Rich Dad Poor Dad – Robert Kiyosaki

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Monica writes in:

I don’t understand how you can recommend that people shop in thrift stores for clothes. The stuff there is usually worn out and just looks bad and outdated. I would never wear that stuff to work.

It sounds to me like you’ve made up your mind about thrift stores and secondhand stores before even stepping inside the door. I’ll make the case anyway.

First of all, I won’t buy the vast majority of clothing on sale at such a store. I’m with Monica on this one – most of the stuff there can be pretty worn out. I’ve seen lots of threadbare sweaters, worn out dress pants, and other items that, if they were in my home, would be meeting the rag bag.

Those aren’t the items I’m shopping for. The reason I go is to look through a long rack of clothes and find two or three items that are barely worn. How do quality items of clothing get to the secondhand store? A person gains or loses a lot of weight. A person passes away. A person decides they just don’t like how the item looks on them. A person is a clotheshorse who only wears an item a couple of times before getting rid of it. Each of these cases can result in some very nice clothes on the rack at the secondhand shop.

If you don’t like the item, don’t buy it. However, there are a lot of gems buried on the racks if you’ll spend some time digging through them.

Second, my biggest focus for clothing buys – once they meet a minimum standard of quality – really is cost per use. Yes, unquestionably, I could go to a store like Men’s Wearhouse, find a high quality article of clothing, and wear it, say, sixty times over the course of several years. That article of clothing might cost me $60, so the cost per use would be $1 per use.

On the other hand, I might find a nice item at the secondhand store. It might have been worn a few times already, so I might only get fifteen wears out of it instead of the sixty I might get from the new shirt. However, that secondhand item only cost me $3. That’s $0.20 per use.

I will take the second item of clothing any day of the week.

What about the time cost? Time cost is one of the first things people mention when they hear a money-saving tactic that they’re unsure about. Human beings are creatures of habit and if we can find a good reason to retain that habit (or even a not-so-good reason), we’ll use it. Time cost is often that reason.

However, in this situation, time cost matters little. I go clothes shopping twice a year, period.

In the spring, I’ll dig out all of my summer clothes (in fact, I’m intending to do this this weekend), determine what needs to go and what can stay, and then figure out if I need to add some clothes to the mix or if I have enough. I do the same thing in the fall with my winter clothes.

Once that’s done, I actually make a shopping list for clothes. I need some number of dress shirts, some number of jeans, some number of shorts, some number of khakis, some number of underwear – you get the idea. Then, I go shopping.

If I use secondhand store clothes in this process, I still just rotate them out at season’s end if they’re too worn, the same thing I’ll do with clothes that are purchased new. I’ll still go clothes shopping twice a year, regardless of whether I’ve bought new or used clothes in the past.

What this comes down to is simple: spending control. I keep a pretty tight rein on my clothes shopping habits. I simply don’t go clothes shopping more than twice a year. Because of that, I don’t devote much time in a given calendar year to picking out new clothes – and I don’t spend nearly as much money, either.

At its heart, an awful lot of frugality and financial success comes down to control over your spending. If you have firm control over how your money leaves your wallet, it’s often shocking how many ways there are to cut your spending without cutting your quality of life one iota.

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An Argument for Secondhand Store Clothes, Even If You Must Dress Nicely

My two children are extremely blessed in many ways. Perhaps their greatest blessing is that they’ve surrounded by a family that loves them dearly and truly cares about their future in a deep, fundamental way – and I’m not merely talking about myself. I’m talking about their grandparents, their aunts and uncles, even some of their cousins. They are surrounded by a cadre of people who love them, care for them, and truly want them to have a wonderful life.

Because so many people care so much for these two children, they’re often the recipient of gifts. Yes, their birthdays and Christmases are full of presents, but it even goes beyond that. Their grandparents often buy them spontaneous gifts. Their cousins sometimes literally give them their old toys and clothes. We even do it ourselves, though our influence is often in the form of books for their bookshelves.

This has a challenging side effect – the kids have accumulated an awful lot of stuff. Their toy boxes are overfilled. Their bookshelves are stuffed with books.

Several problems are made evident by this. First, it’s difficult to keep all of this stuff in order, simply because of the clutter problem. Second, it encourages our children to be overstimulated because as soon as they even have an inkling of being less interested in a particular item, they can just bounce onto another one. Third, they’re often much less enthusiastic about the wonderful gifts that their grandparents give them because they already have so many.

The solution is obvious: reduce the toy count. But how do you do this without upsetting the children?

My goals are very straightforward.

First, I want to reduce clutter. Dealing with clutter means more money sunk into stuff and more time spent cleaning it up. That means less money for the things that are important (like a less stressful career, deeply meaningful experiences, and so on) and less time for them as well.

Second, I want my children to enjoy life with less stuff around them. I do not want them to feel that lots of stuff is the norm.

On a smaller note, I want my children to increase their attention span. With a huge number of toys easily at their disposal, it’s very easy for them to just jump from toy to toy. By strongly reducing the availability of such items, the opportunity to jump around is less.

Here’s my solution for this problem.

First, I’m taking an inventory of which toys they like and play with frequently – and which ones they do not. I’ve actually been making a list of the toys that each child plays with over a multi-week period. If toys are on this list, they’re probably going to be kept. Toys that are not on this list are going to be targeted for removal.

Second, I’ll talk about the process with them. I’m going to ask them what their favorite toys are. I’m going to also tell them that I’m going to take some of the toys that they never play with and give them to other boys and girls that don’t have many toys to play with. Believe it or not, this works very well with our children, even the two year old.

Third, I’ll take advantage of a period when they’re visiting grandparents to reorganize and minimize their toys. When they return from their grandparents, I will have removed many of the toys from their sight, minimizing the clutter. What will remain are the toys I’ve identified as their favorite ones. The toybox will be only about half full (if that) instead of overflowing. The bookshelves will be filtered a bit (though I’m not as interested in reducing their book count).

Finally, I’ll keep the excised toys in storage for a short period, then either yard sale many of them or take them to Goodwill. The reason I’ll keep them in (hidden) storage for a short period is so that if I discover that I removed a toy accidentally that the children really value, I can retrieve it.

One thing I won’t do is discourage family members from giving them gifts. I understand that this is done as an expression of love for children that they don’t get to see as often as they’d like. Instead, I simply want to create a situation where these toys and gifts are deeply appreciated.

For a long time, we did some toy rotations so that the children would always have something new to play with. In my eyes, that doesn’t really achieve the goals I listed above. We still have a lot of stuff. It still doesn’t subtly teach patience and attention to the children.

Any thoughts on this plan?

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Children and Excess

One frequent question I’m often asked is whether or not paying half of a mortgage payment twice a month versus paying a full mortgage payment once a month is actually worthwhile.

Let’s say, for example, you’re in the situation that Paul, one of my readers who wrote in recently, finds himself in. He just took out a $219,000 mortgage. His monthly payment on that mortgage is $1,300.89. Paul wants to know whether paying half of the mortgage twice a month will save him a significant amount.

The first thing he needs to do is make sure that his mortgage allows early payments – and how they work. Make a call to your lender and ask them how often interest is compounded (this needs to be daily or compounded monthly based on the average balance of the month – if it only compounds monthly, paying in advance won’t help), plus how multiple payments during a month are applied to your loan (they must be applied as soon as received for this to work). Most loans work this way, but not all.

There are two options with making early payments.

First, Paul can literally make two payments a month – say, on the fifteenth of every month and on the last day of every month. This means, over the course of a year, Paul pays the exact same amount in principle that he would otherwise pay. The only difference is that on the fifteenth of each month, he pays in half of his payment and at the end of each month, he pays in the remainder of his payment.

In my calculations in Excel, I assumed monthly compounding using the average balance of the last month. Using this method, I calculate that this method will save Paul just over two months’ worth of balance on the mortgage. He’d save $2,931.33 in interest, which would mean he would be able to skip his final two payments and make only a partial final payment.

However, a superior method of doing this would be to simply make a payment equal to half of the amount of the monthly mortgage bill every two weeks. Over the course of a year, this adds up to one extra full payment: since there are fifty two weeks in a year, you’d make 26 half payments, and thus 13 full payments.

In my calculations, I again assumed monthly compounding using the average balance of the last month. I calculated that this method will save Paul $41,117.09 over the course of the loan. His final, partial payment would be issued just shy of five years early.

This method falls perfectly in line with many income schedules (the federal government, for example, issues paychecks every two weeks), which means that you can just allot a certain amount from each paycheck directly toward your mortgage and then not think about it again.

For me, at least, twice-a-month payments would not provide enough benefit to be worth the management hassle of them unless it happened to line up directly with my paychecks.

On the other hand, biweekly payments – once every two weeks – do provide a lot of financial incentive to give them a shot. Add on top of that the fact that it’s directly in line with many pay schedules and that would seem to be a winner to me.

In a nutshell, simply paying twice a month doesn’t save much at all, but paying once every two weeks saves a lot. Yes, one or two fewer days per payment can save you tens of thousands at the end of the payments.

Good luck.

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Publishing, EBook Starter – Create Your Own Ebooks

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Underground Witchcraft Secrets, Fun & Entertainment

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301 Graduation Quotes, Inspirational And Motivational Sayings, Fun & Entertainment

A while back, I wrote about the dangers of selling to friends and family. Recently, a reader wrote to me stating that they wanted to make a “pre-emptive strike” against these kinds of sales pitches, but didn’t know how to go about it.

Please feel free to copy and paste the following email, edit it as you please, and send it to your friends. Trust me, almost all of them will thank you.

Hey friend,

A while back, one of my other friends invited me to a [Tupperware/Princess House/Pampered Chef/etc.] party at their home. I accepted, because I felt like I was supposed to – after all, I didn’t want to let my friend down.

When I got to the party, all of the items at the party were way overpriced and, frankly, I didn’t want any of them. But my friend was trying so hard to sell the items that I bought one out of guilt. There went $30 down the tubes. The item’s now gathering dust until I find some excuse to re-gift it to someone else.

The more I thought about this, the more irritated I got. Why should I have to buy stuff I don’t want just to maintain a friendship? I don’t think friendships and sales pitches mix.

So let’s make a deal right now. I’ll never host this kind of party and “bank” on our friendship by inviting you to it, so you’ll never have to feel obligated to buy some junk just because we’re friends. You’ll do the same for me. Deal?

Your friend,

In other words, be straightforward about it. Make it clear that you don’t want to participate in such parties – and also make it clear that you won’t ever utilize your friendship in such a way.

Yes, yes, I’m sure I’m going to hear from lots of people who are happy with the items that they bought at such a party. I’m not writing to you. If you’re interested in the goods these businesses have to offer, then seek out a party in your area and attend one!

I’m also not decrying the products sold. Some of the items at these parties are perfectly fine, though I make no claims about them being any sort of bargain.

I’m also going to hear from people whose friends were glad to have such an opportunity. Perhaps some of your friends did feel this way. However, I’m willing to bet some of them did not – they went to your party and made a purchase merely to be polite and that item found its way to a yard sale somewhere. I know many, many people who fall into this latter category.

If you enjoy hosting such parties, that’s great! Sell to strangers instead of selling to your friends. If your friends are interested when they find out you’re hosting such events, they’ll ask to attend, but make it clear to them that you don’t mix your business and your friendships so that they don’t feel obligated to come. If not, don’t cash in on the friendship.

My concern is simple: selling to your friends usually diminishes your friendship. They feel obligated to come, and when people start feeling as though a relationship is based on obligations that they don’t want to fulfill instead of things they’re happy and excited about, they begin to grow apart and drift away. That’s never worth the small commission you might get from selling to them.

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A Pre-emptive Strike Against Selling to Friends

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Martin writes in:

I’m glad to see you’re writing reviews of books like Payback Time instead of just blindly preaching about index funds. You’ll never make real money with them.

I’m including Martin’s note because he’s actually right: you’ll never be able to beat the market with an index fund.

But that’s not the point of an index fund.

Investment strategies like the one described in Payback Time or Real Money or any other book that describes an investment strategy that focuses on individual stocks have one thing in common. They all require a lot of homework.

Cramer, for example, in his excellent book Real Money (which is far, far superior to his television show) recommends holding at least ten different individual stocks at the absolute minimum to spread out risk – and basically suggests people should hold twenty or more. However, he suggests spending at least one hour per week per stock you own for homework, plus additional time to study stocks not yet in your portfolio. With a twenty stock portfolio, you’re easily approaching thirty hours per week every single week just to study your portfolio.

Some people who are passionate about investing may actually enjoy spending 1,560 hours a year studying their stock picks. Those people, however, are in the minority.

I’m not going to argue that there isn’t some financial gain for that time invested. I absolutely believe that individuals (who are investing relatively small amounts) absolutely can beat the market to a certain degree with significant homework.

The question is whether or not that time is really worth it.

For a person who is passionate about investing, those thousands of hours are enjoyable fun for their spare time. Studying stocks is their hobby – and it’s potentially a lucrative way to mill away the hours instead of consuming other forms of entertainment.

If you haven’t got that passion, though, all of those hours spent doing an appropriate amount of homework are going to seem an awful lot like work on top of the normal workload a person has. It essentially turns your free time into more work time just to squeeze a few more percentage points out of your investment dollars – and that’s if you can execute a good strategy well.

Alternately, people in that position can toss their investment money into index funds, sit back, and simply match the market. You’ll never beat the market, and you’ll likely never beat a focused person who does adequate research into stock picking.

But you also won’t be spending big chunks of your week doing something you don’t really enjoy just to earn a little bit more than you’re already earning.

To me, the answer comes down to this. If you have the passion, make individual stock investing your hobby. Study it. Invest using your research. You’ll be spending your time doing something you enjoy and probably earning some extra cash from it.

If you don’t have that passion, though, stick with index funds. They’ll earn well for you by simply matching the market and let you spend your spare time on something else that you value more.

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Investing and the Time You Have

As I discussed yesterday in a pair of articles (this one and this one), I dream of a future where my children and I are completely financially independent from one another. I’m not dependent on them, nor are they dependent on me.

The real question that both articles strive to answer, though, is where should I put my money to ensure the best possible outcome for both me and my children? Retirement savings? College savings? Splitting it up?

In my eyes, the issue really comes down to the job every parent is charged with: raising a functional, critically thinking, independent child. If you are truly able to succeed in this regard throughout their childhood, you’re going to raise a child that doesn’t really need your help at all to succeed in the world.

In other words, if you take the time to really focus on parenting your kids in a way that makes them functionally independent and critically thinking adults, you don’t need to save for their education. They’ll be able to make their own way in the world without your financial support. Thus, you can channel almost all of your long-term savings into retirement savings so that you’re not a burden to them in whatever they wind up doing in life.

How do you do that?

Over the last five years, I’ve read a pile of books on the psychological needs of children and young adults, everything from Mindset and Born to Buy to The Read-Aloud Handbook and Raising Financially Fit Kids. I’ve come up with three basic conclusions.

First of all, praise children on their hard work, not their natural gifts. Focus on when they improve their results, not on when they simply succeed because of their talents.

Second, give them room to explore independently. Don’t hover. Don’t be paranoid about kidnapping. Send them out in the yard to explore things on their own, then when they’re done, ask them about it. The more independent exploration they do, the more resourceful they’ll become.

Finally, put them into challenging situations. Don’t protect them from failure. One of the most valuable childhood lessons is learning how to fail. What do you do next? You pick yourself back up and try again. If you go through childhood without knowing how to do this, adulthood becomes much, much harder.

If you are constantly conscious of these three things, you’re going to naturally mold your children to be self-reliant and independent. Those traits will serve them very well in whatever they choose to do in life, and because of that, you don’t need to hand them their education.

They’ll be able to make it themselves.

A final reason to save for retirement: if you do choose to help, retirement savings are usually flexible enough to allow you to help. You can often take out loans to help with education purposes from a 401(k), and you can take back your Roth contributions whenever you’d like to spend as you wish. If you decide that financial help is really needed, you can provide it with retirement savings.

So fund the 401(k) and the Roth IRA and don’t worry as much about the 529. Instead, focus your parental energies on being a parent that raises an independent and curious child.

Good luck.

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Parental Responsibility and Retirement Savings

One of the most common debates I hear about from people such as myself – twenty- and thirtysomethings with young children at home – is whether it makes more sense to save adequately for retirement or save adequately for their child’s college education. Quite often, young career folks (like myself) don’t have the means to do both, so it becomes a choice. Retirement or college? Today, I’ll look at both sides of this coin that’s central in my own life.

When I envision my life thirty years from now, one key part of that vision is that my children are financially independent and not relying on me for any of their financial needs. I don’t want to be in a situation where they’re still living at home or they’re relying on regular cash infusions from me when they’re thirty.

One major avenue to this level of success is earning a college degree, which can directly lead to a much higher level of earning than life without a degree. I can help pay for this degree, but it may come at the expense of saving adequately for retirement.

What are the advantages of college savings when you’re young? An adequately funded college savings plan, started when a child is young, can grow into a major resource for paying for significant portions of a child’s college education.

For example, let’s say you start funding a 529 plan with $250 a month when your child is born. The account returns 8% per year. On their eighteenth birthday, you’ll have $116,844 sitting there waiting for their college education. If you don’t worry about it until they’re in junior high, starting at age twelve, they’ll have only $22,888 in savings.

What about your retirement? Many people who make this choice are also making the choice to work later in their lives than the typical “retirement” age. They have no qualms with starting their retirement savings in earnest after the kids are out of the house (say, age forty five or fifty) and planning on a retirement that starts much later (say, seventy or seventy-five).

For some people – especially people who find a great deal of personal value in their work – this makes a great deal of sense. Take myself, for example – I pretty much never want to be idle until I literally am unable to do anything at all. I’m just not wired that way.

What if I change my mind? If you’re using a 529 savings plan to save for college, you can withdraw the money from the account as you wish. You will have to pay taxes on the gains plus a 10% additional penalty for misusing the account.

However, if you wish to use that money for educational purposes for someone else – say, yourself or a child’s sibling – you can change the beneficiary without a penalty as long as the new beneficiary is a close family member.

I don’t want to burden my children in my dotage. If you find yourself needing their assistance in your old age, you will have given them a tremendously strong platform from which to help you if they so choose. The financial advantage you gave to them by ensuring that they were not burdened by student loans puts them in a much stronger financial position in adulthood, one in which they can afford to help you if you need it.

What if I reach my retirement age and don’t have adequate savings because of this choice? You’re finally pushed out the door, but you don’t have enough money to make ends meet. What happens then?

To put it bluntly, you’ll have to find a source of additional income. It’s important to recognize, however, that reaching this point without adequate money isn’t necessarily a disaster. Most people in this situation – having chosen to help their children instead of saving for themselves – do have a myriad of options available to them when they reach old age.

This might come from finding another job. It might come from financial support from your children. It might come from goverment support. It might come from something as simple as being the daycare provider for your grandchildren. If you choose this route, there will be options available to you at this point. It does not have to be devoid of options if you’re willing to step up and take action.

Wait a second! You’re probably wondering what my actual conclusion on this topic is. Is it better for the parents of young children to save for retirement first – or save for education first? As you’ve seen, there is a case to be made for both sides of the coin, but I actually do have an answer… which you’ll read about tomorrow afternoon.

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Instant Income Plan

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Lessons For Teachers And Artists

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