David Bach is used to people coming up to him on the street to thank him for the wonders his money management tips have made in their lives. And so began the encounter with Gloria on a street in his neighbourhood in the summer of 2009.
She'd done everything the New York-based finance guru advised in his past money tomes: saved $70,000, set aside six months worth of expenses, paid off her credit card, bought a home, and even purchased a rental property.
"And my question to you is," Mr. Bach recalls her saying, "was this all just for nothing?''
The recession had tripped up Gloria's steady footing. Her retirement fund had dropped by more than a third; the same thing happened with her daughter's education plan. Her house dropped so much in value that it was not only worth less than she'd paid for it, it was barely worth what she owed on her mortgage. Her renter had lost his job and was behind on his monthly payments.
No, it's not all falling apart, Mr. Bach assured her. And the encounter inspired him to write Start Over, Finish Rich: 10 Steps to Get You Back on Track in 2010, a book meant to rejuvenate North Americans' tired financial lives. Here's his prescription:
Step 1: Recommit to Wealth Adjusting your mindset is the first - and very crucial - step to "getting rich" (that is, free from financial worry). "A big part of it is getting yourself unstuck: At the end of the day, no one's going to save me, you've got to save yourself." Recognize that economic cycles are just that - cycles - and that recovery is inevitable. The biggest mistake people make when they "get stuck" is they stop saving, they stop investing and therefore have nothing to build on for the future, Mr. Bach says.
Step 2: Find Your Money You have it - lots of it, even. But you won't find it unless you're organized. Mr. Bach recommends creating a file-folder system that will become a profile of your financial self. Cutting back on daily purchases is the best way to find money, Mr. Bach says. "It adds up to a fortune," he says. "Saving just $5 a day can mean more than a million dollars in your retirement."
Step 3: Deal with your Credit Card Debt You can't get rich if you have to keep paying credit card companies. "Right now people in Canada and the U.S. are focusing on paying down their debt," says Mr. Bach, pointing to high interest rates as a catalyst. Pay the minimum on every card except one until that card is paid off, then repeat with others. Compare your credit card interest rate to the national averages (the Financial Consumer Agency of Canada pegs it at 19 per cent) and jockey to lower it.
Step 4: Fix and Protect your Credit Score "If you haven't checked it in the past 12 months, someone else has - maybe even your employer," Mr. Bach writes. Review it once every 90 days or at least once a year, he says. "Like getting on a scale if you're trying to lose weight, it's valuable to know where you're at." Tackle whatever is keeping your score low and seek out credit monitoring services offered by major credit bureaus.
Step 5: Rebuild your Emergency Savings It's all about the "sleep-well-at-night factor," Mr. Bach writes. Find out what your current monthly expenses total and how much you have in your regular banking account. How many months of expenses does this add up to? If it makes you squirm, it's time to readjust. Give up something non-essential and put that money in your emergency account. Then don't touch it unless there's an emergency.
Step 6: Re-energize your Retirement Plan This is where the recession really walloped us, Mr. Bach writes. Many people stopped contributing to their RRSPs - and it's crucial they start again. Have money automatically moved to your RRSP account on a weekly or monthly basis. Find out what level of risk you can manage, and what's realistic for someone your age, and adjust your investments to reflect it. Know exactly what you're investing in.
Step 7: Make it Automatic "Most people are led to believe that they should have discipline, when in fact most of us don't," Mr. Bach says. "So we try the approach and it doesn't work, and we beat ourselves up about it not working." Set up an automatic transfer of at least 5 per cent from each paycheque into your RRSP before the government can tax it. Automatically pay a percentage into your emergency and dream accounts. Pay your monthly bills and all of your credit card bills that way too. Arrange to have them come at the same time every month and make the minimum payment five days before the due date.
Step 8: Rebuild with Real Estate If you're serious about getting rich, buy property, Mr. Bach says. Take advantage of this buyer's market, a chance that comes only every 20 or so years, he writes. And when you do buy, keep the property at least 10 years for a real investment. "The biggest mistake people make with real estate is they [focus]on reselling," he says. "People buy it hoping to flip it for a profit based on cash flow and often [they]don't have enough base in place."
Step 9: Rebuild your College Fund (and Restructure your Student Loan) Save for the education fund after contributing to the emergency pool and your retirement plan, Mr. Bach says. "Why? Because while you can borrow for college, you can't borrow for those other things." Be sure the education plan isn't too aggressive, so your child won't take too much of a hit if the stocks and investments lose value. Keep an eye on the fund and rebalance it periodically.
Step 10: 25 Ways to Save $5,000 You can do it by losing premium TV and cable, re-examining your cellphone plan, ditching the land line, bundling telecom services and downgrading your gym membership to something more realistic, Mr. Bach says. Shop around for cheaper car, homeowner and life insurance. Then cancel subscriptions you don't really need and lower your credit card interest rates and nix the fees (things like late charges and over-the-limit fees). Quit paying for anything you're not getting maximum returns from. Simple.
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FILE EVERYTHING
With a little organization, you can identify where to save money and where to make it. Pick up some hanging files and a box of at least 50 folders to create a file folder system. Label and file as follows, according to David Bach:
Tax returns: In four folders, one for the current year and one for each of the last three.
Retirement accounts: A file for each account.
Investment accounts: For every statement you receive that pertains to mutual funds, stocks, bonds, etc. Separate folders for brokerage accounts.
Savings and chequing accounts: For monthly bank statements.
Household accounts: "House Title" for title reports and insurance policies, "Home Improvement" for receipts, "Home Mortgage" for those statements.
Credit card DEBT: Capitalize the word DEBT so it bothers you when you look at it. Put monthly statements here.
Dead on last payment: Prioritize debt payments here (print out a worksheet at finishrich.com/dolp)
Credit scores: For your most recent scores and reports.
Other liabilities: Records dealing with debts that are not your mortgage or credit cards - things such as university/college loans, car loans, personal loans.
Insurance: A folder for each policy: health, life, auto, etc.
Family will or trust: A copy of most recent living will.
Children's bank accounts: A folder for each child's statements.
Latte factor: Sheets on which you track your daily expenditures.