When is debt justified?

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Debt is like a noose around your neck, avoid it at all costs


Debt = Risk
The economy for the last 20 years has grown almost entirely on debt. Real wages haven’t increased but consumption has double and tippled. We live in bigger homes, drive newer cars, and have more expensive technology than our parents did. The recent boom in housing has dumped billions of dollars of new home equity and home sales money into the economy. This money was created through new loans and new debt. Consumers have maxed out there credit cards, home equity loans, and are struggling to make ends meet as gas and food prices increase.

Debt is marketed vigorously to young, old, and everyone in between. Debt is sold as the end-all solution for any of life’s problems. Sometimes debt is sold as a tool to ‘leverage’ other people’s money to your own ends. This very popular in the get-rich-quick real estate programs. While there is power in leveraging it can work in the opposite direction, and frequently does. Remember the Great Depression? It was made many times worse by the use of borrowing on margin accounts. Margin accounts are used to borrow from a broker to buy stock. When the market went up everybody made money. When the market started to slide downward everyone panicked. The margin accounts left many people over-leveraged and debt quickly turned against them. The longterm results will disprove the theory of leveraging and using excess debt to build wealth.

No matter which way you slice it debt equals risk. Companies and individuals with a lot of debt are not considered financially healthy. Investors and lenders won’t tolerate the high-risk lifestyle and penalize those companies and individuals with very high lending rates. Debt is a guaranteed loser and those that claim debt as a valuable tool can look at the longterm record of all the failed companies and individuals as proof. Longterm prosperity can’t be built out of excessive debt.

Surely, some debt can be good. It wouldn’t be right to say debt is good, but justified. Debt is justified when these criteria are met: It can consistently make more than the cost of debt. The asset doesn’t depreciate or stagnate. The asset appreciates with time.

(positive growth of asset) – (cost of interest on debt) = Asset(+) or a Liability(-)

Most justified debt include education and homes. Debts that are not justified are: consumer debt, automobiles, and vacations. Those things aren’t bad per say but should be bought with cash, not debt.

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9 Free Cell Phone Tips, Tricks, & Services

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Cell phone tips

Saving money and time is a big part of frugal living. These free phone services will save both time and money. Regular 411 calls are now $1.00 to $2.00 a pop. And calling a friend to find a phone number can be a pain. Take some time and program these numbers into your phone. These services will help you with directory assistance, information retrieval (stock quotes, directions, game score, etc), help you find your phone, bid on auctions on ebay, write to-do lists, give yourself a reminder in the future, and much more.

1-800-GOOG-411 – Voice Activated 411 Service
If you never got into texting this is a fast way to get the answers you need. Not only will this service look up the name and phone number for free it will also automatically call the person. This is is increadibly easy to use. Watch a video on how it works here.
*Note: This works on every kind of phone, not just cell phones.

Text GOOGLE – Text Information Retrieval
GOOGLE SMS (Text: 466453) – This text service will give you a wide array of information. Directions, weather, stock quotes, show times, and everything in between. Because it is tied to Google’s database of knowledge there is almost nothing you can’t ask.

1-800-2CHACHA – Voice Activated 411 Service
This is much like GOOG411 but it only works on cell phones. The service is nice but it’s hard to beat Google’s service.


Text CHA CHA – Text Information Retrieval
Cha Cha (Text: 242 242) – This service is much like GOOGLE. If you’re feeling a little crazy and want something different give these guys a try.

Voice to Text Organizer Service
Jott – Write down reminders, appointments, or make a list using Jott. This free service converts the things you’re saying into text for later reference. Simply call Jott and it will do all the work for you. This is very handy for the A.D.D. people out there who think about things that need to be done while they’re running around.

Lost Cellphone
WheresMyCellPhone.com – For those times you need to find your phone but don’t have another phone handy. Enter your phone number in and this free service will call your phone. Hopefully you can find it. This will also work for portable phones at your house. Any number will work.

Emergency Service
112 – Out of range, keypad locked, or traveling internationally won’t stop you from getting emergency medical assistance. Just dial 112 and you’ll be connected to the nearest emergency service provider.

Bid on eBay Auctions
UnwiredBuyer.com – Bid on ‘watched items’ in your eBay account from your cell phone. They offer additional auction updates and allow you to practice bidding. That way you won’t freeze up when the real deal comes your way.

Unlimited incoming minutes with T-Mobile
Grandcentral.com – Sign up for Grandcentral.com and a T-Mobile 5 Fav plan. When you give out your number use the Grandcentral number. Make the incoming Grandcentral number one of your Favs with T Mobile and you get free incoming minutes.

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An investment that is tax free, low risk, with guaranteed returns.

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Looking for a tax free, no risk investment with a guaranteed 6-18% return? This might sound too good to be true but it’s not. Once you have an emergency cash reserve it’s time to start thinking seriously about your investing strategy. Part of that strategy is finding the investment that will yield the highest return with the lowest risk. Tax considerations must also play a role when you start looking for places to put your money. If you could find a place to make a guaranteed, zero risk, tax free investment would you jump at the chance to put your money there?

Pay off credit card debt

If you have consumer debt on credit cards you qualify for this “opportunity”. Your credit debt and interest payments work against any positive interest you might be accruing. Lets say you’re earning 12% a year in the stock market. After taxes you’re only getting 9% unless you’re protected by a ROTH IRA. A 9% return is the average stock market return over thirty years (minus taxes). If you have an equal amount of money in consumer credit card debt and your paying 18% a year in payments you are still down. You are actually losing -9% a year with your current investment strategy.

Risk is a considerable factor as well. If the market is down you could be earning nothing or have negative returns in the short term. This would decrease your -9% to -18% in a hurry. If you tack on inflation you’re investment strategy is negative over -20 percent!

Paying off credit cards isn’t very exciting. It doesn’t feel the same as making new money. When you add up all the positive returns you are making and subtract your negative interest it only makes sense to stop the bleeding. Once you’ve got your debt under control start making positive investments.

You might consider different debt consolidation options, selling stuff, or drive a different car. All of which will help you in your investment goals.

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What is Compound Interest

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Compound Interest is one of the most important concepts in personal finance. By understanding the power of compound interest and how it works it will change your investing strategy, your mindset, and your goals. This concept is so powerful that Einstein is quoted as saying “The most powerful force in the universe is compound interest”.

The idea is simple. Compound interest is interest that becomes principle. When the earned interest becomes principle it starts earning interest on itself. To help illustrate, lets contrast Simple Interest with Compound Interest.


Key to Different Types of Interest
In the following example the icons that look like squares can earn interest. The squares are ‘money makers’. The hexagons can’t create money. They are paid out as interest.
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Simple Interest Example

Simple interest keeps the earned interest and the principle separate. In other words, the interest never becomes principle. Simple Interest growth would look like this:

Simple Interest Graph

Compound Interest Growth
When Compound Interest grows it makes smaller pieces of principle which also earn interest. One of these new pieces of earned money changes from interest to principle when the account compounds. Investments can compound yearly, biannually, quarterly, monthly, and even sooner in some cases. The more something compounds the sooner you can make new money off earned interest.

Intererst Becomes Principle

The above illustration shows the interest making new amounts of interest from themselves. These new sums of principle will grow independently of the first sum of principle.

Compound and Simple Interest Example
This graph shows the nature of compound interest. This is known as exponential growth. In order for you to see big results you need two ingredients: Time and Rate of Return.

What you need for Compound Interest to work well: Time and Growth Rate.

If you had 40 years to let your money grow you would be much better off than someone who only had 30, 20, or 10. Those last few years are critical to make the big returns. The sooner you pull your money out the sooner you stop all the compounding growth.


MoneyChimp Compound Interest Calculator

When you contrast simple growth with compound growth you can see the longterm difference between the two. Notice how similar the compound interest line and the simple interest line are in the beginning. The more time you give compound interest the more it will beat simple interest. The less time you give to compound interest the less it can perform.

Compound and Simple Interest Growth

Rule of 72

The rule of 72 helps you estimate how soon your money will double given a constant growth rate with compound interest. To use the rule of seventy-two take the growth rate and divide it into 72. The outcome will equal how many years it will take to double your money. This assumes a constant growth rate and that your investment is compounding.

72 / (growth rate) = Years to Double Investment

For example with a growth rate = 10%

72 / 10 = 7.2 Years

Answer: It will take 7.2 years to double your money with 10% return on your investment.

The rule of 72 isn’t an absolute but it will get you in the ball park. Another downside is that if your growth rate fluctuates too much the rule of 72 doesn’t work.


Summary
As you understand how compound interest works you can better plan your future. Compound interest is what makes retirement possible despite rising costs of living, inflation, and other costs. If you have any more to add please leave a comment.

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Self Made Billionaires and the Cars They Drive

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Some of the richest people in the world drive very average cars. How average? So average you would never crank your head around to get a second look. In fact, some of these cars would be classified as old, unflattering, and beat up. What can these cars of billionaires teach us about personal finance?

Warren Buffett – Net Worth: $52 Billion

Warren Buffett

By far the greatest investor of our time. Called the Oracle of Omaha he has a knack for generating billions of dollars for his investors.

warrenbuffetcar.jpg

Up until 2006 he drove a 5 year old 2001 Lincoln Towncar. The license plate read “THRIFTY”.


Ingvar Kamprad – Net Worth: $33 Billion

Ingvar Kamprad

Ingvar Kamprad, Ikea founder.

Ikea Volvo

He drives a Volvo which is more than 15 years old.

Sam Walton – If alive today his Net Worth would be: $63.3 Billion

samwalton.jpg

Known for being fiscal and practical in all his dealings. His heirs collectively have $63.3 Billion.

samwaltons-truck.jpg

Sam drove a 1979 F-150 even after he made billions with Wal-Mart.

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Free Retirement Planning Calculators

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How much is enough for retirement? These free retirement planning calculators will help you estimate how much will be enough. Each calculator is unique in what inputs are required and the type of answers you’ll get in return.


MoneyChimp ‘Simple’ Calulator

The MoneyChimp Calculator is simple and offers a quick snapshot of what your annual retirement income might look like. This is one of my preferred calculators for a rough ballpark figure on where your finances should be. It doesn’t go into depth about social security, vacations, and other more specific items. Overall it’s a great simple to use tool. Visit MoneyChimp.com

MSN Retirement Calculator
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MSN’s Calculator is my favorite. It automatically updates every time you enter new information. The numbers change in the results box and the graph redraws itself. It tells you whether you’ll leave your heirs with an inheritance or a load of debt. It also informs you when you’ll run out of money. Because of the flexibility of the tool you can enter a lot of “What if?” questions and have the results instantly. One of the weaknesses of this calculator is that it doesn’t take into account inflation or yearly salary growth. Besides those weaknesses this is a very cool calculator.Visit MSN to try it out

Bloomberg Retirement Calculator
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Bloomberg offers a Java based calculator which is very nice if you can get it to work. It never did work on one of my computers but worked flawlessly on another. If you have a temperamental computer this calculator might not work for you. Besides that issue this calculator takes into account inflation and salary growth which is important for your final numbers. Visit Bloomberg


Things that are missing in all the calculators
None of the calculators mention ‘real dollar equivalent’, ‘relative value’, or ‘inflation adjusted’ annual income. $100,000K a year sounds pretty good right now but in the future it might be worth less, a lot less. For example, $100,000 today was only worth $20,000 in 1972 in relative value. If you planned to take home $100,000/year when you retired in 2007 it would only be worth $20,000 in 1972 relatively.

What this means is $100,000 isn’t a $100,000 in the future. 35 years from now what you know as a $100,000 might only buy $20,000 of goods and services in 2043. In other words, 1 dollar in the future might only be worth 0.20 cents in relative terms in the future. So don’t get too excited about a retirement income of $100,000 annually. There’s a good chance it might only be worth $20,000 in the future.

What does this mean for your retirement goals? It means you’ll need more than you think (especially if inflation increases like it has for the last 30 years). The way to find out how much more you’ll need is by using this tool at measuringworth.com. Take the number for your annual or monthly income from the calculators above and enter it into the ‘Initial Amount’ field. Type ’2007′ into the ‘Initial Year’ box. Now subtract how many years you have until retirement from the current year and use that in the ‘desired year’ box. Now click ‘calculate’ and see what your money might be worth in 2043. This method isn’t a perfect prediction but it will give you an idea of what a dollar will buy 30 years from now. Visit Measuringworth.com

Wow. That was depressing. But with compound interest on your side you have a solid chance at reaching your goals. All this means is that you’ll need to start today and invest more than the minimum.

If you have any additional input on retirement calculators please leave a comment.

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Cheapest Local Gas Prices, How to Find Them

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Driving around town looking for the cheapest local gas prices will cost you an arm and a leg now-a-days. These websites will help you in your efforts to fill-up for less. They provide up-to-date gas prices for many gas stations in your local area. You can search by zip or city/state.

GasBuddy.com

Gas buddy provides gas updates daily and hourly from users that report prices. They give you all the information you’ll need from the business name, address, map, price, and when the price was last updated. The site isn’t beautiful but it gives you great information on prices and locations in your local area.Visit GasBuddy.com

Motor Trend Gas Price Finder

MotorTrend’s gas price tool is simple to use and accurate. It provides much of the same information as GasBuddy.com but the design is nicer. MotorTrend also offers a widget you can install on you computer that keeps you up-to-date with the cheapest gas prices. Visit MotorTrend.com

MSN gas price tool

MSN provides some nice statistics on the average, high, and low prices for every zip code. They don’t offer a city/state option but that’s about the only complaint. It also intergrates a map to show the gas stations location even better. The other sites have maps on other pages or simply give the address.

Gas Price Heatmap

The heatmap below gives a quick snapshot of what you can expect to pay in different parts of the country.

Local Gas Prices across the USA by County

Click on the image above to see the updated map on GasBuddy.com.

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7 ways to become wealthy and change your life forever

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7 ways to become rich and change your life forever

Most all financial books have common themes. The themes repeat themselves because they are formulas to building wealth. No matter the situation these principles work. In essence, becoming rich requires a break from “traditional thinking”. These seven points are what make wealthy people different than everyone else. Do you have any additional points that have helped you financially?

Pay yourself first
If we treated ourselves like the bills we get in the mail we would be much happier financially. For those with a 401K paying yourself first is easy because it comes out of your paycheck automatically. For others without a 401K other options are available. Opening a Roth IRA, online savings account, or broker account to trade stocks and mutual funds work.

Automatically paying yourself is a way to build wealth on auto pilot. Automatic withdrawals eliminate the hassle, self control, and temptations associated with any other method of saving. Because online broker accounts and savings accounts both “piggyback” your regular checking account setting up auto-withdrawals is easy. They give you complete flexibility and control with your money. You will be surprised on how quickly you can save your money using this method.


Invest instead of saving
Saving will never create the same returns as investing in the long run. Compound interest is most powerful with more time and higher yield percentages. Most savings accounts are good for emergency cash reserves. The yields on these accounts are generally barely above inflation. Inflation in the U.S.A. is currently 3-4% a year and online savings accounts are about the same. In short, after you have your cash reserve you should put your cash to work in more lucrative investment vehicles.

Avoid paying interest at all costs (i.e. debt is bad)
Take some time and add up all the interest you’re paying every month. For most people interest and taxes are their #1 and #2 expenses. Interest costs are avoidable and therefore a waste of money. If you’re going to go into debt the asset you buy should appreciate more than the cost of interest. Things like your home and education are justified because they increase in value overtime. They also out pace the cost of the debt (i.e. interest payments). On the other hand electronics, cars, and eating out depreciate to worthless junk very quickly.

For those who have bought the idea that debt is good, consider a few facts. Debt = Risk. The more debt you have the more risk you have. Companies that are burdened with excess debt are riskier investments. Their stocks are undervalued and their bonds are rated as junk bonds. If debt can destroy businesses it will wreck havoc in your life.

Stay off the “bleeding edge” of technology
The “bleeding edge” refers to the sharpest part of the “cutting edge” of technology. It is the newest of the new technologies. Those consumers who buy the newest technology fund its development until it becomes cheaper. They are paying a high price to be the first to have the newest toy. Let other people pay the premium and get the same thing in a year for a third the price.

Try to avoid advertising and marketing. They are designed to persuade you that your old technology is useless and make a “want” a “need”. Companies pay a lot of money to convince you to make the switch. Take the initiative and avoid their marketing messages.

Financial education is worth the time and money
Everyone isn’t born with Warren Buffett as their father teaching them how to invest. Like most people, your childhood is probably riddled with neglect in many areas. So we have to work extra hard and learn all the stuff Warren would have taught us if we were his kids.

Audio books, podcasts, blogs, books, and magazines are great ways to build your knowledge base. Read everything you can. Talk with people who really know what they’re doing. Copy the experts. Most importantly, experience is the best teacher. You’ll learn more in a week by actually trading stocks than reading for a month.

Open an online broker account and learn the lingo, make some trades, run some screens, and find some deals. You’ll become financially literate and develop a style you’re comfortable with. Once you know how to read financial data you’ll be able to spot a deal across the room and make the returns you’ve always wanted.

Upset the Joneses by opting out of the rat race
Living a lifestyle that is not earned is stealing. Going into mass debt to LOOK rich isn’t the same as BEING rich. This fraudulent behavior catches up to all those chasing the Joneses. But the irony is that the Joneses are chasing someone else. There is no end to the cycle. So you need to opt out. Unsubscribe.

Opting out of the rat race makes everyone still in the race uncomfortable. They’ll think you’re crazy, stupid, and out of touch. But that really is the point isn’t it? Moving in a different direction from the mindless herd confuses them. And if they can keep you in the trap, they feel better.

Rinse and Repeat
Most of the financial secrets out there are done over and over for a long time. Repeating a simple step for a long time will have staggering results. Compound interest needs time to truly expand your wealth. A little discipline and a lifetime of good habits will leave you retiring in style.

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