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It’s hard to believe that the New Year is almost here. Christmas has now come and gone (along with Hanukkah) and we’re fast approaching the end of the year 2007. For me 2007 was a great year. I began truly getting my finances in order and building wealth. I’m by no means wealthy at the end of this year, but I am a step closer to achieving my goals. How did you do? Can you look back at the past year and know that you did well with your money? Did you begin an emergency fund (or completely fund an existing emergency fund)? Did you pay down any existing debt? Did you invest any excess money in the stock market or any other financial markets? What sort of returns did you make on your money this year? If you are the type of person who likes to own individual stocks, which companies did you purchase and how did they do? What sort of returns did you make on your retirement accounts? All flavors apply here: IRA’s, 401(k)s, 403(b)s, Roth IRA’s, SEP IRA. How did you do? If you didn’t have a retirement account at the beginning of the year did you start one and fund it this year?

I realize that I’ve asked quite a few questions, and honestly I could probably ask even more, but I think that’s good enough for now. I really want to know how you all did with your finances this year. I want to know, and I want to encourage you to do even better in the upcoming year. Will you do this? I hope so. I definitely plan to.. I know I’ve still a long way to go before I reach my ultimate goal of financial independence. Enough chatter though, let me highlight some of the goals and things that I did with my finances over the course of the year 2007…

At the beginning of the year 2007 my wife and I began a short-term savings account to save up for expenses such as college tuition, vacations, and a down-payment on a house. About midway through the year we expanded our savings by creating an emergency fund money market account. We have been funding this account with $250 every single month. We also opened a mutual fund (investing in gold and other precious minerals & metals) and a brokerage account. As of the time of this writing we have managed to accumulate between these four different accounts about $7,500 dollars. Most of this I money I prefer to think of as long-term, but it’s a start and it’s a cushion just in case we ever face an emergency.

We did pretty well this year I do believe. I want to do better next year, and I think we can. I also want to start focusing a little bit more on saving for a house, and also our retirement. I plan to open and fund an IRA for both my wife and I this coming year. So again I ask, what did you accomplish this year with your finances?

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Unless you’ve been asleep for the past year, you are more than aware of the slump in the housing market. You might be someone who is adversely affected by the downturn in housing, or maybe you are waiting for the downturn to continue because you are looking to buy your own property. My wife and I are in the second situation. We don’t own a house. We are renting and waiting until the best time to buy. Many people are saying that now is the time to buy; housing prices are at their lowest for the past few years, and interest rates are dropping. I disagree. I don’t believe we’ve reached bottom yet. In fact I am unsure that we will even reach bottom in 2008. We may, but it is no sure thing. I’d like to talk about two of the reasons that we are having this downturn in the first place, which will (hopefully) teach us a few lessons about what NOT to do when looking to purchase a house.

A Little Bit of Recent History

The median home price during the year 2000 (this is a national median price) was $119,600. By the fourth quarter 2005 the national median price was $213,900. This is an increase in the national median home price of roughly 178%. The Arizona median home price in 2000 was $121,300. By the end of year 2005 in Arizona the median home price had accelerated to $286,825. This is a 236% price increase. Why are these increases so large? What was going on with the rest of the economy at this time? Most of you will recall the market downturn and the “recession” at the turn of the century. The so-called dot-com bubble burst losing investors billions of dollars and pushing our economy into a soft recession. The federal reserve (public enemy number one, IMO) “fought” the recession (which by the definition of recession wasn’t even a true recession) by lowering their federal funds rate (the rate at which financial institutions lend one another money) 11 times from 6.5% to 1.75% over the course of a few years. These extremely low interest rates are what enabled banks and other financial institutions to lend businesses and individuals money at subsequently low rates.

The Next Pie in the Sky.

Where do investors put their money when their “sure” investment loses them money, and they are forced to pull out? In the next “sure thing,” of course. After the fall of the dot-com bubble and as the fed (aka the federal reserve) lowered their federal funds rate to a ludicrously low amount, investors decided that real-estate was a “sure thing,” and they pumped their money into the real estate market. Of course with this hefty increase in demand homeowners and homebuilders started rapidly increasing their selling prices. Simple economics right? Truly it is. What these investors (and even regular old Joe homeowners) did not think about is that the demand they were creating for homes was unsustainable. What goes up must come down. It’s a law… one which people tend to forget about every single time the next big investment comes around. “It won’t happen to this one,” they say. It always does.

Buying on Expectations

Foreclosures on homes happen. People lose their jobs and can’t afford their home payment anymore and so they end up foreclosing on their home. It is inevitable to a small degree. The level of foreclosures nowadays though is much larger than that small inevitable percentage. Another problem with today’s housing market is that consumers bought their houses on expectations. Expectations that the loan rates would stay low, expectations that they would get that raise next year, even expectations that housing prices would continue to accelerate at the level of growth that they experienced in the early part of this decade. These expectations are foolish to depend on. Purchasing a home will most likely be the largest, most expensive and most important purchase that one will ever make. Making such a large decision while making so many assumptions about the future is foolish, and it is primarily the cause of the increase in foreclosures we’ve been experiencing lately.

I mean no harm and no offense. There are many people out there who are suffering due to the events in the housing market over the past six or seven years. I do not mean to promote that suffering. I only wish to educate those who have not yet made these mistakes, so that they will be able to avoid them. Everyone makes mistakes. We grow by learning from (and not repeating) these mistakes.

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Today’s Friday Book Club will feature chapters three and four of The Automatic Millionaire which was written by David Bach, the New York Times Bestselling Author of Smart Couples Finish Rich and Smart Women Finish Rich.  The third chapter is entitled ‘Learn to Pay Yourself First’ and the fourth chapter is ‘Now Make it Automatic.’  I think these chapters go hand in hand, and that is why I’ll be reviewing and covering the both of them in todays’ Friday Book Club.

Learn To Pay Yourself First

David really touches down in this chapter about why learning to pay yourself first is probably the best and most sure way that one can become wealthy.  One of the first things he mentions in this chapter is that you should throw your budget out the window.  Now while I don’t necessarily agree with completely getting rid of a budget, I do believe that creating a strict budget and sticking to it is one of the more difficult and more stressful way to create wealth.  His point is instead of budgeting every little dollar, pay yourself before anything (or anyone) else.  This way the only money you have to live on is what is left after all of your taxes, deductions and your money spent on paying yourself first.  A great idea, if you ask me.

I want to touch on a topic that David brought up in this chapter.  He brought up a list of a few ways that one can become rich in this country.  While the list is not comprehensive by any means, I do feel that it is important and relevant to bring up in today’s discussion.  I’ll go ahead and list it for you now.

• Win it
• Marry it
• Inherit it
• Sue for it
• Budget for it

OR

• Pay Yourself First

What do you think?  Of course winning it would refer to winning the lottery or gambling of some sort.  Not a very reliable method is it?  Unfortunately a large portion of people in this country feel that winning the lottery will be the only chance they’ll ever have at becoming wealthy.  They don’t realize that becoming wealthy is not something that is out of their hands.  Indeed it is quite the contrary; the road to wealth and financial independence is a path that must be laid out by the person searching for the wealth.  If they do not, the wealth will not mean much, and will probably do them no good in the long run.  Think about it for a second.  Wealth is in YOUR hands.  Not mine.  Not your parents.  Not your significant others.  It is in YOUR hands to become wealthy.  It is in YOUR hands to manage your money, and make it work for you.

How do you do this?  Honestly… it’s easy.  Pay yourself first!  Contribute to your retirement accounts.  These are tax advantaged accounts which allow you to avoid paying taxes on a portion of your money until you retire.  If your employer does not offer a retirement account then start your own (In the form of an IRA or Roth IRA)!  Again, this is not difficult, and it’s even easy to set up automatic payments into these retirement accounts.

Now Make It Automatic

I like the way that David describes the importance of this step, and I’ll quote him for your reading pleasure.  “There’s no getting around it. In order for Pay Yourself First to be effective, the process has to be automatic.”  Truer words might have never been spoken.  Most people just don’t have the discipline to pay themselves first every single month unless the process is automatic and out of their hands.  Please do not take this advice lightly.  Make the process automatic and you will thank yourself later.

Using your retirement plan at work is an easy way to make the process automatic.  If your employer offers a retirement plan and you are not already enrolled in it, then drop everything until you have enrolled.  Most employers will match your contribution up to a certain amount, which gives you an automatic return on your money.  Where else can you get such easy money?  For more information on 401(k) accounts (the traditional work retirement plan) follow this link to Are You Ignoring Free Money.

Another way to create a retirement account and make the process automatic would be to open up an IRA account and then set up automatic transfers into this account.  Ask your bank or credit union if they offer IRA accounts, but make sure that their accounts offer different investment options other than just a set savings rate or cd rate.  You want to retire wealthy right?  You won’t build wealth by investing in 2 to 4% savings and cd accounts.  Ask about how you can invest your retirement in mutual funds and other higher-yielding accounts.  Another place you might go to inquire about an IRA or Roth IRA would be a brokerage firm such as Vanguard, TD Waterhouse, ING Direct, Sharebuilder, or Merril Lynch.

A Quick Overview

These chapters cover a lot more than what I’ve just mentioned and go more in depth with some numbers showing you how much even $3,000 a year can net you over the course of forty years.  It’s amazing how much wealth you can build with such a small investment, it truly is.  Please if you have learned anything from todays’ Friday Book Club, apply this to your life.  Open a retirement account if you don’t already have one, and then set up automatic payments.  You’ll thank me, you’ll thank David Bach and most especially you’ll thank yourself.

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