The 17 Principles of Creating Wealth
Chapters 3-4
Build a Nest Egg with Certificates of Deposit
Once you have reined in your spending and found yourself with a little bit of spending cash at the end of the month, it’s time to think in terms of protecting your growing cash reserves, and getting it to work for you. After all, getting money to work for you, rather than you having to work for money, is what this report is all about.
Thus, the second step towards achieving wealth and finding financial freedom is to establish a nest egg of cold, hard cash equal to at least six months worth of your living expenses. If you have done well with the first step, this should be easy—it just takes a little time. Again, to speed this process you may want to look into some home-based business ideas that can increase your income.
Opening and holding a bank Certificate of Deposit (CD) is a great, and conservative, way to build a nest egg. Keep in mind however, with current interest rates, offset by taxes and a touch of inflation, your future value of money with CDs is not a way to get rich. So, I am not asking you to expect CDs to make you wealthy. CDs are a perfect financial tool for securing money in a safe investment with a modest return. Money in your CD will always be there in case of an emergency, and the peace of mind it provides will motivate and encourage you to save and invest, and it will dramatically improve your self-confidence and outlook on life. Two interesting places you may want to look to park your money, other than your bank or credit union, is Paypal.com and Etrade.com. Both offer some very competitive yields, without the time restrictions typically imposed on CDs (Warning: Keep in mind security risks of online investing).
I recently overheard a cell phone conversation between a woman and her husband. Apparently he had recently lost his job and money was tight. I only heard her end of the conversation, but according to her a used car dealer they had dealt with needed forty dollars immediately, or he would repossess her car. Imagine the stress, humiliation, and inconvenience the lack of forty dollars can place on your family. I never want to be in this position, and I don’t want you to experience it either. Spend less than you earn, and have the discipline to save what you don’t spend. For you husbands, I hope you never have to tell your wife she has to give up her car. And for you wives, I hope your husband never faces the embarrassment of riding the bus or hitching a ride to work. Don’t punish yourselves like this.
That said, I love CDs and use them to save money. In my opinion, everybody should have about six months worth of living expenses locked away in a CD for emergency use. For example, if it takes $2,500 per month to pay the bills and just get by, you should have at least $15,000 tucked away in a CD, prior to engaging in higher risk investments. Even when you begin to expand into stock market and real estate investments, maintain your $15,000 CD, and make all of your future investments pay for themselves, without dipping into your CD capital base. Saving and holding onto six months worth of living expenses is hard, but to paraphrase W. Clement Stone, “If you can’t save, the ability to create wealth is not within you.”
Certificates of deposit are generally FDIC insured, which is certainly not the case for stock market and real estate investments. CDs also differ from money market accounts, so when you open a CD, make sure it falls under the FDIC umbrella. If you don’t think FDIC insurance is important, consider what is happening in the lending markets right now.
Prior to opening your CD, you need to gather some facts about current yields and the time period you must keep your money locked in the CD. There are always ways to pull your funds out of a CD, but early withdrawal will carry penalties. You can get a great rundown on current CD rates and terms by reading Bankrate's CD Rate Trend Index. Check it out at www.bankrate.com. You may also want to see if your bank allows Add-Ons. CDs with an Add-On feature allow you to open a CD with the minimal amount, and then add additional funds to the CD as they become available, while maintaining the original maturity date.
When investing in a CD, be aware of the length of time you are committing your money to. If the annual percentage yield (APY) for a six month CD is 4.9%, and a twelve month CD offers 5.1%, you will have decide if the extra return on investment (ROI) is worth having your money locked away an additional six months. By using Bankrate’s data, you can make this kind of decision based on their forecast for interest rate hikes or drops. If you expect interest rates to drop in the next six months you may want to go with the twelve month CD in order to lock in the better yield. However, if rates are expected to go up, a six month term would allow you to reinvest at the higher rate. Additionally, if you are paying checking account fees at your bank, a CD puts you into a position to negotiate a reduction or elimination of the fees. Talk to your banker, and be assertive. You deserve to be rewarded for your loyalty and your business.
The idea of purchasing CDs ties in with Principle #1, Spend Less Than You Earn. Remember when I asked you to spend less than 90% of your current income? Well, CDs are a solid and safe way to move that 10-30% of your income out of harms way. This was my biggest challenge in achieving wealth. If I had a dollar in my pocket, I always found a way to spend it. Finally, my wife took over the bank account, moved a percentage of my pay into a CD each month, and gave me a weekly allowance. It was humbling, but effective. Today I thank her.
Use a CD to consistently squirrel away your extra income and you will have a sizable nest egg for both security and investment.
Consumer Debt is Deadly
Consumer debt is a financial killer. One of the best ways to reclaim your financial future is to repay those high interest consumer loans and then restrict the use of credit cards to emergencies and fast investment cash.
Therefore, the third step in creating wealth is to reduce your dependence on credit cards and ensure future monthly payments on all of your cards combined never exceeds 10% of your after tax income.
Consumer debt is usually used to finance the purchase of “nice to have” things--which typically depreciate in value. Whereas, investment debt is the use of financing to purchase things which go up in value, like real estate, antiques, and well-run businesses.
Consumer credit increased at an annual rate of 2.5 percent in May 2006, while revolving credit increased at an annual rate of 10 percent. The Federal Reserve Statistical Release for July 10, 2006, indicates Americans currently owe over 808 billion dollars in revolving debt, which is principally credit cards and auto loans, and over 1.3 trillion dollars in non-revolving debt. According to U.S. Bankruptcy Court statistics, there were well over 2 million bankruptcy flings made in 2005 alone, with the vast majority of these non-business related filings. Remember, there are approximately 123 million working Americans; therefore, this number represents nearly 2 percent of the working population. The abuse of credit cards by the American consumer has become a financial epidemic.
The propensity of Americans to assume high interest credit card debt, while fearing the use of debt to make intelligent investments, is mind-boggling. Consider this example. A new car may cost you up to $500 per month. At the end of 5 years, you will have a significantly depreciated car, with a loss of $30,000 or more in principal and interest payments. Compare this to purchasing a rental property. In the worse case scenario, you may expect to make payments during vacancies, provide for unscheduled maintenance, and carry a negative cash flow from month to month. However, at the same time you will be enjoying a property that appreciates in value, while giving you a valuable tax write-off. Appreciation and tax write-offs are not the primary reason to get involved in real estate, nor is carrying a negative cash flow a pleasant thought. But, in the long run, this is more advantageous to your wealth goals than the car loan.
If the fear of a foreclosure is your greatest concern, it is interesting to note that according to RealtyTrac, there is one new foreclosure filing per month for every 1,311 U.S. households. Over the course of a year, the number of homes entering foreclosure barely compares to the 2 million plus bankruptcy filings per year, suggesting the risk to your financial well-being through home ownership is lower than that of acquiring consumer debt. Education in this area is critical to your success, so I strongly recommend you read books by Tyler Hicks and William Nickerson before starting a property investment plan.
The next time you are tempted to take out a loan on a new boat or quad, consider how the cost of this purchase, with compounding interest, may be better used to achieve your financial goals. The National Foundation for Credit Counseling believes it takes from 3 to5 years to recover from credit card debt, once an individual starts a structured recovery plan. This can put a severe damper on your wealth accumulation goals. What it all comes down to is your willingness to delay gratification—a difficult emotion to master.
Over the years I have used credit cards for both consumer purchases and investments. Sadly, like many others I also went through a stage in my life where I abused credit cards and allowed the balances due to become a burden to my family and a drain on my monthly income. I used steps one and two of this report to dig myself out and have since limited myself to carrying a prepaid card. Normally, people use prepaid cards when they can’t qualify for a regular credit card. However, the prepaid is also a great way to minimize your spending, as it only works when there is money in the bank to back p your purchases.
Credit card horror stories are everywhere, and there is a good chance you know somebody who has experienced something similar to this:
A young college student received a credit card offer in the mail. As a full-time student, he did not have a steady income and wondered how he managed to qualify. His credit rating was based entirely upon his potential to earn income as a future college graduate, and the complete lack of negative information in his file.
The student carried his freshly minted card in his pocket for several weeks, resolved to never use it, except for an emergency. Near the end of the semester he and a few classmates were pulling an all-night group study session in preparation for final exams. Around midnight somebody suggested they call out for pizza. They pooled around twelve dollars in cash between them and nearly gave up in frustration when our hapless credit worthy student volunteered his credit card. It was a small beginning, as these things typically are, but credit use is like an addictive drug. It is so easy to use, and the pain of repayment is always somewhere down the road—too far away to be associated with the enjoyment of pizza tonight.
By the end of the school year, the student had accumulated over $1,000 in debt on his card. While his monthly payments remained small, they represented a significant strain on his budget. His monthly allowance from home was now being spent to make credit card payments, which meant he had to use the card to make more routine purchases. The balance grew out of control, leading to a destroyed credit rating.
Another example of credit card use involved a young lady who worked a low paying job. She had dreams of a better life and spent a lot of her time looking for real estate investment opportunities. She carried four credit cards, with an available cumulative balance of around $12,000.
One day after work she came across a small house for sale by owner. It needed some work, but following an analysis of the market, she knew this home was worth more than the asking price. Using the cash option on her cards, she obtained $10,000 to make the down payment and cover closing costs. The owner carried the financing at a fair interest rate.
After closing she immediately set to work cleaning up the property. She then had it professionally appraised (insist on appraisals from Member Appraisal Institute) and listed for sale. For three months she managed to make the minimum payments due on her cards before the house eventually sold for a modest profit. At closing the buyer assumed the loan due to the original owner, leaving a little less than $20,000 profit. She immediately paid off her balance due on all of her credit cards, and parked around $8,000 in her bank account. While her return is not impressive to some investors, she did manage to make $8,000 out of nothing but information and gumption.
Both of these stories illustrate the power and dangers of credit card use. While it is not advisable to get involved in investments using credit cards, it is an option when quick cash is needed to capitalize on opportunity.
As a wealth builder it is vitally important that you monitor your credit report and correct any errors immediately. One of the easiest, and cheapest ways to obtain your personal credit report is over the Internet. It is estimated that up to 60% of all borrowers request a credit report at least once a year. If you are trying to protect your privacy, you may want to be wary of the questions about your current address, phone number, employer, and other personal data they may ask in the “Request Your Credit Report Here” form. A recent amendment to the federal Fair Credit Reporting Act requires each of the nationwide consumer reporting companies, Equifax, Experian, and TransUnion, to provide you with a free copy of your credit report, at your request, once every 12 months. Use the FTC government website www.annualcreditreport.com as your primary source for credit report data.
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All Rights Reserved. No part may be duplicated or distributed without express written permission. This report is an original creation of XOR Career Guides, and is not a part of any affiliate or associate distribution plan. Rights to distribution of this report should not be implied or conferred. Information in this report should not be construed as legal or accounting advice. Keywords: business, success, wealth, money, finance, rich, investments, real estate, stock. This report is for information use only and is not intended to provide investment advice. Concepts and ideas depicted in this report should be used at the reader’s discretion. Use due diligence in all of your investment decisions.
Copyright 2007 The 17 Principles of Creating Wealth Make Money At Home
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