How much is $100 per month worth?

I teach a Continuing Education class, to Realtors, about working with investors and how to become their own best client. One of the lessons has to do with the real value of a small regular income, such as $100 per month.

I show the students that $100 per month, at seven percent interest, for ten years compounds to $17,000. Furthermore, if a person was to invest $17,000 at that same 7%, the monthly interest income is, coincidentally, $100 per month.

Conclusion: One-hundred dollars per month is the equivalent of $17,000 and vice versa.

I am not hung up on the numbers of 7% or ten years. We could modify the interest rate or the term and end up with a modified conclusion, but that is not particularly relevant. My objective is to shine light on the fact that every $100 per month represents a great deal of buying power, and in my example that number happens to be $17,000.

Predictably, most people are more likely to be net borrowers than net lenders so the above dynamic works against them in ways they had not even imagined. That is to say that for every $100 per month we pay in interest, we are also losing the opportunity to use that money to generate passive income, which is the key to building wealth.

Passive income is money that jumps into your bank account, automatically, whether you work or not. Can you imagine how much easier life would be for seniors if they had an extra $1,000 or more in monthly passive income? If they could have saved $200,000 in their lifetimes, and if they could invest that money at a realistic rate of 6%, that is how much extra income they would have. This is a lot easier than most people realize. One important path is by stopping compound interest from working against us and instead make it work for us.

If you have a credit card balance of $5,000 that you do not pay off, and if the interest rate on that card is 14%, you will pay $700 per year, just in interest. If that was a one-time matter, it may not be that big of a deal, but this debt lives on and repeats itself year after year.

If we assume that you could have invested that money somewhere else at a mere 4% interest, it would compound and grow to nearly $80,000 in an adult’s lifetime of forty years.
So ask yourself if you would like to have an extra $80,000 when you retire? That is a big reward for simply paying off your credit cards in full and on time every month. You are going to pay them off anyway, sooner or later, so why not pocket 80 big ones for paying this debt the correct way? That is one reason why I say, if you cannot pay off your credit cards in full and on time every month, you are living beyond your means.

Avoiding unnecessary interest expenses is just like earning extra income, whether it is $100 per month, $700 per year, or any other amount. To stop flushing your money on lost interest expenses, I suggest you reel in your spending habits a bit and pay extra on your cards until you get them down to a zero balance. Then avoid debt that you cannot payoff when the bill comes in.

Then you can start socking away a $100 per month and when your retirement years arrive you will have a very pleasant life-style.

I hope you will also visit my other blog.

Lottery Facts

My newest book features a large section of the Worst Things on Which We Waste Our Money. In that section, there is an Honorable Mention category, wherein “Gambling” is discussed and I establish that your worst odds are found in the various Lottery games.

Before we look at a few lottery winners let’s take a quick look at the odds of common games of chance. If you play 21 in Vegas, the house keeps 3-15% of your money, depending on your skill level. If you happen to count cards and can tell when the remaining deck is ten-heavy (cards that are valued at 10 points), you can cut the house’s advantage a bit. Good players also learn when to double down and split cards. It is especially useful to develop money management techniques, like bet heavier in winning streaks and cut back when the gambling Gods are being fickle.

Other games offer similar odds. For example, most people can reduce the house’s advantage at Craps to below 2% without much trouble. Roulette, slots, KENO and sporting events offer you slightly worse odds, ranging between 5% and 17% Overall the house has an edge on everybody who is not cheating. The government sends all sorts of agents to make sure the evil Casinos don’t take advantage of the public’s collective stupidity.

Predictably, when it comes to government run lotteries, the government does not hold themselves to the same standards as they hold casinos. In fact, it is not even close.

The Colorado lottery is similar to most others in that regard. Our “generous” government only keeps 50% of all lottery money. I find that fascinating. In order to protect an innocent public, they forbid casinos to keep more than 17%, but the same State Government guarantees themselves nearly three-times as much. It is no wonder people scoff when they hear, “Hi, I am from the Government and I am here to help you.”

This means that every time they pay out a million-dollar jackpot, they keep a like amount for themselves. In essence they steal half of the pot. In order to make those payouts, there are over two-million people who had to lose a dollar: one-million people donated a dollar to the winner and another million people paid the state their million.

The officials like to tell us they put their money back into parks and other public programs, and indeed they do make a few token gestures to make it seem like they are on the up and up, but only a fool would believe that the public gets their money’s worth. A great deal of the public’s share is peeled off for “administrative costs”, so the lottery is really just another way to create more Government jobs.

But wait, it gets worse. If you happen to be the “lucky winner”, you must pay a hefty tax on your winnings. Depending on the size of your jackpot, the Feds keep up to 36% of your winnings, and the State (Remember them? They run the whole thing) grabs another 5% as state income taxes.

Anybody who understands the hopelessness of the matter would certainly curtail the amount of money they spend in this way. Most educated people “get it” and some of them buy tickets anyway. I do not criticize them because they basically understand the details and can afford to flush a dollar occasionally. But the real monster in this equation is the State itself because it preys on the ignorance of the public.

Very often, the people who can least afford lottery tickets are the ones who actually buy them. Half of the weekly players have annual household income under $35,000. Many of these people hear lottery success stories and fall victim to the excitement without really realizing that their chances of winning are ridiculously small. They naively use money that ought to go to food and shelter to buy a shot at wealth.

Even if these people do win the lottery, it usually makes their lives worse. Evelyn Adams is a classic example. She actually won two major jackpots in New Jersey, totaling well over Five-Million dollars. But she had no idea how to handle her money and went broke within a few years. Her friends and family all thought she was an endless fountain of money and she did not have the will power to tell them, “No”. Within a few years she was broke and ended back in a trailer court, probably buying more lottery tickets.

Bill Post of Pennsylvania hit a doozey of a lottery pot: Coming in at over $16 million. He too went broke. A girl friend sued him because she said she owned part of the winning ticket. His brother tried to have him killed. Other people also sued him. Eventually, he lost it all and now lives on social security. He admits that the whole thing made him miserable and he wishes he had never won it in the first place.

Janet Lee won 18-million and suddenly found out she had lots of new friends and power. She donated money to anybody who asked, and eight years later, she had to file for bankruptcy.

These people are not rare. In fact 75% of winners go broke within 5 years. They do not really understand what they have, so they do not know how to keep it. One of the best things they could do is restrict themselves to living on the interest that their money can earn. If a person has a million dollars and can get a 5% return,that amounts to $50,000 per year in income. Once again, they have to pay taxes on that income, so they will have something like $38,000 per year left over. That is a tidy sum, but not an infinite amount of money. Once they start digging into the principal, they are doomed to spend it all.

With 47 numbers, your chance of picking 6 correctly is one in fourteen million. To get an idea of how daunting that is, imagine a line of fourteen million people standing back to back. That line would be 6,629 miles long. That is like driving from New York to San Diego and back again. It would take you at least a week just to drive past all 14 million people. Imagine how likely it would be to guess which person in that group would have the winning ticket.

So, your odds of winning are astronomically low and the government steals the majority of the money: the state confiscates half the money before they payout any winnings, and then the winners have to forfeit half of the jackpot in the form of income taxes; furthermore, the majority of winners end up frustrated and worse off anyway.”

Once you understand the numbers and what happens to people who actually do win, it is clear that buying lottery tickets is a voluntary act of stupidity. Those poor people are the types who also believe the common lie, “Hi, I am from the Government and I am here to help you.” That is why I say, “Gambling, and especially the lottery, is one of the Worst Things on Which We Waste Our Money.”

Come back soon and don’t forget to check out my Human Interest blog.

Passive Income

In spite of all of our economic woes, there are still over seven-million millionaires in America…and you can be one of them, even if you are an ordinary Joe.

Chances are, you cannot throw a football sixty-yards or sing like a songbird. You probably are not going to inherit a half-billion dollars or create the next Microsoft. The lottery is not likely to smile upon you and you probably are not interested in stealing a fortune from somebody else. Good news! You don’t have to fit into those categories to attain wealth.

The first thing you need to do is adjust your mind set. When it comes to getting more money, people tend to think in terms if getting a better job, a raise or a part-time job. Those are honorable and worthy approaches, but they all come with limits. One can only get so many raises and there is only so much time to work.

The key to financial security lies in building “Passive Income”. This is money that visits you each and every month, whether you work or not.

When you hold a typical job, you go to work and on payday the boss hands you a check. To get another check, you have to repeat the cycle. You have to go back to work or you run out of income. But what if you could get somebody or something else to send you income every week, regardless of whether you get out of bed in the morning? Wouldn’t that be a lot better? It is not difficult to do.

Let me give you a few examples:

• I have a pop machine at an apartment building. There are 102 apartments. The average apartment contributes about $2.20 per month in profit to me. I have to buy the pop and fill the machine about twice a month. If I was to go get 100 accounts like that, the monthly income would be approximately $22,440. I could hire three people to do all of the work. Two of them would service machines and the third one would do all of the other stuff, like acquiring the pop, warehousing it, bookkeeping, machine maintenance etc. I would pay each one of them $4,000 per month, which would still leave me a nice passive income of $10,000 per month. (If you are asking yourself, “Why doesn’t he just go do that?” the answer is because I have other better options.
• Most of the time, when a consumer acquires a new computer, they end up paying Bill Gates for the software. But Mr. Gates does not have to sit down and design new software for every new customer. He simply employs talented people to attend the details while he enjoys the passive income.
• Every county in the land has tax certificates for sale. These are ultra-safe documents that pay nice returns (at least 10%). There is practically no management necessary to oversee these revenue generators.
• If you buy a CD at your bank, you automatically receive interest income whether you work or not.
• If you have a rental property, your tenant will go to work and contribute the fruits of their time to help pay off your building for you.

IT TAKES MONEY TO MAKE MONEY

In each of the above examples, it takes money to make money. This is the point where most people tend to bog down. They think “I don’t have enough money to buy 100 pop machines” and so, their dream dies before it ever begins.

Their mistake is in their original assumption. When they think in terms of “it takes money to make money”, they wrongly assume the investment dollars have to be “their” own dollars. Naturally it helps if you have a pot of gold sitting around waiting for you to invest, but that is not necessary. There are all sorts of people who will give you their money to invest.

For example, perhaps the guy that sells pop machines will finance them. You make a monthly payment to him until the machines are paid off. Used machines cost about $750, so it would only take 6 months to pay off any given machine.

Perhaps you can get grandma to lend you some money. She may have a savings account somewhere that is paying her a modest return. If she would lend some of it to you, you could pay her a higher rate and you both come out better.

If you have respectable credit, you can get a loan from your own bank or a credit union.

Perhaps you know some other person who is fed up with the stock market and he or she would consider being your silent partner. They put of the money and you guarantee them 5% on their money plus 10% of the profits.

In the example of the rental property, a mortgage lender loans you the money to buy a property and a tenant pays it back for you (this is my investment of choice).

There are other possibilities for the person who thinks it through.

Finally, I would suggest that you do indeed have some of your own money to invest: You just may not realize it. For example, if you are paying for the wrong type of auto insurance, a quick modification to your “deductible” or by dropping comprehensive coverage, you could use that money to invest. Or if you stop at Starbucks every morning for a fancy cup of coffee, you could forgo that luxury and have a nice income source. What about your cell phone program, your cable TV package, where you rent, that extra bull dozer in the back yard that you never use any more? These are all sources of funds that you can add to “Other People’s Money” and invest for Passive Income.

The point of all of this is that there is extra income for you, if you want it, but nobody else has an incentive to deliver free money to you. You have to put in the effort to get the income stream going. Once you get it in place, you will be rewarded again and again for the one-time effort, unlike the way your boss pays you.

So the choice is yours work for a wage, get paid, and then start over; or, work for passive income and let it roll in over and over,

Finally, if you take nothing else from this article, remember this: It does indeed take make money to make money, but it does not have to be your money.

By adjusting your approach to earning money and investing, you can join the elite group of millionaires bringing the new number of them to 7,000,001 Congratulations.

.

Be sure to check out my Human Interest Blog.

Just for Asking

How would you like to make $500 easy dollars for your family in less than one hour…just for asking?

A while back one of my life-long buddies mentioned that she regularly calls some of the companies with whom she does business and asks for discounts. The other day, I decided to see if I could do the same thing with some of the companies who lighten my checkbook every month.

I called up our cable company and told them there have been a lot of attractive ads for satellite TV lately. I politely asked the lady if there was anything they could do to help me cut my cable costs - otherwise I would have to consider one of those satellite deals. She opened up my file and then put me on hold. A moment later she returned and apologized because she could only cut the bill by $9 per month for six months. She said they usually do better than that. I learned three things. 1) I will save $54 in the next six months; 2) I will be calling again as soon as my discount period expires; 3) I really will consider switching to satellite TV.

After I hung up, I called the satellite TV company that provides a signal to our mountain home. Once again, I mentioned the competition and asked for an adjustment to my bill. The lady reviewed my package and we discovered they had a new offer. I had to give up some sports packages (Who cares?) and a handful of secondary stations to get a permanent discount of $39 per month. We do not go to the mountains to watch TV so the deal made sense. The total savings the first year is $468.

At that point, I would have called my cell phone company, but I already have a great deal with them, so I could not make any progress there. My internet service is wrapped into my cable bill and we already talked about that. But, I still had work to do.

While I was inspired, I called one of my credit card companies and asked them to lower my interest rate. They dropped the percentage two percent. It was nearly automatic. It was not really beneficial because I pay off my account in full every month, so I never pay them any interest anyway. However, it still proves a point…you can get a lot of perks from your business associates if you just ask.

Then I called my other credit card company and asked them to raise my credit limit...even though I do not need the additional credit. I did that because of what is called a “Utilization Rate”. Essentially, you raise your credit score when you have more unused credit. They doubled my available credit…just for asking.

Insurance is another area where a person can usually get better rates. Insurance companies have been known to give low entry-rates then they raise premiums upon renewal. It is a good idea to regularly shop for the best rates. In my case, I have good rates for life insurance and hazard insurance for my home and rental properties, but my health insurance company has raised my premiums by quite a bit for two consecutive years. I am shopping as we speak. I am also ready to shop for better auto insurance rates. I expect to make improvements in both regards.

The point here is that it is easy to get lazy or complacent, but a small amount of effort can pay big dividends…just for asking.

My thanks to Pat W. for kicking me in the rear-end.

Be sure to check my other blog.

Gambling

One of the chapters in my new book is about the way adults waste money. Here is a section from one of the chapters.

Many years ago I recognized that gambling can be a lot of fun but I realized right away it is “nearly” impossible to beat the odds in the long run. We all have heard the idea that they don’t build those fancy casinos by losing to the common folks. Still, I knew that if I studied the industry I could at least reduce my losses to a minimum and even win from time to time. I checked out all the library books on the subject and soaked up the information better than Sponge Bob Square Pants would absorb a bathroom accident. Eventually, I became a very good amateur gambler.

I could expand on many of the lessons I have learned, but the most important one is this: There are only a few ways you can beat the odds and here are the ones I know about.

• The best one is to buy your own casino and be on the other side of the table.
• Become a card counter at 21. There are rare occasions when the deck will favor the player. In essence, you bet small amounts while you study the remaining cards in the deck. Then, when the deck finally has a sufficiently disproportionate number of face cards, you increase your bet substantially. There was a mathematics professor at MIT named Ed Thorp who developed and proved this theory in the 60’s. But, the casino bosses caught on and made some adjustments which make it a lot harder to duplicate his success.
• Become a highly skilled poker player. In the long run all players get essentially the same cards, but a few players (below 20% of them) grow their purses consistently while weaker players serve as their prey. But regardless how good you become, there are odds working against you in poker games too. The house takes a piece of every pot, known as rake, and most players tip the dealer with each winning hand. All this overhead makes it very difficult to overcome the daunting odds so the biggest winner is still the house.
• Get incredibly lucky. I know one lady who hit a Vegas slot machine for just under one-million dollars. Her payout is $47,000/year for 20 years. The problem was that she did not really understand how lucky she was. Millions of dollars have to be lost by other players in order to build the jackpot to that amount. In the meantime the machine had to cover all of the other smaller payouts along the way and earn a profit for the casino. Considering she was playing a quarter machine, and it only keeps about one cent per quarter, that is an astronomical number of losses. The first year, after she received her annual check, she tried to duplicate the feat, but she soon lost all of the money. The same thing happened the next year and the next. After that I lost touch with her, but I suspect she may eventually give all of the winnings back.
• Money management. The trick here is to observe streaks and bet a lot more when you are in winning streaks and a minimum when you are losing. The problem is the dice or cards have no way of knowing they are falling in any particular sequence and they have no obligation to continue in the pattern. Therefore, any new roll of the dice or set of cards has the exact same odds as any other. Your streak is just as likely to end as it is to continue. Still, anybody who has gambled a fair amount can tell you there are those occasions when the cards are especially cold or hot. If the gambler is astute enough to take advantage of the trends he can exaggerate his winnings and subdue his losses. This technique can be very successful in spurts, but it too is mostly a matter of luck and doomed to failure in the long run.
• Cheat. We have all heard stories about somebody who bought off an athlete, a coach or referee in a sporting event. Or, I guess someone could put doggie downers in the food of a lighting-fast greyhound and sway the outcome of a race. People have been known to shave the dice, so that one number is more likely to come up. Black jack dealers have been known to form partnerships with other cheaters and skim money. Others put invisible ink on the back of cards, and so on. This all sounds fascinating, but…I “bet” I don’t have to finish this sentence for you.

Everybody else is a net loser. The more you play the more you lose. The best you can hope for is an occasional good session and a lot of fun for your entertainment dollar. So dump the gambling bug unless you can accept those facts.

The lottery is your very worst gambling value. If you listen to the radio ads in Colorado and other places you will frequently hear this phrase: “Prizes equal 50% of sales.” Put another way, the house (the State) keeps 50% of all the prize money. The ruthless casinos give you much better odds than that. If giving up half the money is not bad enough, the “lucky” winner gets screwed even worse because the Feds and the State take another big chunk of the winnings in the form of income taxes; potentially over 40%. Good God, even the Mafia wouldn’t charge you that much. Still the state preys on the many lottery addicts who buy tickets week after week. Sadly, many of the people who live in this dream world are the ones who can least-afford it.

As far as I am concerned, there is nothing wrong with an occasional visit to Las Vegas or playing poker with friends a couple of nights a year. However, when the topic is wasting money, compulsive gambling is as bad as any other addiction. The hard-core gambler cannot get enough action, win or lose. In the worst cases, these people are known to lose everything they own and to destroy loving relationships. I have known three such addicts personally; two of them went broke and the third person could not get through the day without betting on all sorts of things. Obviously, anybody who has problems like these people needs to consult with qualified counselors before all is lost.

To close out this topic, let’s see if we can agree on something: Occasional small losses (let’s say $50 or so, a few times per year) can be a reasonable price to pay for entertainment at the gaming tables, and going to Vegas or Atlantic City can really be a lot of fun. It is okay to occasionally earmark a reasonable amount of money for this entertainment, but more than once per year, or losing regularly or losing large amounts, or buying any lottery tickets are among the worst things on which we waste our money.

Visit my other blog

About Credit Cards, Debit Cards

If you are thinking of getting your first credit card, be sure you know the difference between a debit card and a credit card. A debit card is nothing more than plastic checks. It serves little purpose other than eliminating the need to carry larger amounts of cash around. It does not help your credit rating.

Therefore, a credit card is better than debit card.

Remember these fundamental philosophies:

• Credit can be a best friend or a worst enemy;
• Credit cards are not for incurring or accumulating debt: They are for emergencies, convenience and record keeping only;
• You should use your credit cards to pay for the things you already buy anyway, like gasoline, insurance, and groceries;
• Do not charge things unless you can pay your statement “On Time and In Full” when the bill comes due;
• I suggest you get an account with no annual fee, even if the interest rate is higher.
• The interest rate is not overly relevant if you pay the card in-full every month and thereby avoid paying any interest
• If you are thinking about getting a new credit card, I suggest you check out www.creditcards.com

see my other blog