Why your Credit SCORE is not FREE.

While your Annual Credit Report is free (under the law) your credit score is something you have to pay to see.

As I noted in my earlier posting on Your Really Free Annual Credit Report, you have a legal right to see your credit report every year, from the three main credit reporting agencies.  And the correct website is NOT the one on TeeVee with the catchy jingle.  It is www.annualcreditreport.com.

While you are entitled to a free copy of your credit report, you do not get a copy of your credit score as part of this report.  Why is this?

The credit score is a bit of a flim-flam.  It was created by the credit reporting agencies in response to public outcry that some privately held agency could assemble a dossier about you and not let you see what was on that dossier without paying to see it.  Laws were enacted requiring them to show you your credit report, once a year.  So they created the credit score.

From their perspective, the information they gathered was Intellectual Property and in the Intellectual Property game, you don't make money by giving away your product for free. 

So companies that lend money pay large fees to the credit reporting agencies to be able to "run" someone's credit.  Usually they pay a flat fee for a large number of reports, or pay a per-report fee, which might include a monthly maintenance fee.

When I was a Landlord, for example, I paid TransUnion about $25 for each credit report I ran.  Anybody can do it - all you need is the signed consent of the person you are running credit on, and their Social Security number.

Under the law today, you are entitled to look at your own report once a year, for free.  In some instances, for example, if you have been denied credit because of an unfavorable report, you may be allowed to view the report more often than that.

While your credit report is information you are entitled to, your credit score on the other hand, is another piece of Intellectual Property that the credit agencies create, using a formula that is a bit obtuse.  The credit agencies argue that your credit score is their property, and thus you are not "entitled" to that piece of information under the law.

For a small additional fee, some agencies will report your score to you.  For example, Equifax will tell you your score for $7.95.  Other agencies might want you to "sign up" for a "free" credit protector service first - but the service is a negative option cancellation deal, where you have to hand them a credit card number and they ding your card until they tell you to stop (and then they say you never said to stop!).  At least Equifax is a little more upfront about it.

Do you need this information?  As I have noted before, you can kind of figure out what your score is, from the data provided.  If you have a lot of late payments, missed payments, uncollected debts, etc., your credit score is going to suck, period.  On the other hand, if you have a good payment history, a low debt-to-credit ratio, your score will be high.

The score ranges from 280 to 850 from Equifax.  Why this range, and not 0-100 or 0 to 1000 I do not know (perhaps so they can argue it is Intellectual Property and non-obvious?).   Apparently if you have a pulse, you automatically get a 280.  To qualify for a lot of these "come on" financing deals at car dealers and the like, you have to have a 770 credit rating or higher, and most people don't have credit nearly that good.  If you think a credit score of 670 is good, think again - you will get the worst sort of financing.  Bear in mind that 280 is the minimum -  670 is hardly above the middle of the pack

I actually paid to see this score from Equifax ($7.95) and it was interesting.  They assigned me a 819, which was not the highest it has ever been.  When we sold our Washington Road home and paid off the mortgage, it was 830.  We are debt-free now and have no late or other negatives on our report - why is it lower?

The reasons they gave illustrate why the "credit scoring" system is such a stupid game.  The "key factors affecting your score" were given as:

1. Credit Line on Revolving Accounts
2.  Insufficient Information or Account History on Mortgage Accounts
3.  Percentage of Department Store Accounts to All Accounts
4.  Insufficient Information or Account History for Credit Union Accounts.

Let's look at these factors and try to understand what they mean and how they affect the score and why - and how you can prevent your score from being dinged as a result.

With regard to the first item, having a lot of open credit lines can hurt, even if they are not being used, as it means you can run up a lot of debt in a hurry and thus make you a larger risk.  At the present time, I have only one credit card with a credit line of $10,000.  This may sound like a lot to some, but until recently, I had over $50,000 of credit line on credit cards.  I have since closed most of those accounts.  So I am not sure why they are dinging me here - too much credit line, or too little?  Or was the old credit line bringing me down and their computers have not updated yet?  I do not know for sure.

Again, no late payments, missed payments, uncollected debt, so I am not sure why this affects my score.

The second item is odd, too, and probably due to the fact that I refinanced this most recent mortgage before paying it off.  And I paid off a second note about a year after taking it on.  We also paid off a mortgage on our house in New York only a year after taking it out.  So for four mortgages which were paid off in less than three years, there is not a full 29 months of history that they'd like to see.

Sheesh! - you'd think that actually PAYING BACK a debt would increase your score, eh?  But as I have noted time and again, creditors would prefer you pay back their loans - payment at a time, so they can collect their hefty interest fees.  Paying off early makes it less fun for them!

The third item is interesting, as I do not have any open Department Store Accounts at the present time.  I took advantage of some of these silly promotions offered by Sears, Lowes, Radio Shack, and the like, where if you opened a charge account, they would give you 10% off or something.  I immediately closed the accounts, but they still are on the report.  These promotions were probably a bad idea, in retrospect.

What is interesting about this, as it illustrates how having too much credit is a bad thing, and how department store charge accounts are NOT viewed as a favorable thing to have.  Many financial advisers tell young people to open a department store charge account to "build up their credit score" - but clearly too much of a good thing can hurt you.  Why is this?  My guess would be that the default rate on these easily-given lines of credit are very high.

If the only account you can get is from a department store, and you have a plan to "build your credit" I suppose that could work.  But opening a lot of department store cards could backfire on you, big time, particularly if you run up the cards and can't afford to pay them off.

The last item is interesting in that it is something that I could not have any control over.  I closed my credit union accounts five years ago, and whatever data they reported is old, incomplete, or whatever.  There are no late or missed payments, no unpaid debt - everything was "paid as agreed" and yet, because the credit union never reported some payments as "on time" (but instead made no report at all) my credit score is dinged.  Hardly a fair situation, don't you think?

This illustrates how arbitrary the credit score can be, and how the score, by itself, is not a real picture of someone's credit history - although it could be a good filtering criterion.

All told, these "factors" mean little, as my credit score is excellent and I can borrow money anywhere on my terms, if I want to.

And there's the rub, eh?  Since I have no debts anymore, and money in the bank, why on earth would I want to borrow money at this stage in my life?

The old saying is true:  In order to borrow money, you have to first prove you don't need it!

But regardless of whether you are a poor 280 or a screaming 850, bear one thing in mind:  You are NOT your credit score.  Don't let these reporting agencies get you to believe that this score is somehow an indicia of your underlying worth as a human being.

Once you start praying to the false God of the credit score, your life will go downhill in a hurry.  Because worshiping the credit score is to worship our debt culture and our consumerist culture.  Don't let the credit industry call the tune - and force you to dance.

Take on as little debt as possible.  Save debt for big things - a house or an education (a real one, not one from a for-profit university).  Going into debt for shiny trinkets is a really bad idea, and if you do that, you have sold your soul to the credit reporting agencies - all for a handful of shiny junk.

Equity or Income?

Should you buy stocks that increase in value (equity) or ones that pay dividends (income)?

I take a piss on the Motley Fool a lot here, and for good reason.  Their entertainment model of investments was so symbolic of the excess era of the 1990s.  Going on television in a Jester's Suit and then telling everyone to buy, buy, buy stocks was something that they probably look back at and shiver.

But the graph above is from one of their postings which actually makes some sense.  Yes, even a stopped clock is right, twice a day.  Sorry, couldn't help myself, I had to get another dig in.

But many amateur investors (which means most of us working stiffs forced to invest in 401(k) plans for our retirement) don't have even a clue what the difference between equity stocks and income stocks, or know what "retained earnings" means.  Regardless of whether you are a stock picker or investing in a mutual fund, you have to understand what it is you are investing in.

The initial idea behind stocks was that you would buy "shares" in a venture, which would then use your capital to buy equipment or build a factory, or whatever, and then sell products or otherwise seek to make a profit.  The company would then use part of that profit to buy new equipment, expand, or whatever, and the rest might be paid out as dividends - income - to the shareholders.

Seems like a simple enough scheme, right?  But like anything that looks deceptively simple, it can be devastatingly complicated (like ratio between crank swing and connecting rod length in an internal combustion engine - there is calculus involved there, although it appears to be a "simple" mechanical system).

For example, the company could use its profits to buy back shares.  This is an interesting concept, as it is a bit like a snake trying to swallow its own tail. The value of the company increases dramatically to the remaining shareholders, and thus their share price goes up (which is not a realization event, and thus not taxable until you sell your shares).

And if you did sell those shares (which have increased in value) you would pay taxes at the capital gains rate (15%) as opposed to the ordinary income rate (38% for some folks).

So you see, there are a lot of keen games a company can play to delay taxes for shareholders, or avoid them entirely.

Another variation is the "retained earnings" strategy.  The company can simply keep its profits and invest them in other stocks, mutual funds, or just put them in the bank.  The value of the company thus increases, as the liquidation value of the company is higher.  Thus, even though you have not been paid a dividend, your stock is worth more, and again, you can "cash out" at a later date, delay paying income taxes until that time, and pay the lower capital gains rate.

Of course, as you may have guessed, the IRS has some "retained earning" rules that prevent companies from keeping too much money around, without paying more taxes on it.

And occasionally, some clever investor figures out that a company that has a lot of cash on hand might be bought out for cheap - and so they try to do a "takeover" of the company to get at that cash and also spin off divisions and portions to cash out on what are in effect retained earnings of the company.  While many decry these tactics, oftentimes they are a means of clearing up a logjam in a corporation which has become too complacent and corpulent.

And this is why you see, sometimes, when a company is being stalked by a takeover outfit, that they will do things like buy back their own stock (to make it harder to take over by increasing the price per share as well as decreasing the number of available shares).  Or they may pay out more in dividends, which gets rid of that extra cash on hand and raises the share price.  Or they may go out and buy another company - which reduces the amount of cash on hand, raises the share price, and makes it harder for the takeover artist to buy out the company.  There are a number of these games, including the so-called "poison pill" provisions that can kick in, once a single investor owns a certain percentage of the company.

But aside to takeovers and various tax dodges, the difference between equity and income stocks is somewhat more profound.  Traditional businesses tend to be more income-type stocks.  For example, as I recently wrote about Altria, (which owns the Phillip Morris cigarette brands) that stock regularly pays dividends of 6% or more, which is a pretty decent rate of return in an age when banks are offering fractional interest rates.    Utility stocks are another good example.  Since they are regulated to generate a fairly standard profit, they are not an exciting stock, and they churn out dividend checks fairly regularly but increase in value very slowly.

Old manufacturing industries tend to be income stocks.  Stanley Black and Decker, one of my favorites, sends out checks like clockwork.   Until recently, auto companies (GM, Ford, and formerly Chrysler) were fairly staid dividend payers.

But in other industries, paying dividends is an anathema.  High-tech stocks, for example, rarely pay dividends.  And others that did, such as Apple, have stopped (UPDATE: they have started again). The theory is, these types of companies have to plow so much money into research and development to stay current, that they cannot afford to pay dividends.  If they have extra money laying around (like Google) they go out and buy up other companies.  Pay a dividend to the shareholder?  Never, ever, ever, EVER!

So why do people buy stocks that don't pay dividends?  I mean, if there is no profit to be had, why would the stock be worth anything?  That is a good question, and I am not sure I have the answer, either.

Because I am not very bright, I tend not to follow convoluted arguments well.  Basically, if someone can't explain a simple concept to me in 10 words or less, I just assume they are lying through their teeth and trying to deceive me to steal my money - and I move on.  And funny thing, too, in 9 out of 10 times, I'm usually right.

The arguments about equity stocks that pay no dividends are a bit convoluted.  Why buy Apple stock, for example, if they are not paying dividends - and it does not appear they ever will?  The stock has a number if inherent values, of course.  If the company was liquidated, and all the equipment sold off, the proceeds would go to the shareholders.  But for a high-tech company like Apple, there really isn't a lot of stuff to sell off - leases on office buildings, some computer equipment, and the like.  Many "high tech" companies don't even own the factories they make things in.   And as we saw from the GM example, factories are rarely worth much, anyway.

Of course, there are other inherent values in the company, such as the rights to the products, intellectual property, and the like.  But the problem with high tech products, as we all know, is that they are obsolete within a year or two.  So having the right to sell the iPhone might be lucrative - for a year or two.

And of course, owning stock represents control of a company.  If someone wants to take over Apple, they might want to buy your stock, so there is value there, as well.

But to someone as stupid as I am, the idea of a stock that pays no dividends and keeps increasing in value in equity seems somewhat odd.  I sat through an entire class in Corporations where our professor explained this all to us, and from him, it made sense.  Once I left the class, the explanation seemed to vaporize, however.

So it still puzzles me a bit and it still makes me a bit nervous that these equity-only stocks are little more than a flim-flam for us average investors.  But on the other hand, income stocks, like the old General Motors, can go belly-up in short order and leave you with nothing.

So, should you invest in stocks that pay no dividends but increase in value in terms of equity?  Or should you buy stocks that pay regular dividends?  The answer is, probably a little of both, and the mix should change as you get older.

Of course, if you are invested in a mutual fund, chances are, you have no idea what stocks you own.  You went with Fidelity, or American Funds, or Vanguard, or whatever based on the brand name of the company (and they try to use solid sounding names.  No one invests in "Joe's Mutual Fund" do they?).

Each fund prospectus should tell you what it is the fund is trying to accomplish and what the goals are.  And sometimes the name of the fund itself is a summary of its investment type - Fidelity Equity Income, for example.

As you get older, too, you might want to think about more staid, income-producing stocks as well.  Owning a stock that pays you a regular dividend can be a nice, regular source of income for your retirement, as opposed to the uneven returns on equity, which are more volatile and dependent on market pricing.

And it is an odd thing, too, as most folks buy stocks based on the equity aspect - and most financial news programs talk about stocks in that manner as well.  Share price is king!  Dividends mean nothing!  So we watch the "Dow Jones Industrial Average" - which is an indicia of price, while ignoring dividends.  News programs talk about stock price mostly.  If then mention dividends, it is only as it is related to the stock price.

Like bonds, dividends are not sexy, like stock prices are.  You can make millions overnight (or lose them) based on share price and strategic buying (gambling, basically).  But dividends?  They will never result in a huge payout for an investor, so you never hear about them.

But as I noted in my posting about Altria, getting a 6% return on your investment, annually, is not such a bad deal in this day and age.  And if the stock goes up in value - well, that is a bonus, too.

One more thing to consider about equity and income.  In a way, they are like the two aspects of Real Estate, and with the recent bubble, illustrate how people who focus on equity can lose their shirts.

When I got into Real Estate, it was for the income.  I bought  properties that would show a positive cash flow - income - through rents.   If a property cost me money to carry, I would not buy it.  In short order, I owned well over a million dollars worth of Real Estate in the Alexandria, Virginia area.  But other than my private home, it all generated rents that more than covered the costs of ownership.  Any increase in equity was pure "gravy" for me.  And there was a lot of gravy back then.

But many of my peers were buying million dollar HOMES instead, which generated no income, and even if rented out, had a negative cash-flow.  They felt that the increase in equity would more than compensate them for the cost of carrying these properties.  And we all know how that worked out.

They assumed that a bigger fool than them would buy the home for a lot more than they paid for it - and they would then "cash out" and be rich.  The same was true, by the way, for the "dot com" stocks - everyone assumed there was a bigger fool (not necessarily Motley) that would buy these pigs-in-a-poke and everyone would profit.  But we ran out of fools - a fool shortage, if you will - and the dot com and the Real Estate market collapsed.

Those of us who had positive-cash-flow income-producing property, of course, kept chugging along, generating small, regular profits, but not, necessarily, "the big kill".

And therein lies the problem with these equity stocks.  Apple stock price is through the roof.  But they are only as good as their next product, and if a product fails in the marketplace, spectacularly, the share price could plummet.  Buying these stocks is great and all, but only so long as there are bigger fools out there to buy the stock for more money than you paid for it.

The Motley fool link mentioned above illustrates that income-producing stocks tend to increase in value over time as well, particularly if you reinvest the dividends in the company over time.  Reinvesting dividends, is, of course, just another roundabout way of retaining earnings, if you think about it (and boosting stock prices, which is why most dividend-paying companies HAVE a shareholder reinvestment plan).  The drawback being, of course, that you have to pay taxes on those dividends at the ordinary income rate.

Still, it is a nice fantasy, to be able to retire and just go down to the bank and cash those dividend checks every quarter.  Of course, if you had a stock that paid an annual dividend equal to 5% of its share price (such as Altria) you'd have to own a million dollars worth of shares in order to make $50,000 a year in dividends.  Aye, there's the rub!  You make more money from the equity, which is why people invest in these equity stocks.

Are you a Millionaire or a millionaire?

Are you a Millionaire or a millionaire?  To some folks, there is a distinction.

As I noted in an earlier post, becoming a millionaire in America isn't hard to do, for the average middle-class person.  Buy a modest house, pay off the mortgage, fund your 401(k), and by the time you retire, your net worth could be over a million dollars.  In fact, it may have to be - if you want to retire.

But some folks dispute the definition of what exactly is a millionaire.

To some folks, the equity you have in your primary residence is not counted toward your overall wealth - only investments are counted toward the total - not personal assets, cars, or personal residences.

Others take a more inclusive view - that assets are assets, and to calculate your "net worth" you total all those up, subtract your debts, and then take the balance.  If is over a million dollars, you are a millionaire.

To distinguish between the two, I would call the first definition "Millionaire" with a capital M, and the second as "millionaire" with a lower-case m.  By the former definition, there are as many as three million Millionaires in this country, or about 1% of the population.  By the latter, we have 16 million millionaires in this country, or about 5% of the population.

Frankly, this distinction between Millionaire and millionaire to me is a bit disingenuous.  For example, if you own your home free and clear and it is worth $500,000, plus you have $500,000 in investments, by my reckoning, you are a millionaire.  But the Millionaires, with a capital "M" won't let you into their club, as you don't have $1,000,000 in investments alone.  But, ironically, if you sold your home and moved into an apartment, you'd be a member of the club, as you would then have $1,000,000 in investments.

Or, for example, if you mortgaged your home to the hilt, and then invested the proceeds, that would put you in the Millionaires club, but you would be heavily in debt, and your net worth would be unaffected.

It is, to say the least, an artificial distinction.  But the numbers tell a story, I think.  If you compare the number of Millionaires to the number of millionaires, it shows us that there are a lot of people out there, even today, with sizable equity in their homes.  The jump between 1% and 5% is significant, and as a result it means that a lot of people either own their homes "free and clear" or have significant equity in their houses.

Of course, you can't eat a house.  So if you want to retire on your investment income, you will need to have more than just equity in your home, or to own your home free-and-clear.  You will need significant investments from which you can live on the income produced by them.  This either means you have to have a lot of high-yield investments, or have a lot invested.

And perhaps if you are a lower-case millionaire, that might not be enough to really retire on, comfortably.

Retire at 40? Yes, it Can Be Done - By Almost Anybody. Few Do.

The mythology about " retiring at age 40"  runs deep in our culture.  We all like to think that someone who does this has a high-paying job or a large inheritance.  But the reality is, most middle-class and upper-middle-class people can do this, but they just choose not to.  I could have, but chose not to.

As this MSN site noted, it is possible for the average person to retire very early in life, if they are willing to make a lot of sacrifices and sock away money early on in life.  But to do so require socking away about 20% of your pre-tax income.

If you are willing to drive a battered used Toyota Corolla to work every day (or take the bus, or carpool) as opposed to driving a brand new Lexus, you can do this.  If you are willing to live in a modest house, as opposed to a mini-mansion, you can do this.  If you are willing to eliminate subscription services, such as cable TV, cell phones, and the like, you can do this.  If you are willing to make nearly all your meals at home (and bring lunch to work) you can do this.

From a global perspective, these are hardly great sacrifices.   In fact, such a lifestyle would be considered "rich" by 95% of the population of the planet.   You are well-fed, have a home, and a car - in many countries this is considered to be staggeringly wealthy. 

It is only in America that you would be laughed at as being "poor" for driving an old car and brown-bagging your lunch.  In most foreign countries, that is simply how you have to live - either because your income is much lower, or because there is no "easy credit" to allow you to buy toys - you have to start saving early to buy just about anything.

And this is one reason why recent immigrants often become wildly successful in America after only a few short years.  Trained in a culture that values money more highly than here, they save their money, and then invest it - in businesses and homes.  And they spend wisely.  That Korean family down the street may be driving a Mercedes, but chances are, they bought it secondhand, and paid cash for it.  Only natural-born Americans would think to pay new car prices and then finance or lease.

Natural-born Americans resent the success of these recent immigrants, as it highlights how poor their own spending and work habits are.  So many resort to racism or to nefarious conspiracy theories that the government is handing out money to immigrants.  In many countries, the rumor going around is that immigrants get access to a "special store" where they are given vouchers for free furniture, and then given houses, cars, and businesses to run.  And on top of this, they don't have to pay taxes for seven years.   The reality is, of course, that it is just hard work and thrifty living that explains the success of most immigrants in this country or in elsewhere.  (To be sure, some come here with lots of money, but that is a small minority).

To be sure, there are some shortcuts to early retirement.  For example, a friend of my parents, after the war, took a job with Aramco in Saudi Arabia as a Petroleum Engineer.  To attract Engineers to work there, under fairly harsh conditions (cultural isolation, no drinking) they paid handsomely - over twice the salary he could receive in the States.  And with no place to spend money (and while living in company housing) he was able to bank most of this money and retire at a very early age.

The other side of the coin, of course, was that once retired, he lived frugally.  He drove Volkswagen Beetles, for example, instead of large, poorly made and gas-hungry American cars.  Adopting a frugal lifestyle is the other half of being able to retire early.

Why would you want to retire early?  It sounds like a stupid question.  Yet since most folks never even think of this option, clearly most prefer not to. 

For me, personally, having to be dependent on other people is something I detest and try to do as little as possible.  Human beings are notoriously unreliable, and when they are not merely grossly incompetent, they are petty, vindictive, vicious, and and even violent.

That, and I just don't like getting up in the morning and going to "work".  It sucks, really.  Who in their right mind would sign up for three more years of "work" just so they could have leased cars?  And in effect, when you pad out your lifestyle by spending more, you are adding onto the number of years you have to work.  It is like voluntarily extending a prison sentence.

As I have noted before in this blog, if slavery were legalized in the USA and anyone could sell themselves into slavery for a pre-negotiated price, in 10 years or so, half the country would be enslaved, willingly selling themselves into bondage for a wall-screen TeeVee and a fancy car.  And if you look at how many people live in this country, it really has devolved into a de facto system of debt slavery.  People are so broke or in debt that they are forced to work at odious jobs they hate, just to pay interest on their debts.  And the debts were incurred for status items - shiny beads and trinkets, really.

The idea of working at a "job" for 30 years on the premise that they will promote you and you will make a lot of money is, to me, flawed.  Particularly in today's economy, more and more companies are becoming more and more crass - why bother giving you anything when they can hire some young kid to replace you for half the money?

And nowhere is this more true than in the law business.  The theory behind the law firm job track is that you will work there for many years, putting in long hours (60-80 hours a week) and finally, you will be rewarded with Partnership.  Is this agreement in writing?   Of course not, it is all a verbal promise - and a verbal promise that will be fulfilled based on your popularity and friendship with the Senior partners, the machinations of your fellow Associates, and the finances of the firm (and the greed of the Senior partners).

What I never understood about that deal is that we, as Lawyers, were expected to accept this vague verbal promise (which often was never even verbally made, but merely implied) while at the same time, we would deride our clients for even dreaming of accepting such an unenforceable contract.  Lawyers can be real idiots when it comes to their own finances and situation, it seems.

But in other fields, similar things are happening.  If you are in teaching, the "old school" days of working hard, hitting all the targets and then being granted "tenure" are long gone.  Schools are finding it easier and cheaper to hire adjunct professors, pay them little and have them teach only one or two courses a semester, and then let them go if they demand tenure or more money.  There are an endless supply of replacement professors these days.

And so on down the line.  As I noted in an earlier posting, it is very common these days to be let go at age 55 and never work again in your chosen field.

So the question is, not whether you want to retire early, but are you prepared to retire early if it is thrust upon you?  Few people are, and for the most part, it is because they squandered most of their money during their working years on consumerism.

I have younger friends who lease a new car every 2-3 years and pay hundreds of dollars a month in lease payments plus the highest car insurance payments possible.  They are tossing $500 to $1000 a month out the door for a ride to work, basically.  And if you ask them,, they have all sorts of rationale as to why it "makes sense":

1.  I don't have to worry about the car breaking down.

2.  I am buying only the part of the car I am using.

3.  I deserve this.

4.  Everyone does this - so it can't be a bad deal.

5.  It's advertised on television all the time, so it must be a good deal.

And that right there is the crux of the problem.  People use self-justification and poor normative cues to justify spending most of their income and saving little.  They spend hours a day being trained by the television that eating out at Chi-Chis is an inexpensive fun time, and good food, and hey, charge it all on your VISA card to get free airline miles?  Card over the limit?  Refinance your home, so those "Texas Nachos" are amortized over 30 years!

It sounds insane because it is.  But that is how a lot of Americans live these days - and I'm ashamed to say, I got sucked into it for a few years as well, at great cost to my personal finances and health.

So, retire at 40?  Yes it can be done, and moreover, it is probably a goal you should think about - or at least retiring at 50.  Why?  Because you may be booted out the door by then, anyway, and you will need to be in a situation where you don't have to work.

Of course, once you are in a situation where you don't have to work, work is not nearly as onerous.  For example, I could afford to retire now, but I still practice, part time to pay the bills, so I don't have to dip into my savings for daily living.  Since I have structured my life to be fairly inexpensive, on a day-to-day basis, I don't need to "hump" anymore to earn the big paycheck to pay off all my loan debts.

And I can tell you, it is a nice place to be.

Who Wants to be a Millionare? (You Can Do It!)

You don't have to win a game show to be a millionaire in this country.  If you make an average income, live in an average home, and put aside some money for savings and don't borrow a ton of dough to buy crap, you can easily make it to the seven-figure club.  It is only a matter of wanting to.

Nearly any average person in the USA can be a millionaire - all they have to do is chose to be one.

What do I mean by this?  Take the average family living in an average home in America.  It is worth about $268,000.  If you go back 35 years, that is an annual appreciation of about 5.5% per year.  Now suppose our Average family lives there for 35 years.  They pay off their 30-year fixed-rate mortgage over time and the house appreciates in value.  Their home will be worth $1,745,705.10 by the time they retire.

BINGO!  We have our millionaires!

Of course, by then, maybe a million bucks won't be worth much.  And of course, maybe Real Estate won't be worth much either.  So let's assume their house only doubles in value to $536,000.  If they put aside $5000 (about 10% of their income, if they are average) into an account earning 5% rate of return, by retirement they have $501,761.69 in their account.  Add this to the value of their home and BINGO, we have our millionaires!

You can play with the numbers, using the compound interest calculator as well as other tools on the web and work up different scenarios, including your particular circumstances.  But for the most part, middle-income Americans can all easily be millionaires by retirement if they pay down their debts (and pay off their mortgage) and put aside some money into savings.

Sounds simple, right?  Well, why do so few choose to do it?

The siren song of commerce, amplified by the TeeVee, is one answer.  People today think it is "normal" to carry $5000 in credit card debt, to borrow money for every purchase, to fill their homes with crappy junk made in China or mounds of electrical gadgets.  And worst of all, they go out and buy (or lease) one brand new car after another in a futile attempt to find happiness by trying to outspend their neighbors or peer group.

They refinance their home a half-dozen times, taking out more and more unearned equity to pay off the credit card bills of today.  Many young couples in their 30's today have a mountain of credit card debt, two car loans (or leases), A primary and secondary (or line of credit) mortgage on their home, and little or nothing in savings.  Their net worth is very low, possibly even zero - or negative.  And this does not alarm them, because they can "afford the payments" - or so they think!

They forgo the opportunity to be a millionaire, so they can have shiny trinkets today.

And they will be dirt poor when it comes time to retire, I'm afraid.

Are we supposed to feel sorry for them?  I think not.  And yet, these are the same people who will argue that the system is "unfair" and "stacked against them" and that they are "living paycheck to paycheck" and never seem to get ahead.

YOU HAVE CHOICES.  Make them wisely.

If you are buying a Jet Ski and not fully funding your 401(k) plan, have your head examined.