Blog Action Day

In case you aren’t familiar with Blog Action Day, it is an annual non-profit event that unites the world’s bloggers to focus on a single topic, in the hope of raising awareness.  For 2008, the focus is on poverty and the ways in which the world can help.  Poverty is not a topic that I can write on from direct experience.  But, I often think about the plight of the poor and what everyone can do to help.

My Experiences with Poverty

I often think of myself as having been poor during my childhood.  I often talk about growing up “In the Hood” and all of the tough times we had.  The truth is quite the opposite.  We grew up in a nice house and we attended Catholic school.  We always had something to eat and we always had a safe place to sleep.  My parents were amazing in their ability to provide a good living from very limited resources.

I think the reason I felt poor was because of the constant pressure my parents were under to provide for us.  And, even though they shielded us from any harsh realities, their struggle was obvious to me, even as a young child.  I had no idea how fortunate we were.

As a young adult, I faced many of the same economic challenges faced by my parents.  I struggled to provide a safe and healthy existence for my family.  I had to provide for their immediate needs, while planning and working towards a brighter future.  This is where I learned the struggle was a benefit and not a curse.  It’s also how I came to know that providing for your family is the goal and not the accumulation of material things.

People without Opportunity

I have never directly experienced the desperate poverty that exists in the world.  I have visited poor countries and I have seen many poor people, both here and abroad.  But, I have never had to walk in their shoes.  I have never lived among the poor and I have never been subjected to extreme hunger or complete lack of opportunity.  But, I feel deep compassion for others trapped in poverty and that’s why I have written a series of posts that deal with poverty.

Wealth and Poverty in the World
Giving Back - Wealthy Individuals

The Failure to Lift Others from Poverty

I could write an entire book on the failure to help the impoverished, but that is the subject of a future post.  In my opinion, there are two glaring examples of this global failure and many others that I will spare from scrutiny.  It is difficult to criticize organizations that help in any way, but hypocrisy cannot be tolerated in a fight against poverty.  We need to demand more from these organizations.

The World Bank - The charter of the World Bank is “for providing finance and advice to countries for the purposes of economic development and eliminating poverty”.  The reality is that up to 20% of the money lent from the World Bank may be lost to corruption.  Taxpayers in these poor countries are required to pay back these loans, which creates a tremendous burden on them.  And, 40 years of loans from the World Bank have provided no improvement for impoverished nations.  We need a better plan.

The United Nations - Nothing infuriates me more than the arrogance and corruption of the United Nations.  The UN’s staff openly criticized member nations for being cheap during the tsunami crisis in Indonesia.  Yet, much of that aid may have disappeared before getting to the victims.  They have done virtually nothing to aid the continent of Africa, during a series of disasters and genocides.  Most important, they will provide no accountability for the billions of dollars that are entrusted to them.  Nor will they sanction their corrupt members.  At a time when the world desperately needs assistance from the UN, they are helping themselves instead of others.

How Can We Help?

Fighting global poverty is an extremely complex problem.  Everyone has some capacity to help.  You and I have some capacity to help.  But, as individuals we couldn’t make very much of an impact.  Where we can make an impact is by joining forces to fund programs that can create change.  Private sector funds will likely play a much bigger factor in reducing poverty than government sponsored programs.

My opinion is that we require new approaches to fighting poverty, since most of the existing ones haven’t worked.  The failure of past attempts is likely based in their entitlement nature, which creates dependence.  I think the Gates Foundation may employ one of the most innovative and effective models.  By focusing on health, agriculture and opportunity, they provide a method of self-reliance for the impoverished.  This not only offers economic opportunity, but it empowers the people.

“Poverty is the worst form of violence.”
Mahatma Gandhi - Indian Philosopher

Recommended Reading

This post was featured on the Carnival of Personal Finance.  There are lots of great articles from many top-notch PF bloggers.  If you have some spare time, you may want to check it out.

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The Sudden Crisis

One thing that really stinks of coercion is the sudden nature of this crisis.  From out of nowhere, the President is on TV telling Americans that if we don’t cough up 700 Billion dollars the financial system is going to collapse immediately.  There’s no time for debate, no options or clarification.  The world is going to end right now unless we give the Treasury Secretary everything he wants.  By the way, don’t ask what they are going to do with all of that money, because they don’t really know.  They just need it now.

Our Future at Stake

I’m no economist, but I just don’t believe the banking system would have failed. Despite all of the scare-mongering, most banks would find a way to survive in business, without a bailout. If the bailout got voted down, the strong banks would buy up the weak banks and adjust their business models.  The tight credit markets are definitely affecting the economy, but that would recover as well.  As long as there is money to be made, banks will go after it.  And, if we are stupid enough to give them Trillions of dollars to expunge their past greed, they will happily take that as well.

The Blank Check

What I hate the most about this poorly conceived plan is that it is open-ended.  There is no way to estimate how much the “toxic” securities are worth. And there is no guarantee that by accepting this liability, the banking system will recover. Basically, the plan is to shift a massive amount of bad loans onto taxpayers and hope for the best.  If it all goes according to plan, the banks will benefit and taxpayers will get stuck with the bill.  And, if it all goes badly, expect the banks to want more money.

What about Main Street?

Friday, I was talking to a friend of mine who had just lost her house.  Their mortgage had skyrocketed up to 12% and they couldn’t afford the payments.  They tried to deal with the bank in good faith, but the bank refused to lower the interest rate back to anything reasonable.  And of course, the foreclosure will cost the bank a small fortune, which will be passed on to taxpayers. 

So, how is this bailout plan good for Main Street?  How are we helping by foreclosing on people who are willing to pay their loans?  Why are we bailing out banks, when they are burying homeowners with exploding interest rates?  Shouldn’t we demand fair mortgage rates as part of any bailout plan?  Shouldn’t we mitigate foreclosures to help the recovery?

My Predictions

Housing won’t recover for another two years.  Real wages, adjusted for inflation, haven’t gone up in decades.  This bailout plan counts on housing recovering quickly and that isn’t going to happen.  When housing becomes affordable to average Americans and there are reasonable loans available, then housing will start to sell.  Until then, don’t expect a housing recovery from any action by our Government.

This bailout will cost taxpayers a couple of Trillion dollars.  This will be added to the existing 9 Trillion in debt, which will substantially weaken America’s financial standing.  Other industries, such as automakers, will also expect bailouts.  Worse yet, there won’t be any lasting and meaningful reform of the mortgage and banking industries.  So, banks will expect another bailout during the next economic downturn.

The Bottom Line

The bottom line in America today is the rich keep getting richer, with help from our Government.  I’m a capitalist and I don’t believe in the redistribution of wealth, in either direction.  When our Government takes money from Main Street to give to Wall Street, this is a crime against the American taxpayer.  We are bankrupting our children’s futures to further enrich the wealthy.

“Government is not the solution to our problem, government is the problem.”
Ronald Reagan - 40th President of the United States

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The Situation

I won’t go into a big rant about the way I was treated at my former job.  Like any job, there was the good and the bad.  There were the interesting projects and the constant pressure of being behind schedule.  There were the exciting product launches and the stress of bugs and testing.  There were the wonderful friends and co-workers and the sting of two years without a raise.

The most important consideration was that I wasn’t happy at this job, in a career that I have loved for decades.  I dreaded getting up in the morning and coming into work.  That’s when I knew it was time to move on.  Unfortunately, I had some interviews, but no job offers.  So, I took a huge gamble, typed up my resignation and packed up my desk.

The Change

There are two important reasons I could make this change:

1.   I had the courage to quit.
2.   I had money set aside.

I have always had a certain amount of personal courage.  And, I have always made the tough decisions that have carried me forward.  But, I had never quite been able to risk quitting my job.  Surviving two layoffs and reading Steve Pavlina gave me the confidence I needed to make this change.

Never underestimate the power of finances over your decisions.  If I was living paycheck-to-paycheck, I would have never been able to quit.  I would have had to stick it out, to protect my family.  Having low expenses and money set aside, allowed me the freedom to change my future.  It really is that simple and that powerful.

The Result

After a couple of nervous weeks, the gods smiled on me.  I landed the kind of job I had always dreamed of.  I now work at a professionally run company, in a beautiful building, that is located right here in my town.  After 25 years of commuting, I finally work close to home.  I also got a big raise, stock options and much better benefits.  Most important, is that I wake up every morning thrilled to go to work.

I don’t know how much of this was luck, how much was destiny and how much was intention manifestation.  And, it really doesn’t matter.  I am feeling very thankful and very fortunate.  I am thinking about everyone who pulled for me.  I am thinking about the decades of hard work and the years of night school that allowed me to land this job.  And, it all seems worth it, right now.

The Bottom Line

The bottom line is, when you have control of your finances, you have control of your life.  Finances aren’t just about money and investments; they are about freedom, courage and destiny.  They are about calling your own shots and choosing your own path.  They are about improving yourself and helping others.  Sound finances make many of the greatest things in life possible.

“He that waits upon fortune is never sure of a dinner.”
Benjamin Franklin - Founding Father of America

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21 percent of those with salaries of $100,000 or more are living paycheck to paycheck

What Does a $100K Salary Mean to You?

I remember the days when I was making $21K per year and supporting a family of three. I remember thinking that if I made $100K with my frugal lifestyle; I could practically live like a millionaire.  Well, my income has gone up dramatically and so has my lifestyle.  But, I’m definitely not living like a millionaire.  I still have to worry about the cost of gasoline and groceries.  I still have to weigh my purchases against all of the monthly bills and unexpected costs.  The only difference between then and now is that I have some cushion to fall back on.  One day, I hope to be a millionaire and still live a frugal lifestyle.  Until that time comes, it’s nice to know we can survive a couple of missing paychecks.

Big Hat, No Cattle

I still laugh about this saying, years after I first read it.  That’s what one millionaire in Texas had to say about another person in the book, The Millionaire Next Door.  When I read this great book, it was the first time I realized that high income doesn’t always equal wealth.  Having been low income my entire life, I just assumed that rich people had high incomes and poor people had low incomes.  Nothing could be further from the truth.  The real truth is that saving and investing equals wealth.  A high income won’t create wealth or protect those who never save.  As soon as their income is interrupted, they are just as vulnerable as anyone else.  Foreclosures are affecting everyone.

Protecting Yourself and Your Family

This is a no-brainer.  Saving up a couple thousand dollars could mean the difference between keeping or losing your home.  It could mean the difference between paying rent or getting kicked out of your apartment.  It could mean the difference between years of struggle or a minor bump in the road.  I know people who wouldn’t dream of being uninsured, yet they have no savings to fall back on.  They are leaving their families exposed to all matter of financial horrors, simply because they want to live a lifestyle beyond their incomes.  It doesn’t make good financial sense.  The new car or the trip to Hawaii won’t help you when your income disappears.  Having some savings will.

What Does your Future Hold?

As time passes, the benefit of saving and investing becomes less about small events and more about the big picture.  Everyone has a different dream for his or her future.  But one theme is consistent; the more money you have put away, the more choices you have available to you.  If you envision a life of leisure, you will need money to travel or play golf.  If you would like to volunteer or to help others, you will need money to sustain yourself.  If you wish to give to worthy causes, you will need money to donate.

The Bottom Line

The bottom line is so obvious that I could have skipped this section.  The only way to stop living paycheck to paycheck is to save money.  The only way to avoid big problems from small setbacks is to have some funds set aside.  And, the only way to have a future that you are in control of is to become financially self-sufficient.

Saving and investing are the vehicles to get you there.

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Everyone seems to have an excuse these days for not saving any money and most are based on this argument of “I can’t afford to save”.  Americans can afford luxury cars, designer clothes, shoes & handbags, exotic vacations, dinners out, booze, cigarettes and $4 cups of coffee, but they just can’t afford to save any money.

The truth is that saving isn’t a priority for most Americans and that’s unfortunate.  Because saving money is the surest and most reliable way for building wealth and changing your future.  It’s one of the few things people have some control over and yet, they act as though they are helpless.  Money isn’t kryptonite.  You should have power over your money and not the other way around.

“I’m Going to Win the Lottery.”

This morning, I went surfing with a childhood friend of mine.  We were out in the water talking about our lives, when he mentioned that he often bought lottery tickets and dreamed of winning one day.  I gave him a hard time and told him that he was more likely to die in a car wreck driving to buy the tickets, then he was to win the lottery.  On a more supportive note, I told him that it is much easier to save up a million dollars then it is to win the lottery.  I could tell from the look on his face that he thought I was the one who was dreaming.  The concept of saving a million dollars is way beyond most people’s imagination.  But, it’s actually very easy, once you are committed.

Some people get lucky and they actually win the lottery.  And, it has been well documented these people are rarely happy after winning.  The dream is usually much nicer then the reality.  Not only are they unprepared for dealing with the sudden wealth, but it brings a host of new problems.  By accumulating wealth over time, savers are much happier with their lives and more comfortable managing their wealth.

“My Finances are Outside of my Control.”

Last weekend, another childhood friend of mine called to say that he wanted to come and visit me.  But, he couldn’t tell me when he could make it, because he wasn’t sure of his finances.  In almost the same breath, he wanted to tell me all about the new truck he had just bought.  So, he has a shiny new truck, with a $628 payment, but he can’t afford the gas to drive to the beach.  Normally, I’m not judgmental of others or their finances, but my friend is 43 years old and he still lives with his parents.  For over 20 years, he has been telling me that he is thinking of moving out, but he’s not sure that he can afford it.

Now, this is a pretty extreme example.  But we are all guilty of this to some extent.  We can always find a way to afford the things we want, like a new truck or a nice dinner out.  But, we make excuses when it comes to affording the things we need, like gasoline or a retirement account.  Until people take control of their finances, they are living on the good graces and whims of others.  And, they are limiting their future choices, much like my friend.

Saving a Million Dollars

It’s easy to save a million dollars.
(Credit to Marshall Brain)

• Save $5 per day in an IRA or a 401K plan.
• Earn an average 10% annual return.
• You will be a millionaire, in 42 years.

For the cost of lottery tickets, cigarettes or a daily cappuccino with tip, you can become a millionaire.  It really is that easy and much more likely then wining the lottery.  Although 42 years is a long time, that 42 years will pass whether you decide to save or not.  Will you be wealthy in 42 years or will you be poor?  It’s completely up to you.

The Bottom Line

The bottom line is that almost anyone can afford to save at almost any level of income.  Yes, there are some Americans with dire financial circumstances, but they are few and far between.  Most Americans have created their own financial circumstances and they will continue to struggle, until they accept the consequences of their actions.  Dreams won’t pay the bills, just as excuses won’t make you wealthy.

If you ever want to have a sound financial future, you must begin to save money right now and continue to save throughout your earning years.  Start the habit of saving and the future will belong to you.  If you fail to save, someone else will decide your future.

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When I started out with my very first investment, I was “recommended” a mutual fund with an 8.5% front-end load.  For those who aren’t familiar with a load, this meant that for every $100 I invested, only $91.50 made it into my account.  The other $8.50 went for sales commissions and to the fund company.  On top of this, the fund that was “selected” for me had a poor long term track record, high volatility and very high annual fees.

I was pretty naive at the time and I didn’t realize that there were some great no-load mutual funds, where my entire $100 contribution could go into my account.  And, they had good long-term track records and low annual fees.  Of course, my friend and “Advisor” would never tell me about these no-load funds, because they didn’t pay any commissions.

Lesson 2 - No-Load may mean Hidden-Load

It didn’t take investors long to catch on to such obvious skimming of their contributions and soon even novice investors began to demand no-load mutual funds.  The financial services industry quickly responded with new “Advisor Class” funds, that had no front end load.  Instead, they have much higher annual fees and a “Redemption Fee”.  So, the longer you stay in these funds the more of a “load” you pay.  And, if you try to leave the fund you have to pay to get out.

So, although the fund is technically ”No-Load”, the Advisor is assured of a commission, the fund company collects higher fees and you get to pay for all of this.  An extra percent per year may not sound like much, but it definitely adds up over time.

Lesson 3 - Commissions can Affect your Investments

Another thing I realized very early on, is that most of the Financial Services industry works based on a huge conflict-of-interest.  Often, Advisors are paid the highest commissions for selling clients the riskiest or worst yielding investments.  From whole life insurance, to limited partnerships and variable annuities, some investments pay much bigger commissions to your Advisor than others.  And, you can bet your assets, that it’s not in your best interests to buy these investments.

Another huge commission-based issue is the subject of churn.  Your Advisor usually gets a paid a commission every time you move your assets into a new investment.  The more your investments get moved, the more your Advisor gets paid and the less your investments are likely to yield.  A good investment advisor would never churn their client’s accounts.  But, it definitely happens.

Lesson 4 - Investment Advice is Rarely Objective

Back in the stone ages, when I started investing, the Internet wasn’t around for investors.  There weren’t any blogs and statistics weren’t available with the click of a mouse.  Back then, it was hard to get good investment advice.  You either had to buy an expensive newsletter or you had to buy one of the financial magazines or newspapers.  And, the recommendations of these financial papers closely mirrored the products of their advertisers.  Biased advice can cost you a lot.

Another thing that happens frequently, is that investors get a “hot tip” about a hot stock from their investment advisor.  But, when they purchase this stock, it turns out to be a real dog with poor fundamentals.  The reason this lousy stock was recommended to you, is because it is underwritten by the brokerage.  Advisors push these stock and analysts give them good reviews, because the brokerage makes a lot of money on the underwriting fees.

Lesson 5 - Taxes and Inflation are Part of the Equation

When calculating your investment returns, don’t forget to subtract taxes and inflation.  Investment decisions are never accurate without taking these into account.  A 12% return is closer to 4% after taxes and inflation.  And, you are probably losing money on anything yielding less than 7%.  I base these calculations on 5% inflation and 25% taxes.  And, this doesn’t include currency fluctuations.

Feel free to disagree with me.  Feel free to  plug in your own numbers.  But, make sure that you take this into account or you may be over-estimating the returns from your investments.  More importantly, you may be under-estimating the risk involved, for the return you receive.

Lesson 6 - The Market Moves in Cycles

One of the most obvious ways to profit from the stock market is from the cycles that occur regularly.  The market goes up and down with the economy.  Also, money moves between large cap and small cap stocks and between growth and value positions, as they change in popularity.  Even some types of stocks are considered cyclical.

The first lesson of market cycles is that it’s very difficult to time the market.  I still own a home-builder stock that I held onto just a little too long.  So, I don’t have any great advice, except don’t fight the trend.  If the market is moving solidly in one direction, going with it is usually more profitable then going against it.  And, if it has been moving in one direction for a long time, the cycle may be nearing an end.  So, take some of the profits before the direction changes.

Lesson 7 - I’m Not Smarter than the Market

Recently, I have thought a lot about the failure of Long-Term Capital Management.  In case you aren’t familiar with the story, LTCM was a huge hedge fund that failed in 1999.  Some of the most brilliant minds in the industry, including two Nobel Prize winning economists, lost billions of dollars and were forced to liquidate the fund.  They created a financial model that supposedly would require a six-sigma event to fail.  Well, they were wrong and it failed spectacularly.

On a number of occasions, I have been reminded by the market that I am not smarter than it.  In fact, the Market delights in making people look stupid.  The reason no one consistently outperforms the market, is because the market quickly adjusts to any profitable strategy.  So, take advantage of market trends and don’t try to beat the market.  You may succeed at market timing for a short time.  But, sooner or later, you may fail in spectacular fashion.

Lesson 8 - Diversification is More than Stocks and Bonds

Having been through Black Monday and the Tech Crash, I strongly recommend having some real assets, such as real estate and precious metals.  Real assets hedge against inflation and protect you from stock market panics.   I also recommend some International exposure, such as global or international mutual funds.  International holdings help to insulate you from the local economy and currency fluctuations.

Obviously, these types of investments pose some risks and may require some expertise.  But, they will diversify your risks more broadly.  If you are a novice investor or don’t have a lot of capital, you may want to consider mutual funds, REITS and ETFs that will allow you to invest in these asset classes.

Lesson 9 - Look for Value in your Investments

There are many strategies for finding investments.  One of the most consistent strategies over the long haul is to look for investments that trade at a discount to their book value.  This is commonly known as Value investing and it makes a lot of sense.  Just as you should look for value in any of the products and services you buy, you should also look for value in the companies you invest in.

The first lesson of Value investing is that some stocks are cheap for a reason.  That’s why it’s called Value investing and not Cheap Stocks.  The stocks of dying companies are almost always cheap, but they are never a bargain.  Other investors can predict the future of these companies and avoid their stocks.  That’s why they are cheap.  The real secret of Value investing is in selecting good companies that are a good value.  This brings us to the final lesson.

Lesson 10 - Buy Companies, not Stocks

Some of the greatest investors Wall Street has ever seen, became successful with this simple premise; “You aren’t buying a stock or a security, you are buying part of a company”.  Too many investors (including myself) make the mistake of following the stock prices, without understanding the fundamental value of the company.  The value of the company is hard to calculate.  If it is a market leader, with good products and management, it may become very valuable.

If a company is poorly run or it’s products can’t be sold, it makes no difference how the underlying security is valued.  You will lose money on this stock sooner or later.  This is a big lesson I learned from the dotcom era, where earnings didn’t seem to matter.  Trust me, earnings do matter.  And, so do the products and the management.  They matter more than the current value of the stock.

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If you don’t yet have a financial plan, try my simple Three-Step Financial Plan.  It only takes a few minutes and could make a tremendous difference in your financial future.

What Happens if Your Plan Goes Wrong?

What if you have a solid financial plan and good investments, but the market tanks and you lose a lot of money any way?  No one wants to acknowledge that they have lost money.  No one wants to feel like a lousy investor and I’m no different.  My first instinct is to avoid reading my brokerage statements and to turn off the financial news.

But, this is a critical time to evaluate your financial plan for the long-term.  It’s important for you to make sure that your plan is viable for the future.  You need to cut loose of the dogs and keep the investments with promise.  Now, more than ever, you need to pay attention to your investments. 

Past Performance is No Guarantee of Future Results

One thing that often goes wrong, is that people base their financial plan on the past performance of certain investments and they don’t perform as well in the future.  Don’t feel bad about this, because it’s a normal investment experience.  Investments often perform in cycles and yesterday’s winners will likely become tomorrow’s losers.

There were a lot of smug NASDAQ investors in the late ’90s, just as there were a lot of smug Index investors a couple of years ago.  Most of these people lost their shirts.  Few investments can sustain outstanding performance for long periods of time. Otherwise, they will become over-valued and overdue for a correction.  Don’t chase past performance.  The odds are stacked against you.

It’s Always Darkest Before the Dawn
In 1987, in 1990 and especially in 2002, I lost a lot of money.  I could have bought a car with cash or put a down payment on an investment property in California with the money I lost in the market during the tech bubble.  But, I made all of that money back and then some in the years that followed.   If I had pulled out of the market, I would have lost that money forever.  Instead, I stuck it out and profited from the downturn.  In fact, I increased my investments, which dramatically increased my returns when the markets rebounded.

This year, I lost a lot of money in the market from the mortgage and financial crisis.  The good news is that I’m still invested in solid companies that I believe will benefit from the recovery.  More important, I am increasing my investments and purchasing good stocks at incredible prices.  While many investors are bailing out because of the downturn, I’m focusing on the opportunity in the rebound.

Learning from the Master

Do you realize that Warren Buffet was only worth $140 Million in 1979 and now he is worth $62 billion?  Most of Warren’s success came from being a value investor, which means that he only buys stocks when they are priced attractively.  Right now, some stocks are becoming affordable and Warren Buffet’s company, Berkshire Hathaway, is starting to buy again.  I’m no financial genius, but I’m definitely smart enough to learn from the richest man in the world.  If Warren thinks the market is going up, then I’m a cautious buyer.

The Bottom Line

The Bottom Line is that the market goes up and down, but the overall direction is up.  How you deal with loss and disappointment may determine your future success.  Most books and quotes from successful investors talk about having “discipline” in your approach to investing.  Here is your opportunity to show discipline and stick with your financial plan.  Here is your opportunity to profit from others who panic.

“Discipline is the bridge between goals and accomplishment.”
Jim Rohn - American Business Philosopher

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Growth Stats

The great news is that there has been a 6% increase in the number of millionaires worldwide and their wealth increased by 9%, last year.  Whatever your opinion on the morality of accumulating wealth, the fact that wealth is increasing worldwide is of benefit to everyone.  Wherever wealth is created, jobs are created and opportunities are created.  To believe otherwise, is to contradict thousands of years of human history.

Developing Countries

The number of millionaires from developing countries, such as China, India and Brazil, has increased by 23%.  This is a very positive development, because opportunities for the working-class in these countries have been very limited in the past.  Although the standard of living hasn’t increased radically in most developing countries, there is definitely a growing middle class.  This has fueled a surge in international demand for products and services from Europe and North America.

Here in America

Despite all of the doom and gloom about the American economy, we are doing quite well.  One third of the world’s millionaires come from the U.S., despite the fact we represent less than 5% of the world’s population.  And, the wealth of our millionaires is increasing, despite the recent economic slowdown, the real estate crash and the shaky financial sector.  The American working-class may feel left out of the boom, but the future of our economy appears to be robust.  So, opportunities will continue to be available to most who apply themselves.  The wealth disparity will also continue to exist, as it has for centuries.  Hopefully, it will begin to shrink, instead of continuing to grow.

The Bottom Line

The bottom line is that dynamic companies and individuals create wealth.  That is how America became the wealthiest country in the world, in a very short span of history.  And, wealth itself is not the only benefit.  The products and services created by the wealthy are the other.  Think about life today without electricity, TVs, computers, automobiles, supermarkets, etc.  From the “Millionaire Next Door” plumber or electrician, to the billionaires such as Sam Walton and Bill Gates, the wealthy often give a lot for what they receive.

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Many adults have completed a rigorous schedule in college, devised a career path and systematically attend to the needs of their family.  They meticulously plan out weddings, vacations and social events.  What most people have neglected is to create a financial plan.  And, finances are definitely one of the most important things to plan for.  Your entire future depends on it and it may take decades to execute.

Financial Planning is Easy

The great news is that it’s very easy to create a financial plan.  Don’t be intimidated or confused, because it’s lot easier than most of the things you are already doing in your busy life.  Reasons people avoid financial planning is because they either don’t know where to start or they feel helpless to change their current financial situation.  Take control of your finances and I guarantee you will feel a lot better.

Do It Now

The most important thing is to get started Right Now.  Don’t wait until market conditions are perfect or you are making more money.  Time really is money and waiting is always a mistake.  The sooner you start, the more your money will grow and the more experience you will have.

Three-Step Plan

1. Goals - Make a short list of goals you are planning to achieve.  For me, my original goals were to buy a house, accumulate wealth and prepare for retirement.  Later, as I became a family man, I started college funds for my kids.  Start with your goals in mind and the direction becomes obvious.

2. Commitment - Goals and plans are worthless without action.  Step two is to make a commitment to your financial plan.  You need to decide how much you will invest and how much you will spend for debt reduction.  My recommendations are to save 10% and pay 20% toward debt.  But, everyone’s budget is different.  Start with whatever amounts you are comfortable with and increase them as your finances allow.

3. Investment - Picking investments is easy once you have goals and an investment amount.  My recommendation for new investors is a no-load mutual fund.  Pick a fund with low expenses and a good long-term track record.  If you have trouble choosing, pick an index fund.  The reason I like mutual funds is because they are convenient for making automatic monthly investments.  You can also use a brokerage account or sharebuilder, if you would prefer to invest directly in stocks.  I don’t recommend savings accounts, savings bonds or CDs for long-term investors, because they barely keep pace with inflation.

The Bottom Line

The bottom line is that it’s easy to create a financial plan and to put it into action.  Having no financial plan is no way to get on track.  And, taking no action is no way to get ahead.  So, get started today and your finances will definitely thank you tomorrow.  Nothing feels better than confidence.  But, having money put away is a close second.

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Here are the Grim Statistics

• The delinquency rate on residential properties was 6.35%.
• The percentage of loans in the foreclosure process was 2.47%.
• Loans with foreclosure actions started this quarter were 0.99%.
• The number of homes in foreclosure is around 1.1 Million

The Vicious Cycle of Foreclosure

Unfortunately, the foreclosures contribute to a breakdown in property values, as the market is flooded with vacant properties that must be sold.  This drop in property values then causes more foreclosures as delinquent homeowners realize that they owe significantly more than their houses are worth.  The temptation to just walk away increases as it becomes obvious that it is impossible to sell a house at market value in this environment.  Soon, desperate For Sale signs plague the neighborhood and continue the cycle.

The Haves and Have-Nots

Surprisingly, even in this disastrous environment, most homeowners are just doing fine.  Those with good jobs and good loans aren’t in much danger of defaulting.  Unfortunately, for people in the mortgage, real estate, housing or construction industries, it’s going to be a bumpy ride.  And, for people with adjustable-rate mortgages, the situation is getting desperate.  Subprime ARMs represent only 6% of outstanding loans, but 39% of the foreclosures.

The Bottom Line

The bottom line is that opportunity is knocking for those who are thinking of buying a house or a rental property.  These conditions are ideal for buyers and they won’t last forever.  Even if you think you can’t buy a house right now, you may be able to buy a foreclosure property.  Just don’t be like the previous owners and get in over your head.  And, for god’s sakes, get a fixed loan if at all possible.  Inflation is on the rise and interest rates are definitely going to have to be raised.  They may need to be raised a couple of percent.

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