Sal's Corner

A Dollar Earned, $1.1 Spent

Yesterday I learned that the savings rate in the use for 2006 was the lowest in 74 years.  Yes, you have to go all the way back to 1932-1933 to find savings rates lower than today's.  And you know the reason for the low savings rates back then.  Yet the US is seen today as the most powerful country in the US, I tell you, everything must come to an end, or like they say, every dog has its day in the sun, and my guess is that our day is turning into dusk.  When looking at the news a few questions come to mind, for one, I do save, probably not as much as I should but I do not spend every dime I make, so it makes me wonder that if I'm on the positive side of the distribution curve, there is a lot of people deep in the hole.  This is not good news for our country, and its even more worrisome seeing the wave or should I say the tsunami of baby boomers retiring in the coming years.  Regardless of what your definition of a baby boomer is, if the 2nd world war ended in 1945 and the bulk of the soldiers returned to the states lets say a year later and started having kids right away, now assume that boomers start retiring at 60, that would put 2007 as the year where the oldest of that generation would start retiring.  The future for the US dos not look very bright, that much I can tell you.

Yesterday I woke up to the news that the company I work for, had record profits of something like $25 billion dollars, not too shabby huh?  Well, we were soon dethroned by Exxon reporting profits of $39 billion.  Everybody talks about big oil, but in reality the global economy is a big web where if you pull one end, the whole thing sways that way.

Lets talk about gold, according to what I read, from the technical stand point, gold should be headed higher soon.  You may be wondering if you should buy or add to your position, and my answer is: I'm not your financial or investment adviser.  I can tell you that I do believe gold will go higher and I plan to buy a little more gold over the coming days, but whether you should do the same depend with your level of comfort and how much you tolerate volatility.  Gold closed yesterday at something like $650 and according to the experts that is a good sign that gold is being accumulated.  Before I leave let me remind you that fortunes are made by taking big risks, taking big positions on any one item, so if you are diversifying and putting a small fraction of your savings in gold, I do not see anything wrong with that.  If you bet all of your capital in gold, then is a different matter, in a few years you could be seen as the guru that predicted the gold bull market, or you could be  a lot poorer and waiting for gold to recover.  As for me, I will not be the next guru, I just try to hedge my bets.

Have a great weekend!

The Number

This morning I started listening to a new audio book on my iPod on my way to work, "The Number."  I have listened the first 30 mins of the book, and I'm already hooked.  The book talks about the truth and decision time that we face when we get closer to retirement.  How much money will we need to live comfortable?  Twenty minutes into the tape I listened to some startling statistics that I'd like to share with you:

40% of those asked in the survey say they are saving NOTHING for the future

Americans set aside barely a penny out of every dollar they earn

In 2005 the savings rate was the lowest since 1959, and as a matter of fact it went negative.  Countries like Mexico are saving more than we are.

Of workers 55 and more, only 1 in 4 has invested assets of more than $100,000, 1 in 3 has less than $50,000.

One out of every 2 baby boomers will not have accumulated enough to match their current standard of living.

I found these stats eye opening.  So what's your number?  I may be sharing over the next few days tid bits from the book.  The last few days/weeks I have been thinking about all the problems that trouble our current society, and last week as I was cleaning my night stand, I saw a book given to my by my father-in-law titled "Collapse," I have not read it but it talks about the rise and fall of many civilizations and why this came to be.  I'm wondering whether we are experiencing the first stages of the collapse of the American Empire?  It may very well be, the excesses of our current society cannot go on forever, and I do not care what economists say, that this time is different and that trade imbalances do not matter, I have never seen any single person become wealthy by spending like a drunken sailor in non-producing assets.  Eventually the stuff will hit the fan.  The question is will we be ready for that, and what will our Number be?

Are You Paying PMI?

PMI is private mortgage insurance, and if you put less than 20% down on your house more than likely your mortgage company asked for this.  The reality is that you are throwing away your money by doing this.  When you pay PMI all you are doing is buying an insurance so the mortgage company gets paid if you happen to default on your loan for any reason.  The good news is that you do not have to pay PMI even if you have less than 20% to put down on your house, how? You may be wondering.  If you are about to buy your house, shop around for a loan that is known as 80-10-10, or 80-15-5.  If you are a first time buyer and this is not an investment property, the chances of getting this mortgage are good. 

So what is an 80-10-10, it is a loan where you put 10% down, and you get 2 loans, the primary loan is for 80%, and usually is a 15 or 30 year fixed mortgage, as of today, if it is not an investment grade loan, you should be able to get a rate around 6%.  The second loan is a little bit more expensive and is to cover the 10% remaining, the cost of this loan is about 2 to 3 pct points higher than the primary, but if you work out your figures, it is about the same amount of money you would be paying towards your PMI. So what’s the advantage you may be thinking? The advantage is that with the 80-10-10 you do not throw away your money as the second loan is equity you put in your house, besides, the interest you pay is tax deductible.  One thing I forgot to mention is that the second loan is usually amortized over 15 or 30 years, but it balloons at 10 years, huh? You may be saying, ballooning is a term used in real estate and all it means is that the balance of the loan is due after 10 years.  But think about it, at 10 years this amount will not be as overwhelming, and you may have enough equity in your home by then to roll this into your mortgage.  If you still have questions on this topic, just drop me a note and I will be more than happy to help you.

Is LendingTree telling the truth?

This morning as I was cleaning the inbox of my e-mail I ran across an e-mail message from LendingTree that was titled "Fond Farewell to Mr. Greenspan," the e-mail went on saying that Greenspan may be increasing rates today, and that before that happens you should refinance to avoid the higher interest rates.  To me this is a very misguiding e-mail to say the least.  If you want to refinance and want to get a 30 yr fixed rate for example, what Greenspan does today more than likely will have little to do with long term interest rates.  Something that is misleading and not true is that Greenspan can control the long term interest rates.  He has not been able to do so as hard as he has tried for over 18 months now.  The long term interest rates that dictate mortgage rates are tied to the supply and demand of US securities by Asian countries mainly.  So if your idea is to refinance and get a long term fixed rate, do not listen to LendingTree.  If on the other hand you want to get a home equity loan or line of credit or a variable mortgage, then it does not matter either, you may get your loan today at lets say 6%, but tomorrow after Greenspan increases rates no matter what you do, you rate will be 25 basis points of 0.25% higher. 

I think LendingTree is hurt for business since refinancing and other mortgage related transactions are down.  My honest advice is not to refinance to tap into your home's equity for the purpose of spending the money in non-productive assets.  Remember that whatever you spend your money on, if it's not producing money for you, it should be considered a liability and you should scrutinize these purchases in more detail.  So in summary: "Shame On You LendingTree"!!!!!!!

Since you have stayed with me reading this long I will share with you an investing tip.  I have said it before and will repeat it again, whatever you do, do not take my advice as a universal truth, do your homework, and research thoroughly before making any moves.  Japan's economy is on fire, and investing money on a mutual fund or ETF may be a safe and easy way to profit from this.  Look and see if your employer offers any japan mutual funds within your 401k, or look in Yahoo finance for ETF investing in Japan.  I think this trend will continue for a while and you are very early to the party.  On the other hand, I know I will sound like a broken record, but you have to at least consider buying gold or investing in a gold related fund.  Gold has been rising and with the state of our economy, I believe will continue to do so.

How do you fare with the millionaire next door?

I'm back from my thanksgiving break, I had a lot of fun and ate more than I should have.  This weekend I got my copy of the book "Empire of Debt," it should be required reading for most people.  The book is well written and with lots of historical information.  After reading it, your view of the world will never be the same, the book is a sobering anecdote about how the United States got to where it is right now, and how our spending ways may end up sinking us if we do not do something about it.  I realize that there are many schools of thought but when people is spending more than what they are earning, and the country is minding every other countries business, something has got to give.  I hope and pray the ending is not as drastic as the authors predict, but we should learn from the past to avoid repeating the same mistakes. If you are looking for a good book to read during the holidays, add this book to your wish list. 

On a related note, gold keeps making new highs, today gold closed above the $500 dlls mark, I have said since the beginning of the year that gold is a good buy for now and the next few years to come, by the time everything is set and done you will be quite happy you bought gold.  I have been buying coins and adding shares of GLD (ETF that tracks gold) to my portfolio.  Gold is right now in a bull market (i.e. gold prices will keep climbing for years to come), it will not be a smooth ride, and you will need a strong will to hold your gold and gold shares to the end.  When will it be time to sell? who knows, but a good clue will be when gold appears in the cover of financial publications or other weekly publications such as TIME magazine, and is widly advertised.

Going back to the title of this blog, you may know who Thomas J. Stanley is, he wrote the book "The Millionaire Next Door", and more recently, "The Millionaire Mind", he conducted a survey of more than 1000 people who earn $1,000,000 or more, today I want to share his results, he found that millionaires

- They live far below their means, and have little or no debt. Most pay off their credit cards every month; 40% have no home mortgage at all.

- Millionaires are frugal; they prepare shopping lists, resole their shoes, and save a lot of money; but they are not misers.

- 97% are homeowners; they tend to live in fine homes in older neighborhoods. (Only 27% have built their "dream home.")

- 92% are married; only 2% are currently divorced. Millionaire couples have less than one-third the divorce rate of non-millionaire couples. The typical couple in the millionaire group has been married for 28 years, and has three children. Nearly 50% of the wives of the super-rich do not work outside the home.

- Most are first-generation millionaires who became wealthy as business owners or executives; most did not inherit their wealth.

-90% are college graduates, and 52% hold advanced degrees; however, few graduated top of their class - most were "B" students. They learned two lessons from college: discipline and tenacity.

- Most live balanced lives; they are not workaholics; 93% listed socializing with family members as their #1 activity; 45% play golf. (Stanley didn't survey whether they were avid book readers, but I suspect that many are.)

- 52% attend church at least once a month; 37% consider themselves very religious.

- They share five basic ingredients to success: integrity, discipline, social skills, a supportive spouse, and hard work.

- They contribute heavily to charity, church and community activities (64%).

- Their #1 worry: Taxes! Their average annual federal tax bill: $300,000. The top one-tenth of 1% of U.S. income earners pays 14.7% of all income taxes collected.

- Not one millionaire had anything nice to say about gambling. Okay, but his survey also showed that 33% played the lottery at least once during the year.

And there you have it, I hope you find these tid bits of millionaire wisdom insightful.

One Step Closer to Financial Independence

Many of us dream with starting a new business, but the reality is that just a few decide to take the plunge into the world of entrepreneurship.  For many of us it is far easier to keep our "secure" 8 to 5 jobs, and we live happy collecting paycheck after paycheck every 2 weeks.  The sad reality is that in our ever changing corporate world, it is no longer any safer to be employed by a large, medium or small corporation, than it is to be self employed.  Self employment is not for everyone, but if you feel you are called, commit yourself to it, that is the only way you will succeed.  Life is not easy regardless of the path you take, there are always ups and downs, and and it is up to every one of us to get up and dust ourselves off after falling down.  Having a purpose will make it that much easier.  What and why are you doing whatever you are doing?  If you are still trying to figure out what business to start, I will try to help you by asking you a few questions, as yourself, What are you good at?, what activity or chore do you love doing?, what is important to you?, and finally, what is your purpose?  These are not easy questions and you may have to think long to get a meaningful answer.  Once you have answered these questions, set goals, write them down and keep a copy with you all the time.  It is amazing the power of writing goals, I discovered that when I did the following exercises suggested in a book.  Before you go to bed, think about a goal, one single thing you would like to get accomplished tomorrow, write it down, and keep a post it note or piece or paper with you so it keeps reminding you throughout the day about that specific goal.  The next day, tackle that goal from the beginning, do not leave your goal to the end of the day, as it is during the later part of the day that we start losing energy and become less focused.  I guarantee you that if your goal was well thought out and realistic, by tomorrow night you will have the satisfaction that you achieved something that you actually set yourself up to do.  My goal tomorrow will be to wake up at 4:30am and go exercise (not an easy task for me), and also finish an annoying model of a process that has been bugging me for a few days.  With respect to my family my goal is to compliment my wife on her cooking and thank her for giving up her work to take care of the house and the kids.  With my kids, I will read to Andrew and Marielle 1 book each before going to bed.

Before I sign off, I just wanted to comment on my latest book.  I started reading "The Art of Innovation," it is an interesting book, and worthwhile reading for those of use with an entrepreneurial soul, until tomorrow, take care.

Safely Prosperous or Really Rich

You have heard before "there is more than one way to skin a cat," and indeed there is.  You can spend hours or days, or months, heck even years reading financial advise books, magazines, etc.  The truth of the matter is that there are way too many books, with many different formulas or secrets to help you succeed.  To me this is similar to a diet, the successful one, is the one that works for you.  However, regardless of the preacher, there is one common factor, actually three common factors in every book, and I have mentioned them more than once.  I'm referring to the 3 D's, they are: Discipline, Determination, and Desire.  You got to want to save money, achieve financial freedom, or simply achieve the retirement that you dream of.  Second you have to be determined to do it, you cannot save one month and forget about it, you got to remain constant at any game in life, and by game I'm talking about any endeavor in life.  Third and may be the most important, you have to have discipline, I was just reading a column in Yahoo finance by David Bach, author of the automatic millionaire, where he says that to get rich his way, you do not have to be disciplined, may be he's trying to grab the readers attention, but do not fool yourself, the only place where success comes before work is in the dictionary.  If you want to succeed at something (including making money), you have to be willing to make sacrifices (time, material things, etc).  The other common theme in personal finance books is that they are able to make you think about what your life would be if you do all these things they say you should do.  I'm not trying to berate their advice, I do think that if you follow almost any decent book on the topic, from Suze Orman, to the Motley Fools, you will be better off than you are right now.  The point I'm trying to make is that it may be easier than you think it is.  If you have time and want a good book recommendation, read "The Richest Man in Babylon," it is the financial equivalent of "All I need to know I learned in Kindergarten."  It is fairly short book, and full of conventional wisdom. 

I mentioned at the beginning of the blog how there are many recipes for financial success, and this brings me to the title of the blog, I read about a year ago, a book by Howard Ruff, titled "Safely Prosperous or Really Rich," and the book mainly focuses on Howard's experiences, and it teaches you how you can chose less risk and build your wealth that way, or you can select to take more risks and do it the more entrepreneurial way and become really rich.  Either strategy, if followed will make you successful, but the returns through the less risky path may not be as great.  Not everybody has the heart and soul to be an entrepreneur, and the first part of the book (safely prosperous) is for these folks, the second part focuses on how to get really rich, and more than likely that will involve becoming your own boss.  Whichever path you choose, the common denominator will be the 3 D's.

The best of both worlds???

Recently I was reading that starting next year, companies will be able to offer a Roth 401K.  This is not mandatory and therefore the number of companies offering it will be limited.  I find this significant and you should get together with your co-workers and ask your company to make an effort to offer this.  This type of savings is similar to your current 401K, but the difference is that is after tax money, and grows tax deferred, the big advantage is that you don't pay taxes when you withdraw you money.  This is the great advantage.  We are probably at the lowest tax rate that we have ever been, so there is nowhere to go bu up.  By the time you retire taxes will be higher and therefore the government will get to keep more of your money.  Besides with our crippled social security, Medicare and pension systems, you know the government will use all the help they can get from us, the tax payers.  Go ahead and read more about the new Roth 401k, and more important, take action.  It is a really good opportunity to compound your money tax deffered and avoid paying taxes at a higher rate.

Sal

Were you raised with a silver or a plastic spoon?

The way were you are raised greatly determine what you become.  Your parent spending habits implicitly get passed along to you.  If your dad never thought twice before buying that Cadillac (even though money was tight), chances are that you think alike.  So should we blame our parents if we are a few thousand dollars in the hole on credit card debt?  Absolutely NOT.  What you do is your own responsibility.  We should never blame anybody for what happens to us except for the man in the mirror.  If you were raised to be a frugal individual, thank God and your parents for that, on the other hand if you were raised to be a spender, you should still be very thankful to your parents for many other qualities they gave you, but you should realize that it is never too late to change your habits.  The very first thing you need to do is get rid of any debt that carries an interest rate of more than 8%.  Do not go through life living the rat race where you work only to live day by day and have a bigger house, a bigger car, that new DVD player, etc.  and you never get to save for tomorrow.  I want to remind you again of a great book “The Richest Man In Babylon.”  Very wise advice and it comes as simple as you can get, it would be the wealth building version of the book “All I need to know I learn on kindergarten.”  Sit down and write your wealth goals, I can guarantee you that if your desire is strong enough the chances of achieving them are good.  “Whatever the mind can conceive, it can achieve.”

Go ahead, dream big, but chase your dreams with your actions, start spending today, and saving for the future.

Invest Time to Make Money

There's a saying that goes "It takes money to make money", this is not necessarily true.  When time is on your side you can become the wealthiest individual on earth with little effort.  I wish I could go back to the time I was 12 or 15 years old and I knew what I know right now.  Now I understand why people say that "Youth is wasted in the young".  Anyway, going back to the topic, in investing, time is more important than the amount of money, have you ever heard about compound interest?.  One dollar does not sound like much does it?, but invested at 12% with the earnings allowed to compound, it will earn $32 in 30 years, $1024 in 60 years, and $32,768 in 90 years.  I know you may be thinking 90 years is beyond the lifespan of most individuals (may be may be not), but the point is what I'm trying to illustrate, imagine that is 10 dlls instead of 1 and you get the idea.  To learn how fast your money grows it is handy to know the "Rule of 72", basically if you divide 72 by the interest rate you are earning on your money, it will give you the number of years your money will take to double.  For example at 6% interest, your money will double in 12 years.  Next time you think you can't become wealthy, think again, the more time you waste thinking about that the lower your chances will be.

So hurry up and put that first dollar in your savings account so it can start compounding.  Albert Einstein once called compounding, "The greatest mathematical discovery of all times", and he knew some about mathematics.

Starting tomorrow I will be posting one quote about success and excellence every day for the following month.

I'm writing earlier than usual because today is my son's birthday so if you please say a prayer for him.  I'm off to celebrate with him and my family, have a good one.