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MAKING MONEY AND THE LOOKING GLASS
By: Matt J. Gilbert
Okay, so what do I know about making money? I'm just a
bankruptcy attorney. Unfortunately for me and my
particular kind, you just don't see the neighborhood
bankruptcy attorney driving down the street in a
Porsche, attending banquets with the rich and famous, or
having the private yacht "readied" for the weekend.
Here is a reality check, by the way: anybody that will
be sailing around in his or her private yacht this
weekend already has money. In fact, just give me just
one good-sized yacht and I will make plenty of money.
Man oh man, what I could do with a yacht.... Oh, where
were we? Ah yes...making money.
See, what you want to know about making money, is how to
do it when you don't have any to begin with-that is the
real question. Unfortunately for you and your kind, I
don't have the absolute answer yet. Hey, I'm a
bankruptcy attorney. And the day you see me at the
banquet, is because I just sold that yacht.
However, the advice I can give you comes from my
experiences with failure-oh and do I hate that word:
"failure."
Remember, there is one positive thing that comes with
every failure: it's learning a lesson, albeit painful,
on how not to succeed. And in learning how not to
succeed at a particular task, you have, at a minimum,
narrowed the scope in your search for success. This same
lesson holds true in all aspect of life, including
making money.
You want to know how to make money? Why not learn some
of the common ways people fail at the task? This might
not provide you with the precise path to riches, but
maybe the scope of your search for success will narrow.
I know, it seems backwards-like this advice is coming
through one of Lewis Carroll's looking glass mirrors-but
that is my view, for I see people every day who haven't
made money.
I will tell you about the common mistakes they have all
made, and my advice to you is, "Don't follow their
lead."
Credit Cards
I have heard it all. They are so convenient. I need one
in case of emergencies. What if I need to rent a car or
purchase a plane ticket? I need one for the business. I
have to have a credit card to use on the Internet. Trust
me, I have heard every excuse. And credit cards are the
number one reason people file bankruptcy. In my business
I call credit cards "The debt they don't really want you
to pay."
Think about it: how does a credit card company make
money? Aside from minimal transaction fees, they make
money when you pay them interest, plain and simple.
Consider the credit card holder who diligently pays off
his or her entire card balance at the end of every
month. In a twelve-month cycle, the credit card company
has sent that individual 12 monthly accountings plus a
yearly accounting; it has provided 24-hour a day
customer service for 365 days with fraud protection,
access to funds through merchant accounts and banks, and
often use-incentives like free miles, discounts, etc.
And as concerns the credit card holder who pays off the
card balance at the end of every month, what was this
person charged for all these services? Nothing. This
person paid no interest.
A credit card company makes money when you can't pay the
balance off at the end of the month. A credit card
company makes even more money when you are over the
limit, pay late, or fail to make your minimum payment.
That cushy 9% interest rate then hikes to 24.99% because
you are in default of your credit agreement. Higher
interest means they make more money. And this is exactly
where they want you to be, unable to pay your debt in
full.
So, when you get that notice in the mail that says, "We
have increased your credit limit" it's not because you
are special: you are getting suckered. The credit card
company has reviewed your account, realized you are
capable of paying your debt off, and thrown out an
enticement for you to put yourself in a position where
immediately paying off your debt becomes impossible. Do
this with several cards and you become my client.
Then what is the safe balance to carry as concerns
credit card debt? Zero. There is no safe balance. If you
are carrying a balance on your credit cards, you are one
step closer to making an appointment with me. It is as
basic as that.
Unemployment
Plan for it: you will be unemployed at some point. One
of the most common causes of personal bankruptcy is when
the breadwinner of the family loses their job. Most
often this is not even a problem caused by the permanent
loss of employment. If you are living paycheck to
paycheck, as most people now do, two months without work
and paychecks and your world collapses. Benefits from
unemployment insurance often don't cut it. Consequently,
plan for any short-term unemployment by having enough
non-credit resources available to carry yourself through
several months while you find new work.
Medical Insurance
If you are not insured, you should be looking into some
form of medical coverage after you finish the last
sentence in this article. The days are gone when you go
to a doctor and pay your bill out of pocket. If you
don't have medical insurance and you suffer any
significant injury, you will be in my office asking me
whether your house can be protected.
Medical bills can be astronomical. At least once a month
I have to file bankruptcy for someone who was not
medically insured. If you cannot buy medical insurance,
look into whatever government programs may be able to
help you. If you can afford the insurance, and have
declined insurance so that you can save on having to pay
the premiums, the looking glass is telling you, "Bad
idea!"
Small Emergencies
Understand that catastrophic emergencies are not the
topic here. Other than relying on insurance, it is
pretty much next to impossible to plan for major
catastrophe. Million dollar medical bills, catastrophic
property loss, substantial permanent disability and/or
job loss-all these things happen, and the end result is
usually an unavoidable bankruptcy.
The emergencies that you can predict and foresee are all
of those small emergencies that creep up on us every
year-you know, the child that all of a sudden needs
braces, the car transmission that needs to be replaced
22 miles past the warranty, the water heater that dies
on Sunday at 9:00 pm in mid-winter or the air
conditioner that fails when its 112 degrees outside.
These are the "emergencies" you can do something about.
That's right, you can actually plan for them.
Now, most of you are thinking, "That's why I have a
credit card." Buzz! Wrong answer.
Here is a simple trick I learned from some TV show years
back-sorry, I do not remember the name of the show-but
here is the trick: look back over your last 5 years of
major expenditures, reviewing all those things that
would qualify as small emergencies. These would be the
expenditures that you paid eventually, but not items
that you were able to pay in less than two months.
Determine the highest expenditure that you have had for
a small emergency in that 5-year span. Most of you will
find that the small emergencies fall in the "thousands
of dollars" range. The trick is to save up 75% of that
amount and put the money in an investment account, like
a money market account or high yield savings account.
During those "non-emergency" times of you life, you will
be making money through that fund-and when a small
emergency occurs, you won't be facing high credit card
interest rates during an already difficult financial
moment. Also consider that you may have already saved up
this fund. For example, most 401K plans allow you to
borrow up to 50% of your 401K in times of emergency.
Generally you pay back the 401K loan over the following
five-year period.
True enough, the next trick is to keep your fingers out
of the emergency fund unless you have an emergency-and,
no, a new big screen TV prior to football season is not
an emergency.
Car Loans and Deficiencies
Don't purchase what you cannot easily afford. I cannot
count how many bankruptcies I have filed over the years
for people that have bought cars they simply couldn't
afford. I was driving to work the other day and a guy
drove past me in a Kia-you know, the one that looks like
a Jaguar, but isn't. The license plate read "PRBYJAG"
(Poor Boy Jag for those of you who are not license plate
literate). Aside from the obvious chuckle, the whole
scene reminded me of this issue in bankruptcy practice.
I mean, you got to respect a guy that knows what he
wants and also knows he can't afford it.
When going out to buy a car, don't get all glassy-eyed
and foolish listening to the salesman: know what you can
afford before you even shop for a car. Take into
consideration the cost of gas, the cost of full-coverage
insurance, the cost of registration and maintenance
costs all in combination with your car loan.
When applying for a car loan, budget your loan for a
five-year payoff. You can stretch out the payment term
to seven years, but don't do that solely to afford more
car. Rather, budget for a five-year pay-off and only
stretch the loan if you are relatively certain the car
will last seven years-and relatively certain that during
those seven years, considering your expected usage, that
the loan balance declination will roughly follow the
depreciation of the car.
Use up a car too fast, or stretch a car loan out too
far, guess what you get? You get a worthless car with a
big loan balance. In bankruptcy we call it a deficiency
balance.
Over the years, I have seen these deficiency balances
climb higher and higher. Depending on the car, some of
these deficiencies are well into the mid-$20,000.00
range.
Being a Cosignor
Are you crazy? Here is a person that has gone in to
purchase a product where a professional salesperson,
with their whole bag of financing tricks, could not pull
off a sale. Here is a loan that every professional
lender has declined. You think you know more about the
lending business then the professionals? This is their
business. When you cosign to qualify someone else for a
loan, you should absolutely expect to pay the loan
yourself-remember, at least two professionals expect it
because that's why they would not write the loan without
your signature.
If you recognize that you will likely have to pay the
loan yourself, and you are willing to do so without
sorrow or remorse, then sign away. Otherwise, find a
less expensive alternative.
Buy Now - Pay Later.
Our entire society has to rethink this mentality. There
are some purchases where financing is unavoidable-a new
house, a new car, business capital, etc.-and I get that.
But for everything else, even if you have the credit and
can afford the payments, buying now is not an answer. As
a society, we have all but abandoned the idea of saving
up to make a purchase. Just ask yourself, when was the
last time you spent more then 30 days saving up to
purchase something outright? It's kind of funny. When
you do save up, magically the "need" for that item
changes over the months. Very often you will find
yourself not buying that thing you impulsively wanted 30
days ago-and when you do save up and eventually buy some
special item, the appreciation of your purchase takes on
a whole different form.
Try it. Save up and buy something. It will be strange
that first time, but maybe it will become a habit.
Well, there you go. These are some of the most common
reasons that people find their way into my office. Avoid
these pitfalls, and maybe some of you will make a
fortune. Maybe these little financial tidbits seem
rather obvious to you; however, trust me, I would not be
in business if it were that obvious.
Look, I am an attorney. Don't think I won't happily
accept your money to file your bankruptcy. I will. Truth
be told though, I would much rather that you find wealth
and happiness in your future. That way, you can let me
use your yacht on the weekend when you have to attend
the banquet with the rich and famous.
Anyway, hopefully, by looking at the opposite of making
money, at minimum, you might have a better focus on how
to structure your budget and choices, thus allowing that
"money tree" of yours to flourish.
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