Thursday, February 26, 2015

An Everlasting Impression

 
 
 

Ronald Read’s Story

Until Ronald Read made the headlines in early February, most did not know of him. From multiple articles, we learn Ronald Read was an “unbelievably frugal” man with a generous heart.  He led a modest life, working with his brother as a mechanic for 25 years.  After the garage was sold, he took a part-time job as a janitor for JC Penny for 17 years.  Mr. Read was born in the small town of Dummerston, Vermont, in 1921.  Like many stories we hear today from parents and grandparents, he, too, had to walk to school, a distance of four miles from his home, to obtain an education.    He was the only member of his family to graduate from high school.  After his military service in World War II, he contently returned to his hometown where he took up his occupation as a mechanic.  In 1960 Ronald married Barbara March, a mother of two children.   Barbara passed away in 1970; Ronald remained a widower until his passing in June, 2014, at the age of 92.     

People may not have paid much attention to him or his activities but one thing is for certain, he did something well.  He was an astute student.  His textbook on investing was the Wall Street Journal.  His vocation went beyond his menial tasks as a mechanic and janitor; he had a knack for picking rock-solid, dividend-paying stocks which rewarded him royally over the years.  He had the foresight to stay on course.  He stayed invested and kept on investing.  Mr. Read may have never read the book, “Automatic Millionaire” by David Bach, yet he put into practice the steps which not only made him a millionaire but a multi-millionaire. 

The heart-warming part of his story is the generosity he showered upon his community, the beneficiaries of his treasure.   From his accumulated wealth, Ronald Read bequeathed $4.8 million to the Brattleboro Memorial Hospital and $1.2 million to the town’s Brooks Memorial Library.  

After Mr. Read’s story was released to the public, many questioned how he obtained such wealth on a modest income.  As of last count, 319 comments appeared under CNBC’s storyline, Here’s how a janitor amassed an $8M fortune.  The quest for an answer began with an examination of his lifestyle.

Lessons Learned from Ronald Read

Surely, if Mr. Read faithfully read the Wall Street Journal, as many people attested he did, he no doubt heeded the advice from Warren Buffett, world’s most successful investor and wealthiest person.  Mr. Read may have digested words of wisdom about investing from this well-known guru and teacher. One such message, “Never invest in a business you can’t understand” attests to his choice of investments in AT&T, Bank of America, CVS, Deere, GE and General Motors.  Regardless, whatever investment advice Mr. Read gleaned from the Wall Street Journal’s teachers, he demonstrated their advice was rock-solid.

There’s a lesson in everyone’s story.  In an interview with Chris Horgan, a strategist with Ramsey Solutions, Chris delivered a message to both investor and advisor.  

·         For the investor, your part is “to identify how much you want to save and how much you want to give away, then figure out how to get there with the help of an investment professional.”

·         For advisors, you need to be “someone who has the heart of a teacher and not someone trying to sell stuff.”

Chris Horgan’s closing comment clinched the importance of investing. "It can be done. In America we need to start believing back in the American dream and stop buying the stuff that's on commercials."   The word, dream, is key.  We are so easily swayed by things we don’t want or need that we lose sight of things that we do.  We simply stop dreaming because things appear unattainable. Regardless of the amount of a person’s salary, we can achieve the dream if we are determined to put effort into working and saving. We have Ronald Read as a role model who clearly confirmed that acquiring wealth is possible.

Everlasting Impression

Mr. Read’s fascinating story left a number of impressions. I wasn’t sure which one made the greatest impact: 

·         His ability to save and invest

(or)

·         His ability to be unselfish and put the needs of others before his own.

Then I decided I did not have to choose, I can accept the fact all these points made an everlasting impression.

You, too, will draw your own conclusions from Mr. Read’s story.  When I think of making “an everlasting impression,” I will think of Mr. Read.  Although he didn’t make his fortune from owning a multi-billion dollar corporation, he did own pieces of multiple companies by buying their stocks.   He applied the slow-and-steady, invest-in-what-you-know investment strategy which led to the accumulation of wealth.  In the end, his family and community benefited by his generous donations because of his choice of life and investment styles.

 


Thursday, February 19, 2015

Choose Your Debt Wisely


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Sinking into Debt

Sally graduated with a practical nursing diploma and currently works at a local city hospital.  Over the course of the two-year education program, Sally accumulated $30,000 in student loans. She currently rents an apartment for $1,200 monthly; her utility bills consist of the usual: power, cell phone, and cable. Now that Sally has completed her studies, she decided to purchase a new car for $35,000.  At Christmas time, she and a friend felt the need to escape the cold winter to a warmer climate.  They booked a trip to Hawaii for two weeks.  Sally didn’t have any savings for her vacation.  She charged all the expenses: hotel, airfare and meals, to her credit card.  All the quaint clothing stores had offers too good to resist.  Sally splurged another $1,000 on clothing.  Her credit card now totaled $10,000. Sally convinced herself she deserved this vacation because she worked hard on her studies. She declared this holiday as her graduation present.  Can you see the trend? 

This fictitious incident can easily happen.  Although you may think I am picking on “Sally,” the female gender, men are as guilty of getting carried away with their spending.  So imagine if Sally meets Harry who has spending habits like hers.  They decide to buy a new home and furniture, continue to take annual vacations, and replace their vehicles every second year.  The debt keeps escalating until suddenly their finances seem out of control.  

Pace Yourself

Keeping a watchful eye on debt is not only a smart strategy but also a responsible one.  Debt payments should only account for 20% of monthly income even though lenders permit up to 40%.  In the blog, Borrowing Money is Like Jumping Hurdles, you were shown how to calculate the TDS (Total Debt Servicing) ratio in order to determine your present ratio.  This information helps you understand the guidelines.

I can’t blame you for wanting everything.  Life is meant to be enjoyed.  Owning a beautiful home, travelling to far-off places to escape the winter blues, and planning your dream wedding may only be a few of your goals. You can’t run a 10km marathon in 10 minutes, why would you expect to have and do everything in 10 years when you have a life-time?  P-A-C-E yourself to avoid throwing yourself in a pool of debt and drowning as a result.        

Beware of Sharks

Choosing your debt carefully is like watching for sharks when you are fishing. You can easily get swallowed-up in debt payments.  Beware of obvious signs.

A relentless retail market constantly bombards the public with attractive advertising.  Seeing ads to finance a new fridge and stove @ 0.00% for the first 18 months is very common. Protect yourself by carefully reading the advertising materials, all disclaimers, and sales agreements.

When contemplating a home purchase, I suggest “playing house”. This sounds a bit unusual but in reality considers all the purchases which come with the title of being an official home owner.   Additional appliances or furniture may be required.  Quite often additional expenses like property insurance, taxes, the extra utility bills like energy, water and sewer are forgotten in all the hype. Then don’t forget the lawn mower and gardening tools!

While considering a new vehicle purchase, think of the payment term in months, not years.  We convince ourselves that five years is not a long time simply because counting to five can be done on one hand.  Remember five years (5) is the same as sixty monthly payments (60) or one hundred and thirty (130) bi-weekly payments. Other life events can happen in five years which may also require money to finance.  Falling in love with a new vehicle is romantic until the payments begin.  Vehicle insurance, license registration, fuel, and oil changes also need to be considered.

The smartest strategy is to eliminate one debt before taking on a new one.  For example, before considering a new vehicle purchase, focus on paying off the student loan.   Whatever you have been driving until now obviously works. If your vehicle is in dire need of repair, at the very least, look for a good used vehicle. The concern is that accumulating payments bring accumulating stress.   Avoid this road as much as possible. 

How to Avoid Drowning in Debt

Financial planners can’t stop anyone from borrowing money for the things they want. However, we can make you aware of the dangers. Your income is like a blanket which is intended to cover all your needs: lifestyle, savings, and debt obligations. Someone (or something) could be left out in the cold if your income isn’t able to do this. Do your homework first before you decide to take on debt.     

The word “old-fashioned” applies to many things: clothes, names, and lifestyle.   Although things do become outdated, many things done the old-fashioned way can still work today.  Our ability to save for the things we want is one of those things.  Rather than save, many now resort to the use of “credit.”  The secret to avoid the debt trap is to start doing things the “old-fashioned” way. Although having a mortgage against a home is acceptable for the purpose of owning a home, continually using home equity for vehicle purchases or credit card consolidation is not.  Choose your debt carefully.  Doing things the old-fashioned way may not be such a bad idea.   

The Credit Counselling Society provides a list to alert people to the typical warning signs of debt that might be out of control. Click here to check their list.         

Thursday, February 12, 2015

Borrowing Money Is Like Jumping Hurdles


 
 
Imagine yourself seated across the desk from a loans officer, waiting anxiously to hear the verdict.  Will your request for a loan be approved?  Initially, you felt confident and now you have doubts.  What exactly is the loan officer analyzing?

The credit process can be likened to jumping over hurdles.  As you jump through the following points, you get a sense of the criteria the loans officer puts under the microscope to analyze whether you qualify.  

Hurdle #1: Your Credit Report.  Your credit report will be your first means of defense.  If you have always consciously made your payments in a timely manner, meeting all your loan obligations, then you should have no concerns.  Quite often, people don’t realize what’s involved in maintaining a healthy credit report.  To ensure you understand your credit report and credit score, click here for additional information from Financial Consumer Agency of Canada.  If your credit score is low, you can improve this by implementing some sound strategies as shared in the previous blog, Protect your Score.

Hurdle #2.  Capacity to Make Payments. You can be assured your income plays a significant factor in determining whether or not your loan is approved. Capacity is measured by using ratios: Gross Debt Servicing (GDS) and Total Debt Servicing (TDS).  These are math calculations to ensure your debt payments don’t interfere with your ability to manage day-to-day living expenses.   

GDS focuses on your ability to meet shelter costs, rent or mortgage payments.  That’s all it does.  Generally, when applying for a mortgage, this ratio is used to measure your ability to manage payments.  The amounts factored into the calculation are: mortgage payment (including principal and interest), property taxes, and heating costs.  If the mortgage is for the purchase of a condo, then 50% of the condominium fees are also included.  Once these amounts are tallied, the total is divided by your gross income and then multiplied by 100 to determine your ratio.  Keep your fingers crossed! The guidelines are 25% to 30% of gross income. (Sometimes 32% is acceptable.) The lower the ratio the better since this indicator measures the percentage of your gross income required to cover shelter payment.  For example, if your ratio is 15%, then only 15% of your total gross income is funding your mortgage/rent payments. 

The formula for calculating GDS is as follows (calculate either monthly or annually):
 
                                                
 
                                               Payment of principal and interest on mortgage
                                             + property taxes
                                             + heating costs
                                             + 50% of condominium fees (if applicable)
GDSR =                    -----------------------------------------------------------------------------
                                             Gross Income
 
 
TDS calculates your ability to manage all debt obligations including child and spousal support payments.  For many, the big surprise is the payment amount for credit cards is calculated on the available credit limit, not the outstanding balance.  You may have an outstanding balance of $5,000 but your MasterCard credit limit is $15,000.  Your payment used in the calculations will be $450 (3% of $15,000) since you have access to this credit at any given time.   Because you haven’t used the entire balance today, doesn’t mean you won’t tomorrow.  So lenders realize that if you do, then monthly minimal payments will increase.  Although having access to a high credit limit may be beneficial, the full payment affects your TDS ratio as well as the credit limit is the amount shown as a liability on your Net Worth Statement.  
Since you are aware of the amounts involved in the TDS calculation, tally the total, divide by your gross income, and multiply by 100 to determine the ratio.  Ideally your TDS should be 35% or less.  Some institutions allow a ratio of 40%.  Although your loan may be approved despite your high ratio, you have to consider the financial situation in which you may place yourself.
Here’s a glance at the formula for calculating TDS (calculate either monthly or annually):
 
                                                
 
                                               Payment of principal and interest on mortgage
                                             + property taxes
                                             + heating costs
                                             + 50% of condominium fees (if applicable)
                                             + payments on other personal loans
TDSR =                   -----------------------------------------------------------------------------
                                             Gross Income
 
 
Hurdle #3: Your Net Worth (Capital).  Another measurement of creditworthiness is your present net worth. When assigning a value to assets such as motor vehicles, snow machines and the like, use realistic values. Do not overvalue them. Vehicles are a perfect example since they quickly depreciate. In reality, question whether someone would be willing to pay this amount for a particular asset. 
To help create your Net Worth Statement, click here to use this on-line calculator. Once your statement is created, liabilities are subtracted from assets. If your liabilities are greater, then your negative net worth is alerting your loans officer to a potential problem.  Generally, the one exception for showing a negative net worth is if a student acquires debt in pursuit of an education. Technically, as a student, you are an asset with the ability to generate an income to pay off your student loans. 
 
 
Assets
Everything You Own
 
 
Liabilities
Everything You Owe
Net Worth
(Assets – Liabilities)
 
 
 
Hurdle #4: You (and Your Character).  It’s about you.  Attitude is everything.  Attitude shows up in your credit report, your ability to be employed, and in your conversation with your loans officer.   The important question to answer is: Will you uphold your promise to repay the loan? As time goes on, you accumulate a history which will follow you.  Establishing a strong relationship with your loans officer will be important.  Over time, you, no doubt, may require more than just one loan. 
 
Hurdle #5:  Collateral.   The reasoning behind using collateral to secure a loan is assurance that some or all of the money can be retrieved if you happen to default on your loan.  So many unforeseen events might occur to cause you to miss payments and neglect your financial obligations. Eventually, the only recourse remaining for the lender is to sell your asset to repay the loan.  Whether you assign your car, investments, or house, as collateral, you pledge a promise to pay back the debt. In the event you don’t, then the asset will no longer be yours.  When examining all the criteria to approve your loan, collateral generally would be the last consideration.
 
How does everything look as you jumped over the hurdles?  This information cracked open the door to the credit assessment process. Everyone’s borrowing needs are different; special consideration is given to special circumstances.  Guidelines are in place as tools to help with the process.  Not only are the financial reports and ratios analyzed but your loans officer also implements good judgment on your behalf.  When you continue to meet your loan obligations consistently over time, you will build both a trusting relationship with your lender and a strong credit history.  This best outcome when borrowing money becomes necessary to fulfill your dreams.   
 
 

Thursday, February 5, 2015

Baby Steps Towards Saving


 
Do you have difficulty saving money? Saving is not easy for everyone.  Some people are savers while others are spenders.  Understanding which one you are is important. Not being in the habit of saving may be an obstacle standing in the way of having what you want. If saving is the last thing you do, or try to do after your money is spent, then something is not working.  That something has to change.

The "One Less" Rule

I now realize setting up regular savings on a weekly basis works the best.  It is easier to see where expenses can be reduced in order to increase savings.

One less “something” can make a difference. One less . . .  

  • Coffee and muffin
  • Meal in a restaurant
  • ­­­­­­­­__________________ (you fill in the blank)

You can quickly visualize the extra $5, $10, or $25 deposited to your savings. Refraining from buying the container of ice cream or opting to take lunch to work rather than going out, will ensure the money finds its way into your savings account.  Avoiding the usual purchases, the cup of coffee on the way to the office or the magazine in the check-out aisle, will help in your attempt to save. Even cancelling a shopping trip to your favorite store will avoid the possibility of you spending more than you want. In the end, it’s the day-to-day little things you do (or rather not do) that can save you.

To get into the rhythm of saving, you can devise an exercise of “multiplying” your progress.  You can simply start small and work your way up to your saving target. Starting small is the best approach. The exercise will get more difficult as the amount increases.

The chart below shows beginning with $1 a day for the first week, increasing this to $2 per day for the second week and $3 for third week. See the trend. Finally at Week 7, you will be saving $49/week.  Keep these strategies going until you reach your target.  If your ultimate plan is to save $100 per week, you need to discover ways to spend $15 less per day.   The amazing part is not spending money on any given day is a way of saving.    In reality it’s this momentum which helps overcome the barrier to saving that you encountered in the first place.

My Personal Savings Plan
Week
Days of the Week
Total
S
M
T
W
T
F
S
#1
$1
$1
$1
$1
$1
$1
$1
$ 7
#2
$2
$2
$2
$2
$2
$2
$2
$14
#3
$3
$3
$3
$3
$3
$3
$3
$21
#4
$4
$4
$4
$4
$4
$4
$4
$28
#5
$5
$5
$5
$5
$5
$5
$5
$35
#6
$6
$6
$6
$6
$6
$6
$6
$42
#7
$7
$7
$7
$7
$7
$7
$7
$49

 

Letters of Encouragement

Good things start with something small. A tiny sunflower seed grows into an enormous plant. Small snowballs roll into gigantic snowmen. Your savings will build to a hefty amount.  You need to incorporate patience into the savings plan.

P – Positive attitude propels you; you can do this!

A – Anticipate the end result to show where you are going.

T - Tolerance towards mistakes tests your commitment.

I – Intent drives your actions.

E - Effort pays off.

N – Need to stay focused keeps you on track.

C – Commitment sustains you.

E – Excitement motivates you to keep on “keeping on.”


Please share ways you discovered savings to be easy for you.  Other people certainly may benefit from your strategies.