Why Debt Consolidation Doesn't Work (A Point Of View You May Not Have Considered)

You’ve heard all the commercials that urge you to consolidate your debt into “one low payment”. The concept makes logical sense and promises to free up some cash so it is easier to live paycheck to paycheck. The reason this usually doesn’t work is that it doesn’t address the real problem. The reason we get into this mess is because we have not learned how to spend within our income. What we need is a method to manage and organize our money so we make conscious decisions about how we spend it. A good book that I’ve used is “Your Money or Your Life” by Joe Dominguez.

To get started you might try the following:

1. Get a small notepad to put in your pocket or purse and write down each time you spend money and what it was spent on. This will help you track what you did with that extra cash you pull out of the ATM. (By the way, if you need a small notepad, I have some very cool business card-sized notepads at the office. Just call or email and I’ll send you one!)

2. At the end of the month consolidate your spending information into categories that are meaningful to you.

3. Organize the categories in the following groups:
a. Monthly Required Spending
b. Monthly Discretionary Spending
c. Periodic Required Spending
d. Periodic Discretionary Spending

4. Review your spending and establish funding amounts for your discretionary categories.

5. Label separate envelopes with each of the discretionary categories and fill them with the appropriate amounts of cash. Some envelopes will accumulate cash month-to-month. For instance, your clothing envelope will gradually build up until you actually make that trip to the mall (spoken like a guy, right?).

6. Only use cash from the envelopes to pay for discretionary items. This will help you be less impulsive when you spend money.

7. When you see the need to borrow from one envelope to pay for another category, make a note right on the envelope.

8. At the end of the month, make adjustments to your spending plan and envelope amounts.

This process may seem very time-consuming, but outside of keeping a notepad and using the envelopes the process of establishing a funding plan and making adjustment should only take one evening and eventually only an hour or so a month. If you are married you will want to both commit to this as you get started. You might want to have someone other than your spouse to be your “accountability partner” in following the process.

By following this process you’ll have your spending habits well in hand in no time, which is the root of the debt issue. As you get a handle on your finances, you’ll soon be in the position to put your debts to rest – and with this discipline you’ve developed, a debt consolidation loan might work wonders!

Investor Threats

According to the most recent “Securities Bulletin” from the Illinois Securities Department of the Secretary of State, these are the Top Ten Threats to Illinois Investors for 2005:

1. Ponzi Schemes – paying early investors with money raised from later investors. The only people who make money are the promoters who set the Ponzi in motion.
2. Unlicensed Individuals Selling Securities – Anyone selling securities without a valid securities license should be a red alert for investors.
3. Unregistered Investment Products – Con artists bypass stringent state registration requirement to pitch viatical settlements, pay telephone and ATM leasing contracts, and other investment contracts with the promise of “limited or no risk” and high returns.
4. Promissory Notes – Empty promises can leave these notes worth less than the paper on which they are printed.
5. Senior Investment Fraud – Because of their access to lifetime savings, senior citizens often are the target of con artists peddling fraudulent or unsuitable investments.
6. High Yield Investment Schemes – Promises of triple-digit returns through “risk-free, high-yield instruments” or something equally deceptive should signal a red alert.
7. Internet Fraud – Stock promoters are using online “boiler rooms”, messaging and fake web sites to lure investors into “pump-and-dump” stock schemes. Just a new twist to an old game.
8. Affinity Frauid – Con artists are increasingly targeting religious, ethnic, cultural and professional groups with this type of scheme.
9. Variable Annuity Sales – Senior investors especially should beware of the high surrender fees and steep sales commissions that agents often earn when moving investors into these investment products.
10. Oil and Gas Scams – With oil topping $50 a barrel and continued Middle East instability, schemes promising quick profits in oil and gas ventures are expected to be on the rise.

If you have been subject of one of these types of scams, or even if you just suspect that the offer being made to you is suspicious, Illinois’ Secretary of State Jesse White urges all investors to contact the Securities Department at 800-628-7937 with any questions about an investment product, broker/dealer, or adviser before committing your hard-earned dollars.
Remember – if an investment sounds too good to be true, it usually is.

REAL ESTATE ALERT

Many of you may disagree with me, but I think this is worth stating: The real estate “bubble” is bound to burst at some point in the near future. If you don’t agree with this, you should go back and re-read “Extraordinary Popular Delusions and the Madness of Crowds”, by Charles Mackay.

The end of all historical booms has been preceded by involvement in the boom by the least sophisticated investors – those who do not understand the investment but are getting in on a “sure thing”. Look around you. Isn’t this happening right now?

Now, more than ever, it makes very good sense to be extra cautious as you consider your real estate holdings. Make certain that you have plenty of diversification in your portfolio, so that when (not if) the burst occurs, you’ll be cushioned.

Ready For Retirement?

In this ever more sophisticated age of investing, it becomes a great concern for financial planners such as myself that most folks are still not saving enough for retirement, either due to a failure to realistically assess future costs or by spending too much without saving – which is a hallmark of the baby-boom generation.

Many Americans’ poor savings habits are actually a crisis, because many folks don’t think a shortage of retirement funds will affect them unless someone close to them has an age-related or medical condition that forces the family into a financial quandary. The truth is, many folks in retirement can spend more annually on medical prescriptions than they earn from their pensions, social security, and investments.

A recent survey found that seven out of ten Americans are more concerned with short- and mid-term financial spending, placing long-term (retirement) savings a distant third place.
The survey further found that about two-thirds of people who unexpectedly retired due to a corporate downsizing or a medical condition indicated they weren’t financially prepared. 60% (of those still working) say they are behind schedule in saving, and the consensus of the survey respondents said that they had a consistent lack of progress toward retirement security since the year 2000. This consensus was the same regardless of age, income, or ethnic background. 70% of those surveyed expect to work at least part time for the first 10 years of retirement in order to supplement income. Plus, over half of those surveyed expressed an extreme lack of understanding of how to choose financial products to meet their long-term savings needs.

A Comprehensive Approach
In order to address these shortcomings, it is necessary to get a handle on all of your potential areas for funding your long-term savings plan – including employer plans, IRAs social security, long-term care and disability insurance, and even annuities.
By reviewing all of these available avenues, it becomes apparent that the “vehicles” are available, and the question then becomes how to fund the savings plan.

Parkinson’s Law
Welcome to Parkinson’s Law, specifically the Third Principle. For those of you that are not familiar with this principle, the Third Principle of Parkinson’s Law states that expenses always rise to meet available income, and then some. You may also recognize this statement: “It’s always possible to live outside your means”.

The good news is that it can work in reverse, as well.

So – when you voluntarily reduce your “available resources” or expendable income by diverting it into savings, it may be a little awkward and painful at first, but you’ll quickly figure out how to bring your day-to-day expenses into equilibrium. As you accomplish this, you can gradually build up the amount that you divert in order to start accelerating the savings rate.

Where Should I Put This?
Your next concern should be what “vehicle” to place your savings into. As we’ve discussed previously on these pages, the following order makes sense for most folks:

· 401(k) up to your employer’s match (or other deferred option)
· Roth IRA
· Finish maxing out the 401(k) or other deferred plan
· Your choice – no-load annuities, low-income/high growth stock funds, and/or various forms of ordinary life insurance (no load/low expenses in all cases)

Allocation??
The next question is how to allocate your investments. A very general way to look at this is to consider the primary types of investments, stocks and bonds, and think about the best way to split your investment across these categories.

As you may already be aware, stocks are the more risky of the two, but in general stocks provide a possibility of greater returns over the long run. On the other hand, bonds are generally less-risky, but the yield from bonds, while steady, lags that which can be found in the stock market.

For a younger investor, with 30 or more years in their goal horizon, a portfolio consisting largely of stocks (90% to 100%) works very well. Typically, it makes the most sense to maintain a fairly high equity or stock position, gradually reducing, until about five years from retirement, at which point the transition begins over the final years to get to their ideal ratio for retirement.

As time goes on, you’ll likely want to introduce more stability (and therefore less risk) into the mix, eventually moving to your retirement mix, which will likely be somewhere in the 50/50 range.

It is necessary for most investors, even in retirement, to maintain exposure to the stock market, in order to be able to keep up with inflation. Bonds on their own won’t normally provide a hedge against inflation, so a component of stocks is necessary in nearly all cases.

That’s All There Is To It!
Hopefully this “crash course” in retirement planning has given you some ideas and encouragement as you develop your strategy to save toward your retirement goal.