The following is a guest post written by Greg McFarlane. If you are puzzled by your current financial state of affairs, he’s going to explain why you are not rich yet – and what you can do about it. Greg is really my kind of blogger. He calls it like he sees it and he’s not afraid to ruffle a few feathers if by doing so he can help readers take action to improve their financial lives.( I also like Greg because he says such nice things about me.) Enough from me. Let’s hear what Greg has to say.
Anytime you get an opportunity to write a guest post for one of the few personal finance bloggers who knows what he’s talking about, you’re duty bound to take advantage of it. A licensed Certified Financial Planner™ who explains to readers how to preserve and build wealth, rather than just clip coupons and create an emergency fund? Count me in.
Hi, my name is Greg McFarlane. I run a site, Control Your Cash, whose message is somewhat similar to Wealth Pilgrim, if vastly different in style and tone. Like Wealth Pilgrim, my site espouses a simple truth: instead of having your finances be in charge of you, you can invert the relationship. It takes discipline, of course. And education. A little professional counsel doesn’t hurt, either. But there’s an even more fundamental requirement that’s almost always overlooked.
You’ve got to be self-aware, instead of overestimating your capabilities. Most people aren’t self-aware about much, let alone finances. And yes, that probably includes you. Consider the famous study in which 93% of drivers considered themselves to be above average. On the flip side, it’s like alcoholics who don’t think they’re alcoholics. The number of people who say, “Yep, I drink to excess. Dangerously so” is several orders of magnitude smaller than the number who actually do.
If you claim that you’re financially savvy or at least OK with money, it’s extremely likely that you aren’t. Take this news item about a childless 40-something couple in Houston who, after spending $40,000 on multiple rounds of in vitro fertilization, beseeched a Pro Football Hall of Famer to help them have a kid. (No, not like you’re thinking. He autographed a card that they hope to sell to raise money for another round.) Here’s the takeaway line, buried deep in the narrative:
[The couple] say their credit cards are maxed out, so they started thinking about the best ways to get out credit card debt. The Nelkins, who are also looking into adoption, say they’re financially stable…
It doesn’t really matter how that sentence ends. It takes a particularly stubborn kind of ignorance to contradict oneself that succinctly. Financial stability can’t exist in the same universe as a single maxed-out credit card, let alone several. Spending $40,000 with nothing to show for it is bad enough. Financing that $40,000, on credit cards that probably carry an interest rate of 15% or so, is miles beyond lunacy.
You heartless monster. They’re trying to have a child, and they can’t. What they’re attempting to do is an unspeakably glorious act of love. They’re clearly hurting. How dare you say such a thing?
Which brings us to the 2nd-biggest problem people encounter when attempting to build wealth, and largely failing: keeping emotions out of it. The mindset that chooses to dismiss or downplay facts, as uncomfortable as those facts might be, is the one that says, “I want to get in on Facebook’s IPO, RIGHT NOW. What do you mean, ‘Look at their financials first’? Jeez, what a buzzkill you are.”
Personal finance is more science than art, in that it holds up to the scientific method. Conduct the same experiment under the same conditions – like, for instance, maxing out real dollars on your credit cards for something that won’t generate a real-dollar return – and you’ll get the same result every time. In this case that’s a hole that, let’s be honest, the people involved will never dig out of.
Emotions are wonderful things. Joy makes the world a better place. Trust attracts the best qualities of others. Benevolence is noble. Even righteous anger has its place. But none of them have any business interfering with your pursuit of wealth. Every financial decision, from paying off consumer debt to borrowing money for a business venture, has to be coldly rational. If it isn’t, and if you introduce emotions into the equations, you’re asking for impoverishment.
Most of us (hopefully all of us) would agree that having a winning, can-do attitude doesn’t make a lick of difference when buying lottery tickets or playing roulette. We know instinctively that our mindset is helpless in the face of chance. So why on Earth would we let emotions take over when
-Spending money on a car
–Spending money on a house
-Borrowing money to attend school and study in a field with modest earning potential?
Yet millions of people do so every day. For most, nothing will convince them that they’re wrong. For the few whose minds are open to the truth, however, the possibilities are endless.
Being able to flourish, financially speaking, is easy. Well, it’s not “easy” in that it doesn’t require much work: it does. It’s easy in that the steps you have to take are simple and unambiguous. First, if you have consumer debt, pay it off as quickly as possible. No matter how overwhelming it seems, or how miserable you think you’ll be along the way. Experiencing sharp, relatively brief pain is far better than enduring dull, interminable pain when getting your net worth up to zero.
It’s basic math. Your 15% credit card payments are an investment with a 15% return for VISA or American Express. Investments that pay 15% annually are great fun to be on the receiving end of, and correspondingly awful to be on the other end of. Think about that when, for instance, you’re fooling yourself into believing that you have to have an “emergency fund”, willingly oblivious to the emergency that’s already enveloping you.
Once you’re at zero, and have excess cash, only then should you look at investing it. Investing, after all, is nothing more than deferred spending: forgoing little rewards today for bigger ones tomorrow. Until you’re in a position to defer that spending, i.e. until you’ve paid off all your consumer debt, investing should be the last thing on your mind.
But once you’re there – and better it take you 2 or 3 years than 20 or 30 – it’s a glorious place to be. The very purpose of money, at least for those of us who’ve figured out the secrets available to anyone willing to look for them, is to free you from day-to-day drudgery. Leverage what you earn, beyond what you need for living expenses, and you’re on the road to mastering your money and having it do your bidding. Which is far, far better than the alternative. (And if you have no idea where to start, this is fantastic place to start.)