Treadmills are for Losers

Life and Money Outside the Box

Would you classify yourself as an independent thinker? Would you say that you are a visionary? Your thought-life has direct implications on your real life, so what do you think about? In researching the characteristics of millionaires, independent thinking and casting vision are common denominators.

Millionaires think differently about everything – not just money – because they know that conforming to social norms is a recipe for mediocrity. From how they spend their time to how they use their energy, these people identify what is important to them and then go about pursuing it.

We tend to sensationalize millionaires in our culture, believing they all have private jets, homes around the world, and heated toilet seats. In truth, the typical millionaire in our country observes what works and doesn’t work, then casts vision for his or her financial future.

What works? Saving and investing money, making wise purchases, living with a purpose for monthly income, and helping others. What doesn’t work? Trying to borrow your way to wealth, having a “keeping up with the Joneses” mentality, following the herd, and being self-centered.

We’ve all heard the phrase “think outside the box,” and most of us recognize that we’re at our creative best when we avoid groupthink. What if instead of just thinking outside the box, you lived outside the box? What if the way you approached all of your financial decisions took into account what you want to accomplish for your life – not just tomorrow, but also ten years from now?

Thinking independently requires we get away from the noise and clutter in our media. Having a vision means sitting down and honestly deciding what you want out of this life. Creativity and a positive attitude accompany those who know what they want. They are the ones who align their beliefs and values with their actions somewhere outside the box.

The Tax Man Cometh and... Giveth?

April showers bring May flowers – so they say – which gives us something to look forward to. April also ushers in the annual deadline we all love bumping up against. It’s tax time again.

Many of us will receive tax refunds this year. I’m not a huge fan of refunds simply because I want that money in my pocket throughout the year rather than sitting in the government coffers as an interest-free loan. Please recognize that if you divide your refund by 12, that’s how much more you could’ve been bringing home each month last year. We can’t change the past, though, just the future. So what is the best use of those refunds anyway?

Given the pervasive attitude of fear in the economy right now, I imagine some are viewing their refunds as an unexpected boon – kind of like finding a $20 bill in a pants’ pocket that you completely forgot about. Fear is a terrible motivator – often times causing us to make brash decisions without a solid basis in reality. The reality is that we can’t control everything around us, but we must have a plan for what we do have authority over.

Start with a budget for your refund. Of course, you definitely need a monthly budget – where every dollar is spent with purpose before each month begins. Now we’ll create a plan specifically for the tax refund. Take a look at the Seven Financial Freedom Steps.

Do you have a beginner emergency fund? If you don’t have around $1,000 in a savings or money market account, then use your tax refund to open and fund an account like this. There’s no sense in throwing caution to the wind – unexpected expenses happen all the time, it’s called life. Money Magazine tells us that 78% of Americans will have a major negative financial event in any given ten-year period; that’s plenty of reason to be prepared. Likewise, if we’re going to get out of debt for good, we have to stop going into debt for these expenses, which aren't really "unexpected" after all.

Are you aggressively paying off your debt? After you’ve gotten your beginner emergency fund in place, go ahead and pay something off with your tax refund. Believe me, it’s going to feel really good! Use the debt snowball process: list all your debts from smallest to largest, pay minimums on everything except the smallest – throw as much at that one until it’s paid off. After that, move on to the next one and repeat until free of consumer debt.

If you’ve already dumped your consumer debt, find a creative way to give a portion of your refund to help someone else. Use the rest to top off your full emergency fund of three to six months’ expenses, invest toward retirement and your kids’ college, or pay down the principal on your house. The most important thing is to have a plan for this money; without one it’ll sprout legs and wander out the door.

To estimate your 2009 taxes, visit the IRS Withholding Calculator.

My Father-in-law is my Master

Three times in the last two weeks I’ve encountered people engaged in or preparing to engage in lending money to family. All three cases are the same: parents wanting to help their kids financially are lending money at a lower interest rate than the kids could get from a bank on their mortgage. Financially, it all looks like a good deal: the parents get some guaranteed return on their money better than most Certificates of Deposit are offering now and the kids have lower mortgage payments.

One of the cases I’ve encountered resulted in the parents, daughter, and son-in-law sitting around a table in my office, the two kids in tears. Yikes! What looked great on paper resulted in an incredibly burdened relationship when unexpected events derailed the “good deal.”

The very first debt myth I cover in our Past Due Boot Camp is “lending money to a family member or a friend is wise because I’m helping them.” The truth comes from a trustworthy source: the Bible. Proverbs 22:7 – “the rich rule over the poor and the borrower is slave to the lender” – packs a lot of punch. In practice, if you have the means to help someone financially just give them the money and don’t expect it back. Let it be a gift instead of a loan because no one likes eating Thanksgiving dinner with their master.

Two weeks ago a friend in a position to pay off her daughter and son-in-law’s mortgage (and then replace it with a lower interest loan to her and her husband) asked me if I thought it was a good idea. The kids get a lower payment and the parents make a better return than they could get at the bank; seems like a win-win. After I cited the Proverb, I told her she asked the wrong financial guy if she was looking for affirmation. She is financially savvy, and so I think it important to address the financial merits of such an endeavor along with the relational.

Let’s say that the mortgage currently has an outstanding balance of $200,000 and the couple has an interest rate of 6%. If they’ve been in the house for a year already, there are 29 years left to repay. The parents propose an interest rate of 4%. On paper everything looks like a great deal. The mortgage payment goes down by $227.15 each month; the total saved on interest and principal is just over $93,000 during those 29 years. The parents’ $200,000 investment becomes $338,000 when the mortgage pays off.

Let’s put ourselves in the shoes of the parents. Would it really be wise to tie up $200,000 for 29 years in an investment yielding a whopping 4%? Sure, we look around at the current market conditions and a 4% return seems like 40%. But in the next five years, the likelihood is that the market will turn around. We could even make the argument that investing $200,000 today – when the stock market is deeply discounted – could make these parents at least $381,000 more than the mortgage option during the same amount of time.

So, financially, it doesn’t appear that tying up those assets for so long is an ideal option for the parents. However, if you asked them, they’d probably say they just want to help their kids out. What if the kids sell the house three years into their deal? That’s a lot of lost interest. What happens if, six years from now, the son-in-law loses his job? What if he becomes disabled and doesn’t have disability insurance? What if…? What if…? What if…? Could any of these life changes leave a sour taste in one or both parties’ mouth? Basically, have these parents considered all the relational pitfalls of this financial deal? They could wind up holding a mortgage for kids who can’t repay and relationally they would become their children’s masters.

Why disrupt a great parent-child relationship or strain a daughter’s marriage in the name of 2% lower interest? I’m sure we all can think of examples in our own lives where what looked great on paper didn’t unfold according to plan. Placing a higher value on relationships than the almighty dollar will help us all keep the big-picture perspective we need when mixing family and finances.

For Love and Money

The look in her eyes said, “I am frustrated and I am nervous.” The look in his eyes said, “You’re just overreacting.” I love working with married couples as they begin setting goals together for their lives and their money. I also love to show them that their marriages will get stronger in the process of communicating better about their financial condition.

But let’s face it. Men and women are different creatures; some say they come from different planets. A husband might throw his hands up when his wife talks anxiously about money. A wife may harbor resentment over financial decisions that were made by “the head of the house.” If this sounds like you, the good news is that you aren’t alone. Money is the number one thing couples fight about in marriage. It’s also the number one cause of divorce. But who wants to be normal?

I met a young woman today who said she and her husband are about to start saving for a house. I could tell there was a slight bit of hesitation in her voice before she revealed that before they were married, her husband borrowed some money from his parents. She told me that her in-laws probably weren’t expecting it back because the money was more given than loaned. Then why was her body language so tense as we talked about this “gift”?

This is where personal finance gets personal. There is more to it than paying mom and dad back. There is stress and tension on a young wife who feels like every purchase she makes is being scrutinized by her in-laws because how can she afford the new towel set when she hasn’t paid us back? If she and her husband are going to get on the same page about the loan from his parents and saving up for a home, they’re going to have to talk about it. The truth of Proverbs 22:7 – “the borrower is slave to the lender” – has been ringing all too clear.

Remember when you were dating your future spouse? Remember talking about dreams and desires – everything you wanted out of life? Who said you had to stop after you exchanged vows? I told the young wife to sit her husband down and tell him that paying back some or all of the money he borrowed from his parents was extremely important to her, and she would have trouble putting any other financial goals in front of that right now.

I also said that if he has learned anything as a husband, he should know that “if mama ain’t happy, ain’t nobody happy.” That’s not to say she should always get her way, but it is to say that a subject causing tension, anxiety, and stress must be addressed. In talking about her feelings, the husband has an opportunity to serve and show love to his wife. Imagine that! In their book For Men Only, Shaunti and Jeff Feldham found that women prefer emotional security in their marriage to financial security. They’d rather be broke than think their man is distant and indifferent. So, men, be sure to show love – especially when dealing with finances, because financial security is still very important to your ladies.

This couple can sit down and address the stress point, then talk through a plan to shed the burden. That’s the beginning of setting goals together. When two people love and serve each other they have a lot of fun dreaming together. Getting out of debt. Buying a home. Traveling the world. Starting a business. Share your dreams with your soul mate.

Dreams become goals and goals need plans if they are ever to be accomplished. Each spouse offers a unique skill set and personality that will play a part in making those dreams into realities. Embracing those differences is the first step toward a sound financial plan, better communication, and a stronger marriage. Now go ahead and have some fun together!

Getting out of Debt: The Debt Snowball

A little over a week ago we had a freak snowstorm here in North Carolina. Four inches later, all the kids in the neighborhood were in their yards sledding on trashcan lids and using beach toys to gather up the white stuff for snowballs. Some of the kids had never seen snow, but they all wanted to build snowmen.

The first step to building a snowman is gathering up that chunk of snow that you can start rolling across the ground. The more you roll, the bigger the ball gets. Before you know it, there’s a real-life Frosty keeping watch over your home. Those kids were rolling snowballs all over the ground, delighted to see them grow larger and larger.

Being a financial coach and certified nerd, I immediately linked the snowman process to dumping debt for good. I teach clients a process called The Debt Snowball for completely eliminating their consumer debt – typically in 24 months or less. Here’s how it works:

With the debt snowball, you list the debts from smallest payoff to largest. While paying minimums on everything else, you attack the smallest debt with such a vengeance that it can do nothing but hit the bricks. I’m talking about selling stuff, tightening the budget to free up cash, and doing whatever else you can to kick that first debt out of your life for good.

Once the smallest debt is gone, you take the minimum amount you used to pay on it and roll it into the payment on the next debt – along with any other funds you can free up. Remember, we’ve already discussed putting your foot down and being done with debt; your ferociousness can shine in all its glory now. Once that second debt is paid off, you roll its payment, the first debt’s payment, and any other cash you can scrape together into the third debt. Just like a snowball for a snowman, as you pay off a debt and roll the funds into the next, your payments get larger and larger.

But, why wouldn’t you pay off the debts in order of interest rate – from highest to lowest? I get this question all the time. Personal finance is much bigger than numbers and interest rates. We’re talking about emotions and behaviors here. It’s personal. If the debt with the highest interest rate has a huge balance, it’s going to take a while to pay it off. It won’t take long before you lose your enthusiasm and motivation. But when you taste some victory by paying off a small debt you’ll be invigorated to push forward and kick that next one out of your life.

I’ve worked with people who were able to throw thousands of dollars each month at their largest debts after they’ve gotten rid of smaller ones. That’s a huge snowball rolling downhill, destroying every debt in its path! Thousands of others across the country have used this process to achieve debt freedom, so what do you have to lose? Debt.

Getting out of Debt: Expect the unexpected

My wife and I were driving home from my in-laws a few months ago when I hit a pothole. Lo and behold, the darn thing blew out my tire and put a nasty dent in my wheel rim. That little pothole cost me nearly $600! You know what, though? I knew it was going to happen before it ever did.

Sorry, no Magic 8-Ball here. Money magazine says that 78% of us will experience a major negative event in any given 10-year period. Now, busting up my tire and wheel don't qualify as "major" in my book, but because we know that life happens - usually unexpectedly - my wife and I have an emergency fund in place for when the rain comes.

Remember that the first part of getting out of debt is changing the way we view debt and making the choice not to go into debt any more. If you have an emergency, you have to cover it with your emergency fund - not your VISA. Putting emergencies on credit cards will keep you locked in the vicious cycle of debt.

For most of us, having $1,000 in a savings or money market account is the First Step on the road to freedom!

Getting out of Debt: Putting your foot down

Debt has a way of lingering, always for too long. So, if the debt is lingering how can we get out of it? What is the best method of getting out of debt?

There aren't any magic pills that make debt go away. If someone on a late-night TV ad or on the radio tells you they have the secret to eliminating your debt without any effort, they're lying. To start getting out of debt you have to do one simple thing: stop going into debt. It's crazy, I know!

I think about it like this: when I was a boy, I joked with my friends about "digging a hole to China." Imagine digging a hole - a big hole - so deep that you'd need a ladder to climb out of it...but you don't have a ladder. So you're stuck in your hole with a shovel. If you want to get out of that hole, obviously the first thing you're going to do is stop all that digging, right?

Proverbs 22:7 says "The rich rule over the poor and the borrower is slave to the lender." If you want to get out of debt, you must stop going into debt and allow for a paradigm shift in your way of thinking. Debt doesn't build the prosperity we've all been led to believe by our culture. When surveyed, 75% of the Forbes 400 (the 400 richest Americans) said they got there by becoming debt free. So, instead of putting the cart before the horse by talking about how to actually go about eliminating debt, we first have to change the way we think about debt altogether - otherwise, we'll wind up right back where started...in that hole.

The first step to get out of debt

The first step you must take is to stop borrowing money. If you want to get out of a hole, you need to stop digging.

Take the first step towards getting out of debt. Cut your credit cards up or freeze them in a block of ice.

If you don't have enough money to get through a month without using a credit card then you have to face reality and either cut your expenses or raise your income.

Debt Stress

It just doesn't sound good, does it? No, it's certainly not something I want to have.

A recent poll shows about 20% of Americans suffer from debt related stress. Here are a few things and article from USA Today pointed out that these people suffer from:

• 44% had migraines or other headaches, compared with 15% with low debt stress.
• 29% suffered severe anxiety, compared with 4%.
• 23% had severe depression, compared with 4%.
• 6% reported heart attacks, double the rate for those with low debt stress.
• More than half, 51%, had muscle tension, including pain in the lower back. That compared with 31% of those with low levels of debt stress.

How about developing a plan to pay off your debt in just 24 months or less and then do it?