Blanchard Warren, CFSL
The first, and perhaps the
most important step, is to live within
your income. In today's
society, this may seem like a foreign
concept. It wasn't always
that way. In fact, prior to the advent
of credit cards in the
1950s, living within one's income was
commonplace. About the only
credit available was a home
mortgage and a car loan. The
terms of these loans weren't as
liberal as today. There was
no 30-year mortgage. You couldn't
finance a car for more than
three years. Sure there were store
charges, but they weren't
revolving charges. They had to be
paid for at the end of the
Homeowners made do with what
they had. Appliances, cars,
etc. were repaired rather
than replaced. If money weren't
available for an item they
wanted, or even needed, the mind
set was to wait until they
could afford it.
With the economy and
unemployment as good as it is today,
many Americans think only of
the present rather than their
future needs when spending
their income. The feeling is if we
can pay our debt service
each month everything is OK. So
we continue to create new
debt until we can't afford any more
debt. Unfortunately, some go
past this point without a thought
of the consequences until it is too late.
Most consumers fail to
realize is by having credit debt,
including a mortgage, they
are seriously jeopardizing their
ability to create retirement
wealth. The fact is most Americans
are only two paychecks away from insolvency because of
their spending habits.
The second step is to pay
yourself first by paying off all your
debts, including your mortgage, before investing or even
saving. This is an unique
concept to the financial planning
Paying off a credit card
with a 15% APR is the same as
receiving an equivalent
return of 15% from an investment. In
addition, this return is
guaranteed. Ask your stockbroker to
guarantee the percentage of
return on any stock he recommends.
Using the model of the
average American family that I use in
my seminars, I show that
this family would realize a 37.13%
return on their money by investing in their debt of $169,341 first.
Furthermore, let's assume
this same family invests 10% of their
monthly gross income ($427) to get rid of their debts first
rather than investing it in an investment vehicle yielding a 10%
return. The long term result by investing in their debts first is
they would build a retirement nest egg of 1.8 million dollars
over the same the same period it would have taken them to
pay off their mortgage in the normal way. The person who
invests first would accumulate about 500 thousand dollars,
700 thousand dollars less. Both families established a six
month cash reserve.
After all your debts are gone, the money you were using to pay your debts is
now available for investing. To become debt free can take from 5 to 10
years, many years before the time required to pay off the mortgage alone.
What also is important that by freeing yourself from debt you are not
vulnerable to financial misfortunes such as a loss of income. You probably
could survive on unemployment compensation if necessary.
The third step is to create
wealth by investing your money in
low risk investments over a
long period of time. A debt free
60-year-old may not have
enough time to build real wealth.
However, without debt even
the 60-year-old still can enjoy a
debt free lifestyle. On the
other hand, someone in their
thirties or early forties
could conceivably amass over one
million in retirement
wealth. One million dollars is the nest
egg amount USA Today said on
May 8, 1995 that the average
Baby Boomer earning $50,000
annually today will need to
retire to enjoy the same lifestyle they had before retirement.
It is recommended you invest
for the long term using dollar
cost averaging. This means
investing the same amount of
money each month no matter
what the market does. It may
be wise to invest in an
indexed mutual fund such as the
Standard & Poors 500 that
returned 14.3% during the period
from 1985 to 1995.
My intent is not to give
investment advice since this isn't my are of expertise. Rather, I am suggesting a way to invest for
the long term without having
to learn the ins and outs of
investing in the stock market.
The rewards by following
these three steps are immeasurable.
Think about how much
disposable income you would have
when you have no debts. I
suggest you calculate the amount
of money you spend each
month on debt payments. This
exercise might prompt you to
really consider becoming debt
free. Without debts perhaps
your life would be less stressful.
Your marriage and family
life might be more enjoyable.
You then could build wealth
for a happy, comfortable lifestyle.
Start today by living on
less than you earn. Next pay off all of
your debts before saving or
investing.. Then build retirement
wealth by investing the money you were putting towards debt
payments in conservative, low risk investment vehicles.
Remember most Americans believe that "everything will just work out." It
doesn't work that way. You must take action to build real wealth and to
achieve financial freedom.