Debit versus Credit

Friday Book Club

Hey everyone! I’ve decided to start up a “book club” here at Debit versus Credit. I love reading whenever I get the chance to do so and I especially enjoy personal finance books so I’ve decided to share my love of these books along with the lessons I am able to learn from them with all of you, my faithful Debit versus Credit readers.

Every Friday I will comment on a number of chapters from whatever personal finance book I happen to be currently reading. I have a few goals that I hope to accomplish by starting up this Friday Book Club. First I’d like to be able to share what I’m learning with all of you. Secondly I feel that I will be able to absorb the material much more effectively if I review it and sum it up, in a manner of speaking. Then finally I think it would be beneficial to show you how these lessons can be applied to ones own life by relating whatever it is that I’m learning to things I’ve seen, heard or experienced personally.

I hope that the Friday Book Club is something that you will be able to enjoy and hopefully even join along with me with my current readings . Please do submit comments on what you were able to learn, or even some experiences that relate to the lesson at hand.

You can begin reading my first Friday Book Club recap by clicking the link below:

The Automatic Millionaire: Chapter One

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November 16, 2007
The Automatic Millionaire: Chapter One
Today’s Friday Book Club will feature chapter one 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 first chapter of The Automatic Millionaire is entitled ‘Meeting the Automatic Millionaire’ and focuses on a middle-aged couple that David met when he was in his young twenties. This couple meets with David to discuss their retirement, which he assumes is still quite a few years off. He is shocked to discover that this simple-minded couple actually has a net worth of close to 2 million dollars, and begs them to share with him their secret. Chapter one of this fantastic book covers the rest of the conversation that David shared with this couple and is a great introduction to how simple it really can be to become an “Automatic Millionaire,” as David Bach puts it.

Just about the first thing that David does with this couple is look at their financial statements which they had brought in. For the previous year they had earned about $53,000, which he refers to as a decent income. While scanning their financial statements he did not see any debts listed, when he inquired this happy couple about it they told him that they “don’t do debt.” Looking further into it he saw that they owned two houses, both of which were completely paid for. They lived in one of the properties, and the other they kept as a rental property. They also owned three cars, a boat and had roughly $900,000 dollars between three retirement accounts, municipal bonds and a bank savings account. At this point I was floored, as was David. I couldn’t believe what I was reading. My wife and I make a little bit more than this couple does every year, and just thinking about how they were able to build up their net worth like this in just under thirty years was exhilarating.

The only thing we inherited was knowledge. Our parents taught us a few rules about handling money. We just did what they said, and sure enough it worked.

David mentions at this point how he couldn’t believe that such ordinary people with an ordinary income could have amassed such great wealth and he asks the couple if they had inherited any of it. The man laughed and said “Inherit? The only thing we inherited was knowledge. Our parents taught us a few commonsense rules about handling money. We just did what they said, and sure enough it worked.” They then go on to talk about how they started to set aside money every single paycheck (on average 10 percent) when they were newly married to save for retirement, then a down payment on a house. They also brought up what David refers to in this book as the “Latte Factor.” They talked about how getting rid of little spending habits they had which could probably be done without was part of their success in becoming financially independent. For their example they mentioned how they both smoked and decided that if they would just stop smoking and save they money that they spent on cigarettes they could have enough money for a down payment on a house saved up within two years, and of course save their health in the process.

Next the couple that David is interviewing mentions that they accelerated their mortgage payments in order to pay it down more quickly. A really neat trick that they used which I found interesting was to cut the monthly mortgage payment in half and instead of paying the full payment amount once a month pay the half of it twice a month. According to them this would cut a 30 year mortgage down to only 23 years. They also contributed even more to the principal when they could which cut down the time until their mortgage was payed off even more. By the time they were in their late thirties their house was payed off and they decided to move into a nicer house and rent out their first house. This brought them in monthly rental income and helped them pay off their new house mortgage even more quickly than their first one.

It’s amazing isn’t it? I mean honestly here’s a couple who truthfully doesn’t make all that much money a year. It’s a modest amount for a family, to say the least. Yet they managed to have the financial discipline to make sure they pay themselves first, before anything or anyone else. This is how they amassed their wealth, and this is the biggest thing that David was flabbergasted about: their financial discipline. Yet when he asks them how they were able to be so disciplined they tell him that they took it out of their hands; they automated their savings, which ensured their success. This is what I love, because this is what I do, and it works great. Just as I mentioned in My 33% Savings Plan I have my money processes mostly automated. Every two weeks when my wife and I are paid a set portion is transferred from our checking account to our savings and investment accounts. This is the best way that I have found, and I believe this is the only way to ensure my future financial independence.

Let me make a quick bullet-point list for you of the main highlights of the chapter, or the different ways that this couple were able to become “automatic millionaires.”

Cut out wasteful spending

Accelerate mortgage payments (if any)

Pay yourself first, and do it automatically

Avoid debt at all costs – save until you can pay cash for something

Don’t get trapped in the web of credit card debt

If you have anything to share about this book or if you have applied any of the principals learned in this to your life, or plan to apply them to your life please leave a comment or send me an e-mail. I love to hear from you all!

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November 16, 2007
A Decision to Make
I also considered entitling this post, “An Opportunity Cost.” Therefore I believe it would be appropriate to subtitle it as such. Not that this of course is really relevant to the topic at hand, but it’s something that I thought I’d mention, because it might not include the topic of my post tonight but the topic of my post has EVERYTHING to do with decision making and more importantly Opportunity Costs.

I’ll be receiving my associates degree next month and transferring on to finish my bachelors program in Global Management and Leadership at Arizona State University. Thus far in my post-high-school education tuition has been relatively cheap all things considered, however my tuition costs are going to almost triple when I begin my junior year at ASU in the spring. I mentioned earlier in The Worst Years of My (Financial) Life how poor money management and low wages earned me a place in “debt hell” and that I had to use student loans to subsidize my poor income and massive levels of credit card debt. At that point in my life I had no other choice but to take out a loan to consolidate my debt and pay for my tuition expenses that I could not afford on top of my living expenses. Now I come to another point where I am facing student loans, but this time it is not something that must be done, but something that I am considering doing. Let me explain…

Deidre and I have managed to save up enough to pay for my tuition in cash and still manage to keep some money in an emergency fund. Some money is not much money though and I don’t know how comfortable I would be depleting my emergency fund to only a months worth of expenses when I can potentially take out a subsidized student loan and maintain a comfortable emergency fund of 4 to 6 months expenses. I’ll list out the pros and cons of taking out the subsidized loan and then I’d ask for you to share your comments and/or experiences about the subject.

Pros

Interest is paid for by the government until I graduate, thus potentially giving me an interest-free loan if I pay it off at graduation.

We would have more cash in our emergency savings to cover any necessary expenses while I’m still in school.

Cash saved could earn us interest.

Cons

Debt. I’d have more debt which could potentially negatively affect my credit and my net worth.

After graduation I’d be responsible for repaying the loans, and any applicable interest which could be a significant amount depending on how much I take out in loans.

What are your opinions on the matter? I’m still a little unsure what I’ll do. Of course I also will be applying to scholarships and other forms of financial aid in the meantime, but I’ve only a month until tuition is due. At this point I’m leaning more towards taking out the student loan, but of course I would only go for this option if the loan was subsidized by the government. If you have any experience with this or an opinion I’d love to hear it. Please leave your comments!

Beware of excess of loans and maintain checks as carelessness might lead one to debt consolidation, not just the cancellation of your travel insurance.
November 14, 2007
Investing 101
Let me begin this post by saying that I am by no means a seasoned investor and my advice might not be as complete as someone who has been investing for 20 or 30 years. That being said I do not believe that investing is rocket science, and I do believe that the average Joe has the ability to earn returns on their money that can match – if not beat – the returns that the “professionals” achieve. Truthfully it’s really not all that difficult to do. There are just a few things one needs to remember when they begin investing.

Investing is not gambling; luck should never be something that you rely upon when choosing an investment.

Investment decisions should never be made without doing any research.

One should never buy into a stock or fund when everyone and their grandmother is telling them how great an investment is and how it is going to make EVERYONE rich.

Always diversify your portfolio (i.e. invest in more than one industry and/or stock type)

Determine your level of risk tolerance (how much risk are you willing to take on?)

Choosing a stock to invest in requires first choosing a few companies in which you are interested, researching the companies and finally (this is the easiest part of all) purchasing the stock from your brokerage of choice.

Choosing a stock to research

The first step to investing would be choosing a few stocks each from different industries that you are interested in, or you could go about it by merely choosing companies that you do business with, determining their industry of business and finding out who their competitors are. For example let’s say that I am interested in the Oil Industry, the Retail Technology Industry and the Restaurant Industry. These are just three industries I picked off of the top of my head, but they do a good job of diversification considering that different economic events would not all have the same affect on these three different industries. Now that I have chosen a few industries I would want to think of a few companies that I know in these industries. For Oil I will choose Exxon Mobil (ticker: XOM) and Chevron Texaco (CVX). For Retail Technology I will choose Best Buy (BBY) and Radio Shack (RSH). Finally for Restaurants I will choose Cheesecake Factory (CAKE) and PF Changs (PFCB).

Researching your chosen companies

Now that I have chosen these few companies in each of my selected industries I would want to do some research on them and compare them to other companies in their same industry. This part is probably a little bit more time consuming than choosing stocks to research or purchasing them, but is also the most important step in investing. Just as a quick note, if you are not willing or do not have the time to do periodic research on your investments, such as reading earnings reports then stocks are probably not the best choice for you. If this is the case you might be interested in investing in one of the hundreds of mutual funds available out there. These funds are based on a diversified index of stocks such as the S&P 500 and would earn you the historic average of 8-9% a year.

Before we dig into research ideas I’d like to introduce you to a few of my friends, who if you are serious about investing will soon become your best friends also. My friends are finance.yahoo.com and moneycentral.msn.com. These sites should be all you need to do some basic research (and view results of research already completed) on your chosen stocks.

Because this is just a basic overview of investing and research I won’t go too deeply into the different methods of researching, but will instead just skim over some of more traditional and basic things to look up and compare. You’ll want to look up your companies P/E ratio, which means price to earnings ratio. Basically this ratio compares the current stock price of a company with its earnings. Traditionally the lower the number the more of a value the companies stock is, but this would not always hold true, for example P/E ratios between industries would not be a good thing to compare. As an example you would not want to compare the P/E ratio of Exxon Mobil (XOM) to that of the Cheesecake Factory (CAKE). Other things you can research and compare are sections of your chosen companies financial statements. It’s always a good idea to see how well the company is doing in bringing in revenue, how much debt they have and how well they are doing at paying it off and how effective they are at increasing revenues and decreasing expenses.

Let me just leave you with one other quick note on researching: I asked my friend Josh (who is a successful investor/day trader) if he had any advice other than what I’ve already mentioned and he mentioned how “you should never invest in a company that you don’t understand. If you don’t know how AAPL (Apple, Inc.) makes money or what their products are then you should not be investing in it… Research and then invest in companies that you understand.”

Purchasing your chosen stocks

Now that you have a good idea on how to choose companies and do a little bit of research on them you’ll want to open an investment account of sorts. The company that I used when I first began investing is Sharebuilder. I like a few things about Sharebuilder. I like that they make it easy to set up automatic investing plans, I like it that you can purchase stocks in dollar amounts instead of only per share price and I like it that their trading fees are extremely well-priced. It is for these reasons that I’m going to say that if you are just starting out then you might consider Sharebuilder. As you can see there is a large banner right below. As a disclaimer to you, my readers, I will let you know that if you click that banner and sign up for service with Sharebuilder and fund your account I will receive a commission. I do this to try and earn enough money to pay for my hosting and also because I’m hoping I’ll be able to raise enough to return some to you, my readers, in the form of contest prizes and what-not. We shall see how this second idea develops in the future. In the meantime if you disagree with providing me with some support by clicking on that affiliate banner please feel free to follow this link to Sharebuilder.

Also if you are not interested in Sharebuilder as much as a traditional broker you might try Scottrade or Etrade.

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November 12, 2007
My Financial Account Structure
In my 33% savings plan post I mentioned that I would cover at a later time my money funneling techniques (e.g. my financial account structure) for y’all. I figure now is as good a time as any to cover this, so here you are…

I work primarily with two financial institutions, USAA and Desert Schools Federal Credit Union.

USAA

Checking Account: I have all of my money deposited into this account and from here I divvy out my allocated percentages to different accounts. I also pay all of my bills, with the exception of my auto loan, from this checking account.

Savings Account: This is a mid-term savings that I have established for my short-term goals, e.g. new car purchase, house down payment, etc. This account is for anything that I plan to purchase within the next 1-5 years.

Brokerage: This is where I send a portion of my money to be invested in stocks, index funds, mutual funds and – when I get one – a Roth IRA. Included in this is a money market fund which I have set up as my emergency fund.

Desert Schools FCU

Checking: I use this account to pay for gas, groceries, eating out, etc. I also use it to pay on my auto loan since I received a quarter percent discount on my loan rate to set up automatic payments from checking.

As I discussed earlier in my 33% savings plan I prefer to divvy my money up by percentages. To figure out the percentages that I would use I first researched how much my monthly expenditures were by creating a budget, then I figured out my average monthly net income (net meaning after taxes… e.g. take home pay) and then I figured out how much I would like to save a month. I ran a few numbers and came up with a list that looks something like this:

Percentage-Based Budget

47% – Expenditures

33% – Savings

20% – Mad Money

That’s not exact, but I think that gives you a pretty good idea of how I work my percentage-based budget. It’s really quite simple and having different accounts with different purposes really simplifies the process. I have been managing my finances this way for about a year now and it’s really helped me to manage my spending and saving more efficiently.

A few quick notes

Please do take a few hours (or even better a day) to get your finances in order. It’s important (at least if you want to gain financial freedom) to always have your money flowing INTO your long-term accounts: e.g. IRA, Stocks, Mutual Funds. Another thing which I think is extremely important is to have an emergency fund built up for – well – emergencies. It’s always stressful and terrible when bad things happen to you or your family, but not having an emergency fund built up to handle sudden deaths or transportation problems or anything else that you can imagine makes it doubly hard. “That’s what she said.” Ok that was uncalled for and I apologize; I’m just a big fan of The Office. Seriously though it’s just smart financial management to save up 3 to 6 months worth of your cost of living. If you have any questions please comment or you can always e-mail me.

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November 9, 2007
A Charity I Recently Donated To

Do you donate to any charities on a regular basis, or have you made a substantial donation to one in the past? My wife and I just recently made a substantial (keep in mind that this term is relative) donation to a charity which treats children in less-fortunate countries for cleft lip.

Now before I convey myself as a completely selfless person who thinks of everyone before himself, let me just say that this was completely my wife’s idea and I had nothing to do with the decision, other than telling her that it was ok with me if we donated. That being said I should also note that I am a huge proponent of charitable donations and I personally think it would be irresponsible and selfish of me not to share my good fortune with those who are less-fortunate than myself. Of course this is my opinion and maybe there are some out there who do not believe in donating to charities. That is your opinion and you are entitled to it, of course.

The charity that my wife and I donated to is Operation Smile. They are a children’s medical charity that was founded in 1982 by Dr. William P. Magee Jr., a plastic surgeon, and his wife Kathleen S. Magee. Operation Smile provides children in poorer countries with surgery to fix cleft lip.

This is a picture of a little girl before and then after the cleft lip surgery, so you can see how emotionally traumatizing this “disease” could be to someone, and then the results of this miracle surgery.

I am not, of course, trying to tell you where to donate your money. I am letting you know one of the charities I have chosen to donate to and hoping to get an active discussion going on the topic at hand.

The question is then as follows:

What charities do you donate to, and if you choose not to donate to any charities what is your reasoning behind not wanting to donate? I’d love to get some responses and opinions from those on both sides of the fence. In fact to make things interesting if I get at least 15 valid comments on the topic within a week from now I’ll make another donation, this time to a charity of your choice, or if you can not think of one I will donate again to Operation Smile.

November 6, 2007
National Get Out of Debt Day

October 30th is National Get Out of Debt Day. How are you doing at getting rid of your debt, if you have any at all? Is your level of debt increasing, or is it decreasing? I have been slowly paying down my debt over the past few years. I am debt-free when it comes to credit cards and credit-lines, but I still have a secured auto loan which I need to pay off and a few student loans which I’ll start repayment on in about two years. I hope that you are all doing as well, if not better than I am, at taking care of your debts.

For those who might be struggling with debt, whether it be from a mortgage or credit cards there is help out there. While making the rounds today at the different financial portals (yahoo finance, cnn, msn, etc) I noticed that MSN sponsors a credit counselor message board. They also have a short article posted on how to contact credit counselors, and what services they can typically offer. That article can be viewed by clicking here.

If you have any success stories for getting out of debt or at least overcoming significant amounts of debt then I’d love to hear them. Please send me an e-mail or just post a comment with your story!

October 30, 2007