The Magic of Quixstar*

* Quixtar® is a registered trademark of the company by the same name and to avoid use of this trademark, I have added the letter 's' to its name in my post but I refer to the same company.

I have been receiving comments from a few of my blog readers to write about this subject. Much ink has been spilled about the multi-level marketing (MLM) business, both for and against it, often with passionate arguments on both sides. Quixstar (erstwhile Amway Corporation) is perhaps the most well known and widely discussed MLM company. Most successful professionals have, at one time or another, been approached by ubiquitous "business owners" (IBOs) or "entrepreneurs" of Quixstar at such diverse settings as the grocery aisle at a local supermarket and the top floor of the Empire State Building overlooking New York City (where I was approached). Even places of worship have not been spared. There must be something wonderful about a business that encourages its practitioners to share their insights about wealth creation to anyone willing to listen. The altruism of such folks deserves some careful consideration. I have been fortunate enough to have found that this business does not suit my temperament (selling products directly is not my cup of tea) even if I could get rich doing it, which is unlikely, as I have discovered.

I am not going to diss the Quixstar business model in this post but what I have problem with is why are so many smart people (including successful professionals from India who seem to the new face of Quixstar) barely making any money in spite of trying so hard. A friend of mine has been a Quixstar business owner for the last 4 years. He, his wife and his 3 year old daughter have been "successfully" doing it and have supposedly reached the 'Direct' level. They have apparently developed 7 'downlines', and some of them are apparently starting to do well. Whenever I ask him about why he is doing it, pat come the canned answers, "residual income", "not working to make my boss rich" and the ever-popular "financial freedom".

I never find him and his family relaxing on any weekend or even on weekday evenings. They are always busy attending "meetings", "seminars" and "workshops". I am told they are motivational workshops, but the only thing these meetings seem to be doing is motivating them to attend more meetings! My friend and his family work crazy hours beyond their full time jobs and drive crazy distances to attend these meetings. They even drag their 3-year old along at times. C'mon, how many motivational meetings do you need to attend to run your business? If the business is based on a sound business model and YOU believe in it and YOU have the power to grow it, why do you need to spend money attending motivational pitches and drive around others as well to these meetings? Would you rather not spend your time and money growing your own business?

Speaking of business, during my research, I was often confused as to what they were selling. Were they selling products (unknown brands but supposedly superior to national brands) to their clients OR do they sell clients on their 'business model'? The more I looked into it, the more it appeared to be latter. Also, if your plan is grow through selling products, why is it that the Quixstar motivational tapes/CDs/DVDs sell a whole lot more than the Quixstar products themselves? What is the business sense that drives you to spend $100 buying motivational tapes to earn $50 in product sales? Isn't the fundamental rule of a business to earn more than you spend? What is the principal product line here - consumer products or motivational tapes or new "clients" to join the business?

The money part started to unravel even more. I asked my "successful" Quixstar friend how much money he makes in this business. He said about $2500 a month. That's not bad, I thought, although not spectacular considering he spends about 4 hours on each week day and 16+ hours on weekends to earn this much. If you consider the time, he earns $17 per hour from this business but considering his wife works and travels with him, the earnings per person is just $8.50 per hour. This is what he is slogging for, I wondered, when he and his wife each earn more than $75,000 per year working in professional jobs.

I should have stopped right there....but silly me, I asked him, "so you reported about $30,000 in additional income in your 1040 last year? You must have paid the marginal tax (33% at their income level) on this, so you netted probably around $20,000 last year". This is where the math unraveled beyond belief. I learned that $2500 is what he makes "gross" per month and that he pays business "expenses" from this figure. Considering the motivational tapes, downline sponsorhips, travel costs and several other expenses, I realized he barely breaks even! This is the business that is going to make him financially free? And he is considered "successful" in it? The more I learned about how the business works, the more it worried me. At some point during my research, my understanding of Quixstar transformed from a "business" to a "cult".

Friends, before you sign on to Quixstar, please ask your "sponsor" IBO the following questions:

• Ask them how long have they been in the Quixstar business
• Ask them to show you their 1040 tax returns over the last 3 years or however long they have been in business - Many will not show you but if anyone does, see their Schedule C and calculate how much they have truly made and paid taxes to IRS. If there is no Schedule C, subtract whatever figure they have under "Wages/Tips/Additional Income" by the amounts reported in their W-2s . The difference is their earnings from the business. If they won't show you their 1040, ask for a copy of detailed business income and expense (P&L) statement over the past year.
• Ask them how many hours (and miles) on average per week they have spent on their business over the past year
• Ask them how many of the people they have signed on have stayed with the business after one year

If your potential sponsor's answers to all the above questions still whets your appetite for this MLM business, then remember to read this excellent e-book titled Merchants of Deception, written by a former 'Emerald' of the Amway/Quixstar business. After reading this book, probe your sponsor and his 'upline' about the practices exposed in this book. If you still want to enter the business, good luck! Walk safely, my friend.

(Un)real Estate

I received this forwarded email from a good friend of mine. It had everything I wanted to say about real estate "investments" that I found no reason to make any corrections! With the continuing crash (which the pundits call 'soft landing', yeah, you better have a cushion attached to your butt!), this article is timely and de-bunks the myth of owning real estate in the U.S., especially in the East/West coasts and other regions that saw a dramatic rise in home prices in the first half of this decade. Some of the points may even apply to the bubbly real estate markets in the many of the cities outside the U.S.

Wonder if house prices will continue to fall? Real estate related businesses disagree, because they don't make money if buyers do not buy. These businesses have a large financial interest in misleading the public about the foolishness of buying a house now.

Buyers' agents get nothing if there is no sale, so they want their clients to buy no matter how bad the deal is, the exact opposite of the buyer's best interest. Agents take $100 billion each year in commissions from buyers. Agents claim the seller pays the commission, but always fail to mention that the seller gets that money from the buyer.There are good buyer's agents who really believe they are helping the buyer, but they often in denial about their conflict of interests.

• Mortgage brokers take a percentage of the loan, so they want buyers to take out the biggest loan possible.
• Banks get origination fees but sell most mortgages, so they do not care about the potential bankruptcy of borrowers, and will lend far beyond what buyers can afford. Banks sell most loans to Fannie Mae or Freddie Mac. The conversion of low-quality housing debt into "high" quality Fannie Mae debt with the implicit backing of the federal government is the main support for the housing bubble. That is ending as Fannie Mae shrinks.Even for the "jumbo" loans that banks cannot sell to Fannie Mae and Freddie Mac, they have a motive to lend beyond what buyers can afford. Banks designate interest as "income" whether they receive it or not. As long as borrowers do not actually default, additional interest owed is counted as bank income, and banks can claim higher "earnings". That is going to end when those borrowers cannot even make the principal payments.
• Appraisers are hired by mortgage brokers and banks, so they are going to give the appraisals that brokers and banks want to see, not the truth.
• Newspapers earn money from advertising placed by realtors, so papers are pressured to publish the realtors' unrealistic forecasts.Worse, realtors have a near-monopoly on sale price information, and newspaper reporters never ask realtors hard questions like "how do we know you're not lying about those prices?" The result is an endless stream of stories which quote David Lereah of the NAR saying it's a good time to buy, as if there were some news in hearing salesmen say that you should give them your money. To be optimistic about this market takes a real estate "professional". Everyone else speaks the truth too clearly.As one reader writes: "The advertiser-paid media continues to interview commission-based salesmen who try to cover up the crash and hope to bring a few more young suckers into massive debt for houses that are falling in value."
• Owners themselves do not want to believe they are going to lose huge amounts of money.What are their arguments?

1. "Renting is just throwing money away."FALSE, renting is now much cheaper per month than owning. If you don't rent, you either

* Have a mortgage, in which case you are throwing away money on interest, tax, insurance, maintenance.

* Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a place to live. This extra income could be 50% to 200% beyond rent costs, and for many is enough to retire right now.

Either way, owners LOSE much more money every month than renters. Currently, yearly rents in the Bay Area are about 2% of the cost of buying an equivalent house. This means a house is returning about 2%, and it is a bad investment. Pretty much any other investment is better. If you don't like risk, put your money in US Treasuries at 5%.In effect, landlords are loaning the purchase price of a house to their tenants at a 2% interest rate. This is a fantastic deal for renters. When it is possible to borrow a million dollar house for 2% yearly rent at the same time a loan of a million dollars in cash costs 6% interest, plus 1% property tax, plus 2% maintenance, something is clearly broken. I would think every rational businessman would take the extreme discount renters are enjoying.

2. "There are great tax advantages to owning." FALSE. The tax advantage is not significant compared to the large monthly loss from owning. For example, it is far cheaper to rent in the San Francisco Bay Area than it is to own that same house, even with the deductibility of mortgage interest figured in. It is possible to rent a good house for $1800/month. That same house would cost about $700,000. Assume 6% interest, and we can see that a buyer loses at least $4,936 per month by buying. Renting is a loss of course, but buying is a much bigger loss.Renting:Rent: $1,800----------------------Monthly Loss: $1,800

Buying:Property Tax: $486 ($729 per month at 1.25% before deduction, $486 lost after deduction.)Interest: $2,333 ($3500 per month at 6% before deduction, $2333 lost after deduction.)Other Costs: $450 (Insurance, maintenance, long commute, etc.)Principal loss: $1,667 (Modest 3% yearly loss on $700,000. Reality will be much worse.)----------------------Monthly Loss: $4,936

This is a very conservative estimate of the loss from owning per month. If you include a realistic decline in house prices, as in this rent-vs-own calculator, you'll see that owning right now is a very poor choice. Here's a more optimistic calculator which ignores price changes entirely. House value losses will stop eventually, but it could take 5 or 10 years to bottom out.Remember that buyers do not deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real pre-tax dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them on mortgage interest. Of course the creeping AMT will eliminate the mortgage interest deduction soon anyway. Ah, you didn't know that there are limits to the mortgage interest deduction and that more and more people are hitting that limit every year?Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc. Since you can rent a house for 2% of its price, but have to pay 6% to borrow the equivalent amount of money, it is much cheaper to rent the house than to rent the money.Then there's earthquake insurance. It's really expensive, so most people just skip it and risk everything on the chance that no earthquake will happen.

3. "A rental house provides good income."FALSE. Rental houses provide very poor income in the Bay Area and certainly cannot cover mortgage payments. In the best case, a $1,000,000 house can be rented out for at most $25,000 per year after expenses like property tax and repairs. The return is therefore 2.5% with no liquidity and a huge risk of loss.If the owner were to sell that rental house for a million dollars, he could get about 5% with no risk, no work, and no state income tax by buying a US Treasury Bond. And the money would be liquid and secure.That said, there are many parts of the US where it does make sense to buy because mortgage payments are less than rents in those areas. They are generally rural areas away from the coasts, and have not seen the same bubble that the coasts have.

4. "Impending regulation changes to allow 40 and 50 year mortgages will fix everything."FALSE. 40 and 50 year mortgages will probably not be paid back, since a large number of borrowers will die before 40 or 50 years are up. This makes these loans a bad idea from the lender's point of view. It also doesn't make sense from the borrower's point of view, since almost of their payment will go to interest for most of the life of the loan. This makes it almost the same as renting - except that it's 2 or 3 times more expensive!

5. "OK, owning is a loss in monthly cash flow, but appreciation will make up for it."FALSE. Appreciation is negative. Prices are going down in most places, which just adds insult to the monthly injury of crushing mortgage payments.

6. "House prices never fall."FALSE. San Francisco house prices dropped 11 percent between 1990 and 1994. Buyers in SF in 1990 did not break even in dollar amounts until about 1998. So those buyers effectively loaned their money to the sellers for 8 years at no interest, losing all the while to inflation. With inflation, 1990 buyers truly broke even only about the year 2000, ten years after buying.Los Angeles' average house plummeted 21 percent from 1991 to 1995, and of course there have been many similar crashes all around the US. The worst may have been after the oil bust in the 1980's, when Colorado condos lost 90% of the value they had at their peak.

7. "House prices don't fall to zero like stock prices, so it's safer to invest in real estate."FALSE. It's true that house prices do not fall to zero, but your equity in a house can easily fall to zero, and then way past zero into the red. Even a fall of only 5% completely wipes out everyone who has only 10% equity in their house because realtors will take 5%. This means that house price crashes are actually worse than stock crashes. Most people have most of their money in their house, and that money is highly leveraged.

8. "We know it will be a soft landing, since it says so in the papers."FALSE. Prices could fall off a cliff. No one knows exactly what will happen, but the risk of a sudden crash in prices is severe. As Yale professor Robert Shiller has pointed out, this housing bubble is the biggest bubble in history, ever. Predictions of a "soft landing" are just more manipulation of buyer emotions, to get them to buy even while prices are falling.Most newspaper articles on housing are not news at all. They are advertisements that are disguised to look like news. They quote heavily from people like realtors, whose income depends on separating you from your money. Their purpose is not to inform, but rather to get you to buy.

9. "The bubble prices were driven by supply and demand."FALSE. Prices were driven by low interest rates and risky loans. Supply is up, and the average family income fell 2.3% from 2001 to 2004, so prices are violating the most basic assumptions about supply and demand.

10. "They aren't making any more land."TRUE, but sales volume has fallen 40% in the last year alone. It seems they aren't making any more buyers, either.

11. "As a renter, you have no opportunity to build equity."FALSE. Equity is just money. Renters are actually in a better position to build equity through investing in anything but housing.

* Owners are losing every month by paying much more for interest than they would pay for rent. The tax deduction does not come close to making owing competitive with renting.

* Owners are losing principal in a leveraged way as prices decline. A 14% decline completely wipes out all the equity of "owners" who actually own only 20% of their house. Remember that the agents will take 5%.

* Owners must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity. Only houses are such a guaranteed drain on cash.

* Owners must insure a house, but not most other investments.

* Owners must pay to repair a house, but not a stock or a bond.

12. "If you rent you are a buyer. You are just buying it for someone else."FALSE. It may be true that rent covers mortgage payments in some places like South Dakota, but not in any of the markets that have shot up in the last few years. Rents are much less than mortgages in most places now. No landlord buys with the intention to rent out in California because that's not profitable. The owner is generously subsidizing the renter, a wonderful thing for renters during this crash.

13. "If you don't own, you'll live in a dump in a bad neighborhood."FALSE. For the any given monthly payment, you can rent a much better house than you can buy. Renters live better, not worse. There are downsides to renting, such as being told to move at the end of your lease, or having your rent raised, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash. There are similar downsides to owning anyway, such as being fired and losing your house, or having your interest rate and property taxes adjust upward.You may worry about being forced to move, but the law says the landlord has to offer you a one year lease at a minimum, and they'll probably be delighted to offer you a two year lease and give you a discount for that. Other people want the mobility that renting affords. Renters can usually get out of a lease and move anywhere they want within one month, with no real estate commission.It is much easier and cheaper to rent a house in a good school district than to buy a house in the same place.A fun trick to rent a good house cheap: go to an open house, take the real estate agent aside, and ask if the owner is interested in renting the place out. Often, desperate sellers will be happy to get a little rental cash coming in and give you a great deal for a year or two.The biggest upside is hardly ever mentioned: renters can choose a short commute by living very close to work or to the train line. An extra two hours every day of free time not wasted commuting is the best bonus you can ever get.

14. "Owners can change their houses to suit their tastes."FALSE. Even single family detached housing is often restricted by CC&Rs and House Owner's Associations (HOAs). Imagine having to get the approval of some picky neighbor on the "Architectural Review Board" every time you want to change the color of your trim. Yet that's how most houses are sold these days.In California, the HOA can and will foreclose on your house without a judicial hearing. They can fine you $100/day for leaving your garage door open, and then take your house away if you refuse to pay.

15. "If and when the market goes south, you can walk away."FALSE. If you have a single loan with just the house as collateral, it may be a "non-recourse" loan, meaning you could indeed walk and not lose anything other than your house and any equity in it (along with your credit record). But if you refinance or take a "home equity loan", the new loan is probably a recourse loan, and the bank can get very aggressive, not to mention what the IRS can do. A reader who lived through the 1989 housing crash in LA pointed out the following nasty situation that can happen:

* Let's say you buy a house for $600,000, with a $500,000 mortgage.

* Then the house drops in value to $400,000, you lose your job, or otherwise must move.

* If you can't make your payments, the bank forecloses on you and nets $350,000 on the sale of your house.

* The bank's $150,000 loss on the mortgage is "forgiveness of debt" in the eyes of the IRS, and effectively becomes $150,000 of reportable income you must pay tax on. It is true that buyers who put zero down and have nothing invested in the house are much more likely to walk away. The large number of new uninvested buyers increases the risk of a horrifying crash in prices rather than a "soft landing".

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I received the above e-mail today from a well-meaning fellow investor who I have never met - bless his soul - who really wants me to be rich....NOT!

Such emails are the modern-day equivalent of the boiler room tips pitched over the phone by unscrupulous traders just itching to churn their clients' accounts. This is a company, whose stock did not even exist before Feb. 1, 2007! As soon as it became public, what's a small unknown company to do to attract interest from investors? Hire marketing companies to pitch their stock. Who falls for this pitch? People who are always looking for the next big thing to make them rich! When the stock rallies as more and more people buy (remember The Greater Fool Theory?), the founders and original investors cash out, leaving the rest with nothing.

The pitch is usually more polished than the above. It often involves comparisons with a large company stock (like Wal*Mart or Microsoft) saying that 20 years ago, these stocks were unknown just like this one. Now, who doesn't want in on the next Microsoft?

As a FinGho Walker, I hope you never invest in individual stocks. Even if you want to dabble in it with your play-money, there is a starting point to begin your analysis on which stock to buy. There are several other important rules to consider when picking stocks (which is a loser's game, in my opinion) but this is a good place as any to start: Place less faith on companies that pitch their stocks rather than pitching their products. A company can survive and prosper only by selling products or services, not their own stock!

If you ever receive mails like these, I hope you do what I do. Hit the delete button faster than a kid running towards a candy store. Why? Such marketing pitches violate the first two rules of RV's Four Axioms on money. Or better than deleting them, hit the "Report as Spam" button if your email provider has this option, and let them deal with it. The problem is, such e-mails come from all sorts of weird places and easily changeable email IDs that it is near impossible to track down these spammers.

Walk safely, my friend.

True Financial Freedom

You have seen it in magazines, TV shows and movies. They always portray someone in front of a yacht near crystal clear water on a cloudless sunny day sipping champagne as the picture of financially freedom. This is a gross distortion of reality. Most financially free people (especially FinGho Walkers) will shy away from advertising their wealth.

Financial freedom does not mean you have to leave your job. In fact, you have no reason to leave your job except when it sucks energy from you and if so, by all means leave the job to enjoy your freedom. However, for many people, their jobs provide meaningful activity - physical, mental and social. These forms of activity keep you plugged into the real world rather than being alone on a yacht or a golf course. They also help keep your sanity. Try golfing every day for a week. I guarantee you, it will drive you crazy (no pun intended!).

Before we get into what financial freedom can do for your work life, let us first define in the simplest way what it means. How do you know when you have achieved financial freedom? No need to rush to the complex spreadsheets that 'experts' develop to justify their existence to define it. Here's my simple formula:

You have achieved financial freedom when:

Annual Expenses '<' SWR x Total Financial Assets
('<' means "less than")

SWR = Safe Withdrawal Rate, which is 2% if you want to be financially free in your 30s, 3% if you do it in your 40s and 4% if you are in your 50s and beyond.

Before anybody complicates this formula by several additions and subtractions (some are valid, which I will get into later), let me propose that if you are pondering this when you are 55, you have achieved financial freedom when your total financial assets (not considering your home) grows to a level where withdrawing just 4% of it annually fully covers your living expenses. Put another way, you should have total financial assets of at least 25 times your annual expenses.

As you can see, there are two factors contributing to financial freedom. Increasing your assets is just one piece of it. Controlling your living expenses is an equally important piece. This is why some smart retirees who made their money working in developed economies choose to retire in developing countries in Latin America or Asia, where their living expenses can shrink by a factor of 2 to 5 compared to U.S. Consider this example: to support $60,000/year in living expenses in U.S., one needs 25 times that figure or $1.5 million in financial assets. If you choose to live in a low cost location where your living costs can be cut to 1/3rd of your current costs with no noticeable change in your quality of life, you need only $500,000 to achieve the same financial freedom. This cost-of-living arbitrage is one of the advantages for those working in high-wage economies like U.S. or Europe. It is one of the very few "free" lunches available in the world today. I am not advocating that all baby boomers pack their belongings and head to the third world but I wanted to point that option as it has increasingly become feasible in today's connected world.

Note that I have not included any passive income you may receive. This includes social security and company pensions, neither of which an a person younger than 40 should rely on given the shaky SS system and fast disappearing company pensions. If you are fortunate enough to get anything from social security or company pension, consider it as gravy.

Regardless of whether you achieve financial freedom by growing assets or cutting down your expenses (or preferably doing both), there is no requirement that you leave your job. This is especially true for long-time FinGho Walkers who have amassed substantial wealth over their working life and find themselves in an enviable position of having achieved financial freedom before they turned 50. Naturally, I have not seen many 'experts' talk about the benefits of working after achieving financial freedom. So, here is my list:

• You can truly speak your mind at work and not worry about adverse consequences. You have no reason to suck up to anyone.
• You can ask for and work only on the projects that you care deeply about and say 'no' to ones that do not interest you (If you are really good at what you do, most organizations will give you this freedom anyway).
• You will become the envy of your fellow workers who desperately need their jobs
• The income, health and other benefits (however, meagre) from your job are gravy for you. Each year you spend without depending on your financial assets means more moolah for you (and your heirs) to enjoy later.
• You can indulge in several luxuries that you denied yourself while achieving the financial freedom. (yes, FinGho Walkers can finally buy the luxury cars!)

Latte-nomics vs. FinGho-nomics

Folks, time to put this Latte story to test. I have heard this story far too many times from far too many 'experts'. It has even found a place in some bestseller books that sell a million plus copies. I thought I should compare the Latte math with the math of a FinGho Walker to see who does better.

Latte-nomics 101

Your daily savings by giving up a Starbucks Latte ($4) and settling for a 'no frills' coffee ($1): $3

Imagine you are 30 years old and do this every working day for the next 35 years. There are 241 working days/year (52 wks*5 days/wk. - 9 holidays - 10 vacation or sick days). You'll save $723 per year. Investing this money in a broad portfolio of no-brainer index funds can yield an average annual return of 8%. Over a 35 year period with annual compounding, your daily Latte sacrifice would yield in the neighborhood of $125,000 when you turn 65. Great!

As impressive as this figure sounds, don't discount the sacrifice. Imagine going without an exceptionally brewed cup of coffee each morning for the rest of your working life (which can be the only comfort on some miserable days) , i.e. for 35 years or 8,435 working days!

Compare this with the case of a FinGho Walker who refuses to give up this daily indulgence but focuses on what's important.

FinGho-nomics 101

A FinGho Walker would not deny himself such simple indulgences but rather be strong-willed about resisting the Madison Avenue-driven symbols of lifestyle, typically seen in a major purchase we all are confronted with every few years....buying a car. Instead of buying a $35,000 luxury car just because he can (and to be told later by 'experts' to give up his daily latte to make ends meet!) , a FinGho Walker will buy a reliable used car like a Honda or Toyota, available for about $10,000. Both the 'showy' luxury car and the reliable used car will do a fine job of taking us to work every morning. I would argue the used car will make you a more relaxed driver knowing that the inevitable dents, accidents and repairs along your commute will cost a whole lot less to fix compared to a luxury car. Aside from stress-related advantages, here's the math comparing a reliable used car buyer who loves her morning latte vs. a stressed out luxury car buyer who has grudgingly given up the morning latte.

For the sake of apples-to-apples comparison, I assume both put down $10,000 for their cars. By buying a reliable used car, the FinGho Walker will save about $37,620 over 5 years or simply stated, an annualized amount of $7,524 (See table at the end of the post for details). Let's assume our FinGho Walker friend invests these savings in the same no-brainer portfolio (8% annualized return) as our 'Latte-less' friend. When both of them are 65 years old (assuming the used car and new car are both replaced every 5 years), the FinGho Walker would have accumulated $1.3 million more, while enjoying great coffee each morning! This is more than 10 times the amount accumulated by our friend who has to drive past Starbucks each morning and be reminded of his Latte sacrifice.

What's more, even if our FinGho Walker friend did this for just the first 5 years till she is 35 and then proceeded to buy brand new luxury cars every 5 years till she retired at 65, she comes out way ahead. By investing the car savings during the first 5 years and nothing more ever after, she would have accumulated over $444,000 more by the time she turns 65! This is still more than three times what our friend would have accumulated by giving up a refreshing daily Latte. This example illustrates the power of compounding and the rewards of making sensible decisions where they matter most.

Now tell me, is giving up the Latte everyday really worthwhile compared to making sensible purchase decisions in the major discretionary areas of your life?

	Luxury Car Buyer	Reliable Used Car Buyer	Savings Over 5 Years
Purchase Cost ($10K down for both)	$35,000	$10,000	$25,000
Annual Interest (5 year loan; 5% rate)	$774	$0 (cash purchase)	$3,870
Annual Insurance	$2,500	$1,000	$7,500
Annual Property Taxes (~1%)	$350	$100	$1,250
		TOTAL SAVINGS	$37,620

Focus on What's Important

You have heard it before from many 'experts' on TV and Internet - if you can skip the $4 Starbucks latte in the morning, you will have a lot of money at 65. That advice, though popular, is not realistic and leads to a "penny wise, pound foolish" mentality.

If you really want to take charge of your finances in your personal life, focus on the top 5 things that cost a lot which, many don't even care to think about. Even if you did, most of us are programmed to buy into the 'better-quality-of-life' myth perpetrated by the marketing whizzes on Madison Avenue. Here are the top 5 important expenses for most working people:

1. Housing costs (rent or mortgage)
2. Car
3. Insurance (all types)
4. Major Discretionary Purchases (such upgrading perfectly good appliances, furniture, clothes etc.)
5. Discretionary Subscriptions (anything that comes with a monthly bill...starting from cable TV all the up to spa or upscale club memberships)

Note that I have not included your morning latte or your $5 daily lunches. I have not even included vacations or any occasional splurges that we as humans do to make life interesting. Why? Because I believe in the 80:20 rule, which in this case means that if you are careful about the top 5 expenses I mentioned above, 80% of your money problem will be solved!

That's right. Most people live paycheck-to-paycheck because they are not able to control these top 5 expenses. They buy a house beyond their means, buy a new car every 4 years and pay high insurance costs on both, buy top-of-the-line appliances and furniture (often on credit, causing monthly bills that stack up) and to top it all, sign up for 'monthly extras' (gotta have a membership to this club or that league or this spa to match your house and car, right?).

Before they know it, they are in debt upto their eyeballs and when they wonder how to manage, they are told to give up their $4 latte, 'cos a cup a coffee is available for $1 or less at a gas station. You know what, Starbucks makes one hell of a cup of coffee for $4, and I have not found the $1 coffee at any other place taste nearly the same! Enjoying an exceptionally brewed cup of coffee is one of life's few indulgences affordable to many. It is actually a good return-on-investment (ROI)! What is a lousy ROI is buying a brand new Cadillac to drive a high-traffic, pothole-laden road for 30-45 min. each morning to work, when a 4 year old Honda can do the same thing (and probably more reliably over the next 5 years). The price differential is about $25,000 between the two cars, and the finance cost differential (FinGho Walkers can buy the Honda with cash) will add up to $7,000 or more over 5 years, and the insurance cost differential between the two cars will add up to $1500 per year or $7,500 over 5 years. I am not even considering the price differential in repairs - fixing a dent on a cadillac will cost you a whole lot more than a Honda. For a detailed analysis, see Latte-nomics vs. FinGho-nomics.

In effect, the Cadillac-buyer will have spent about $40,000 more than the Honda buyer over 5 years (actually a lot more, if you consider the opportunity cost of money - we will cover that later). This difference, ironically enough, can allow the Honda buyer to also buy a Cadillac after 5 years just for kicks (though FinGho Walkers would never do that) and have money left over, compared to the original Cadillac buyer who now has a 5 year-old car. If the Honda buyer also practices the FinGho Walker principles, he would have more than $55,000 at the end of 5 years. This is the "opportunity cost" - that is the cost of putting your money to work somewhere else instead of making this purchase. So, the Cadillac buyer 'lost' an additional $55,000 to buy his car compared to our FinGho Walker friend who settled for a 4-year old Honda and yet, both have a good enough vehicle to drive to work and back. Talk about a lousy purchase! By my definition, any purchase that has a high opportunity cost is a lousy one.

Same thing applies for house purchase. What? Wait a minute...house is an 'appreciating' asset, car is just 'depreciating' asset, some among you will argue. True, you can't compare one with the other, but the mentality of stretching beyond one's means applies nonetheless. The housing issue is so contentious that I decided to write about it in a separate blog. Stay tuned...

RV

RV's Four Axioms

• No one but you really cares about your money. Anyone who says otherwise is flat out lying.
  
• Nobody has a "sure" way to get rich quickly and if they did, they would practice and not preach it.
  
• Nobody can save you from your own mistakes, but you can learn to avoid them.
  
• Taking the time to learn about money and investments will make you rich.

Who is a FinGho Walker?

(pronounced Phingo Walker - rolls off the tongue better with a Texas twang!)

I know the words 'FinGho Walker' do not mean much at first glance leave alone evoke a great sense of admiration. Least of all, what does this got to do with financial freedom? I can hear some of you ask, what do you mean someone is a FinGho? Is he drunk? Or is she distraught? Or is it a new name for tightrope walking? In a way, it is but it is walking the tightrope of money management. Even still, why would someone on the way to financial freedom want to even walk? Don't you expect such a person to be a fast-talking, wheeling-and-dealing, Armani-clad, mile-a-minute businessman who Hollywood portrays as a picture of success?

Wait...this is where words are decieving. The FinGho Walkers can be an average Joe (or William or Ram or Chen or Nguyen - or choose some common name from the country you are from) and they may be slogging away in an 'average' job. But they all are:

• Compulsive Savers - Most save at least 20% (some as high as 50%) of their income.
• Goal-oriented - Want to achieve important personal and family goals over their lifetime.
• Long term Investors - Don't believe in any "get-rich-quick" scheme.
• Strong Believers of the Four Axioms of money
• Believe in the Efficient Market Hypothesis for investments but keep an eye out for rare opportunities
• Shun financial glamor in favor of true financial freedom (a "ghost" walker in the financial world!)

The last point especially needs explanation. Too much emphasis is made today on the external trappings of wealth - mostly, thanks to modern media and its non-stop adoration of media celebrities. FinGho is short for Financial Ghost - one who seeks financial freedom in a way that keeps him/her invisible and immune to the 'popular' expectations on spending and lifestyle. This is a wise man or a woman who walks like a ghost in the financial jungle and emerges wealthy and free!

RV

Beware of the Sharks on TV

Last night, during an uncommon bout of insomnia, I turned on my TV and predictably, all the late night sharks peddling their "how to get rich quick" wares were on. I wondered who would be up at 2 AM watching this crap. That's when I realized the hardworking folks who put in crazy hours slogging away at their jobs in food service, construction and other back-breaking work are the ones that will be awake at this hour. Unfortunately, these are the very people who should NOT be exposed to the dangerous advice dispensed by the con artists at 2 AM. These hardworking people have the most to lose from the crapola that spews from these decieving snakes.

Sorry for the long lead in and the flattering introduction of late night informercials...well, last night, there was one about making money trading stocks. Boy, how easy they made it sound. Just by watching some colors (Green is 'buy' and Red is 'sell' - pretty simple, right?), the man on the screen continued, anybody can make money trading stocks. They showed a 12-year old kid making 'play' money ($500-$2000 profit per trade), a middle-aged family living the proverbial 'dream' life (btw, why does the beachfront home always look the same in every "get rich" commercial? ) and a couple in their 70s enjoying a golden retirement.

To keep the regulators from jumping on such utopian claims, there appears a fineprint at the bottom of the screen (with groggy eyes at 2 AM, I challenge you to read it without trying too hard) that says "Results not typical. Your experience may vary". Aha, I thought - a shred of truth among a heap of lies!

To all those who have lost money following these infomercials or just itching to lose money by buying their wares and attending the investment "seminars", I give you the 4 basic axioms of personal finance I learned the hard way and no insider will tell you.

1. No one but you really cares about your money. Anyone who says otherwise is flat out lying.


2. Nobody has a "sure" way to get rich quickly and if they did, they would practice it and not preach it on TV.


3. Nobody can save you from your own mistakes, but you can learn to avoid them.


4. Taking the time to learn about finance and investments WILL make you rich.

Stay tuned for more...