***Yes, I know it’s spelled cosine. But clever titles should never be tossed aside for silly things like the English language or spelling.
This post will anger people. I just know it will. It will anger people who have recently co-signed on a loan for a loved one. It will anger people who have recently had a loved one co-sign on a loan. And it will anger people who have co-signed on a loan, yet weren’t burned.
As you may or may not know, some lending institutions may ask for a co-signer when the primary borrower doesn’t appear to be a good credit risk. When a person becomes a co-signer, they are essentially promising to pay back the loan, in the event the primary borrower can’t handle the loan payments. At first glance, this doesn’t necessarily sound like a terrible idea. But it is. With very few exceptions, I find this to be an irresponsible thing to do. I believe most people are put in a tough situation, when asked to co-sign, and they generally acquiesce due to guilt.
Don’t get me wrong, there’s a ton of pressure and emotion revolving around co-signing. “Don’t you trust me?” the borrower might ask. But co-signing isn’t about trust. It’s about risk. Risk and trust have very little to do with each other. Do you know who specializes in risk assessment? Lending institutions. Do you know who doesn’t specialize in risk assessment? Biased family members. As much scrutiny and criticism as banks receive, they still serve an important purpose in regards to loan underwriting. If a bank says no, then why should you say yes? When you co-sign, you are essentially underwriting a sub-prime loan. This is tricky territory. People love to get mad at banks for loaning money to people they shouldn’t. Why would you loan money to someone you shouldn’t?
I feel a miniature rant coming on.
Here’s my mini rant.
People love to get salty at the banks for sub-prime lending practices. In other words, people love to blame banks for lending money to people that can’t afford to borrow money. This is commonly classified as predatory lending. While I certainly think some predatory lending exists, it’s not forced lending. You don’t have to borrow money. You don’t have to buy a house. You don’t have to buy a car. What? You didn’t know you had a ridiculous interest rate? Shame on you, not the bank. If you default on your loan, then the bank was correct in charging you so much in the first place. They knew you were a tough risk. And they charged you a premium for being a sub-prime case. Not everyone has proven himself or herself to be a good lending risk. We can’t circumvent reality, and turn into ogre-chasing villagers. The banks have plenty of blood on their hands, but lending money to people that shouldn’t borrow it, isn’t their cross to bear.
Whew. I feel better.
This isn’t a credit score discussion either. Earlier this year, a young guy came to me with no credit. NO CREDIT. In the eyes of the credit agencies, he hadn’t done enough to register a blip on their screens. I started poking around this guy’s finances, and quickly realized that he was doing a helluva job. He had very few financial obligations, and he had accumulated $50,000 in savings. He wanted to buy a home. I directed him to a lending institution that I knew would assess the risk involved with lending someone with no credit, money to buy a house. They assessed the risk. Decided that his credit score, or lack thereof, was irrelevant. They loaned him money to buy a house.
As cliche as this has become, isn’t this an extension of the participation trophy problem? There’s no way that every kid deserves a trophy. And there’s no way everyone has earned the right to borrow money. Not everyone has proven himself to be a good risk. Family members shouldn’t mess up this financial natural selection. Your kid isn’t missing out, when a bank tells him or her no. It’s feedback. Your kid is being told he hasn’t done enough to display his credit worthiness. This isn’t a bad thing!!!! When someone is denied a loan, it should be celebrated. Unfortunately, most people view a loan declination as some sort of insult. It’s not. You should take no for an answer. Take that no, work on your skills, and then come back later to get a yes. How long will the person need to wait? Longer than he or she wants to.
It’s not that different than letting your kid ride a carnival ride, despite the fact they aren’t “this tall.” Sure, you can probably talk your way past the carny, but should you?
You asked for it. What? You didn’t ask for it? Well, somebody did. Here is the How Not to Move Back In With Your Parents podcast that I created with IU Money Smarts.
Are you a college student? Do you know a college student? Have you met a college student? Were you a college student? Will I stop asking questions? Be sure to pass this link on to them. In just eight minutes per week, we plan on changing the financial decision-making of college students. We discuss budgeting in college, work income, credit cards, student loans, and a ton more.
You don’t have to be one of Indiana University’s 130,000ish students to listen to this podcast. IU wants to help educate all students around the world.
In 1994, I tackled Chad Patterson….at varsity basketball practice. Chad was one of the star senior players (and a really good dude), and I was a solid sophomore point guard that played a little bit of varsity. I denied tackling him on purpose, for nearly two decades. I was just coming off of football season, and I blamed it on my football legs. But I tackled him on purpose. I pretty much had BSed everyone else in the gym that day. I even convinced myself that I didn’t tackle him on purpose. Did I mention he was dating my ex-girlfriend? I tackled him on purpose. Lying to yourself is great and all, but what’s the point?
I’ve had hundreds, if not thousands, of people lie to me about their financial lives. I don’t really care whether they are lying or not, because I usually have the numbers in front of me, and the numbers rarely lie. I’m usually more concerned that people believe their own BS. When someone starts lying to me, I think to myself, “I wonder if they believe this crap.” If they do believe the ish they’re spewing, they’re in trouble. Believing your own BS is always a recipe for a financial disaster.
Below, you will find the five biggest loads of crap that I hear on a regular basis. Again, I don’t really care if people lie to me. I’m just trying to help. I’m more concerned that they’ve started to believe the lie, and are on some sort of mission to find the real killer, when the lie itself…well…you know.
1. “I’ve got plenty of time to save for retirement”- Um, no you don’t. There are two factors that are important in any accumulation plan: money and time. You need both. You need to invest money for the future. And you need time to do what time does. I believe that time is the most important element of retirement savings.
2. “I spend the same amount of money on my credit card as I would if I just were to use my debit card for monthly spending.”- Things I’ve never heard a debit card user say: I spend between $1500 and $3500 per month, on my debit card. Do you know who says these sorts of things? People who use their credit card for everything, and then pay it off at the end of the month. While refusing to carryover a balance is a good practice, it also creates a blank check mentality which induces freer spending. You don’t have to believe me. Just put down your credit card for one month, and do all your spending on your debit card. You will spend less. And I don’t care about your points. Please shut up about your points.
3. “I have plenty of life insurance.”- You probably don’t. I’ve never quite understood people’s general aversion to life insurance. We’re all going to die. You don’t seal your fate if you buy life insurance. You actually seal your fate if you don’t buy life insurance. Why would you want your significant other and/or children to suffer financially, at your eventual demise? When you die, your income dies. And if your family depends on your income, then you are putting them in a terrible position. Skip a few trips to Applebee’s and buy the right amount of life insurance. Most people need about ten times their annual income in life insurance.
4. “I’m very aware of my finances. I check my bank balances daily.”- Do you know what online banking has done to financial awareness in this country? It is has killed it. And not “killed it” in a good way. Online banking has become a financial crutch for the apathetic. Do you think people in the 1980′s checked their check register every single day? No. They didn’t. Did they save more of their disposable income? Yes. Did they have less consumer debt? Yes. Online banking is a convenience tool, not a financial tool. If you were financially aware, you wouldn’t need to look so often. The more times you look, the more money you will spend. It’s called “balance spending,” and it’s real.
5. “I don’t need financial goals. They’re stupid and pointless.”- Okay. I don’t understand why people fight goals. You aren’t signing-up to walk on hot coals. You’re simply letting a piece of paper know what’s going on inside of your tiny dinosaur brain. The strangest thing about not writing down financial goals is that it actually makes your financial life easier, not harder. Sure, some goals will cause you to increase your effort, but most of the time, goals just allow you to better focus whatever effort you are currently giving. Start with 30-day financial goals. What would you like to accomplish financially in the next 30 days? How much money will that require? How would accomplishing this goal affect your life?
You can lie to me. You can lie to your friends. You can lie to your spouse. You can lie to your boss. You can lie to your dog. You can lie to your financial planner. You can lie to your hair stylist. You can lie to your therapist. You can lie to the IRS. You can lie to everyone at your high school reunion. Just don’t lie to yourself.
Sorry, Chad. I tackled you on purpose.
I was wrong for a very long time. I dismissed a financial metric that financial planners have been using since financial planning was created. I still can’t decide if I completely misunderstood the metric, or if I eventually started viewing the metric in a completely different way. The metric was first introduced to me as a tool to measure wealth, but it’s more than that to me now. As you will see in a moment, the metric is much more powerful for people who are actually struggling.
I believe Charles Dickens said it best in Bleak House. I’m kidding. I never read Bleak House. Net worth is the greatest metric in all the financial world. It’s a powerful, misunderstood tool that can drive wealth higher, and better yet, pull desperate people out of the doldrums of debt.
Why is net worth such a great measure? Simply put, it measures various financial activity in a very complex way. If you monitor your net worth, you will be able to see the impact of making debt payments, saving money, investing money, and you can even watch your investments’ market performance or simple appreciation. Net worth is obtained by subtracting your current debts from your current assets. As you know, assets are things such as real estate, savings and investments. And debts are…debts.
Let’s take a look at a couple of different examples to help us better understand this. First up, let’s examine the financial life of local pop sensation, Dustin Tendersnake:
As you can clearly see, Dustin’s net worth is $280,000. If Dustin takes care of business and makes some prudent financial decisions, then he can make some shockingly good financial progress. For instance, if Dustin pays his mortgage (12 month’s of principal payments for a total of $13,000), puts money into his 401k ($10,000 deferred from his paycheck and $5,000 matched from his employer), saves into his savings account ($1,000 per month), and pays on his student loans (12 month’s worth of principal payments for a total of $2,000), then his net worth will increase by $31,000 in 2013. And that doesn’t even include the possible market appreciation of his home and/or return on his 401k. By measuring his net worth, Dustin learned that he moved the financial needle by $31,000, or 11% of his net worth at the beginning of the year.
Let’s now examine the financial life of local football phenom and UGG enthusiast, Dawn Grady:
Dawn is depressed. Her powderpuff football team just lost an important game, and her financial life is pretty UGGly. Dawn NEVER looks at her debts. They stress her out. “What’s the point?” she often says to her self. Dawn decides to measure her activity for one year. Here’s what she does. She works hard to pay down her credit cards by $8,000. And she pays down $1,000 on her student loans. Additionally, she starts contributing to her company’s 401k, up to the match. Thus, she deposits $1,200 and the company matches $1,200. On December 31st, 2013, Dawn does the math and realizes that she just increased her net worth by $11,400, or a 21% increase. Sure, Dawn now has a net worth of -$43,100, but she made AMAZING progress. And better yet, she’s enthused. She’s been working really hard on making financial changes, but she always felt like she was running in place. She clearly isn’t running her place. She improved her situation by 20%! That’s phenomenal.
Can you imagine eating well, exercising regularly, feeling crappy about your fitness progress, yet never weighing yourself to see if you are getting any results? Yeah, it happens all the time. When you don’t measure your net worth, you miss the opportunity to reward your progress and hard work. Paying down debt can feel mundane, but it isn’t. In fact, if you paid down $10,000 worth of debt, it has the same effect on your net worth as if you were to save $10,000. In both cases it’s a net worth increase of $10,000.
Do you want to start viewing your debt pay down process differently? Then start measuring your net worth. The only debt I personally have is my mortgage, but I love figuring my net worth so I can measure the impact of my mortgage principal payments. I sincerely celebrate each mortgage payment, and so should you! The possibilities are endless, when net worth is your goto metric. Take for instance the story of Mr. Ihave Lotsamoney.
Mr. Ihave Lotsamoney had lots of money. He was CONSUMED with monitoring his portfolio’s performance on a daily basis. Like many people, Ihave lost sight of reality. He was so concerned with how well his broker was doing, he neglected to put any more of his income toward his investment portfolio. Instead, he chose to spend wildly because he had a $500,000 portfolio. Frankly, his portfolio was struggling. He lost 1% or $5,000 this year. The crazy thing is that Ihave was completely wasting $2,500 per month on really stupid stuff. Really stupid stuff. If Ihave had monitored and utilized the net worth metric correctly, he would have increased his contributions to his portfolio by $30,000, despite his $5,000 loss. Not only would his net worth have increased, but he would have hypothetically purchased more investments, at a lower price, thus insuring more profit, once the portfolio turned around.
I love using net worth to reinvigorate individuals who’ve already amassed great wealth, yet have fallen on apathetic times. I love using net worth to reinvigorate individuals who’ve dug themselves such a deep hole that they can’t muster the intestine fortitude to glance at their actual debt levels. I love using net worth to show anyone and everyone that purposeful financial decision-making will always lead to progress. Net worth is the greatest financial metric, in all the financial world.
I don’t like to think about other personal finance experts as competitors. I like to think of them as teammates. My goal is for people to find financial wellness. If they happen to find it through the inspiring words of someone else, cool with me. Why would that bother me? At times I disagree with some of the teachings and ideas of other experts, but I keep those to myself. I know that people disagree with some things I say, but I just chalk it up to different strokes for different folks. There is one topic that most everyone else has weighed in on, except me. That’s the concept/idea of becoming a millionaire. In fact, I don’t think you can find the word millionaire on my website, five years worth of radio shows, or any of my five books.
My aversion to the quest to being a millionaire is certainly conspicuous in its absence, if you follow other personal finance experts too. I don’t talk about being rich. I don’t want to teach you how to be rich. I want to teach you to be resourceful. I believe that wealth is a side effect, not a goal. What good is a big pile of money, if you don’t know how to handle it? Patrick Ewing said it best during an NBA Players Strike back in the day, “we may make a lot of money, but we spend a lot of money too.”
There’s one concept within personal finance that I’m currently obsessed with. I’ve written about it in The Indianapolis Star, discussed on my radio show, and have talked about it to thousands of people that were part of recent live audiences. I believe that we should all be on a lifelong mission to break our dependency on our incomes. If you’ve taken a look at my Four Financial Stages, you’ll see that I want people to save at least 20% of their income as part of the Arriving stage. The reason why, might surprise you. Whereas I obviously want you to accumulate money so that you can fund your eventual, but not guaranteed retirement, the real reason I want you to save at least 20% of your income is much more important. I want you to demonstrate the ability to live on only 80% of your take-home pay. This is all part of a strategy to reduce your dependency on your work income.
If your income consistently rises, and you don’t consistently save your raises, after a certain level of comfort is achieved, then you are creating a nearly insurmountable mountain of dependency. You can accumulate a million dollars, but if you need $100,000 per year in retirement, then you’re going to be in trouble. I believe if you focus on the wealth, then you are focusing on the wrong goal. I believe people act differently when wealth, not resourcefulness, is the goal. I believe greed and emotions can cloud otherwise good judgement.
Think about most of the financial planning commercials you’ve seen. What is the message? In my unabashed opinion, the message is that accumulation is the key. I disagree with this message . You can’t accumulate money without resourcefulness. When wealth is the goal, then the focus turns to assets, not income. This means that people worry more about what their investments choices are, rather than how their income should fund their investments.
Maybe I’m crazy, but dangling wealth in front of people in order to get them to care, doesn’t seem sincere to me. I think you discredit your audience when you make financial wellness about wealth. In most cases, I believe that behavior is to blame in both success and failure. That’s why I want the discussion to revolve around the behaviors that lead to resourcefulness.
I’m personally striving for a mindset in which money is a byproduct of my work. This doesn’t mean that I’m going to live in a hut in the woods and purify my urine for drinking water. It just means that I’m trying to measure my satisfaction on a non-monetary scale. When wealth is the goal, you will ALWAYS measure satisfaction on a monetary scale.
I don’t believe we sell ourselves short when we strive to be resourceful. Resourcefulness isn’t about being cheap. It’s not about penny-pinching. To me, it all boils down to this very simple idea: a person that isn’t resourceful doesn’t ever have enough resources. Wealth CAN’T be the goal.