David Bach @ Amazon.com

Mr. David Bach, author of The Automatic Millionaire, Smart Women Finish Rich, Smart Couples Finish Rich, and Start Late, Finish Rich, came for a visit to Amazon.com. He had a few things to say that make sense. I'm hoping that this blog will start some conversation amoungst those that know money. Me... well, I'm not even acquainted with the stuff :(

He spoke very frankly and smartly. I tried to take some notes, and here's what I managed to record.

1. Are you smart with your debt?
   
   Most people have some credit card debt, a car loan, and either rent or a mortgage.
   
   
   
   • What are you going to do about your credit cards? Credit cards are spectacular money pits. Average interest rate hovers around 19%. One day late on a payment? Welcome to 29%... sometimes you can get to 37%. That wonderful "minimum payment" option? That will make you pay about 29K over 37 years for a 10K debt. Not good. Some reccomendations (they seem to be US-balanced, hopefully there are options internationally, as well): go to websites like http://www.lowermybills.com/ or http://www.bankrate.com and find yourself a CC with a lower interest rate. Sometimes you'll find offers such as 0% interest when you transfer your balance from another CC. Even if you get one of those letters from a CC Company offering you another card, at least read the terms. Armed with these offers, call up you CC company and ask what your rate it. If you can do better, tell them that the rate is too high and you want to cancel. Those are the magic words to make the Customer Service guy go into hyperdrive to satisfy the customer. You may even work out a 0% rate if you transfer some of your other CC debt to them. 0% interest sounds good to me!
   
   
   • Car Loans?
     
     Cars are generally the single worst investment you can make. You buy the thing for a gagillion dollars, and one year later it's worth about $10. Great. This takes a little bit more number cookin', but a 3 year old car is usually a lot less.
     
     Take for example the Honda Accord. Honda has some of the best resale value in the
     industry, so I'll use this, and a Chev. Cavalier to show the difference.
     A 2004 Honda Accord LX Coupe 2D hits about 20,940.00, and a 2001 goes for about 14,415.
     hmmm ok. 6Gs for 3 years. Pretty good. Gotta love Honda.
     
     How about the Chevy?
     A 2004 LS 2Dr goes for 18K. A 2001 LS 2Dr goes for 9K. That's 50%!!
     
     (Source: http://www.kbb.com)
     
     So do your math! If Honda (for some reason) decides to offer 0% on a new Accord, and you can't get better than 10% interest from the bank for the used car, then it's your call. When the price difference is as staggering as the Chevy, however, perhaps you should consider pocketing the 50%... or investing it!
     
     Again, I reiterate, your milage WILL vary, so balance the actual cost of the loan. If you pay cash then it's usually a no brainer. Do you need BRAND NEW wheels? Hyundai had a 10 year warantee on their cars at some point. So if you want a new Tiburon, consider a 3 year old one... you still have 7 years left on the warantee!
     
     
   
   
   
   • Mortgage.
     
     He really didn't get into this. So I guess the basic "shop around" principle applies.
     
   
   
   
   
   
   



2. Do you pay yourself first?
   
   Use your 401(k) plan!!!! Before you even get your paycheck, Big Brother has taken more than his share. The only way to pay yourself first is by jamming some cash into your 401(k). To quote Ron Popeil, this is the "Set it and forget it" plan. Money comes out to pay your future self. No thinking involved. Better than that, many companies offer some form of matching. Why not take that raise? Rule of thumb: put at least one hour a day worth of money in there. ( Approx 12% )
   
   
   



3. What's your Latte Factor?
   
   Do you spend $5 a day on coffee and or snacks?
   
   That's about $150/month.
   
   Can you invest that instead? On a long term average of 10%/year, that's $30,727 over 10 years. $113,905 over 20 years, $339,073 over 30 years, $948,612 over 40 years. Can you give up that expensive daily coffee? Is there anything else you can invest? Bagel? Chocolate? Can you brown bag your lunch? Hey, if you can give $5 a day without sacrifice, at least invest it! OR, how about still committing to the sacrifice $10/day? That's $300, month. Invested, that $61,453 in 10, $227,811 in 20 or $678,146 in 30 years!
   
   
   



4. Do you rent or own?
   
   Plain and simple, rent == lost opportunity. Rent gets you a place to live for a month, and then it's gone. Mortgage payments at least get you closer to owning your place of residence. On top of that, your home generally increases in value, so your mortgage goes down, and your equity grows! There are legal methods by which you can purchase property without a down payment. If you can acquire more than one peice of property, rent the other one out! As THEY shrink your mortgage, YOUR equity grows. See why renting is bad?
   
   Be the first one at new developments. (I'm pissed at myself for missing the boat on this one). Here's my (Johnny) personal example. A house I wanted to buy was 300K. I waited and moaned and groaned and thought and thought. Now, 6 months later it's not even built yet and is going for 320K. That's 20 grand for nothing! David Bach was the first one at a condo site here in Seattle. He committed to purchasing a 500K condo, with a downpayment of 70K due in 3 months. When he came back, a similar condo 3 floors DOWN was now going for 800K. Takes money to makes money, and that's about 300K... for 3 months of nothing. If he rents that bad boy, they will be paying his ~400K mortgage for him, happy to have an 800K condo for such low rent. Meanwhile, he can sell that place at any time for more than 800K. What does he get? 800K + whatever was paid in rent - 500K. Dayumn.
   



5. What brings you joy?
   
   Find what makes you happy and try to focus on that rather than money. Having no money makes you miserable, but having lots of money won't make you happy. You need to know what you want.
   



6. Give something back
   
   Try to make the world a better place. (nice guy :)
   

We then asked some questions:

• Apparantly there exists some law where if you sell your property and use the profit to invest or buy more property, then the profit you made off selling the first place is tax free. At least that's what I think was said. Could be a US thing, could be a B.S. thing ;)
  
  The numbers worked something like this:
  If you are unmarried and personally live in a place for more than 2 years, then anything up to 250K profit can be used tax free to invest in more property.
  
  If you are married, that amount goes to 500K.
  



• Yeah, property is good, but if I'm just cutting my daily latte expenses, I won't have enough cash for a residence for a long time. What do I do with that?
  
  
  It depends on how much time you want to lock that money in for. See http://www.sharebuilder.com/ for index and mutual fund info, http://www.morningstar.com/ or http://www.dodgeandcox.com/ for balance fund info, or good ol' ING Direct for money market info.
  



• 
  A good financial planner will:
  
  
  
  1. Charge you
  2. Be managing at least 50M
  3. Have at least 5years experience, 10+ is better. It's a tough game
  
  
  
  



• You can borrow from you 401(k) plan!
  
  You have to pay back with interest, but that money is going to YOU anyway! There are details involved. Read your owner's manual.
  



• Leverage your real estate!
  
  Think of this.
  You get a $200K condo for a $10K down payment. Then rent it out for whatever your expenses are. If (and when) the value goes up, say a minor 10%, The condo is woth 220K. Now, remember you didn't pay 200K for the condo. You invested 10K. So what do you have? 200% return on investment, that's what! You got 20K for investing 10K.
  



• But renters are risky.. people suck!
  
  Yeah, good renters... they can be found, but it takes work.
  Check their Credit scores and Criminal Record.
  

All these points have to be fleshed out a little bit before you actually do invest, but it was only a 45 minute talk.


Does it all sound to simple? Yeah. David's best line of the day:
It's simple, not easy