like home cooked meals but all you do is heat them up. When you are really in a rush you can hit one of the fast food chains. Whether you are in a hurry or have some time to relax, there is a restaurant that will offer you what you want for a price. When you are spending your 200% dollars, you have to ask, is their product worth the price and the lifestyle when there is another option?

By lifestyle, I mean that you work a full day, and then you race past the grocery store, or hit the fast food restaurant or go out to a restaurant for your repast. You rush through dinner and then rush to your evenings’ commitments.

The option is to make your take home dollars work a little harder on your food budget. By taking the time to shop prudently, learn how to cook properly and then take the time to cook properly, you can cut at least 50% off of a prepared meal food budget. To figure out how hard you are working for someone else to make your dinner let’s do this calculation. Take the full dollar amount of your monthly food budget. (50% is for preparation times 2 because it is out of take home pay) Then divide that amount by your hourly rate of pay. That will give you the number of hours that you work each month at your job to pay for food preparation. When you get the number it may surprise you and then you have 3 choices. First choice is to maintain the status quo as a cost of working. The second choice if possible is to reduce the number of hours that you are working and use that time to reduce food costs. In the end you stay about the same in regards to the amount of money left for other things in your budget but in a double income house, one person can be home minding house business and kids at the same time as they are reducing the food budget. The third option is to keep working but get organized so that you budget your time to shop prudently and cook your own meals. That leaves a substantial amount of free money in your budget for indulgences or saving and investing or all of these things.

Do not underestimate the power of pennies, nickels, dimes, quarters and dollars saved. I have a little game that I have always played since my kids were born. I take whatever change I have in my pockets at the end of the day and put it in piggy banks for the kids. Once every few months, I roll it up and put it into a savings account in the kids’ names. Do you know that I have always had money for special projects for them? Those pennies, nickels, dimes and quarters have added up to thousands of dollars over the years and our kids have never done without even through the leanest times. Now it pays for my wine making hobby.

Take this concept and adapt it to your whole spending budget. If you take time to analyze a new car purchase, you can identify a multitude of ways that they are trying to hang a bucket on your wallet. Any purchase like a cell phone, that wants you to pay by monthly draws from your credit card or bank account should be scrutinized thoroughly as a bucket. If you analyze all of your purchases you can spend much less money and still accomplish the emotional goals you have aimed for. This is the “trenches” of money management.

This is where you really have to THINK YOUR MONEY .

Chapter 6 - Savings

Start Saving Money

When I first started at the job that I stayed with for 26 years, the senior administrators of it insisted that all of us young fools just starting up sign up to contribute to the corporate pension plan. The logic they gave us was that if you start paying right from the beginning, you would never miss it. If you are not allowed to touch it, then it will be there when you want it the most…when you are tired and worn out at the end of your working life.

I am in complete awe of how completely correct they were. If they were not so correct, I would not have time to be doing what I am doing at this moment. I am also in awe that they did this in economic times that were at least as uncertain as they are now. I am also thankful to them for having enough respect for me and my contemporaries to manage that plan with the highest level of diligence. There were economic ups and downs. There were those who tried to take our savings in a scenario much like that portrayed in the movie, “Wall Street”. Through it all there were those who always had a better idea and those who do not appreciate the level of diligence that has been applied to our collective savings. As I look at the youth heading into the workforce, I do not see a future for them like the one I had. They will be left to do this for themselves and hopefully they will listen to the wisdom that is available to them.

One of these bits of wisdom is that they must have a long term savings plan. One financial tool that should be in your toolbox is that you should know what constitutes an ideal budget. This is very similar to the form you fill out when you want a bank loan. You should have no more than 30% go for your housing, another 10% for your other financings and the rest should be for survival. Out of that 60% of your income, a percentage should be put into long term savings. You will never miss it and the financial power you will gain as time and the miracle of compound interest have their effect is amazing to witness as it builds. In the particular instance of retirement savings, the government actually helps you save by not taxing you on the money that you put into registered accounts for this purpose. They will allow you to save a percentage of your income but there is a cap on the percentage of your income that you can contribute. And this is in the highest tax bracket of your income. If we assume you are in a 30% tax bracket, if you save $1000, only $700 of that is from your 2-cent take home pay. The other $300 is from reduced taxes. You are going to lose that $300 to taxes anyways, why not lose it to yourself? You don’t really lose it either. You just defer getting it. Another nice thing about Retirement Savings Plans, no matter what country you are in, is that you save paying taxes on the interest gained while the money is in the plan. When you do receive it, you will have gained the tax free interest plus it is taxed in a low bracket when you do spend it in your retirement.

A lot of people have the attitude that these kinds of plans are not just for retirement. They are designed for retirement but are an extremely useful tool for those whose incomes may have huge peaks and valleys. The idea is that you are in high tax brackets during your peak years and you are in a low or no tax bracket in the low times. So you squirrel away your money when you are at the peak. The government gives you its share in the high tax bracket years. During the low times you can take it out of these accounts but in the lower tax bracket. You gain the difference between what you have to pay in the lower tax bracket and what you saved in the higher tax bracket. You also gain the tax-free interest income that you made on that money while it was in the registered account. You got to use money that you should have given to the government to help your self. You have got to like that. You have to remember to keep on saving for the long term and not allow yourself to drain your savings that are set-aside for your twilight years. One of the most disciplined efforts you will ever have to make is to take as little as possible of those long-term savings when times are tough.

Choosing how much to save also has to be weighed against your spending needs. In your youth and mid life years there are so many demands on your cash flow. There are things you can do when you are young and free that you cannot do when you are older and tied to responsibilities. If you don’t have some fun, you may regret it or cut loose at a time in your life when it is not appropriate to the point of being harmful to people you care about. If you have too much fun in your youth and do not plan for the future, you can leave yourself in an awful spot. If you work in your old age, I hope you would because you want to not because you have to. No matter what you do, you will find that you need the help of your children in your old age and it will help them to help you if you can be financially independent. That should help you choose sticking to your savings plan over indulging in consumer forms of immediate gratification.

There are other forms of long term savings that can also be used while building savings. The first is to build equity in your family home. You need a place to live so instead of paying rent you buy your home. While you raise your family, you pay down the principal on the mortgage. When you retire you may not need or want the big family home and you can downsize to smaller and cheaper accommodations. By doing this you either eliminate or have already eliminated all of your mortgage debt and the corresponding cash draw of rent or a mortgage. If you buy a cheaper accommodation and have money left over, you can invest it in income producing investments to give you even more cash to live on. This makes much more sense than pulling the equity out of your house and spending it on consumer items. Similarly, you can build equity in your business. If you run a small business that has stability in its capacity to produce cash flow going forward, it has resale value. The business may buy property or may require a property to operate out of. That property should gain value over time. If the business is run properly, it should reduce debt over time and store value for the owner that way.

The question now is which way should I use to do my long term saving? The answer is to at least do 1 but do all 3 if possible. Diversity is the key to economic survival and you should do as many as possible. Remember you have a lifetime to save so if you only build little bits of equity at a time, it will compound. It is hard to find money during the busy years but you will be so happy that you saved when you are finished and ready to reward yourself in retirement. Those little bits that you save at those times will grow to more than you ever expected.

There is also short-term savings and it has its own set of goals and ways of improving your lifestyle. You have things you want to do and things you want to have. Here is a really interesting concept to pay for them. Save up the money first and then buy the big ticket consumer items you want with the cash you have saved up. Most businesses love cash. The phrase “You can pay me now or you can pay me later” brings forth appropriate images to illustrate this point. Finance plans and credit cards cost money to administer. If you save up so that you pay the total amount for an item in cash, the first thing you will usually be able to negotiate is a break on the price. The first thing that the business owner will gain is that he does not have to pay the vendor fees to the credit card company. These are usually in the form of a monthly fee plus a percentage of every sale put through that credit card company. It may only be 1% to 3% but ask for it. If you don’t get it you may want to reconsider your purchase. You may get that item somewhere else where the owner of the shop may be more willing to share the savings you have created for him. Remember you are working with your take home pay so a penny saved is 2 cents earned. If you save $15 on a $500 item, that is $30 that you do not have to earn to pay for NOTHING!!!!! You also save by not paying interest on the credit card debt that you may incur and gain the little bit of interest that you may make while saving up your money for this item.

Like long-term savings, you need to engage in a little self-discipline to get this cash pump primed. You can set aside a percentage of your spending budget to go into savings as a routine. Another way to start the savings process is to save all of a windfall. Then you keep adding to it with the money you have set aside in your budget. You wait for the product that you want to be available in one of the constant “SALES” that are used for hype in the retail industry. By saving and managing your money properly, you get control of “impulse- buying”. You save so much money by not taking the bait set out by advertising and hype. You also get what will really satisfy your emotional needs and you will have personal satisfaction of knowing that you did it right.

You can have different accounts for different things that you want to save for. You can have one for your fun spending. Another account that you may want to set up is a “Vacation Account”. You want to go on a vacation to relax. There is nothing that takes the relaxing feeling achieved from a vacation than the arrival of the unpaid bills when you have returned. Prepaying for a vacation not only increases your enjoyment while on it but makes the feeling last longer when you return.

Once you have mastered the pay me now approach to managing your emotional needs, you will find that you can actually address more of your wants and needs because you are getting full value when you pay for the things you want. This should make you a happier person. You can grow and you will find yourself able to do things that you never thought you would be able to do. It is one of those circular thoughts. By saving up and paying cash for 3 things that you want, you can buy a fourth item with the extra money you would have spent on the first 3 things using the old pay me later method.

Chapter 7 - Debt

Good Debt - Bad Debt

If you need will power to save and managing savings, you will need it in larger measures to manage debt. The simplistic view of debt is that it is compound interest working the other way. That is true if you do not pay debt down.

Debt also has a positive side that it multiplies your investment power. This is called leverage. Both have to be managed very carefully.

Who doesn’t have credit cards? You have to have at least one or two just for identification purposes. With so much counterfeiting of bank notes, some businesses would rather take a chance on your credit card than on taking higher denomination bills. Once you have them it is so easy to use these cards. There are so many sales and so little time. You can save 20% to 70% at those very special “sales events”. The only thing is that credit card interest rates for the majority of people start at 18% per annum. If you buy something on a 20% off sales event and don’t pay it off for a year, you are paying full price. By the time you pay for it, is it still even in your closet or garage?

I cannot stress the point enough that this 18% interest rate that you pay is out of your take home income.

In most cases, credit card companies want you to pay at least 5% of the outstanding balance each month as a payment. That is pretty easy at the start when the balance is low. However, if you let this balance grow and grow, pretty soon you are paying 5% of the maximum balance that you are allowed. So you make your payment, but you spend it right back up to the maximum balance again each month. If this strategy works, often the credit card company will bump up your maximum balance. I know this is good for the credit card company but is it really good for you? The other thing that will happen if you are able to keep up on your payments is that other credit card companies monitor information banks for customers who pay on time. If they can get a new customer to pay 18% to 20% interest, they will offer you all kinds of deals. They may offer that you can pay 3% instead of 5% of the balance as a monthly payment. They will offer you a “special reduced interest rate for 3 or 6 months on transferred balances”. Wow, it’s pre-approved as well! That’s great isn’t it? Now you have 2 credit cards. This cycle can continue until you have 3, 4 or 10 credit cards. By that time you are robbing Peter to pay Paul. You take a cash advance from one credit card to pay the payments on the others. A worst-case scenario is that you buy merchandise on one credit card, take it back and return the merchandise for cash and use that money to spend or pay off the other credit cards. This is called the “SPIRAL OF DEATH”. Everyone has seen a picture of an airplane spiralling into the ground after the pilot hopefully has ejected. This is a great analogy except imagine that your finances are the airplane with no parachute.

It is amazing how many people end up in this spiral. To get out of it, just like big companies, you have to restructure your personal finances. The easiest way is to have a windfall drop into your wallet. However, betting the milk money on the ponies is just not a high ratio success strategy. Waiting for that rich aunt to die is another of those strategies that just does not work for so many reasons. In both these cases, you are not dealing with the root problem, which is your own attitude toward yourself and your take home income. If you get into this kind of predicament, you must learn to manage your money properly. A lot of people who get into the “spiral of death” still manage the rest of their finances well enough that they have some assets. Many own a house. One way to restructure is to consolidate your loans using home equity as collateral. This gives the lender security and reduces the interest rate and the monthly payment as well. The lesson is that you have to be wise enough to learn to manage your credit cards properly so that you exercise this option only once. Your house is supposed to be a way to save for your long term goals. Another way to manage house equity is to sell and buy a smaller house or move further from the centre of town. In the first case your mortgage cash draw can stay the same. The equity that you cash in can be used to reduce or pay off all credit card debt. To move further from town, you can usually get a similar house for less money. Here again, you keep your mortgage the same and use the equity to reduce or eliminate your unsecured debts. The problem is that your mortgage is back to the full amortization period.

These situations have costs. You only want to do them once because these costs are not recoverable. You get nothing for that money except access to your own equity. Some people will take their mortgage right up to 90% or more of the house value every time it is up for renewal and then spend their equity. Sooner or later, any real estate market takes a downturn. Now you have a negative equity position, have spent what they thought they could refinance for and are now painted into a financial corner. This was originally written in 2006. I feel almost prophetic. The only thing to do is start over from the beginning.

This may involve declaring personal bankruptcy. Though the stigma of it is gone and it is so much easier to rise from bankruptcy these days, most folks still do not find it easy to choose this option. If you are in the spiral of death, you do yourself a great favour by having the courage to make this decision. In a lot of cases people feel like the weight of the world is lifted off of their shoulders.

There is good debt and there is bad debt. Bad debt works to overwhelm your finances and put you into the “spiral of death”. Up to this point we have covered bad debt.

Good debt is used to “lever” your savings into situations where you can buy assets far larger than you could ever save for in a much shorter time. It also allows you to acquire more appreciating assets that will add to your net worth far faster than you could by saving. A mortgage is by far the most common of good ways to owe. To get a mortgage you have to save up enough to put a “down payment” on a property. Then the bank will loan you the rest of the cost of the house. You make monthly payments to the bank to pay down the mortgage for an “amortization period” of 10 to 30 years. This means you are gradually paying off the loan. This is especially good if your mortgage payment plus taxes is very close to or lower than what you would pay for rent for similar accommodation. At the very beginning very little goes towards your principal but each month a higher and higher percentage of your payment becomes equity. If you rent, your rent money is gone forever. With a mortgage, your house turns into a savings account that you live in. Choosing which house to buy makes a big difference because there is a second way that you can gain by using a mortgage to own a house. In the long term, houses almost always increase in value over time. If you stay in a house or in a successful housing economy for decades, the value of your house increases in value. Over that amount of time there will be peaks and valleys in the rate of price increase but let us assume that it appreciates 60% over 10 years. If you bought a house for $200,000, it would now be worth $320,000. The gain is $120,000. You put in $40,000 of your own money. You would have paid rent anyway. So what you have here is a 300% return on your $40,000 investment. You also have managed to pay down your mortgage by about $40,000, so you have also saved that amount. Let’s add this up. You have your down payment $40M plus you have paid down the mortgage by $40M plus you have gained $120M in market value increase. That means that your $40M down payment has grown into $200M of house equity in 10 years. Due to inflation your cash flow is the same or better than if you had rented. You can see now why it is worth it.

Look at the progression we have made. First we took Benjamin Franklin’s “a penny saved is a penny earned” and modernized it that a penny saved is now worth two cents earned. If you put this to work in your house for a decade you can earn 5 more cents on each of those 2-cent pennies. That means that for you a penny saved is 10 cents earned. Can you feel the power? You know you can do this!

Not only is this a nice way to build financial security but also in most countries, the governments do not tax a financial gain on your principle residence. Some even let you reduce your income tax by a percentage of how much interest you pay on your mortgage.

However, please be careful. There are exceptions to the rule that the value of property will go up over time. 2008 showed us what a house price market crash is all about. Industries move and ghost towns are created when a town’s main employer closes the plant. Interest rates can climb to the point that when you renew your mortgage, the cash draw takes too much of your monthly income. This will probably be the next big problem that will develop in the housing market. Don’t buy any bridges or beachfront property in the dessert. And keep your property insured.

All good debt is similar to the mortgage scenario. There are many possibilities come to mind. Retirement savings plans are another example of using good debt to improve your financial security. In most cases money put in a Registered Savings Plan is tax deductible. If you can borrow money to put in your plan, assume 30% will come back as a tax refund; the first fact you have to appreciate is that you just got a 30% return on your investment in yourself. It will still earn interest all year and compound year after year. If you pay off that loan in 1 year, you are ready to do it again the next year. You can even take an extra year or two to pay it off and still be ahead. You can do a similar exercise to the mortgage calculation we did earlier. Imagine yourself borrowing $3000 at 6% to put in a Retirement savings plan. Pay off the loan in 2 years at $93 per month and put your $900 tax refund toward the loan. You invest your savings at 6% compounded return. After 2 years you have no debt and have $3370.80 saved. It cost you $2225.00. You gained $1155.80 over and above what you put in. That is over a 50% return in 2 years. You have got to like that.

You don’t have to gamble to make big money. You just have to THINK YOUR MONEY especially when it comes to debt. It is always a similar calculation. You can apply it to so many things in life when you have the patience to stay within the confines of your cash flow.

Chapter 8 - Investing

How to Invest Money

The Capitalist economic system is alive and well and is global. You are part of it and you need to know what it means to your household finances. In capitalism the machines of production of goods and services in economies is separate from those who work the machines. The people who own the machines share the returns of production with the workers. The emotional and mental challenge for most folks is that in one way or another they are engaged on both sides.

The regular Joe or Jane works for hourly wages or a monthly salary. In most cases they save up money to invest on their own or they will save in some sort of retirement pension plan and that money is invested to buy bonds or shares in companies that regular Joes and Janes work in. Since the economic crisis in 2008, I think everyone is aware that they are exposed to this reality and that what happens at the Towering Heights of the economy affects personal finances.

In the environment of investments you work all day and then have a little time to work on your family finances and even less to devote to managing your investments. Meanwhile there are giant institutions that employ fulltime workers to manage or steal your nestegg. The giant institutions will always pay themselves first and they will always get paid whether your investments with them gain or lose. How does the regular family protect their savings and investments? Who and what do your protect your self from and how do you protect your investments in this environment?

The first rule of business is the KISS rule…Keep it Simple Stupid. If some investment scheme is too good to be true it most likely is. If decision making is so complicated in a fund that you just have to trust the manager of that fund, you should see a big red light for you to invest. You have to be able to see how your investment works with someone’s skills and talents to add value to a product. At some point when you loan someone your hard earned saving you know there is a risk of it being lost. If it is low risk, the rate of return is low. For guaranteed investments where the safety of your principal and the interest are guaranteed through banks and insurance companies, the safety is high but the return is almost 0. If you want to make higher returns you have to take risks. Takings risks is a skill and you need to prepare yourself. You learn how to do due diligence. Due diligence is asking the right questions to find out if the company that you are investing in has a viable plan, is honest and can actually execute their plan. To ask the right questions you need training and field experience. You need to develop your rational skills and your intuitive skills. You need to read and take courses. With practice you learn how to read situations and people. You develop an intuition which will give you a “gut feeling” to go with your analytical conclusions. You will make mistakes so you do not put all of your eggs in one basket…you do not invest everything in one opportunity. For many of the folks who lost their savings in the 2008 fallout, many made this huge error. They invested all of their money in some Ponzi scheme or fraudulent investment house that went bankrupt. If do your due diligence is the second rule of investing, the third, fourth and fifth rule are DIVERSIFY, DIVERSIFY and DIVERSIFY. Invest in different things. Have your money accounts in different banks. If one fails you still have 80% to 90% of your money left. You should never set yourself up to the risk that you will lose everything that you have invested. The other facet of diversification is that you diversify your risk. You have worked hard to save your investment capital so you need to respect your efforts enough that you will protect most of it in low to medium risk investment tools. If you crave higher risk do so with a small percentage of your investment portfolio. Age has a lot to do with risk tolerance. If you are young you can take some chances. You have more time to recover from mistakes plus that is how you learn that you need to do more due diligence and you develop investor intuition. Older investors need to protect their nestegg but they need income from it. They are less tolerant of risk but should be more skilled at managing the risk. Investing is never easy.

The process of learning investments follows developmental steps that are paralleled by aging. You go through developmental stages in all of the facets of your life and your investments evolve as you do.

Starting out

You are in your late teens and into your twenties. For the author that was a time when I was young and stupid. It is the best time to be young and stupid especially about your money. You have lots of time to recover and you find out the dangers of high risk behaviour. While you are engaged in this behaviour, there are some things that you can invest in. The first is an education. My Pappy used to say, “They can never take it away from you”. I never knew what he meant by that for decades. Later I figured out that he meant no matter how hard you try, you cannot unlearn the life skills you develop while getting an education. If you are able to use your education to get a better job, that is a bonus. The real bonus is that you learn how to read and express yourself. You develop analytical skills that you can apply to any facet of your life.

You learn how to live on a bare bones budget. When you get out of school you start investing in the tools you need to make a living and the tools you need to function in society. For most kids, the first big investment is a vehicle. You are young and unattached so you will be offered jobs that require travel. You will need reliable transportation. If you are one of the sharper tools in the shed, you will start saving some money in the simplest of savings instruments. The earlier you start savings accounts the better. If you get compound interest working for you earlier you expand your investment options as you evolve. You can move into what are called Certificates of Deposit or Guaranteed Investment Certificates which offer improved interest rates and the same amount of safety for your new nestegg. Savings is challenging to accomplish when you are young and busy. You are just starting into the working world and pay rates are low for most youngsters. Then there is so much to spend money on. The challenge is to be patient and let your youth work for you.

Intermediate

When you get established in the workplace and in family life, you develop the awareness and desire to take on more demanding investments. If you were smart enough to establish some savings, leave them alone and keep saving. This can always be the safe part of your portfolio. Your core retirement savings should be a separate and constant part of both your budget and your balance sheet. It is the foundation of your portfolio and should be conservatively invested. You can weather the ups and downs of your other investments but to lose your retirement savings is devastating on your psyche.

The biggest investment for most folks is a house…a family home. It is a good investment in so many ways. First it almost always will increase in value over time. You should buy your home with the expectation that you will spend most of your adult life in this home. Moving requires spending 10% of the value of the house on agent cost, transfer costs, and moving costs. Note that the move is paid for out of your equity money. To move when you have less than 50% equity in a house you will spend twice that percentage of your equity or more. When you stay in a house long enough to pay off the mortgage, you reap a multitude of benefits. Your banker will always call you sir and you will get the best rates and service that they can offer. This is because you not only have an asset that you can sell; you have shown the financial skill to accumulate a large asset over time. It is because you have freed up the 30% of your income that is allocated to paying for accommodation. That is a lot of cash flow that you can spend or invest. And that should be for the rest of your life.

Through the middle years of home ownership, you can manage your cash flow to either pay off your mortgage sooner than the amortization period. You can enjoy that your income will increase over the years and that your mortgage payment should be going down as a percentage of your income. This allows you to invest money in your kids’ physical, mental and emotional development because you will have the cash flow to pay for activities and sports. You will have money to put away in their educational funds.

You will also have money to invest. You may want to start your own business or you may wish to invest in other peoples’ businesses. You can try out different investment vehicles and learn the skills necessary to become a “Sophisticated Investor”.

Sophisticated

One definition of a sophisticated investor is “a person who has a lot of money”. In 2009 the media has been full of stories of such investors who have lost a lot of money. So if you want to keep your money you obviously you need a more complete definition of sophisticated investor to set as your standard. The first requisite is that you need to live by the 5 laws of investing outlined in the introduction to this chapter. You need to develop a strategy that works for you. There are a lot of investment choices and you cannot do it all. So keep your choices simple and invest in things that you know. When you do invest do your “Due Diligence”. Know what you are getting into and what the risks are. Know the people you are investing in and know the product. I know of a lot of people who have money invested that do not do this and are fortunate that they do not invest in the wrong people. It is not because they did their homework. Try to leave chance out of it and make sure that you do yours.

The next 3 laws are “diversify”. Not only diversify your holding but your risk levels. Know what is out there and what the risk is for each kind of investment. Here is an outline of what you will see offered to you as investments.

This is not a comprehensive list. There are many versions of the listed instruments and there are other types of investment out on the markets. In all cases there are those who operate with integrity and there are those who are cheaters, schemers and scammers. They all walk the same and talk the same. The presentations are all so similar. They all dress the same and have the same haircuts. They all have the “integrity look”. But because they walk like a duck and talk like a duck does not mean they are a duck. This is where you really become a sophisticated investor. You develop the intuition about the guys who pretend to have integrity and then you know where to look to expose them when you do your due diligence. It usually comes out when you inspect their financials. There will be glaring inadequacies when you know what to look for. If you can read and understand the two books offered below, you can call yourself a sophisticated investor.

Chapter 9 - How to make a Deal

Negotiation Strategies to Make a Deal

Several years ago, I made a trip to Singapore. My perception of the city was that it was a giant shopping mall. The retailers there are hard working and diligent. They start a little later in the day than western retailers, as most shops don’t open till 10ish. They have an interesting superstition that they must make a sale to the first customer into their shop. That sets the pattern of good fortune for the day.

The most interesting thing about bargaining there was how they dealt with customers. They would always greet you and show you whatever you needed to see. Then they moved you expeditiously into the negotiation stage of how much of what at what price. They would haggle and when you made an offer, they would go to their calculator to see if the bottom line on the deal was a positive one and if it was positive enough to close the deal. By positive I mean that they made sure that they made a profit. Then they would come back with a yes or a counter offer that allowed them enough profit to make their efforts worthwhile.

In Mexico making a deal is a social thing and the haggling process is lengthy and punctuated with teasing, joking and heated discussion. In Italy and other Mediterranean countries, the making of a deal can start out in the morning and continue all day. You will break off your discussions and pick them up the next day. The western way would be to pick up the negotiations where you left off and move forward from there. Mediterranean negotiations restart from the very beginning and you do not necessarily get as far the second day as you did the first.

I liked Singapore because I found the retailers cut to the chase very quickly. If you were skilful they were willing to back off of their first price quite quickly. However, once they got to the point where their calculations told them that there was not enough profit and you did not seem like you were going to move your offer, they would just walk away to another part of their store and ignore you by fixing a display or filling shelves. They stayed within earshot so that if you reconsidered and offered them a deal that was worthwhile, they could respond to you immediately. If there were other customers in their store, they would quickly abandon you and move onto serving one of them. The attitude was quickly apparent that if you would not let them make money from their business interaction with you, why talk to you? After all, they are in business to make money. If the other prospective customer in their store would make a deal that was profitable why would he waste any more time on you, the one who wouldn’t allow him to make profit? Even if the store was otherwise empty, any retailer knows that a store can go from quiet to buzzing with customers in less than a minute. Shoppers can be like drunks passing a party. They just have to see some action and they are drawn to it. With this strategy, the Singapore retailer is ready when that happens and not tied up with a customer that has no intention of letting him make a profitable sale.

Research and Analysis

When making a deal, if you do not do your homework you are going to get your butt kicked. By getting your butt kicked I mean you are going to give away a lot of that 2-cent take home pay. If you are buying small items you may give away a few cents or a few dollars per item. The piggy bank example back in “Savings” shows that this adds up over a lifetime. When you are buying big-ticket items like your car or your house, you can get your pocket picked for thousands and thousands of dollars. You can end up working extra years to pay for your house and car(s).

There is some research to do every time you go shopping because every time you go shopping you are making a trade…A DEAL!! If you are buying, check for sales in the paper. Check the flyers. Check on line for better prices and sometimes better service. See if you can find better value in a used product. Talk to your friends to see where they go to save money. See if there is a way to structure a deal so that you avoid taxes. Know how you are going to pay for the product. Know the fair market price for what you want to buy. If there may be a need for follow up service, know if you will get good follow up service or make sure that the price you pay reflects that you will need to get follow up service elsewhere. The list can go on but you get the point. Know as much as you can so you will know what a reasonable price is for what you are buying.

Impulse buying should be taboo…that means do not engage in impulse buying. It means that you have not done any homework. If you see something that is on sale for a less than reasonable price, you must have done some homework to know that it is a less than reasonable price. At that point you must question why the item is on for a less than reasonable price and get a satisfactory answer. This is why you have short-term savings. This is one of the times that you use them. You will have not only done your homework to pay less for an item you really want but you then have the means to pay for it so that you capture all of the savings and don’t give any of those savings to a credit card company unless you have really factored in the financing cost as acceptable. Impulse buying is buying using emotion. Money works best when it is managed rationally. You will always pay a price for impulse buying.

If you are selling, you need to be like the Singaporean shopkeeper. You need to know all of your costs. You need to know all of your costs on a per item basis. You need to know if you are offering a cost saving convenience or service to your customers by the location of your store. You must know what the buyers’ other options are. Is your price in line with market price? For example, in the case of a used car you want to sell, what are your options to sell it and what are the costs and then what is the bottom line to each? How much time do you have to sell the item? After all you must get paid for your efforts. In the case of your house where so much money is at stake, you need to know market value of your house, who is a reliable agent if you are going to hire one, what the prime selling time of year is and where will you go afterwards.

In all cases you need to be aware of market conditions, banking conditions, economic decisions, weather conditions and political developments that may affect what you are doing. When you spend your food budget, the weather conditions thousands of miles away can affect what you pay for certain items. Produce items are cheaper in ripening season than they are in the off-season. For bigger ticket items, the first four conditions can greatly affect whether your deal turns out to be an okay deal, a good deal or a really good deal over time. The more you learn about how markets, banking, economics and politics work, the more you learn how they affect your decisions over time.

Goals

Different deals have different goals. Most deals are trading your money for goods and services or vice versa. There are investment deals. You make deals in other aspects of your life other than your finances but they affect your finances. People often get tangled into situations that are not very pleasant. It can be the purchase of a big ticket item that one cannot afford the monthly cash output on, or it can be in the form of an investment gone sour or on a more personal level, it can be a divorce. In all these cases you are forced to deal with a bad situation. If your cash output exceeds the income input, you are headed for bankruptcy unless you make deals to correct the situation. If you make a bad investment, do you wait for your investment fortunes to turn around or do you cut your losses? In the case of divorce, all you can do is minimize both the financial and the personal damage.

For the case of the big-ticket item, buying too much car is a great example. It is a path a lot of people go down. You buy a nice shiny new car. They gave you a nice deal and allowed you to fudge your finances to get the car loan. At the very least you are at the maximum amount you could have borrowed. Then something happens and your income decreases or your monthly costs increase. So you figure just sell the car and the equity in the car will help set things straight. However, you find that the car has been depreciating as fast as you have been paying it off. You find it is hard to sell and the dealer that sold it to you will not even give you what it is worth. Not only that, you are putting the monthly payment on one of those nice credit cards that were offered pre-approved. Holy Shit!!! You feel yourself being pulled into the spiral of death. What do you do now?

The saying goes, “The first loss is the best loss”. In this case the goal is to sell your car as quickly as possible. The goal is to stop the financial haemorrhage that it is causing. If you have some one who will buy it at a reasonable price, sell it. If not find someone who will buy it even if you lose some money. If you lose $1500 on the deal and your payment is $500 per month, you are even in 3 months without considering insurance and operating costs. Your monthly budget will be viable and you can start over again in 3 months.

In the case of an investment that is losing its value, the goal may be to recover as much value as you can while there is still some there. With the money that is left you can invest in a business or project that will increase the value of your investment instead of losing it.

In a bear stock market, the idea is to sell a stock while the price is high. People who win in this market are usually very knowledgeable and have analyzed that a particular stock is overvalued and its price must come down. When it does come down, they then buy the stock again. That way they own a higher percentage of the company with the same amount of money invested or they own the same percentage of the company with less money invested.

In the case of family disputes, people always have so much emotion on the line that money seems irrelevant. At this point it is really hard to appreciate that the assets left in an estate or that are accumulated in a marriage are not just a reflection of the positive achievements of a lifetime, but they were accumulated to help those involved cope with the future. To dwindle these assets through bad behaviour and litigation is an insult to your parents, your partner and your self.

You can expand this discussion to include anytime you have to get legal counsel involved, the goal is to minimize the damage. The person who built the assets has left this world or the love that joined two people together has left, or the business that had so much hope is unworkable. No one can move forward until a deal is made. The deals made in circumstances such as these may seem unfair when they are made. These situations eat cash flow, assets, your time and your emotions. If you are involved in such a situation, the time you spend is lost in 2 ways. You are almost always chasing a dwindling percentage of some assets you already had. If you engage in this exercise for too long, there will be no assets left. Secondly, you are not engaging in doing anything positive with that time so you lose whatever income or pleasure you may have created with that time. To just get such a negative situation behind you is worth giving up a lot in the short term.

To move on is like getting rid of the car loan that is destroying your budget resources. All that money, time and emotion can be returned to pursuing the enjoyment of what you have of your life and rising from the ashes of a bad experience. To illustrate what I mean, I feel that an example will paint the picture that is worth a thousand more words.

A man went to a lawyer because his partner was engaging in self-destructive behaviour that was taking down the business. He had offered to buy his partner out for 50 cents on the dollar, which he thought, was a more than fair offer. His partner countered with an offer to buy him out for 25 cents on the dollar. He was insulted and asked the lawyer what his legal options were. The lawyer counselled him that he could sue his partner and probably win 50 cents on the dollar but that it would take a few years. By that time his partner would probably have the business destroyed so he would get half of nothing. The lawyer counselled the man to take his partner’s offer and with his skill, good sense and hard work he would probably make more money in a positive milieu than thrashing through the courts recovering the crumbs of what he had had before. He followed his lawyer’s advice and settled. A few years later, the man had worked diligently and owned many successful businesses including the one that he had been bought out of. The old partner had destroyed the business and he picked it up for pennies on the dollar.

Skill and Talent

If you’re Dad is the owner of the local car dealership for example, you grow up always hearing about deals and how they were made. For some parents, it is what they know and what they do with their friends. Their friends are all dealmakers. It is natural that if that were the case for you, you would grow up learning, honing and perfecting the skill of deal making. So much of it is how you say things. Good deal makers know which face to put on for whom. The know when to be bold and tough. They know when to give that little bit to close the deal or when to hold out and let the other party give in to close the deal. Mentoring is very helpful, and opportunities to practice making deals are important.

Some people just seem to have a knack. There are naturals in deal making. These people are amazing to watch. They have a posture. They look people straight in the eye and make an offer that you think will be viewed as utterly outrageous but the person who the offer is directed at takes it. Some have a sixth sense as to where the absolute lowest price that a vendor will accept is. If you ask them how they knew that was it, they cannot tell you. They sensed it.

The one characteristic that I have noticed is common to all good dealmakers is that they are decisive. Like the Singaporean shop owner, they know where their bottom line is. They act on it if you make a good offer that accomplishes their goal. They walk away and wait for the next one if they do not get an offer that accomplishes their goal.

Experience

However, every one including you the reader of this book has to make deals. You have to everyday and you can’t bail out and say I am just no good at it. You have to get good at it or plan to work harder than you need to for the rest of you life. Remember, any time you are making a deal it is with your 2-cent take home income. Any time you cut a deal that saves you $1500; you are saving $3000 of your gross income. That can be half a month to a month’s pay.

Chuck Yeager was once asked, “What makes a good pilot?” His reply was “Experience.” The same is true about making deals fly. You can have talent and training but you must have and exercise the capacity to learn from experience to get really good at it. Life will give you ample opportunities. You need to do your homework. When you start negotiating you will find that you are more confident because you know when you are being treated fairly and are being offered a fair deal. This will lead to you being decisive because you know the deal you are making is good for you. You build your self-esteem by respecting yourself and properly spending your take home income. By making good deals you leave more of your take home income available for you to make even more good deals.

Summary…to make good deals you need to cultivate the skills. You can have the natural ability but you still need to do homework and then you need to practice by making good deals every day in all aspects of your life.

Chapter 10 - Choosing a Partner

Relationship Help - Personal Goals - Family Money

You do not go through life without doing joint ventures. You always have to rely on people to work with you honestly and fairly. You have employees or co-workers, friends and you have your family. Most of these people have limited access to your personal finances. They are not difficult to deal with, as they usually are not involved with your capacity to make and manage your money. They can be full of advice but they do not have access to your accounts.

However business partners and a “life partner” version of marriage partner are much closer. They are intimately involved in your capacity to make money in both cases. In the latter case, you have to work with your life partner to make money as a team, and then manage that 2-cent take home money. No relationship has as much influence on your capacity to manage your money properly. A couple working harmoniously can achieve financial security relatively quickly. A couple with conflicts can undo decades of building in months. The most helpful and the most dangerous people to you and your money are the people closest to you.

How to do it once and do it right

If I could answer this question, I would be the richest guy in the world. There do not seem to be any rules. Some couples who stay together for life should not get through get through with a lifetime marriage. Some marriages are in such a state that you wonder why they ever did get together. Some marriages are very successful in every way including financial…and one like this that I know was a case of love at first sight. Some make it through with one being as bad at life as the other in all aspects of life. Go figure?

Movies and advertising constantly bombard us with romance. The story in the movie or the advertisement ends with the couple at the height of bliss. Soap operas try to put a wedding in the script as ratings always rise for the week or two that they have this story line. We are romantics. Romance is fun. Marriage is fun but it is also a lot of work and discipline.

If I could get couples to choose wisely and live together happily ever after, the next goals would be to bring world peace and solve the problem of global warming. Prince Charming and Cinderella and living happily ever after only exist in fairy tales. Real life is full of challenges and changes. Even the best marriages have rough times when one partner is doubtful of the other whether it is character, fidelity, behaviour, or financial endeavours

The mind sometimes has to overrule the emotions and control behaviour in a successful marriage. This is especially true when one partner or the other has made a mistake or is challenged by one of the other aspects of their life. In successful marriages the partners have staying power. They stick with each other through the challenging times and the exhausting time. In successful marriages the partners have to like doing hard things together for a long time. Building a business, paying off a mortgage and raising children are long term and very hard projects. They test your capacities and push you past your limits of endurance. It is an “outward bound” experience.

The challenges are huge but the rewards are great. You should be able to work with a partner to brainstorm and see problems coming and solve them before they become a crisis. When one has a bad day, the other can step up and be strong. On another day the roles can be reversed. That way as a team you rarely have a disastrous day. As your project comes to fruition you share the satisfaction of success with someone who is now special because you did it together. Long-term projects build special and long-term relationships. No life is complete without them.

When it goes wrong

The reason that I have given this a special chapter in this book is because I have witnessed divorce and I have witnessed the treachery of a business partner undoing the good works of hard working and diligent people. I have witnessed the huge emotional damage it does and I have witnessed how long the damage lasts. In some cases it can permanently hobble one’s capacity to have a normal life. I can think of no personal relationship that does as much good as a partnership working well. On the other hand there is nothing that can undo years of progress as quickly as a relationship gone sour. Emotions can motivate vindictive and destructive behaviour. I have seen people engage in the worst kinds of self-destructive behaviour just so that they can take the other person down with them. I use the life partner term not just to be current. In the few homosexual or lesbian relationships I know, the behaviour patterns for success or failure are remarkably identical to those in heterosexual partner relationships. This is bourn out in the news of how fast some of the new same sex marriages have come undone.

There is a song about just this situation. A woman wants to get back at her guy for cheating on her. So she, and in the song she coaches other women to do the same, makes sure that she destroys this guy’s financial health as revenge for him betraying her love. She runs up the bills, doesn’t pay the mortgage, runs up the credit cards and spends as much cash as possible. Now let’s make this clear, the other gender can operate the same way. Bad behaviour and such irresponsible behaviour is not gender specific.

In the case of a business, you pool your resources with some one or some people that you think will make a good team. Once in and your financial resources are at risk, you find out that a partner is incompetent, lazy, scheming or lying. You have signed a long-term contract to work with these people or this person. You know that this situation can take the business down and you with it.

How did you get into such messes? How do you get out of these messes? Why you? Is a hit man an option?

How not to get into these messes

I can’t think of anyone who has gotten through life unscathed so the header is misleading because you will get into these messes. You are bound to exercise bad judgement every now and then as part of being human. In youth you are compelled to take chances. Peer pressure moves you to do things that an iota of reflection flashes a judgement that the behaviour is stupid. It is funny though, if you survived. Anybody reading this and not having one of their own stupidest acts running through their mind right now was a boring person. Guys love to sit around over a few beers and laugh about stories of insane acts. However, adventure is one thing and insanity is another.

Be young and stupid while you are young and stupid. First, you don’t have much besides life and limb to lose. You are only harming yourself and hopefully you will learn good judgement from all of your bad judgements. Your body and emotions are young and resilient. The other positive about being young and stupid is that you have lots of time to recover from the damage done by your stupidity. And you will recover. Once you have it out of your system, you will help yourself by using good judgement and choose to do smart things instead of “crazy kid things”.

Learn about relationships while you are in your youth. Watch your friends and learn from their misadventures. Watch soap operas and do not engage in any of that behaviour. Watch grownups engage in childish behaviour that tears their lives apart. Engaging in stupid behaviour is like hitting your head against a post. You find that it feels much better when you stop. Stupid behaviour may get you a lot of laughs in your youth, but it does get old. The older you get, the older it gets for those watching you. Engaging in stupid behaviour leads to trying to out-stupid yourself or others. This brinkmanship leads to you engaging in such stupid behaviour that it crosses over the boundary into the area of self-destructive behaviour.

What does all this have to do with choosing a partner? This is a hard one to put into words succinctly because there are so many ways to screw up relationships. Some people seem to be able to get away with breaking the rules and they stay together. I don’t know how that works. No one has a special recipe for success. It is a “whatever works” situation. However there are more recipes for failure than there are for success. Experience and learning from bad judgement seems to help you learn what works and what does not work.

You will learn that there are boundaries to everything. You are allowed having some things that are private and so is your partner. You can have fun that is fun. Don’t overdo it to the point that it is self-destructive or destructive to your partnership. You cannot make huge mistakes and not expect to lose your partner. Adultery in a marriage is one thing that undoes all trust ever built. Embezzlement in a business would be about the same. You need to learn that it is often not what you say but how you say it. You will learn that timing is important in communication. Knowing not to speak in anger is best. Cool off and talk calmly later is how to solve a problem. You need to learn priorities and that your partner relationship is the most important human relationship that you will have in your lifetime. You will learn how to communicate about the smallest things. It is amazing how important this is. You will learn to tell the truth. Letting your partner know that something is private and you do not want to share it with them is being honest if it is not abused. You learn that just being there is all that is needed sometimes. Sometimes, a partnership and the work needed to make progress together are enormous to the point of being overwhelming. You have to believe that you can make it together. Then you have to figure out how which is much easier if you are committed to doing things together.

All this wisdom sounds great. However, wisdom comes with experience and you usually get the urge to partner up while you are still young. Usually in youth that urge to partner up comes strong and often. How often have you used the adage in reference to yourself or others that “Love is blind”? Youth can be blind for decades. So what do you do to let in some light?

Youth are surrounded by full-fledged, card-carrying mentors. You just need to chose one and listen. That is what organizations like big brothers and big sisters are about. There are the Lions Club, the Rotary Club and many other fraternal or sorority like organizations that usually have charitable goals. Their other function is to provide the younger members with a pool of wisdom and the forum to learn from the older members. Some find a family member, a teacher, or just someone who recognizes youth that needs to be helped by a mentor. As a youth the important thing is for you to allow someone to be your mentor. For the mentor, the compliment is too flattering to be turned down and the responsibility is too large to be taken lightly. As children move into young adulthood, this is a role that can be fulfilled by a parent. When the parent relationship grows to the level of a quality and trusted mentorship, it is a normal and wonderful part of the developmental process of a family. If you are unsuccessful at finding someone that you trust, there is no shortage of counsellors and there is no shortage of self help literature. You don’t have to sign on to everything that is told to you, but you can shop around and try out different things. Then stick with the successful ideas and always keep looking. Life is a constant challenge with new things to learn at every transition. If you are really smart, use several mentors if you are lucky to have them.

What will a mentor counsel you about how to choose a partner? This mentor will tell you to ask the hard questions first. In a business you look at your potential partner’s track record. In a romantic relationship you look at the family that this person grew up in. How do the parents treat each other? What is their attitude to their partner? The reason that this is the first question visited is that this is where your partner grew up. These are the attitudes that this person lived with while growing up. These are the attitudes that your potential partner learned and what your partner will emulate. The saying goes, “You don’t just marry the person…you marry the family”. Other questions follow. Can this person contribute financially? Does this person have a future? Can this person be trusted with your heart and/or your money? Does this person have staying power? Does this person have courage? Do the positive personality traits out weigh the negative ones?

Choosing a partner is a huge decision. I cannot stress this enough. Do not take it lightly. If you can build a lifetime of happiness together, you will save yourself a lot of work over that lifetime and give yourself a lot of peace. You will build life goals and achieve them. You will teach the next generation to do the same. Staying away from the negativity of a broken home and family is worth the work, patience, time, love and thought that it takes. Asking questions may seem shallow and unromantic. The complete opposite is true. You are shallow and unromantic if you do not ask the questions. If you do not ask the hard questions before you commit you are not doing what it takes to assure that this most important relationship in your life is solid.

The result of choosing badly

What is common to most break-up scenarios is that emotions run very high. With money meaning more than just dollars and cents, emotionally injured parties try to hurt the other person’s power, freedom or confidence by doing damage to their financial situation. They will do it to the point of inflicting damage on their own power, freedom or confidence by damaging their own financial situation just so that the other person cannot have any of their money. These are people who have worked together to build some financial nest egg. The power of compound interest is working for them. They have pooled resources to do more together than two people could do separately. Part of the tragedy is that this is stopping. They are just starting to get time working for them and now it is stopping. The second part of the tragedy is that apart, they cannot accomplish as much. The third part of the tragedy is that there are many costs associated with breaking up any partnership. This is money thrown away. There is no return on that money. The courts of any country do not even give air miles for every dollar spent in them. The fourth part of the tragedy is that people will vindictively spend their assets on consumer items just to use it up so that there is none left. This is bizarre and self-destructive behaviour. The fifth part of this tragedy is that the worst of these people will drag this on for decades. They just won’t let go.

This is the financial personal equivalent to a natural disaster. If this occurs late in life, it is very difficult to recover and rebuild. Most of money’s friends need time to work. When couples divorce the only thing to do is to try and minimize the damage.

Some messes are harder to get out of than others

Most folks that start into a business have dollar signs in their eyes. Those walking down the aisle have hearts in their eyes. When things go bad, if you do not have the benefit of a mentor or mentors to raise your awareness of the perils that may await you, you have to get aware now. At this point clarity is hard to achieve because you will be in a state of anxiety. Your dreams are being destroyed. Your pride will be damaged. Your power will be diminished. Your confidence will be shaken. At some point you will realize that this is not a test. This is the real thing. Life is happening to you!

Your strategy will depend on you and the party you are dealing with. The ultimate goal should be to patch things up and move ahead with what is left. Get back to what you were doing right and correct the things you were doing wrong. If that is not the case, wait out the emotional fire and try not to fuel it. Then try to cut a deal to end the relationship. If there are ongoing issues such as children, make a plan to deal with it peacefully. The courts can’t solve your problems. Lawyers can’t solve your problems. Counsellors can’t solve your problems. They will try to lead you, follow you or get in the way and every time they do they take some of each partner’s money. Get help but get full value like any time you spend consumer money. In the end the courts don’t even want to solve your problems. That is because it is your job to solve your problems. You and your partner made the partnership…now take it apart. Try to do it as nicely as possible and there will be something left for each of you. Otherwise you are just spending all of your 2-cent money on the consumer goods of counsellors, lawyers and judges. You undo all of your hard work saving and all of your money’s hard work compounding.

Life goes on. You have made a mistake but learn from it. You will make mistakes and you will make big mistakes. Learn what to do right from what you did wrong. Learn big things about what to do right from big things that you did wrong. The Number One concept is LEARN!! The second concept is that you must move on with the rest of your life. Get over it. At first it is hard because you are alone and you have fallen from where you were. Hopefully, one thing that you have learned from your successes is what you have to do in the future for things to have a successful outcome. On your second time through the rules seem easier to follow and it takes less time as well.

Summary: It is about how to manage your number one relationship…partnership in life in particular. Mentors will help you make the right choice. We explain why you might fail and what to do if you fail.

Chapter 11 - Transitions

Financial Planning Guide

Whether you like it or not, money affects your life from the moment you enter this world. The first thing you do is run up a hefty medical bill.

The Beginning

Some come into the world with a silver spoon in their mouth. The majority of the planet’s population is born in poverty. Most of you reading this book were probably born into working class or middle class families. Money meant little to you other than the rich kids had nicer stuff than you. You went to school and then in your early teens you really started to want your own money. So off you went and got a paper route and then a part time job. When that magic first pay check comes it is usually spent in minutes. Kids are so easy to market to; their initial impulse is to spend their money immediately if possible on the first consumer item they see. Marketers know that and are unconscionable about encouraging impulse buyers. So hopefully parents step in to begin the process of teaching their child how to manage money. Depending on the dynamic of the parent-child relationship, the child is either assimilated into a culture of saving, investing and value spending or rebels and spends every cent immediately on stuff. Of course there is every dynamic in between.

You then head off to post secondary school or start to work. I highly recommend that you go to school. You will always learn something. You can learn a marketable skill. You can learn about how the world runs and then you will have a clearer idea of how you fit into the bigger picture. At the very least, you learn how to learn.

The early years

Life is going good. Everybody starts paring up. You find a partner. You have your career or a nice little business. There are so many lifestyles to choose from. You can choose one that is free and unencumbered. You can spend your income on playing and dining out and having a fun life style. There are the wild ones. And there are the sedate ones where you work hard and your pleasures are in books or music or travel. You can have the city lifestyle or the country lifestyle. You can be extravagant or humble.

Most financial planners or therapists will try to get you to start thinking about your financial life now in these early years. For the most part they are unsuccessful. The fact that most people’s retirement plan includes winning at least a small lottery means that they do not think of their financial life nearly early enough. From our analysis of compound interest, you now know that you have to start something here in the early years. If you have not begun by the age of 30 you are doing yourself a great disservice.

The first nest egg

After some good mentoring or after engaging in a lot of bad judgement you learn what a budget is. You learn to spend less out than you have coming in. You learn to be disciplined and stick with your budget plan. You start saving. You add some to your savings every month. Compound interest starts having an effect. Another way you save is that once the bank sees that you have some assets, some of your banking fees start getting reduced or some services are offered for free.

You can buy many consumer items with cash, thus avoiding finance charges. You are able to borrow money for bigger items or investments because you now have collateral. You may buy your first house and have a mortgage.

For a long time, I thought that the age of 24 to 26 would be a great age to be if you got to stay one age. You are young and just starting out. Life is exciting and the world is your apple. You have income and you are relatively free of responsibility.

Mid life

As I get older I realize that each and every age has good things about it and that you would not want to be stuck at one age. Even mid-life has some redeeming factors. Most people have engaged in enough bad judgement by this age that they are starting to get wiser. As wisdom increases, your assets and net worth should be growing as well. You have risen with a few windfalls and bits of good luck in life. You have made some good choices and life has rewarded you. You have also had some bad things happen. You have had some losses and defeats. You are now the old guy saying “If you’re so damn smart, why ain’t you rich?” to the young guys. You have “bin der done dat”.

You are loaded with responsibility. You have a career or a business with employees. You probably have a life partner, a business partner or both. You may have an ex-partner or two. You may have some kids. You have bills. You have debts. You have assets. And your days are full. You don’t even have time to wonder what happened to those days when you wanted a fuller life because you were tired of just hanging around.

You have power. You got it because now you know a little of how life works. You put in your time and learned your job so now you are running things. You have steady income and assets so the bank respects you and helps you make your net worth grow. You have learned how to deal with bad things that can happen to you. You have learned how to control your emotions and remain poised in difficult situations. You have learned how to capture the proceeds of positive financial events in your life and not to squander them. You know that when you wake up tomorrow, usually it will be normal, but you are ready if something really good or something bad happens. Mid-life is good.

Empty nesting

There is a time just as you are winding up your working life where you get back to that time where life seems to get a lot simpler. For those who raised kids, they have grown up and been educated and moved out of the house. Even if you did not have kids there is this stage where responsibilities that you have carried for 2 or 3 decades are finally over. It may be that you downsize your house because you just do not want a house and yard that big any more. A lot of people pay off their mortgages at this point in their lives by either downsizing or just paying them off. All the cash flow that went into the house and kids and educations is now freed up. This is a time when a lot of people are able save a much higher percentage of their incomes to set up their retirements. If you did not start early in life saving for retirement, this is catch-up time.

If you need to save lots, there should still be lots of time and money left over to enjoy the things that you have been waiting to be free to do during mid-life. You should also remember to balance this with your need to do your final saving as you head into your twilight years. This is your last chance.

Retirement and old age

A lot of people have the image that retirement is just coasting. They think that they will never work again and just enjoy the sunshine and golf. If you have done that well, you are amazing. Some have more cash flow than they have ever had in their lives. Good for you if you are one of these people. You have obviously done it right. However, you will soon find that good and bad things can still happen to you and your finances. Economic conditions change and investments that you thought were secure are sometimes affected negatively. Frauds target the retired and the elderly. You may find yourself bored and therefore risking your savings unnecessarily. Illness and medical bills can eat your savings. Inflation can erode your buying power of your pensions. I am afraid that you just cannot go to sleep and think that everything is taken care of. You will find that you will always need to monitor and manage your financial resources. As you get into old age, hopefully you will have someone to watch over your finances that you can trust so that your final wishes can and will be followed.

Summary: this goes through stages of life and the corresponding financial evolution that you should go through to meet the demand of each step in your life development.

Conclusion

As you go through the transitions of life, how do you know how you are doing? The accountants have an interesting tool for this and it is called net worth. Now, this just measures your financial well-being. Net worth in its simplest forms is the monetary value of your hard assets (those that a bank can put a lien on) minus your liabilities (the money you owe). At any time in your life you want this to be a positive figure. Ideally, you want it to grow every day of every week of every year.

This is where life transitions, life windfalls and life disasters come into play. The analogy that came to me for this is one of the first board games you ever play in life, Snakes and Ladders. You roll the dice every day and move ahead. Sometimes you just move ahead. Sometimes you get a ladder and move ahead much faster than you expected. These are the windfalls in the game of life. And then there are the snakes. These are the disasters. I always hated to hit one of those 2 snakes on that top line. You hit those and you go back to the 40 and 50 line. Life can be the same. You can play with this analogy all you want. The point is that rarely is the growth of your net worth a straight line or an arc that curves to a vertical climb. Sometimes it may fall in value. Life is a seesaw battle and you have to take some chances and that means testing your judgment. With better judgment, you can miss those snakes going down and catch a few more of the ladders. This is one of the ways where the life and the game differ. However, the snake of chance is always there with the ladder of chance.


So always keep track of what you are doing. This is part of the rule of money that says; know where your money comes from and where it is going. Companies have month ends and year end accountings to do this very thing. They want to know exactly where they are at any given moment. You need to as well. As you practice tracking net worth, you get to the point that you intuitively know whether you are gaining or losing.

You have seven facets of your life. They will have their ups and downs as well. There are different ways to track those as well. Your financial life needs to be in balance with those other facets of life and their needs. That is why you have to sometimes relax when your net worth goes down. You may be investing in another facet of your life that will allow your finances to rise again at a later time.

It is very complicated and a lot of life’s decisions require good judgment and by this point in this book we all know where that comes from. Life is about learning so live. The money part is easy if you THINK YOUR MONEY. It is managing it in the context of the rest of your life that is hard.

Summary: You keep score of your money with your net worth balance sheet. Know where you are through the transitions of life. This should be easy compared to managing the other 6 facets of your life.