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Thursday, July 29, 2010

Unintended Consequences

You may have heard of the ‘Butterfly Effect’…a butterfly flaps his wings here in America and sets off a tornado in Japan…or so the saying goes. It’s a metaphor used to explain how small changes can create large unintended results.

The greed and mismanagement that dominated the executive offices of America’s largest banks over the past decade caused what is now called The Great Recession. The banking industry was brought to the verge of collapse; unemployment rose well above 10%; consumers and businesses severely curtailed spending and our economy came to a screeching halt. Our government leaders hopped on white horses intent on ‘saving the day’ with an array of new legislation, regulation and corporate quasi-takeovers. Enter, the Butterfly Effect. Let’s look at a couple of the unintended consequences of government intervention.

Extension of unemployment benefits. With so many people out of work and unable to find jobs, it makes sense to extend the period of time people can receive unemployment benefits, right? A business owner tells this story. “On a weekly basis, I have people coming in asking if we are hiring. If I say ‘no’, then they ask me to sign a form indicating that they sought employment which is one of the requirements to remaining on unemployment benefits. If I says ‘yes’, the person asks if he can be paid in ‘cash’. If I say he’ll receive a payroll check, he moves on to the next business. Why? Because he wants to keep his unemployment check coming in and hopes to earn some ‘non-reported’ income.” Many others who are receiving benefits have found that they can manage on the unemployment checks so, ‘Why work if you don’t have to?’ So by extending unemployment benefits, the ripple effect is that unemployment itself is also extended. Now it is true that there are lots of people who are trying very hard to find a job, but as long as you extend benefits, you can bet re-employment will be a slow process.
Lowering of interest rates. When the financial crisis began to unfold, our government reacted by lowering interest rates to zero (Federal Funds Rate). The idea was to slash interest rates in order to encourage borrowing and spending by businesses and consumers. In addition, the government jumped in bed with our largest bankers and loaned them an unprecedented $700 billon dollars to keep them afloat and allow them plenty of cash to lend…which is their primary function. So how did it work out? Well, the bankers hoarded their new-found cash and eighteen months later, they’re still not lending. They can borrow at 0% and earn a spread investing in treasuries or commercial paper without taking any risk. A VP of the Southeastern Business Division of one of the nations largest banks said that from January through August of 2009, they made no loans and that for 2010, they had made only 18 loans. Worse, current retirees who depend on interest income to pay their bills have seen their cash flow slashed and as a result…are not spending money!

So how do you jump-start an economy where the banks aren’t lending money to businesses so that they can expand and hire new workers; retirees can’t afford to spend money; and many unemployed workers are gaming the system? One answer is for the government to spend more money. But at what Butterfly Effect?

Sunday, July 18, 2010

9 Secrets of Achieving Financial Freedom, Pt VIII

“9 Secrets of Achieving Financial Freedom Pt VIII”

As I conclude this series on the ‘9 Secrets to Achieving Financial Freedom’, let’s begin with a review of what we’ve covered so far. The Secret of Decision states that before you can accomplish any goal, you must ‘decide’ what you truly want. With the Secret of Total Commitment and the Secret of Clarity you commit to do, “Whatever it takes” to succeed and get very clear exactly what success will look like for you. Once you’re clear about what you intend to achieve, use the Secret of Decisive Action to both develop and execute a written game plan. Any goal worth achieving will likely involve many challenges and obstacles so you’ll need to fortify yourself by implementing the Secret of Perfect Attitude. With this secret you discover that while you may have little choice regarding your challenges and obstacles, you get to choose how you react to them. That choice allows you to respond in a positive, constructive and productive way…and will hasten your journey to success. Adopting the attitude of success allows you to incorporate the Secret of Financial Focus. Each day ask yourself, “What can I do today that will move me closer to my goal?” and then take a positive step. Most major goals are accomplished with hundreds of ‘baby steps’. The Secret of Passive Income states that to be truly financially free, you must create a source of cash flow outside of your own paycheck that is at least equal to lifestyle expenses. Think of it as a way of ‘automating’ your success. With the Secret of Leverage, you’re looking for ways to accelerate your success…to reduce the time it would normally take otherwise. In the world of personal finance leverage is available in many forms. Donald Trump and millions of other people use financial leverage to create personal fortunes with modest amounts of money. Business owners use ‘people’ leverage to magnify results. Just look at what Bill Gates has accomplished by assembling a group of highly talented employees. Our government provides tax laws that allow you to leverage returns through tax deductible retirement plans. And the list goes on and on.

This brings us to the final secret, the Secret of Team. Rarely have I met a Self-Made Multimillionaire who got there without a lot of help. In fact, built into most Self-Made Multimillionaires DNA is the intuitive knowledge that they’ll need to develop a Team; seek out mentors; and model others who have gone where they intend to go. You should do likewise. Whatever your goal, think about who you could get to help you achieve it. It might be a professional, a friend, a family member or someone you don’t know personally but will need to meet. You’ll find most people are willing to help you if you’ll just ask.

In my own Ultimate Fitness Quest, I used all of the above ‘secrets’ as I set out to lose 20 pounds of body fat in 40 days and cut my waistline from 37 inches to 34 inches. Each secret proved critical to success as each is interconnected. By day 40, I lost 20 ¼ pounds and cut my waistline to 33 inches. So where do I go from here? I’ll set a new health and fitness goal that builds on my current success. You can as well. Whether your goals are in the area of personal finance or fitness, take the first step today and visit www.StewartWelch.com.

Monday, July 12, 2010

The 8th Secret - Leverage

The eighth secret of the 9 Secrets of Achieving Financial Freedom is the Secret of Leverage. Archimedes said, “Give me a lever long enough and a fulcrum on which to place it and I shall move the world.” The right use of leverage can accelerate your success for just about any goal you have. Thinking of the investment arena for a moment, there are numerous ways leverage is used to magnify success.


One of the simplest forms of leverage is compound interest or as Albert Einstein said, “Compound interest is the eighth natural wonder of the world and the most powerful thing I have ever encountered.” Simply stated, compounding is the effect of earnings on both your principal and interest. In other words, if you invest $1,000 at 5% interest, you’ll earn $50. By reinvesting your interest along with your principal, you are now earning 5% on both your principal AND your reinvested interest.

You can also create leverage through tax planning. For example, our government has passed tax laws that encourage certain behavior such as deferring income into your company 401k plan. Doing so avoids immediate taxation on income and defers taxes on earnings until funds are withdrawn in retirement. Whether it’s tax free interest on municipal bonds, depletion allowance on oil and gas exploration, depreciation on real estate and business assets, each strategy allows you to leverage your returns.

Donald Trump became a billionaire by using financial leverage to buy real estate. He’s not alone. Financial leverage has created more millionaires than just about any strategy. You put a down payment on a piece of real estate and a bank or other lender will loan you the balance. Here’s an oversimplified example: You pay $100,000 cash for a rental property and it produces a $10,000 profit, earning you 10% on your money. However, if you invested $10,000 and borrowed $90,000 and earned a $10,000 profit, your return would jump to 100%. Now that’s leverage!

Clearly leverage can be a ‘two-edged’ sword as we have seen millions of good folks lose their homes and businesses to foreclosure because of declining values and revenue. However, when used judiciously it can truly accelerate your success. With any goal you have, ask yourself this question, “How can I use leverage to accelerate my success?”

So how have I used leverage in my Ultimate Fitness Quest? It started with a demanding goal…to lose 20 pounds of body fat over 40 days. I then got great advice from a team of experts in the field of health and fitness. I knew I would need leverage to inspire me to success so I did three things. First, I asked for support from my wife and co-workers, the people I would be spending the most time with. Next, I recruited a Support Partner, someone who would encourage me and hold me accountable. Finally, I told someone…excuse me…EVERYONE what my plans were. You want to create leverage on yourself? Try setting an audacious goal and then tell a bunch of people! So far I’ve lost 15 pounds in the first 30 days!

If you’re ready to set some audacious goals for your personal finances or health and fitness, sign up for the 9 Secrets to Achieving Financial Freedom or the Ultimate Fitness Quest at www.StewartWelch.com.