Clear Debt From Your Life In 2-5 Years

I recently read “The Total Money Makeover” by Dave Ramsey… Dave proposes a very common debt reduction plan – and one that has gained a lot of popularity in recent years. He calls it a “debt snowball”, and says to start with your smallest debt, work on paying it off using “gazelle intensity”, and then adding the payment from it (and any other money you can come up with) to your next smallest debt until it is paid off, and then applying all of those payments to the next smallest debt until it is paid off, and so on. Dave says that if you use this plan, and you truly give it everything you got, most people will be debt free in approximately 2-5 years (all debts paid off except their primary mortgage, which apparently will sometimes be paid off in that amount of time and sometimes will take a little extra work after that). The snowball effect being that, each time a debt is paid off, the payment from it and all previous debts grows like a snowball, and gains momentum, making it easier and easier to pay off bigger debts.

In the stone age of financial planning, financial planners said you should make the minimum payment on all debts except for your debt with the highest interest rate, and apply all extra payment to that debt. The problem with that was it didn’t consider the psychological make up of people. If your highest debt was a large one, it took a very long time to make a significant dent in it, and most people would give up because they didn’t see enough progress. Same idea as in weight loss – you do crazy dieting or exercise in the beginning, which you can’t maintain forever, because you must see progress; if you diet and exercise for weeks without any noticeable progress, your enthusiasm fades and you give up. If you start with a very small debt, you can make noticeable progress, get fired up, and have even more intensity to continue the plan. The concept is not unique to Dave Ramsey – though the book at times makes it sound like “his plan”. What is unique is Dave taking the “debt snowball” up as his personal crusade, and backing it with a fire and intensity rarely seen in financial planning. Let’s face it – most people find budgeting to be slightly less exciting than… watching grass grow.

Dave’s passion for his plan is catchy, and it is probably a great plan for a lot of people, but I am not sure that Dave will admit it is not for everyone. Dave apparently crashed and burned in real estate investing using debt/leverage, and he takes on the idea that any and all debt is bad and will ruin anyone and everyone. He fails to acknowledge anywhere in the book that I could find even the remote possibility that debt can be a tool for good (a la Robert Kiyosaki). Many a man has made his fortune by the wise use of debt (as a tool). Most large and successful businesses, at some point or another, expanded through the use of debt. Countless real estate millionaires made their fortunes by borrowing wisely, leveraging their real estate investments, and benefiting from positive cash flow, mortgage pay down, appreciation, tax benefits, etc. (and, yes, admittedly many have failed in these same endeavors through the unwise use of debt).

By the same token, let’s talk about credit cards. They are a double-edged sword – a weapon that can badly injure the user, and that, used correctly, can be a great tool. Dave Ramsey suggests no one ever keep any credit cards for any purpose. I disagree. I use my credit cards wisely, and I love them. I learned it from T. Harv Eker. I charge almost all of my standard business expenses on one of two credit cards, and I pay the balance in full every month. Also, I charge enough in routine business expenses (my business is rental properties and rehabbing houses) that the cash back and other bonus awards from my credit card use provides my family with nice meals out regularly, gives my wife funds that pay for most of our family pictures and photo books, and other occasional bonuses. Harv says his credit card use pays for his family’s all-inclusive vacations. Terrific. I have good credit. I get credit card offers in the mail all of the time offering me zero interest on balance transfers for up to eighteen months. I recently took advantage of two such offers. I had 2-4 years left to pay on my wife’s car and my truck. I decided that, by transferring to zero interest for eighteen months, I could pay the same amount I was already paying every month in vehicle payments, and, because 100% of every payment would go to principal (no interest), I could have both loans down to nothing or a fraction of what I owed on them in eighteen months. At that point, if my interest jumped up to 20% for the remaining balance, and I had no other options to reduce that rate or pay off the balance (which is unrealistic), I STILL WOULD HAVE BEEN MILES AHEAD! Dave, show me the flaw in my logic!!! What Dave should say, somewhere in his book, at some time, is that his plan is great for many, but is not for everyone. He should mention that, if you have self discipline, and if you manage your money well, that maybe, just possibly, debt can be a tool that works for you. I ASSURE YOU IT CAN BE!!!

Anyhow, the book is a quick, easy read, with many interesting stories, and, as I have said, it can benefit many (including most average Americans). Dave exposes many common misconceptions about money and finance, and proposes a plan that has definite value for those who are serious about eliminating debt from their lives (and are willing to really throw themselves into it). Now, don’t kid yourselves into thinking that Dave is sharing a big huge secret, and that, once you know it, you can become debt free fast without applying any effort. Dave preaches that you have to really throw yourself into the plan, and do whatever it takes to get out of debt. He talks about extreme budgeting, garage sales, overtime or second jobs, part time businesses, etc., in addition to managing your money wisely, but he says it will be one of the most worthwhile things you could ever do for yourself, and it will change your life. Dave says, “if you will live like no one else, later you can live like no one else”; in fact, it is printed across every single page! I like it better the way I have heard it before – if you are willing to do the things others won’t for a short time now, you will be able to do things others won’t for the rest of your life! Either way, there is value in Dave’s plan, and if the idea suits you, I absolutely would recommend “The Total Money Makeover” for you, my friend!

P.S. – Dave provides a bunch of budgeting forms in the back of the book that might be helpful – I even wrote up a copy of “The Debt Snowball” chart myself, as I may apply some form of it myself some time if and when it suits me.

Great related quotes:

“A budget is people telling their money where to go instead of wondering where it went.” –John Maxwell

“If you aim at nothing, you will hit it every time.” -Zig Ziglar

No Crystal Ball About the Future of Real Estate

I recently shared Frank McKinney’s opinion that the real estate market is likely to turn around in late 2008 or in 2009… Now I read an article by David Butler, who is published regularly on www.creonline.com, and figured it is only fair to give airtime to a contrary opinion (see “Dead-cat Bounce” below). The truth – none of us has a crystal ball about what will happen to real estate in the short term, and we all have to act prudently, and do the best we can with the circumstances that surround us. Ten to twenty years out, real estate prices will almost certainly be much higher than they are today, but not everyone that owns real estate can wait that long for a comeback… Personally, I think there is a lot of opportunity in the current real estate market, and I am rehabbing two houses right now that I hope to flip, but, until I have completed those flips and have profits in hand, I wouldn't be fair for me to tell you “yes, it still works today.” Also, I bought both properties at prices where I can keep them as rentals if necessary. I will let you know how my flips work out. Also, my single family rentals still cash flow, and I am keeping them, and I expect them to get better in the next few years because the rental market is getting stronger right now, plus I expect to see Florida property taxes dropping significantly in the next couple of years (as recent lower property values get factored in by the property appraiser’s office). On to the part of David’s article that predicts a gloomy future for real estate values (go to www.creonline.com to see the article in its entirety).


CRE Online > How-To Articles > A "Dead-Cat Bounce" in the Rocky Real Estate Market

A "Dead-Cat Bounce" in the Rocky Real Estate Market
by David P. Butler
[June 2008]
The phrase "Dead-Cat Bounce" is finance industry term derived from the notion that "even a dead cat will bounce at least once if it falls from a great enough height," and describes a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise--before resuming its downward movement. The connotation is that the rise is not an indication of improving fundamentals of the stock. A "bounce" is often the result of speculation. Traders buy into what they hope is the bottom of the market, expecting a "bounce" and making a quick profit. Thus, the very act of anticipating a bounce can create and magnify it. There is evidence of a "Dead-Cat Bounce" happening in the current real estate markets in several parts of the country. Investors are rushing headlong into some of the worst markets (Stockton, CA is one such example) and actually bidding up prices against retail buyers for REO listings--on homes listed at prices still higher than the affordability levels for the areas where they are located! Many investors have been brainwashed by Wall Street and the media to think that "buying low" is always a winning approach. But "buying low" all by itself, is a very speculative strategy--and more so in times like these. The biggest challenge is that turnarounds are often difficult to spot because deflation in the housing markets typically runs about 18 quarters (4.5 years), and false bottoms in housing sales and starts are common. It is imperative to stay focused on ways to navigate the foreclosure and pre-foreclosure markets right now because the real opportunity will only come in 2009-2011, depending on the region. So--buying for value is the optimal strategy.
Housing market declines are steep and accelerating
The current recession will most likely turn out to be the worst in decades. There are many more problems ahead. My forecast for the next 5 to 7 years includes the following economic scenarios.
Deleveraging (the process of taking leverage out of the financial system) is the dominant theme in the markets in 2008 and going forward for at least a year, as the capital markets recoil from the massive losses in structured finance and the housing bubble. This process will transform the banking industry, putting an increasing drag on economic growth and corporate profits.
Due to the weakness in the economy, the next trend in the housing correction will be a crisis in prime mortgages, and...
A likelihood of a meltdown in the $40 trillion global credit CDO market for the same reasons that crashed real estate securitizations, as a massive credit card crunch is looming right around the corner;
Many more hedge fund blowups, corporate bankruptcies, bank failures;
The inherent rise or interest rates that has to come with bank deleveraging--only now in its early stages. After 2010, you should expect inflation and interest rates to really begin soaring, which will put an increasing drag on economic growth and corporate profits.
From their peak in 2006, home prices will ultimately decline to pre-1999 levels between now and 2012. Commercial real estate market will also suffer.
The rental market is set to heat up, and will provide good investment opportunities for patient and prudent investors.

Financial Freedom For a Fist Full of Nuts! Can It Be True???

A friend recently loaned me “The Total Money Makeover”, by Dave Ramsey (I will save some of the details of the book for another day), and in the book Dave shares a story I have heard several times before… I will use a version I heard that is only slightly different than Dave’s version.

The way I heard it, people used this method to catch monkeys in jungle areas. The captors would cut a small hole in one end of a coconut shell, just big enough for the monkeys to fit their open hands into, and then put nuts, a favorite treat of the moneys, into the coconut shell. The captors would tie a rope to the other end of the coconut and hold it or anchor it, and wait for the monkeys to come along. The monkeys would put their hands into the hole and grab the nuts, but the hole was so small that, while their open hand would fit into the coconut, their closed fist would not fit back out through the hole. The monkeys, in their desire for the nuts, refused to open their fists, and the captors could easily walk up and capture them.

Now, first, you and I think, “Gee, it sure is silly of those monkeys to be so greedy for the nuts that they allow themselves to be captured, when all they have to do is drop the nuts and they can escape.” Simple enough, right?

Next question… Do you have a ‘fist full of nuts’ in your financial life? Something that you are holding onto so strongly, and you will not let go no matter what, that might be costing you your financial freedom? How about something like keeping up with the Joneses? How about wanting to drive a little too much vehicle for your finances? How about a little too much fun, or not quite enough hard work? How about too much house, or too much credit card spending? How about too much television time that could be used more productively in your part time business, or working some overtime, or getting a second job for a short period of time to push your finances to a new level? How about expensive habits like gambling or smoking? How about ideas regarding how to handle your finances, that, despite the fact that they have not worked for you in the past ten years, you continue to cling to, instead of learning new, better ways (you have heard the saying, ‘if you always do what you have always done, you will always get what you have always got’)?

Truthfully, don’t almost all of us have one or more examples of ‘a fist full of nuts’ in our lives? I know of some I have been able to get rid of to a large degree (like television), some that have burned me badly (like thinking I could outsmart the market place using stock options), and I know of some I still have (like the big fancy truck I decided I deserved, and the nice house and pool I decided my family deserved). Now, some of my things, like the house and truck, I decided were earned because of the hard work and real estate investing success I enjoyed over the ten years prior to those purchases, and maybe that is completely true, and maybe it is only partly true – I can’t say for sure until the end of the story, but this I know for sure… if the monkeys would have been willing to let go of the nuts, they could have escaped. And this I know for sure… there are a lot of things that the average American holds onto tightly, that, if they were willing to let go of them for a short period of time early on, it would allow them freedom from the rat race and financial bondage for the rest of their lives.

How much sense does it make for millions and millions of Americans to drive fancy, new vehicles, live beyond their means using credit cards, and spend their whole lives struggling financially, living paycheck to paycheck, if the alternative is to drive cheaply for five or ten years early on, keep the spending under control, put all of the extra money into wise investments (or, if they adhere to Dave Ramsey, debt reduction), and then after five or ten years they could have comfortable finances and be able to drive what they want and spend what they want for the rest of their lives?

One way or another, every day with every dollar, we all vote for what happens in our lives. We decide on a fist full of nuts, followed by a lifetime of financial captivity, or we decide to make some sacrifices, so we can enjoy a future of financial freedom. Best wishes at the ballot box!!!

Successfully Start a Business, & Successfully Invest in Real Estate

In his book, ‘Ready, Fire, Aim: Zero to $100 Million in No Time Flat’, Michael Masterson says that "Nothing matters more than selling." "Many first-time entrepreneurs have the impression that they are doing things in a logical order when they look for the perfect office space, have logos designed, and order a lot of inventory. The reality is they are wasting valuable resources on secondary and tertiary endeavors. If no one is going to buy what you want to sell, you've just wasted a bunch of money on a business that will never be."
Author Susanna Hutcheson, commenting on Masterson’s book, says “I see this when a client comes to me and has spent most of his small budget on Web site design and left the important thing, the sales message, for last --- just to fill in the beautiful design. They've spent their money on the least important and have no money left for the most important… I've seen this first hand in my own consulting business. Entrepreneurs tend to put their values and their money on all the wrong things --- and this leads to certain failure.”Here are Masterson’s three steps to starting a business:Step one: Get the product ready enough to sell, but don't worry about perfecting it. Step two: Sell it. Step three: If it sells, make it better.

While this all sounds fairly easy, it's not. "Selling can be terrifying," Masterson says. "It can be tough, gritty, unglamorous work. But when you make that first big sale, you realize it's also exhilarating. And like it or not, you probably won't become a successful entrepreneur until you can sell your product or service in your sleep."

Masterson also shares that you have to give far more than you expect in return to succeed. Similarly, I have read numerous times that you should give customers more value than they expect to get for the price, and I believe it.

What does all of this have to do with real estate? Two points.

First point. Several years back I talked to an investor who I saw at my Real Estate Investment Association every week for a few years. It was the first time we really spoke at length, and I asked him if he rehabbed houses. No, not yet anyhow. So rental properties is your game? No, but I wouldn’t mind doing those some time. Okay, then you wholesale houses? No, but I almost did wholesale one, and I would have made big money, too, if it worked. So now I am at a loss, and I ask him what he does do in real estate. He is still learning, and trying to figure out what will work for him. This after a few years of going to meetings every week religiously!!! [some of you are in my real estate investor association, and meetings are every other week; well, back in the day we were hard core, and met every week]

I see people all the time that buy real estate courses like they are candy. I go to free seminars and watch the same people rush to the back of the room to buy three and four different courses – any one of which would probably provide more information than they would need to get started. I see people study, read, spend time and energy learning the business, networking, and several years later they have still never made one red cent in the business. I see people with LLCs, corporations, accountants, attorneys, fancy business cards, using real estate investor terminology that I have never heard before, and they still haven’t done one deal.

I have seen people that have gone through every secondary and tertiary endeavor possible, but they never stopped to ask the most important question of all… Can I go out, locate bargain properties, and figure out a way to make money on them? At what point do you stop studying, learning, buying courses, buying sophisticated software, networking, etc., and just ask “can I make money in this business (or investment)?” [I think many who call themselves real estate investors are not investors, but are running their own small business, but we will save that for another article…]

Masterson says people starting a business need to sell, but it is hard, so they do everything else first and don’t find out until afterwards if their product or service is wanted. People interested in real estate investing find it somewhat fun and easy to learn, study, read, network, set up companies, set up offices, etc., etc., so they do those things, but they wait way too long to go out in the marketplace and find out if they are able to locate properties, negotiate bargains, and find a way to make money on them.

That leads into my second point. Personally, I believe that almost all businesses should be started on a shoestring, while you accomplish that one task… Find out if there is a market for the product or service you want to sell, and can you make money meeting the needs of that market place. If the answers are yes, then start meeting those needs, and base your expansion on your success and the level of demand for your product or service.

Real estate investing should be done in a similar manner. Personally, I did most of my studying in the early years in the library, and by picking the brains of a couple of co-workers that were successful real estate investors. I may not have spent one red cent until I bought my first property, and if I did spend some before that, it wasn’t much. The fact is, by many standards, I still run my real estate investing on a shoestring budget. I minimize all expenses, except for when it comes to giving the customer the best product I can at a reasonable price (part of my formula is to rehab houses nice, giving potential tenants and buyers more than they expect in a home in a given price range).

You might say, “Ready, Fire, Aim” (from Masterson’s title) is crazy, and you have seen some investors that rushed into crazy deals and got in over their heads. I agree with you. But don’t they still have the same issue as in my first point – they tried to buy, buy, buy, but they didn’t stop first to ask “can I go out, locate bargain properties, and figure out how to make money on them?” “Can I make money in this business?”

Anyhow, not my best article, but those were just a couple of points I noticed and wanted to drive home about how to successfully start a business, and successfully invest in real estate.

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My vacation, and a business quote for the day...

Hi everyone!

I haven't had time to write much lately... My family and I just got back from two weeks of vacation in Michigan, much of which was spent with my wife's relatives... I guess every family has a few 'quirky' members, but most of them are terrific, and we had a great time (really, we did)!

We did some boating, with tubing and water skiing, some swimming and hot tubbing, played ping pong, got to see many houses and talk to Tammy's relatives about what they have done with their houses and what they plan to do (which a house guy like me always enjoys). We spent three days in Mackinac (tourist town), where we had a jacuzzi in our suite, and an indoor water park at our hotel, where we had hours and hours of family fun. We discovered "ladderball", which is a fun game that was new to us, went to a wedding and reception, a family reunion, and much more. My six year old got to have six birthday parties, as most everyone wanted to do a small party for his July 1st birthday, plus he got a real 4-wheeler from Mom and Dad at his first party before we ever left for vacation (it will be tough for us to ever top this birthday)! We stayed busy, showed off our two amazing boys to everyone, reconnected with many, and most of the rent checks came in while we were away. One of the benefits of buy and hold real estate - earning money even while you are gone on vacation!

I am not sure how much writing I will do in the near future, either, as we are finishing upgrades on one of my rental properties now, with a rehab house waiting to follow that, and I close on another fixer-upper Tuesday of this coming week. Time to get back to basics, get out to some job sites, and start making sure things are getting done, done right, and done in a timely manner! I have been reading Frank McKinney lately, which I thoroughly enjoyed, and I am fired up to get back in the field and start leading by example (aka - hard work). I don't usually do a lot of the fix up myself, but I can do some, plus the planning, some shopping, etc. (it has been a while since I got very 'hands on'). Eventually I will let you know if buy, fix up, and sell works for me in this real estate market (hopefully it will be good news - I am confident that it will be)!

Anyhow, I thought I would share a business quote for the day...
"When everyone is looking for gold, it is a good time to be in the pick and shovel business." -Mark Twain