Archives For October 2011

Do you know exactly what you want to do in life?  The ideal situation is that you do and you follow the education path that will take you there.  Sounds easy enough, right?!

If you want to be a plumber, you can apprentice with a reputable company or attend a vo-tech or trade school.  If you want to be a lawyer, you need to set your sights on a successful undergrad that will allow you to enter your preferred law school.

However, many times higher education is selected out of desperation.  This may not always be a bad thing, but you have to weigh the opportunity costs of this selection.

I’m definitely not in the ‘has it all figured out’ camp.  It seems I’ve studied for every ‘next level of education’ admittance test and have followed through on some of them.  The two most notable are the GMAT (MBA) and the LSAT (Law School).

Some of these decisions came out of desperation because I felt stuck in my path and the additional qualifications seemed like a good way out.  I also thought I could be more successful and make more money by pursuing these paths.

Ever since we were young, we were taught to dream big.  No one gasps and cheers for the kid who says he wants to be a truck driver.  It must be something major like the President, a sports star, or a celebrity.

Once real life hits and most people aren’t astronauts or CEOs, it always festers in the back of our minds that we’re not quite good enough.  The only clear answer most of us can see is more education.

If you’re happy with where you’re at, ignore all of that other stuff and enjoy your life!  Find ways to improve your current situation by pursuing what you want and taking control of your money.

However, if you are considering higher education, make sure you think it through and consider all possible ramifications.

The first possible downside is the opportunity cost of further education.

If your company reimburses the expense of continued education, it very well might be a great opportunity.  There are intangible benefits to furthering your education, one of them being the network you build.

However, if you’re going to quit your job and pay for school yourself, you’re hit with a double whammy.  Not only will you be in debt if you can’t cover the expense with cash, but you will also have lost 1-4 years of income.

Let’s say you’re going back to school for a full time MBA (two years) and you’re leaving a salary of $45,000.  I’ll assume you’ll pay $20,000 a year for tuition.  Add up the tuition plus room and board and we’ll say you’re at $60,000 in student loan debt for the two years.  Now, add lost wages for two years, and all of the sudden you’re talking $150,000 for the total cost of your MBA.

If you get a great job and make $65,000 out of graduate school, it will take you 7.5 years to break even on the deal (not assuming taxes, chances for increased salary, etc.).  To get this number, take the total debt + lost salary ($150k) and divide it by the increased income ($20k).

This is also assuming you’re living the same standard of living as before and all of your extra income can go towards the debt.  Many people higher their standards and expectations when they make more money.

There are other programs you can pursue part time that can provide a great alternative to quitting your job and going full time.  I discuss the ‘investment’ piece further in “Is a college education worth it?“.

The second possible downside is you might not like or even find a new job.

You could spend 1-4 years on furthering your education, and graduate to find no jobs in the field or that you don’t want to even be in that field!  If you make the decision for further education, it better be something you really, really want.

Instead of viewing further education as a ‘way out’, you should have clear goals you’d like to use it for.  For example, I have a friend who’s an engineer and wants to get more into the business management side of things.  It made great sense for him to get his MBA so he could move into his desired field.

However, I didn’t have any clear objectives of what I’d use my further education for.  I just figured I would magically find my way once I started. For me, it just sounded like a way out and in all reality it was probably the easy way out short term.

So, if not further education, what are the other paths?

I have a close friend in higher education and he says that most business graduate schools are rip offs.  Anything you learn there can be learned on your own without the huge expense and loss of income.  It just takes a little courage, initiative, and creativity.

The first step is to find what you really want to do.  Then, you need to find a way to educate yourself.  You can find a mentor in the field, read some books about it, and you should definitely start researching companies that are in that field.  Networking is absolutely essential to succeeding in any business.

For me, the answer is not further education.  I don’t want to be a lawyer, and I don’t want to continue down a path where an MBA is required to move up the ladder.

I started my quest by finding strong mentors and continued with reading many books on various subjects I’m interested in.  I’m now taking the first major step with my blog and will continue from there to build a business helping others take control of their lives.  All much cheaper than going $150,000 in debt without an income!

Higher education might definitely be right for some, but I don’t currently believe it is for me.  What is your experience with higher education? Was it worth it?

What does it mean to be an in debt American?  I pulled together some statistics on total US consumer debt to give us a comprehensive view of the total debt picture for the great citizens of the United States. I’ll also compare it historically to the US and then against some other countries.

Let’s start with an individual view and then take it up to a country view. First, we like our consumer debt a lot. I can confirm as I’ve been there, done that.

What kind of consumer debt?

The folks at Money-zine have done the hard work to break down what we owe on. Believe it or not, home mortgages aren’t included in the “consumer debt” category! Our current stats:

– Average credit card debt per household with credit card debt: $15,799 (2)

– Total U.S. consumer debt: $2.43 trillion, as of May 2011 (4)

– Based on the 2010 Census statistics, that works out to be nearly $7,800 in debt for every man, woman and child that lives in the U.S. (5)

– Around 33% is revolving debt, which is mostly credit card debt ($793.1 billion) (5)

– The remaining 67% is non-revolving and includes car loans, student loans, loans on boats, trailers, etc. ($1.63 trillion total, almost $1 trillion of that is student loan debt) (5)

– “The average new car loan is over $27,600, and the loan to value ratio is 83%. That means new car buyers are using down payments that are 17% of the car’s purchase price.” (5)

How’s it looking for college students?

– 66% of students graduated with student loan debt in 2009, compared with 58% in 1996. The avg student loan debt in 2009 was $23,000 (6)

– In 2008, college seniors with at least one credit card graduated with an average of $4,138 in credit card debt (7)

– Total student loan debt will exceed $1 Trillion by the end of 2011 (8)

How much mortgage debt do we hold?

All of the consumer debt numbers doesn’t even include our mortgage debt! It turns out we owe just as much on our houses as the US total GDP (Gross Domestic Product, the market value of all products created within a country in one year). That number – $14.4 trillion (9).

“On average, total US mortgages were below 50% of the GDP until about 1977 when the ratio started to gradually increase culminating in the year 2006.” (9) In 2006, our mortgage debt surpassed our total GDP.

US GDP vs Total Mortgage Debt

How does our consumer debt look versus historical standards?

In 2007, we were in more consumer debt as a percentage of income as we’ve ever been before. According to the Federal Reserve Bank of San Francisco (FRBSF), “U.S. household leverage, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007.”

An income to debt ration of 133% would mean you have $133 of debt for every $100 you make. In 2006, my ratio was around 120%, so I definitely contributed before I paid off my $50,000 of consumer debt.

Below is a chart from the FRFSB that shows how household debt, housing wealth (equity), disposable income, and stock wealth changed between 1960 and now. They did some math to set the 1960 amount for each category equal to one. Doing this allows you to see a straight comparison of what happened to each area.

For example, in 1960, the household debt equals one, which in real terms might have been a number like $2,000. Then, you can see in 2005 it equaled 12, which translates into ($2,000 X 12) $24,000. Until 1985, disposable income and household debt grew around the same pace, but after 1985 household debt skyrocketed and left disposable income in the dust. This means we were accumulating debt faster and had less cash on hand.

Household debt vs wealth

Has this recession changed us?

Americans have started to pay down their debt. This is where “deleveraging” comes into play, which basically means people try to reduce their debt as compared to their incomes. This can be done by paying it off or through bankruptcy.

Have we ever been through a “deleveraging” period before? According to the FRBSF, “History provides examples of significant deleveraging episodes, both in the household and business sectors, which offer a basis for gauging how debt reduction may affect spending. From 1929 to 1933, in the midst of the Great Depression, nominal debt held by U.S. households declined by one-third (see James and Sylla 2006).”

Our deleveraging looks pretty close to Japan’s after they went through a similar stock market and real estate boom before they busted out in 1989. They are still experiencing a stagnate economy even 20 years later.

However, the best news is that as of Q2 2011, our debt to income ratio decreased all of the way down to 115% from the peak of 133%! It took Japan six years to get down to that level versus our four years. Some of this could be due to higher bankruptcy and debt forgiveness, but it’s still a good sign.

Take a look at the chart below which compares our situation to Japan’s. It took them 10 years just to get their debt leverage ratio from a peak of around 130% to 100%. If we mimicked Japan, we would remain in this delevaraging period until 2017 just to get to the point of only holding a debt equal to our current incomes!

US_Japan debt to income leverage ratio

How does our debt look versus other countries?

It was a little refreshing to see we weren’t the first to go through something like this, even though Japan is still going through it 20 years later. I wanted to see if any countries had an income to debt ratio as high as our. Believe it or not, many European countries have had ratios similar to ours.

This isn’t something to be proud of, but you can see some of those countries below and their debt to income ratios. I can’t find the updated information, but there are a few countries that have had higher ratios than ours.

Household Debt by Country

Are we at least saving some money?

The key to deleveraging is to spend less than you make, and to begin saving money again to pay off your debt. So, how are we looking in the savings arena?

The Harris Poll recently did a survey in 2011, which showed:

– 34% of Americans have no retirement savings (1)

– 27% have no personal savings (1)

That’s not so hot! However, as indicated in the chart below, as a whole we have changed our ways in the last couple of years and began to save money again. We actually had a negative savings rate for a few quarters in 2005!

US Savings Rate

Things look pretty bad now, but they’re actually better than 2007, and we’re moving in the right direction. The economy will continue to stagnate as we try to work through our problems.

The good news is all of these numbers are averages, and they don’t dictate how you live your life!  You need to take control of your money and your life

 

Sources

(1)- Harris Poll

(2)- http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php#ixzz1bnrwaSpN

(3)- “The Survey of Consumer Payment Choice,” Federal Reserve Bank of Boston, January 2010

(4)- Federal Reserve’s G.19 report on consumer credit, released July 2011

(5) – http://www.money-zine.com/Financial-Planning/Debt-Consolidation/Consumer-Debt-Statistics/

(6)- Source: Project on Student Debt

(7)- Source: Sallie Mae (2008 data)

(8)- http://www.usatoday.com/money/perfi/college/story/2011-10-19/student-loan-debt/50818676/1

(9)- http://seekingalpha.com/instablog/562560-clemens-kownatzki/55271-us-mortgage-debt-versus-us-gdp

(10)- http://www.frbsf.org/publications/economics/letter/2009/el2009-16.html

(11)- http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=4622

Does it matter if you grow up with rich or poor parents?

If only I grew up rich, then I’d have it made… I’d be cruising the seven seas in a yacht named Spartacus while sipping the world’s finest wines. I’d throw away my soap after I wore off the letters because I can’t stand using small bars!

The kids who grew up in rich families never had to forgo the new pair of shoes because their parents couldn’t afford them. They went to the best schools because their last name was their admissions ticket, and the Ivy League education was all but guaranteed. After graduation, they had a plum job with a large salary already lined up.

Even if they didn’t receive millions from work, they would surely get it through an inheritance. They hit the genetic jackpot.

Would rich parents have been the answer to all of our problems of too little money and too much work?

How about the boy whose father left the family when he was a teenager and was forced to be the provider for the family at a young age? He had to quit school so he could work full time and feed his younger siblings.

Does that sound like the upbringing of a rich man? Ever heard of John D. Rockefeller, the richest person ever?

This begs the question, is it better for your financial future to grow up rich or poor?

Let’s look at the obvious answer; it is better to grow up rich. Some reasons:

1. You can receive a great education

2. You have great connections due to your pedigree

3. You were raised to know how to manage money

4. You’ll inherit millions!

Now, the not so obvious answer; it’s better to grow up poor. Some reasons:

1. You’ve had a job since you were young, and you have great work ethic

2. You have an unquenchable thirst to become wealthy because you’ve never had money

3. You understand the value of a dollar and can live frugally

First, there are definitely some advantages to growing up poor.

We always hear the stories of people who grew up poor and later became wealthy. What’s the reason for this? In The Wealth and Poverty of Nations, David Landes writes, “Nothing so concentrates the mind as lack of money.” Andrew Carnegie was a perfect example of this as he grew up poor and vowed to never be that way again.

Carnegie was a first time millionaire in his family. According to Dr. Tom Stanley’s book The Millionaire Next Door, 90% of millionaires are first time millionaires. They achieved that status themselves.

However, that statistic doesn’t mean 90% of poor people will become millionaires! For every story you hear of someone making millions, there are probably one million stories for people who never made it.

Next, there are obvious benefits of growing up rich.

We tend to learn the most from the people we spend the most time with. If you grow up in a family full of doctors and lawyers, there’s a great chance you’ll do something similar. It’s just the way things are, and you wouldn’t even worry about how to pay for your school.

However, just because you grew up with money doesn’t mean you’ll have money when you grow up. A common scenario is for families to inherit massive amounts of money and then squander it away quicker than it took to earn it. The typical reason for this is the first generation rich doesn’t do a good job of teaching future generations how to manage money.

Some other disadvantages of growing up rich are you’ve never experienced what it’s like to be broke, and your parents may have spent too much time making money and not enough time teaching you anything. Living a life of comfort can be dangerous to your wallet.

In Thou Shall Prosper, Daniel Lapin wrote, “Generations raised with very little in the way of material possession often focus so single-mindedly on providing their children with everything they didn’t have that they neglect to provide their children with what they did have.” They give them the money, but they don’t teach them the principles that will lead them to success.

In reality, most Americans are somewhere between the two extremes discussed above, and you must remember we all have different defintions of rich.

I grew up with very little money, and I’m glad that I did (in hindsight!). It taught me many lessons, but it also taught me the importance of values. When I was young, I didn’t think I was poor because I felt like I had everything I ever needed. Notice, I said ‘needed’ and not ‘wanted’.

My parents provided an incredible amount of support for me and my three brothers while growing up, just as they do today. I’m still not sure how my mom was able to keep up with all of our sports practices or how both of my parents managed to attend all of our games (baseball, soccer, football, tae kwon do, etc). We never had a doubt our parents would be there for us.

We were taught humility, rock solid values, a strong work ethic, and that the world was ours to explore. All of these qualities helped me get to where I am today.

In Out of the Labyrinth, Robert and Ellen Kaplain explain, “Man can be better understood in relation to his potentials than to his beginnings.”

So, where does that leave us? Is it better to grow up with rich parents or poor parents? In my opinion, neither is a true indicator of future success. The most important predictors of your potential wealth are your values and financial education.

The most promising part of this discussion is you can learn what it takes to be successful and many people – rich and poor – have done it. If you have the ambition are are willing to take the right steps to educate yourself, you have the possibility to get rich. It may not happen overnight, but it’s possible.

So, what excuses are left? It doesn’t matter if you didn’t grow up rich or poor.

 

The first step to planning anything is to define where you want to go.  That’s obvious, but it’s the step most of us miss.  I graduated from college in 2004 and wandered aimlessly for the next five years.  I experienced success at work and was able to pay off my debt in 2007.  However, I still had no clear direction.

It’s scary how fast five years goes by, and it hit me in 2009 when I realized I didn’t know where I was going.  By that point, I was an avid reader of non-fiction and self-help books, so I was starting to realize I should probably make some kind of plan.

The first step I took in early 2009 was to write a letter to future self – five years away.  I took it pretty serious at the time, but have looked back at it the last couple of years and had some laughs.  However, I’m now realizing it was my first step in the right direction.  It was my first real commitment to changing my life.  Below are some excerpts from my letter to myself:

 

1/14/2009

To: Danny in five years (2014) (FIVE YEARS)

Mr. Meyers,

I am currently in the state of Georgia writing to my future self (you).  Certain parts of my life couldn’t be going better right now.  I’m marrying (my wife) in June and couldn’t be any happier.

Financially, I am doing well.  This is the start of the second year of market turmoil and our financial system is still getting beat up.  Looking back, I believe my goal was to have my first million by the time I was 30.  It is still possible, but I don’t think Accenture will get me there. [Update:  I’m one year away and unless something big happens won’t make it!!]

My job isn’t really in jeopardy, but Accenture has started the process of lay-offs (currently soliciting “voluntary separation”).  At times, I feel that if I do get laid off or quit that it might be the best thing for me because I won’t have an option to do anything else (but go out on my own).  Hopefully, you have it by now.

I continue to enjoy reading immensely.  It all started with the Munger book that I got in June ’07.  Since that time, I have read close to 30 books on a number of different subjects.  Hopefully, I will continue with the reading as its something I really enjoy.  I also feel there is a real purpose to it.  I feel like it is my preparation for when something does come along.

At this point five years ago, I was in my Senior year at OSU and looking forward to the things that would come; and subsequently that are here now.  I believe that I have reached some of my goals.  Mainly, I am learning a lot at work, making good money, marrying (my wife), and progressing through life.  I have also achieved some pretty cool goals with my volunteer service.

However, I think that I would have expected a little more of myself at this point.  It’s awesome how big one’s dreams can be out of college, but sometimes the real world has a way of dampening some of those dreams.  Actually, I don’t think it’s life’s fault at all.  I think it’s my own inaction.

I still believe that I will get to where I want to by the time you read this.  Hopefully, you are running a successful business, happily married, financially stable, and living your dreams.  Remember the bucket list, hopefully it’s still around.

Fare well my friend!  Dan

Ok, the letter might seem a little strange; especially since I called myself my friend!  However, I still think it’s a good exercise.

1/14/2012 is year 3 of my five year letter.  I’m finally making the progress that my old self wished for, and I think I will be able to hit many of my five year goals I’d hoped for at the time.  In fact, I think my old self from 2009 would be pretty happy as this blog is manifestation of those hopes.

Don’t let another five years go by and wonder where it went.  There’s a saying that the best way to know your future, is to know your history.  This pertains to many things, but most importantly it pertains to you.   If you don’t have a plan, you’re going to walk around in circles for the next five years and not even realize you’ve come back to the some place you started from.

Try writing a letter to your future self.   Spend fifteen minutes and make sure you capture the good things that are happening in your life as well as some of the things you might want to change.  Don’t be afraid to add in your big dreams of where you hope to be.  If you’re ambitious, you can even go beyond the five years and write a letter for 10, 25, or even 50 years.  It’s a great way to give yourself a vision and direction.

Do you have any tips for creating your personal plan?  If you have tips, I’d like to hear about it in the comments.

What’s your net worth? We all know money is not the most important thing in life… but it’s pretty far up there! Money can’t make you happy, but not having it can make you miserable.

To keep your money in perspective, you should view it as a tool to help you do what you want in life. It’s important to create your money philosophy so you know how you want to handle your money and know how much is ‘enough’.

One way to help you reach your “enough” is to track how much money you have against your goals. The easiest way to do this is to use a net worth tracker. I’ve tracked my net worth (and our net worth now that I’m married!) since 2007.

Below is the chart with our results; I’ve removed the $ amounts because I’m not quite ready to share our net worth with the world! I track three major areas: Total Investments, Liquidity, and Total Net Worth. Your net worth is your total assets minus total liabilities (debt). Each category of the tracker and chart comprises of the following:

1. Total Investments = 401ks, IRAs, stock accounts, etc

2. Liquidity (accessible cash) = savings/checking accounts, cash, CDs, etc

3. Total Net Worth = Total Investments + Liquidity + home equity – all debt

whats your net worth

It’s good to track your net worth against your goals, but you need to be aware of the positives as well as the negatives of tracking it.

Positives:

1. You keep focused on your goals

2. You control your money

Negatives

1. You can become obsessed with it

2. It can start to control you and your emotions

The net worth tracker can be especially painful during market drops because you’re forced to track your investments as they shrink. You just have to keep in mind that you’re investing for the long term!

One business management saying is you manage what you measure. If you track your net worth and the various components, you’ll do a much better job of controlling your money and hitting your goals.

For you convenience, I’ve already created a template for you to use! You can find it on the Money Tools section along with some additional helpful tools or download it:

Download Net Worth Tracker

Check it out and let me know if you have any feedback to make it more helpful.

 

Have you ever read to the bottom of a page only to realize that you have no idea what you just read? How about forgetting after a single sentence? It’s not uncommon because we all have too much going on in our lives.

Often times, I’ll watch an entire movie and can hardly explain any specifics the next day. It’s almost like I didn’t even watch it! I realized the same principle applies when I read books. I’m sure at some subconscious level the book plants some thoughts in my mind, but it’s hard for me to consciously remember.

My solution is to write down quotes that I find important. It helps you hold onto the quote both figuratively and literally. I started when I was traveling to a client location and I needed to fill the time on the long flights. This was way back in 2007 before e-readers were common!

Here’s the process I use:

1. Write down the quote on a spare piece of paper (I wrote small so I could keep them all on one page)
2. Copy the quotes onto my computer for future reference

This increased the chances of remembering the quote because I spent so much time on each one. Think about it. Reading the quote and then copying it to paper will make you reference it multiple times so you can write it all down. Then you’ll do the same thing when you type it on your computer.

Another benefit is it makes me pay more attention to the book because I’m busy looking for the next quote. However, even with this strategy, I sometimes catch myself scanning pages without paying attention to the words.

I started this method while reading books in 2007 and continue today with 2,500+ total quotes.  The only problem with doing this on a flight is some people get nervous when they see me hunched over my book and writing something so small in cursive that they can’t see it!

Surprisingly, out of the hundreds of flights I’ve been on, only one person has ever asked me about it. He went on to tell me he read Abraham Lincoln did the same thing so I guess I’m in good company.

I’ve heard that you can take notes on some e readers but I’ll stick with my old way until someone can convince me of a better way. Do you write down quotes or have another way of capturing them? Let me know about it in the comments.