Who Wants to Be a Millionaire? Change Your Car Buying Habits.

Many who lament not being able to save any money could save millions by changing the way they buy cars. Often, a small change of habits can make huge differences, like the difference between retiring financially free or having to greet people into Wal-Mart in your later years.

In 2007 Consumer Report studied the difference between buying a new Honda Civic EX and maintaining it for 15 years, versus buying a new one every 5 years. If you kept it 15 years, you'd save about $1400 per year. (They were pretty thorough in this study, figuring in the costs of repairs, etc.) Do that for a lifetime and invest that $1400 at the market average of 10% per year and in 60 years of driving you've got $4.5 million!

Think about this. It's astounding. Just by keeping a car longer, you could save a fortune. Even if you just kept the car for 10 years instead of 5, the savings would be astounding.

One of my cars, a Mazda Millenia, has 230,000 miles on it and is running great. I can't find a good reason to trade it in.

If you want to save even more, do what I do. (Don't turn me off here...I know it's radical.) Think of a car as reliable transportation, period. Forget the image thing. Get over the peer pressure to have a car that reflects a high status - many never get over it, and it costs them millions.

Find a good, trustworthy mechanic who sells used cars that have already depreciated greatly. I bought a car last month with under 80,000 miles for $1400, including four new tires. I buy cars outright, never making payments. It runs great and I hope to get 200,000 miles out of it. But the reason it sold so cheap was that it has a big dent in a part of the car that's difficult and costly to repair. But it doesn't affect the performance of the car in the least. I have no plans to repair it.

I don't feel embarrassed to drive a car like this. I actually feel rather smug for beating the system. I recall recently speaking to a lawyer who'd been downsized out of his practice and had to launch out on his own. Money was suddently tight and he was stuck making huge payments on his exorbitant car. "I thought I was pretty smart when I bought it," he told me. "But now I feel pretty dumb."

One of the reasons that self-made billionaires Warren Buffett and Sam Walton did so well was that they were totally unconcerned about the appearance of wealth. They drove normal cars (Walton drove an old truck), especially in their early days. Their frugal, early decisions paid off over time in both their personal and business finances.

Many people could be having a lot more fun and saving a lot more money if they simply didn't have a car payment. Work toward paying off that car, save up for the next one, and get on the road to financial freedom.

What's It All For?

Most money books give advice on how to amass wealth, but fail to ask the deeper questions:

• "What am I doing all this for?"

• "How do I define success?"

• "Precisely what am I trying to achieve by bettering my personal finances?"

In Enjoy Your Money, I argue that most of us are searching for deep and lasting happiness. To see if that's your ultimate goal, do this little dialogue with Socrates (substitute your financial goal for the "Corvette" and substitute your name for "Bob"):

Socrates: Give me one of your financial goals.
Bob: I want a Corvette by my 35th birthday.
Socrates: Why do you want a Corvette?
Bob: Because Corvettes are super fast and look cool!
Socrates: And just why do you want something that's fast and cool?
Bob: Because people would look up to me and respect me.
Socrates: And why do you want people to respect you?
Bob: Because if I could get people to respect me...I suppose they'd want to hang around me.
Socrates: And why do you want people to hang around you?
Bob: Because if people wanted to hang around me, I'd be happier.
Socrates: So, you want the Corvette because you think it will make you happier. In other words, if you knew that buying a Corvette wouldn't make you happier, you wouldn't buy it. Right?
Bob: Right.

I think Socrates would tend to lead us back to happiness as one of our ultimate goals no matter what our financial goals may be, which helps us to clear away a lot of fog and simply ask the question, "How can I be a happier person?" Attaining certain financial goals may indeed make us happier. Others may not. We'd do well to think it through.

Fortunately, Psychologists have done some pretty extensive studies to try to narrow down what makes some happier than others. Interestingly, once we've crawled above the poverty line and have basics such as food and shelter, just making $5000 or $10,000 more per year doesn't do much for our happiness. What does?

In part, psychologists have found that giving people are happier people. Those who seek hardest for wealth in itself are less happy than those who seek hardest for the welfare of others. I noticed that today, as I was inexplicably down this morning. With my mind distracted by life's heartaches and troubles, life looked grim.

Around noon, a neighbor knocked on the door, leaving a card. In it, she thanked us exuberantly for a little act of kindness we did last Saturday. Having just found out that her husband was recovering from a stroke, my wife and I walked over to find him trying to fix his lawn mower. I asked what we could do to help and he suggested that it would take a couple of hours for him to pick up all the pine cones left from the winter, so that he could mow.

No problem. I asked David and Paul, my 15-year-old twins, to come over and help out our neighbor. It took a bit over an hour. While we were picking up, another neighbor saw us and asked if I was making extra money (which wouldn't be beneath me, I might add). I told him about the stroke and he said, "after you get the pine cones picked up, I'll do the mowing."

To us, it was no big deal. To the family reeling from an unexpected blow, it meant the world. And hey, what could be a better memory to build with my kids?

So we brought a bit of happiness to a struggling family. In return, they gave us a deep feeling of fulfillment. Even now, three days later, their card pulled me through a downer morning.

So my answer to the "what's it all for?" question involves serving others. Is one of your long-term goals "to be the greatest possible assistance to the less fortunate by using my God-given gifts and abilities?"

I'm able to pick up pine cones. What can you do?

As Albert Einstein once stated concerning life's meaning:

"The life of the individual has meaning only insofar as it aids in making the life of every living thing nobler and more beautiful." (Albert Einstein)

Meaningfulness...and happiness, today's scientists might add.


This post by J. Steve Miller, author of Enjoy Your Money: How to Make It, Save It, Invest It and Give It.

On Predicting the Economy

To make business plans or retirement plans or even plan for a summer vacation, we'd like to take into account the future of the economy. If things are to get worse, we need to go conservative. If they'll pick up in six months, we'd like to start paddling out into the surf so that we're ready to catch the next wave of growth and prosperity.

Since we're not economic experts, we rely on the opinions of those who spend their days researching the economy, interviewing people on the economy, and helping to set government policy concerning the economy. That's probably why CNBC has record ratings during this economic crisis. We crave expert advice.

Which brings up an important point: can the experts be trusted when they make pronouncements like, "The next six months will be rough, but I see us getting back to steady, albeit slow growth in the last half of the year."?

Unfortunately, I don't believe there's adequate evidence that the experts can predict the future of the economy. Here's why...

1) Governmental figures and most heads of companies have every reason to bias their reports toward the positive. This is shown on a smaller scale by how CEO's of failing companies keep giving hope to their employees and stockholders, even when all the facts in their grasp tell them that the company will fold completely in six months. If they were to admit that the company's failing, stockholders would immediately sell all their shares and employees would bail for other jobs.

Aren't government officials in the same position? If they felt the evidence led them to think we were headed for a depression that history would label "The Greater Depression," they couldn't speak out about it, lest everyone lose confidence in the economy and sell off all their stocks, thus ushering in an even worse recession.

2) Studies show that experts do a poor job of predicting the economy. Professor Philip Tetlock teaches at the University of California-Berkeley. He's an expert on top experts. For about 19 years (culminating in 2003), he studied 300 academics, economists, policymakers and journalists, to find out how they made their economic forecasts and chart how often they were right. According to Tetlock, "we found that our experts' predictions barely beat random guesses - the statistical equivalent of a dart-throwing chimp.... Ironically the more famous the expert, the less accurate his or her predictions tended to be."(1) Thus, odds are, that expert you heard forecasting the economy on the evening news, if you were to chart his past predictions, would probably have been wrong as often as he was right.

My guess as to their inability to conjure up an accurate picture of our economic future is that, in order to predict it, they'd have know many facts that nobody can possibly know. For example:

• If our economy did better after government intervention following the last depression, how can we know for certain that the government intervention was the cause of the recovery.
• Since no two economies are ever identical (in a sense, a visit to the past is a visit to a foreign country), how can we know that what worked then will work now?
  
• The world's economies are more entertwined than ever before. How can we know what may happen in another country to either delay or speed our recovery?
  

Those are just three of the difficulties that I see springing up from a veritable Pandora's Box of economic possibilities.

So what do I do in the present economic climate? Despair?

No, I simply do what everyone should have been doing when most economists were predicting more cheery economic futures - don't believe them. Nobody knows. Realize that at any time, things could turn around and we'd be off to a prosperous decade, so that whoever bought up the cheap stocks would look brilliant in retrospect. Alternately realize that at any time, the economy could go to hell and we'll see a repeat of the Great Depression. Then again, things may continue as they are now for some time, neither getting better nor worse.

As author Kurt Vonnegut observed in his novel, Slapstick, "History is merely a list of surprises. It can only prepare us to be surprised again."

In other words, we don't know the future. Once we accept that, we can go about our plans with that in mind. That's why we major on the basics that work in any economy:

• work hard. You never know when you might get sick or your services might no longer be required.
  
• keep sharpening your skills so that you'll be the last one fired in a downturn and the first promoted in good times.
• save all you can.
• keep a large emergency fund on hand in case you lose a job for an extended time.
• don't live beyond your means. Debt is always scary, good times or bad.
  
• diversify your investments. Since the past isn't prologue, we can't know if the long-term gains of stocks or bonds or CD's or real estate will be the same as the past. Since we can't know which will do better, we diversify.
  

Disagree? Agree? Want to add to the discussion? Feel free to post your opinion below.

End Note

1) Eric Schurenberg, Why the Experts Missed the Crash, Money Magazine, February 18, 2009, 4:10 PM, ET.

Frugal, Frugal, Frugal

I stole this title from the title of one of Stanley and Danko's chapters in The Millionaire Next Door, reflecting the findings of their surveys of people who had accumulated over $1,000,000. It's counter intuitive to think of the wealthy as frugal, I know, since we've all seen "The Lifestyles of the Rich and Famous" and assume that all wealthy people continually indulge themselves with yachts and extravagant vacations.

But it makes sense when you think about it: to accumulate wealth, you've got to live beneath your means; to accumulate extraordinary wealth, you've got to live wayyyy beneath your means. What distinguished these people was not so much how much they made, since they were spread out among many ordinary vocations. They were distinguished, in part, by spending much less than they made - living in neighborhoods with those who made far less, buying conservative, reliable cars. They accumulated wealth by refusing to throw it away.

This is the way my parents lived, thus instilling in me a different mentality than most of the culture I sense around me. Mom's favorite place to shop for clothes is, to this day, her favorite thrift store. Her favorite car is the one she's owned for ten years. She has plenty of money saved for retirement, believe me. Yet, she detests spending money needlessly and relishes a great bargain.

In the spirit of mom and the millionaires surveyed by Stanley and Danko, I've kept my eye out for ski equipment over the months. I take some of my kids skiing once each Winter, but I detest paying such exhorbitant fees for equipment rental. If we could purchase our own equipment cheaply and avoid the rental, we'd only have to purchase a lift ticket. Enter the local Good Will store and Play It Again Sports (selling used sporting goods).

If I bought brand new ski equipment, it would be new only until I used it once. For the rest of my life, it would be used. If you can buy quality used equipment, why not skip that first "brand new" day and start off used?

(By the way, my wife's in full agreement about my frugality. We had a Saturday morning date to Goodwill and she was delighted. She picked up a small table we needed for the laundry room. Reference Stanley and Danko's findings on marrying a frugal mate!)

So I got a nice pair of skis, Saloman ski boots in my size, poles and nice carrying bag, all for under $30.00.

Looking at sporting goods sites, it appears that new skis cost anywhere from $125 to $700. Saloman Ski boots from $125 to $450, poles from $20 to $50, carrying bags starting at $50.

So it appears that, even if you took the cheapest prices, I've saved over $300 in ski equipment by shopping used in the off-season. I'm also in the process of helping my 14-year-old twins purchase snow boards. If they save a similar amount, we're talking $900 in savings as a family, which, if invested in a stock market index fund that might return the historic average (10%), would give me over $100,000 in 50 years!

It's just one item. But the impact can be huge. Doesn't it make Stanley and Danko's findings make sense? These first-generation millionaires understood the power of frugle and applied it to their cars, homes, clothes, vacations, etc. So don't be embarrassed to frequent thrift stores, shop off-season and peruse Craig's List. When you do, you're thinking like a millionaire!

Common Problems with Sudden Wealth

David Hultstrom is a financial planner and wealth manager for whom I have a lot of respect. His most recent newsletter was very insightful and I thought others would be interested. His contact information is at the end if you'd like to subscribe.

Financial Foundations August 2008 Newsletter

This month I would like to talk about the psychology of "sudden wealth". While probably all of us have had pleasant daydreams about the possibility of suddenly coming into a large amount of money, in fact it can cause a great deal of stress. The source of sudden wealth doesn't necessarily have to be winning a lottery or receiving an unexpected inheritance. Many people face adjustment issues even from the sale of a business, or the rollover of a large 401(k) upon retirement. In those cases, even though net worth is unchanged, having the wealth more accessible and liquid somehow makes it seem more real. Following, in no particular order, are some comments that I think might be instructive:

1) People who are prudent with small amounts of money tend to be prudent with large amounts of money. People who are profligate before an unexpected inflow will be profligate with that inflow. Or, in other words, more income or wealth won't solve what is fundamentally a spending problem. This is undoubtedly the reason that studies have found between a third and half of lottery winners end up declaring bankruptcy.

2) Far too often people who come into sudden wealth seem to almost be trying to lose the money - and subconsciously, they might be. Most people become comfortable with a certain lifestyle, self-image, etc. When something happens to change that, they may try (perhaps subconsciously) to get back to where they were previously. This is the financial equivalent of the biological process of homeostasis.

3) People think that lump sums will go further than they actually will. Someone who has made $50,000 per year all their lives may see the $500,000 in their 401(k) at retirement as an incredible amount of money, when it really isn't. The most extreme example of this that I have seen is a very successful attorney who was approaching retirement. His main assets were about $1,000,000 in his 401(k) and the value of his partnership share which his partners would buy from him for about $500,000. I asked the couple how much they needed to live on in retirement and his wife replied, "We have a fairly modest lifestyle, if we continue to get what he makes now, we should be just fine." I asked the obvious follow up question, "What do you make now?" To which he responded: "About $500,000." I wanted to ask what they planned to live on in year four (but I didn't). I also didn't get them as clients. My guess is they went with an advisor who said they were in fine shape.

4) People sometimes try to "prove something" to someone such as a spouse or a parent (even if the parent is deceased). It is not uncommon for someone to lose a great deal of sudden wealth in investments or businesses trying to demonstrate how skilled they are at investing or business.

5) Sometimes people don't know what to do so they ignore the funds completely. I once did a financial plan for a schoolteacher who lived very frugally on her salary. Her primary concern was whether she could afford to buy a condo to live in rather than continuing to rent an apartment. Her father had left her some stocks when he died more than 20 years previously, and she not only didn't spend any of the money, she had never bought or sold anything in the account. It was untouched for more than 20 years and her net worth was just under $1,000,000.

6) The receipt of sudden wealth can also cause strains with existing friends and family members. Many wealthy people are treated differently and not uncommonly feel taken advantage of. Of course, new "friends" and "advisors" become prevalent as well.

So, what is the solution? The main thing is to proceed slowly. It is OK to leave the wealth in cash while becoming acclimated to the new situation. It may not be prudent to immediately move to a nicer area, a bigger house, etc. As a first step, paying off all debt, and committing to remain debt-free is probably prudent. In addition, thinking of the wealth as an income stream, rather than a lump sum may be helpful. As I covered in the July 2007 Financial Foundations, the sustainable withdrawal rate from a portfolio is about 4% per year. Thinking of a million dollar windfall as being able to pay off a $500,000 mortgage and then have $20,000 per year from the remaining portfolio to spend, may lead to vastly different decisions than thinking about what to do with a million dollars.

Note: Our clients are located around the country (and world), if you know someone we may be able to help, we would be happy to do so. While Financial Foundations is intended primarily for our clients, we are happy to expand our readership so feel free to pass this along. If you have received this from someone else in that manner and would prefer to get it directly from us each month, please let us know. Similarly, if for some reason you no longer wish to receive this (as unimaginable as that seems) simply let us know that as well.

Regards,
David E. Hultstrom
MBA, CFP, CFA, ChFC
Financial Architects, LLC
Financial Planning & Wealth Management
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Woodstock, GA 30188
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On Money and Happiness

The final chapter of my book, Enjoy Your Money, addresses the relationship between money and happiness. When does more money make us happier? When does it not? I pulled part of my research from psychologist David Myers. Here's a summary of one of his books:

David G. Myers, The American Paradox: Spiritual Hunger in an Age of Plenty (New Haven: Yale University Press, 2000)

Why do we have more stuff and comforts than we've ever had, yet people report more misery and dissatisfaction with life than when people had much less? Thus the paradox that Myers, a respected social psychologist, tries to explain.

Citing abundant studies and reflecting on their accuracy and meaning, Myers concludes that, although money helps our happiness when it lifts us above the poverty line, it doesn't really help our well-being when it grants us more than we need. Supporting this thesis are studies that find lottery winners initially exuberant, but later adjusting to their former level of happiness. Similarly, accident victims who lose their eyesight or find themselves suddenly quadraplegic, initially fight depression but eventually find themselves with about the same level of happiness as before the accident.

Who finds themselves less happy than others? Those who strive most for material wealth. How fascinating! While many give lip service to the religious teachings and wisdom of the wise who insist that "it's better to give than to receive" and that "real happiness comes more from caring relationships than accumulating lots of stuff," Myers demonstrates from study after study that these teachings are true.

Myers comes with sound credentials. As professor of Psychology at Hope College, his research and writings can be found in over sixty periodicals. His psychology textbooks are used in nearly one thousand colleges and universities.

Applications

1. Poverty isn't good. Some may cry "duh!", but many hold a noble ideal of leaving the corporate rat-race, working minimum wage or part-time and earning minimum wage and playing their guitar on street corners for spare change. Others are so mission-minded that they want to live in the ghetto and serve those around them. While this may be fine for singles, it's not good for raising children. They'll likely grow up in fear, choosing the wrong role models in a crack neighborhood. Plan on making enough money to live in a decent neighborhood, send your children to decent schools, and have decent health care. Find ways to help those who are in poverty and support policies that help people out of poverty.

2. Materialism leads to misery. Studies show that those who strive most for wealth are less happy than those who put relationships first.

3. Do everything we can to promote stable families. The sexual revolution that started in the 60's brought more misery than happiness. The best sex happens in the context of a committed, long-term relationship - what we traditionally call marriage. Much of the depression and anxiety and maladjustment and violence of youth can be traced directly to their unstable homes. Sure, we all need a village - but we also need a family. Much, much research shows the power of the stable family unit to produce productive, happy children. A huge amount of today's poverty can be a attributed ruptured families that must survive with single parents. Promote government policies that promote stable families. Stay faithful to your spouse and children.

4. Promote living for others and community rather than radical individualism. Myers identifies the latter as one of the most remarkable characteristics of the present age. It's also the root of much of today's misery. This has been a huge shift in attitude since the 50's. Today, people typically seek personal peace and affluence above all else. Paradoxically, those who strive hardest to satisfy me, me, me end up less satisfied with life than those who are more concerned with others. The most obvious place we see this is in marriage. Those who go into it for what they can get end up unfilled and often divorced. Those who go into it with more selfless aspirations get the most fulfillment.

5. Character education must continue to grow and prosper in our schools. Communities agree on many traits they want to see in their students, such as honesty, diligence, concern for others, etc. Schools have the responsibility to partner with parents and community leaders to reinforce these traits in the school.

6. Religion is a positive force in the world. Sure, there are plenty of examples of religious people and organizations who've been negative. But when you look at the big picture, religion has been extremely positive for the world. The vast majority of work with the poor and down and out is done directly by religious organizations or done through secular organizations by religous people. Deeply religious people also report significantly greater happiness than the irreligious.

7. Involvement in corporate worship is essential for spiritual growth. The individualism of our age impact many people's approach to religion. They see little need to meet with other religious people when they feel they can just as easily worship and please God on their own. Yet, Myers sites numerous studies that find that meeting with people of similar beliefs strengthens your own beliefs. Also, studies find that those who don't meet with other believers neither serve nor give like believers who take corporate worship seriously.

Why This New Blog?

Since I'm doing final edits on my latest book - Enjoy Your Money!: How to Make It, Save It, Invest It and Give It - it seemed wise to begin blogging on the topic, especially since my research yields so much more than my book can contain. I plan to deal with a wide range of aspects of personal money management.

I'll post my book summaries and reviews from my reading on money, what's working and not working with finances in my own family, etc.

Thoughtful and practical. Those words will drive this blog. Hope to hear from you!