Wealth...Uncomplicated

Dave Ramsey Followers are Successful, Here's Why

Think what you want about Dave Ramsey and his loyal followers, but they are head and shoulders above 'average' people when it comes to handling their money.  While he teaches sound principles and has a lot of charisma, the real reason that his followers have such great success is because they are ripe for change.  It is this combination of a firm, consistent message and an audience that is eager to listen that makes Dave and his followers so successful.

A Powerful Message

If you read either of Dave's major books, Financial Peace and The Total Money Makeover, you will find that he delivers a powerful message for people to get out of debt and start saving to alleviate existing financial pain and move towards a secure financial future.  In his words, he wants his listeners to "kick Murphy out, permanently".  Of course, the Murphy he refers to is that of Murphy's Laws that are along the lines of, "If anything can go wrong, it will go wrong".

He teaches the old school method of handling money which is to make a budget each and every month and then stick to it.  He shows people how to get out of debt, stockpile cash, and invest aggressively--none of which are unique lessons in personal finance.  Even with his methodology being far from original or unique, his listeners seem to handle their money better than most of us, even those of us that are doing quite well.  So what is the secret behind his and his listeners' success?

The Listeners

You might think it's because he's a financial genius or that his charisma can convince people to take action, but on both counts, you'd be wrong.  The reality with Dave and his listeners is that he is starting the conversation with them at a point where they are in financial peril.  By reaching folks when they are struggling with debt, he has found an audience that truly listens to his advice and are willing to put that advice into action--even if it's a massive pain in the backside.

The reason for this is simple.  The pain that those deep in debt are experiencing is far greater than the pain of making and sticking to a budget.  Ask someone off the street who isn't in debt and doesn't have any major financial pains to do a budget, and you're likely to get a dirty look.  Not so with Dave's people, they are ready, willing, and able to do as he teaches.

Why is this?  Well, if you haven't been through the debt grinder, just imagine that each month you're sinking further into debt.  This continues for some time until one day, you miss a payment on a credit card.  Then the collections calls begin at home and work.  Pretty soon, you miss another payment and suddenly you're well on your way into a tailspin that manages to suck the life out of you at work, creates marital discord at home, and eventually has you thinking there's no way out.

Do you think you'd be more receptive to making major changes in your life if you found yourself circling the drain, so to speak?  Of course you would.  And why wouldn't you?  Obviously if you find yourself in that kind of state, you'd be happy to hear anyone that had a message of hope backed by the experience and expertise needed to help you get out of the mess and into a better tomorrow.

Lasting Change

As Dave walks people through this process of getting out of the mess, he does it in a firm manner that basically says, "you need to do it this way...no exceptions, no shortcuts".  He teaches the long road to people who are really listening and as people take the long, hard road to get back to scratch, something fundamentally changes in the way they view themselves and the role that money plays in their lives.

While it's different for each person, I view this fundamental change as being similar to that of those who lived through The Great Depression.  In my career, I've had the great privilege of meeting and speaking with a good number of people who survived this turbulent economic era.  Without exception, everyone I encountered in this group was conservative with their money, lived well below their means, and perhaps most importantly, understood money's proper place in life.

With this group, money was more important as a security measure than as a means to enriching one's life.  This might sound counter-intuitive--particularly with all that we've learned from financial services marketing messages--but the reality is that the Depression Era survivors were closer to the truth of the matter.  Ultimately, the limited and often short-lived happiness derived from acquiring material possessions pales in comparison to the financial pain created by not having enough money.

It is this intense pain that has the power to create lasting change.

My Money's on Dave's People

Now you have my take on why Dave's followers are more successful with their finances than the average person off of the street.  Real pain opens the ears; Dave has a powerful message; and the lessons learned are lifelong.  If I was a betting man, I'd put my money on Dave's people every time.

Loan Shopping Done Right

When it comes to getting a loan, many go about it the wrong way.  The most common progression goes something like (1) find something to buy, (2) talk to salesperson about financing, (3) sit down with related finance company, and (4) sign where indicated.  This is an expensive proposition unless you get lucky.

If you've decided to buy something that will require a loan (don't do it...debt kills wealth), at least go about shopping for a loan the right way.  Below are the steps you should take when shopping for a loan:

1. Start with BankRate.com - this site will give you a pretty good idea of what good loan rates will be based on the type of loan you are taking out.
2. Apply at a Loan Brokerage Site - services like LendingTree or eLoan are a great place to start shopping for a loan.  They typically offer loans from a dozen or more lenders that do business in your area.  When looking at these loans, sort them by APR, not the simple interest rate.  The reason for this is simple, APR includes all costs of the loan so you can compare apples to apples.
3. Check with Local Banks - after you have a good idea of what the rate on your loan will be using an online loan brokerage, it's time to shop in your area.  You need not put in an application to all of the local banks, but calling your bank and others in the area will help you determine if the local banks will be competitive.
4. Select a Loan - after comparing APRs for all of the loan offers, choose the loan with the lowest APR.  In addition to the APR, you can also compare based on the total of payments over the life of the loan.  This number is usually insanely higher than the original loan amount, but it tells you the total costs involved with the loan.
5. Take a Step Back - before going through with the loan and signing your future paychecks away, take a step back and ask yourself if you really need a loan to begin with.  By the time you've reached this part of the process, you're typically a little further away from the purchase so it's a good time to evaluate if you truly need the loan or the item you're purchasing.  If you really do need the item, go ahead and execute the loan.

This is the basic process for securing a good loan, but the best way to purchase something is with cash.  It's far less expensive, limits risk to your personal finances, and lends itself well to accumulating wealth.  With that said, shop for loans carefully; the person selling you the loan wants you to be in debt and cares nothing for your financial welfare after the loan is processed.

Tips for Transitioning from a Credit to a Cash Lifestyle

If you've been sucked into the credit lifestyle that involves near daily use of credit cards and financing purchases with loans, there are some small steps you can take that will help you transition to the greener pasture of a cash lifestyle.  These steps are neither painful, nor incredibly difficult to execute, but their effects on your path to building financial security can be enormous.

Show Me Your Jackson

The first thing you should do to make the transition is to put together a small stack of papers with Andrew Jackson printed on the front of them.  About fifty of them will do just fine.  This will cover most of the small emergencies that happen in life and prevent you from using expensive credit.

Stop Carrying Credit Cards

Even if you can't cut the cord completely from your cherished titanium, platinum, gold, silver, copper, bronze, nickel, or whatever card, just stop carrying the little devils around with you.  Instead, fill up your pocketbook with cash from the ATM.  It's a drag to have to go to the ATM, but paying with cash will instantly make you expense conscious.

The 89 Cent Memo Pad

Whenever you want to buy something, write it down in your memo pad with the name of the item/service and the cost.  Wait a week and see if you still want it or not.  I've done this experiment with some clients and it invariably saves them a thousand dollars or more throughout the year.  By waiting, you come to realize that you didn't need the purchase anyway.

Turn Same as Cash into Cash Discount

The furniture stores are getting hammered in this economy and the same as cash offers are about as hard to find as the back of my hand.  Instead of going with the same as cash offer and paying top dollar, pay cash for your purchase--but only if they discount the merchandise.  This does two things:  (1) eliminates another loan from your balance sheet and (2) reduces your total cost to own.

Hang On to Your Car Another Year

If you're planning to get a new car when yours is paid off, hold off another year.  When the year is up, ask yourself these questions:

1. Did I still get from point A to point B?
2. How much did my car insurance go down?
3. Were my repair costs more or less than a car payment?

There are few things more enjoyable than driving a car that has no payment.  Once you get this feeling, live with it for awhile.  It will help you grow the desire to live a cash lifestyle.

Use Your Scissors

Coupon clipping can actually become a bit of an art form for some, but for me, I just like to be sure I'm getting the best deal possible.  I look at it this way, "If I'm not using a coupon when one is available, I'm just a sucker paying a higher price."  Think of it like this, if Macy's is having a 50% off sale, would you say, "I'll pay full price, thank you."  Of course not!  It's the same kind of thing with coupons--get the best deal you can.

Track Your Savings

From writing down the amount you saved by keeping your car an extra year to the weekly average savings from coupons to the purchases you didn't make from your memo pad, take stock in the amount you saved.  After that, add 15% for the interest you saved and you'll see the one year savings of cash versus a credit card.  When you have that total, multiply it by 17.5 and that's the amount of money you could have if you invest the savings over 30 years.

Remember that the credit lifestyle is fed by convenience.  By inconveniencing yourself only slightly, you can begin to transition to the cash lifestyle where wealth accumulation is easier, financial disasters are less damaging, and your career span is shortened by your savings.  Seriously, cash is the greener pasture...wow I'm funny...harr-dee harr harr.

Working with Debt Collectors

Having spent some time on the phone as a collector for Citibank, I can tell you that there are some basic rules when dealing with collectors that will serve you well.  From knowing whom you're dealing with to understanding the right things to say, you can have a dramatically better experience with these people if you simply follow some simple guidelines.

Levels of Collectors

First, understand with whom you are speaking.  I divide collectors into three tiers with each one having unique characteristics as follows:

1. Big Name Company Collector - this group of collectors hails from the big name credit issuers like Citibank, Bank of America, Capital One, etc.  They have the strictest guidelines for conducting their collections business and are traditionally the easiest and most polite group in the business.
2. Third Party Closely Associated Agency Collector - these people are employed by a third party agency that the big name company has an ongoing relationship with.  They are more difficult to work with but will often have more flexibility in setting up repayment plans and/or settlements.  What they lack is the politeness of the first group.  You can expect higher pressure tactics that will sometimes manifest in a harsh way.
3. Third Party Off Grid Collector - this is the worst group to try to work with.  They are the lowest of the low and will use any means necessary to collect on your debt.  Violations of the Fair Debt Collections Practices Act (FDCPA) are common in this group and they absolutely should not be trusted.  Before giving them any information or setting up repayment agreements, get everything in writing.

The Collector's Tool Box

After you've identified with whom you're dealing, it's time to get some perspective on their side of the phone and how you can put this information to good use.  The typical setup in big bank collections departments is to have a certain set of tools available based on the level of delinquency on the account.  In other words, the further behind you are, the more willing to work with you they become.

Ultimately, the job of the big bank collections department is to keep your account from going past 180 days past due which would require them to write off your account.  To do this, they have all kinds of tools that include the following:

• Waiver of Fees - by crediting back late and over the limit fees, collectors can often get an account that is running only slightly past due or over the limit back to a current status.
• Temporary Interest Rate/Minimum Payment Reduction - if you're a few months or more past due, fees have mounted to the point that waiving them won't do enough.  Thus, a temporary reduction in your interest rate and/or minimum payment due can bring your account back to current.  These arrangements usually only last three to six months.
• Permanent Interest Rate Reduction - if you're chronically in the collections system, some collectors may offer you a permanent interest rate reduction if you can agree to a minimum payment amount that they calculate.  This serves to incentivize you to stay on time and be more apt to pay them instead of other creditors.
• Settlement - when a situation arises where there is a low likelihood of the bank receiving consistent payments going forward, settlements become a preferred option for the collector.  The idea here is that if you've suddenly lost your job, experienced a disability, etc., the collector will try to obtain a lump sum payment to get as much money as possible and write off the rest.  Settlement negotiations typically start as high as 85% and in rare instances can be as low as 20%.  Keep in mind that any amount you settle for under the amount owed will show up in a 1099-C as income.  In other words, if you owed $5,000 and settled for $2,000, you will have to add $3,000 to your income for the year.

Collector Compensation

Now you know with whom you're dealing and the tools they have available.  Now it's time to learn the collector's compensation arrangements.  Knowing how they get paid can help you in figuring out what their personal interests are which can sometimes help you figure out which course of action is best.

The big bank collectors are usually paid on a salary/base wage plus bonus structure.  They will have a pretty consistent income with their bonuses accounting for 20% or less of their total compensation.  They will usually be reluctant to go outside of the company's guidelines because it usually doesn't add up to a bigger paycheck.

The third party collectors will also receive some base wage amount, but with many of these agencies, they will earn a commission for the amount they collect.  This is especially true with the last group of collectors, as they may have as much as 75% of their pay determined based on what they are able to collect.  The reason this is true is because many third party collections agencies will purchase bad debts from the big banks at a few pennies on the dollar.  This means they can buy your old debt of $5,000 for as little as $50 and if they get $2,000 from you in a settlement, they still make $1,950 on your account.

Getting the Best Outcomes

To get the best outcome, you'll need to apply the information above and follow some simple rules.  If I could boil it down to the best characteristics that can help you in working with collectors, they would be:  (1) be nice on the phone, (2) tell the truth about your situation, and (3) stay strong when they try to bully you.  To put this another way, don't try to out-rude a collector, don't tell lies because they track them and can use them in court, and don't rollover when they push.

In addition to demonstrating these characteristics, you also need to be aware of your rights.  If you have collectors breathing down your neck, please download and review the rights provided to you under the FDCPA.  These are the ground rules established by the federal government that collectors are required to follow.  Violation of these rules can result in a fine and dismissal of the debt in question.

Also, if they're lighting up your phone and it's causing you to lose your grip on reality, feel free to write them via certified mail a Bud Hibbs Letter which effectively requires them to cease collections efforts by phone.  They can still fill your mailbox, pursue legal action, levy your bank accounts, garnish your wages, or put a lien against your property, but if the calls are just too much, tell them to cease and desist.  If you're mental stability is being adversely affected, sending this letter can help you gather your sanity.

Quick Story

My last two weeks at Citibank were the best of the time I spent there.  I negotiated a slew of overly friendly repayment plans and settlements with the debtors in my queue.  This group that I was able to help on my way out were extremely friendly and were living through the most difficult time of their lives.  After I spoke with them and setup their repayment arrangements, they were all very grateful and I was happy to help them.  Not a single person forgot to say "thank you" and one gentleman said if he were swingin' for the other team he'd take be to bed.

The lesson here is that you never know who you have on the other end of the phone.  If they're being ridiculous, tell them you think they're ridiculous and hang up.  If they're being friendly and trying to help, work with them.  Always, always, always keep a positive attitude and you will be out of collections and moving on with your life before you know it.

Laws of Wealth - Always Use Fixed Rate Mortgages

This is an obvious one by now, but there are still a good number of people taking out adjustable rate mortgages (ARMs) and adding an enormous amount of risk to their financial lives.  No matter the argument, using anything other than a fixed rate mortgage is begging for trouble.

History of ARMs

In 1982, interest rates were at levels that would be almost unfathomable today as a result of attempts to try to corral inflation.  According to the Federal Reserve, mortgage interest rates averaged 16.08% for conventional fixed rate loans in that year--making housing very difficult to afford.  In response to this, the government enacted what is known as the Garn-St. Germain Depository Institutions Act of 1982 that created the adjustable rate mortgage.

At the time, ARMs were a terrific answer to high current mortgage rates that were expected to decline in response to the Federal Reserve's actions of raising rates to cut off inflation.  The basic idea was that interest rates were at historically high levels and they would most certainly come down sooner rather than later.  With this in mind, an adjustable rate mortgage would make sense for new homeowners so that they could have a reduction in their interest rate and monthly payment when rates began to ease.

This made perfect sense because interest rates declined over the next several years and ARM holders were rewarded for making a good decision--using variable rates pegged to the market at peak rate levels.  As interest rates dropped, ARM holders reaped tremendous benefit.

Two Decades Later

As we now know, using ARMs when rates are near historic lows is an incredibly stupid idea.  Only twenty years after ARMs were created, rates hit rock bottom at the same time that real estate was in bull bubble mode.  With investors fleeing the stock market for the 'safety' of real estate, ARMs became a mechanism to buy more property than one could afford with a traditional fixed rate mortgage.  As a result, ARMs were hugely popular at the worst possible time.

The real estate collapse and ensuing financial calamity that followed it is proof positive that ARMs are a foolish, foolish proposition--particularly when rates are at historic lows.  When rates are low, fixed rate mortgages are among the best deals that one can ever hope to find in the financial marketplace.  However, with slick salesmanship and a healthy level of greed, millions of homeowners were sucked into the appeal of a lower, albeit temporary, interest rate.

Law Review

You should always use a fixed rate mortgage to purchase a home regardless of the interest rate environment or your personal circumstances.  If interest rates come down, you can always refinance into another fixed rate loan at lower rates.  If interest rates go up, you don't have to worry about whether or not your mortgage payment will increase.  Always, always, always use a fixed rate mortgage.

Eliminating Credit Cards - the ethical argument

In the 1990s, credit cards offering rewards of one sort or another became popular with anything from gas to cash to airline miles being awarded to card holders that spent money using plastic.  This was designed by the credit card industry to induce an increase in spending and subsequent interest and fee income.  Mission accomplished.

From 1989 to 2006, the consumer credit card debt increased by a whopping 315%!  This increase in debt was due in large part to the rewards programs that consumers enjoyed coupled with highly effective marketing campaigns.  One of the more memorable was Citi's 'Live Richly' campaign that emphasized using customized rewards programs to enrich one's life.  Of course, most of this enrichment was being enjoyed by Citi's bottom line.

These rewards appear to be innocent enough, as consumers that payoff their balances monthly pay no interest, but receive a nice perk that usually ranges from 0.25% to 2% of spending.  These rewards can be used to take a vacation, reduce the costs of gas purchases, and a host of other things.  However, these 'free' rewards that so many credit card holders enjoy have to be paid for by someone else, otherwise the credit card issuer would go out of business, right?

This is where the ethics of using credit cards comes into play.  When examining the revenue streams of credit card companies, it is painfully obvious that those that can least afford to pay interest and fees are the ones that pay for the costs of rewards programs, operating expenses, and profits for these companies.  Put another way, this is a transfer of wealth from those that are least able to afford it to those most able to afford it.

If you don't believe this to be true, let's walk down Common Sense Boulevard for a moment.  Most credit card holders payoff their balance in full each month.  Most credit cards offer some type of rewards program.  Since the company operates at a loss for those that payoff their cards monthly, they must generate revenue somewhere else.  This somewhere else is through the minority of account holders that pay significantly higher interest rates and fees.  Obviously these people paying interest and fees would pay the balances off if they were able, but they aren't.

But, but, but you say that it's a personal choice to pay interest and fees.  These people are irresponsible and the ones behind on their bills are deadbeats anyway.  Having served a tour of duty with Citibank as a collector, I can tell you that of the thousands of people I spoke with that were seriously past due (three to six months), very few of them fell into the deadbeat category.  Most were hard working people that were going through a difficult time and like most Americans, were wholly unprepared for a major emergency like disability, chronic illness, death of a breadwinner, etc.

The bottom line here is that credit cards offer no net benefit to wealth accumulation even if you pay no interest and receive all of the rewards.  However, credit cards do create an artificial tax on people who can't afford it.  In the end, I would rather not participate in a system that effectively transfers wealth from the have-nots to the haves.  Think about it.  If a friend of yours was going through a tough time, would you tell them to pay for your next airline ticket?

Begin with the End in Mind - no place for credit cards

I'm sure you've heard many people speak about their desire to become wealthy.  Some want to be millionaires while others want just enough money to be comfortable, and virtually all of them forget a key piece to becoming wealthy--begin with the end in mind.

Think of it like this:  When you envision your life after you have the money you need, what would it look like?  If you're like me, you probably see a future with zero debt, large cash and investment account balances, and the freedom to do whatever you please.  Looking a little deeper, this means that you would have no mortgage, no auto loans, and certainly no credit card debt.

So why do you have a credit card right now?  Is it going to help you get rich?  Are those points and miles going to help you fulfill your endgame?  Of course not.  Read this carefully:  credit cards are a deterrent to the accumulation of wealth.  They do not help you; they help the bank.

Take a few minutes today and cut up every credit card you have.  You know they aren't going to help you, so get rid of them.  Funny thing about not having credit cards is that you physically can't create credit card debt.

What's in my wallet?  Cash, personal debit card, business debit card, and ZERO credit cards.

Tax Myth: Keep Your Mortgage, Invest the Tax Savings

There are a lot of really bad ideas out there and for whatever reason, this one chaps my backside more than most.  Perhaps it's because I've had many an accountant feed my clients this load of bull or maybe it's because the math is just so flawed, but either way, I'm going to make the argument using professional grade tools you've probably never seen applied to this myth.

The Myth

Accountants love tax deductions--particularly low level accountants that think in a very narrow and constricted box.  They reason that taking a tax deduction and investing the savings into the stock market will result in a higher ending net worth than simply paying off a home that has a slower growth rate and no tax deduction.  This makes complete sense and they'll even run a spreadsheet that proves it...allegedly.

Pardon Me While I Laugh

Sorry, I just started laughing quietly to myself because this argument fails in so many respects.  To make this argument work, there exists a truckload of conditions that must be just right and in real life, it simply doesn't happen.  Sorry, I'm still laughing.

Human Behavior

The greatest flaw in this argument is the underlying assumption that the taxpayer/investor will be disciplined enough to put the money saved from the tax deduction into an investment account on a regular basis.  Considering that 70% of the country lives paycheck to paycheck, I don't see that happening.  While human behavior won't show up on a spreadsheet, we all know too well that this kind of discipline is a very rare commodity.

Investment Discipline

Assuming that the individual pursuing the perfection of the myth is able to manage to put the tax savings into an investment vehicle, we must then believe that he or she will invest it wisely.  The most likely place to put this money is in a 401k or other employer sponsored retirement plan that offers pre-tax contributions.  If you examine 401k holdings over the last decade, you will find that the top three holdings are (1) cash, (2) company stock, and (3) fixed income.  In other words, the average investor isn't very good at investing.

To add to this, if you look at the annual DALBAR studies that examine average investor returns versus the S&P 500 over 15 year periods, you will see that the average investor trails the index by anywhere from 5% to 11% over those stretches.  Another damning piece of evidence that this myth is riddled with basic human problems.  When investors see declines, they flee the markets when it's too late and return after the bulk of the rally has passed.

Continuity of Savings

By now, you should realize the myth is really preposterous, but let's keep going because I'm in full fledged pulpit mode.  The argument for maintaining a mortgage also assumes that the individual continues these investments of tax savings the entire time the mortgage is in place.  Of course, financial emergencies happen and when they arise savings and investing almost always suffer.  There's job loss, sickness, disability, and a host of other things that can disrupt even the most well intended saving and investing plan.  

On average, one can expect a major financial emergency to strike about once every decade and when big emergencies happen, both cash flow and assets can take some hits.  Having an emergency while still paying a mortgage serves to compound the problem, as more cash flow is required through a job loss, sinking asset balances and sapping valuable cash flow.  Think about our current market.  I think we'd all agree that for the many 50 or 60 something workers that have been let go and still have a mortgage on top of decimated retirement account balances, they are experiencing the greatest financial emergency of their lives.

Market Cooperation

What if one is lucky enough that they haven't been thrown off track to this point?  This is where the completely uncontrollable forces of the market come into play.  In a post yesterday that got me fired up to write this, a commenter suggested that 10 years was a long enough time horizon to carry out this strategy of keeping a mortgage and investing the tax savings.  The market is negative in the last 10 years and I haven't seen a bank that's paying borrowers to take out a mortgage so it's obvious that when the market is bad, the myth becomes a nightmare.

In my post last month, I pointed out the fact that markets go through these kinds of periods and its completely normal.  The problem is that most of us don't remember the last bad market because we weren't market conscious yet.  To really make an assumption about market returns, a 25 year period or longer is required.  The variance in returns over that period are much narrower and are positive 100% of the time.  Even with an expanded time horizon, you'll still need market returns above the net interest rate on the mortgage.

Disappearing Deductions

If you think that paying mortgage interest guarantees that you will be able to deduct it on your tax return, you're wrong.  On the two extremes of the income scale, we find that low income and high income households lose out on the full value of itemized deductions that include mortgage interest.  On the low end, we have the standard deduction that can eat up part of the deduction and on the high end, we have something known as phaseouts of deduction values.

First, the low end.  If you pay mortgage interest and have a small amount or no other itemized deductions, your mortgage interest would need to exceed the standard deduction that breaks out as follows for 2008:

• Married filing jointly:  $10,900
• Single or married filing separately:  $5,450
• Head of household:  $8,000

For those of you lucky enough to live in a state without an income tax, you have much greater odds of losing part of your mortgage interest deduction to the standard deduction.

Now for our high income earners.  This group is defined as married joint filers earning more than $159,950 and single or married separate filers earning more than $79,975.  Once you exceed these numbers, your itemized deductions are more than likely going to be reduced.  

This can happen from the simple phaseouts for very high income earners or because of the alternative minimum tax (AMT).  I've worked with the AMT a great deal and suffice it to say that it's a nasty tax that can strip out all of your itemized deductions if your income is high enough and we'll leave it at that.  see Form 6251 and page A-10 of the 1040 instructions for more on phaseouts and the AMT

Monte Carlo Analysis

This is something that is relatively new to consumers but has been used by professionals for a good while.  I used Money Tree Software to take a look at what mortgage payments do to the sustainability of one's nest egg based on the variability of returns and consumer behavior over a 20 year retirement.  The results should end the debate on this topic because Monte Carlo Analysis takes into account variations that are dictated by standard deviation assumptions.  Put simply, it takes into account the ups and downs of spending and investing.

Here is the report for someone without a mortgage payment, focus on the last page - Download 2009 0311 Without a Mortgage

Here is the report for someone with a mortgage payment, focus on the last page - Download 2009 0311 With a Mortgage

If you don't want to download the report, here are the outcomes:

• With a Mortgage:  26% chance of retirement nest egg lasting 20 years
• Without a Mortgage:  41% chance of retirement nest egg lasting 20 years

The assumptions not listed in the reports are a $150,000 mortgage at 6%.  I reduced the starting nest egg for the 'without a mortgage' report by $150,000 to be fair while also reducing the after tax spending requirement to compensate for the lack of a mortgage payment.  This report is from the latest in financial planning tools that accounts for variable investment, inflation, and spending patterns over the course of the twenty year retirement modeled and covers 10,000 possible scenarios in the aforementioned variables.

The reports are clear.  41% is better than 26% and it's really that simple.  Payoff your mortgage and you will have a better shot at stretching your nest egg through retirement.

Myth Debunked

After taking into consideration all of the information I've presented in this case, I believe we can all agree that this myth has been successfully debunked.  Now you can get out their and payoff your mortgage early knowing that it's the right thing to do...tax deduction be damned!

Debt Myth: Credit Scores are Critically Important

     "It's critically important, due to the enormous impact that your credit rating has on so many aspects of your life, that you maintain your bill payments, and pay down your credit cards as much as you possibly can," said Jack Gillis, director of public affairs with the Consumer Federation of America.

This is an excerpt from an article I spotted on Market Watch today.  Can you tell me the problem with this statement from Jack Gillis?  How about the first three words, "It's critically important..."  Unfortunately, Jack Gillis evidently believes that one's credit rating is critically important--a statement that simply isn't true.

The Myth of FICO

Many years ago, a group of banks were trying to figure out how to create consistent lending standards and find better data to make those decisions.  This gave birth to the consolidation of formerly localized credit reporting bureaus to the big three that exist today using the FICO scoring system.  One's FICO score is used for a variety of things that include lending, membership to certain groups, employment, and others.  As a result, the myth of your credit score being critically important has become so widespread that most mistake it for fact.

While it is true that your credit score is important to these institutions, it really isn't that important to you.  In fact, for most of us, a high credit score can become the so-called long rope to hang oneself with.  See, the truth is that credit worthiness allows us to buy things we can't afford.  With the average household carrying nearly $9,000 in credit card debt, I think the proof is already out there.

Related Myths

There are a number of related myths to the idea of credit scores being critically important with some of them listed here:

• You have to have a credit card to rent a car
• You have to have a credit card to book a hotel
• You have to have a credit history to get a mortgage
• You have to have a good credit score to get a job
• You have to have a good credit score to get a student loan
• You have to have a good credit score to get a car loan

All of this is crap and here's the counterpoint to each of these expanded myths, respectively:

• A debit card linked to your checking account is perfectly acceptable by rental car companies
• A debit card linked to your checking account is perfectly acceptable by hotel chains
• Make a large down payment and you will find a lender with a competitive rate
• If you're the right candidate, they'll hire you
• Anyone that hasn't seriously defaulted on a previous student loan can get another one
• If you can't afford to pay cash for the car, you shouldn't buy it anyway

Look, we are in a credit based economy that evolved in the 1980s to include mass use of credit cards and has ultimately led to our current economic pains.  If you had lived in the last decade or two without debt, without interest being transferred from your hard earned paycheck to the greedy hands of lenders, and if you were flush with cash, was a good credit score really critically important to you or to your lenders?

Bottom Line:  Lose the credit score, cash is king.

Debt's Myriad of Problems - 1 of 10

There are a myriad of problems that debt causes and they can be far reaching to be sure.  From the simple problem of paying some interest to the more complicated issues of divorce, depression, and even suicide, debt presents a series of problems that can grow in magnitude in a very short period of time.  The simple fact is that having debt, and particularly, having more debt than you can afford, can and often does, lead to serious and long-lasting consequences.

Howdy, Partner?!

The next time you go to work, I want you to think about the debt partners that you have to your income.  Even if you don't have any personal debt, you still have a debt partner to your paycheck and his name is Uncle Sam.  Our national debt is now over $10,000,000,000,000 (that's $10 trillion...seems more real with all the zeroes doesn't it?) and to maintain this debt, taxes are taken from your earnings to pay the interest to keep our creditors happy.

If you do have debt, you might be making payments to credit card companies, banks, mortgage lenders, and the like, and you should remember that every dollar of interest is a dollar that you'll need to earn and receive nothing in return.  In other words, if you're paying interest to Citibank, say hello to one of your income partners.  You do the work; they get paid.  Simple as that.

Wealth Killer

While paying your partners is never fun, the effects that paying interest over a long period of time are far more disturbing.  In examining the impact of interest paid on debt, it's necessary to consider the opportunity cost.  The chart below is a quick comparison that assumes $200 paid in interest monthly towards debt versus $200 added monthly to an investment portfolio yielding 8% annually.

The cost of the interest is fixed at $48,000 over the twenty year period, but the investment portfolio, funded with the same amount of money, would have grown to over $117,000.  The difference in wealth here is over $165,000 on just $200 a month.  Maybe you're not paying this much in interest, but you get the point.

Eroding the Quality of Life

While the monetary cost of debt is clear and readily defined, the overall quality of life when living with debt is another matter.  When debt totals begin to grow to the point of breaking budgets, or as Dave Ramsey has so aptly put it, "When there's too much month left at the end of the money", there is an increased strain on virtually all parts of one's life.  This strain shows up in relationships, work performance, and even one's self image.

The fallout from this serves to compound the problem to the point that one can be trapped in a cycle of debt from which they can find no relief.  Imagine (or perhaps you're living it) for a moment that you started with a couple of credit cards and paid on time.  Your credit rating allowed you to purchase a new car and perhaps even a house.  As time continues, your debt steadily grows and things seem to be under control.  Your FICO score is high, your payments are on time, and you have many nice things around you.

Then one day, you look up and find yourself in a hot mess of debt, your payments fall behind, interest rates double overnight, late fees and collections calls become the norm, the repo guy is hunting you down, the mortgage company wants to foreclose, your bank account is seized, your paycheck is garnished, and you feel like you're in a hole that you can't seem to dig out of.  As a result of this, you're feeling anxious about the situation which carries over into work.  You're distracted, frustrated, and tense.  This transfers into arguments at home with your spouse.  The kids get a front row seat to watch the drama unfold, and finally, you fall into a state of depression - perhaps even contemplating suicide.  

Now this is a kind of worst case scenario, but it happens repeatedly every year.  Depression rates are higher among those with debt.  Suicides have been linked to high levels of debt.  Most divorces involve debt problems.  It's simple enough; debt erodes your quality of life and it can unravel you in the unkindest of ways.

It's a Sin

Besides, did you know that debt is a sin?  That's right, the Catholic Church dictated lending practices centuries ago and deemed lending at interest to be a sin.  You're not Catholic?  Fine.  The Koran forbids lending at interest as well.  Not a follower of Allah?  Okay.  The Church of Scientology says...well...I have no idea.  Whether you believe in religion or not, the Bible and Koran are a couple of pretty good millenia old texts that figured debt to be a bum deal.  That hasn't changed since they were written even though we have really shiny cards with really cool rewards that tell us otherwise.

Make the Decision

After getting better acquainted with the problems of debt, there's really only one decision that you need to make today.  Do you want debt or not?  If you're on the 'not' side of things, stay with me over the next nine days and I'll layout the path to a debt free lifestyle.  If you want debt, please be sure this - View this photo - didn't happen to you.

Plastectomy, defined

The first time I had ever heard this term used was a few years ago while listening to the Dave Ramsey Show.  Someone called in and they were doing an on-air plastectomy using a paper shredder.  So what is a plastectomy?

     A plastectomy is the act of destroying credit cards to prevent their use

While most just cut up their cards, Dave Ramsey listeners have been treated to some of the more creative means of credit card destruction that can include the use of chainsaws, axes, blenders, and a host of other tools.  The on-air plastectomy is a celebrated occasion on the show because it symbolizes a listener's bold first step in getting out of debt.

In practical terms, eliminating one's means of creating more debt is the logical first step in working towards a debt free lifestyle.  As the old adage goes, if you find yourself in a hole, stop digging.  This couldn't be more true in dealing with debt.

Staying out of debt is one of the cornerstones of building wealth.  If you have any credit cards, take a few minutes and perform your own plastectomy.  It's easy to do and it will save you many thousands of dollars in your lifetime.