Today we have a guest post from the Car Negotiation Coach who takes a break from discussing car negotiation strategies and reveals how to combat common sales ploys.
 

Whether you’re buying a car,  jewelry, mattresses, or a big screen TV, you’ll most certainly be going head to head with a professional salesman.  Unfortunately for you, these folks practice selling every day.  In order to get a good deal it helps to understand the tricks they use to separate you from your money.   Let’s breakdown are a few of the more common sales tactics and how to defend against them. 
 
1.       Sales Tactic: Teaser Ads.  Before you arrive at the store the dance has already begun!  Many times you’ll find a teaser ad that’s too good to be true.  Stores advertise an incredible offer, but when you arrive it’s out of stock.  That’s because they only stocked a limited number of that amazing item in the first place.  Once you’re in the door, the salesman tells you they just happen to have a similar model with a faster processor, more memory, etc. for only $200 more.

Defense:  Realize this may be the case before you leave the house and don’t get your heart set on the item.  When you arrive at the store, maintain your objectivity and look for the best value even if your target purchase is not there.

2.       Sales Tactic: Assuming the Sale.  One of the first tricks salesman are taught is to make subtle, forward looking statements to help buyers subconsciously accept the terms of the deal.  For example, “Your wife will love this when you get home”, or “let’s try on some ties to go with your new suit”.  Mechanics are great at this technique.  You go in for an oil change and they’ll tell you they need to replace the filters and brakes…..and it’s not phrased as a question! Pay close attention the next time you buy something and you’ll notice these types of statements.   People naturally don’t like conflict.  Subconsciously it’s easier to go with the flow then to openly contradict the salesman and back out of a purchase.

Defense:  Don’t let a salesman convince you that you’ve bought something until you’ve made up your own mind.  Take your time and make a purchase on your own schedule, not someone else’s.

 
3.       Sales Tactic: Limited Offer.  The idea is to create a sense of urgency and prevent you from shopping around for a better price.  For example, a salesman tells you “If you buy this TV today, we’ll give you a free extended warranty, but the offer is good for today only.” 

Defense:  Take the time to evaluate the offer.  Do you have a cell phone or pda?  Excuse yourself for a minute and see if you can find any similar deals online.  Don’t be pressured to buy immediately unless it really happens to be a great deal.

 
4.       Sales Tactic: The Rebate.  Retailers budget for extremely low rebate redemption rates, sometimes even 20% according to Wikipedia.  They expect that the general public is too lazy to take the time to complete a rebate.  Doesn’t that sound crazy?  But think about how easy it is to procrastinate getting an original receipt, filling out the rebate card, addressing an envelope, etc.

Defense:  Read the fine print and understand what hoops you will have to jump through.  If you do decide to buy, make sure that you actually mail that rebate in! 

 
5.       Sales Tactic: Breaking down payments.  To overcome the “I can’t afford it” objection, a salesman may break down a figure into daily amounts to minimize the appearance of the overall cost.  You’ll notice this tactic used for big items like financing a car or a home mortgage.  They may say something like, “you can afford an extra $100 a month…it  comes to only $3 a day, same as a Starbucks coffee.” But that same $3 a day adds up to $1100 a year pretty quickly!

Defense:  Never be conned into thinking about price in terms of payments.  Always negotiate the total purchase price, payments are secondary.

 
6.       Sales Tactic: One-of-a-kind products.  Do you know why it’s so hard to comparison shop for mattresses?  It’s because you’ll never find the same brand and model of mattress at a competing store.  The mattress companies do this on purpose to confuse buyers.  Ever notice how hard it is to compare jewelry from one place to another?  They don’t want you to be able to compare apples to apples and shop around for the best price.

Defense:  Compare the key factors that make up the quality of the item you’re buying.   If it’s a mattress, compare coil counts and coil gauge…  If it’s a ring, compare the cut and number of karats, etc.

 
7.       Sales Tactic: “I bought this model myself”.   Whether or not this statement is actually true, the intent is to give you the impression that the item must be the best if the salesman owns one himself.  What they neglect to mention is that if they did in fact buy it, they probably got it at cost or used their employee discount to make it worthwhile. 

Defense:   Ask them how much they paid.  And are they willing to share that employee discount with you? Not likely…
 

When buying big ticket items, the key to getting a good price is to take a step back and evaluate the deal.  Realize that almost everything the salesman says is calculated and on purpose.   They are playing a game to get you to you to spend more money.  If you are aware this is happening, it’s much easier to keep your perspective and get a good deal.
 
Photo By: hahatango

Introduction

I think the picture captures the spirit of this month’s update… running along a lonely patch of highway, a good distance from the start but still a long way from the finish.  I have lots of ground to cover and even some ground to make up.

 How about you.  Are you crushing or cursing your goals?  I’ve been doing a little of both!

Progress Recap

April Goals

2010 Year to Date Results

May Goals

Feel free to add your goals in the comment fields below.  If there’s enough interest and traction, we may dedicate articles to your progress as well.

Also, please comment on your experience with similar goals or even your general reactions to my goals and progress.

Photo By: obiwonmakanubi

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

Success has been achieved!  A mountain has been scaled and a once inconceivable objective is now marked done and DONE!

Debt is largely accepted as normal and we’re so easily swept into that mentality.  Often we’re so numbed to debt as normal that thoughts of getting out of it don’t surface until it’s too late. 

Getting out of debt then becomes an impossible task.  It is overwhelming.  It is climbing a mountain, losing weight, and running a marathon at once.  Who can possibly do it?

Well… I know for a fact that YOU can do it.  And how can I make a declaration so bold?  Well, because the old adage rings true, if I can do it, so can you!

That’s right – sorry if I’m being a little circular in my presentation today – We have just in the last 3 days paid off the very last of our household’s non-mortgage debt! 

…Baby Step 2, CHECK!

Such an accomplishment deserves a story, so here’s mine.

In so many ways, I am the picture of average.  I went to college and signed up for a couple easy to get credit cards and I was off.  A super cool stereo was my first really big and really unnecessary purchase.

After grad school I had more than a couple grand on cards and a fresh student loan.  When my classmates were walking the stage, I was financing a motorcycle.  Soon thereafter, I had to furnish a new apartment – college digs simply wouldn’t do in the ‘real world’ and so by the day I showed up for work on the very first day of my career… I was roughly $35,000 in the red.  How could that be?  I was fresh out of school and my starting salary was only $34K.

Only my spending didn’t stop.  More furnishings, and more clothes, and more and more and more.  My debt balance soared to nearly $50k – I foolishly bought a new car when my trusty truck with 140k miles was totaled – before it struck me hard and fast.  I was not going to out earn my spending, especially when every raise was accompanied by a new lifestyle enhancement. 

Something had to be done…

That thought quickly passed with my next raise – a pretty good one actually – and I rethought my thesis.  Perhaps I could earn my way out…. But alas, that proved fool hardy for even as my salary increased the weight of my debt continued to crush.

Budgeting was a big help.  I was able to stem the flood of new debt and I stopped bouncing checks at the end of what felt like every month, but freedom was a lifetime away.

So in proper fashion, I bought a house got married and bought a larger house – keeping (and feeding monthly) the first house as a rental.  I was able to make small strides but I felt ridiculously paralyzed and materially aggravated with my situation.  I was failing.  At least that represents how I felt.

Then a completely incidental, totally disposable conversation in passing planted a seed that triggered a series of events that started to turn the tide.  Most will find this silly but those that know me well will say “bingo”.  A co-worker started talking about her husband’s iPod – something I was wholly against until she started speaking magic words…. Her husband downloads radio programs that he would normally miss while at work and listens to them on his drive to work…. Radio programs you say?  Like maybe even sports radio programs?!?! 

Hook baited, dropped, bit, and set.  Apple reeled me in that night as I went straight to Best Buy and put an iPod Nano on my Amex.  How ironic.

One thing led to another and I was quickly obsessed with finding more abbreviated radio programs to download and that’s when I stumbled onto Dave Ramsey and reluctantly added him to my mix.  Several days went by before I listened to the first show.  I was so sure that he’d convict my approach to finances and I didn’t want to hear it.  That is until one night, in a crappy hotel room in Louisville, KY having run out of sports talk shows, I decided to give it a go.  From the start I was relaxed by his manner and humor and damn there are some crazy broke folks out there.  I listened to several shows over the next couple days entertained, but convinced his message was not for me.  Until one day it dawned on me that his message was directed right at me.

I get that it’s hokey and clichéd but it’s the truest of stories.  I was hooked and within a couple months I sold the rental house and plucked some funds from savings and recalibrated my budget and designed a debt snowball tool and was a fanatic. 

A job transition and period of unemployment halted my progress for a spell.  We suspended the elimination process long enough to replace a failing car but once we got back on track, we were full tilt and here we are.

For years as I lugged around, card hopped, and debt consolidated my way in circles a single thought persisted.  Though I had literally paid it off tens of times over, I continued to view my credit card balances as representing that very first stereo purchase.  Every time I would think of my mountain of debt, I’d think of the purchase that really started it all.

So just this week as I signed the check cutting the debt cord do I feel like I FINALLY own that darn stereo.

And so that’s probably more narrative that I had intended – could you tell I got a little caught up?  But I’m excited about the path I’ve carved and the future I’ve now enabled.  I do think there are a few “how to” nuggets buried in the story to assist your cause.  But more than absolutely anything, I hope you take away the knowledge and understanding that YOU can do it too.  Because I have now done this – and I know how I once thought about this target – I’m certain you can too.

Build both your budget and resolve and get to it.  Meanwhile I’m going downstairs to blast some Zeppelin on MY stereo!

Photo By: rAmmoRRison

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Baby Step 4 – 15% Earnings Invested for Retirement

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

Baby Step 6 – Pay-Off the House

Today, we’ll examine Baby Step Seven.

Baby Step 7 – Save, Invest, and Get Rich

It’s still early.  The sun is barely denting the dark sky.  My wife is sound asleep and so too are the kids.  There is a stillness in the early morning that calls out to me.  Quietly I steal out of bed so as to not disturb and I make my way to the kitchen to brew a pot of coffee.  Caressing the warm mug, I step out onto the deck and have a seat.  In this calm moment I bask in my accomplishment.  Humble steps in my past have strung together to form a perfect now.  I own this home outright, a growing balance is set aside for my children’s education and what was previously a 6 month emergency fund swelled to well over 12 when the mortgage payment went away.  Sure, I still have wants… that new Harley would look fine in my garage and that trip to Italy may have been put off for long enough.  But those are just checks I can write when the mood strikes strong enough.  For now though, I’m content enough to sip my coffee, reveling in the notion that I am winning.  I have done something good for my family and damn it just feels good.

Ok, so I’m no master fiction writer, but the scene is one for which I long.  And even better, I believe that it exists within my future.

Once the house is paid for and you’ve already been contributing to retirement and college educations, you have the opportunity to amass great wealth simply by continuing to make wise decisions with what now amounts to a significant flow of fully discretional cash.

Your current income CAN make you wealthy!

What’s interesting is that when you start the Baby Steps your mind almost will not allow you to consider this kind of future.  It’s so foreign to our normal that is seems impossible.  But with each new step you’re carried closer and closer to an abundant life.

A life once well outside your reach, exists only Seven Baby Steps away.

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 7 

Plonkee Money – step 7

Dave Ramsey – step 7

Photo By: Leo Rynolds

I’ve shared before my opinion on handling frustrating customer service situations – rather than try to reason with a script reading, non-thinker in a cube half way across the country (perhaps half way around the world), if I’m materially aggravated, I’ll draft a letter to the CEO. 

Admittedly my results have been mixed.  The CEO from Six Flags was wildly dismissive, and the CEO from U-Haul delegated his duties to a lackey unable to understand my complaint, but the COO for TransUnion called me directly and invested 45 minutes in discussing the issue and providing me with his personal contact information if I ever experienced another problem with his organization.

So while my outcomes have varied, I’m satisfied in knowing I’ve done everything I can do.  I’ve escalated to the top.  Because I know most organizations have a dedicated team responsible for handling these types of letters, I’m confident I’ll either reach a pleasant conclusion or I’ll identify a company not worthy of my business.  Sorry, Six Flags and U-Haul, my dollars are not for you.

Recently I’ve encountered an interesting cross road between my penchant for letter writing and my motivation for driving this site.  While making extra principle payments against my wife’s student loan (in an effort to get out of debt), I’ve observed a dishonest tactic by Sallie Mae.  It seems that despite very clear labeling, Ms. Mae likes to treat large principle payments as advanced monthly payments – interest and all.  In this way, a large payment pushes out the next monthly payment date (forcing you to pre-pay interest) rather than unilaterally attacking the principle loan balance.

I personally find this a dishonest practice at best and malicious theft at worst.  I’ve also found it cause for another round of letters.

As a set up to the letters below, this nonsense happened just recently (March and again in April), but it also happened multiple times in the fall of 2008 – before my job transition.  So below, to demonstrate a full context, I’m providing copies of my letters from just last week, as well as, the letter from 2008.  Finally, to further illustrate my point, I’ve provided the form letter I customize each time I submit an additional payment – you tell me how they missed my intentions.

How a lending institution could screw this up so badly is beyond me.  How they could do so when provided such clear direction to the contrary is another matter altogether.  Face it, my messages to you only resonate louder against the backdrop of these examples – Debt Sucks.  If sweet sounding Sallie Mae is so eager to screw you over, can you imagine what other lenders have in store for you?

Enjoy, and let me know what you think below:

Letter to CEO Albert L. Lord – April 2010

April 12, 2010

Albert L. Lord – 

I am writing to your office a second time to share my continued disappointment with the significant limitations demonstrated by your organization.

On a number of occasions I have submitted additional principle payments against my wife’s outstanding student loan (account number ##########).  When these payments are processed, they are routinely processed incorrectly and recently a large payment was not credited at all.

My previous correspondence dated December 30, 2008 (enclosed) dealt with the repeated failure of your organization to recognize clearly marked checks as payments against the principle balance.  Instead of reviewing the account records – which so clearly demonstrated a “next payment due” date several years into the future – my wife was met with a terse phone call explaining “her error” and a promise to contact me directly to “help set me straight”.  Not surprisingly I was never contacted and the account information on the web was quickly corrected.  Apologies and/or acknowledgements remain outstanding.

True to form, your organization has screwed up again.

• On March 14 a check for $1000 was mailed and cashed on March 22.  This check and accompanying letter (both enclosed) were clearly marked as principle payments yet processed as monthly pre-payments (screen shot enclosed demonstrates “next due date” of January 2011)
• On March 18 a check for $3036 was mailed and cashed on March 25.  This check and accompanying letter (both enclosed) was not credited against my wife’s account until at least April 9 and not until the payment had been verified multiple times by my wife.  This payment too has been processed as monthly-pre-payments (screen shot enclosed demonstrates a ridiculous ‘next due date” of February 2013)
• During my wife’s follow-ups she was told many conflicting stories.  She was told that the payments were treated as principle payments with no explanation for what your website demonstrated.  She was also told that she was responsible for all interest on the loan regardless of how quickly the loan was paid.  Clearly demonstrating errors in both your recruiting and training processes.

I am mailing a check to your organization this week to pay our remaining balance and forever close my wife’s account.  I require that you promptly and accurately process this payment – steps which have represented significant challenges to your operations team to date. 

As an accurate payoff balance is impossible to glean from your site, given its design to assume interest pre-payments, I also require a prompt return of any overpayments which may be unwittingly included.

I expect all overpayments and documents confirming the closure of this account to be express mailed within 72 hours of the time my check is presented for payment.

In the interest of full disclosure and to help inspire accountability on your side, I will be posting this letter and your response (including its timeliness) on my blog.

Attached you will find the enclosures referenced above.  Please contact me or the loan holder if there are questions, meanwhile, I await your prompt response.

Letter to Payment Center and CEO Albert L. Lord – December 2008

December 30, 2008

Sallie Mae Payment Center – 

HELLO!!!!

Please consider this letter a wake-up call to help you overcome a troubling level of incompetence.

Allow me to explain.  On two occasions in November 2008 I provided checks with accompanying letters indicating that my payments be treated as additional principle payments – I am resubmitting those letters for your re-review. 

However, when viewing the account on-line my payments have been treated as pre-payments – which includes the pre-payment of interest.  A losing practice if ever there was one.

To address this issue, I require the following 4 actions on your part:

1. Immediately adjust the accounting for my additional payments according to both my current and previous requests
2. Make the necessary interest credits to the account
3. Provide me with a detailed accounting of the above steps
4. Provide me with your preferred method of communicating an intent to make additional principle payment as black and white printed letters are not sufficient

 Enclosed please find copies of my original letters from November.  Please contact me or the loan holder if there are questions, meanwhile, I will await your prompt response.

 Additional Principle Payment Template

March 14, 2010

Sallie Mae -

Please credit the full amount of the enclosed check as an additional principle payment against my wife’s student loan.

• Loan Number:   ##########
• Loan Holder:      wife’s maiden name/wife’s married name
•  Current Payment Amount:         $1,000.00

Upon posting this payment, please provide loan holder with an updated payoff balance.

Please contact me or the loan holder if there are questions.

So what do you think?  Is Sallie Mae sinister or just inept?  Am I overacting?  How do you think they’ll respond?? 

I’d love to hear your response and I promise to share Sallie’s response with you.

 Photo By: jk5854

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Baby Step 4 – 15% Earnings Invested for Retirement

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

Today, we’ll examine Baby Step Six.

Baby Step 6 – Pay-Off the House

I find there is an elegant symmetry in Ramsey’s Baby Steps.  In step 2 you use a snowball principle to eradicate your debt.  You deploy minimum payments in multiple directions while focusing your heavy firepower against a single target.

The second half of the Baby Step set works in much the same way.  You see, Steps 4 and 5 and 6 are meant to be exercised concurrently.  A portion of your income is directed against your retirement – consider it a 15% minimum payment.  Similarly your college savings are incremental deposits against a future need – the age of your children and the amount already saved will help inform that ‘minimum’ payment.

That should leave you with a hearty sum that you begin to focus against what is often considered an unthinkable goal – paying off your home mortgage.

Granted, paying off your mortgage will not happen overnight.  That is why you need to engage the retirement and education savings at the same time.  But it is an attainable goal.

Consider some popular strategies for attacking a home mortgage:

• Make half payments every 2 weeks rather than a full payment monthly.  The trick here is that a 52 week year has 26 two week intervals which equates to 13 payments.  One payment more per year than the 12 month calendar.  On average, this approach will shave 6-7 years from a traditional 30 year mortgage.
• Many folks are electing for a 15 year mortgage rather than the traditional 30 year term.  Given how mortgages are amortized, cutting your term in half does not equate to a doubling of your monthly payment.  Often it is only a couple hundred dollars.  An easy increase to handle if you’ve eliminated your consumer debt.
• Extra payments are valid if you have an irregular income stream or are unable to refinance into a shorter term.  Pay raises, gifts, bonus payouts, etc are easy ways to ply additional dollars against your mortgage.
• Tag Team… imagine paying half payments every 2 weeks against a 15 year term loan and tossing a healthy chunk of your annual bonus into the mix as well.  Suddenly 30 years looks like 15 which looks a lot like 9, which can begin to look even smaller.

In reality, if you’ve eliminated your consumer debt, it may not be unrealistic to shave your mortgage payoff down to a 7 or 8 year term.  When I consider that we’ve already been in our current home for nearly 5 years, I wish I had applied some of this thinking back in the day.

But the beauty is that rather than lamenting previous decisions, I have the freedom to embrace a new decision today.  And I’m certain that once I finish step 2 this spring and then step 3 over the summer, I’ll be excited to start pushing my snowball to where I want to take it rather than to where I have to take it.

Paying off the house… now that’s just cool!

Stay tuned for the final installment in this series:

Baby Step 7 – Save, Invest, and Get Rich

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 6

Dave Ramsey – step 6

Photo By: chrisinplymouth

Introduction

Hey Team, I’m a little late putting this one in motion.  Last week took an unexpected turn but I’m not complaining.

My goal-based activity is move along but at a slower clip.  I need to get started or I’m going to embarass myself. 

How are you doing??

 Progress Recap

March Goals

2010 Year to Date Results

April Goals

Feel free to add your goals in the comment fields below.  If there’s enough interest and traction, we may dedicate articles to your progress as well.

Also, please comment on your experience with similar goals or even your general reactions to my goals and progress. 

Photo By: Separation

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

As a validation – and an excuse to give a link back to serveral sites that are helping me along the way – here are the carnivals and round-ups I’ve participated in over the last month.

The Wisdom Journal’s roundup

Carnival of Debt Reduction

Money Hackers Carnival

Carnival of Personal Finance

Best of Money Carnival

Festival of Frugality

Best Financial Planning Articles of the Week

Fiscal Geek’s Weekly Roundup

Debt Free Adverture’s Roundup

Consumer Boomer’s Roundup

Carnival of the Road to Financial Independence

The Wisdom Journal’s roundup

Debt Free Adventure’s roundup

FiscalGeek’s roundup

Carnival of Financial Planning

Fiscal Geek’s roundup

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Baby Step 4 – 15% Earnings Invested for Retirement

Today, we’ll examine Baby Step Five.

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

This may be my favorite single step.  Not because I don’t want to experience the benefits accrued to the other steps – they are all winners – but rather because of what it represents.

I’ll explore this step by elaborating on what this step represents to me.

• Assumed Affluence – face it, if you’re writing checks to send your child to college then you’re doing something right.  You may not be swimming in money, but you’re surely not bouncing checks and worrying about the mortgage each month.  Something may be keeping you up at night, but if you’re taken care of business on this front then it likely is not your cash flow position.  Bear in mind, I’m not saying affluence to suggest flash.  Rather, this is an attained position of financial comfort.
• Love, Sweet Love – who wouldn’t want a couple extra hundred dollars in their budget each month?  That may represent a couple nice nights out with the spouse or access to the latest high tech gadget or (for many) an enhanced car payment.  Or, it could be quietly tucked away in an act of sustained selfless discipline and devotion aimed at your child.
• Shoulders of Others – there’s a certain truth in the idea that each generation wants their children to achieve more than they did.  I know that my father loves me in the way he is so genuinely proud of the success and opportunity I’ve had in my life and career.  Through the years he has made sacrifices to help me along my way.  As a living tribute to his example, and with the hope that my child will one day see my love echoed back onto them, I want to shoulder as much of their educational costs as possible.

The tools for executing against this objective or step are varied and I’ll supply a handful of links to help inform your (and my) research.  However, the mechanics are less the point for this Step – at least in my mind.

Resource Links:

What is a 529?

Comparison of College Savings Plans

What is an Educational Savings Account (ESA)?

Whereas the previous steps have progressively influenced the relative comfort of your situation, In Step 5 you can begin to redirect the future path of your children.  Imagine them embarking on adulthood with no debt.  For so many of us, that’s the starting point we’re still struggling to achieve oh these many years later.  That’s why I want to advance my child’s starting point as far as possible.

That simply is worthwhile.

Stay tuned for upcoming installments in this series:

Baby Step 6 – Pay-Off the House

Baby Step 7 – Save, Invest, and Get Rich

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 5

My Two Dollars – step 5

 Dave Ramsey – step 5

Photo By: fabio funkyb

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Today, we’ll examine Baby Step Four.

Baby Step 4 – 15% Earnings Invested for Retirement

I like to think that when you engage Step 4, you are finally able to deploy your money against your best future.  Sure, playing off debt is a positive action but in Step Two you are simply admitting and owning up to previous mistakes.  Your money is still being used for the enrichment of others. 

In Step 3 you are at least retaining your money, but it is being stacked as defense against an unknown future.

However, when you start socking away 15% of your income against retirement… well, now you’re thinking, planning, and acting with the future in mind.

But Investing is different from Saving.  Money market accounts or even CDs are fine instruments for saving your money – perhaps your emergency fund.  In these accounts you are assuming no risk and ensured only a small return.  These accounts are solely intended to preserve the principle, which make them perfect places to store the money you expect to need within a short time horizon.

Investing is different in that it does assume some risk and more frequently offers a larger return – the stock market is the classic example of investing money.

Now let’s be honest.  I’m not an investing guru and I won’t play one on this site.  However, I will provide some guidelines I use to help plan my investing activity.  Since we’re talking retirement here, I’ll lean in that direction:

• Start with your employer 401k match, if this is an option for you.  Free money is rarely a bad place to start and with many employers matching at least 50 cents per dollars, you’re starting with a 50% gain.  That’s a smart return even before you really start investing.
• Select a Roth 401k if offered by your employer.  If this is not an option, then contribute to the traditional 401k until you max the employer match. 
• If you’ve maxed your employer match but not your 15% target, then direct the balance into a Roth IRA.

“Roth” products – 401k or IRA are beautiful in that they grow tax free, whereas, a Traditional 401k or IRA is simply tax deferred. 

The difference is initially subtle – Roths are funded with after tax dollars while Traditionals are funded with pre-tax dollars.  Those characteristics then trail the life of the product.  Monies accumulated in a Roth are not taxed on the way out because your contributions were taxed on the way in.  Contributions to Traditionals were not taxed on the way in so they are subject to taxation on the way out.

Stated another way, imagine you’re 65 and have a 401k worth $1,000,000.  Would you rather have already paid taxes on your income years and years ago when you were making a modest living (Roth), or would you rather be faced with a tax bill on the cool million – your contributions and growth?

Once you’ve selected your investment tools or structure, now you must consider the investments themselves.  I’ll resume the bullet list here with the same caveat, I’m no Buffet.

• Diversify your holdings – stocks or bonds are fair starting points but I tend to shy away from bonds and individual stocks.  Rather, I prefer to diversify across different types of stock by purchasing different types of mutual funds – Large Cap, Small Cap, International, Value
• Know the fund – pick a fund or fund family with a long track record of success relative to its peers
• Watch out for fees – many funds or managed accounts add significant fees which can significantly impact your overall return.
• Know what you’re doing – invest in what you understand, you may never be a stock market expert but you should never follow someone’s advice on blind faith.  Do a little homework, read the literature, and be an informed investor.
• Set it and forget it – Investing is a long term game.  I personally almost never review my investment statements.  Lately with the high market volatility I could not help but notice the decline and recent increases but they’re only numbers on a page and do little to impact my day to day.  I know I won’t need this money for many years so what happens day over day or even month over month is of little consequence to me.

And that’s the key to Step Four – use a portion of today’s money to fund a wealthy tomorrow.  It’s what smart people do, it’s what rich people do, and that should be enough to validate that it’s what you should do too.

Stay tuned for upcoming installments in this series:

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

Baby Step 6 – Pay-Off the House

Baby Step 7 – Save, Invest, and Get Rich

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 4 

Enemy of Debt – step 4

DoughRoller – step 4

Dave Ramsey – step 4

 Photo By: L’imperatrice Nocturne

Welcome back to our study on the Views of Money.  After resetting the contextual baseline, we’ll jump into Part 2 Net Worth, Balanced Perspectives and Opportunity Cost

Money is important.  It is the lifeblood of our society.  It is our economy.  In the context of our modern culture it is a requirement for our day to day living.  If you doubt this notion, imagine yourself penniless for the next 30 days.

Money also is dynamic.  It is huge in the context of government spending programs or corporate initiatives.  Equally so, it is small measured against our next meal or gas tank top-off.  Money is even tiny as it collects nightly in our change cup.

A former teacher oft shared a story of 3 blind men describing an elephant.  The man at the trunk reported an animal significantly different from those reporting from the side and tail of the animal.  All reported a piece of the truth but not a whole truth. 

Money operates in our lives in a very similar manner.  Many of our views on money are technically correct, but lacking a grasp of the greater whole.

Across this two part series I want to reconcile several views to ensure that we keep each in proper balance.  If we skew too hard in one direction we’re likely to end up with a distorted picture of reality. 

The key to our money, as with many things in our lives, is proper balance.

Today we will examine:

View 4 – The Long View – Net Worth Planning

View 5 – Mosaic View – Balanced Perspectives

View 6 – The Lost View – Opportunity Costs

Please visit Part 1: Objective Setting and Simple and Advanced Cash Flow if you missed that entry.

View 4 – The Long View – Net Worth Planning

Once the art of the Mid View (Annual Planning) is mastered, it is not difficult to begin expanding the annual view into 5, 10, or even 20 year horizons – think new(er) car, new house, college savings, and retirement.

With your mind now wrapped around larger and life altering objectives, you are less likely to direct your unallocated cash flow towards acquiring a new monthly payment, first because your mind resists such shortsighted thinking and second because there are no unallocated dollars.  The planning and aspirations are too focused to allow otherwise.

As with previous views, you may still feel constrained by your income.  But the constraints are positive rather than negative.  Instead of feeling constrained against being able to lavish yourself with new gadgets and trinkets, you are much more likely to feel constrained against making large debt payments or maximizing your IRA and 401k contributions.  The beauty is that as you are able to overpower those constraints you are propelling yourself forward rather than further tethering yourself to fixed station.

Net worth is the scoreboard for your long term financial success.

View 5 – Mosaic View – Balanced Perspectives

There is a certain evolution of thought as you progress from view to view but there are important lessons to carry and retain as you progress.  In many ways it is like using the addition, subtraction, multiplication, and division fundamentals you learn in grade school to master the principles of geometry, algebra, and even chemistry and finance you engage later in your education.

Another example may be a highly successful business that monitors its stock price (think net worth) by reporting and managing its cash flow statements, balance sheets, individual store sales amongst a bevy of additional reports and performance matrices.

The key message here is that we need to be nimble and versatile across these views.  At times, we may need to gauge a purchase or investment across multiple perspectives. 

Borrowing from a personal example, I am currently in the process of refinancing our home.  While I am lowering my interest rate I am also shortening the term on my loan from 30 to 15 years.  This move has implications across all views.  My monthly payment will actually go up a bit which impacts Views 1-3, but the condensed time horizon will play a significant role in advancing view 4.

View 6 – The Lost View – Opportunity Costs

If View 1 is our starting point and most immature (in terms of thought development) view, then the mastery of Views 5 and 6 are our most evolved judgment criteria for driving our financial activities towards a successful outcome.

Opportunity Cost is a compelling and engaging concept but sometimes hard to fully grasp.  The idea is that, unless you are a member of Congress, you can only spend a dollar once.  However, when you hold that dollar, you have many potential opportunities for its deployment.  Opportunity Costs suggest that the cost of an item is the sum of its actual dollar cost AND the cost of the lost opportunity had that dollar been spent elsewhere.

For illustrative purposes, here’s an extreme example.  Let’s say that in the early 80’s a spent a couple dollars to buy a hotdog rather than an aggressive option for Microsoft stock.  You could argue that I had consumed a million dollar hot dog. 

That may be a fun example, but it is not realistic because the ballooning value of Microsoft was unknowable at the time.

To really work the concept, you have to consider your actual and viable options.

Consider a more realistic example whereby you decide to spend a $1000 bonus check on some cool new electronics gadgetry. 

Instead, you may have directed those dollars against a high interest credit card, placed it in a mutual fund, or applied it against your outstanding mortgage balance.  Each of these options has an interest component that makes the comparison math easy.  For example, a 10% interest rate on the card suggests that you’ll accrue $100 interest waiting until next year’s bonus.  Similarly, the investment and mortgage prepays could be calculated but it is easy enough to grasp that the $1000 bonus has an exaggerated value when considered against three likely alternative deployment opportunities.

Putting it all together

Consider now another example.  You positioned yourself in a job or career better aligned with your values and income targets and are now receiving your first annual raise and bonus.  What do you do?

• View 1 is addressed with the job selection and income
• View 2 understands our cash flow has increased and immediately looks for deployment options
• View 3 recognizes our annual budget has increased and provides a ‘capture’ point for the new inflow
• View 4 envisions how these new dollars can best drive the future you envision for your family
• View 5 finds harmony amongst the varying perspectives
• View 6 makes the best and most informed decision

 Without the full view we’re much more likely to make an impulse decision which often is a suboptimal decision.  Meanwhile, chasing an input through the full range of perspectives does not ensure absolutely that we’ll each make the same or even the best decision.  We each have our own visions and dreams, and our own personal contexts.

And that in the end is part of the beauty and mystery of that dynamic lifeblood we call Money.

Photo By: shadphotos

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