"Pearls of Wisdom" #1-#5


 Pearls of Wisdom
Dear friends,
Welcome to my newsletter, “Pearls of Wisdom”. These Pearls are some of the best financial lessons I’ve gleaned through 53 years of observing others, reading books & articles, and reflecting on life experiences and on the best instructor of all –the Bible. Hope you enjoy them.
Pearl #1    “Spend less than you earn and do it over a long period of time.”
I was cuing up my power point presentation on finances with the above quote projected on the screen. The professional looking woman passing by glanced at it and blurted out, “And they pay
you for saying that!? Isn’t it obvious!!?” Well, if it’s so obvious, why do I keep reading headlines like this, “Last year Americans spent all they earned”, or like the following…
25 years ago, Americans saved 11% of their disposable income. This personal savings rate has steadily declined until 2004 we Americans saved only 1.2% of our income (Investment News, May 9, 2005 “Retirement Crisis”). In 2005 we are trending downward from there averaging only .8% savings through the first 5 months. (U.S. Department of Commerce: Bureau of Economic Analysis)
Why do we have such a hard time saving for future expenses?   I’d be curious to hear your thoughts. Maybe it’s due to a subtle change in our thinking. We used to ask ourselves, “Can I afford it?” But somewhere along the line someone asked us, “Can you afford the monthly payments?” 
Whoa! That’s a huge difference! One question seeks the answer in our bank account; the other seeks the answer in our income stream. One answer results in zero interest being paid out, while interest is paid to you. The other answer results in massive amounts of interest being paid out, while opportunity for interest income goes to others. One question has to do with being content to wait & save up. The other question has to do with “I gotta have it now.” 
Can you spend less than you earn this month? Will you spend less than you earn this year? If you can, and you do it over a long period of time, you will reap the untold benefits of staying out of debt, and accumulating necessary resources for the days ahead.
I first heard this quote from Ron Blue, a nationally known financial planner, author and teacher on financial stewardship. At the time I wasn’t spending less than I earned. In fact, at age 33 I was spending & giving away all I earned. But, with the help of my wife, I decided to change. We adopted a very practical rule of handling money that has made all the difference. I look forward to telling you all about it in my next newsletter…
Sincerely yours,
Michael Gerhard CFP®
Pearls of Wisdom
Pearl #2       “Follow the 10 – 10 – 80 rule”
Dear Friend,
I was 34 years old on a business trip. I took some time in the exercise room and made a feeble attempt to work out. The vigorous old man pumping iron across from me blurted out, “Young man, have you ever heard of the 10 –10 – 80 rule?” “No, never heard of it.” With great enthusiasm and conviction he looked me in the eye, “If you follow it you will live freely, never have to worry about debt, you’ll build wealth and make a huge impact in this world. And someday you’ll thank me. You want to hear it?”   “Yes I do.”
“Of all your income, give the first 10%, save the next 10%, and spend the rest, the 80%. Give 10, save 10, spend 80. Do it .”… and I never saw him again. Who was that masked man? I don’t know. But it’s 19 years later and I’d like to thank him. 
Shortly after this challenge, and with the encouragement of my wife, Mary, we decided to do it. We gave the first 10% to God, saved/invested the next 10% and budgeted the last 80% to meet our current needs.   It was hard at first – even shed tears. But we stuck with it and we’re reaping the benefits!   We live freely. We’re sharing and having an impact. We’re seeing great progress toward our goals. The man spoke truth.
“How did you do it?” you might ask. How does one quit smoking? How do you start exercising regularly? (tell me if you know the secret to that one.)   It takes discipline, and a budget system.
The order is important! First give. Second save. Then spend what is left. If you spend first and then try to give or save what’s left over… well, it’s like the father who says to his son after the son begs him day after day to play catch, “We’ll see. If there’s time.”
Why give first? If you take the view that all that we have has been given to us from above, then give back. Share. It is our joyful privilege to give. An ancient Proverb says, “One man gives freely, yet grows all the richer. Another withholds what he should give and only comes to poverty.”
Why save & invest?  Do you want to live hand to mouth all your life, or would you like some breathing room? More income is almost never the answer. Whatever your income is now, learn to save right up front. Save & invest to provide for your future needs and dreams. Saving is putting aside money for a future purchase. Investing is putting that money to work. There is incredible power in compounding interest. Send those little dollars to go out and work for you!
If you just can’t manage 10 –10 – 80 right now, try 5 – 5 – 90, or even 3 – 3 – 94. Start today, and stick with it. And some day you’ll thank me.
Sincerely yours,
Michael Gerhard CFP®  
Pearls of Wisdom
Pearl #3    “The day you can’t pay the full balance is the day to perform plastic surgery.”
I was driving to an appointment and the car needed gas. As I pulled out my credit card to pay the bill, a beautiful young cashier smiled and said, “I don’t use those anymore, and I don’t miss them one bit!” 
“Really?” I responded, “You don’t use credit cards?”   
 “No. You want to hear my story?” 
“Sure”. And she gladly told her experience…
“I was 21, a model, and making good money. I started getting all these requests for credit cards and I couldn’t turn them down. I had a lot of fun, buying whatever I wanted. The more I made, the more I charged… until I started getting phone calls - lots of phone calls - threatening phone calls, because I started missing payments. The debt was piling up faster than I could pay it down.”
“One evening when I was all stressed out, I called my dad and through tears I pleaded, ‘Daddy, I need your help! I don’t know what to do.’”
“My dad was eager to help, ‘I’ll be right over honey.’” 
“I fully expected my daddy to come to my rescue and pay off all my cards so I could start over. Well, he came to my rescue all right, but not in the way I expected.  
“He said, ‘You want me to help you? I’ll help you. Let me see all those cards you have.’”
“I pulled them out. There must have been 10, 15, or more. Then my dad reached for his pocket, ‘At last’ I thought. ‘Daddy’s billfold will solve everything’. But instead of a wallet, he pulled out a big ol’ scissors and began cutting each and every one of those plastic money cards.” 
“He said, ‘There. I helped you. Now, pay off all those balances and don’t ever do that again!’”
“I was so mad!! … and hurt.” 
“But you know what?   I worked hard and it took me a long time, but I did pay off those cards! And now I feel real free.”
She didn’t have to say a word. Her face told it all: free, and happy and confident.
Last year bankruptcy filings soared 31.6% to over 2 million with about one in every 53 households filing.[i] Americans are use to spending more than they make. Over 70% of US households at the lower end of the income scale spend more than they earn. Even at the upper end of the spectrum (incomes over $118,800) more than 15% of households spend more than they make.[ii]
Simple is out of fashion. Today, an average wedding costs over $26,000[iii].   What happened to punch & cake receptions in the church basement?
American families have an average of 7.6 credit cards each and carry $9,000 in credit-card debt per household.  Only 4 out of 10 card holders manage to pay their bills in full each month.[iv] Am I saying that if 6 out of 10 people are unable to pay their balances in full each month, they should all
cut up their credit cards?!         Well…. Uh….. Yes! Especially if they want to get out of debt and live freely.
I’ve got nothing against credit cards. They are handy, convenient, and with those nice reports I can track all my expenses. But they don’t help me control my spending one iota. In fact, I have no doubt that if I didn’t use them, I’d spend less.   Experts believe that when paying by credit card, people spend 25-30% more than when paying with cash.[v]
Ponder this definition of a credit card: 
“A credit card is what you use
To buy things you don’t need
With money you don’t have
To impress people you don’t like.”[vi]
Does it ring true?
At any rate we use them, but Mary & I have paid off the card balance every month of our married lives. We have a distaste for debt and an even stronger distaste for giving away hard earned money to financial institutions (in the form of interest and late fees).   The day we can’t pay off the balance is the day we cut the cards. I like the young lady’s father. Wise was he… to perform plastic surgery.
Sincerely yours,
Michael Gerhard, CFP®
[i] CNNMoney.Com Jan. 11, 2006, “Personal Bankruptcies hit record high”
[ii] CFP Board Report – February 2006 Newsletter
[iii] ibid
[iv] Yahoo! Finance, Jan. 31, 2006, “The Automatic Millionaire” by David Bach
[v] Sound Mind Investing, Austin Pryor, c2000, p.40.
[vi] Scott Morton, 4:10 Funding School.
 Pearls of Wisdom
Pearl #4        “Understand the power of compounding interest.”
You can work for your money, or your money can work for you. It’s your choice.
You may be asking, “Mike, what do you mean, ‘work for your money’? Doesn’t everybody work for their money?” I am talking about the high cost of debt accumulation. The more debt you accumulate the harder and longer you have to work to pay off that debt. I remember watching Popeye cartoons as a boy. Wimpy would often lick his chops and say, “I will gladly pay you Tuesday, for a hamburger today.” The only problem is Tuesday comes with an extra price tag. And if he can’t pay it on Tuesday, but waits until maybe Wednesday, or the Wednesday after that… watch the power of compounding interest work against him.
Let’s say you overspend your VISA by just $100 per month (that’s just one extra trip to Walmart, beyond your budget) at 15% APR interest. And let’s say after 5 years you decide, “Enough is enough! I’m paying off that credit card.” Your debt of $6,000 plus interest has now compounded to $8,857! If you start paying off that debt at $210.71 per mo. you will have it all paid off in 5 more years. You will now have paid off the $6,000 of merchandise plus $6,645 of interest out of pocket for a total of -$12,645 paid over the 10 years!   That’s called “working for your money”.
Now, suppose instead of overspending by $100 per mo., you under spent by $100 per mo. and invested that $100 at a 10% return over that same time period. Over the 10 years, your $12,000 investment would have generated $8,484 of interest-growth! Now you have a total of $20,484 ‘in the bank’! That’s called “your money working for you”. Which would you rather choose?
That was just a 10 year example. Imagine what could happen over 30 or 40 years?   Using the same example, if you were to continue investing $100/mo. for another 30 years at a 10% return, your $20,484 balance would now grow to $632,408. So for just $100/mo. ($48,000 invested over 40 years) your money would have earned you $584,408 in interest! The power of compounding interest – understand it! And make it work for you – to accomplish your life purposes.  
Take a moment now to look in your wallet. Do you have a $20 bill? Now take that $20 and send it out to work for you. Twenty years from now, you’ll thank me.
Sincerely yours,
Michael E. Gerhard, CFP®
*Periodic investment plans do not ensure a profit and do not protect against market loss in declining markets.

Pearls of Wisdom
Pearl #5        “The less you need, the freer you become”
The way to freedom is downward. Choosing to live more simply will set you free.
In these extraordinary times of financial stress – this ‘pearl of wisdom’ gives little comfort. However, this is a prudent long-term principle which if followed allows you to weather the inevitable financial storms. 
We are suddenly living in a time of de-leveraging. Banks, corporations and consumers are paying off their debt. Spending is down. Lending is down. (gas prices are down. Yea!!) Our economy may suffer in the short term, but there is much hope for the long term. It is time to re-evaluate. 
What drove us to buy bigger houses than we could afford? What compelled us to buy newer and nicer things with borrowed money? And really, how much is enough? I read in an article recently that 19% of Millionaires do not feel wealthy. Their investable assets averaged $3,000,000. How much would they need in order to feel wealthy? $23 million on average according to the survey¹
More money is not the answer to peace and security. Contentment is the answer. If there is “this one more thing” I’ve got to have to be happy, I am moving toward bondage. If you can feel truly thankful for what you have: the food you eat, the clothes you wear, you are experiencing freedom.
I remember years ago as a young married man with 2 young children, how badly I wanted a deck on my newly purchased home. Friends had them and I just had to have one! We had just raided all our savings to put 20% down on our home. I also had a credit card. Laying out the meticulous diagrams and well thought-out plans before my wife… “Doesn’t that look great!? And we can enjoy years of our kids playing in the backyard while we cookout on our deck.”
“And how much will this cost?” as she cut through my enthusiasm.
“About $600 in materials. Ed is going to help me build it. Isn’t that great!”
She didn’t budge. “Do we have it in the bank?”
“Well, not exactly, but…”
“But we have our answer, don’t we.”
Oh, I love that woman!! At the time I was angry, but she was right and I knew it. That was a real turning point for us. Had we put that purchase on our credit card – we would have moved toward financial stress, or worse. Today, with the help of my wife, our house is completely paid for. 
Contentment is a process. It does not come naturally. The less you need, the freer you become. Truly.
Michael E. Gerhard, CFP®                                                                                                        1KingdomAdvisors.org   eNews   May, 2008