Chapter 14 - Nest Egg

Where did the term nest egg come from? Seems a strange term for your estate value yet it carries a very real comparison. Though both are inherently strong in their structure, in the wrong circumstances both may be considered very fragile.

So you followed the rules as best you could. You maximized your savings and minimized your spending. You contributed to your retirement plan. What now? When do you have enough to quit working and enjoy your 'golden years'?

Those questions are difficult to answer and you may have found that there are few specific answers in the media. You can find all sorts of formulas and perhaps can even arrive at some comfortable amount of money that will meet your needs. But for how long? Will you be sentenced to live forever under the veil of fear that one day your money may be gone while you still aren't (gone).

Generally accepted rules suggest that after you reach fifty years of age that you should subtract your age from 100 and that portion of your nest egg should be invested in bonds and after keeping some cash for living expenses the balance is invested in stocks. A bit of a problem arises with this concept in our day because the rules that make the rules have changed and the rule may not be changing quite fast enough. Here's the problem. In all likelihood you will retire sooner and live longer than the generation ahead of you. Retirement for you may reasonably be measured in thirty to forty years.

That being said, taking your nest egg home and hiding it under the mattress is a sure fire way to be sure you outlive your money. I believe a best bet for your nest egg is to move your safety horizon way out. Keep your nest egg actively invested primarily in stocks as we discussed in the previous chapter well into your retirement. The stock market over any 10 year period out performs bonds on an order of double. When inflation is factored in, over the long haul bonds and cash may keep a steady stream of income flowing your way year after year but that steady flow of income will buy less and less with the passing of each year.

Nest eggs are tricky work. They take discipline, timing, research and responsibility. First and foremost protecting the principal is paramount. Yet protecting the principal while earning a livable and inflation protected return is equally important to give yourself the lifestyle you worked hard and saved for most of your life.

How much do you need to be comfortable while not working? Sorry, I don't know. There are too many variables. However, we can readily calculate a pretty good estimate. How much after tax income do you think you need to live the lifestyle you want? Don't forget to consider income taxes unless you are wholely invested in tax free bonds.

Take the income you will require and divide the amount by 5%. Five percent is a reasonably safe yield expectation on most investments. Understand that you will probably earn more, more like 10%, but that excess must be left in your investment account. The excess becomes a part of your capital protecting you against inflation. You will have more principal yielding 5% allowing your income to grow over the years as prices go up.

The calculation becomes very simple. For example assume income must be $25,000 your first year (of freedom). Divide $25,000 by 5% and the size of your next egg must be $500,000. Over time you will likely earn 10% and the balance you don't spend increases the $500,000 to $525,000 which next year allows $26,250 income. The third year your principal is $551,250 which allows $27,600 income. And so on. The magic is in allowing part of your return to be reinvested.

I am certain that you probably exhaled after reading the paragraph above and now despair of ever being able to not work. Slow down! Remember the $500,000 in the example is not necessarily simply your investments. Perhaps your home has a great deal of equity and moving to a less expensive place can yield resources that can be included in your principal. Remember to include you Social Security income in your income calculations, and don't forget to make a realistic income calculation based on your new freedom based lifestyle that probably will not require many of the fixed and variable expenses required while you are working.

Now we come to the end of the story. You now know everything you need to know to prepare yourself for a financially stress free life leading to a comfortable time when you do not have to work nor be dependent on anyone else.

Chapter 13 - Stocks

By Richard Valentine Reily, author of Gregory's Hero.

So, you saved up some money and are itching to buy some stocks. Good for you! Now you want to know the rules, right? That's an easy one: buy low and sell high. Easy to say though most folks find it hard to so since most buy when the market is rocking and rolling (high) and sell when the market tanks (low) and are happy to escape with only the thrashing they got. Whew!

Real rule number one: diversify your securities purchase across as broad a swath of the market that you can and then forget-about-it. Rule number two: refer to rule number one.

The greatest threat to the value of your investments over the long term is trading. Market fluctuations, trading fees and taxes on gains. Don't pay any of them. Make a serious long term well researched investment decision and stick with it.

This is not however to say that you should never revisit your decisions or check out how things are going down at the investment account. You should know and one of the surest methods is the two hundred day moving average. Using an online financial website will allow you to create graph of the two hundred day moving average price of your investment. When the value of your security drops below the two hundred day moving average by more than 5%, sell it. When it moves back above the two hundred day moving average by more than 5% buy it again.

The two hundred day moving average method lets you lock in large up moves and limits your down moves by moving you out of the security before it falls further. Remember, we are not talking about the inherent quality of your investment, we are talking about the movements of the overall market that forces movement in the value of your investment.

What to buy? Consider an exchange traded fund, also known as an ETF. There are many ETF's that cover most of the investing world including most companies and industries both domestic and foreign. What is an exchange traded fund? At its simplest it is a mutual fund that is traded like a stock with a significantly lower management fee. There are some excellent books available that will give you an in depth understanding of the instrument.

ETF's are available to mirror most indices, industries and markets. You can buy a broad basket of stocks in one share of an ETF to give you exposure to any index, industry or market you want to invest in. An ETF is a perfect vehicle to diversify your investment and limit your costs.

If you decide to invest via ETF's, how many do you want? Probably at least six and no more than eight. Properly selected you can pretty much invest in every company on earth via eight well selected ETF's. Once you have selected and invested in them, track them on a two hundred day moving average, forget about them most of the time and buy more whenever you have the money.

Chapter 12 - Investing

By Richard Valentine Reily, author of Gregory's Hero.


Savings grow like magic. Savings are fun because they deliver a sense of security, a sense of getting something more than everyday work out of life. You may have noticed that I like savings.

One fine day you will look at your operating savings and your capital savings and notice that there’s a lot of money sitting around not doing much of anything. The savings just lie in the bank winking at you with each statement. Now that’s a good problem so let’s discuss some options to putting savings to work to create even more wealth.

At some point your operating savings should go into a money market account. Your money market account can be held by your local bank, by a brokerage firm or by a mutual fund company. Operating savings belong in a money market account simply because money markets typically pay a little more interest than a traditional savings account and generally have similar withdrawal restrictions.

The money market account is really just a super savings account. It may require a minimum balance to open, and like a savings account it has limitations on how many and what type of withdrawals you may make within a monthly period. You will incur fees if you attempt to use your money market account like a checking account, even though the account will provide you with checks for access to your savings.

But, this won’t be a problem for you since you have broken the spending habit and are focused on the savings habit. You won’t want to send your savings; you have worked to hard to accumulate them! Now checks to access your money market account are a convenience – not a threat.

Open your money market account at your local bank if that makes you more comfortable. There are some differences in the rates of interest on various money market accounts and they are worth reviewing. However, the rate differences are typically small and at this point in your savings career comfort of knowing where your savings are may be more important to you than another ten or twenty basis points of earnings.

If you will eventually begin to buy mutual funds with your operating savings you may consider a mutual fund company to hold your money market account. Then when it comes time to make your mutual fund purchase you can simply transfer funds from the money market to the fund that you purchase.

If stock purchases are in your future you may want your money market account with a brokerage. Your brokerage will give you a cash account with your brokerage account anyhow. You need it for your earnings if they are not reinvested and for holding assets between investments. Brokerage accounts can have some hefty annual fees attached and at this point you might just as well keep your money and use a fee free, interest paying, account.

For now, your local bank will do fine. When you have a thousand dollars in your operating account consider moving that money to a money market account. With the move you place one additional barrier between you and ready access to the cash. Once your thousand dollars is moved, begin again to save another thousand dollars in your savings account. The savings account is where you go for money to cover planned or unexpected expenses. The money market account becomes a backup account for the savings account and is used only to fund the savings account. Resist the temptation to spend from the money market account because it is for building wealth.

On the other hand capital savings is another matter entirely and takes a bit more consideration. Do you remember the purpose of capital savings?

Capital savings is your future. This is the house you will one day buy, a college fund for your child, the business you dream of one day owning or your retirement. Capital savings needs to be invested with greater risk because you will want the greater return often associated with greater risk.

Investing risk is what separates the men from the boys or the women from the girls. There are two types of risk. One we will not address here because it does no fit into our savings efforts. That risk is high, immeasurable and more often than not will leave you broke. Conquering your overspending, paying down your debt and beginning your savings is work enough. You needn’t place your hard won savings at total risk.

Long term investing risk is the risk you want to take with your capital savings. Over your lifetime the stock market will return an average twelve percent. Not bad. Your money will double about every seven years, and compound even faster when you have many years between your investment and the time you need the money.

The stock market is a friend with whom you need not get intimate. You do not have to be a stock investing guru to do it well and right. Actually you are probably better off applying the same rules to investing that you apply to house plants – the less attention the better.

There was a young guy working in my office who begrudgingly opted to participate in our new 401K plan a year before the market crash in 2000. Four or five years later I asked him how he was doing in his 401K and what was he invested in. He gave me that blank look, a shrug of the shoulders and an ‘aaaa ummm I don’t know?’

He went on to say that he had never opened a statement from the investment company, never reviewed the account on line and never changed any investment choices in all the years. With each paycheck he simply funded his original investment choices. Choices I had originally helped him make. With a huge lack of commitment he promised to bring the next statement for us to review; which he finally did and handed it to me unopened.

The statement showed that he had earned 9.5% total return over five years in the same mutual funds including the crash of 2000 and lingering recoveries of 2001-2. A lot can be said for making a good investment choice for the long term, sticking with the choice and consistently funding it.


If you save well from twenty to thirty you need save no more for retirement. Time will take care of everything for you. If you begin saving at thirty you will need to save all the way to retirement. Time is your friend when you make the decision and commitment to saving.

Back to long term investment of your capital savings. The capital savings account will soon reach a balance of one thousand dollars. That is the point at which you will take the savings and put it to work in a mutual fund. Mutual fund companies hire the market experts and you simply need choose a good fund with a good company. The managers will take care of everything after that.

For years I was fascinated by rich people who were fleeced by their accountants and money managers. I always wondered how that could happen. If they were smart enough to earn the wealth what could be so difficult about managing and keeping it?

As it turns out there is a lot to managing it and keeping it. Sometimes it seems it’s easier to earn it than to keep it. Since we are talking about savings, we are talking about keeping it. Don’t fear a professional manager, use it.

Making a mutual fund choice is very simple. Choose a big well experienced company. Some financial magazines prepare all sorts of lists – the biggest, the most profitable, the most productive, etc. Which company you choose is not near as important as choosing one and getting on with it.

Within the mutual fund company choose a reasonably aggressive fund. Each fund is rated by Morningstar and many are featured in Value Line, a periodical available to financial professionals, and to everyone at most libraries. Know the fund you are investing in, just don’t let fear of the unknown stop you from getting started.

The mutual fund company will offer you various options to associate with your fund when you set it up. Regular deposit is a good one for you. Regular deposits can be set up to automatically deduct a certain amount from an account of yours each month. If you have a regular amount deducted from your checking account each month you will have created an additional savings vehicle. Or have a regular deduction from your capital savings account to the mutual fund.

Regular periodic investing is one of the fundamentals of building wealth. You have the opportunity to buy when the market is down and you always buy when the market is up. You never miss a chance. The best time to buy into your mutual fund is whenever you have the money.

There are some don’ts about your mutual fund investment. Don’t take the credit card option. There is never a necessary time to use a credit card in relation to your capital savings. I also recommend that you do not take any checks, or destroy them if they arrive, associated with your mutual fund account. When the money needs to be transferred into some other long term financial vehicle, you can have it electronically transferred without every taking possession of the funds. That limits a lot of temptation.

Choose to reinvest your dividends. When your fund receives dividend payments from its underlying investments your portion of that income is reinvested into your account giving you additional shares. Reinvestment is a key to building wealth. This is your compounding. If you still have a problem understanding the concept of compounding go on the Internet and find a savings calculator. Enter parameters that suit you and I assure you that you will be amazed at the amount of money you can accumulate over a long period of time without a significant investment. Go on, go look!

Stocks are not the place for you to be, yet. This is not to say that you should never invest in individual stocks. A certain level of knowledge is required to successfully invest in individual stocks. Most investors do not do their research but simply respond to friends or family who suggest they buy this or that stock because it’s cheap, is going to go through the roof or a friend’s cousin’s sister works there. These are all bad reasons to give away your money. Let the professionals manage it for you.

If you insist on getting into the stock market as an individual investor research how the pros have done it. Michael Milken was famous for picking stocks and when asked how he chose good stocks he said, “I go into the store and look at what people have in their carts. I go to the office and buy the stock.”

There is a lot to be said for his analysis. If you know a company well and have good reason to believe it will do well, or continue to do well by all means invest in it. Chances are you will do better long term, including your trading costs, to simply let the professional managers take care of the investing for you via mutual funds.

Bonds are for old people. Not really, but I know you’ve heard that. As people reach retirement they move to bonds in an effort to protect their nest eggs from the fluctuations of the stock markets. Bonds, after adjustment for inflation, historically return something on the order of four percent. This is not a spectacular pace to get rich and no place for your investments while you are young, earning and saving. You need to be aggressive since you still have the power of time and earnings.

A primary error people make when moving to bonds is underestimating their financial horizon. If I ask you what your time horizon is for your investments you will probably tell me some time around when you expect to retire. This is not long enough.

Your investment time horizon must extend to how long you expect to live. If you are fifty years old and expect to retire at sixty five you do not want to go defensive on your investments in ten years. You will eat up your assets long before you die at your estimated life span of between seventy five and eighty, and getting older everyday. Your investment horizon at fifty is thirty years, at least.

Cash is king! How often have you heard that? Cash is a great thing. Lots of it flowing out of your pocket, stuffed under the mattress and jarred up in mayonnaise jars.

Cash is generally the worst investment you can have. Okay, hold that scream! Ever heard of inflation? With every one point rise in inflation your dollar becomes worth one cent less. At a one point rate of inflation you now have a ninety nine cent bill. Over time inflation will eat away at the purchasing power of your cash.

My old friend Thelma was left well off by her husband who met an untimely death in the early 1960’s. The Sixties were a low interest time followed by the high inflation Seventies and Thelma quickly found herself with dwindling assets and a long life expectancy.

Her son, who worked in the financial industry understood the problem and took possession of Thelma’s cash and invested it in Blue Chip stocks. He returned Thelma her living expenses and she lived another thirty eight happy years. On her passing her son had a significant asset base of stocks purchased with Thelma’s dwindling cash; far more than he had paid for her expenses during all that time.

You want some cash around, and we have discussed how you will get cash around. But, yield to the temptation to invest in cash for the long haul. It is a false security and will leave you far less assets in the long run than someone who has taken the same money and invested it in a stock mutual fund.

Most financial mangers and planners want to discount the asset value of your home for planning purposes. I don’t.

Your home, especially after you have paid off the mortgage is a primary asset. And, real estate can be a valuable investment and wonderful place to park your capital savings. Buying your first house is one of the best places to invest your capital savings. Saving for a house is also a great motivator to get going saving in the first place.

The federal government has created several terrific investment vehicles; 401K, IRA, Roth IRA and derivatives of each. The idea behind these is to invest with tax free money, and pay the taxes later.

Your employer probably offers a 401K plan. This plan allows you to have a portion of your income withheld from our paycheck. You don’t even notice it is missing.

The best part is that a 401K is what is generally known as a salary reduction plan. It works like this. Assume you earn $500 and are in a 28% tax bracket. If you contribute 5% of your earnings to your employer’s 401K plan, you now earn $475 and your federal taxes fall from $140 to $133. The $25 you contribute to the 401K plan only reduces your take home pay by $18, because $7 would have gone to pay taxes on the $25. In addition most employers match a portion of your contribution, usually 50% of the first 5% of your earnings. So in addition to the $25 that only cost you $18 take home, your employer will contribute another $12.50. Now you have $37.50 in your 401K plan and only $18 less in your pay check.

Your 401K plan is a no-brainer. Don’t over think it, just join it. Everyone who is serious about achieving a secure financial future will invest in an available 401K plan. The really serious people will max out their annual contribution.

If you are not eligible for a 401K plan, you can set up your own IRA, Individual Retirement Account. IRA’s have contribution limits, and no matching contributions but they are still tax deferred and a good option if a 401K is not available to you.

A Roth IRA is similar to a traditional IRA except that the money used to fund the Roth IRA has been taxed already. The benefit here is that the earnings in the Roth IRA account are never taxed, even when you eventually withdraw the funds.

Learning to save is like learning anything else. Start with a desire, take a few baby steps, get comfortable with the success and begin to take major strides. I promise you will be chest swelling proud of your results!

Chapter 11 - Fund Accounting

By Richard Valentine Reily, author of Gregory's Hero.


Okay, I heard that yawn, and don’t even think about skipping this part.

Let’s review before we move into fund accounting. What have you learned so far?

• How you got into financial trouble to begin with
• What is money
• The problem with spending
• Taxes
• How debt is created
• How to spend less
• How to pay down your debt
• How to begin saving
• How to control your spending desire

You may have been wondering through all this how you are supposed to live with all the focus being on spending less, paying off debt and saving. Where do living expenses come into the conversation? Right here.

Budgeting is not a bad word. It’s not a difficult task. It’s the next step to maintaining your financial freedom. You don’t need a complex budget, a simple plan will do. You don’t need an expensive software package; a pad will do (though bookkeeping software will make the job much easier and probably more accurate).

The thought required in the planning is the key. You need to understand those expenses that you have to pay or want to pay. Through the process you will define some expenses you have thus far failed to eliminate. When it comes down to planning to pay them they take on real value. Simply list all your expenses.

Aside from a formal budget, list your expenses as they correlate to the rate at which you get paid. If you are paid weekly plan your budget weekly; if you are paid biweekly budget on that schedule.

For planning sake let’s use this example of a budget when you are being paid weekly. Your expenses are:

Rent $150.00
Electric 20.00
Phone 10.00
Food 50.00
Entertainment 50.00
Auto Expenses
Car Payment 75.00
Gas 20.00
Insurance 50.00
Repairs 25.00

Total $450.00

Now you know that you require $450.00 per week take home pay simply to cover your expenses. At this point the budget does not include the most important cash flow item which is savings.

This budget is cash out, money you need to or intend to spend. You must have $450 net cash to fund the budget, not earnings of $450. The government gets their taxes first! Most people will need to earn about $600 to fund the budget example, and remember that is before savings.

Here is how you do it. You use a simple technique with a fancy name: fund accounting.

What is fund accounting? Fund accounting is a method of prepaying your expenses. This means that you set up accounts which you pre-fund for your planned expenses. When you are ready to pay the expense, the money is in the pre-funded account ready for you to use.

It works like this. Let’s say the budget example above is yours. You get paid weekly and your budget is planned weekly. Obviously you won’t pay your rent or your utility expenses weekly, but by funding an account for the amount of those expenses when you are paid, the money will not be spent on something else leaving you short when the due date comes around.

Set up a separate checking account at your bank for each of your pre-fund accounts. You will find many banks offer free accounts when you do something such as keep a minimum (or aggregate minimum) balance, use direct deposit or keep money in a savings account. With online banking you can manage your accounts easily from your PC.

Each payday you deposit $180 into your home account that covers the rent, electricity and telephone in our example. You deposit $100 into your food and entertainment account. You deposit $170 into your auto account which covers the car payment, gas, insurance and repairs.

On rent day you simply write a check for rent. You simply write a check for utilities. You write a check from the home account into which you have deposited your planned weekly amount. No muss no fuss no worrying about being able to pay the bills on time without late fees or bounced check fees.

At the supermarket you use your debit card to buy food directly from the pre-funded food and entertainment account. If you decide to eat out the debit card works like a credit card in the restaurant except you can’t overspend the balance of the account. Watch your spending or you might be on an enforced diet! Go back to the chapter on spending and review the part about shopping with a list and coupons.

Here’s the trick and fun part to fund accounting. If your rent is $600 per month and you fund your account $150 each week, at the end of the year you will have funded the account $7,800. Your rent payments will have totaled $7,200. You have one extra rent or mortgage payment already made.

How does that happen? Simple, there are fifty two weeks in each year and you divided your monthly rent by four even though there are more than four weeks in each month, on average.

You could take your rent of $600, multiply it by 12 to get $7,200, and then divide $7,200 by 52 and get your actual weekly rent of $138.46. But isn’t it much more fun to fund the few extra dollars each week and end up with an extra month rent prepaid by the end of the year? However, an extra rent or mortgage payment would not be used for that purpose now would it? What would you do with the extra money? Save it, you say? Correct. Each little bit of savings you create contributes to your wealth and sense of financial well being.

And the car payment too! The same holds true for your auto payment as well, though variable auto expenses such as gas and repairs may consume any overages. You can build up a little extra auto repair cushion using the 52 week method.

Life is not always easy, and all good plans will run into unexpected situations. When you fund account, you build in a cushion for the times when things don’t go your way. You have worked to hard getting your financial life in order to have it again thrown in disarray if you change jobs, get sick or have a significant unexpected expense.

Using fund accounting is a great way to really get ahead of your spending by planning a budget and prepaying your expenses. Fund accounting removes stress from bill paying since you pay the bills with earnings before those earnings get spent elsewhere.

As an adjunct to fund accounting another successful spending limiter is an account for each spender in your family. Probably you and your spouse have access to the checking account. Other than that being a recipe for disaster since no one has responsibility and both can spend, spending inequities invariably bring stress to the relationship.

Since you are reading this I’ll assume that you have taken responsibility for the money in your family. By extension I can also assume that someone else causes lots of spending related stress and problems by taking money out of the ATM whenever they want, and spending it on whatever they want without any planning associated. Sound familiar? If both partners in the relationship are not committed to financial planning and savings you are doomed to fail. There is no way to keep debt out and savings in a relationship when one person remains an over spender.

If you have the problem that many people do where one person spends without planning and keeps you constantly on the verge of bankruptcy, all you need to do is agree with your partner on a preset spending limit for each person. Each person gets a bank account and each period the agreed amount is deposited. The money can go out by any method for anything. But when it’s gone, it’s gone until the next scheduled funding. Sounds harsh, huh? Sometimes that’s what it takes to achieve financial freedom, savings and elimination of stress over money.

I once knew a woman who worked hard managing finances for her family. She worked, in addition to her husband. She got them into a house of their own, she prepaid the babies college funds, she made regular contributions to her 401K and made sure her husband set up a 401K at his job and funded it.

One day she looked really strange and I questioned her to find that she had discovered her husband had accepted one of those unending credit card offers that flow into the house through the mail. He had never told her about it and had charged thousands of dollars of meals with the boys and stuff she never saw or knew about. She only came to know about the card when the bill collectors began to call because he had not made minimum payments. He had never made any payment. They had nothing to show for the experience except a huge overdue credit card bill.

This turned out to be a case of him having to look good to his friends. Buy them a drink in the bar, lunch once in a while, dinner out here and there. And before he knew it he was in over his head and brought the family into jeopardy along the way. Both partners in the relationship must agree to financial planning, savings and financial stability, or the effort will crash and burn. This difficult problem has a simple solution.

Set up a bank account for each primary earner or spender in the family. The account is separate from the pre-funded expense accounts and is funded at the agreed upon rate each period. When the money is gone, it’s gone. The over spenders will learn how to manage!

Set up your new bank accounts and begin budgeting and fund accounting now. You may have to plan some time bring the fund balances to their correct levels if you don’t have spare cash around, but don’t let that be a deterrent to getting started. Prepaying expenses through fund accounting is a primary key to valid financial management.

Chapter 10 - Curb Your Spending Desire

By Richard Valentine Reily, author of Gregory's Hero.

To be truly successful with your new savings habit you have to find tricks to keep yourself from succumbing to the temptation to spend again. The temptation is ruthless, fueled by advertising, friends and desire.

In addition to creating debt, or at this point reducing savings, spending generates baggage. Over time spending will cause lots of dust collectors, crippy crap and knickknacks to accumulate. You don’t need it.

Once you have tired of the stuff, which everyone does, it will have to be stored. Why do you think storage rental businesses are springing up all over the place? Being able to not acquire in the first place is the easiest solution to not creating debt, increasing savings and relieving yourself of excess baggage. Yet even if you have already accumulated the stuff get rid of it. If you have not used an item one full turn of the calendar you have seen each season. The item is obviously useless. Get rid of it.

My spending master sister has more yard sales than the taxing authorities approve of. She has a small house, on purpose, and when it fills up she puts the good stuff on ebay and puts the rest out for a yard sale. The yard sale clears out the house and gets some of her money back from the things they no longer use.

Has your Mother called you yet to ask if you want the stuff in the attic from your childhood? You can bet there’s a bunch of it too. Your hand print watercolors, your first shoes and your favorite stuffed toy, you get the picture. Tell her no. Tell her to get rid of it. You don’t need to cart it around until under her imposed guilt you rent a place to store the stuff. Move on, you’re an adult now.

With little things I keep it simple. If I want something new I require that it replace something I already have. The same thing I am buying. Do you want a new shirt? Which one are you giving up? When you have to place a current value on the new purchase you are less likely to make it. Even if you do decide to buy the new item, you already have a commitment to dispose of something. Your load will not get heavier.

With larger things like cars or vacations your expectations have to be different. It’s as easy to rationalize a new car as it is for an alcoholic to rationalize another drink. The old car is on its last legs, the warranty is running out and it requires a great deal of repairs. The paint used to be shinier. Sounds like a new noise coming from somewhere. Have you ever used those? Why not get a new one and be done with all the worry? You can always use the ‘the new payment is the same’ rationalization too. Why not buy a new car for the same payment?

Because the new payment is for a longer period, will for sure be a ‘few dollars’ higher and involve some additional cash from you to the dealer. A new car is almost always not a financial decision. It is almost always an emotional decision. Emotional decisions always decimate finances. Major purchases must always be based on sound financial planning. Whenever emotions come into the decision it is time to stand back, cool off and allow your sound decision making skills to prevail.

A new car will not relieve you of the worry. In no time the new car will be on its last legs, going out of warranty have fading paint and require costly repairs. A deliciously never ending cycle that is always compounded by additional debt even as your local dealer is delighted at your loyalty.

Does the car really need repairs, or are you rationalizing a new car purchase? Even if it needs repairs, how much do those repairs really cost? Did you know you can buy an extended warranty for almost any car?

Do some research and find the car you really want without any cost considerations. Be certain it has a good safety, maintenance and reliability record. Then buy it three or four years old. Let the emotional buyers take the new car depreciation and you enjoy the car when it is half or a third of the original price.

I like a big car because I am a tall person. Cramping into compact cars causes me lots of pain. But, as you probably know by now I don’t like to give my money away. So I buy three or four year old high end cars and buy an extended warranty to cover down the road repair costs. I have the nice car, and my money is still in my savings account.

I recently bought a Cadillac Deville, a few years old of course. A young guy in my office commented on how he would love to have that car. He had recently purchased a new compact car. As he ogled over the Deville I showed him that I had paid less for my car then he did for his. If you could have seen his eyes go wide you would have laughed. He is a used car customer in the future when he pays off the rapidly depreciating new compact car.

Make savings your primary financial focus and always bring yourself back to saving when the desire to spend overtakes you. Spending consumes money that could otherwise become savings. Making the saving connection before spending allows you to let your savings grow even faster.

Here are a few tricks to help in the depths of ‘desire to buy despair’.

Don’t do it now. Take a good look. Consider the purchase. But, go away without it. If you still want it in a few days go back and get it. Then it’s not an impulse purchase. Try this a few times and keep track of your decisions. How many times did you go back and get it and how many times did you simply forget about it?

Look at anything, and look a lot. Look in lots of places. Just don’t buy. Go home without it. You will be just as fulfilled, and have lots less stuff and no debt. You only need food, clothing and shelter. The rest is extra.

Require a use and a place for everything before buying. If you don’t know where you are going to put the new purchase, don’t buy it. Put it down, take one last look and go on your way. You can always go back and get it another time. In the mean time the money is still yours.

At gift giving time only buy specific gifts. Don’t buy because it’s one sale or a holiday or birthday is coming up. If you can’t deliver a gift to a specific recipient at a specific time don’t buy it; no storing. Retailers are really good at storing. Let them do it; you can always run over and get it.

Use what you have before you buy anything new. I have more clothes than I can probably wear out before I die, and I expect to live a long time. The closet is full. There is no need to buy anything new. Here is where my throw one out if I buy a new one rule comes in.

The desire to buy is powerful and supported by your family, friends and advertising. You do not have to succumb to the desire to buy when you make the decision to create wealth. Decide to save.

Chapter 9 - Saving

By Richard Valentine Reily, author of Gregory's Hero.

You remember that I lived in Steamboat Springs when I woke up financially. That day I was in some kind of beautiful place; rushing water, treeless peaks in the distance and a blue sky. Once my eyes were opened it was amazing what I began to see.

One of the first things I saw was a billboard. I suppose it had been there all along, though I had never noticed it. When your eyes are closed it’s impossible to see. Since my eyes were closed to money… well you get the idea.

Anyhow, the billboard said something very simple. So simple in fact that it appeared virtually impossible. The billboard was put there as an advertisement by the Routt County National Bank. It simply said, ‘Pay Yourself First’.

What a novel concept! Did it truly mean that I was allowed to keep some of my hard earned money and do whatever I wanted with it? Never in my life had I been able to keep anything after chasing around borrowing from Peter to pay Paul and never getting ahead of the never ending bills. Paying me first was an idea I could live with. I had been given permission to save.

We have already discussed the impossibility of reducing debt without controlling spending. Now that spending is controlled and debt is gone or severely reduced paying yourself, saving, is truly in order and the real payoff for all your hard work.

I began paying myself first even as I reached the payoff of my debt. I wanted the savings habit to take root and take place of the spending habit when my debt reduction was complete. After all if I paid off all the debt without a savings plan what in the world would I do with all that money I had been focusing on debt reduction? I don’t know you, but I know me and if I paid off all my debt without a plan for my money after that there was a real probability I could revert to my poor spending habits.

Paying yourself first is easy. Designate a small amount of money to begin saving. The amount must be small. Not too much, just a little. Say five dollars each paycheck. Are you wondering yet why I emphasize a small amount?

The object here is to create a habit. The object is not to build wealth, yet. We will get to building wealth later. We are still focused on reducing debt after all. Again, the object here is to create a habit, a new habit to replace the spending habit when debt reduction is complete. It has been said that twenty one repetitions make a habit. You only need save the same amount twenty-one times and you will be on your way.

If you commit to beginning the savings habit before the debt reduction was complete, you will come to the time when you are saving and the credit card debt is paid off. Then you can focus on savings as a primary use of your money. All the resources that have been focused on debt reduction may now be focused on building your savings.

What a wonderful day it is when you send off your last credit card payment! It has been said that it always rains at a funeral. I say it will be a bright sunny warm and happy day when you are done with the burden of debt. On the day you send in your final credit card payment your financial focus changes, from debt reduction to savings.

There are two types of savings. For simplicity I term them operating savings and capital savings. Be sure to understand the difference, it’s critical to your long term financial health and success.

First, let’s look at operating savings. This is money you put away on a regular basis that you intend to use at a future date for normal or unusual expenses. Since you are no longer paying down debt those resources can be refocused to saving for future events such as a vacation, college for the kids, new furniture, a new car, you get the idea. You have worked hard eliminating debt and you probably deserve a vacation or some gift to yourself that you pay for with money, not debt. Trust me, you’ll love the reversal.

Operating savings, however, are savings. When we get into fund accounting in the next few chapters, don’t mix up fund accounting and savings. Fund accounting is when you will prepay your planned expenses by putting aside a portion of the expense with each paycheck. Operating savings are built though disciplined, regular planned contributions to your savings account. Operating savings are only used for those expenditures that you have defined up front.

Secondly, there are capital savings. Capital savings are the most fun because capital savings are the savings that grow and grow and grow. Like operating savings, capital savings are funded regularly – with each paycheck. The difference between operating savings and capital savings is that you never spend capital savings. Did I say never? If there is any confusion here, let me repeat, the difference between operating savings and capital savings is that you never spend capital savings. Never, never, never, never…

There, I think that’s clear.

So, you might ask, what’s the purpose of capital savings? If you did ask I would first answer that that’s a great question. It’s important to understand.

Capital savings is for the creation of wealth.

Think about a business. A business takes in money from the sale of its products or services. Some of the money is spent paying the workers, the rent, the utilities and all the other expenses of running a business. A smart businessman reserves the balance, the profit, for reinvestment.

If the business makes widgets, and the widget machine cranks out enough widgets to fill only part of the markets demand, a smart business man will quickly decide that a second widget maker is required. But, widget makers are expensive to purchase so the businessman requires a great deal of money to acquire the widget maker.

Luckily he has saved his profits, keeping them within the business and the money he requires is in the bank ready to purchase his new widget maker. Because he is a smart businessman he is able to buy his new widget maker and increase his sales even further.

You may have noticed in the widget description that I did not suggest the smart businessman went to the bank to borrow the money for his new widget machine. He doesn’t have time for all the paperwork and doesn’t want to pay the interest. He has prepared for the new widget maker by planning for his business expansion.

Your capital savings work in the same manner. They can never be used for everyday expenses that you failed to plan for. Capital savings are used only to generate additional income for you.

Most people work all their lives and retire dependant on Social Security. Even if you forget all the hype about Social Security going broke in the future, today the benefits payable by Social Security do not provide a high level of security. The benefits might keep a roof over you head, or food on the table, but not much else.

Do you happen to work for a company that provides a pension plan? If so, lucky you; you are one of few. There were only about two generations who had the security of a company pension. Chances are you will not have that security.

That’s the job of your capital savings. To grow throughout your lifetime and provide you income when you chose to no longer work or are unable to work.

So the rules are clear, right? Capital savings are never ever spent. Except…

Capital savings may be used to buy a house, invest in stocks or other investments. My rule for capital savings is that they are used to earn, not spend.

When you invest in a house, even with a mortgage, you are investing in an asset. In most markets, over most time frames a house is an appreciating investment. Someday when you no longer want to work you can sell the asset, buy a less expensive home and have the balance for your expenses. You can use your capital savings for the down payment on your house, or better yet for the outright purchase of your house.

As your capital savings grow from the first small contributions you made while paying down your debt, the account will reach a balance where you will want to gain more than the simple interest a bank will pay. Generally when your savings gets to one thousand dollars you should look for another investment for your capital savings. We will discuss investments later.

Capital savings will grow and grow and grow. Capital savings are never ever spent.

Chapter 8 - Debt Reduction

By Richard Valentine Reily, author of Gregory's Hero.

Much is made of credit counseling, debt consolidation and debt reduction. Often it seems that there are more advertisements on television, radio, newspapers and billboards for debt consolidators than cars. Knowing that, be warned there is a lot of money in the industry. Your money.

I’m sure you have heard the basic rule of credit ‘anyone will lend to those who don’t need it’. These are the borrowers to which lenders attach little if any real risk. Those who don’t need credit have resources to finance themselves and often find there are advantageous reasons to borrow rather than use their own assets. Leverage is the key. We don’t need to talk about these borrowers because you probably aren’t one of them and they probably aren’t reading this book.

Credit counseling in its pure form is a good thing. We’re doing it now. The goal of credit counseling is to help you better understand how credit works, what credit is for and when and how to use credit. This is not rocket science though there are some points to keep in mind.

Above all in almost all cases credit counseling is a business. That’s right, a business. Big business; remember they can buy all those ads. You got into financial trouble because you didn’t plan well and spent poorly.

You have to figure that the business to which you might give your money to help you out of our mire will require money to operate, pay your counselor, return the owners on their investment and make a profit. Before you spend one more cent of your money make certain the organization you are ‘hiring’ to unravel your financial mess will not simply drag you deeper into it.

Everything you will need to clean up your financial life is in this book. Some people need a helping hand making big changes in their life and some hand holding along the way. If you are one, you are a customer for a credit counselor. If you insist on going forward with a credit counselor, check out their Better Business Bureau report. Research them on the Internet. Ask for references of those who they have helped. Know up front what the total cost to you will be, and what exactly will be done for you and when. You are well within your rights as a customer to do your due diligence upfront before you sign up and ask as many questions and ask for as much proof of the answers as you want.

My goal is for you to use and understand this book and avoid the credit counselor all together. After all if debt reduction is your goal there is no need to incur an additional expense to reach it. And, if you are so lucky to find someone who can truly accomplish the task of straightening out your financial mess, you will not have learned anything and will probably find yourself right back in the same place before you know it.

The decision to hire a credit counselor is one I highly caution you against, and if you insist it is the right route for you take the time to really do your homework before signing up.

Debt consolidation is also a dangerous business. Done successfully it can deliver the erroneous impression that you have resolved your financial problems. The bill collectors have stopped calling, the late notices have stopped arriving and you exhale a great sigh of relief. Usually what debt consolidation means is you have swept your spending problems under the rug and gone about your life creating new debts. Unless you experience the process of paying off your debt, you are unlikely to create new spending habits that will keep you from spending your way back into debt.

It has been statistically demonstrated that the vast majority of those who consolidate debt, weather by combining all the debt onto one credit card, taking a second mortgage or a personal loan recreate the debt problem quickly. Then they have the consolidated debt, and a new mountain of debt.

If you have taken a second mortgage you have put your house at risk for the dubious comfort of being ‘out of debt’. All you have done is put your home at risk. Don’t do it, even when the pundits and marketers insist you will save money with a lower interest rate and those interest payments are tax deductible.

Here is the ludicrous logic of debt consolidation. You bought too many sweaters, a new refrigerator, a new stereo and a computer. The bills are rolling in and you are struggling to make the payments. What is the credit card company going to do, come to your house and take your sweaters? Do you think they might arrive in the night and take your refrigerator? Probably not.

When you roll all this debt into a second mortgage on your house you have secured this unsecured debt with your home. Your home is at risk if you can’t or don’t pay the mortgage payment. For a sweater or refrigerator you have risked your home. Forget about it!

Putting your home at risk, running up new bills after consolidation and incurring the costs of consolidation are a false economy. Instead of consolidating your debt, pay it off. What a novel concept; pay off your debt.

Which brings us to debt reduction, just what you wanted to know how to do the entire time right? Debt reduction is the process of reducing your debt.

First it’s important to understand the types of debt and their relative level of importance. For the purposes of debt reduction we will focus on the riskiest and therefore highest cost debt.

Credit card debt reduction must begin with the first step of spending reduction. We covered spending reduction already and won’t revisit the subject here except to say that unless you are willing to seriously implement your spending reduction, you will have little opportunity to succeed at debt reduction. If you are unwilling to implement spending reduction save yourself the time and put this book down. The mall is more interesting.

It is virtually impossible to reduce debt concurrently with creating it. Resources that you have available for the act of debt reduction are going to come from your spending reductions.

First thing to do when working on credit card debt reduction is to understand what resources you have available for the task. Each dollar you spend, no matter what for, is one less dollar available for your debt reduction.

Define what you have available each month for credit card payments. Make a list of all the amounts you owe, to whom you owe them and the rates of interest you are paying on each. If you are lucky enough to have the option of transferring balances to lower rate accounts, this is a good place to start. Anything you can do to reduce the carrying cost of your credit card debt frees up resources to help achieve debt reduction faster.

When your transfers and list is complete put the list in the order of the most expensive interest first. Define the minimum payments required for each account. Deduct this amount from the total available for your debt reduction. The balance remaining is paid toward the most expensive card until that balance is zero.

When you pay off the most expensive card first, rather than paying the same amount to each card, you cut the amount of time necessary to pay off your total credit card balance and save interest payments in the process. If you simply continue to pay minimum balances and do not charge additional amounts to your credit cards you will pay for many years and pay four or five times the total interest.

After the first account is paid off apply the amount you have paid to that account to the second most expensive account in addition to the minimum payment you had been making to the second most expensive account.

After the second most expensive account is paid off, apply the amount you had been paying to the account, including the amount you paid to the first now paid off account to the next most expensive account including the minimum amount you had been paying to the account, and so on until all your credit card account balances are zero.

As you pay off each card, destroy the card and notify the issuer that you want the account closed. When I attempted to close my accounts I got lots of resistance from the credit card issuers who wanted me to keep the accounts open ‘at least for emergency’. Don’t fall for it, they know the statistics. Statistically you will run your debt back up even after you pay it off. Close the accounts and don’t become a statistic.

One issuer had over the years opened six credit card accounts for me under different brands. When I asked to have them closed they offered to consolidate them into one account which would carry the combined limits of all the cards. They left me with one card with an available balance of over $50,000; after all I had been a great customer. I paid all my balances, and lots of interest. I accepted the offer in a moment of weakness and cut the card up on arrival. Don’t offer yourself the temptation.

When you are done with your debt reduction, you should keep one credit card for true emergencies and traveling with a commitment that you will charge nothing that you could not pay for in cash at the moment of purchase. In addition, the commitment must include paying the balance in full at the end of each billing cycle, no matter what.

Soon enough the credit card debt will be gone. Hurray! Now get to work on the cars and the house. Use the same habits you formed paying off the credit cards. When you focus your resources on debt reduction, it is difficult to fall back into the old spending habits.

There is no good debt. Unless you are using debt to build assets such as buying a house, you are needlessly paying your hard earned money for usurious interest rates. You are too smart for that. Your money looks better in your pocket.