CHAPTER 1
Laying a Foundation
"Financial success is reserved for those whoaggressively seek financial knowledge and thenapply that knowledge to create a prosperous life."
Aaron Campbell
Have you ever wondered why some people are successful and whysome people are not? Maybe you know someone who was raisedalmost identically to you, had the same educational background,and made a similar amount of money. Yet they may have achieveda much higher level of financial success than you. Is it because theygot lucky? Is it because they worked harder than you? Is it becausethey were smarter than you?
I have found that success often has nothing to do with ability levelor desire. Most people seem to have the desire to do better and mosthave the ability to achieve more, so what is the secret? What is therecipe for financial success?
To get started, you must lay a foundation that will be wide enoughand strong enough on which to build your personal financial empire.I have found that there are seven simple steps to building a strongfinancial foundation that will support a life of financial freedom.
Seven Simple Steps to Building a Strong FinancialFoundation
1. Educate yourself about how money works.
2. Pay yourself before you pay any other person or company.
3. Do not spend more than you make.
4. Pay off debt as quickly as possible.
5. Invest the money you pay yourself so it will provide afuture income and will not be lost.
6. Buy insurance to protect the things you cannot afford tolose.
7. Trust yourself to make a good decision.
1. Educate Yourself
It is absolutely astounding that most of our children are not taughtin school about finance or how money works. Isn't the ability to earnmore money and be more financially secure one of the main reasonswe go to school in the first place? Yet most Americans end up usingthe trial and error method when making financial decisions.
I know it can be intimidating with all the financial mumbo jumboout there. It can also be intimidating to go to a financial advisor orfinancial person that may look at you as if you are a second-classcitizen if you do not have a million dollars to invest. However,educating yourself about how money works is probably the mostprofitable investment of time and effort you will ever make. So in thischapter I want to talk in simple, straightforward terms and providesimple, easy-to-understand truths that apply to almost everyone. Ialso hope to provide some good financial education along the way.
2. Pay Yourself First
The second key and probably one of the most basic ideas is to simplypay yourself before you pay anyone else. What I mean by payingyourself first is simply saving a portion of whatever you make rightoff the top before you pay anyone else. The money you pay yourselfshould be invested with the purpose of providing a future incomethat will ultimately replace the income you make by working. Thinkabout some of the people and companies you could pay before youpay yourself:
• Mortgage company
• Electric company
• Gas company
• Phone company
• Grocery store
• Clothing store
• Car finance companies
• Restaurant
• Movie theater
• Cafe
• And others
I realize we have to spend money to live; we must purchase goods andservices. But there is no company or person that is more importantto pay than yourself. If you never pay yourself, how will you everhave anything? Many people tell me that they don't have any extramoney to pay themselves every month. My reply is, "Baloney!" Youmust pay yourself first, and if you don't have enough money left atthe end of the month, consider reducing your expenses or find a wayto make more money.
It has been said that most good things in life require some type ofsacrifice and some level of discipline. This is what typically separatesthose who have financial success and those who don't. If you askedtwo people who worked for the same company, made the sameamount of money, and worked the same hours if they felt they couldafford to save money before they paid their bills, their answer mightbe, "No." Yet one of those employees may have five children and theother may be single with no children. Wouldn't you think that thesingle person would have a much better chance of saving money thanthe person with five children? People tend to spend whatever theymake. That's why it is absolutely crucial to pay yourself before anyother person or company.
3. Do Not Spend More Than You Make
I know this sounds like common sense, but it is very difficult for mostpeople. Not spending more than you make means just that: do notspend more than you make. That means you pay yourself at least fiveto ten percent right off the top. Then you will use ninety to ninety-fivepercent of the rest of your income to establish your lifestyle.
Today too many people want to live lifestyles that require moremoney than they actually bring in each month. That is a recipe fordisaster. Consider this saying: "Successful and prosperous people arewilling to live a temporary lifestyle that most will not so someday theycan enjoy a lifestyle that most cannot."
4. Pay Off Debt As Quickly As You Can
If you owe money to a company or another person, you will probablyhave to pay interest for the privilege of using the borrowed money.Though I understand it is sometimes necessary to borrow money,perhaps to buy a house or a car, I have found that most successfulpeople have paid off debt as soon as possible. That way the interestthey were paying to make someone else rich goes back in theirpockets to build their own wealth.
There are many calculations that can be made to determine whetheror not it is a good idea to pay off a mortgage or other debt early.However, in almost every situation, if you choose to pay off debt asfast as you can, you will not only be happier, but you will end uphaving more money.
Now, there are exceptions to this rule that I cannot ignore. Forexample, my best friend has never made very much money fromemployment. He had four children, and his wife stayed home withthe kids. Yet he was able to purchase his first home using a loan fromthe bank. A couple of years later he had to relocate, and instead ofselling his current home, he found that he could rent the home formore than his payment to the bank every month.
When he did this, light bulbs went off in his head that he couldmake money by borrowing money. If he could borrow money witha five-hundred-dollar per month payment and collect seven hundreddollars a month for rent, he could effectively make two hundreddollars a month that he didn't have to work for. Today he has overforty properties. In the next five years, he will have a few of the fortyhouses paid for and will be making approximately twelve thousanddollars a month in rental income. Though he still has maintenanceexpenses and taxes to pay from the rental income, the income he getsto keep he didn't have to go to work to get. And the best part is thathe used very little of his own money to provide this income.
My friend would have never been able to reach this financial positionby saving a little money off the top of his paycheck every month. Yet,by educating himself and borrowing money with a strategic futurepurpose, he has been able to do very well. Just keep in mind thatthough this is possible, it requires a significant amount of time andrisk to make it work. Just educate yourself and consider if you wouldbe happy using debt to help build your future assets or not.
So now you have begun educating yourself about money; you havestarted paying yourself every month before paying anyone else; youare living within your means; and you are paying your debt as soon aspossible. Something miraculous is going to start to happen: You aregoing to find that you're accumulating money. It is almost magicalthe first time you realize that you are actually doing it. You aremaking progress toward financial security and peace of mind, and itis exciting. It is liberating!
5. Invest the Money You Pay Yourself
Start using your saved money to grow and produce more money foryour future. The money you pay yourself every month is somedaygoing to be used to replace the income you receive from working.Therefore, it must be a priority to invest in areas that will producea constant, reliable income in the future. There are many differentplaces where you can invest money.
• Stocks
• Bonds
• Real estate
• Commodities
• Personal businesses
• Annuities
• Cash value life insurance
• Real Estate Investment Trust
• Private capital investments
• And others
The key to making good financial decisions and picking the righttype of investments is educating yourself and seeking advice fromprofessionals who understand and specialize in the area you areinterested in using to grow your savings. I will address methods ofinvesting and growing dollars in later chapters.
6. Buy Insurance
You need to protect the things you cannot afford to lose. In Decemberof 2012, the area in which I live experienced an ice storm that tookdown thousands of trees, and left people across the state withoutelectrical power. The electricity at my house went out on Christmasnight and stayed off for several days. It was very cold outside, and wehad about six inches of snow on the ground. But we have a wood-burningfireplace in our home, so we just made a nice fire to helpkeep us warm. Since we had no electricity, we went outside, took ourson sledding, and made snow ice cream. Then we came home andwarmed up hot chocolate right on the fire. It was a really fun day.
At about ten o'clock that evening, as we were about to go to bed, Ithrew a couple of pieces of wood in the fireplace, and we bundled abunch of blankets on the beds to try to stay warm as the temperaturewas down in the low twenties outside. My wife looked like a mummy.She had on two pairs of sweatpants, two pairs of socks, two or threeshirts, and about three blankets. I told her she was going to get hotand would sweat under all of that clothing, but she didn't care; shejust wanted to get warm.
Around midnight she woke up (because she was hot) and startedtaking off the top layers of clothing. Then she heard somethingpopping in the living room and woke me up. "Get up and go seewhat's popping!" she said. Well, it was about forty degrees in thehouse and I was quite warm under the mountain of blankets, so Isaid, "It is just the cold wood popping in the fireplace. It's normal."
My wife kept asking me to check; she is quite persistent when shewants something done. So I said, "Okay, okay, I'll go look." I walkedinto the living room and looked at the fireplace. The wood wasburning normally, but I could hear a weird popping noise. I figuredthe popping was just the ice outside making branches on the treessnap. So, I walked back into the bedroom and reported to my wifethat everything looked fine.
Then I happened to notice a light flickering on the snow outside.Immediately I thought the power had been restored. I went to thelight switch and flicked it on, but nothing happened. I walked overto the French doors in our bedroom, opened them, and walked outon our deck to see where the light was coming from. It was comingfrom our chimney, which was on fire. I screamed at my wife to getup and get dressed, because the house was on fire.
We ran around in circles trying to find clothes and shoes in the dark.I grabbed the phone and tried to call 911, while she got our son out ofbed and bundled him in a blanket. I then drove them to a neighbor'shouse. I got back to our house quickly and got a wheelbarrow that Ihad used to move firewood from the firewood pile to the house.
My mind immediately told me to get pictures and keepsakes—thethings that couldn't be replaced due to sentimental value. So Istarted grabbing everything I could get my hands on and throwingit into the wheelbarrow. I got pictures and clothes and guitars—whateverI could think of in the time I had before the fire becametoo dangerous.
The fire department showed up and started working to put outthe fire. As I stood in the snow, watching my home begin to breakdown, I started to think about what the next steps would be. Wherewould we go, what would we do, and so on. Though the logistics ofwhat would happen were unclear to me at the time, I was peacefulknowing that my family and our most important sentimental itemswere safe and that we had insurance.
We pay a relatively small amount of money monthly to an insurancecompany to provide protection of an asset we can't afford to lose. Now,I am human, and I don't like to pay premiums for insurance that Ithink I may never use. However, when we do need the protection, thevalue of insurance becomes evident. Our insurance company literallytook care of us during this time.
Buying insurance does not just apply to a home. Think about yourretirement savings and the sacrifice and time it takes to accumulate.Now think about saving for twenty years or more and then having amajor catastrophe (such as a stock market crash). Your life savings wouldbe destroyed. Wouldn't that be a lot like watching your home burn? Butinstead of feeling a wave of relief, knowing you were going to be savedby your insurance company, you would have terrible dread, knowingyou had no protection, no safety net for one of your largest assets.
Wouldn't it have made sense to simply protect your savings from loss,just as you would with your home? If you understand the importanceof this principle and will follow this rule, your level of stress inyour retirement years will decrease and your level of happiness willincrease. You will no longer have to worry that today may be the dayyou lose your assets.
Often people make financial mistakes due to lack of education. Oncethey make a mistake and lose money, a sense of urgency amplifiesthe problem. This leads to more mistakes. Emotions coupled withimpatience lead people to seek out faster, easier ways to make money,like get-rich-quick schemes. They end up taking risks in unprovenareas without ensuring the safety and ultimate return of their money.This is how financial catastrophes happen. When you place thethings you can't afford to lose at risk, the outcome generally willnot be favorable. In the game of planning for a stress-free, happyretirement, not losing is winning.
7. Trust Yourself
There is no one on Earth who cares more about you than you. If youhave educated yourself, have followed the other six financial keys, andhave sought advice from experts, then make a decision not to worryabout making mistakes. Though mistakes will happen, and you maymake some bad choices, as long as you follow these principles, yourprobability for success is very, very high. So now you have the keysto building a prosperous financial future.
Next, I will get much more specific about the challenges that youmay face in the future. I will also talk about some history and aboutspecific plans to help you plan for and enjoy a stress-free, happyretirement.
CHAPTER 2
The Shift/Shaft
"Neither a wise nor a brave man lies downon the tracks of history to wait for thetrain of the future to run over him."
Dwight D. Eisenhower
The path to retirement was much different in the past than it is today.You may have had parents or grandparents who worked the same jobat the same company for their entire lives. They were dedicated tothe company because they were working toward a company pension.(A pension is a promised lifetime payment a company pays to anemployee as a retirement benefit for his or her years of service.) Theysimply worked hard and stayed dedicated to their company. Andwhen they hit retirement age, they got a guaranteed paycheck forthe rest of their lives. In recent years some companies that providedpension benefits to retired employees have had financial difficulty.However, the Employee Retirement Income Security Act of 1974created an independent agency of the United States government calledthe Pension Benefit Guarantee Corporation (PBGC). This agencyprogram was created to protect retired employees that were promisedpension payments from their companies. Today if a company hasfinancial difficulty and can no longer make the promised payments totheir retired workers, the PBGC would take over to continue payingthe promised payments up to a specified maximum. In life thereare no absolute guarantees. However, when it comes to retirementincome, company pension payments are typically considered a verystable form of retirement income.
