Monthly Archives: August 2007

Seek Wealth not in a Piece of Paper, Rather in Yourself

In reading my local paper a few weeks ago, I was reminded by how it seems harder and harder to get ahead financially today. Our local newspaper ran a story about a few college graduates with staggering student loans who were having a hard time living with a basic entry level salary and repaying their debt.

A few months ago, I wrote an article on what is good debt and bad debt. In the article, I pointed out the faulty logic that college debt is good debt because it was an investment that should payoff down the road. This is faulty analysis because we put debt and investing into one bucket. The difference between good debt and bad debt is not the reason for the loan rather two key factors (i) interest rate paid and (ii) ability to pay off the loan. The reason to go to school is partially due to its investment potential and partially because a student wants to do it. A good investment is based on the money we put in to it compared to the return we get back. A student loan can be a good investment yet as we will see a bad debt (too large to pay back easily).

The article looks at a few students who had $80,000 to $100,000+ in loans to attend a private college. Due to having private loans with higher interest rates, they ended up paying back over $1,000 a month. When the average entry level salaries are only $14,000 better than a high school graduate, it becomes difficult to pay back the student loans. It is true that a college graduate can earn over $1 million more compared to a high school graduate. Yet, our drive for money has made us go after bad debt in the goal to make money.

We have incorrectly put a value on a college education that is not there. We pursue it without regards to how we may be able to pay it back. Even though I am a big proponent of a college education, I believe that we have tied to a piece of paper to a degree to our self-worth. When we believe a piece of paper can make us rich, we have given up our self-worth over to money (piece of paper is more valuable than we are). In this pursuit, we make bad decisions (taking on too much debt) to try to achieve a piece of paper that has no value.

In listening to a radio program the other day, a caller asked about what to do with her life. She had recently received a job running a new not-for-profit for teens in Mexico with an unlimited budget. Yet, she felt that she was drawn to go back to school to get her degree at age 40. When asked why she needed a degree, she responded that a degree is what is expected by society.

Here is a woman who was very competent in what she did with years of experience in the field (learning by doing). Yet, she was letting a piece of paper determine her self-worth or lack there of. It was not like she had no opportunities to do what she loved. She could have turned down this opportunity and spent $100,000 for a piece of paper, yet she would have ended up with a debt that she would have continued to pay off in retirement.

The point is when we try to look outside ourselves for worth (in a piece of paper), we end up being poor (paying off debt forever). I am not saying to not pursue a college education. Yet, what makes a piece of paper that is printed at one college more valuable than another? For some people, a MBA at Wharton may be more valuable if they if they want to be an investment banker (Wharton gets them in the door). Yet, 20 years later, the difference in the piece of paper becomes obsolete because one’s true worth is what is inside him and not in a piece of paper.

By seeing our worth, we can make more informed decisions. Instead of going after the private elite schools to try to distinguish ourselves, we can go after a public school and distinguish ourselves through our actions. I have had friends do quite well in life without a college education because they had great self-worth. One friend dropped out of school because his business got too demanding for him to do both. A college education does get you in the door, yet it is up to you (and your self-worth) to walk through it.

Trust – Difference between Your Purpose and Chasing False Gold

One of the questions that I have been grappling with is if a person keeps on banging his head against a wall and making no progress towards his goals, how does he know this is part of his purpose in life (the path he should follow) or a sign that he should give up and try something else?

There is no easy answer to this that can be answered in a short blog. Yet, part of it is having a knowing of our purpose in life. What we are born to do. For many, we may think we know our purpose yet do we really? What I mean by this, I see numerous examples of people going out to start their own business as their purposes. For many, this may be their true purpose in life, the work that makes their heart sing. However, for others, they may be driven by wanting to get out of the corporate world or to put food on the table.

Thus, when I heard last week on America’s Got Talent that Terry Fator, the ventriloquist, almost gave up his act because he had only one person come to his show years ago, I wondered how do you tell which person should carry on their dream (which may get Terry the $1 million prize) and another person to go try something else?

I guess the simple answer is if you are doing what you love to do (your purpose), you would do it even if you had 1 person in the audience. Terry’s passion was to bring ventriloquism back to mainstream. And, as I saw the other night, that passion is probably going to make him a millionaire. Note, his goal was not to become rich, rather do what he loved. When he was asked why he should win the $1 million, he gave a totally different answer than the other two contestants before him (who said something to the effect that it was their dream to win). He said that there were 4 great contestants and only vote for him if you (the voters) thought he deserved to win. His goal was not to get rich and famous (at least from what I have heard from him so far), it was to live his passion. This does not mean that the other contestants do not deserve to win. It means that when you seem to be butting your head against the wall, you really need to see if what you are doing is really your passion because if it is, you should trust that you will break through.

Thus, in determining if you should trust your current path if things are not working out the way you would have hoped, think about:

1) What is your passion in what you are doing?

2) Are you driven by what you are giving to the world or what you will receive back?

3) Would things be different if you had $1 million or $100?

4) Are you driven by what you want to avoid? For example, working for a greedy corporation or to change the misery that people are suffering.

5) Are you expecting a certain outcome?

If we look at Terry, he was doing his passion not for changing the world or for achieving a certain outcome rather because it was what makes his heart sing. In giving his talent when he performed for 1 person, he showed that $100 or $1 million is not the issue for him because he is giving to the world rather than receiving.

As strange as it may sound, trust/passion does not include performing an action to change the world. When I got involved in personal growth, I wanted to make a difference in people’s life. In particular, I did a lot of work with children and teens because I wanted to make a difference in their lives. However, even though I seemed passionate about the work, nothing really worked out. I did have an effect on many; however, the next door never seemed to open for me. I ultimately turned my focus on my brand of personal financial with an emphasis on personal growth and doors have started to open. What was the difference? When I was driven to help, I did not step back to see which doors would open (I just tried to push them open). When I took a breath and a step back, the doors just seemed to open on their own. Wanting to help others and change the world is an admirable goal. However, if we are pushing to open doors instead of seeing where they open, we are driven versus trusting the process.

Trusting includes knowing that the world will be saved with or without us. It does not mean that we do not help, yet we join with others to see where we are each best utilized. For me, my work is helping people take responsibility over their finances and raising my own child. The work with children that I wanted to help with is being continued by a few friends of mine who I introduced to the right people in the field of child development. They will carry my work to bring a specific program to Cleveland because their youthful energy is opening doors for them that would no open for me.

Long-term Trust versus Short-term Hope that Our Financial Situation Improves

I was listening to NPR on show about universal health care. In listening to the report, I started thinking if we have universal health care what will change? We should have more people covered by insurance so that people should not worry as much about going to the doctor. Yet, do we need to do more than give insurance to people to improve health care?

Note, this article uses a health care example to show how trust and hope applies to our financial health. The premise is that when we trust, we take action while when we hope, we give our power away.

In discussions about universal health care, I find that personal responsibility is left out of the discussion. In thinking about the discussions, I notice how we give it away when we hope our situation improves instead of trusting it will. How I see it, universal health care is a hope that it will solve the problem where price is the issue. However, there is something missing in this and that is looking at what we can do or should do now (personal responsibility).

Part of the issue is the cost of insurance. However, part of the issue is also pinned on deductibles and co-pays. Per the proponents, proponents of universe health care say that we would not send tens of thousands of dollars on expensive procedures if we gave more people access to $60 to $100 doctor visits. Is the real issue deductibles and co-pays? I totally agree with this – treat the smaller issues before they become large issues. However, I also view insurance where the small costs should be covered in a budget because when small costs are covered by insurance, the profit, commission and administration costs of insurance would increase the cost of a doctor visit significantly. So, why do we need to provide preventative health care when in perspective, the costs are minimal to other larger health care costs (such as paying some money into an emergency fund instead of paying off credit card debt with high interest rates and fees).

It got me to thinking why do some people forgo the doctor visit (or emergency fund) when they know they have or could have a potential problem. There may be millions of reasons such as not having enough time, not having the money to pay for it or believing that the problem will get better. These solutions are short-term focused versus looking at the long-term (considering impact of what happens if it does not get better).

I have written in the past that struggle (financial or otherwise) makes it harder to get out of a situation because we give up trusting the situation will work and instead we focus on put out short-term fires hoping our long-term situation improves. The energy of putting out fires, keeps us from being able to thrive because our energy goes to the short-term fix instead of long-term solution. For the person with the medical issue, it may be a struggle between going to the doctor and putting food on the table. There may be a hope that the medical condition improves on its own, as other medical issues may have done in the past. The morale is that the short-term struggle with living day-to-day keeps people from having a long-term outlook of healthy living. This keeps the struggle going from one issue to the next, as time is spent overcoming one issue a new issue comes up.

I bring this up because even if we have universal health care, we will still leave other problems because universal health care does nothing to solve some of the long-term preventative issues (e.g., exercises, nutrition, etc.) that would go a long way in taking care of short-term issues (costs) due to poor health. It is easy to forgo that morning workout because our schedules are too hectic. Yet, the underlying issues is we are hoping some short-term work (go to work to catch up or spend time catching up with friends and family) to make our lives better versus looking at a long-term solution (proper eating and exercise) which can give us better vitality where we can get more done in less time.

To bring this back to trust and hope, when faced with a struggle our instincts are to focus on the short-term hoping the situation improves instead of focusing long-term solution and trusting. Financially, this may be living day-to-day and hoping for government to step in and help (with universal health care, lower taxes or more benefits) or for a company to offer us a better position with proper pay. As we focus short-term, we overlook long-term solutions which need to be done to get up on our feet and stay up (education, savings, balanced budget, etc.).

The key difference, in which situation we take either short-term (living day-to-day in struggle) or long-term (the solution), are trust. The more trust we have the longer-term focus we develop and the better off we will be. Trust is having an unshakeable belief that we can make it through a situation, thus our focus in long-term (our future). Hope is having a disbelief that we can make it through, so our focus is on what is lacking now in the short-term (here and now) because a better tomorrow may never come. We may think of hope as looking at tomorrow (future), yet it is more about what is going on today (here and now). Hope is about believing that today is not so good and that tomorrow is our only option. Trust, on the other hand, is about knowing a bump in the road is temporary so the focus is not as much about now (the bump in the road) rather the future (the road to recovery from the bump). Trust is about doing what we need to do to stay on our long-term course.

We may think of trust as giving up control and hoping. So what is the distinction? When we fly, we trust the pilot. Yet, before trusting the pilot we have actually done our homework that their airline is relatively safe (taken some responsibility on taking action on research). If we have not done our homework (known that flying is safe), we are hoping and praying that the flight will make it. Trust is doing what we can and letting the rest go. When we say that we trust that things will work out and do nothing, it is actually hope because everything is out of our hands. We are saying that we do not have any influence on the outcome, thus this is the only option is to hope a higher power (in one form or another, spiritual or government) to step in and save us. We are saved by doing our part and trusting the rest.

We may want the government to help us with things like universal health care and hope it actually happens. Yet even if we get it, it does not work unless we do our side of preventative health (do not get sunburn, over and over again; exercise; do not smoke, etc.). Trust is doing what we can about our health, knowing that everything will be alright because we have taken that first step.

Financially, when we are in a struggle, we need to shift from hoping our situation improves (questionable belief) to trusting that it will (rock-solid belief). This means taking action on a long-term perspective to get to where we want to go because we when we trust, we take action. When we hope, we leave it up to someone else to step in doubting we can make it happen on our own.

If we had a rock-solid knowing (trust) in our financial situation, we would pay for the $60-$100 doctor visit to ensure our long-term success instead of hoping the condition gets better because we are struggling day-to-day hoping our situation improves. Universal health care can help with some of the higher bills. Yet unless we take action on our own to go to the doctor and exercise, universal health care is only a hope that something happens to improve our health and finances instead of trusting if we do our part, the rest will fall in place. Financially, for people in trouble, this is doing our part to cut our spending, increase our income (improving our skills) and becoming a better risk candidate (to lower our interest rates), knowing that other things will fall into place to reduce our situation (or debt).

Thus, even before we hit the financial side of what to do, the key is to look at our beliefs. If we are hoping (doubtful) of a better financial future, we need to transform it to a trusting (knowing). We do this by seeing how much control we have in a situation and knowing that the universe has not stacked a deck of cards against us (where everything goes against us). Thus, look at your situation with a fresh set of eyes and list everything that you can control about your finances. If we are honest, there may be more that we can control than we initially thought of.

The Real Cost of a Loan

We all know by now the basic interest cost of a loan. If we have a $20,000 car loan at 7% interest for 5 years, the amount of money we pay back is approximately $23,800. Thus, the cost of the loan is $3,800 (interest paid) plus any origination costs (e.g., car dealers may add on another $50 or more for their services). For me, the cost of a loan like this is not that big of deal because it is fixed cost, relatively low interest rate and a large part of the interest rate is due to inflation.

When inflation is reflected, the cost of the loan decreases significantly. Assuming 3.5% inflation rate, the cost of the loan is broken down to $1,900 for inflation (purchasing power because $1,000 today is worth $1,035 next year) and $1,900 ($3,800 – $1,900), is for the lender’s profit to do the loan. The real cost of a loan net inflation reflects the profit for lender to reflect risk and lender’s opportunity to use money elsewhere.

For me, paying a little bit more in the future due to inflation versus paying it off now is a wash especially if wages are indexed for inflation because of the equivalent purchasing power (this ignores the possibility of earning more on investing versus paying off the debt). For example, for someone earning $50,000 and purchases a $10,000 car, he could pay off the car in year 1 (at 20% of his salary). Otherwise, if he received a 3.5% loan (reflecting inflation only) and got 3.5% raises, he could pay off the loan over 5 years using 4% of his salary each year ($2,000 in year one, $2,070 in year two, $2,142 in year three, etc.) to get back the cost of the care, 20% of his salary.

Many see this as the real cost of a loan when they sign the loan papers. However, I started to think about if there are any additional costs behind the numbers. For example, the cost of a payday loan is not only for the cost for the 1st two week period but also for subsequent periods because the principle is typically not be paid off in the first two weeks and additional loans are taken out until it is. This is similar to credit cards that charge 12% interest on $2,000 balance. The cost of the loan is not the $20 interest charge in the first month, yet the total interest paid (that can add up to $200+ if not repaid within a year) plus any late fees.

Yet, there are other costs that are hidden. For example, a loan reduces our flexibility that can relate in higher costs on our other financial transactions.

Future Loans – When we take out a loan, future loans may have a higher interest rates associated with them. For example, if we take a $300,000 mortgage that lowers our credit score because it is deemed that our debt to income ratio is too high, we can be charged a higher interest rate when trying to buy a $25,000 car because the bank fears that we may fall behind in payments.

Insurance – We all know by now that lower FICO score could increase our automobile insurance. However, I started thinking about the higher cost of needing lower deductibles. Many times, people forgo a higher deductible (or drop comprehensive coverage altogether) because they are living paycheck to paycheck and could not afford the cost of replacing their car if something happens (could they afford a $1,000 deductible if living paycheck to paycheck). Thus, they get a lower deductible, at a higher cost, to substitute for an emergency fund because it is hard enough to have one car loan let alone add another loan on top of it if their car got stolen or damaged.

Credit Cards/Pay Day Loans – If we are paying off a car loan, we are probably not saving (putting money away) for the next car or possibly even saving for an emergency fund. Thus, it is easier to slip into a situation where taking out a short-term high interest rate loan is needed because we were not in a position to save money. If we were ahead of the game, we could be saving a large down payment for the next car which adds another layer to any existing emergency fund. Thus, if something were to happen, there would be extra savings around (for next car) that can get through the situation if needed.

Opportunities – The more leveraged we are, the harder it is to make adjustments to our personal situation out of fear of impairing an already tight financial situation. For example, it is harder to quit a job (without another job in place) if there are too many loans to repay without enough savings to get through a few months of a potentially long job search. Or, if you want to start a business that needs 1 to 2 years to get off the ground, it is harder if you are maxed out financially.

I am not against loans. Actually, I took out a car loan because at the time I did not want to dip into my stock portfolio or savings because I wanted the flexibility to change jobs and possible buy a new home (did not want to use a large portion of my savings just in case I needed it). Yet, in 2 years when my situation changed, we bought a new home so I did not need as much in savings to pay a dual mortgage if I could not sell my current home. Thus, we were able to payoff the car loan early.

The point is that we need to be aware of our financial situation to see that if a loan is pushing us closer to the financial edge where the cost of that loan in more than the interest paid on it. The added costs are possibly higher because other financial decisions are dependent (possibly costlier) on what we do now (if we take on too much debt).