Don’t Let Peer Pressure Derail Your Financial Success

It was late spring of 1959. The year before we’d moved from the small coal mining town of War, West Virginia to the big city of Bluefield, Virginia. (At least I thought it was a big city after growing up in War.) I’d just turned 13 and like most teenagers I was looking forward to getting out of school for the summer and spending time riding bikes and playing with friends, but an opportunity presented itself I couldn’t resist.

The city had a new water filtration plant under construction near where I lived and workmen were laying lines from it to serve communities throughout the area. The way lines were put in back then was totally different from the way it is done today. All of the ditching was done by hand. A foreman oversaw a crew of men who dug the ditches, laid the pipes and then refilled them. It was an interesting process.

The men were stretched out along the ditch line for several hundred feet. The lead man, wielding a mattock or pick would loosen the dirt down 4-6 inches and the second man would shovel the loose dirt out of the ditch. Then behind this pair, two more were doing the same thing and the ditch would get a little deeper. More pairs of ditch diggers followed until the ditch reached the desired depth. The men in each pair would trade jobs periodically to spell each other or to break the monotony of the work.

Once the ditch was deep enough, the pipe layers followed behind joining new sections of pipe to extend the line. Behind the pipe layers were additional two man teams filling in the ditch. In these teams, one man would shovel in about 6 inches of dirt and the second man would follow with a heavy tamp packing down the loose soil. Additional two man teams would repeat this process until the ditch was refilled. In total there were about 30 men on the work crew and depending on the soil they could install from a few feet to a couple of hundred feet of line each day. It was this exhausting hot dirty work, which presented me an opportunity to make some extra money that summer.

Unlike my friends, who all received allowances from their parents, I had to earn whatever spending money I had. I guess this instilled a bit of entrepreneurial spirit in me, because when I saw these men toiling in the hot sun, with sweat streaming off their bodies, an idea came to mind. I had a sturdy bicycle, with a large basket that I’d used to deliver newspapers; what if I offered to bring them ice cold soft drinks to go with their lunch instead of the lukewarm water they got from a container on the crew bus. Was there a way I could do this and earn a few dollars?

To try out my idea, I took one of my mother’s quart canning jars and filled it with ice. I poured water over the ice until the jar was full and then poured the water off into a measuring cup. It measured just less than a pint. With this knowledge I went to a nearby store and bought a quart bottle of Coca Cola. I took it home, filled two quart jars with ice and used it to make two quarts jars of ice cold Coca Cola that I took down to the work site just before lunch time. I offered them to the workmen for $.50 each and sold both immediately.

I waited around while they ate lunch and then got back my jars when they finished. Both men asked if I would bring them another drink the next day as did eight others on the crew. I was in business! The quart drinks cost me less than $.25 each, I borrowed my mother’s fruit jars and the store let me have ice for free. Since one bottle made two drinks, I was making over $.75 on each bottle which was not bad money for 1959. Soon I was riding my bike to the worksite each morning, taking orders, going back and preparing what each man wanted and then delivering the drinks just before their lunch break. Within a month nearly everyone in the work crew was buying drinks from me.

My friends all laughed and made fun of me, but while they were out playing I was making money and learning about business. While they were getting a couple of dollars a week allowance and doing nothing, some weeks I was making $5 to $10 and by the end of the summer had made several hundred dollars. Had I turned my back on this opportunity because of their criticism and negative comments I would have missed both the experience and the money. Unfortunately too many people let peer pressure derail their financial success.

Here’s a tip! When opportunities to improve your financial position present themselves, don’t worry about what others think. It’s your life, not theirs that’s being affected. Opportunities are all around you if you will just look for them. When you start thinking creatively about ways to turn those opportunities into cash, not only will your financial picture improve, but so will your knowledge and confidence.

Whether that one experience at age 13 gave me the confidence to start my own business later in life or whether it was the series of similar ventures I attempted as a child, the bottom line is I never doubted my abilities or let fear or peer pressure control me. When you start with successes in small ventures, especially ones that others aren’t willing to attempt, you gain knowledge and build self confidence and those are the keys to becoming successful in almost any endeavor. Look around! What opportunities are you passing up?

Original text from article for Asheville Citizen-Times, 20th week of 2007

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The Importance of Cash Reserves

Have you ever thought about how cash reserves impact your ability to pay bills timely and improve your credit rating? I made an interesting discovery that taught me how cash reserves can do for financial stability what storage reservoirs do for the dependability of water systems. Let me explain how I learned this.

I live on the top of a hill and have a spring on one side of my property. Many years ago it supplied drinking water to several houses below me. When I bought the property, I had no idea the spring even existed. I certainly didn’t know that it supplied a water system I would unearth several years later. The spring is located in a wooded depression north of my house. It had been buried by decades of decaying leaves and the silt heavy rains had washed into it.

One day I was operating a small bulldozer, building trails on the twenty five wooded acres I own for my young sons to have a place to ride their dirt bikes. As I made a cut below the depression, I hit an old pipe buried in the ground. Water was seeping from it, but it was obviously not coming from an active water line. I had no idea why this water pipe was buried in my woods, but I decided to find out. I climbed up the hill to see if I could find its source.

To my surprise, less than a hundred feet up the hill I found the corner of a large concrete structure buried in the ground. By clearing the dirt from its top, I revealed a lid that covered a large access hole. Beneath the lid was a large tank partially filled with water. The pipe I had broken protruded from a spot about a foot above the bottom of the tank. A second pipe entered the tank from the upper side. It ran a few feet on up the hill to the head of a spring that had been completely filled mud and silt. When I cleaned out the spring, I saw that it flowed from under a large rock into a concrete lined bowl that was covered with a flat rock.

By cleaning out the spring a larger stream of water started to flow into the bowl. It took several minutes before the bowl filled, but when it did the water started running freely through the pipe into the storage tank. I plugged off the flow going into the pipe, dipped the water from the tank and cleaned out the mud and silt from its bottom. When I let the water flow back into the tank, it took the rest of the day for the trickle to fill it back to the point where water again flowed into the lower pipe, but there was still little more than a trickle coming from the end I had broken. I now understood how the system had been designed to work.

I cut and thread the end of the broken pipe and attached a faucet to shut off the flow of water. It took a couple of days for the tank to fill. Now when I opened the faucet, a strong stream of water gushed forth. An overflow pipe near the top of the tank kept it full and dumped excess water out onto the ground, but the volume in the tank pressurized the flow from the faucet and would provide a strong continuous flow until the tank was drained. When the faucet was closed, the trickle from the spring refilled the tank (Fig. 1).

This primitive water system regulated the supply of water in very much the same way cash reserves regulate day to day finances. Think of the flow from the faucet as the daily requirement for money and the storage tank as a cash reserve (Fig. 2).

Without a storage tank (cash reserve) the flow from the faucet can never be greater than the volume coming from the spring (Fig 3). By the same token, if you spend all you make as you make it, you will never be able make large purchases or handle unexpected expenses without going in debt.

Here’s a tip! When you get paid, put part of your earnings into a savings account and live on what’s left. This regular deposit will slowly build a cash reserve that will act as a cushion to help you through tough times. It will also help you to buy some of the nicer things in life without having to resort to debt. When you spend everything you make, it would be like the people below the spring trying to live without the storage tank. They would have to go through life trying to survive on the small trickle from the spring and if drought reduced the flow, they would be forced to ask others for help.

You might think it’s difficult to save, but if you can’t do it, you’re already living above your means. You might need to temporarily lower of your standard of living in order to save, but doing so will help you avoid the burden of consumer debt. The problem is, once you start overspending, it’s easy to slip into habits that lead to financial distress or bankruptcy, which truly does ruin ones standard of living.

The old saying, “An ounce of prevention is worth a pound of cure,” is never truer than when it comes to building cash reserves. Putting aside a little from each paycheck, even $5 – $10, will gradually help you build a reserve that will enable you to pay your bills timely, strengthen your credit rating and give you peace of mind. Try it and see if it doesn’t work for you too.

Original text from article for Asheville Citizen-Times, 12th week of 2006.

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Patience Is Key During The Current Unsettling Times

As the economy falters, prices are falling on just about everything. A house that you couldn’t buy for $250,000 two years ago may sell for less than $175,000 today. New vehicles that were selling rapidly a year ago are now sitting unsold in spite of huge discounts, cash back offers and low or no interest financing.

We are in a recessionary period unlike any we’ve experienced since the Great Depression. In April 2000 we entered a recession that was due to the bursting of the bubble, which lasted about 18 months. In the early 1990s we experienced a brief recession that saw industrial production and manufacturing-trade decreases, but it lasted less than a year. The longest downturn since the Great Depression occurred during the early 1980s, and lasted for two and a half years. Its primary cause was the uncertainty of the cost and supply of oil following the Iranian Revolution; especially since it came so soon after the oil crisis of 1973 when OPEC quadrupled the price of oil.

I could go back even earlier and discuss the recessions of 1957, 1953 and 1947, which all followed the Great Depression, but none of these impacted all segments of the economy like what we are now experiencing. Of the 14 airline bankruptcy filings since 2002, five of them occurred this year. FDIC insured banks are failing left and right. In addition, some of the country’s largest banks and brokerage firms are teetering on the brink of failure and only being kept on life support with trillions of taxpayer dollars.

Oh! Let’s not forget the housing industry, which is blamed for starting it all and the Wall Street gurus who manipulated financing markets to create the huge real estate bubble that burst with devastating effects. Everyone from builders to lenders, Realtors, suppliers and millions of homeowners has been devastated by the collapse. Foreclosures and price declines are both at their highest levels since the Great Depression and are only getting worse. Speculative home building has virtually stopped. Carpenters, plumbers, electricians, and other trades people are out of work.

The cumulative effect of this recession/depression on the US economy is still not known. Conventional wisdom says that increasing the money supply will pull the economic wagon out of the ditch; however there is only so much that monetary policy can do to correct poor fiscal policy. As I’ve said many times, you can’t borrow your way to prosperity, but as a nation, that’s exactly what we’ve been trying to do. We’ve been living on borrowed money for decades and now the federal government is compounding the problem with $ trillions more in additional debt as it tries to prop up the faltering economy. As Pete Seeger wrote in the 1960s song Where Have All The Flowers Gone, “When will they ever learn?”

Can you imagine what would happen to a family if they tried to use debt to keep living above their means? The growing interest expense would gradually choke their ability to maintain their standard of living. In order to avoid bankruptcy, they would have to stop spending so much, reduce their standard of living and start paying down their debts. Sure it would be painful, but when you’re trying to get out of a hole, the first thing you need to do is stop digging. It doesn’t take a rocket scientist to figure this out. Why can’t elected officials understand this? Anyone with an ounce of common sense knows that you can’t continue borrowing forever. Eventually, the debt has to be repaid and the longer you wait and the larger it grows the more bitter the pill you will have to swallow to do it.

Here’s a tip! During these unsettling times, the best course of action is to tighten your belt, reduce debt, increase savings and get your financial house in order if you expect to weather the economic storm. Falling prices may sound good, but rising unemployment is also occurring and this could lead to falling wages and more economic panic.

Almost everyone agrees this major economic downturn isn’t nearly over. If that’s the case, the more cash you have, and the less you owe, the better you will be able to survive it. The worst thing you could do during these times is to go out and spend money you don’t have, buying things you don’t need, just because prices have fallen. Don’t be sucked in by the sales hype that merchants use to get people to overspend. You’ll be much better off if you have the patience to wait until the economy stabilizes. In the mean time, commit yourself to buying only those things that are necessities.

We are navigating uncharted waters. The US debt stands at unprecedented levels and is rising. No one knows what impact this debt might have on efforts to stimulate the economy. If there was ever a time to err on the side of caution, it is now. Force yourself to live on a balanced budget, start saving; and hope your income is not interrupted by layoff or outright job loss. While unemployment may not reach 25% as it did in the Great Depression, there’s no doubt it will continue to rise for the foreseeable future. It’s time to let patience prevail!

Adapted from original text for article for Asheville Citizen-Times, 50th week of 2008.

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It’s Time To Track Your Spending And Change Your Life

A couple of years ago, I wrote an article about the different individuals I had observed by hanging out in several convenience stores and watching their spending patterns. There was a major difference between those who were obviously wage earners and those that appeared to be executives or professionals. A far greater number of the wage earners came into the store to pay cash for the fuel they put in their vehicles and many would only put in $5 – $10 rather than fill up. On the other hand, nearly all of the executive/professional types paid at the pump with credit cards.

The natural assumption would be that wage earners have to be more careful with their spending because they don’t have as much money, but that wasn’t the case. Although a large number of the wage earner types only bought $5 – $10 worth of fuel, nearly every one of them bought beer, cigarettes, smokeless tobacco, candy or other type snack foods. Conversely, the executive/professional types, when they did come into the store, usually bought items like milk, bread or other staple items, which I got the impression were purchased to avoid an additional stop at a grocery store.

I’m not trying to be critical; I’m merely pointing out what I found to be an obvious difference in the spending habits of people and one which could play an important role in whether or not they achieve financial success. Impulse spending, even for small items like junk food or drinks can add up quickly. Something I learned at an early age is that it’s nearly impossible to improve your finances until you know where your money goes. Converting a single bad habit like drinking a $4 cup of latte daily into a savings program can have a dramatic impact over the course of a lifetime.

The one exercise that I did early in life that had more effect on my spending habits than anything I’ve done since was recording all of my spending for an entire month. I know you’ve probably read or heard dozens of financial counselors say something similar, but I actually did it. I bought a small spiral bound notebook that would fit in my shirt pocket and started writing down every penny I spent. If I bought a soft drink, I wrote it down. If I bought a candy bar, I wrote it down. Everything! Groceries, gas, cigarettes (yes, unfortunately I smoked at the time), clothes, bowling, even a piece of bubble gum, I wrote it down. At the end of the month, I did a simple analysis; I went back and categorized the expenditures as either necessary or unnecessary.

Mortgage payments, utilities, food and similar expenditures fell into the necessary category. Things I wanted, but didn’t actually need, were categorized as unnecessary. Cigarettes, candy, soft drinks, records, a new pocket knife and a new bowling ball were things that showed up on this list. The hardest part of doing this was being honest with myself when doing the categorization. We all have a tendency, just after making an impulse purchase, to start trying to justify it in our own minds. After all, who wants to look stupid to themselves?

When I say this exercise had more effect on my spending habits than anything I’ve done, let me explain why. When I totaled the list of unnecessary expenditures I had made in just a single month, I was shocked to discover that it amounted to over $600. No wonder I was like so many people who complain about coming to the end of the money before they get to the end of the month. This exercise taught me a valuable life lesson. I could change my life by just changing what I did with the money I was spending on unnecessary things.

To help curb my impulse spending, I started paying for all purchases with bills and saving the change. The change became sacred. I wouldn’t spend it no matter what. I found it was much harder to break a $20 bill to buy a soft drink or candy bar than to buy it with the change I had in my pocket. This may not seem like much of a life changing experience, but it helped me develop a habit of saving that I’ve since expanded to many other areas of my life.

Here’s a tip! With credit tight, jobs scarce and money becoming increasingly hard to come by, what better time could there be to reassess your spending habits? Don’t wait until it’s too late. Make a commitment to analyze your spending habits now. Where can you make cuts that will allow you to pay off debt sooner or increase savings?

If you want to use my methods, fine. If you have other ways of tracking and taking control of your spending, that’s fine too. What’s important is that you do it and do it now. We don’t know how long this recession will last or how deep it will be. You can ask 100 economists and probably get 100 different opinions. The only opinion that really counts is how it is affecting you and your family. The sacrifices you make today to get your financial house in order will pay huge dividends in the future. The best way to solve the nation’s financial problems is not to become part them.

Original text from article for Asheville Citizen-Times, 49th week of 2008

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Profit Is Made When You Buy Real Estate

You can’t call yourself a real estate investor if you have to sell to make a profit. Buying real estate as an investment to provide income is an art not practiced by many who call themselves investors. Keep in mind, if you have to sell a property to make a profit, it’s not an investment, it’s a speculation. And, as all speculators discover, sooner or later you will get burned. That’s a fact that many people are now learning the hard way.

Greed is the main factor that entices otherwise sensible people to speculate in real estate, stocks, precious metals or other investment instruments. Rapidly rising prices lure thousands of unsophisticated people who take their hard earned savings and buy commodities in anticipation of selling them in a few months for huge profits. That’s the lure that makes the late night get-rich-quick infomercials so appealing. Imagine how enticing it must be for people who are struggling economically to watch a program that promises they can become millionaires in just a few months and quit their jobs. And they can do it for just 3 easy payments of $$$$.

The secret to investing in real estate is to buy right and the income will follow. Buying right means acquiring properties that produce enough money to cover all the expenses associated with ownership and still provide a return on your investment. That pretty much excludes non income producing properties like vacant land. I’ve had many people tell me about land they bought, held a few years and then sold for much more than what they paid. By showing them that adding the cost of owning the property; things like taxes, lost income from a non producing asset and other such expenses, to the purchase price, their profit wasn’t nearly as spectacular as they thought and in many cases resulted in a loss.

Another lure rooted in greed is investing in beachfront, ski resort and other such exotic properties. The sales presentation for these type properties is pretty much the same everywhere. Buy one of our townhomes, condos or houses and we’ll keep it rented for you for a few weeks out of the year for enough to cover your cost of ownership and then you can use it for free the rest of the year. Yeah right! For every unit that works that way there are hundreds that do not. Vacation type rentals are so fickle and subject to outside market forces that no projections can be reliable. An increase in gasoline prices or a downturn in the economy can quickly turn your hot property ice cold overnight.

At the peak of the real estate boom, people were lining up in hot markets like Florida and Southern California to bid on preconstruction contracts for yet to be built condos. Often successful bidders could sell their contracts and double or triple their money without ever taking ownership of the property. In some markets, over 60 percent of the sales were to speculators, which kept driving up prices. The lure of big profits drove many people to tap into their home equities for money to pour into these red hot markets. Greed canceled common sense and even real estate professionals found them selves caught up in the euphoria.

Investors, who understand that you make money when you buy, sat out the bubble and only bought the occasional property for which the numbers would work. As a long time investor, I bought fewer properties during the bubble of 2004-2005 than at any time during my investing career. It’s hard to find deals when there are 10 buyers for every one seller. And, it’s also hard to resist the temptation to jump on the bandwagon when people all around you are buying and selling for quick profits.

When it comes to real estate investing, the old saying common sense is a very uncommon thing could not be truer. Those who shunned common sense and bought properties betting on higher prices to bail them out are learning a very valuable lesson. Those who experienced success in the beginning have often turned out to be the biggest losers. Like gamblers who hit a jackpot and then keep playing until they lost all their winnings and more, these speculators plowed their profits right back into more speculative real estate and ended up getting caught short when the market turned sour.

Here’s a tip! If you want to be a real estate investor, you must set standards and stick with them. Don’t compromise your principles or be swayed by greed. Set a steady course to build wealth and stick with it, knowing that true wealth cannot be created overnight. Today I look around and see many people who had sound businesses, but didn’t follow that mantra. Now, many of them are losing properties to foreclosure, filing bankruptcy and wondering what is going to happen next. These are the same people who were riding a wave of success just a couple of years ago. Now they are facing financial disasters.

Although the real estate bubble has burst, the bottom is still many months or years away. Prices will continue falling, foreclosures will increase and lenders will be very cautious until the market comes back in balance. Once income is again able to support purchase prices, the markets will start to recover. Until then, investors with cash and good credit are in the driver’s seat and will continue to make money when they buy.

Original text from article for Asheville Citizen-Times, 47th week of 2008

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A College Education Is An Investment That Takes Planning

One of the biggest financial decisions parents will face is whether or not to pay for a child’s college education. I’ve discussed this matter with numerous people and their feelings run the gambit from paying for everything to paying for nothing. Some take the position that they had to work, take out student loans and struggle to get a college education and they want their children to do the same. They feel the struggles they faced made them tougher and prepared them for the pressures of the real world they faced after school.

Others viewed giving their children a good education and enabling them to enter adulthood with the ability to earn a respectable living and not be saddled with debt as part of their responsibility as parents. I have encountered strong feelings both ways. Personally, I chose the latter and I am very pleased with the results. On the other hand, I know people who chose not to help their children beyond high school and whose children have been very successful as well.

What concerns me is the people who would liked to have helped their children get a college education, but couldn’t? These are the parents who kept putting off saving until “next year,” but “next year” never came. Kids grow up fast. College is expensive. If you plan to help your children with their education, the time to start saving is now. Now means as soon as they are born.

Most students enter college at age 18 or 19. They take 4 years or more to earn a degree. That means if you start as soon as they are born, you will have 22-23 years to save before having to make that final tuition payment. With that much time for your savings to earn and grow, the amount you would need to save each month is small.

Many years ago, I heard an insurance salesman use the best example of why starting early is so important. I’ve followed his advice in many areas of my life; saving for my children’s college education being just one of them. Here’s how he explained it. If you start saving when a child is first born, the amount you need to put aside is small enough it would be like carrying a marble around in your pocket. In a short time, you would hardly notice it was there. If you wait until the child starts school, then the amount you would need to save becomes more like carrying a baseball around in your pocket. You could do it, but you’d know it was there every day. However, if you wait until the child enters high school; the amount you would need to save would be like carrying a bowling ball around. It wouldn’t fit in your pocket and even if you could carry it around, it would be an extremely difficult task.

In today’s society, people want everything to be easy, but they aren’t willing to make the small sacrifices it takes to make them easy. Today, parents who want to help their children with college expenses have more options than ever in history. In addition to traditional options like savings accounts, annuities, and U. S. Savings Bonds, there are Section 529 college savings programs and Coverdell education savings accounts. There are plenty of ways to save for college, but none of them work unless people think long term instead of just what’s facing them today. Choices have to be made. Choices like, do I dine out an extra time this week or use that money to educate my children?

A college education is an investment. The question is, how do you finance that investment? As the greasy mechanic in the old Fram oil filter commercial used to say, “You can pay me now…or pay me later.” The implication was you’re going to pay, one way or another. That’s the dilemma facing many parents who wait until they are left with only three options; pay as you go, finance it and pay later, or find scholarships to help. If they had only realized how much more freedom and choices they would have if they had started saving early and not waited until their children were ready to enter college.

Statistics show that over the course of a lifetime, the additional earnings from a college education can easily exceed $1,000,000. That’s not a bad return on a $50,000 to $200,000 investment, depending on whether your child attends a public or private institution. One of the most popular ways to fund this investment is with a Qualified Tuition Program or 529 Plan. These plans allow earnings to grow tax free and the distributions are tax-free when used for qualified post-secondary education. The problem is, there are no guarantees that funds invested in stocks and bonds will go up in value and as we’ve seen recently, they can go down substantially in a short period of time.

Here’s a tip! If you want a safe and secure way to save for your children’s education, for most people Series EE and I bonds purchased after 1989 offer the same tax advantages as the 529 plans without placing the principal at risk. There are some income limitations for the tax exclusion, but you don’t have to worry about the principal being reduced by a stock market crash. No matter which savings plan you use, the important thing to remember is that the earlier you start and the longer you keep it up, the more ability you will have to assist your children with their education.

Original text from article for Asheville Citizen-Times, 43rd week of 2008

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Another Concept Not Being Taught In Our Public Schools

We’re all born and we all die! These are things we all have in common whether we’re heading up a Fortune 100 company or broke and unemployed. Getting from birth to death has a cost to it. Granted that cost may be higher for some than others, but it’s a fact that our journey through life has a cost to it. What may not be so obvious is the fact that the money we spend today pays for the days from birth to the present. It’s the money we don’t spend; the portion that we invest that pays for the days from death back toward the present. When your investments grow to become enough to pay for the rest of your days on Earth, that’s financial independence. I call it functional retirement, because it’s the point when you get to choose what you do each day rather than having to do what someone else wants you to do to earn a living.

The beauty of reaching functional retirement is that there’s no age limit associated with it. Depending on your success, you might become financially independent in your 20s, 30s or 40s instead of waiting until your 60s or even 70s, but you’ll never get there without investments. With that thought in mind, can you see how starting to invest early and investing as much as possible can move retirement up dramatically? Why is this concept so difficult for young people to grasp? I think a lot has to do with our educational system.

Last week I wrote about the failure of public schools to teach basic consumer economics. Paying bills, balancing bank accounts, and understanding how and when to use credit are critically important to handling the money you earn, but that’s just the beginning. Understanding wealth and how to create it is even more important. When I talk with educators about the problem, they point to a myriad of initiatives that when reduced to a common denominator, all focus on teaching students how to get a job and work for a living. They never discuss programs designed to teach young people how to build wealth and secure their futures.

We are all blessed with three eight hour blocks of time per day, seven days per week. In a typical work week, most people work five of these eight hour blocks and they sleep seven of them. It’s what they do with the other nine that determines their fate in life. Most people treat the hours they aren’t working or sleeping as fun time and try to entertain themselves during these 72 discretionary hours. Unfortunately, this can be a recipe for disaster when it comes to wealth building.

If you work 5 of these eight hour blocks of time, try to pay all your bills with the money you earn, plus entertain yourself during all this discretionary time, can you see how money might become an issue? Why not invest part of your spare time instead of spending it? Thirty seven years ago, I decided to invest a few hours each week learning how to buy investment real estate. I recognized the potential it had for producing passive income. In case you don’t know; that’s income for which you don’t have to work.

Today, I still own all the investment properties I’ve purchased over the past 37 years. The income, which was only a break even proposition during the first year, has become enough to secure my future for the rest of my life. That’s what happens when you use patience and persistence and are willing to accept delayed gratification.

This concept is not being taught in our public schools. If you don’t believe me, just ask a few young people to tell you how much money they would have at age 60 if they started at age 20, invested $100 per month and earned an eight percent return compounded monthly. I did this recently and not one of the 14 new high school graduates I interviewed could come up with the correct answer. It’s just over $351,000, or at an 8 percent return, enough to pay a monthly income of almost $2350 per month for the rest of their lives. If they can’t calculate the future value of today’s actions, how can we expect young people to understand the value of delayed gratification? Why aren’t our schools teaching this?

401K plans, IRAs and other retirement type accounts rely on compounding interest and delayed gratification to produce maximum results. These investments aren’t attractive to most young people because they can’t calculate the future value of the account. They would rather have a new car or boat now and worry about the future later. The problem with this thinking is you lose the value of compounding in the early years. In the above example, by starting at age 20, it takes less than 9 years for the interest earned each month to exceed the $100 deposit being made. At that point over $200 per month is being added to the account. Students should not be allowed to graduate high school without understanding this concept.

Here’s a tip! I like real estate as a long term investment for several reasons. First, because it can be highly leveraged, real estate can earn outstanding returns on the cash invested; returns that are far greater than the 8 percent mentioned earlier. Secondly, rents from real estate grow with inflation. Third, as rents increase and mortgages pay down, cash flow increases. Fourth, real estate appreciates in value which increases the owner’s net worth. Fifth, and I think most important, real estate provides great protection from impulse spending because it cannot be readily converted to cash on a whim. Finally, current conditions are the best I’ve seen in my lifetime to invest in real estate.

Original text from article for Asheville Citizen-Times, 35th week of 2008

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