Review: Ramit Sethi’s I Will Teach You To Be Rich
Boot Camp.

I’m excited to help my friend Ramit Sethi in his quest to help you take back control of your financial future.

This video explains everything, but the story is also below for you…

My Story

In 2007, I nearly bankrupted my business because I didn’t keep track of my finances. I didn’t hire an accountant or financial planner because I “couldn’t afford it”. Little did I know that my business had far more money going out than coming in.

I always thought the numbers would work themselves out. I was smart; I read a ton of business books every month, and my business was growing like gangbusters. What was there to worry about?

It took our landlord locking us out of the building and me having to lay off most of my 6-person staff for me to hit bottom and realize what a terrible mistake I had made.

My lack of financial planning devastated not only my life, but the lives of others whose families depended on me for their well-being. That day, I made a critical decision: I set in motion a plan to take action and get my business and personal finances straightened out.

I didn’t like what I found. Between my business and personal debt, I owed over $160,000.00 to various creditors. I was sick to my stomach when I finally added it all up.

From $160,000 in Debt to Debt-Free

I am pleased to say I came out of it. Today, I am debt-free and proud of it; I save 55% of my monthly income, and I know exactly what I spend money on every month. I am free to make wise choices because I know what’s important and what matters to me.

In 2008, I ran a personal finance conference in San Francisco. My goal was to show the attendees what had happened to me and to give them the tools they needed to move forward and be successful.

My keynote speaker was Ramit Sethi, owner of the popular I Will Teach You To Be Rich blog. Ramit blew the audience away with tactical tips on how to “negotiate like an Indian”, save money, spend wisely, and invest for retirement.

Ramit is a friend of mine, and he has personally helped me with much of my financial life. Thanks to Ramit, I have a better credit card that pays me more rewards, I am in control of my spending, and I have automated many of my monthly bills so I no longer have to worry about money.

Now, Ramit is taking a select few of you by the hand and guiding you through his personal system to get your financial life on track. In just six short weeks, you will learn how to save for retirement (and start funding a retirement plan), how to earn more (whether you are an entrepreneur or you have a job), and how to save and invest your money wisely so you are in complete control.

Ramit’s 6-week bootcamp will get you out of the joy-fear-guilt cycle…where you spend money and buy something nice (joy!), only to fear the credit card bill, and feel guilty when it arrives.

Is It Worth the Investment?

From the bottom of my heart, I believe it is worth it for you to invest in Ramit’s program and get your financial life back on track. Not only does Ramit guarantee that you will save more than your investment in the program, but it’s a unique opportunity to set your life on the right path.

Your age and income don’t matter. Young or old; struggling to get by or with a ton of money…you’re not alone. If you don’t know what’s going in and coming out of your wallet every month…if you haven’t signed up for a Roth IRA or 401(k) yet…if you have big goals (like buying a house or retiring early) but you’re not sure if you’re on track to meet them…this is your chance to interact personally with one of the gurus of personal finance.

Who Would NOT Benefit from Ramit’s Boot Camp?

My policy is to be totally honest, so: this isn’t for everyone. If you’re already sporting a fully-funded Roth IRA and 401(k), kickin’ it with multiple ING Direct subaccounts for your savings goals, and you’re totally debt-free and on your way with flying colors to early retirement…well, this probably wouldn’t be of much benefit to you.

If, on the other hand, you just read that and said “Yeah, right! Who even does that?” well, then may I humbly suggest — Ramit’s program just might be right for you.

Have the Courage to Invest in Yourself

“But, Erica,” I can hear you saying. “The holidays are coming up. I’m cash-strapped as it is. And this boot camp costs money. There’s just no way I can do this.”

My response: Have the courage to say “Yes.” This is an investment in yourself and your education. (Compared to a college education, it’s a huge bargain!)

Close your eyes and imagine for a minute that, this time next year, you have:

1. A fully-funded retirement account.
2. A savings account set aside just for holiday gifts to others, so you can afford to give them gifts without the worry in the back of your head of the mounting bills.
3. An account set up (with money in it!) for a goal you have in the future — whether that goal is buying a house, taking that vacation you’ve always dreamed of, or starting a new business.

Now compare that to your current reality. Kind of hurts, doesn’t it?

If you desire all of this, but don’t know how to get there…Ramit’s boot camp is for you. No matter how many books you read, it won’t matter. The hundreds of business books I read didn’t save me from having to go into that conference room and lay off most of my staff.

Stop Doing the Same Thing and Expecting a Change…

Don’t wait. If you wait, your situation won’t change, and next year at this time, you’ll be no better off financially than where you are today. (And, as I can attest, it doesn’t matter how much income you make…if you spend more than you make, you’re still going to be in the same situation.)

An average college extension course runs $400-$500, and doesn’t even help you save any money. (You also typically have to take 2-3 of them to even accomplish anything!) On the other hand, Ramit’s program is tactical, strategic, and designed to help you take action now. Think about it: if you save just $25/month, you will pay back your investment in his program in just a few months!

Sign up for Ramit’s 6-week boot camp today. It’s a rare chance to interact personally with someone who really knows his stuff when it comes to personal finance. Your investment of $199 is an investment in yourself and your future. Have the courage to say yes to your goals.

For more information or to sign up, click here:

Breakdown of Exactly What’s In Ramit’s Boot Camp

Week 1 – Unearth secret credit card hacks. Find better credit cards and negotiate with your credit card companies. Get perks from free airline flights to free hotel stays with “secret” credit card hacks you aren’t currently using. Get a plan in place to pay off your credit card debt once and for all!

Week 2 – Stick it to the big banks. Negotiate fees and get rid of them with step-by-step scripts. Use the support of Ramit’s community to switch banks if necessary.

Week 3 – Retire early and happy. Why your friends haven’t invested; how to become rich on $100/month; how to legally evade taxes!

Week 4 – Spend guilt-free on the things you love. How to get out of the joy-fear-guilt cycle of debt spending. How to spend money on what you love and cut back on everything else.

Week 5 – Automate your way to freedom. Spend just a few hours a month managing your money, and stop letting it manage you. Special techniques for those who are freelancing, self-employed, or who have irregular income!

Week 6 – Invest like a pro without taking the risks. How to automate your investing so your money works for you. The top ten mistakes people make when investing — are you making one of these? Running the numbers on investment strategies (with Ramit’s help!)

Plus — Guest speakers will be demonstrating personal finance tactics, entrepreneurship, and career paths.

You will also gain exclusive access to a community of like-minded folks who can help you if you’re struggling or support you when you need it. If you have people in your life who aren’t fully supportive of your goals, you’ll find Ramit’s community to be invaluable!

How Others Have Used Ramit’s Tips to Make and Save Money

Jason Demant saved $50,000 in 2 years and is now taking a 1-year vacation…

“The reason I’m writing is to thank you for your help in automating my money, getting my 401K properly allocated, and pushing me to sell my crap to make some cash. Using your step-by-step instructions and advice, my girlfriend and I have been able to save over $50,000 the past couple of years and now, in a couple weeks, we will be quitting our Silicon Valley jobs and traveling around Asia on an extremely extended vacation (1-year minimum)! I’ve been reading your site for a few years now and I’ve never properly thanked you for the help, so I decided it was time. Thank you!”

Josh G has saved $14,000 in a few months…

“I have saved 14k so far since I started May 2008 and I’m on track for 20k by the end of the year!

Fear kept me from automating my savings previously. I had bills and it seems that was all I thought about every month.

Ramit mentioned using ING Direct to create sub accounts. I decided to try the full automated savings because I could do sub accounts for future purposes.”

For more information, or to sign up, click here…

Special — Just for My Readers!

If you sign up through any of the links on my blog (you have to sign up through me to get your exclusive invitation), forward me your receipt to erica@erica.biz and I will invite you to a free 1-hour group conference call where I will answer all of your questions regarding personal finance and entrepreneurship.

Here are some questions you should ask me:

• What are some great business ideas that I can start right away?
• Should I start a blog?
• What’s the best way to make money on the Internet?
• How should I market my business online?
• How can I utilize Twitter and Facebook to grow my business?
• What are the top strategies to get more customers for my business right now?
• How can I make some extra money if I only have a couple hours of free time a day?
• How do I make my income more “passive” and stop trading hours for dollars?

Pretty much anything related to personal finance or business is fair game.

This is only when you buy Ramit’s product through my link.

For more information or to sign up, click here.

If you have any questions that aren’t answered by this link, feel free to contact me and I will reply.

I believe in you and want you to achieve your goals. However, I know from experience that you can’t achieve your goals unless you have your finances in order. Give yourself permission and have the courage to invest in yourself, and watch your life change as a result. Sign up for Ramit’s boot camp today!

Note: This program is time-sensitive, so you must sign up by Friday, November 6. If you miss your chance this time, Ramit will offer it again, BUT the price will double…so don’t miss your chance!

Ramit is offering a 100% money-back guarantee for 30 days, so if this program somehow isn’t effective for you, you can request a full refund. You really have nothing to lose (and everything to gain, including meeting your financial goals!) by joining.

I do get some money for referring you to Ramit’s program. Ramit is a friend of mine and I have full faith and confidence in his ability to deliver. I look forward to hearing your success story!

I think you have every right to be mad as well.

During these times, I’m probably not alone when I say what I am seeking most is a feeling of control. Despite selling my company at the top, I didn’t realize the stock market would plunge over 50%. I lost a bunch of money there — and you probably did, too.

I am also disgusted with how most banks have performed, and that disgust has fueled a passion to clear myself of debt. From over $100,000 of revolving debt in 2007 (most of it used to finance my business), I’ve come a long way — I now have no debt other than a low-interest car payment, and I plan to pay that off this year.

With banks paying meager interest rates and the stock market bouncing around like a pinball, you are right to look for other places to invest your money. Particularly with small amounts, investing in the stock market doesn’t really make sense; the transaction fees eat up profits for any investment under $1000 or so. I can invest a small amount — say, $25 — in my business, but it’s iffy whether such a small amount would show a measurable return.

What Alternative Investments are Out There?

I spent months researching alternative investments. Finally, a few weeks ago, I came across Lending Club. You can take as little as $25 and lend it out to other people. What intrigued me is that this allows you to form your own tiny bank of sorts. You read each potential borrower’s profile, including their credit score and history. They tell you why they want a loan, what interest rate they have agreed to pay, and how much they wish to borrow. Just like a bank, you can then decide whether that borrower gets your $25 (or whatever you’ve decided to lend.)

But the best part is this: Just like a bank, you get to collect interest on the loans you fund — from 8% to 16%. Lending Club claims that a well-diversified portfolio should earn you an average return of 9.05%. Since CD rates have dropped so dramatically, Lending Club seems like a viable option for diversifying your portfolio.

But was Lending Club really worth it? I funded my account with $100 and dug in deeper.

To sign up (which is free), you must go through a 4-step process that verifies your identity. Once your identity has been verified and your bank account confirmed, you can fund your loans.

If you have ever used Kiva.org, this process will be straightforward. Let’s take a quick walk through it…

How Lending Club Works

Once you select “Invest”, you can either choose LendingMatch, which is Lending Club’s proprietary tool to help you get the exact return you want, or you can browse all available loans. I prefer to simply browse loans.

When you click “Browse”, you will see some options on the right, where you can filter loans by their interest rate, credit score, etc. When someone applies for a loan, Lending Club sets their interest rate. The loans with the least risk (as judged by Lending Club) carry the lowest interest rate. To balance your portfolio, you will want to make several loans to different people at various interest rates — just as you wouldn’t put all of your investments in one stock.

How do you know which loans to fund? A few tips, most garnered from other lenders, are below. These tips are subjective, but you can use them as guidelines:

1. Don’t loan to anyone who seems desperate or needs cash “now!”
2. A person who has had a lot of credit report inquiries in the last 12 months is likely more risky.
3. Business loans, especially for someone with no previous business experience, are more risky than personal loans.
4. A high debt-to-income ratio means the person is more likely to default, since they are carrying a large amount of debt relative to their income. Ideally, the debt-to-income ratio should be less than 20%. Use the “DTI” checkboxes on the right side of the loans page to adjust for this.

Why Lending Club?

Why should you invest in Lending Club and not in the stock or bond market? In my opinion, it’s not an either-or situation. Lending Club fits best when you have a savings account and a retirement account and want another option that doesn’t involve you losing your entire investment to transaction fees. Let’s put it this way: very few of us would miss $25 a month. Usually, those small amounts just sort of disappear from your checking account. But investing $25 a month every month means that, with just a few minutes a month, that $25 could be making you money instead of being wasted. If you’re a fan of paying yourself first, Lending Club even has an auto-deposit feature.

How much can investing just $25 a month really make you? At Lending Club’s 9.05% average return, investing $25 a month for 3 years will earn you $170.13 in interest. That’s free money…just for taking the “spare change” you already have and sweeping it into Lending Club instead of frittering it away. And if $170.13 doesn’t excite you, try $50/month or $100/month!

As if gaining interest on your money isn’t enough, Lending Club is offering you a $25 bonus just for signing up! It’s free to sign up.

What’s the Catch?

As with any high-yield investment, Lending Club does have its pitfalls. First of all, you are lending to individuals, who can default on their payments. Lending Club builds in some defaults to its 9.05% average return promise, but your default rate may be higher or lower. Remember to diversify your portfolio, and keep in mind the guidelines above, to be safe.

Lending Club charges a 1% fee on every payment they collect from a customer, which equates to a 0.7% interest loss per year. This isn’t that big of a deal, but it’s something to be aware of.

Finally, there are some investor requirements. You must be a resident of one of the following U.S. states to participate as a lender:

California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Minnesota, Mississippi, Montana, New Hampshire, Nevada, New York, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin, West Virginia, and Wyoming.

Lending Club has filed for registration with the appropriate State securities authorities in all other states and expects to be adding more states over time.

In addition, individual lenders who are residents of states other than California must (a) have an annual gross income of at least $70,000 and a net worth (exclusive of home, home furnishings and automobile) of at least $70,000; or (b) have a net worth (determined with the same exclusions) of at least $250,000. Individual lenders who are California residents must (a) have an annual gross income of at least $100,000 and a net worth (exclusive of home, home furnishings and automobile) of at least $100,000; or (b) have a net worth (determined with the same exclusions) of at least $250,000.

As far as I know, Lending Club has no way to confirm what your net worth actually is, but stating your net worth is required by the Securities and Exchange Commission.

All loans have a 36-month repayment term, so consider this somewhat like investing in a bank CD. Lending Club has a trading platform where you can sell your notes for quick cash (which I may explore in a later blog post, if there is interest), but you’ll lose a small amount of your principal by doing this, and it may take a few days for your loan to sell.

Conclusion

I have been enjoying using Lending Club as an alternative investment vehicle for the past few weeks. Already, I have loaned out $100 and received $0.83 in interest. My greatest joy, however, is the satisfaction of becoming my own tiny bank — and beating the big banks at their own game!

For me, Lending Club is a way to regain control over my finances. I may not be able to control higher tax rates, gas prices, or our government spending money like it’s going out of style, but I can make wise investment decisions for myself. Every loan I help to fund on Lending Club is one less loan that greedy banks get to cash in on…and one more way I can help someone else improve his or her life.

Helping people and making money…and getting a free $25 just for spending 10 minutes signing up? To me, it doesn’t get any better than that.

Now, to do something I don’t do very often: I’d like to ask for your help.

Here’s the deal: I want 80 of you to sign up for Lending Club and collect your free $25. Do this today, because every day you delay, you lose potential interest payments. Since it’s free to sign up, you have nothing to lose.

Beat the banks! Sign up today as a lender and collect your free $25.

If 80 people sign up through my link and collect their $25, I will celebrate by giving everyone who signed up a free copy of my first ebook, which is due out this summer. Its working title is “Pay Less For Life,” and it’s all about how to effectively save tons of money on everything from banks to bills to better food.

To claim your free copy of my ebook, sign up using the links in this post and then comment on this post. Leave a valid email address, and I will email you my book when it is released. This will save you at least another $20!

How can you help? Who do you know who could use a free $25? Tweet this post, post it on your Facebook account, Stumble it, and email your friends. Your friends will appreciate you sending them a link to get $25, and you will all win by getting a free copy of “Pay Less For Life.”

Sign up now — don’t let someone else collect your interest payments!

Thank you in advance for your help!

If you’re interested in signing up as a borrower and getting a loan, please sign up for Lending Club via this link. It won’t get you a free $25, but it may get you a loan!

Disclosure: I collect a small amount of money for every person who signs up for Lending Club through one of the above links. Per my advertising policy, I have personally reviewed, actively use, and endorse Lending Club, and have not been paid to write this post.

This web site is only intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any securities. The author has taken all usual and reasonable precautions to determine that the information contained in this website has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes affecting data availability and information may be available which is not reflected in this website. Consequently, the author does not make any warranty as to the accuracy or completeness of information, analysis or views contained in this website or their usefulness or suitability in any particular circumstance. This website should not be relied upon for any investment or portfolio assessment or other transaction. Please consult your financial advisor directly to review any proposed investment or transaction. The author accepts no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this website in contravention of this notice.

How do you envision your future retirement?

Some shocking statistics recently caught my eye. The median IRA balance is just $55,000, and the median 401(k) balance is just $15,000. Baby boomers are working longer, since most do not have enough saved to retire comfortably. And, given the statistics, it’s likely you are in the same boat.

Why is it that so few of us save enough for retirement? Why are we so woefully underprepared?

I usually search for answers for these thought-provoking questions in marketing books. Often I find that lack of good marketing is underneath a lot of personal finance problems. Car manufacturers are great at showing off the sleek curves of their latest model, but “retirement” typically doesn’t have flashy commercials. But is it really that simple?

While reading the book Made to Stick recently, I came across an interesting principle: concreteness. The authors, Chip Heath and Dan Heath, describe it as one of the features necessary to make an idea stick in your mind. They cite an example of The Nature Conservancy, a nonprofit organization dedicated to preserving land. When they touted how many acres of land they wanted to save, people simply weren’t interested. But when they showed a particular piece of land they wanted to save, and named it “Mount Hamilton Wilderness” (after a local mountain), people flocked to help them.

Why is this? Our brains aren’t wired to have a tangible picture of “1,000 acres”, but they are wired to understand “Mount Hamilton Wildnerness.” Making something tangible — giving us the picture in our minds — makes it meaningful.

How does this relate to retirement?

One huge factor in why we don’t save for retirement might simply be that we lack a visual anchor in our minds for the word “retirement.” In other words, if I ask you to define “retirement”, you probably won’t have a quick answer. You may visualize some old person fishing or sipping a Mai-Tai on the beach, but you probably won’t relate that to yourself.

But if I ask you to define “watermelon”, you can probably visualize not only the fruit itself, but one or more times where you’ve eaten it, smelled it, or seen it.

How do you avoid the trap of buying tangible objects such as houses and cars instead of saving for retirement and investing? You start by making the things you desire tangible.

Making Retirement Tangible

There is probably something you spend $5 a day on that you could do without. A daily coffee; a Coke or two from the vending machine; a lunch out instead of brown-bagging it; premium cable TV and video games. Whatever it is, no matter how silly–write it down. Chances are you can easily visualize whatever it is. You can probably remember the last time you used it (especially since it probably hasn’t been that long ago!)

$5 a day, invested at an 8% annual return for 30 years, is over $228,000. (It’s actually even more than that, since you’re investing daily or monthly instead of annually.)

The problem is that’s where most personal finance authors stop. They show you a latte vs. $228,000 and expect you to be in awe. They expect that you will do the logical thing and cut out the latte.

Since Starbucks is still in business, that obviously doesn’t work.

Why don’t you pick the money? Simple: $228,000 is not tangible. It doesn’t have meaning or value to you. Those lattes hold an emotional significance and a value to you, but $228,000 does not.

Our next step, then, is to make $228,000 actually worth something to you.

What $228,000 is worth to you will be different for every person. Let’s assume for now that you plan to retire with your newly found $228,000. (By the way, if you plan to retire in 40 years instead of 30, that $228,000 becomes nearly $535,000!)

Now that you have visualized the video games, coffee, movies, or whatever you’re spending money on now, the next thing to do is visualize what you want out of retirement. So you have your $228,000 (or $535,000.) What are you going to do with it?

If you write down some lame one-word answer like “fishing”, by the way, I will kick you.

Visualizing Your Retirement

How about this retirement option? “For my retirement, I’m going to sell some of my possessions, take 4 years and travel the world. During those 4 years, I plan to see Paris and buy a designer dress, go to Switzerland and ski the Alps, and head to Australia and try a vegemite sandwich. I’ll save some money by living cheaply, and I will learn to speak at least one other language.”

Or this? “I plan to move to Mexico and rent a gorgeous beach house. I will enjoy living in a community with multi-cultural folks who love a warm, sunny climate. I’ll learn how to wrap a burrito so the stuff inside it doesn’t fall out, and I will teach music–particularly piano–to others to make a little pocket change.”

What’s happening here? Suddenly, your retirement is becoming real. If you do this right (look at travel magazines and talk to others for ideas), you’ll feel a shift in your thinking. Suddenly that latte doesn’t seem appealing…not when your dream is put off another day into the future!

Want to seal the deal? Find a picture or two that you feel represents your future retirement and place them where you will see them every day. If you feel so inclined, write something inspirational on the pictures. Maybe you can even think of a catchy saying to remind yourself of what’s really important. What about “A Coke a day keeps my retirement at bay?”

Most of us haven’t even taken a few minutes to think about what we really want out of retirement. No wonder, then, that nearly 50% of us choose to cash out our 401(k)s instead of rolling them over. It’s not just about how much money you will need to retire and when you can afford to retire; it’s about making retirement tangible. Real. Beautiful, even.

On Buying a House

This same line of thinking helps us understand why people buy a house, even at their own financial peril. Even when they know that renting and investing the difference could make them a millionaire, they still choose to buy.

Why? Simple: “Investing” isn’t tangible. Neither is “a million dollars.” (You can’t picture “a million dollars” as easily as you can a watermelon.) But a house is tangible. You can see it, walk around in it, live in it. I could just have easily named this article “Why Most People Buy A House Instead of Becoming a Millionaire.”

If you have a spouse or significant other who is interested in buying a house — or there is even part of you that desires it — numbers probably won’t change your mind. But what if you consciously decide to rent for less money every month and invest the difference? Remember to make it tangible. “If we choose to rent our current place instead of buying a house, we can afford to go on a vacation to Europe this year.” Maybe you can retire five years earlier than if you owned a house. (But remember to plan out exactly what you’re going to do once you do retire!)

Once you add in property taxes, home maintenance, water, garbage, and HOA or Mello Roos fees, renting a home typically comes out ahead. In fact, a recent study showed that middle-age renters in 2004 were more wealthy than the equivalent homeowners. Use this to your advantage and enjoy your rich life!

Take a few minutes now to sketch out and visualize your dream retirement. Discuss your plans with your spouse or significant other. Make it as tangible as possible. Maybe you can even start working toward it in other ways (learning the language of a country you want to live in, for instance, or planning a small trip to a potential place to live.) The more real you make it, the more likely you will be to save for it.

And remember: An indulgence today will lead your retirement astray!

Recommended Reading:

• Made to Stick. If you are selling a product, or if you are interested in why certain stories and commercials seem to stick in your head better than others, this is the book. Well worth reading.
• The Impending Retirement Crisis at MoneyNing. David does a good job of breaking down why our country is facing a retirement crisis.
• One Decision That Can Make Anyone a Millionaire.Can buying a used car instead of a new one really make you $1 million? I break it down.
• Carnival of Personal Finance #199. This post was an Editor’s Choice!

Given that nearly every class of investment seems to be going down, what is the best way to invest your money (for the long and short term) to buck the trend? In this post, I break down how to invest your money during this downturn, based on how long your investment horizon is.

Long-Term: 10+ Years

The two most likely assets that you will want to hold on to long-term are your house and your retirement account. Let’s examine each of those in more detail:

Housing.
If you own a house: Make sure you are on a fixed-rate mortgage (preferably with a term length of 15 years or less), and that you can afford the payments for months even if you were to lose your job or income. If you are on an adjustable-rate mortgage, call your mortgage company and negotiate to get a fixed-rate mortgage at the lowest rate possible.

If you are on a mortgage and cannot afford the adjusted payments, or you have housing-related debt that will be untenable long-term, this is the time to drop all emotional pretense and admit that you cannot afford the house you are in. Whatever you do, do not pull money out of a retirement account or put money on a credit card to pay your house payment. Your house will be worth less next year than it is right now — there’s no point in throwing good money after bad.

Call your bank and immediately arrange a short sale of your house, and then rent for a few years and save up money. There’s nothing wrong with renting — especially if it frees up hundreds or thousands of dollars a month that you would otherwise be throwing down a drain. Even with a foreclosure or short sale on your record, you will be able to buy a house again later, when your cash position is better and houses are more affordable.

If you rent: Continue renting for at least another year, no matter where you are. I have heard some people say they are planning to buy a house because they are afraid they won’t be able to get a mortgage next year. Do not make one of the largest financial decisions of your life based on fear! If you plan to buy a house, you should be saving money every month toward that house…putting you in a stronger cash position. Also, every year for the next 3-5 years, you will have more cash and houses will be worth less — a win-win proposition. Your patience in continuing to rent will be rewarded.

401(k)/IRA accounts. If you’re investing for the long term, keep your money in an index fund. The stock market may go down short-term, but that means your money buys more. Eventually, the stock market will recover. If you plan to retire in the next few years, you need to adjust your 401(k) and IRA out of the stock market now and put that money into a safe haven such as bonds.

Intermediate-Term: 5-10 Years

Pay down all your credit cards. If you already have debt, especially credit card debt, it’s key to pay it down as soon as possible. Tally up everything you spend money on (I track my expenses to the penny every month.) Really look at those numbers. Where can you cut back?

You may be surprised at what you’re spending money on — I found my boyfriend and I were spending over $1500/month on food. We’ve cut that by 60% since then, and found we enjoy meals out more than we did previously, since it’s no longer a burden to decide where to eat. I also cut my spending on clothes by 80%, cut our cable bill by $57/month by downgrading to basic cable, canceled a business membership I wasn’t using, and changed to a different gym, saving me about $300/month. Overall, I pared my spending by nearly $1000/month, just by tracking what I was spending!

What did I do with the extra money? I paid off all my debt except for my car payment — which should be paid off next year.

Short-Term: 0-5 Years

Cash will be king over the next few years, and you will be able to buy assets as large as houses and as small as electronic gadgets at discount prices.

If you have no high-interest debt such as credit cards, there are a few approaches you can take. Gold recently hit a long-term buy signal, dropping below $850 an ounce on the day the second bailout passed. I noticed this and decided to take the plunge. I pulled money out of my savings account and invested in 10oz. of gold coins. If gold drops below $850 an ounce again, I would recommend picking some up. Gold is an excellent hedge when times are rough and fear rides high.

I plan to sell my gold when it hits $1500-$1700 an ounce, and invest the proceeds into housing. If you currently are in a positive cash flow situation, you can do something similar. There will be a time in a few years when houses make sense again as an investment. That time is not now, but you can put your cash in CDs, high-yield savings accounts, or government bonds and wait patiently for that time. (Stay tuned here, as I will be posting about real estate regularly.)

For you cash savers, ING Direct has a $25 bonus just for signing up for their high-yield savings account. It pays 3% interest at this time. I have one and would recommend it. You can set up auto-deposits to it from your regular checking account, which I would also recommend doing, so you won’t be tempted to spend that money.

You should have several months’ worth of living expenses set aside in a high-yield savings account in case you need cash.

I do not recommend the stock market for short-term investing, unless you are an options trader who enjoys volatility. I have traded options in the past and they are tricky. It’s an easy to lose a lot of money quickly. Only attempt day trading if you really know what you are doing. Ultimately, after spending a month day trading, and having some wins and some losses, I decided it wasn’t for me at this time.

Summary: The Best Way To Invest

Paying down debt with an interest rate higher than 8% will return you far larger amounts of money than pretty much any investment right now. Do that, and get your spending under control, first. Cash will become critically important over the next few years; do what you can now to make sure you have as much cash as possible sitting in a high-yield savings account, CDs, or government bonds.

The stock market is risky for short-term investments. For the short term, consider gold, and stockpile cash to prepare for an eventual investment in housing or other distressed assets at low prices in a few years. Keep your eye open for bargains, but don’t expect too many right now. Next year around this time, there will begin to be some good deals, but don’t spend all your money then, either, as the housing/commercial real estate contagion will continue through 2012-2015.

There will be many chances to get firesale prices on assets in the future, but you must have the cash position to be able to jump on them when you see them. Have patience and do not act when you see the first good deal. Asset prices on everything from real estate to art to wine will decline in real terms over the next few years.

Long-term, keep your existing retirement account in the stock market and continue investing in it now while stock prices are low.

Finally, don’t panic! Focus on what you can control. You can control your spending. You can start a business to make more money. My IRA, like many of yours, is invested in stocks and has fallen 30% this year. I am, however, not concerned, since my IRA is very long-term and I will have many more years to gain that money back. In the meantime, I am happy to stockpile cash, invest in gold below $850, invest in my new business, and patiently wait this crisis out.

“Don’t waste life in doubts and fears; spend yourself on the work before you, well assured that the right performance of this hour’s duties will be the best preparation for the hours and ages that will follow it.” –Ralph Waldo Emerson

Recommended Reading:

• Why You Don’t Save Money, Even Though You Know It’s The Right Thing To Do. Can’t resist buying stuff? I couldn’t either. Learn how I stopped spending myself into oblivion.
• When Will Housing Really Bottom? Charles Hugh Smith wrote the blog post I have had on my mind for months now. Short answer? Expect houses to keep going down in value through 2013 or perhaps even longer. Start preparing for this eventuality now.
• Three Business Ideas That Will Help You Thrive During A Recession. I started my last business in 2001, at the bottom of the dot-com bust. You, too, can start a business that will thrive during a recession. You just have to know which trends to look for.
• One Decision That Can Make Anyone A Millionaire. A decision any of us can make that will make us $1 million.

This is a long post, but I urge you to take the time to read it if you want to know how you can help stop the credit crisis.

Henry Hazlitt Explains The Bailout

Perhaps the most succinct and understandable explanation of the bailout plan is highlighted by Henry Hazlitt in his book Economics in One Lesson. Chapter 14 of his book is called “Saving the X Industry,” and explains an example of a government bailout. It begins as follows:

“The lobbies of Congress are crowded with representatives of the X industry. The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores and local motion picture theaters will lose business, and depression will spread in ever-widening circles.

But if the X industry, by the prompt action of Congress, is saved–ah then! it will buy equipment from other industries; more men will be employed; they will give more business to the butchers, bakers, and neon-light makers, and then it is prosperity that will spread in ever-widening circles.”

The Argument For The Bailout

Hazlitt goes on to point out:

“We are concerned only with a single argument for saving the X industry–that if it is allowed to shrink in size or perish through the forces of free competition…it will pull down the general economy with it, and that if it is artificially kept alive it will help everybody else.”

This should be easily seen as the argument of those who are in favor of the bailout. In fact, George W. Bush was recently quoted as saying, “With this strong and decisive legislation, we will help restart the flow of credit so American families can meet their daily needs and American businesses can make purchases, ship goods and meet their payrolls. I’m confident that this rescue plan, along with other measures taken by the Treasury Department and the Federal Reserve, will begin to restore strength and stability to America’s financial system and overall economy.”

You might be surprised, then, to know that Henry Hazlitt wrote Economics in One Lesson, not recently, but in 1946.

When Hazlitt was writing this book, a similar proposal was making its rounds in the U.S. government, called “save silver.” The bill was passed…and here’s what happened:

“The United States Treasury was compelled to acquire, at ridiculous prices for above the market level, hoards of unnecessary silver, and store it in vaults.”

Quite like our modern-day equivalent of acquiring worthless mortgages…

What Happens If The Bailout Passes?

Don’t let today’s “no” vote on the bailout mislead you; this isn’t over yet.

As Hazlitt points out, the money must come from somewhere: “The taxpayers must lose precisely as much as the people in X industry gained.” $700 billion is a little over $2000 for every taxpayer in the U.S. That $2000 must come out of your pocket at some point. That is $2000 less than you had before, to spend, save, or invest.

Hazlitt continues: “It is equally clear that, as a consequence, other industries must lose what the X industry gains.” Many of those new taxes, which will be paid by businesses, will mean that those businesses no longer have working capital to invest in new equipment, salaries, or processes. Billions of dollars that could otherwise be used in productive, profitable industries will now be forcibly taken by our government and handed to an industry that cannot survive in its current incarnation.

If you think that jobs will be lost if businesses cannot get the credit they need from the banks, and thus, that this bailout is needed…I assure you that it is guaranteed that jobs will be lost and our economy will falter if this bailout passes, since ultimately it is every one of us who will pay the cost in higher taxes.

What Happens If The Bailout Doesn’t Pass?

This is where it gets more interesting.

Let’s take a step back. Representatives of our government are saying that banks will not be able to lend if they do not have the capital to lend, and that this $700 billion will help them be able to lend again.

Banks make money by taking deposits and then lending the money that has been deposited out to businesses and consumers so they can buy new equipment, such as houses, cars, and machinery.

The Federal Reserve dropped interest rates to a low of 1% in 2003 to try to stimulate the economy. This had the effect of lowering the cost to borrow. It also had the secondary effect of making money in a savings account nearly worthless, since many savings accounts were not even beating inflation.

What did this do? It caused a massive wealth transfer from deposit accounts (such as savings accounts and CDs) to tangible assets such as land, houses, and even art and wine. Many of us shrugged and stopped saving. What was the point? Our money wouldn’t even be worth as much next year as it was this year. But houses, collectibles, gold and silver would. In particular, this caused a massive housing bubble, as housing was one market that was considered nearly infallible.

Banks rode the wave. After all, they were making plenty of money giving everyone mortgages. The homeownership rate hit a historic high of 69% in the mid-2000s, up from 64.2% in 1990 and 55% in 1950. All of those people buying homes (and refinancing since rates were at a lifetime historic low) kept the money rolling into banks. Deposits were dwindling, but the banks didn’t care, since there was more money to be made by selling those same people mortgages.

Ultimately, in 2007, when many of those mortgages went bad, banks had to shore up their loss reserves, and turned to their depositors. The seeping away of bank deposits had gone largely unnoticed. But now banks needed those depositors’ money! That’s why, in 2007, many banks started offering high deposit and CD rates (sometimes as much as 5.75%) to lock in money and shore up their accounts.

The FDIC stepped in when certain banks had so many losses that they could no longer meet minimum Federal requirements for loss reserves. The FDIC helped arrange the sale of several banks, including Washington Mutual, to institutions that desperately wanted to buy depositors (like Chase.)

Banks became afraid to lend to each other since they didn’t know how many unrecognized losses they had in their mortgage portfolios. In the absence of more depositors, the Federal Reserve stepped in and lent short-term money to banks to ensure they would have money to then lend out to businesses and consumers.

How YOU Can Help Resolve The Credit Crisis

I want to give you an example of how we can work our way out of this mess ourselves.

Scenario 1: Hypothetical consumer Ann, in 2006, takes out a $30,000 loan from her local bank in order to make home improvements, such as buying a new roof and installing central air conditioning. Ann agrees to repay the loan over 10 years, giving her a (approximately) $320/month obligation for the next 10 years. The bank now has an additional $30,000 liability, and must carry more deposits to meet loan loss reserve requirements.

Scenario 2: Hypothetical consumer Bev, in 2009, decides her house needs a new roof, and heads to her local bank. Because the value of her house has gone down since she purchased it in 2004, she is denied the loan. Bev decides to take a different track. Instead of applying for a loan, she decides to save $500 a month in a high-yield savings account. Her new roof won’t go on for a few years, but her bank now has thousands of dollars to lend out to another business. At some point (perhaps in 4-5 years), banks reach an equilibrium and loosen lending standards.

Remember, banks make money by lending out their deposits. They may take fewer credit risks than they did in the past few years, but if they have the deposits, they will lend. The problem right now is that we’re stuck in a strange zone where banks have few, if any, deposits, and a lot of bad lending debt.

What About Complicated Financial Instruments such as Derivatives?

I am not arguing that credit default swaps and derivatives aren’t part of the problem. Certainly, a lot of investment banks adopted a “can’t lose” attitude in the past few years, and conjured up overcomplicated financial instruments to pass a debt burden to other companies.

But I also think that in order for us to feel we have control over the situation, we must look at what we can all do differently. Most of us did not save anything over the past few years. We are in debt up to our eyeballs. Is it really going to hurt us that badly if we have to save a few extra years for a new TV or a new appliance? Yes, that means that appliance won’t get purchased right away, but it will still be purchased.

Some of us will lose houses that we couldn’t afford to begin with. But then we will rent, for less money, and have extra money every month to save, invest, or spend. If hypothetical consumer Cara goes into foreclosure on a $2000/month mortgage payment and decides to rent an equivalent house for $1400/month, don’t forget that Cara now has an additional $600/month. If Cara decides to put that money in a safe investment such as a high-yield savings account or a CD, that bank can then lend Cara’s money to another business or consumer. And if Cara decides to spend it, that means more money for many businesses who will benefit from her spending.

We can solve this credit crisis on our own. No one forced us to buy a house or take out loans. We created this crisis by going into debt and ignoring our savings, and we can fix it by starting to save again and by speaking out against insane amounts of debt.

Yes, I acknowledge that that means there will be pain for many of us over the next few years. But ultimately, I believe that a more sound financial system can be built from the ground up out of this crisis — one where we buy what we can afford, and learn to love what we have instead of seeking to constantly acquire more.

Let’s solve this crisis ourselves. Take action! Please Digg this post or recommend it on StumbleUpon. It will only take a few seconds, and it will help others realize that we hold the solution to this problem.

Recommended Reading:

• Economics in One Lesson. Henry Hazlitt explains many common myths about economics. A must-read if you want to know more about governments and bailouts.
• How To Start A Business With No Money. Starting a business doesn’t have to mean a huge capital outlay. Here’s how you can start a business even if you don’t have money to work with.
• Three Business Ideas That Will Help You Thrive During A Recession. Three specific businesses that will do well during a time of cutbacks and belt-tightening.

We all have goals, dreams, and hopes, but all too often they’re quashed as we join the rat race to make more money, to then spend that money, which means we have to make more money, to spend more money…an infinite treadmill that, judging by many of the statistics I’ve read recently, some of us are never able to get off of.

I don’t want that someone to be you. I don’t want you to look back in 30, 40, or 50 years and say “Where did it all go?” I don’t want you to regret not doing the things that are really important to you — like spending quality time with your family and friends, and traveling — because you were working just so you could pay the bills.

Step Off the Treadmill and Live Your Dreams!

I want you to be able to step off that treadmill, because only then will you truly be able to rock this world. Want to spend 5 days a week working for your favorite cause without concern for how much the job pays? Want to buy a boat and sail across the ocean? Want to actually watch your kids grow up instead of sending them off to daycare? I want you to, as well. But you won’t be able to do any of that if you don’t start planning now for that future.

That’s why I have started a new mission — WealthCamp. WealthCamp is a unique personal finance conference. I have brought together some of the top personal finance speakers and authors and put them together in one room. They will be there to answer your questions and listen to your stories.

Ramit Sethi of I Will Teach You To Be Rich will be there explaining how to get started saving and investing. Judy Lawrence, who has sold over 400,000 budget books, will teach you how to make a budget. And Fred Ecks, who retired at a young age without winning the lottery, is going to show you how this is all possible and open your eyes to a new way of living.

Why Should You Be There?

Why should you come to WealthCamp? Simple. You have questions about personal finance. You have stories to share. You can learn from the gurus and in turn help others. But above all — you should come to WealthCamp because you understand this:

Financial education earns you financial freedom.

It’s true! If you want to retire early, how much money do you need to do that? Where should you invest? What’s the difference between a 401(k), a Roth IRA, and a traditional IRA? If you don’t know, WealthCamp is your opportunity to find out. And if you do, WealthCamp is your opportunity to share your story and help others.

Don’t Follow The Crowd…

Our economy is at a critical inflection point right now. There are massive amounts of Baby Boomers who wish to retire, but can’t, because they don’t have the money. At the same time, some 90% of 30-39-year-olds are in debt, and 76% of 20-29-year-olds are in debt. Financial education is the key to making sure we can live the life of our dreams. WealthCamp is the first personal finance conference in the world to engage a community of those who want to live their dreams and let you — the community — have a say in the conference.

I am passionate about living my dreams without having to worry about money or personal finances. If you want to learn how to start living and stop the treadmill, join us at WealthCamp on Saturday, May 31 in San Francisco. Use coupon code “friend” to bring your price down to just $50 — a bargain considering all of the excellent advice you will receive and all of the great people you will meet.

You will get a chance to reach out and connect with others who will support you in living the life of your dreams and fulfilling your goals. And you’ll become the first part of what will become a global community of people passionate about using money and investments as a tool to enable their true destinies.

I hope to see you there!

I know the financial facts that most people don’t – that less money spent on a new car can add up to millions over a lifetime. (That blog entry was how I talked myself out of buying a Mercedes SLK 350. Instead, I bought a Miata.)

Let’s get real, though. The $33,000 I spent on the Miata (after sales tax) could be invested. At 10%, it would return $275/month, every month for the rest of my life. Instead, I own a depreciating asset that will last me probably about 8 years before it will need be replaced.

I also bought a lot of art recently. I went for high-quality art from known artists, and bought at auction, so my costs were significantly reduced over paying retail at a gallery. Still, I spent $12,000 on art. Assuming it appreciates at 1% per year (art, thankfully, unlike cars, does appreciate a bit), I’m “only” passing up $90/month, every month, for the rest of my life.

Doing the math, I could have had $365/month, every month, for the rest of my life, but I gave it all up. Why?

The answer is the same reason you probably don’t have any money saved right now, and it will probably surprise you at first. When you look at it a bit more closely, though, it makes sense…

Why You Don’t Save Money

Spending money gives you an emotional “high”. Marketers know how to prey on your emotions so that buying that sports car, expensive cell phone, or high-end TV becomes not a negative cash-flow situation, but an integral part of how you define who you are.

Stop for a minute and think about this. I’ve lost count of how many people refer to their iPhone as an iPhone instead of a cell phone in conversation. Same for Apple laptops — it’s no longer a laptop, but a “MacBook.” (I use Apple products as a reference because Apple is undoubtedly the master of emotional branding.) Look back through your blog entries, chats, or text message logs, and you’ll see similar trends. Whenever you buy something based on emotion, you’re more likely to refer to it by its brand name. It is a subtle way of getting this point across: “I spent a lot of money on this. That means I am a more interesting person!”

And that’s why your savings account balance is probably close to $0…because product marketers have mastered emotional branding, but savers and investors ignore your emotional needs and focus on the numbers.

Three Quick Steps to Break the Emotional Trap

How do you turn the cart around?

First, accept the fact that you buy things based on emotion. The more integral the purchase to how you define yourself, the more likely you are to buy something based on emotion. If you’re constantly using your cell phone, you’re more likely to buy a more expensive cell phone — not because it’s more functional, but because you look better using it. Do not fight this or try to justify your purchase with logic. Simply accept that you have made past purchases based mostly on emotion.

Second, realize what emotional need made you buy the product! This is the biggest step, and also the most difficult. Try to distill it down to one or two words. Why did you buy the expensive cell phone instead of a cheaper one? Ignore the features (those are justifications!) and press inward. Think more deeply.

Today, I thought about what connecting factor would have made me buy both a lot of art and a new car. Oh, sure, there are plenty of facts (justifications.) Let’s get those out of the way first: art will appreciate in value; my current car had nearly 150,000 miles on it; my boyfriend needed a car to commute to work due to a change in the bus schedule. Now that you have all those out of the way, concentrate on how the purchase made you feel. I found that I thought the purchase (in both cases) would make me more beautiful.

You’ll know you have it when you think, “Oof.” The real emotional need below all the justifications will hit you right in the heart. It may make you a bit sad, as you realize that there is a lack in your life that you feel you need to fill with stuff. Don’t fight that. Embrace it. This is a process, and you will come out on the other end understanding yourself better.

Third, really think about that need, and become aware of other emotional needs, when you buy in the future. There’s no going back. What you’ve bought, you’ve bought. Don’t turn this into regret over what you have. In my case, I have much more beauty in my life now, and that makes me happy. But it won’t make me feel more beautiful to purchase things. That’s a big difference, and one that I must recognize when I make purchases in the future.

We Have Failed As A Society

I’m sad to type this, but I also hope this blog entry, and many more like it, will be an agent for change in the future. We have failed. Instead of teaching kids that their worth comes from within, we’ve given in to the marketing bandwagon’s “emotional blitz” and bought stuff that we thought would make us happy. Yet we’re just as depressed as we ever have been.

Personal finance bloggers and financial columnists miss the mark when they write, “JUST SPEND LESS THAN YOU EARN!!” It’s not about that. Those daily lattes the financial columnists love to target as a key component of being frugal…when we buy them, we aren’t thinking about the $4. We’re thinking “This latte will make me more happy (somehow).” Spending less than we earn won’t make us happy in the same way, and that’s why, despite the plethora of financial advice available, most of us are still in debt.

Once you identify what emotional need your purchases are fulfilling, you’ve made a huge breakthrough. The next step is figuring how to make investing and saving money fulfill that need just as much as the latte, cell phone, or new car does. This is something we all have to step up and do. We need to figure out, as a society, how to live emotionally fulfilled lives without resorting to spending. Until we do, no matter how much we earn, we’ll still be in debt up to our ears.

No, this isn’t some “get rich quick” scheme, and it doesn’t require anything illegal or immoral. It’s actually quite simple. The one catch is that it’s easier to do earlier in your life. But it’s something anyone can do, and is easily within the range of most Americans. You have to follow some rules to make this work. But once you do, you’ll be a millionaire.

What is the decision?

Buy a cheaper car, and invest the difference.

Yep, that’s it. Let’s break this down: how does buying a cheaper car make you into a millionaire?

For this exercise, I am going to assume you are 30 years old, and you want a million dollars by the time you are 70. Let’s also assume for the sake of argument that you are interested in a car that costs $35,000 new, and you have little or no down payment. This seems fairly accurate given the data I found from Edmunds in 2004 that states that the average new motor vehicle MSRP was $30,841 in December 2003. We can safely assume that number has gone up since then. Factoring in taxes and licensing, $35,000 seems a reasonable estimate of what the average new car costs.

$35,000 over 6 years, at an interest rate of 8%, is $613.66 per month. Whew, that’s quite the car payment! But it’s similar to what many 30-year-olds have.

Where does the million dollars come in? Spend $24,000 on that car instead of $35,000, which you can easily do by getting a used car or a slightly cheaper car. Your car payment over the same term is $420.80 per month, or a savings of $192.86. Round that up to $200 per month, and put that $200 per month into a mutual fund earning 10% per year. Here’s the catch: You have to invest the extra $200. You can’t blow it on food, TV, music, etc. I strongly recommend you find an investment service that will take the money directly out of your paycheck so you won’t be tempted to spend it.

Once you’ve done that, find a mutual fund that will give you high returns on your money. This shouldn’t be too hard. If you’re unsure, the S&P 500 index has returned an average of 10.30% over the past 30 years (1976-2006.) Pick a S&P index fund, put $200 in it every month, and leave it alone!!! for the next 40 years. Let the compound interest magic work for you.

Invest $200 a month at 10% for 40 years, and you will have a cool $1,168,444.35 saved up for retirement. If you are still having trouble deciding what you want to do, I recommend you visualize a pile of $1.1 million dollars in cash and a used car on one side, and a brand-new car on the other. Which would you rather have?

Here, I’ll help you out:

2003 BMW 3-series (approximately $24,000 used) and ONE MILLION DOLLARS IN CASH!!!
  

2007 BMW 3-series (approximately $35,000 MSRP) and what you will be stuck with
  

I’d pick the $1.1 MILLION DOLLARS IN CASH any day.

I am sure some of you are saying, “But Erica, spending $35,000 on a car is ridiculous! I would never do that.” Well, good for you! Seriously. Now go invest that $200 anyway. Which is more interesting, a couple pairs of shoes or $1.1 million? 10 DVDs, 5 of which you’ll never watch again anyway, or $1.1 million? You get the idea!

Go set up that investment fund, and go set up your paycheck to deduct into it. If you’re self-employed, set it up to withdraw from whenever you pay yourself. In 40 years, when you’re living the high life, you can toast me from the helm of your beautiful boat that you bought with your spoils.

Photo credits: BMW photos by xrrr. Cash photo by noahwesley. Sad Mac photo by Inkington. All photos licensed under Creative Commons.