Advice from the broke is useless

I know this seems so obvious, never take advice on money, investing and business from the broke. The problem is it is not always easy to recognize the “broke”, when I refer to people that are broke I am not saying they live in a “poor house”, make very little money and eat mealy porridge. I simply mean they are broke as in more money goes out that comes in.

Broke people live next door to you, they live in neighborhoods that are both two steps down and two steps up from yours. Broke people are everywhere, most of the people in America are broke by my definition. They are the people in huge 50K dollar SUVs that they justify as being needed “to cart the kids around in”. Jeez, how big are these kids? They have beautiful homes, nice furniture and perhaps even lawn care service. Many have vacation homes or time shares or other true luxuries. How can I call these people broke?

Easy they are broke, they have very little to no surplus cash flow, they save next to nothing other then what perhaps goes automatically into a 401K (Thank God for that at least). They have TVs on credit, cars on credit, pools on credit, some have charged the very paint on their walls and the sofa they sit on. Cut off their income for 30 days and most would loose every thing they have. They are broke because they have no “wealth” only things, stuff and the appearance of wealth.

Such people are always big talkers. They tell you “now is the time to buy” or that “that business deal seems risky” and other wonderful nuggets of advice. They tell you how great that new SUV is, how wonderful owning a plasma TV is and they always have investment advice for you.

My advice is, don’t take their advice. If you follow the advice given by most people it will lead you down the same path they are on. In other words take advice from your uncle who has that beautiful house, nice cars and kids in top schools and you may just get their yourself. Yet you will probably do it “his way” (the normal way) and be in debt up to your eyeballs and working into extended retirement years just to pay the interest on all of it.

So where do you go for advice? To the successful, to the millionaires next door. Look for the guy that pays cash for everything, the woman that has a 6 figure job and a 150,000 dollar house and a sensible car along with a nice savings account, a good team of advisers and a very fat and growing Roth IRA. These people are not “broke” they could go with out work 6 months to a year with just a bit of sacrifice if they had to.

How do you find them? There are many of us, just talk to people and you will know right away.

• The broke talk about how expensive gas is and the wealthy talk about how efficient their cars are.
• The broke think rich people are “over paid” and “thieves” and the wealthy think the rich are “generous” and “admirable”
• The broke shop for “deals” on consumer goods, the wealthy look for “deals” on real estate and investments
• The broke think cars are status symbols and the wealthy think cars are a “necessary expense”
• The broke talk about “saving money” by spending it, the wealth talk about budgeting and investing the savings

Just realize it is not income that separates the broke from the wealthy. In my town I can show you people with a household income of 100K or more that are “broke” and I can show you some with a household income of say 70K that are very “wealthy”.

Just remember this and consider it when anyone advises you how to spend your money, what to buy, how to invest and on what is important or what is safe vs risky. Now I am not saying that no broke person ever gives any decent advice. Sure many times they do, just don’t let the broke counter your instincts or justify what you know to be a mistake for short term gratification.

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Your job is not secure

Let me be clear I don’t think you have a safe, secure job today if you work even say for the Post Office or even a State Government agency. I believe firmly with the toxicity of debt in both the consumer credit card market and the sub prime lending market a major recession is coming. We won’t die off, no one will jump from tall buildings on Wall Street and the dust bowel is not comming back but there also may no longer be “two chickens in ever pot”. Todays “chickens” are Plasma TVs and other do dads.

Right now there is over 1 Tillion Dollars in toxic debt in the consumer credit market, that is money that will NEVER get paid back. The American tax payer has had enough, we won’t bleed money any more. Social Security is getting to where you as a working member of society have you “own old person” to provide for, it will change and that will be good but short term it will hurt.

The dollar weakens almost daily now! Canada now has a stronger dollar then the US that has never happened. The weak dollar is supposed to help fix the multi trillion dollar trade deficit we have with the world, it does nothing of the sort. The biggest potential export markets for us are China and Japan and both artificially tie their currency to the dollar. When the dollar drops so does the Yen by an equal amount. All a weak dollar does is make your money worth less and less in the global market.

My point is this can’t all just stand as the house of cards it is today and there will come a time soon when some of the bills will have to be paid. When that happens there will not be enough money to pay it. At that point employers are going to feel it hard and tough decisions will have to be made. Your boss might love you but if it comes down to the company surviving and your employment he will have that hard talk with you about some measly severance package. Odds are in many instances he will then get to have the same talk with his boss and so on.

How bad will it be? I do not pretend to know but it will be worse then it is today, that I am sure of. My real point though is it doesn’t really matter does it how many people loose jobs? All that matters to you is if and when you loose yours! It can happen to the best of us, it happened to me and because I live by the things I teach and write about it just wasn’t that big of an issue.

My point is you need to live as though you are currently in the hight of summer. You must buget and make spending choices with the view that you are right now at the peak of your earnings, you must plan for a big decline that can come at any time. This does not mean that you live in fear only that you live free from illusions.

If right now this second you or your spouse lost a job and were unable to replace it quickly how long would your last before you started to go negative on paying your bills. How long till you lost your house or got evicted from your apartment? The average American could scarcely make it 30-60 days! Many are but one or two paychecks from bankruptcy!

How do people get in this position? The belief that a paycheck is an entitlement that’s how. It amazes me how entitled employees tend to be in relation to their employers. Just look at the auto and airline unions, they keep getting more and more from their employers but the problem is the airlines and the car makers no longer can pay the bills. They are putting their very security in jeopardy by always wanting more, more, more.

So what is the solution? - Here are ten things you should be doing starting yesterday.

First - Never see yourself as secure in your job, have a plan B. Always know which competitor or similar company would be best for you to go work for. Cultivate relationships within said company, don’t act like you are ready to switch if you are not but be on the radar.

Second - Build a big network of contacts in your line of work, I don’t care if it is packing boxes or running companies as a CEO. Build network of people around you that can help you if you ever need a new job.

Third - Live below your means! Nothing is more important, make sure you buy less house then you can afford. Buy a cheaper to own and maintain and fuel car that you really have to settle for. In short never buy what you can afford today, buy what you should still be able to afford with far less then you have.

Fourth - If you deep in debt get out now! If have home equity and large credit card debt refinance your house and pay off the cards, then cut them to pieces.

Five - Buy and own a home! Renting has a place but as soon as you can afford to own a home the right way do it. Buy smart, pay less then the house is worth, find a deal, there are always deals. Know this variable rate mortgages are the devil, if you can’t afford the home with a fixed loan, you can’t afford the home!

Six - Build a second income, in other words own your own small business. You know how to do, make or advise on something better then most people. Find a way, anyway to make money with it. Do private consulting, build online income (this is what I do) hell just by blogging you can make 500-1000 dollars a month, (I will show you how in the future). Someway, somehow develop a second and even a third stream of income.

Seven - Save money outside of just your 401K, IRA, etc. The golden rule is get to where you save 10% of your income in an IRA or other tax deffered acocunt. That money is locked away until you retire though. I am all for 10% going to retirement as long as you can save say 15%. If today all you can afford to save is 10% put 5 into a long term locked away account and 5% where you can get to it with out penalty if you need it. Build an emergency fund of at least 90 days of your current income before you lower your savings contributions to liquid accounts.

Eight - Plan on being fired, your company being bought, your job being downsized, etc. It may never happen but plan on it. The very act of viewing such things as a possibility will make you smarter in your decisions every day. It will also make you more level headed and able to stand the hardship if it comes. Again do not live in fear, just follow the boy scout wisdom of “be prepared”.

Nine - Educate yourself in and outside of your current employment niche. When I lost a job about 8 years ago it became an opportunity! I went from Sales Management into online marketing and became very successful. The reason was simple in my sales career I educated myself on how to sell all the time. At the same time I taught myself how to market on and off line. I took my sales knowledge and put it to use online with my new skills. This was my “secondary income” a tiny small business that was making me about 500 dollars a month. I turned it into a new career because I had become a learning sponge. Today I own companies because of this education I gave myself. Be it online, via books, classes, seminars, I don’t care what invest both time and money in educating yourself.

Ten - Be the supreme commander of your own life and destiny. Every day think about how you can do better for yourself, your family and your employer. Your job IS NOT a right, you salary IS NOT an entitlement. Get that into your head right now this second. Would you take a raise if it was enough to damage your companies future? If you can answer that with a yes you should be fired! See yourself as an independent contractor, self employed no matter what your job is about. You should get paid as much as you can with in reason, many are underpaid but many people are also over paid. Work hard enough to be able to demand and expect more.

The key here all goes back to one thing though, no job is secure today. That false belief has put many people into massive debt and financial ruin along with a retirement in poverty. Sure this post was an ass kicking but most of America needs one from time to time.

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Help your children save for college

OK I have to give credit for this idea to my Brother-In-Law (we will call him Mark).  I took a different approach to saving for college for my son.  In our case simply set up a 529 plan for our son, made contributions as part of our financial plan and he is now in college and can do four years (including housing) as a state college with no debt and almost on out of pocket expense.  While this seems wonderful a bit of it is already biting us in the rear.  Our boy just doesn’t seem to realize how lucky that makes him.  I am glad we did it but what I am about to lay out for you is a much better solution at least to a degree.

What Mark has been doing since both children were born is both simple, cost free and may I say genius.

Every kid has birthdays, Christmases, Easters and many other times that relatives, friends etc send them cards and gifts and very often money.  Mark has required that 50% of his two children’s financial gifts (no matter how small or large) go into savings accounts to be used for college.   He choose very safe investments and did not elect to use a 529 due to its restrictions.

What does this mean to his kids?  Upon Graduation both will have over 20,000 dollars in funding toward schooling or life in general if they choose not to go to conventional college.   I should point out that this is not a family the gets huge amounts of money for each event, we are talking 20 bucks here, 5 bucks there, may be 50-100 for a Christmas that goes into these funds.  Mark requires his kids to save this money no matter the source.  If they come over to my house and I give them a ten a piece for spending money, Dad puts 5 bucks a piece away, just like clockwork.  The fact that 18-20 years is a very long time for money to grow, takes care of the rest.

Some of the family thinks this is “taking away the fun of just being a kid”, most of our family is BROKE by the way!  Taking advice from the broke is a good way to not only be broke but build generations of kids and grandkids that are broke too.  Mark wisely has ignored this and I think when his kiddos go to college or start a business or do what ever with their money as adults they will put more value on the funds.

Now we did teach our son to save, we helped him invest in stocks, set up accounts and always made him put some money away.  Yet if I had it to do over I would have also had some allocation go to his college fund directly from his hands.  Not just to increase the funds available but to give him a true sense of ownership, responsibility and gratitude for the fact that this money is available.

What I know is this my niece and nehpiew will have real options when they finish high school.  Options my brother-in-law would be hard pressed to provide on their household income.  All this from the simple wisdom of “pay yourself first”.  Consider it the next time your little ones get a card from Grandpa Joe or Aunt Betty.  A few less do-dads today for a real kick start to life tomorrow.

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Start with what you use every day

Cutting the monthly cost of your expenses does not have to be difficult and it often involves just doing a few simple things that we know we should do. Often it is simply that we don’t want to take the time to make a phone call, send a letter or deal with the hassle of making a change on an account or service.Yet this is a mistake, a place where apathy can cost you thousands of dollars or more over your life time. Consider a five dollar a month savings, not much right, sixty bucks a year. Well, 60 dollars a year, times 45 working years until you retire and that five bucks a month now equals 2700 dollars you could have invested. The big things is there are lots of five bucks here, and ten bucks there you can harvest right from your own home with out any sacrifice.

Consider home phone service for instance. Do you even care who’s name is on your bill? If you get your internet access from the cable company you might do what millions already have, use your cell phone as your only phone and throw out the home phone all together. Or Consider Broadband Phone options that you can run on your Cable Internet connection, they often cost well under twenty five dollars a month or less including any taxes or fees.

If you want to keep your conventional phone service one provider I really recommend is Cleartel. They are not available everywhere but if you are lucky enough to be able to get them you can get great service at a real savings.

I bring up phone service because it is easy to cut costs on but it is only one example. Look at every recurring monthly bill and consider your options. Mortgage refinance is not a fun process but with rates where they are it might put a hundred dollars or more a month into your pocket. What is 100 times the number of months you have left to work in your career? Electric service has been deregulated in many states so see if you have options there. A simple call to a credit card company and the phrase, “can I talk to a supervisor” or “then can you put me in touch with someone that can make a decision” can shave points off a credit card rate.

You get the idea, start at home and examine every expense. Start treating your household like a business, expenses are to be examined, cut and justified. Just because our government hasn’t learned that lesson does not mean you have to live that way.

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