Finding Financial Freedom
Lesson 2: The Peril of Debt
(Money Management for KMHS Seniors)

Review (Discussion): 

Step #1 of "Finding Financial Freedom" was to "Learn the Awesome Power of Multiplication." What does that mean and why is it so important? 
Step #2 was to "Invest Wisely: Let Multiplication Work for You." How can we begin to let multiplication work for us? What are the "Laws of 10's and 7's," and how do they help us with investing?

For homework, I asked you to ask your parents and other adult relatives and acquaintances for financial advice. What did some of them say? 

Introduction: The Two Families - Finding Financial Freedom

Step #3: Avoid Debt! (Don't Let Multiplication Work Against You.)

Your greatest financial question:  "Will you harness the awesome power of multiplication to work for you or allow others to drain your money by having multiplication work against you in the form of 'easy payments?'"

The X-Box Dilemma: What would you do?

Beating the System: Credit Cards and "Easy" Payments 

$400 - Advertised price for X-Box and two accompanying games
$520 - Amount actually paid by credit at 13% with minimum payment of 3% over 51 months. 

$9,000 = Average family credit card debt 
$1170 = Average amount paid in interest per year (Like throwing a $100 bill out the window every month!)

Other fun stuff you could do with $1170 per year besides throw it out your window in interest. 

• Take a cool vacation.

• Use $100 per month for something cool.

• Invest that $1170 per year at 10% interest and have 1/4 million dollars in 32 years or 1 million dollars in 46 years. 

Beating the System #2: Car Payments

“USA Today notes that the average car payment is $378 over 55 months. Most people get a car payment and keep it throughout their lives. As soon as a car is paid off, they get another payment because they “need” a new car.” (Dave Ramsey)  

Just save that money for 8 months and you’d have $3,000.00, enough to pay for an older, but reliable car. So then you put the $378 per month in a total stock market mutual fund. If it averages 12% interest, and you pay in the money each month from when you’re aged 25 to 65, you’d have $4,447,084.01 at age 65.

Unless you have tons of money, buy reliable, used cars.  

1. They cost less.
2. Cars last longer these days, so that many are reliable for 200,000 or more miles.
3. A new car depreciates greatly in value the day you drive it off the lot.

Beating the System #3: House Payments (Mortgage)

The problems people run into include:

• Buying beyond our means. If we're stretched to the max, we can't enjoy life, even in a mansion. 

• Paying over too long a time period. 

• Forgetting the impact of frequent moves. 

• Purchasing at a premium price.

What people pay for the same house: 

$100,000: The cash price
$151,894: Paid over 15 years at 6% interest 
$215,000: Paid over 30 years at 6% interest

The bottom line: Pay the maximum you can pay comfortably each month on your house payment.

Action Points: 

• Commit yourself to learn financial management. Talk to your parents and other adults. Read. Talk to your friends. 
• Flee debt like your worst enemy. Use debt only for extreme emergencies and perhaps paying on a house, not for getting stuff before you can afford it. 
• Learn how to invest wisely.
• Resist Peer Pressure ("keeping up with the Joneses") and Live Within Your Means. 

Sources of Financial Wisdom:   

Money Management Guru's:

http://www.daveramsey.com - Dave Ramsey is a popular talk show host who helps people move from paying debts to building wealth. 
http://clarkhoward.com - Consumer advocate who has advice on buying cars, finances, etc. 
http://www.vanguard.com - Great mutual fund company website with great articles to learn about investing in stocks and bonds. 

Interest Rate Calculator (Lots of these on various sites.)

http://www.bankrate.com/gookeyword/rate/calc_home.asp - Offers many helpful online calculators for car payments, mortgages, investing, etc. http://www.tcalc.com/tvwww.dll?Save - Play around with interest calculators like this to find out how fast your money will grow as you invest various amounts of money at various interest rates.  
http://www.cardratings.com/creditcardtrapcalc.html - Calculator to find out how much you pay over time if you carry a balance on your credit card. 

Sites recommended by the Atlanta Journal for Compulsive Shoppers 

www.stoppingovershopping.com - Gives treatment options.
www.4therapy.com/consumer/assessment/taketest.php - Take a self-assessment to see if you need help for a shopping addiction.
www.debtorsanonymous.org A 12-step recovery problem, including self-assessment questions.
www.addictionrecov.org/spendaddict.htm From the Illinois Institute for Addiction Recovery.

Helpful Radio Personalities: Clark Howard and Dave Ramsey.

Some Good Financial Books to Read (with a critical mind!) Read reviews on Amazon.com to learn the strengths and weaknesses of each book.  

• The Millionaire Next Door, by Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D. . Americans in general manage their money pitifully, digging themselves further and further into debt, while saving little or nothing for the future. Stanley and Danko decided to study the successful to discover what we might learn from them. They began their search for the wealthy in upscale neighborhoods, but discovered something odd. Many of those living large were not wealthy, but strung out on debt. Most of the wealthy were hidden away in quiet middle class neighborhoods driving affordable cars. That's why you just might find a millionaire living "next door." Most of them don't look like millionaires. Read this book to find out how the successful got that way and stay that way. Surprisingly, it's the way many normal people with normal salaries can get there, if they follow in their footsteps. Don't worry that it's 250 pages long and written by Ph.D.'s. It's written clearly and practically. 
• The Total Money Makeover: A Proven Plan for Financial Freedom, by Dave Ramsey (Nashville, TN, Thomas Nelson, Inc., 2003). Don’t be daunted by the 240 pages. The font is large and includes many testimonials, making it an easy read. Popular financial talk-show host Dave Ramsey writes and speaks with the passion of a man who took his family through the emotional hell of bankruptcy, but learned from his mistakes and achieved financial freedom. According to Ramsey, most of us are managing their money like idiots. Hard statistics indicate he’s right. We desperately need someone to tell us frankly how stupid we’ve been. Like the little boy in “The King’s New Clothes," Ramsey points out our financial nakedness, but follows through with a clear path to financial freedom. His answers include working smart and hard, living within our means, setting aside 3 to 6 months of wages in case of an emergency, paying off our debts “with gazelle intensity”, avoiding future debt like a plague, investing for the future, and giving to the needy. A strength is that he confronts the psychological factors that lead to financial problems, such as the peer pressure to "keep up with the Joneses". 
• The Richest Man in Babylon, by George S. Clason (Penguin Books). This delightful long-time best-seller has over 2 million copies in print. Many successful people refer to it as the book that most impacted their success. Learn the basics of acquiring wealth, not from dry discussions of facts and figures, but from intriguing stories set in ancient Babylon. A fun and life-changing read! His main principles are:
  
  1. Save 10% of your income. 
  2. Live within your means. 
  3. Invest your savings wisely. 
  4. Make your home a profitable investment.
  5. Plan for your future needs. 
  6. Increase your ability to earn through growing in wisdom and skills. 
  
• Financial Peace, for the Next Generation, by Dave Ramsey. (a high school curriculum)
• Forty Eight Days to the Work You Love, by Dan Miller (Broadman and Holman), 224 pages. You'll do better at your job if you love your job. In light of this obvious thought (duh), shouldn't we be all about discovering who we are so that we can find a job we can really get into? Read this book to help you discover who you are and how to find the right niche for your personal temperate, desires, skills and abilities. 
• Anything by Larry Burkett or Ron Blue. Wise, insightful faith-based authors. 

• Think and Grow Rich! ( The Original Version, Restored and Revised, Aventine Press), by Napoleon Hill, 412 pages. Hill spent decades studying over 500 of America's wealthiest, most successful people.  The result is a classic that influential speaker/author Brian Tracy calls "the best single book on personal success ever written."  

• The Wealthy Barber, by David Chilton, (Prima Lifestyles, 3rd edition), 224 pages. The Book of the Month Club called it "quite simply the best financial self-help book." It's appeal, like The Richest Man in Babylon, is that it gives sound, ageless, financial advice in an appealing, often funny, story form. In brief, a teacher, business owner and plant worker need financial advice. They are told to consult with a local successful barber who gives them sage advice. The introductory kind of book that people give to newlyweds and parents to pass on to their children and grandchildren.

• Mary Hunt's Debt-Proof Living: The Complete Guide to Living Financially Free (Broadman and Holman) 346 pages, Mrs. Hunt found herself saddled with $100,000 worth of unsecured debt and had to radically change her lifestyle. This book shows how. Many say that it changed their lives. A faith-based guide to getting out of debt and staying out of debt.

• Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money-That the Poor and Middle Class Do Not!, by Robert T. Kiyosaki (Warner Books), 205 pp. USA Today called it "a starting point for anyone looking to gain control of their financial future." It's appeal? Principles of accumulating wealth are couched in the story of how the author learned money management from an early age. His real dad was an educator with a Ph.D. His other "dad" was the father of his childhood friend. Surprise! The poor dad is the one with the Ph.D.! A great book for driving home the need to focus on building assets rather than just getting a raise. Also a great book to pique students'  interest and get them discussing. Weaknesses: 1 - His criticisms of formal education may come across too strong to some. 2 - He comes across as if the accumulation of wealth is almost everything. 3 - Some advice is rather ludicrous, like promoting short-term stock trading with the claim that he successfully invested in "a new undervalued oil company that was about to find some oil deposits." (p. 155) So where do you find insider information like that, unless you're pretty tight with God? Yet, in my view, the strengths of this book outweigh its weaknesses.

• How to Get Out of Debt and Live Prosperously, by Jerrold Mundis (Bantam), 320 pages. Provides the motivation to stop accumulating debt and start paying it off.