Sunday, October 19, 2008

Making good financial choices. Doing things right

When you are young and starting out in your financial life you can probably afford to make some mistakes when managing your money (not advisable) but as you start to earn more and get older the decisions you make are critical to your long term financial well being. Whether you are just starting out or are recovering from a recent financial crisis reviewing the decisions you made on how you spend money will highlight mistakes and equally important assist in allowing you to make adjustments to meet your short and long term financial goals.

If you've been following my story you know I'm presently up a financial creek without a paddle. As I look back on how I got into my financial predicament of being broke with no assets and no present income I am forced to look back to a time when I did things right. After all you dont accumulate a multi millionaire net worth by accident.

When I first left my city government job to join the self employed at 26 I had developed and used the right personal finance traits to allow me to make this move. After all I had bought my first home at the age of 20 while a full time student, gotten married and started investing any excess money we had (we both worked full time and went to school full time until we were 22) in the stock market. And these traits continued for a while as we started making money but after a while things changed as we move up the money food chain.

When we first entered the six figure income catagory back in the early 1990's I can remember being excited at the thaught of having more money to invest in the market. And because my business is commercial real estate I started thinking about all of the real estate investment opportunities the market was throwing off at the time. And I started deploying these excess resources towards investments.

I started by adding to my brokerage account at Kidder Peabody (anyone remember them) and by buying my first building. The stock portfolio continued to do well as I activley traded towards profits and the industrial building was adding to our net worth as I had bought this first property with owner financing on a ten year note amortized over 10 years. Because real estate was ugly then (believe it or not it was worse then than it is now) and sellers couldn't give away many properties I was able to buy a fully leased 60,000 square foot building leased two two tenants with a 10 year loan and it still paid a 4% return after expenses.

Within a couple of months of buying this first building the tenant who was leasing half the building approached me to allow him to cancel the lease as his business was tanking. Ironically I knew the people across the street were looking for somethig to lease close to them so I was able to lease the building to the business across the street for 2 1/2 times what the current exiting tenant was paying on a long term lease. This turned a good situation in to a great situation as the income generated from this passive investment was now in the six figures alone. Witin a year this income would double as my new tenant took thier company public and bought out my other tenants lease and started paying me more for both spaces. The good old days of funny money. Thats when our consumer and money management habits started to change.

While I was investing all our excess monies we moved our family from a typical blue collar neighborhood to an affluent beach community. And because our new neighborhood was affluent and had all the trappings of affluent people, luxury cars, fine furniture, fine dining, expensive vacations and expensive hobbies, we felt compelled to become part of the "community". We bought our first luxary car (300 SE mercedes) which had a car payment equivalent to the payment of our first mortgage $725 per month. To make matters worse we leased this car knowing I would be driving 25-30k mile a year. And we bought furniure and big screen tv's, and all the other stuff to fill our new bigger home. We took our fist trip to a tropical location and then started taking trips with new friends to ski and play. Flying first class, staying firsts class, and eating first class. Life seemed grand. Here is the most telling part of this conversion from fiscal conservative to hyper consumer. I started buying a lot of our stuff and taking these trips using credit even though I did have the cash to pay for anything we did. I justified this by telling myself I would only finance 50% of any product purchased and would pay off the balance of the credit cards I used while traveling. But after a while these purchases started to add up to tens of thousands of dollars and my full payments turned into triple the minimum, then double leading to minimum payments.

This change in our consumer psychology was slow and gradual but its important for me (and you if you'd rather learn from my mistakes) to recognize the progression. Buying the things you need when you can afford to buy them is not a bad thing. Buying more than you need just to have the best, biggest and brightest is obvioulsy not a good consumer habit. Buying stuff or doing things just to fit in or to fill out your house or life using credit is definately not doing things right.

When you buy something or want to do somehting ask yourself some simple questions.

1. Is this an essential purchase? Do I really need this product/service OR do I just want it.

2. Can I afford to pay cash for this product/service? What if the car breaks down or the drains get clogged? Can I still handle this purchase?

3. Is this purchase something that is going to add value to my life or net worth? Will it increase in value or will it be worth less soon. If technology related will it be obsolete soon.

4. If I didn't buy this product/service could I get by with out it?

If you answered yes to the first three questions then you'll know your purchases are not wasteful.

Regardless of the size of a purchase anything from a cup of coffee to a new car, if you questions the reasons for the purchase you will discover whether you really need to make a purchase. Do the right thing and make good financial choices.

The information contained in this site is the sole opinion of the Baron Von Savings. The Baron is not a professional money manager, tax expert, accountant, attorney, or stock broker. You should consult with an appropriate professional before making decisions concerning your finances.

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