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152

Want to Get Rich and Stay Rich?

In 2003, my wife and I refinanced our Virginia home. We'd put a large down payment on the house when we bought it, and it had tripled in value. Mortgage rates plunged, so we refinanced. We dumbfounded our Wells Fargo banker by refusing to take equity from the house, and opting to use a fixed, rather than a variable-rate, loan. I asked him how many people in our position had done the same thing, and he said, "I can't remember the last one."

One more quick story: We needed a larger car for our growing family, so we went to the dealership and bought a Volvo for my wife. When we agreed on a price, I pulled out a checkbook to pay for the car, using money we'd set aside for that purpose. "Don't you want to use leverage?" asked the dealer. We insisted we did not. Notably, the dealership's transaction system was unable to accept full payments for cars. They ended up having to "finance" the car at 0%, and then have us immediately pay off the "loan" in full.

There are all sorts of theories, conspiracies, and analyses going around at the moment regarding the Treasury-led takeover of Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) . Most of them focus on the macroeconomic realities, but very few focus on the simple fact that this government action is a response to the tragedy of people losing their homes, and in many cases, their life savings.

For many people, the word "tragedy" tugs on the same heartstrings that are susceptible to puppies and Hallmark cards. So before we go too far down this particular road, let me make a controversial and incontrovertibly true statement that gets to the heart of my article: For many, if not most, of these people, their tragedy was self-inflicted. They took on too much debt. They bought too much house. They neither understood nor processed the risk they were taking on.

You can't grow rich by borrowing more
If you want to grow wealthy, you must be extremely judicious in taking on debt. There is no one out there looking after your best interests. American Express (NYSE: AXP  ) will give you credit to the extent that they think you might be able to pay them. Whether you can pay them and afford to eat is not their concern.

Debt is a tool. It helps people and companies buy things that they do not have the liquid assets to buy otherwise. But it also helps people buy things that they cannot afford. The two might seem similar, but they aren't. Someone earning $200,000 per year with $50,000 in the bank can afford a $600,000 house -- she just doesn't have the liquid assets needed to pay for it, and debt helps.

Someone earning $40,000 with no savings cannot afford the same house. And yet, in dozens of markets around the country, financial "helpers" allowed people to believe they could perform similar feats of financial alchemy. Is it any wonder that Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , and even Target (NYSE: TGT  ) and Cabela's (NYSE: CAB  ) have their own finance departments? They want you to buy things. Their things. Whether you can afford their things is not their concern.

Don't buy it if you can't afford it.
I have an almost un-American hatred of debt. In the last few years, my financial decisions have been in stark contrast to those of many of my compatriots, who believed that they were borrowing their ways into prosperity. Acquaintances who believed they could "flip houses and grow rich" laughed at me and my old-fashioned ways.

I don't hate debt because it's bad. I hate it because it's dangerous. No one tells you when you sign up to get a new credit card that the free T-shirt, iPod, or whatever you get as a bonus is almost guaranteed to be expensive over time. That's because the card companies know that most people will not use credit cards as a cash flow manager -- they'll use them as a way to borrow.

There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don't have. It's really that simple.

Want some help?
Stock analysis is The Motley Fool's bread and butter, but we know that before you can invest, you have to have money to invest. That's where my colleague Robert Brokamp's Rule Your Retirement comes in. It offers great tips on planning, saving, and investing to help you maximize the benefit you gain from the money you earn. After all, every dollar saved is just as valuable as a new one earned. You can read all of his tips with a 30-day free trial -- click here to get started.

Bill Mann owns none of the companies mentioned in this article. The Motley Fool owns shares of American Express. Cabela's is a Motley Fool Hidden Gems recommendation. American Express is an Inside Value selection. The Motley Fool's disclosure policy takes prisoners, names, and lunch money.


Read/Post Comments (53) | Recommend This Article (152)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 12, 2008, at 11:12 AM, laketoys wrote:

    I was sucked into reading this article by the title, but I am sure you know that already. Nothing wrong with your article OTHER THAN - it had NOTHING to do with the title. Why don't you people create titles that at least remotely resemble the content?

  • Report this Comment On September 12, 2008, at 11:54 AM, jmt587 wrote:

    I think laketoys didn't get it. The point is if you want to get rich and stay rich, don't use debt to borrow, use it as a cashflow tool, or not at all.

  • Report this Comment On September 12, 2008, at 5:22 PM, jennscott wrote:

    I totally agree with the statement, "For many, if not most, of these people, their tragedy was self-inflicted." I don't understand why the government (we the people) has to bail out everyone, it seems, who makes bad judgements on loans. Sounds heartless? I think it's more heartless to subject others (taxpayers) to your poor decision-making. It's quite selfish, you know. Thanks for your article.

  • Report this Comment On September 12, 2008, at 5:35 PM, FOOLBEFREE wrote:

    Bill is the Mann, good advice.

    We did something similar. We bought our house in 1999 with a fixed rate, smaller house, we do not carry balances in our credit cards, we did not borrow $ to buy other houses and flip them. We know some people who bought houses to flip or rent and are suffering right now.

    We also buy cars with cash, zero debt.

    We have accounts where we save for a car or vacation. We use no debt for vacations or cars.

    -->Use debt for assets that appreciate, for a house, not for a car or HD TV or vacation. That's the secret of getting rich and staying rich.

    I would add that to become rich, you spend less and invest it in stocks overtime. Pay yourself first: save for your retirement pre-tax (401k, IRAs).

    A great book is "The automatic Millionaire" by David Back. It mentions all of the above.

  • Report this Comment On September 12, 2008, at 7:17 PM, mtkatch1 wrote:

    Amen!!!

  • Report this Comment On September 12, 2008, at 8:43 PM, tramagli wrote:

    I regret that I have but one rec to give thee! The concepts in this article regarding debt abuse are so simple, yet so many people just don't get it. And as for the title, you can't get rich or stay rich (how many lottery jackpopt winners are bankrupt) by carelessly using debt.

  • Report this Comment On September 12, 2008, at 8:56 PM, SteveTheInvestor wrote:

    I often agree with the sentiments expressed by LakeToys when it comes to MF articles. In this case however I think the article is right on point. You can't gain true wealth without first learning to control your finances. Debt can be an evil thing if it gets a grip on you.

    Personally, I see lack of financial education as a significant problem in the US (not sure about other countries). When my wife and I bought our house 17 years ago, we really did not understand the intricasies of what we were walking into. Fortunately, it all worked out and we are on our way to being debt free in a few years.

    Handling credit, rather than letting it handle you, is a core requirement if one ever hopes to become "rich", whatever that might mean to each of us.

  • Report this Comment On September 12, 2008, at 11:20 PM, DLSTL wrote:

    Article was "right on". I've emailed it to my adult children. Good lessons

  • Report this Comment On September 13, 2008, at 10:27 AM, Dogbreath101 wrote:

    I, too, am debt free, and have always paid cash for autos, TV's, etc. I retired a dozen years ago, and saw my retirement account halved in 2001 when the tech bubble burst, and had not one Dot.Com company! Sadly, even we folks who "did it right" are affected by market fluctuations which today are largely created by greed/emotion. The "I deserve everything I desire (and right now!) mentality, coupled with banks' willingness to oblige, always leads to imprudent lending. The "good guys" are then left to pay up and clean up the mess.

    BTW, we've all heard that. over time, equities beat other investments. Here's fact: If I had put my money under the mattress in 1998, I would be WAY ahead. And, don't recommend bonds or CD's; they haven't had yields that beat inflation in several years.

    All-in-all, it's a tough season for retirees.

  • Report this Comment On September 13, 2008, at 12:01 PM, twosense wrote:

    This article was filled with wise advice and sound principles. However, does it really make a difference in the over all use of debt as a tool? Knowing these simple rules has had little impact on peoples lives. We all "KNOW" that exercising more and eating less will give us healthier bodies and yet obesity and overweight bodies are overly abundant in our society just like debt ridden, over extended life styles.

  • Report this Comment On September 13, 2008, at 12:08 PM, GreatPricePearl wrote:

    Thanks Bill for sharing your "old-fashioned" discipline. My wife and I saved for twenty years for our first house and paid cash for it. And we still contributed to our IRAs annually. We fixed up the house and sold it for a five-bagger ten years later. Our income is moderate as we both have worked for our church since college. Recently we borrowed from our home equity to fix up our present home. I liked it better being debt free.

  • Report this Comment On September 13, 2008, at 1:03 PM, Dart65GTConv wrote:

    About two months ago I added a comment on I think Toll Bros. Told about my first home buying experience in the middle 80's. Plain and simple had to bring something to the table besides proof of income, how about some of your cash too. That's the simple version. Two yrs later achieved this feat, then what do you think happened? Somebody learned to save, and the bank got all their money. Oh! and earlier than I'm sure was good for them, rejection in front of my new and hopeful family was a demeaning and motivating experience for the good. As I said in that other comment to new home buyers today. Get together and take advantage of crushed pricing and cheap money save 20% and get in. Three times your investment is in your hands. This fool is rolling back in now, its a cherry pick and almost irresponsible not to do so if you can.

  • Report this Comment On September 13, 2008, at 1:13 PM, Dart65GTConv wrote:

    One more thing, Bill is correct and the lesson here is the old principles were in place for a reason. Somthing tell's me they will be back in style.

  • Report this Comment On September 13, 2008, at 1:18 PM, wick80 wrote:

    Again, this article hits at the roots of the economic problems plaguing the US today. In 2001, my one of my finance professors lectured on different loan types. Fixed, variable, interest only, etc. It didn't occur to me until two years later that working and middle class Americans were using interest only loans to purchase their primary residence, lured in to a false sense of security by scrupulous lenders. Now look where we are: economy in or on the edge of recession, millions of Americans facing foreclosure and bankruptcy, and the S&L's are beginning to fail at an alarming rate. Those Americans who purchased their homes with interest only loans may not be bankrupt yet, but their homes are now worth 20% less on average, leaving them with principal owed that they will never recover from the sale of their home. This economy is in for a roller coaster for the next several years due to the poor choices many Americans made over the past eight years. Yes, it provides many opportunities for the savvy investor now, but should leave us all with a bittersweet taste in our mouths after reflecting on what has ultimately given us this opportunity.

  • Report this Comment On September 13, 2008, at 2:50 PM, lasvegaslf wrote:

    I agree with you all - being debt free is wonderful !

    But sometimes life deals us a few nasty blows, and the only way to deal with them is to borrow and/or use your cedit cards.

    I have invested small amounts in conservative funds and stocks and still have mad some money, TG !

  • Report this Comment On September 13, 2008, at 2:53 PM, DerektheDude wrote:

    Actually lake, it has plenty to do with the article. As a fairly accomplished writer, which appropriately describes Bill Mann, he gave you a nibble of some words that caught your attention. Once we had that first bite none of us could resist finishing the entire entree', even though it wasn't exactly what we were hungry for.

    Bill makes an excellent point here about personal finance vs. business finance. Unlike businesses, individuals don't have thousands, millions, or billions of dollars of assets that we can assume debt against to improve our situations. I share his view that debt, especially in the form of credit card and mortgage debt, have been misused for so many years that society today is predisposed to rack themselves with a heap of debt that they will likely never repay.

    The important point here that wasn't lost on me was that debt is just that: debt. The bank will give you pretty much whatever you want in terms of credit. However, all of that money that was created for you out of nothing must eventually be repaid. So, quite obviously, you will eventually have to pay $600,000 REAL dollars for that fancy new house that you just moved into. Not only that, but you'll end up paying even more in finance charges, interest, and dealing with interest rate increases on a variable-rate mortgage.

    If you can't be reasonably assured that you can pay off a certain amount of money, THEN DON'T BORROW IT! Period.

    PS- I rent an apartment even though I could probably afford the monthly payment on a small house, I've been driving my '05 Focus since 2006 and plan on driving it until it explodes, and I've taken an aggressive stance towards credit card debt by paying off my US Bank card (in full) every month. It takes a little work and some sweat on the brow but ANYONE can become fiscally responsible. There's no magical financial dragon out there preventing you from reaching your goals; the traps that most have fallen into, including most of these major companies failing and declaring bankruptcy, are all self-inflicted.

  • Report this Comment On September 13, 2008, at 4:10 PM, xserver wrote:

    I live debt and mortgage free but I would add a cautionary note. Don't stop using credit cards as they help build your credit rating. After paying off my mortgage I continued to pay cash for everything (checks or debit card) but soon learned my credit rating/score was declining. If I ever want to get a loan again I might not get a good interest rate. So I've opened a few credit card accounts and pay the balance off every month, plus I get money back for my purchases.

  • Report this Comment On September 13, 2008, at 4:11 PM, kimnovack wrote:

    Its true wealthy is not rich by spending what you don't have, I have showed my kids (and I'm just as human as everyone else buying something that we didn't need), but because I saw my parents way of becoming wealthy, eating at home, wearing the same clothes for school at least for 1 more year, one present for my birthday, 1 present for christmas (and its was always something we needed), vacations every other year..but we would go camping close by so our budget was always low. I don't drive SUV's I have 2 compact cars, and I bought them cash, one new car and one used for my son who I knew was going to need a car soon, since he was driving our old station wagon and it had over 200,000 miles on. I still have those 2 cars, and I sold my home ( 30 yr fixed @8 percent loan) way before the crises hit this was shortly after 911 since both my jobs (airport) were at jeapordy. I put my $$ in the bank and still there cuz everything took a sh...t. Now I'm renting a loft close to work for all 3 of us and putting together more $$ (a near impossibilty with cost of living outta control) but we do, even if its a $100 bucks its a hundred bucks. But we are saving cuz we have no car payments, take the metro, and shop at fresh and easy (a new market with prices for ppl like me that don't make $100,000 year). We all this we will be able to afford our new home soon (70% down), and our role models (grandparents) are living independently in their new home enjoying their retirement. The other very import thing is insurance auto and health, there are now doctors with private practices charging $25.00 visit and provide prescriptions for $30 from their office (they usually go by who u are), and auto I am the primary and add my kids on the same cars..much less than if we were insured individually. And Chevron rocks on not cheating you at the pump like many others do towards the weekend. And we have the same 2 laptops we bought at Best Buy sale 5 years ago. And its not for myspace, music downloards, We use our computers its our livelyhood!! and I share with my daughtger who still a teen and she never complains as she has started a business and knows the name of the game. So, no need to impress anybody about your wealth except yourself:) me and my kids have endured not having but our wealth is steadily growing, having debt and those giving you debt make it so easy. If I would have chose to stay and keep my home, I would have lost it and had debt to this day. So, to all those preppy SUV mom's, prada purses, jimmy choos, loosing their homes..in your face!! Only because they would make fun of me in my old cars and clothes and my kids riding around in a beat up station wagon with the same back packs throughout high school. Oh yeah I left my job at the airline before they went belly up and my other job who I have been paying my dues is finally paying off:) very very happy!

  • Report this Comment On September 13, 2008, at 8:23 PM, radicalaccountin wrote:

    Yes, I'm hoping that the fact that I didn't invest more than I could afford not to live on, so i can ride out this market, will make me rich, ha, ha.

  • Report this Comment On September 13, 2008, at 9:04 PM, OmahaGuy wrote:

    Good article by Bill Mann. I too went to Wells Fargo for a mortgage and I had to fight and argue for a fixed rate mortgage. They were trying to push a variable rate on me which I have always thought was insane and I told them so. Funny thing though, sometimes slick sales people can make you feel dumb when you do the smart thing...just remember you'll never see them again! Now I'm loving my 15 year 4.75% fixed rate mortgage!

  • Report this Comment On September 13, 2008, at 9:05 PM, TMFHockeypop wrote:

    Great advice including the rec to Rule Your Retirement. I'm a charter member and it pays the full price every month for me either from a nugget from Robert Brokamp or advice from the boards.

    Don't miss you not coming by very much :), plus please get OtterPater to swing by more often. The apple doesn't fall far from the tree!

  • Report this Comment On September 14, 2008, at 2:40 AM, crazygood wrote:

    Bill Mann is awesome. Absolutely awesome. Thank you, thank you, thank you. We followed exactly these ideas, and paid off our credit cards each month, and invested rather than spent our money -- and suddenly, there we were paying off our house in ten years, selling it for twice plus what we paid for it, buying a house in the woods for cash, and putting half the money from the house sale in the Million Dollar Portfolio, among other investments. Now, we're in Tokyo -- because guess what? -- forty-three is too young to retire, really. But boy do we love the freedom we have now, because we never felt comfortable with debt. Most of our friends (in and around NYC) still have not bought a house, or saved anything substantial, and we're beginning to worry about them long-term, and it's all because they lead lifestyles they feel entitled to (like matching silver Mercedes - one of the couples) but they really can't afford.

    Bill Mann, we love you for saying what needs to be said!

  • Report this Comment On September 14, 2008, at 7:52 PM, mythos1453 wrote:

    I always thought that paying i.e. $30k cash for a car and not getting involved with any loans is the best bet. But thats not always true. Here is why:

    Car companies need to sell their cars, and they are willing to make discounts in order to do so. When they tell you put 5-50% of the money and the rest in 24-48-... payments with no interest, is like giving you a 5-8% discount. Now tell me, if you went to the car dealer and he told you "we give you 5% discount!" wouldnt you be like..huh?

    The reason why, 48 payments with no interest is more profitable to you, is interest rates. Even if you put the money in a closed account for 4% interest rate, it would still be much more profitable to you, than giving the $30k on the spot.

  • Report this Comment On September 15, 2008, at 2:30 AM, Papayatree wrote:

    you guys are all wrong. the best way to get rich is down simple. it is not a rocket science. + > - . spend less and don't spend at all, if you can. that is how you get rich.

    look at all the multi billionaires, and how they accumulated their wealth. not sure if it is true, but mr. warren buffett gets a 9-dollar haircut or something like that. i spend more on my dog's haircut.

  • Report this Comment On September 15, 2008, at 6:59 AM, Estrogen wrote:

    If this article resonated with you, you may also want to check out Dave Ramsey's Total Money Makeover. As he says, no one ever got wealthy on american express points.

    In my household, we have been paying cash for everything (we do have a mortgage). And to those that say, "yeah, but I want to live," I'd counter with my middle class family of 5 just voted to go to Hawaii for 2 weeks next summer.

    Oh yeah, we'll be paying cash for the whole trip.

  • Report this Comment On September 15, 2008, at 9:56 AM, BottomIsIn wrote:

    After reading Dogbreath's comment about he would be WAY ahead if he put his money under his mattress, and how he also always paid cash. Seems to me his standard of living would be MUCH higher and he would be no worse off if he had spent some of that money he hoarded.

    Folks, rich is just a number on a piece of paper. Life is a short journey. Why save it all to MAYBE spend when you are old and feeble?

  • Report this Comment On September 15, 2008, at 2:21 PM, solangemike wrote:

    Thank You Bill Mann for writing this article.

    Like a nightmare, the past 8 years I've watched in slow motion as everyone from the President on down has hurled themselves (and our nation) in front of an oncoming "bankruptsy" locomotive-- while yelling to warn but no one can hear you!

    I live in Scottsdale - everyone was 'about' to get rich and spent in anticipation - leased SUVs* (Scottsdale is the capital of Hummerland, $1.5M McMansions with only $100K down, and a lifestyle to match. All while working completely insecure jobs in retail etc

    Now -- not so good. 50% of my 'hood is out of work and health insurance or just pink slip away.... (and blaming everyone but themselves)

    Greed, arrogance and complete disregard for facts - these aren't the traits that made America great.

    Cash is how my huband and I operate,too. Just like Bill writes. Xtra cash means more stocks and rental houses (not new furniture and tvs - our couches are just fine, thank you)

    Even if we enjoyed flushing money down the toilet, we wouldn't. America has enough spoiled kids and we are not willing to add our three to the list.

    Kids thrive on less money and more responsibility. Maybe America needs this downturn.... for our kids sake.

  • Report this Comment On September 16, 2008, at 1:03 AM, jssusi wrote:

    Good article, however I believe that it's not enough just to know it but the harder part is to apply the principle on day to day basis. I tend to practice it gradually, cutting out one credit card would feel easier than straightly using cash only. I tend not to agree with today's event for not bailing out Lehman Brothers without considering the impacts to the fragile economy. There were many instances in the third world countries where in the event the government got bankrupt then an international institution would still be able to help them out through strict conditions and continuous monitoring for a certain period of time to get them out of the billions/trillions debts. I just don't buy that this way will give lessons/punishments. Yes, punishment to the employees!! How to keep telling americans to be confident if the market keeps crashing? I agreed for not putting tax money into helping a small group of greedy people but mistakes were already made and the Fed for sure has had a role in it, no matter how small it is. The decision seems to be shortsighted, just creating further mess and bad reputation to the global investors..

  • Report this Comment On September 16, 2008, at 11:47 AM, cams0ft wrote:

    Nice article reaffirming the old time status quo.

    However in today's climate of extreme inflation, its hard for some lower down the rung in terms of income to maintain a 'reasonable' standard of living without the facility of credit.

    Take for instance the average worker in London.

    Average salary £22K.

    Average Minimum Annual Rent: £12K

    Average Price for 1 bed flat: £180K

    Reason for working in London: "Couldn't get an analyst job anywhere else."

    So just to live, and we are talking like a peasant now. 1 bed flat, simple dinners, cheap clothing, you will need more than the post tax £16K you will receive in annual salary.

    Throw something simple like an old car into the mix, small vacation or cheap restaurant and you are looking at a situation where young people are FORCED into debt dependency. This is then carried on into adulthood. It's a form of financial conditioning, those of you bragging about your portfolios wont be laughing when your child purchases a new 4x4 on credit and uses your porfolio as a deposit. Is finance taught at your child's school??? No I didnt think so.

    You'll need $30K for an MBA for that.

    The Government/Bankers talking up the American dream of home ownership has ballooned house prices and ultimately turned the dream into the American Nightmare, forcing people into debt just to maintain a 'reasonable' standard of living. Make no mistake, this house price hike affects renters, owners and investors. All conditioned to belive that the home is where all your financial resource should pour into, living you with little else except the option of debt.

    And if you dont agree to be a 'debt slave', well simple, you live in the street with the homeless...

  • Report this Comment On September 17, 2008, at 12:41 PM, kerry6932 wrote:

    The author of the article is partially correct but is almost entirely misinformed. Debt responsibility is only one small aspect of accumulation and preservation of wealth. In fact, debt is an extremely useful tool for someone to leverage assets, take advantage of opportunities and enter markets to which they would otherwise never have access in order to build wealth.

    To "get and stay rich" requires a combination of:

    1) earnings,

    2) savings,

    3) responsible spending habits,

    4) wise investing,

    5) planning,

    6) discipline,

    7) patience and

    8) (last but not least) hard work.

    For example, I have never known someone to "get rich" from making $50k, or even $100k, per year, absent other influences. I am not saying that a person earning $50k or $100k per year cannot build a comfortable nest egg by effectively practicing the factors described above.

    The way to get rich is to figure out how to make a lot of money and to keep it.

  • Report this Comment On September 17, 2008, at 5:44 PM, mattack2 wrote:

    This has been mentioned a bit, but I'll repeat it.

    I used to too have the fear of credit cards.. but now I pay as much as I can with credit cards. It's more convenient than cash (fewer trips to the ATM, usually FASTER), and CHEAPER than cash, because of cash back/rewards programs.

    Just sign up for autopayments, and it's all set. I've gotten several $50 cash back checks from one credit card, got a free PS2 a few years ago from my Sony credit card, etc..

  • Report this Comment On September 18, 2008, at 12:44 AM, rbmf12 wrote:

    I've never had a fear of credit cards either. I do, however, have a healthy disdain for debt. Your recommendation to sign up for autopayments is a very good one for those who do use credit cards and pay them off in full every month. I have always paid my credit card off every month, thereby avoiding late fees and interest. Thought I was outsmarting Chase because I was using their money and they were giving me $20 gas cards every month. Well. . . it caught up to me. I had to pay stupid tax because I simply forgot to pay my bill on the due date (just flat out forgot). I made the payment online but still was hit with a $39 late fee and a yet to be determined amount of interest. When I called to get a courtesy waiver of the late fee, I was treated extremely harshly, and was told basically to ESAD. The guy even asked me if I wished to close my account! I told him yes as a matter of fact I did. So lesson learned- cash is king! But if you do pay by credit card make sure you pay it off every month on time.

  • Report this Comment On September 18, 2008, at 12:52 PM, rogerh11 wrote:

    I too live dept free except for home mortgages which I (still) have plenty of equity. I also live below my means. Now, it seems I and other like us, will be paying higher taxes to support those who cannot control their spending.

    I believe the root of this problem is a flip-flop of values. It has become more trendy to be lavish than friendly, the center of attention than dependable and abrupt than disciplined. It has become all about getting there than HOW you got there.

  • Report this Comment On September 18, 2008, at 12:59 PM, axel17 wrote:

    My wife has two "four-letter words" in her vocabulary that most people don't associate with the other four-letter words. These are DEBT and (unfortunately) GOLF. I wholeheartedly agree with her on the debt side. When we met, I was a pathetic professional who's semi-monthly pay check would lift my bank account into positive territory. I would then immediately head back into my line of credit. I was in this difficult situation because I bought a car I could not afford but thought that I should have. She quickly straightened me out, took over our finances and we've been in excellent position ever since. First mortgage was paid off in 5 years. For our second house, we paid cash. We have never had a car loan / lease, and we pay off our credit card balances religiously. We use credit cards a lot, but only because we get the 20 - 45 day float and get cash back at the end of the year. Although we have a lot of stress in our lives (jobs, commutes, raising two teenage girls), finances is not one of them. With respect to the other four letter word ... golf ... I'm working on her!!

  • Report this Comment On September 18, 2008, at 2:35 PM, yarbtly wrote:

    The seeds of today’s financial melt down were sowed by the U.S Government over a decade ago when Congress passed the Community Reinvestment Act (CRA) . Banks’ were required to provide investments in the "Low to Moderate Income" areas of their "community". Bank examiners regularly graded the banks’ CRA efforts, always pushing them to do more.

    The CRA required the banks to keep track of mortgage loans by race and geographic area. While no quotas were ever set, again the banks were strongly encouraged to find innovative ways to make home loans to low income borrower who wouldn't normally qualify. Thus the standards (or lack of) for sub-prime loans were born.

    When you add in the notion that home prices never go down with unlimited money provided by upstream institutions, you end up with billions of dollars floating around packaged as Mortgage Backed Securities (MBS).

    The final nail in the coffin was when rating agencies such as Moodys and S&P rated the MBS as investment grade without actually evaluating what made up the bonds.

  • Report this Comment On September 18, 2008, at 3:27 PM, rm56 wrote:

    I agree with Bill completely! At one point in my life I was drowning in credit card dept and could not get out. My solution? I stopped being selfish and put the needs of others first. At 46 years old I returned to the military, deployed to the Middle East. And in the process my wife and I paid off two car loans, three cards and I put $7000 in savings at %10. While other soldiers were buying Harleys I got out of dept. Too this day when someone asks me if I want to open a credit card it makes me mad. I tell them no thanks, if I want it I'll save for it. Two years ago we bought a small duplex when others were buying huge homes. I drive a 99 Ford not an Escalade, which I paid cash for. We went with a 30 year fixed at 3%. I don't feel sorry for people who bought luxury cars and huge homes when they should have started with a smaller home and a Civic. And I certainly don't think the rest of us should eat it on all the bad loans they took out. You make a dumb choice its your fault not mine. But then no one ever takes responsibility for their own actions anymore...its always someone else's fault, time to call the lawyer.

  • Report this Comment On September 19, 2008, at 12:03 AM, Tweetle wrote:

    Bill, great article!! High school students should be required to understand and implement these principles before graduating.

    A wise friend of mine once said, "In order to get rich, it doesn't matter how much money you make....the key is how how much money you spend, or conversely how much money you save."

    Unfortunately, too many people (and companies for that matter) foolishly spend much more money than they make and unwisely leverage their fixed incomes with excessive debt in order to finance their "needs".

  • Report this Comment On September 19, 2008, at 12:27 AM, GotGlobal wrote:

    Some people read and react, while others read and comprehend. Bill, you chose a perfect title. To all others in disagree, I hope you are not helping your children (if you have any) with their homework. Fool ON, FOOLS!

  • Report this Comment On September 19, 2008, at 1:39 PM, SparklingReturns wrote:

    " For many, if not most, of these people, their tragedy was self-inflicted. They took on too much debt. They bought too much house. They neither understood nor processed the risk they were taking on."

    I agree.

    Many of my own problems are self-inflicted. That's why I've learned to rely on those with greater experience and wisdom. (i.e. Motley fools)

    We need to be able to rely on others to operate in a manner of integrity, honesty, and genuine concern for others. If the profit makers were more concerned about the folks they "thought they were helping," I believe they would not have allowed this overextension of credit.

    We pay for each others errors. We need to return to trusting God and loving our brothers. I endeavor to do such.

  • Report this Comment On September 19, 2008, at 1:49 PM, debtfreenana wrote:

    We too are debt-free including our house and loving it. We always made extra payments on the principal of the mortgage. About five years before we were going to retire, we asked the bank to figure out how much we should pay monthly to have it paid off in five years. We paid that amount and we were debt free before we retired.

    One time I was telling my grandmother that I had gotten a raise. To which she replied, it's not what you make, but what you save. She was a very wise woman. Actually in the depression of the 1930's she lived in Montana and worked nights at a restaurant. She saw the weathy men of the town going in and out of the bank at night. She told my grandfather to go to the bank and get their money out. The bank gave him a hard time about getting their $10,000 out, but he succeeded. The bank went broke soon after and they had to leave town because people were upset that they lost money and my grandparents didn't.

    DH and I always bought a home on his salary only, because we moved around for his job and I didn't always have a job right away. Now we use credit cards for the cash back but pay them off every month. When so many people are losing their homes, it's a comforting feeling to know we own ours.

  • Report this Comment On September 19, 2008, at 2:30 PM, DeeDubya100 wrote:

    In an environment of information overload where everyone is clamoring for your attention, a little twist in a headline isn't going to hurt anybody. And Mann's article is basic, sound advice. Even a pro ballplayer still has to drill in the basics as a pro to keep the skills up.

  • Report this Comment On September 19, 2008, at 4:15 PM, WiseA wrote:

    Great Article! On a macro level, the secret to a strong economy is a healthy savings rate, which unfortunately in this country is virtually non-existent. On a micro level, I suspect few people truly understand what "cash is king" means. A diligent saver knows that by maintaining significant pools of liquid assets, they can increase their wealth significantly by buying the lows and selling the tops. Something that has drastically diminished effects when purchases have been leveraged.

  • Report this Comment On September 19, 2008, at 6:18 PM, RogerPaige wrote:

    Yeah, yeah, yeah... I did the same thing -- fixed rate refinance, pay off the credit cards every month. Good advice. But then you say, " For many, if not most, of these people, their tragedy was self-inflicted. They took on too much debt. They bought too much house. They neither understood nor processed the risk they were taking on."

    True enough, but this crisis wasn't precipitated by some people buying too much house, it was that too many people bought too much house. What shall we do, hang them all out to dry for being not very smart about money? Few people are smart about money (present company excepted, I would hope), and when they get self-serving advice from hucksters anxious to lure them into those too-big houses, they get stuck. And when there are as many of them in that fix as there are now, the rest of us get stuck, too.

    When Ike hit Galveston, and when Katrina hit NO, I suppose we could have just said "Screw 'em if they didn't have the good sense to get out of the way." But we didn't, did we? (OK, GWB did, the rest of us didn't.)

    Let's don't be too snooty about how smart WE are and how silly THEY are, with their foreclosed mortgages.

  • Report this Comment On September 19, 2008, at 7:57 PM, parchesi wrote:

    Mr. Mann is on the money and it looks like there are a number of us who understand the basics. The problem, however, is that as we see capitalism crumbling (isn't this facism that we are seeing?), those of us who played by the rules now will end up paying for the criminal, unethical, and immoral people who caused the financial crisis. This did not happen by accident nor was it a surprise. Any idiot (I avoid the use of "fool" here) knew that what was happening was bad and unsustainable. But the guilty ones took the money and ran. Greed ran rampant and the puppetmasters knew how the masses would react. So whilst we didn't buy what we could not afford, the big boys fueled the fire, tool the profits, the govt drove it (the Fed), and the humans lapped it up. The masses pulled equity out of the houses and bought their fancy cars, then lost their houses...but they lost nothing--in fact they are driving better cars than some of us are and just had to pack up and move like hermit crabs looking for another shell. Sure, their credit rating is shot, but the govt will probably fix that too. Let the house prices fall and the "free market" businesses fail. Nobody complained about any of this on the way up since they were making their money. Now that it's collapsed, we are supposed to pick it up? No thjanks. Where are the investigations? This stuff is criminal. The financial market is loaded to the gills with highly paid and very smart people who knew all this was going on. Come on, giving morgages with no collateral, no money down, and no verification of employment? Let it all collapse under it's own weight and bring the culprits to trial. Liquidate their overseas accounts, multiple houses, jets, etc. We all know it will never happen. America is not what is used to be or what it should be.

  • Report this Comment On September 19, 2008, at 8:06 PM, emmapeel01 wrote:

    To cams0ft: In London, earning 22K, netting 16K, paying 12K in rent, leaves four thousand pounds, equal to around eight thousand dollars. That's about $650 per month for food, heat, electric, public transit or auto expenses, phone. I manage on $300 or less per month by living in an apartment that includes utilities, walking to work (bus in bad weather--and my employer pays for bus pass), cell phone/no land line, car for weekend use only, good auto insurance with high deductibles, designer clothes from church thrift shop, vintage furnishings I restore, library for internet use and books/films, etc. It may be a bit more difficult in London, but it can be done, and the pride in one's victory is priceless! Save credit for emergencies only, use cards only to build credit score for future mortgage. Frugal rules!

  • Report this Comment On September 20, 2008, at 9:12 AM, submar329 wrote:

    Hell...Don't fret so much about all this stuff...You can Borrow enough to get out of debt...............

  • Report this Comment On September 20, 2008, at 10:12 AM, housacards wrote:

    A famous investor/ financier, by the name of Charles Allen, once said: "if you borrow money, make sure you borrow enough so they have to bail you out...this is what has happened in the past decade...only, the ones who end up with all the dough are the usual suspects. Keep this in mind when you start buying things you cannot really afford.

  • Report this Comment On September 20, 2008, at 1:11 PM, normsd wrote:

    My dad saved 10% no matter what, never made over $90 a week in his life and raised 3 kids. He built a house on $10k borrowed from family and a $5k mortgage. He always paid cash for everything else including new cars, He shopped at Kmart for clothes and necessities. He took vacations every year and many, many camping trips. He sold the house 25 years later at10X what it cost, bought another for cash and 17 yrs later did the same thing. He always had upwards of $50K in money market or mutual funds. His credit allowed him to walk in to the local bank and they told him, "name the amount you want" Ditto for his father earlier.

    Wich I had done the same. I'm 76 and still working, paying off credot cards, etc.

    Saving 10% should be first priority. It may not make you rich but you'll always be solvent. Isn't that what it's all about?

    Who wants to be in my position?

  • Report this Comment On September 20, 2008, at 2:19 PM, zag001a wrote:

    I believe Lake pretty much defines the problem with the working class today. Who will tell me how to get rich? What is so sad is he won't return to read the replies and realize how off the mark he really is.

    My parents were savers and they never made more than $30,000 per annum at any time. Pay your bills, then save to buy what luxuries you want. And that wasn't anything extravagant. I guess that is why I don't have a new car every year, go to exotic locales or have the best of anything really. But I did get to retire at 55 and do what I want.

    I do place some blame on the money lenders because people are not informed or don't want to take the time to be informed. They want what they want - and they want it now. They assume if they pass the loan application it means they can afford it. They might be able to if all they are paying for is a house...or a car...but you cannot have it all. Get your priorities straight.

  • Report this Comment On September 22, 2008, at 2:10 PM, melehi wrote:

    Good article. Sound advice. I am part of middle America and make a decent wage but am far from wealthy. My parents taught me to save and I've followed their example my entire life. My house and car are both paid for, and I continue to put 20% of my salary into my 401k each month. I use 2 credit cards (only to keep up my credit score) but pay them in full each month. Being debt free is the only way to go. I highly recommend it.

  • Report this Comment On September 22, 2008, at 6:05 PM, pbealtx wrote:

    The old saying is truer now than ever..

    "The rich get rich by acting poor and the poor get poorer by acting rich"!

  • Report this Comment On September 25, 2008, at 4:24 AM, cams0ft wrote:

    Many of you in this forum appear to be over the hill and fairly pleased that after living a life of financial misery you can now smugly occupy the moral high ground to preach to the young fallen about their ignorant perception of finance.

    Congratulations, however in this day and age the old rules simply do not apply. The average English home is now valued at several times the average salary. Most young families require excessive debt just to keep the home running and tucking away borrowed money only serves to exasperate the problem.

    Example:

    Average Salary in 1970: £1,500 – increased to £22,000 in 2008 or 1,500%.

    Average House Price in 1970: £5,000 - increased to £180,000 in 2008 or 3,500%.

    There was no VAT in 1970, inflation of the money supply had not yet run rampant and income taxes were significantly lower. The young families whose homes are now foreclosing are reaping the benefits of your ignorance. You helped the bankers rob the country and in return the central bankers ALLOWED you to own your own home. As time goes on the global debt will be so high that NO ONE will be able to afford ANYTHING besides the basic necessities to survive.

    Mark my words...

  • Report this Comment On December 30, 2008, at 11:12 PM, steveherb wrote:

    I agree. The seniors are boasting about their own frugal lifestyles. Let's open up those closet skeletons. ENRON, pyramid scams, and sell Amway. You at one point enquired for something better and got stuck or burned. Your own advice, " Someone has to lose in order for someone to win." You sold your $80,000 dollar home for $400,000. Where did that money go? It's in your new home where you don't have a mortgage. Please! I am one those people who never had credit card debt, paid cash for my cars. As with many of my already foreclosed friends, along with myself on my way out the door. We don't care. First time buyers listened, enquired, and trusted about owning a home. In return, experienced agents used a form of panic selling, "Home costs are rising buy now. Buy now." My lender stated he has twenty years experience. "This is just a rollercoaster. You'll be fine." The owner of the home showed no guilt after reading how the new buyer was going to qaulify for the home. No one stepped up or questioned anything about why the prices were rising. Everyone was pleased with the values. So, please! Don't place any ignorance on the buyer. Seniors boast about their thrifty moral values but won't disclose some of their negative means for profit.

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