ADKAR: Five Steps to Creating the Life YOU want.

by Elisabeth Donati | Dec 12, 2008 | Financial Literacy Articles for Parents, Uncategorized

One of the most interesting aspects of life is the disparity between knowing what you need to do in order to have the life you want and actually doing those things. This conversation always leads back to the concept referred to as “Be – Do – Have”.

For those of you who are aware of this conundrum of sorts, you understand that the BE part has to come first. The question has always been, “How to you GET to the BE part?”

It’s much like the question of the chicken and the egg. Which did come first? It’s one of those answers our brains often freak out about. Like thinking about the immenseness of the Universe. Does it have an end or doesn’t it? And if it does, where is it and what comes next? Our brains just want to climb under the safety of a warm, down comforter and not think about it any more!

Let’s explore this ‘Be, Do, Have’ thing. Let’s put on our pristine white scientist cloak and tuck our loose hair in one of those fashionable hair-nets and look at it under the magnifying glass as if we’ve never heard of it before. And perhaps you haven’t.

Let’s apply this to your life’s financial situation. For the purposes of this discussion, let’s say you are $10,000 in debt, have a decent job making $4000 a month and have expenses of $3850 a month. You have no savings, $5,000 in a retirement account from a previous employer and are in a state of frustration at this situation. You feel lost, hopeless and overwhelmed with your seeming inability to ‘get ahead’ and all you want is to be financially free someday.

This is actually a common situation in the United States even though a person in this position would be considered very rich in many parts of the world. Regardless, this is you and you want to change the situation. But how?

Be, Do, Have. But you’re thinking, “Wait, first I have to HAVE the money before I can BE anything or DO anything with the money!” Ah, this is where the thinking goes awry. But in a way, it does make sense. How can you possibly BE rich without the money? If this concept is new to you, hang on. It will become crystal clear under that microscope in just a bit.

What if, instead, you learned what BEING a millionaire looked like? What if you studied the habits of millionaires and started incorporating those habits into your daily life? What if you learned how millionaires thought and started thinking those thoughts instead of the thoughts you’ve been thinking all these years? Would it make a difference?

It makes all the difference in the world. We’ve all heard the stories of lottery winners who lose all of their winnings, and more. Why does this happen if they have millions of dollars coming in? Ask yourself this simple question: Why didn’t they have money BEFORE they were millionaires?

The simple answer is that they didn’t know HOW to be millionaires; they didn’t understand the thoughts, beliefs, attitudes and habits of wealthy people. They knew how to think like a poor or middle class person. So, when they got all that money, they continued to think like, and have habits of a poor or middle class person and there you go. They are out of money quicker than they are out of life to live it with.

You see, before anything shifts OUTSIDE of you, you have to choose to shift what’s INSIDE of you. And in order for that to happen you need several things and those things are sometimes described using the acronym ADKAR.

The first things that must happen for anything in your life to change is AWARENESS; an awareness that something in your life isn’t working and must be altered to get a more desirable result. Once you have that awareness, the next step is to have a DESIRE to change the situation.

There’s a saying that goes like this…People don’t change until the pain of change is greater than the pain of staying the same.

After you’ve discovered an awareness that something needs changing and you develop the desire to change it, you must then seek the KNOWLEDGE you need in order to make the change you wish to make. The best part is that once you are in this place mentally and emotionally, the knowledge you need seems to seek you! It is everywhere. It’s as if you willed it to you. Surprise! You did. Just by starting to think it, it started to come. Seem too good to be true? Have you heard of the movies, The Secret or What The Bleep Do We know? These movies are based on the idea that our thinking makes it so. Napoleon Hill, the author of one of the best read success books, Think and Grow Rich, said it this way…Thoughts are Things. Try it. What do you have to lose?

Now you have the knowledge. What next? You must take ACTION and this is where people get hung up and where the BE, DO, HAVE concept enters back into the picture. You see, a wealthy person who is BEING a wealthy person, naturally does the things he or she must do in order to get and stay wealthy. You must learn to BE the wealthy person before you will BE the wealthy person. And now it gets a little muddy under our microscope for just a little while. Sometimes, before you have the beingness of that wealthy person ingrained in your cells, you just have to DO what they do until it comes naturally.

I suspect you are really confused now. Stay with it…confusion is a great state to be in. It tells you that you’re on to something new and exiting.

You see, the more you DO what a wealthy person does, the easier it becomes to continue to DO those things and, before you even notice, you are BEING the wealthy person naturally and you don’t have to stop and consider what the next, right, supportive action that will lead you right to what you wanted, and where you wanted to be, in the first place. This is when it all becomes second nature and you don’t have a clue why you thought it was so hard to begin with when you were still BEING that poor or middle class person.

To finish the process, you find yourself, sometimes quicker than you ever imagined possible, at the RESULT you were after. Congratulations. Now you can HAVE all those things in life that you’ve dreamed possible. The fact is that you just made them possible by BEING the type of person that lives that kind of life.

Let’s review the ADKAR process: Awareness, Desire, Knowledge, Action and Results. It takes the really complicated idea of changing your life and lays it right out there in simple steps you can follow, if you want to change something badly enough.

Which takes us back to the very initial question: How do you go from knowing you want to get somewhere in your life to actually being there? Now you know. Use the ADKAR formula, sprinkle in a lot of Be, Do, Have along the way, season with laughter, stop along the way to celebrate your progress and viola’, you have the life you want. Good luck with it. Oh, and the Results at the end? That would be Your Life. Enjoy.

Elisabeth Donati is the owner of Creative Wealth Intl., LLC and creator of Camp Millionaire, a unique and effective financial intelligence program for kids and teens and Creative Wealth for Women, a workshop designed with the special financial needs of women in mind. She is an expert in teaching the basic financial principles people need in a way that is engaging, empowering and fun. For more information, visit http://www.innerwealthpublishing.com.

She is the author of the only financial parenting book parents need, The Ultimate Allowance, available at http://www.ultimateallowancebook.com.

Please feel free to email her at: elisabethdonati@gmail.com or give her a call at 805-957-1024.

Let Financial Freedom Ring

by Elisabeth Donati | Dec 12, 2008 | Financial Literacy Articles for Parents, Uncategorized

For most Americans, the month of July conjures up images of fireworks sizzling in the sky, back yard BBQs and the thrilling sound of patriotic songs; “Our country ’tis of thee, sweet land of liberty, of thee I sing.” America was built on a solid foundation of freedom for all, with the additional caveat that all men and women were created equal. At least that seemed to be the original idea.

The word liberty refers to the state of being free from other’s restrictions on how one chooses to live life. If we apply this definition to what we actually have today, we can see that there are millions of Americans who aren’t free at all.

Being truly free generally requires that we have the information and tools necessary to create that freedom. And in order to create that freedom, it’s helpful to have at least a basic understanding of how money works in society and the primary investment principles that are required to become free. In addition, a strong entrepreneurial spirit is almost mandatory these days if you really want freedom in your life.

Learning this critical information currently doesn’t come as a natural right of being born an American, or a Canadian, or a Mexican or a Frenchman, etc. Financial intelligence, for some strange reason, is usually relegated to ‘elective’ status when it is as necessary as reading, writing and arithmetic. And often when it is taught, it’s about budgeting and balancing checkbooks, not investing in passive income producing assets or thinking like a wealthy person. Heaven forbid, we teach kids how to become financially free when they’re young instead of expecting them to spend 40-plus years in a job where they will hopefully ‘accumulate’ enough money to ‘retire’ at some point in their future. What if we teach kids the concept of financial ‘utilization’ instead; using their natural born entrepreneurial talents to create businesses that allow them to live amazing lives while helping others along the way? Gone are the days of a good, stable, secure job; here are the days of creating your own way.

At present, most of America’s youth are not learning about money in school and the vast majority of children never learn about money at home. This is because most parents don’t understand money either and those that do, for whatever reason, don’t talk to their kids about it. The fact that such a small percentage of people actually understand the ‘language of money’ explains why the consumer debt number in America in 2007 reached an astronomical $2.5 trillion dollars, not including real estate mortgages. According to the Federal Reserve, $2,500,000,000,000 represents $8,200 for every man, woman and child that lives in the US.

Something happens when the numbers get this big. There’s a shift in our ability to conceive it as real. It is one thing to owe someone $1000 but quite another when that debt reaches $100,000. The idea of adding another $100 to a $1000 debt causes most people to consider what they are doing. Adding $100 to $100,000 worth of debt often doesn’t raise an eyebrow.

It’s a matter of contrast; the bigger the contrast, the smaller the perceived reality. This is exactly what’s happening when Americans view our national debt: the numbers are SO big that you just can’t wrap your head around them. It’s kind of like thinking about the Universe; our brains short-circuit and shut off.

So what do we do? Well, in my opinion we must start educating our youth about money. I believe the more we educate, the less we must legislate. How do we do this? I have three simple things that, if done, will yield amazing results for our nation’s financial future.

First and foremost, we must set a better example for our youth, from mom and dad all the way up to the highest branches of our government. Children learn first by example and they learn by example in three primary ways: by what they SEE; by what they HEAR; and by what they EXPERIENCE. Bottom line: start watching what you and others are teaching your children about money by what they see you doing with it, what they hear you saying about it and by the experiences your kids are having with it.

Second, talk to your kids about money.  Just like sex and drugs, if you don’t talk about it, you have no idea what they are learning, or from whom. We all have to get over the idea that money makes us who we are. Money is simply a tool to reach our dreams, help others and do good in the world. Money doesn’t make you happy, pretty, sexy or cool. Money generally just makes you more of what you already are. If you were greedy when you were poor, chances are you’ll be more greedy if you become rich. If you were generous when you were poor, chances are you’ll be more generous when you’re rich.

How do you bring your kids into the ‘family money conversation?’ Simple… just start  talking. Let them help you pay bills online and write checks, balance the checkbook, work on the family budget. Let them tag along when you visit your financial planner.  Invite them to work with you or give them a job in your business. Talk to them about your paycheck and taxes, your investments, your debt. Yes, I said your debt. What better way to help them learn about debt than to experience the pain around it. Don’t shelter them. Show them. Let them see that money is just another tool we all have to learn to use wisely. Make learning about money a family affair. Show them what it takes to be an adult who is working towards self-reliance and financial freedom.

Third, give your kids practice with money before they move out and their mistakes cost them dearly. College students are dropping out with huge amounts of debt. Some are even committing suicide over the debt they accumulate. For the most part, teens don’t have the maturity or necessary knowledge to handle their own finances. This includes all the credit card offers they are tempted with, the high cost of living and competing with their peers in terms of clothes, entertainment, vacations, phones and more.

Financial practice must start early and you must have a system.  The Ultimate Allowance is one such system. This book is the result of teaching thousands of kids and their parents about money for the past seven years. It shows you, the parent or guardian, how to run the money that you’re spending ON your kids, THROUGH them instead.

Consider this example: If your son or daughter came to you wanting to grow up and become a major league baseball player but you never gave him or her a ball, a glove, a bat, time to practice, a place to practice or heaven forbid, THE RULES, what’s the chances of him or her accomplishing the dream? Slim to none. This is exactly what we’re doing with our children. We MUST start teaching them how to think like, and make decisions like, people who value financial freedom over Piddlycrap.

What’s Piddlycrap? Just look around your house and you’ll see it everywhere. It’s the stuff we waste our valuable financial resources on every day; the stuff that goes down in value instead of up. The stuff you sell at a garage sale for pennies on the dollar. It’s the stuff that takes money out of our pockets instead of putting money into them.

Parents, your number one job is to prepare those beautiful kids of yours to be self-reliant ~ and loving them is not enough. This means you have to:

1. set the best example you can;
2. talk to them about everything money; and
3. give them plenty of practice while they’re young.

Doing these three things will dramatically increase your chances of successfully turning America’s children into resourceful, financially free leaders who will make this country’s economy strong again. And isn’t this what all parents want?

In 2002, I dedicated my life to teaching our youth, and their parents, the basic financial principles I never learned in school or at home. I have taught many different races and cultures, genders and ages and, everywhere I go, I find people want to learn the same thing. They crave the knowledge they need to know how to make informed choices and decisions that will help them create a sense of freedom for themselves.

Isn’t that what this country is all about? Isn’t that where we started; a desire to be free? Isn’t that what Martin Luther King, Jr. was willing to give his life for? Isn’t that what this nation stands for?

Let’s make financial literacy mandatory in our schools and financial intelligence a sought after value. It’s time everyone had access to the information and tools they need to create real freedom in their lives. Join me in this mission, won’t you?

Allowances and Holiday Spending: Give the Gift of Financial Skills that Keep on Giving

by Elisabeth Donati | Nov 12, 2008 | Financial Literacy Articles for Parents, Uncategorized

It’s that time of year again. Time to ‘help’ your kids buy gifts (if you do gifts) for others. And by help, I mean help them literally and financially.

There’s so many options for this ‘help’, I could write a book on the subject but let me illustrate a few of the most common approaches to helping kids buy gifts with a few pointers to help reduce the stress around kids and holiday gift buying and giving.

Scenario #1. Your kids don’t get an allowance and they aren’t earning money of their own.

Since this situation can be the most expensive situation, let’s deal with this one first.

First, have you child make a list of the people he/she wants to buy gifts for with a column of potential gifts and a column of the projected cost of that gift that he would like to give that person. This activity is great for kids so they get an idea of how expensive gift-giving can actually be!

Once your child’s list of people and gifts is finished, sit down with him and work out a budget for the purchases. Make an agreement with your child about the ‘help’ you will be providing.

• Will you simply be buying the gifts for the child to give?
• Will you be loaning the money to the child to buy the gifts and they have to pay you back somehow (extra chores, outside job, etc.)?
• Will you split the costs: you pay for half, you ‘loan’ him the rest of the money required to purchase the agreed upon gifts?

  Encourage the child to consider making gifts by hand in order to save money as well as the fact that it will lend a nice personal touch to the gift. Helping the child create these gifts is often a wonderful bonding experience for you and the child and creates positive memories around family and holidays. (To this day, I remember my Mom helping me make home-made ornaments for the tree and it makes me smile!)

Once you make the gift-buying agreement, stick with it. Help your child learn to stay within their ‘budget’. Experience is the main way children learn to handle their money wisely. Do everything you can to ensure their success and praise this success.

Celebrate their success by doing something the child likes to do rather than rewarding him with a gift something as celebration. This sends the wrong message, i.e., I do a good job, I spend money on ‘stuff.’ Not a message we want them to learn and not a belief or habit that will be supportive as he grows up to handle all his financial needs.

Scenario #2: You give your child an allowance and/or they make their own money. (If you are using The Ultimate Allowance system, gift-giving will be figured into their Living Jar.)

In this situation, it’s important to establish an understanding about where gifts fit into the allowance system or both of your expectations of how and what the child’s own hard-earned money is used for.

Hard feelings usually result from misunderstandings and unspoken expectations that one person had of another person or situation. Have this conversation early in the game.

Again, there’s a couple of options, but first have your child make the person/gift list mentioned above. Before we move on, because the money being spent is primarily the child’s money, it’s important to understand the different types of money personalities a child may have and how this may affect his spending. The four classic money personalities are as follows:

Spender: this personality is happy to spend money any time. They love buying things for themselves and others, often with no thought about the future or additional spending or expenditures that are coming up.

Saver: this personality isn’t so happy spending money. They prefer to save it and watch it grow. They are actually quite reticent about money and ‘wasting’ it on others and unnecessary things. Their purchases often have to be well thought out, calculated over and over again and have enough relevance to warrant the spending.

Avoider: this personality doesn’t want to have to even think about all the gifts and the spending and the wrapping and such. They are the last minute buyers that put it off until the very last moment because they just didn’t want to deal with it, whether they have the money or not.

Monk: this personality usually is a little put off that they are expected to buy gifts for people just because it’s a holiday. They are very ho-hum about the whole thing. They would rather donate their time to a food bank or shelter than buy a bunch of piddlyjunk someone probably doesn’t need anyway and they don’t necessarily have the money to purchase.

With a child that is spending his OWN money, the personalities come into play a little more than when they are spending YOUR money for some reason. It’s just a little more painful when they are spending THEIRS. All the more reason to really stay involved, help them budget, come up with gift ideas and options and help stay present (no pun intended) during the gift giving process so they are successful, stay within their budget, are happy with their purchases and have hopefully learned a bit about money.

Again, in Scenario #2, you can make an agreement to help your child with the gift purchases, paying ½ while they pay ½ .

Each child will learn different lessons during the holiday season as they get older because they are accumulating beliefs about money, gift buying, the meaning of the holidays (does Santa exist or not?), the commercialism and more.

Bottom line, as always, the best thing to do is simply pay attention to your child to see how he is doing during the holidays in the realm of handling money and purchasing gifts for others. Ask yourself, “What powerful money habits and lessons can I help instill in my child by the things he experiences this year?” You’ll be surprised by the answers that come up.

It’s never too early or too late to learn how money works and how to make it work for you. Your children are learning all the time by what you are doing with your own money, what you are saying about money and by their own experiences with the green stuff.

Here’s some basic financial philosophies you might work on this season: only borrow money if it makes you money, pay yourself first (are they taking care of their own needs first?), helping others is helping yourself and one of the most important…money is a tool to reach your dreams and the dreams of others.

What will your children learn this holiday season? Set it up in advance and watch your children gradually grow into financially-savvy adults. Now that’s the best gift of all!

Elisabeth Donati is the owner of Creative Wealth Intl., LLC and creator of Camp Millionaire, a unique and effective financial intelligence program for kids and teens and Creative Wealth for Women, a workshop designed with the special financial needs of women in mind. She is an expert in teaching the basic financial principles people need in a way that is engaging, empowering and fun. For more information, visit http://www.innerwealthpublishing.com.

She is the author of the only financial parenting book parents need, The Ultimate Allowance, available at http://www.ultimateallowancebook.com.

Please feel free to email her at: elisabethdonati@gmail.com or give her a call at 805-957-1024.

Money Games for Kids

by Elisabeth Donati | Nov 12, 2008 | Financial Literacy Articles for Parents, Uncategorized

Every holiday season—birthday, Christmas, etc.—many parents are faced with the question of what to buy their children for a gift. And experience shows us that kids sometimes use the box something came in more often than the actual gift it came in.

If you’re going to be buying your children presents anyway, why not buy them the gift of freedom…financial freedom, that is! Besides giving your child the all-important games are fabulous as teaching tools. We all learn quicker and easier when the learning comes with laughter, competition and emotion. Games serve all these purposes and more.

Here’s six financial games that will teach your young ones a thing or two about money.

1. Monopoly

Monopoly is a great money game for kids learning how to count money and make decisions. Play the classic Monopoly with paper money or the new Monopoly with Electronic Banking. There learn to buy and sell properties, build houses and collect rent. Robert Kiyosaki says this is how he learned the ‘game of real estate’. No wonder he’s so good at it! Four green houses, one red hotel is the rule he learned from this game and most of us know the story from there!

2. Cash Flow for Kids

Cash Flow for Kids is a simple, yet effective game that teaches kids the idea that financial freedom comes from developing passive income streams by investing in assets. It’s the game that spurred our Creative Wealth Money Game that we play in all of our unique financial intelligence programs. You can’t go investing in this game for your kids.

3. Game of Life

This game may help your children make decisions about their careers and other life events. The decisions they make affect the income they receive and how they spend their money.

4. Payday

Even though all of our programs promote starting businesses to become financially free, most kids will at one point in their lives have a job or six! This game kids learn to have that job, lend money, pay bills and interest, and deal with unexpected expenses.

5. Moneywise Kids

Two different games are included in Moneywise Kids, one for making change and the other for budgeting money. Players must account for food, clothing and housing in the play option focused on money management.

6. Money Bags

One of the first things we realized we needed to teach kids in our Camp Millionaire programs was how to count back change. We didn’t think this one up actually. The parents requested it. Ask and you shall receive. And believe it or not, it’s often one of the most challenging activities for our campers.

Kids learn how to count change by earning money for various activities in Money Bags. In addition, kids are limited to using certain coins, forcing them to keep finding new ways to count the coins.

7. Easy Money

Easy Money is over 70 years old! You buy and sell houses and build properties to earn as much money as you can.

Again, if you’re spending money anyway, make it an investment in your child’s future! You and your child will be glad you did.

Bailout Fails – Market Comment

by Elisabeth Donati | Sep 29, 2008 | Financial Literacy Articles for Parents, Uncategorized

They say it isn’t a bailout … but it is.
They say it is necessary to keep Main Street alive … and they are right.

THE PAULSON BAILOUT GOES THROUGH CONGRESS

Last week, I sent an email blast telling everyone to contact their congressional leaders asking them to slow down on the bailout.  Every survey I saw showed the American public against Hank Paulson’s plan by a huge margin (9 or 10 to one in most cases).  In fact the plan had an approval rating that was lower than Congress!  I didn’t think that was possible.

We are not done yet.  While this is being voted on, it isn’t set in stone.

Wall Street is down this morning – that can either be because they don’t like the plan or because they don’t like uncertainty … or both.  I vote for the combination.  There are significant problems with the bailout and the repercussions.  There is also significant uncertainty over what will eventually get passed.

SOME KIND OF ACTION IS NEEDED

In case you hadn’t picked up on this – I am a free market enthusiast.  I believe that government intervention almost always creates waste and makes a situation worse in the long run than letting the market work through the problem.  I also believe that the problems we are facing today were created by government agencies and meddling in the first place.

That said – something needs to get done because if we muddle along too long we risk the significant chance of a completely destructive crash of the system – something that could create irreparable damage to the world economy, not just our own.

QUICK SUMMARY

There are lots of bad loans on the books of most banks and many other corporate entities.  They are often in the form of complicated derivatives – financial instruments where it is not easy to discriminate between the good ones and the bad ones.  In addition, these derivatives are often piggy-backed on top of other different-but-equally-complicated financial instruments.

While these instruments will wreak havoc on many corporate financials, the primary concerns are those derivatives held by banks and lending institutions.  As we identify this “toxic waste,” each bank’s balance sheet looks worse and worse by the day depending on their exposure to it.

Today, we not only have many banks which are technically insolvent (as they write this toxic waste off their balance sheet), the cash they spend to remain solvent from a bookkeeping standpoint is cash they can no longer lend to businesses and consumers.  They also can’t borrow money to lend because of ratings downgrades and their weaker balance sheets.

A number of times in the past few weeks, banks have found themselves unwilling to lend to each other, much less anybody else – because everybody knows that everybody else holds some of this toxic waste in their portfolio.  So everybody is a bad risk.

This is an extremely dangerous position for the economy to be in.

THE PURPOSE OF THE GOVERNMENT INTERVENTION

I am refraining from calling the ultimate solution a bailout, because if it were done right it SHOULDN’T BE a bailout.  It is only an intervention.  Whoever owns toxic waste must deal with their problems and resolve them rather than just selling them to the taxpayer.

The purpose of the intervention is to free up liquidity so that businesses can continue to operate and the economy can continue to function.  This will add faith to our banking system which will keep foreign investment dollars here in the US rather than have those trillions of dollars be moved into other countries and financial systems – an act that would be devastating.

AVOID THE MORAL HAZARD

This is probably the key point underlying all of my blog posts the past three weeks.  We got to this point because of a moral hazard that was promoted by our government in the form of excess liquidity by the Fed, aggressive lending programs by Fannie Mae and Freddie Mac and massive leverage within the already-highly-regulated banking industry.

It is this moral hazard that has promoted over-leverage by American consumers and companies and unrealistically high market prices for real estate and financial institution stocks.

These excess values have led to more leverage which have, in turn, led to even greater share prices and home values creating a seemingly-never-ending upward spiral.  This is what a bubble is.  This is what we are dealing with.  Now the cycle is broken and there is a lot of pain to be felt as values retreat to sustainable, intrinsic levels.

The new program/intervention which I believe has to come from the federal government MUST make every effort to avoid creating new moral hazards – moral hazards which would mean more asset bubbles and greater catastrophe in the future.

Unfortunately, the Hanky-Panky bailout (the Paulson proposal going through Congress) creates whole new layers of moral hazard and incentives for more poor choices in the future.

WHERE IS THE MORAL HAZARD?

If you are a bank or corporation and you got yourself in trouble by buying an investment asset that ended up losing money, under normal circumstances you would report the loss and take the hit as your stock price goes down.  You would lose some of your investors and stockholders.  As a company you might survive … or you might go out of business.  If you used leverage (borrowing) to make this investment, you increased the potential to make gains on your investment, but you also increased the downside which could make a small loss turn into a huge loss.

If, however, after making a horrible decision made worse by a lot of leverage – the government came in and said, “Hey that’s OK, we want to help you so we’ll take your crappy investment off your books and give you more than it is worth in cash.”  Now your crappy investment turns out to be not so crappy – in fact you may have ended up profiting from it (and profiting a lot if it was heavily leveraged).
What’s to stop you from continuing your behavior in the future?

You’ll keep looking for risky investments figuring that if you make money, you get to keep it.  If you lose money, someone will come in and save your butt.  That was the essential flaw in the Fannie Mae and Freddie Mac situation – profits were privatized, losses were nationalized.

NOW AMPLIFY THAT HAZARD BY 1000

In essence that is what a $700 billion bailout does.  It takes the moral hazard of condoning activity which has brought us to the brink of disaster and then puts the downside cost on the backs of future generations while giving upside to the thousands of companies that made terrible choices over the past 10-15 years.

Nobody learns anything.  “No pain, no gain!” as Richard Simmons used to say.
We sow the seeds for the next mother-of-all asset-bubbles AND we bury future generations’ prosperity with more debt, uncontrollable inflation and a banking system in which foreign investors have no faith.
No good comes out of a massive bailout – except to the relative few who get bailed out and the politicians who get elected into office by burdening our grand-children and saving us the pain of an important learning experience.

WHAT WE NEED TO GET FROM ALL OF THIS

1) As a society, we should be more self-reliant.  History is riddled with countries that tried to spend their way out of a jam whether they were socialist, communist or free market.  It never works.  I don’t believe that counting on government (especially one that also spends more than it makes) to bail us out solves any of our problems.

2) Transparency – The more we know about what is going on with a company and their balance sheet, the better.  Some people propose that regulation provides this transparency.  That has not been my experience.  Regulation usually creates ways for insiders to obfuscate the truth and protect themselves from competition.  That is a topic for a different post.

3) Responsibility – We all need to take responsibility for our money.  If a company has toxic waste on their books – they need to figure out how deal with it.  They should write it off and take the loss.  They should not be able to show a profit that isn’t there and/or pawn it off on the US taxpayer.  If a person bought a house they cannot afford, they shouldn’t be in that house.

4) Liquidity – for reasonable loans (the kind that used to be underwritten before all this started).  Cash needs to be available at a reasonable cost so that businesses can continue to operate and people can continue to live their lives.

AN ALTERNATIVE

The GOP offered an insurance alternative to the Paulson plan.  Nice.  Cute.  I don’t see how it will work.  It still creates all kinds of moral hazard especially as far as the responsibility quotient is concerned.
I am fascinated with the solution used in Chile in the early 80’s.  In this situation, the government loaned money to the banks.  This provided cash and liquidity to the system.  All loans were collateralized by the bad debt.  Any company borrowing this money would be required to keep the toxic waste on their books and to write it off over time as it matured.  This keeps the company honest about their responsibility for the debt and improves transparency within the market.  Any company with one of these loans on their books cannot distribute profits to their shareholders (or pay incentives to executives) until this loan is paid off.  This gives an incentive to the borrower to resolve the issue as fast as possible using their own resources.

The biggest advantage to the Chilean solution is that the US taxpayers can actually benefit from it.  It minimizes our exposure to losing the money (some companies will not survive and the collateral on the loan may not be worth a whole lot, but that is only a percentage of those who participate).  It takes government out of the role of hedge fund (which is what it becomes if we start buying this toxic waste – especially at “above market” prices) and puts it into the roll of market maker and liquidity resource.
The US House of Representatives just shot down the $700 billion bailout … There is still time for a more reasonable alternative.  Fax your letters to your representative today.  Tell them they will not get back into office if they vote for the bailout – you do not want to burden your kids with this bill.

SOME BOLD PREDICTIONS FOR THE FUTURE

Housing prices are not done going down.  They will continue to drop until values have retreated at least to the point of historical intrinsic value.  Historically real estate values grow at a rate equal to inflation plus productivity improvements.  That translates to about 4.5% over the past 50 years.   In order to get back to that trend-line, real estate values nationally need to drop another 15-25% (depending on your location and how you calculate the trend-line).  In these cases, prices ofter retreat PAST the historical norm like a pendulum goes past its resting point.

If we get prices to stop falling now (maybe down only another 3-5%), then expect home values to stay flat with no increases for years if not decades.  The key is to get back to the trend-line.  With great certainly I can predict that this will happen.  I cannot predict the path by which it will happen.

Financial Firms aren’t done losing value.  There is a lot of toxic waste.  Thanks to the obfuscation which comes with regulation, we don’t even know how bad the problem really is.  Banks are also pretty highly leveraged institutions – the equivalent of 90% loan to value so the balance sheets of these firms will get whacked even more as we uncover all of the exposures.  Expect huge losses and market values to end up at 10-30% of their peaks a year ago.

We will see a recession before this is done.  This is the one that kills me.  I hate recessions as people go through knee-jerk reactions to the situation and stop spending money even when the expense is for something that can truly add to their quality of life today.  I just don’t see how falling home prices, falling financial stock investments and the unravelling of all this leverage can happen without consumers spending less – and maybe for a long time (2-3 years).  There is a sea-change that has to happen regarding spending and saving.  That requires a time out from growth.

If tax rates go up in 2009, it will kill the economy.  The middle class – and especially the entrepreneurial middle class – are the keys to getting this country out of this mess.  If you punish them with higher taxes it is likely that the US economy will never recover in this global financial world.

Now More Than Ever – Financial Literacy is Critical.  The events of the past few weeks and the challenges we face in just getting Americans to understand the basics of what is going on – all lead me to conclusion that financial literacy is critical.  Everybody must understand how their money works.  We all need to know how leverage can help you and how it can hurt you.  Pandering and demagoguery are rampant in Washington DC.  It gets votes which then are translated into programs that spell disaster for us economically as a nation.

Take classes.  Read books.  Participate in an ongoing dialog about money.  Don’t take what Hank Paulson, Ben Bernanke, President Bush or even John Buerger says without asking questions and getting your arms around the concepts.

For more information on John Buerger and to read more of his wise writing, visit his Rich and Fullfilling website and as John reminds us all…

Get Control Over Your Money… Before it Takes Control of Your Life!

John D. Buerger, CFP®
Wealth Coach
jdbuerger@altuswealth.com
www.RichAndFulfilling.com
ALTUS Wealth Solutions
3211 Broad Street, Suite 201
San Luis Obispo, CA 93401
805-476-0333 (office)

Summers and Lemonade Stands: Entrepreneurship 101

by Elisabeth Donati | Jul 12, 2008 | Financial Literacy Articles for Parents, Uncategorized

Summer is here and you may be wondering what you’re going to do with the little ones…or wondering what they are going to be doing with themselves, if they are old enough to fend for themselves, that is.

The question is, How do you know when are they ready to fend for themselves? That is a great question. The only way to really find out is simply to give them a little rope and see what they do with it!

The great thing about summer is that, unless they have their first job already, they often have quite a bit of free time on their hands. They hang out with friends, bug you to take them places and, unless they are already getting an allowance, constantly ask you for money. Whether it’s a movie here, a mall visit there, an ice cream with friends every weekend, the nickel and diming can add up to a whole lot of change by the end of the summer.

What if you could could end up with a whole lot of change in a different way? What if you could empower them, instead, to make their own money this summer? What if you could set them on a path that would ultimately lead to financial self-reliance?

How about this: next time they ask you for money, turn to them unemotionally and say, “Wow, won’t it feel great when you figure out how to make that money yourself? I wonder what you could do to start creating an income for yourself right now?”

And then be quiet. Don’t say anything else. Don’t give ideas or attempt to rationalize the proposal. Just let them sit with the idea.

You’ll probably see some eye-rolling, a little shoulder shrugging and perhaps a good deal of frustration expressed in the form of ill-formed sentences protesting the injustice of it all. But, if you stand in your resolve to help them begin a life of their own, you may be very surprised at what comes next.

Once they realize you’re serious, your next question to them could be something like, “So, what do you see people buying or needing around you?” Let them think about this question for a bit. Suggest that they start paying attention to everyone around them. Notice what they need. Notice what they are buying. Notice what they are talking about in terms of products or services that they would like.

If you can get kids to do this, you will have saved them from the number one mistake many entrepreneurs make.

Oh, you want to know what that mistake is? OK, the number one mistake entrepreneurs make is this: they get a ‘great idea’ and then go off and expend a tremendous amount of energy and quite a lot of capital bringing that product or service idea to market without first considering whether there’s a market for the product or service in the first place.

Many businesses don’t even make it out of the starting block simply because there is no market (people) to buy their great idea!

Instead, teach your children to do what successful entrepreneurs do: they pay attention to what’s going on around them and pick a market (group of people like women, teens, boys, girls, golfers, basketball players, seniors, pet owners), they notice what that particular market is buying already and then they choose a product or service they think that particular market may buy as well.

This is how successful businesses are born. And this is how you can help your children take that first step in growing their own business. Once you’ve provided the catalyst for getting them to think about creating their own money and you can get them to start thinking about the above question, be ready to assist them every step of the way.

Help them refine the market (pet owns with big dogs, women with toddlers, etc.), help them write a business plan, help them create a budget and be ready to lend a little startup capital if needed (and yes, charge them interest or take a percentage of their new enterprise. There are valuable lessons every step of the way).

If all this talk about business is foreign to you, no worries. Simply help your child find a friend or neighbor who would be willing to step in as a mentor. Successful entrepreneurs often welcome helping a child start and run their own business. There’s nothing more fulfilling than helping a child learn the ropes of self-reliance.

There you have it. Whether it’s a simple lemonade stand or the creation of a new dog walking leash for seniors, help your children learn the lessons of business so they come to love the power in creating their own way, and money, in life. You’ll be doing them, and the world, a huge favor.