The 9 Steps to Financial Freedom (33 page)

If you have money in a money market mutual fund, think through whether you might be better off, at least during a period of low interest rates, shifting some into a federally insured account at a bank or credit union. And if peace of mind is a priority, then you definitely want to focus on a bank or credit union MMDA.

There are lots of other ways we leave quarters on the sidewalk. Here are ways to pick up that found money.

If you are self-employed or retired and getting a pension check, did you know you don’t have to have taxes taken out of your checks each and every month? The interest that this tax money could earn could be about $100 or $200 a year, which invested yearly over forty years at 8 percent could net between $25,906 and $51,811.

If you can, pay your taxes by using an estimated tax payment schedule, which means that four times a year (April 15, June 15, September 15, January 15) you need to send in an installment payment of the taxes that you will owe. Here, too, you have a choice. In these four installments you need to send in either 90 percent of this year’s projected tax or 110 percent of the tax you paid in the previous year.

Let’s say last year you owed $8,000 in taxes, but this year you took a large sum of money from your retirement plan and, as a result, you will owe about $18,000 in taxes. Your choice is to send in 110 percent of last year’s taxes, which totaled $8,000, over those four installments at $2,200 each, or pay 90 percent of what you expect this year’s tax liability to be—in this case 90 percent of $18,000 = $16,200.

Who wants to part with money, particularly to the IRS, before they have to? You would pay the $8,800 (110 percent of $8,000), in four installments of $2,200 each, and keep the
remaining $7,400 you owe in a money market or interest-bearing account of some kind. Instead of letting the IRS earn interest on your money, you’re doing it. And it can add up to a nice sum.

Let’s say that you buy a house with a thirty-year mortgage of $200,000 at 6 percent. You will be scheduled to make 360 payments of $1,199.10, paying a total of $431,676 by the time your house is paid for. That interest can sure add up, to the tune of $231,676, over time. However, if you pay off this thirty-year mortgage in fifteen years, you will pay far less in interest. Your payments would be higher, $1,687.71 a month rather than $1,199.10, but since you would be paying them for only half the time, you would have shelled out a total of $303,788 to own your house free and clear, or about $128,000 less than if you did it over a thirty-year period of time. That’s quite a savings.

If this is something you’re thinking about doing, please make sure you consult a financial professional. There are other factors to consider—the present tax deduction on the interest from a primary-residence mortgage; what the $489 difference in monthly payments would add up to if you invested it well instead (and whether you would be disciplined enough to do it). This is an emotional decision, too, as well as a financial one: if you bought a house with a thirty-year mortgage at age forty, how would you feel knowing that those monthly payments would cease when you were fifty-five? Or when you were seventy?

Several other options are available to you as well. Sending in one extra mortgage payment per year, for example, and specifying that it be used against the principal will start to reduce a thirty-year mortgage. If you do this, it will reduce a thirty-year mortgage to just under twenty-five years and a fifteen-year to about
thirteen years, depending on your interest rate. Beware, however, of banks that offer to do this service for you (deduct from your account bimonthly) and charge a onetime $300 fee. You can accomplish the same goal by simply sending in an extra payment.

Did you know the interest on a thirty-year mortgage is usually higher than the interest on a fifteen-year mortgage? The 6 percent you’re paying for your thirty-year mortgage in the previous example would most likely have been only 5.5 percent, or 0.50 percentage points less, if you had applied for a fifteen-year mortgage to begin with.

You need to give thought to this before you apply for your mortgage. If you are planning to pay it off in fifteen years, why would you apply for a thirty-year mortgage in the first place, the way so many people do? For a safety net, right? You figure that if money gets tight, you can always go back to paying it off with less expensive monthly payments over a longer period of time.

Your safety net, based on the difference between a 5.5 percent, fifteen-year mortgage and a 6 percent, thirty-year mortgage will cost you an additional $103,000 in interest payments.

Wasn’t it nice when you signed up for your mortgage and the lender said, “Why don’t we just go ahead and add your property taxes and insurance to the bill every month, and we’ll pay it all for you?” Sure it was nice. For them.

Property taxes and insurance both come due twice a year, but by saving yourself the hassle of writing four simple checks a year, you’re paying them every single month—and losing out on the interest the money could be earning. It is not farfetched to think you could have earned $240 a year on the interest from your insurance and property taxes. Let’s say you did. Over forty years (which is about how long people really pay mortgages, by buying a house, selling it, buying another house, and starting the mortgage process all over again) at 8 percent, you could be paying your bank $62,173 in lost interest and earnings just to be your personal secretary and write those four checks for you. Over thirty years you could have lost out on $20,187; over fifteen years, $6,517. And if you’re carrying two mortgages, your savings will more than double.

Some credit cards do not charge annual fees, but those that do levy an average fee of $43. If you are paying $43 a year, you are essentially wasting $5,693 over the next thirty years. That’s how much your $43 a year would grow to assuming an 8 percent average annual return. Over fifty years, you are throwing away $28,662. To me that’s found money.

Often I encounter people who tell their brokers exactly what to buy or sell, yet they are still paying full-service commissions on their trades. When I ask them why they don’t switch to a discount broker, the answer is usually: “Well, we’re settled where we are, so why change?” Or, “Well, he’s a great guy.” (Or, “He’s
done so well for us,” which is curious, since they’re the ones making all the decisions!) Even if you’re forty-five right now, if you save just $300 a year on commissions and invest the money at 6 percent over the next forty years, that adds up to $49,000. Will you still be making investments in forty years? If you’re alive, you will. Are you sure you like your broker that much?

Let’s say all you ever invest is $5,000 a year in an IRA, and you put that money in a loaded mutual fund with a 5 percent commission. (The difference between loaded and no-load funds is explained in Step 6.) Five percent of $5,000 a year is $250. If you start your IRA at the age of twenty-five, by the time you turn sixty-five that $250 that you did not need to spend every year invested at 6 percent a year would have added up to more than $40,000. It seems to me that the one who will eventually be loaded is that broker who is selling everyone these funds.

Would you lend me, every year for the next thirty years, a few thousand bucks interest-free?

Well then, why would you make that loan interest-free every year to the IRS?

This drives me crazy. Every year at tax time I used to get a few new clients who were all excited because they had just gotten their refund back from the IRS. Well, they could have begun investing it months before and, on a $4,000 refund, could have already earned a good bit of interest. The IRS takes your money, but know that it doesn’t give any back with interest—these
refunds have been earning interest for the IRS, not for you. Make sure you send them your fair share of taxes when they’re due, but not a penny more. No refund is what you want. Let your money work for you instead.

When someone says to me, “Oh, I don’t know, I guess I just don’t really care about money,” I always say, “But if you don’t care more about your money than anyone else, who is caring about it on your behalf?” When someone else says, “Well, I just don’t think about money,” I say the same thing: “But if you don’t think about your own money, who will? You must think and care about your money until you’ve taken the necessary steps to know that you have done everything you can to show respect for your money, which is a way to show respect for yourself.” Then your money will think and care about you in return.

That’s what this step has been about: respect.

With this step, the path to financial freedom is coming into view. You’re almost there, you’re on course. Now you can clear out the debt that’s cluttered up your present and weighs you down in fear. The future looks clearer, too, now, doesn’t it? Now you can see that you can create enough for tomorrow once you’ve acted today. You have to count every penny to make every penny count. When you have done that, you can begin to create money, more and more money.

Respect for your money and respect for yourself are linked. Building one builds the other. With the next step, you will learn how much you already know deep inside you. We all have a wisdom within us that will tell us, if we listen, how to act, with
our money and with every other aspect of our lives. To get in touch with that voice from the core of our being is not only a step toward financial freedom. It’s also a step toward spiritual serenity. That they go hand in hand is not as curious as it may seem at first glance. When you can create money, you are suddenly free to live a life rich in all kinds of ways.

W
HEN
I
WAS A STOCKBROKER
, it never ceased to amaze me that when I could buy the exact same stocks for my clients, some would always make money and some would never make money.

When brokers find stocks they like, they try to do what is called
building a position
in the stock—buying lots of it for their clients. For instance, if I liked widget stock, I’d call every single client I had to tell them all about widgets.

Then I’d say: “How many shares would you like, five hundred or one thousand?” I was taught in stockbroker training
school never to ask a “yes” or “no” question when trying to make a sale. By asking whether clients want five hundred or one thousand shares, you leave the client only with a choice of how many they want, not whether they want them.

I was a good salesperson, so most of my clients would buy stock in Widgets at, let’s say, $85 a share. Now let’s suppose all of a sudden Widget cuts its dividend, and before you know it, the stock is down to $40 a share—and my phone begins ringing off the hook. Some people would invariably say, “Sell, sell, I don’t want to lose more than half my money!” In those cases I had no choice but to sell their stock. Some of my other clients, in for a longer haul, even though they might not have been happy that the stock was down to $40, still knew that this was a good company and that in time it could come back. Often they would buy more shares at the lower price. Before you knew it, widgets were at $120 a share. All of my clients had bought the same stock. Some had made money, and some had lost it. By the way, if you think I’m exaggerating the way stocks move, I’m not.

It also worked the other way around. Let’s say this time I was building a position in lobster pots, and all my clients bought it at $6 a share; before long, it went up to $12 a share. Big increase. I’d call my clients and some would say, “Okay, sell it,” and others would say, “Let me think about it,” then call back to say, “No, let’s see if it will go a little higher.” All of a sudden something happened and the stock fell, to $4 a share. All the people who didn’t want to sell it at $12 now got frightened and sold at a loss.

Over the years I started to notice that the people who lost money in either of these ways were always the same ones. They’d sell too soon or too late, but they always lost money. In the business, we called them clients with the “kiss of death” when it came to their investments.