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25 September, 2022 13:04 IST
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Total disregard is biggest mistake people make regarding money management: Raymond Aaron

Source: IRIS (23 March 2010)

Total disregard is biggest mistake people make regarding money management: Raymond Aaron
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In an exclusive interview with Yogita Khatri and Pooja Chopra of myiris.com, Raymond Aaron - success & investment coach explores the concepts like money management, debt management, tax planning, etc.

Raymond Aaron, North America`s most sought-after speakers, is the nation`s number 1 success and investment coach. He has committed his life to teaching people at all levels from different areas; how to utilize his powerful goal setting strategies and life management tools to dramatically change their life for the better.  For over 20 years, Raymond has shared his vision and wisdom on hundreds of North American radio & TV programs and authored numerous books- the most recent being the bestselling book `Double Your Income Doing What You Love` . Raymond is also co-author of the New York Times bestselling `Chicken Soup for the Canadian Soul` and `Chicken Soup for the Parent`s Soul``. He has been filmed in several movies including the movie `The Secret`.

> What do you feel is the biggest mistake people make regarding money management, and how can they be corrected?

The biggest mistake people make regarding money management is their total disregard of the entire issue. Most people actually don`t really make mistakes in their money management; more correctly, they simply don`t do any money management of any kind at all. For example, the most common method of managing bank accounts is writing checks until one bounces or until the bank calls to inform of an overdraft. The most common method of setting aside money for retirement is to avoid the issue entirely. The most common method of being prepared in advance for needed car repairs in the future is simply to ignore the issue and then be surprised when new tires are needed.

The correction needs to occur in two places: the school and the home. Both places seem doomed to failure, at least in the next several decades. Why? Because school teachers are government employees who are woefully untrained in matters of money. They are not beacons of wealth wisdom. Like the general population, they have received no education in money management so how can they be expected to teach it? Secondly, the home is a risky place to rely upon to learn money management because parents represent the general population which has little to no money awareness. So, growing up, children can be expected to learn nothing about money for at least the next several decades.

The only real opportunity for success is that young adults somehow become aware of the necessity to manage money. Social networking websites may well be the solution. These are relatively new constructs that appeal extremely well to the young, or at least to the young at heart. Possibly through awareness gained through social networking websites, young adults can become aware of the necessity to learn money management. If this is the case, then entrepreneurs will spring to the occasion and produce such schools and such courses. And, they will deliver such education in ways that young adults enjoy learning.

Can adults today, who are already in financial trouble with debts and insufficient retirement savings, can these adults be retrained? Yes, but first they need to become aware and secondly they need to find the schools to teach them.

> What can you tell us about dealing with debt other than the obvious - reduce credit card spending, etc.?

Debt is a terrible plague afflicting a very high percent of adults in the developed world. And, it can be solved only after understanding its causes. The causes are:
> Credit cards
> The dehumanizing of banks
> The ruthlessness of advertising
> The lack of any counter-balancing forces
Let`s analyze each cause and this will enlighten the solutions.

Credit cards are an obvious cause and they are highly visible so they can be easily blamed as the demon. Studies have shown that people spend 25% more using credit cards than using cash. Why? The reason is that using cash forces people to connect the dots between the amount of money in the wallet versus the amount of money needed for the purchase. Unfortunately, the beauty of credit cards is also its curse. Credit cards decouple you from the strong connection which there should be between how much money you have available and how much money you need for a specific purchase. Once decoupled, the excesses flow effortlessly. Even if people attempt to be responsible, they cannot. Why? Because a typical credit card user cannot keep in mind exactly how much has been spent; such work needs to be done on paper or on computer. Keeping track in the mind is doomed. Also, even if perfect track is kept, such tracking assumes that everything will go as planned. So, when any `emergency` occurs, there is a sudden `unexpected` problem.

Now let us examine banks. It used to be, decades ago, that a bank was a friendly loans officer who actually knew the borrower and indeed usually knew the borrower`s whole family and all the stories of that family. The loans officer cared. The loans officer was a member of the community who knew the borrower outside of the banking interaction. Today, such a caring connection is gone. A borrower is a number. A loans officer has quotas and rules. Indeed, ATM machines these days can actually process mortgage applications. With the caring guidance of a money-wise banking mentor absent, dire financial consequences ensue both to unaware borrowers and imprudent banks.

Next, advertising has become insidious, ruthless and ever-present. With data mining as an entire industry these days and with advertising hiding behind such new-age masquerades as `buzz marketing` and `social networking`, people have less and less ability to protect themselves against advertising. People now are bombarded with the lure of lots of bright shiny objects and are falling to such advertising attacks. If an advertising campaign does not lure enough people, it is scrapped. If an advertising campaign does work, it is NOT reused. Rather, it is `split-tested` meaning that it is reused partially and changed partially. Then the two slightly different ads are compared. If the slightly different ad works better, then the process continues, making the ads cleverer and cleverer and more and more irresistible.

Finally, there are no counter-balancing forces. There are no huge advertising campaigns encouraging prudence in spending. There are no giant media blitzes promoting wise savings. There is no funding for marketing extravaganzas to sell carrots - but there is lots of money to sell sugar-filled drinks, fried foods, expensive do-dads, name-brand this-and-that`s, etc. With billions cleverly spent to woo you to spend on what you may well not need and cannot afford and nothing spent on the other side, it is no surprise that you overspend and arrive into debt.

The cure is class action lawsuits. Fast food chain restaurants that sold deep fried food after it was found that such a process is carcinogenic are being sued in class actions. Bars that allow patrons to drink far beyond what reason would dictate and then drive home are being sued. Companies that encourage their salesmen and executives to drink alcohol as part of their job to schmooze high-end clients are being sued by the employees who have become alcoholics. Casinos are being sued by gamblers who have become gambling addicts. Factories who pollute have been sued by communities. That is the cure.

People need to band together to launch class action law suits against absurd credit card practices like handing out credit cards en masse to first year college students. People need to sue banks for approving loans way beyond the borrowers` ability to repay. Advertisers need to be sued for all their underhanded practices, just one being `buzz marketing` in which people pretend to be honestly taken by a product but really are simply being paid. Another is subliminal advertising. And, there are many others. Also, banks and credit card companies and advertising companies must fund education and marketing to produce a counter-balancing force to help people make responsible decisions.

So many workshops and books on financial planning seem to focus on very general advice - reduce debt and spending, increase savings etc. What are some things people can do right now, say in the next 15 minutes to an hour, to improve their financial situation?

> What steps can you take - right now - to improve your financial situation and financial education?

If you are in debt, you are drowning and need emergency action. Practically everyone in debt sees all their friends in debt and imagines that it is an unfortunate but acceptable situation. It is not. Drowning is not acceptable and it is far worse than merely `unfortunate`.

So, what can you do, actually right now?
The very first step you can take is a tough one. Cut up and destroy your credit cards - all of them. Your general credit cards, gas cards, department store cards, yes, all of them. You cannot solve the problem until you at least first stop the cause. It`s like attempting to quit smoking while you are still smoking or tying to lose weight while you are still overeating. First, you must stop causing the problem. Second you can begin to cure it.

Once the credit card is gone, then order a new credit card. This may seem like strange advice, but pay close attention. This time order a prepaid credit card. You see, these days, a credit card is actually mandatory for survival. You cannot rent a car or even get into a hotel bedroom without a credit card. You have a problem that you need a credit card but it is the cause of the problem. So, what do you do? You get a prepaid credit card. It looks and acts exactly like a credit card. And, you cannot be refused one. Every single application is accepted. The only difference is that you must first pre-load the card with your own cash. Then, you spend your own cash using your credit card. You are never declined because it is your own money. There is no risk whatsoever to the card-issuer. Also, it has the educational advantage that it teaches prudence and record-keeping.

With a prepaid credit card, you cannot overdraw. You cannot go deeper into debt. You cannot worsen your situation. That`s the first step. It doesn`t get you out of debt, but it does stop you getting deeper. Stopping the fall is a crucial first step. The second step begins the process of climbing out of debt.

> Do you think a separate emergency fund is an essential part of financial planning? How would you recommend our readers to structure it? Should it be separate from one`s investment portfolio?

I strongly oppose an Emergency Fund. According to the Law of Attraction, if you have an Emergency Fund, you will begin attracting emergencies. Whatever you put your attention upon that is what you will create. Do you really want to create emergencies? I am sure not.

Do I recommend planning funds? Yes. Just don`t call them emergency funds. For example, I do recommend a Next Car Fund. Maybe your next car will cost USD 50,000 and the resale value of your current car may be USD 20,000 at that time. Clearly, you will need about USD 30,000. If you like replacing your car every four years or so, then you will need to put away about 1/50th of that amount every month, or USD 600. Set up a separate bank account. Set up an automatic transfer every payday equal to USD 600 a month (or whatever the monthly amount is for your car replacement) and then the system will work automatically in your favor. When the new car is needed, the money will be there.

Also establish a Home Improvement Fund. And, a Clothing Fund. And, a Retirement Savings Fund. Set up whatever funds you wish. Decide in advance how much you will have your bank automatically transfer on every payday to each specific fund. After other automatic monthly payments like mortgage, phone, utilities and after other required monthly expenses like food, you are left with how much you have available for spending and enjoying. Without such forethought, you are doomed to a life of surprises and emergencies every time you need to buy furniture, repair your car, buy a new car, handle a medical issue, etc. Do not let yourself any longer pretend that you are surprised when such `unexpected` expenses occur. Realize that though you do not know the date of such issues, you do indeed know that they will arise.

I liken it to a novice at a Black Jack table in a casino. If the player`s first two cards add up to 16, then the player has the toughest choice as to whether to say with those cards or take another. If he takes another card, he will lose for sure unless the dealer goes bust. If he takes another card, he is quite likely to go bust himself. Darn. Tough choice. What do experienced players do? They decide in advance how they will handle such situations. When an experienced player draws a 16, he simply and calmly invokes his plan. When a novice draws a 16, he moans and groans. He asks his fellow players for advice. He pleads for the dealer to give him advice. He wrings his hands in pain. Then, with huge fanfare and fear, he makes his giant decision. Strangely, he then goes through this same charade every single time he draws a 16.

The novice is just like an imprudent person with no savings. Every time something occurs, he pretends he could not know it was coming and makes a huge show of pain and surprise. Yet, Black Jack players do indeed know that 16s will come; they just don`t know when. You too know that cars need fixing, homes need furniture, cars need replacing, etc. Prepare in advance and don`t pretend you are surprised any more.

> A lot of blame has been put on the financial advisors for losing a lot of their customers` wealth in the financial meltdown. What are your thoughts on this?

Can financial Advisors be blamed for their clients` losses? In many cases, yes. Why? Financial Advisors pretend to be independent and unbiased mentors and helpers. But, they are paid on commission. Such a relationship is terribly problematical. It`s like asking a Realtor if you should buy real estate. It`s like asking an insurance salesman if you need insurance. It`s like asking a chiropractor if you need a spinal adjustment. It`s like asking an acupuncturist how to cure your headache? He will advice acupuncture. When a person`s income is dependent on your taking his advice, then don`t expect good advice; rather expect biased self-serving advice - which will sound totally reasonable.

Am I saying that all professionals are insincere? No. I am saying that the pressure and temptation are so severe that it is way too easy for professionals to give advice that somehow is consistent with increased income for the professional.

Medical doctors will advice coming back in a month after a procedure for the doctor to simply check on the progress of your cure. Well, that sounds reasonable and indeed there are documented cases where a month-later check-up has revealed a situation that the doctor can handle and save the patient considerable distress. So, it seems reasonable. But, notice it is also in the best interest of the income of the medical doctor.

Let`s take it to the logical extreme - plumbers, if they knew you would take their advice, would all recommend annual check-ups of your home plumbing system citing cases where plumbers have uncovered problems that were less costly to prevent than fix after the system failed. This would dramatically increase the income to all plumbers in the world. And, it would uncover some problems before they became huge problems. But, really, it would be a financial benefit mostly just to the plumbers and not necessarily to home-owners.

So, blaming Financial Advisors is easy and legitimate. But, the deeper truth is the gullible clients simply do what they are told. If an Advisor needs income one month, then expect a phone call advising you to make some transaction in your account that seems eminently reasonable. But, know that it will be a more certain benefit to the advisor than to you.

On a totally different note, Financial Advisors are using under pressure to sell specific products, even if they disagree with such products. You, unaware that the Advisor is obliged to sell a financially weak product are the unwitting victim of a system in which the Financial Advisory firm is primary in importance, the advisor is secondary in importance, and you, the client, for whom this is all supposed to serve, are third and last in importance.

And finally, advisors are usually required to offer their own firm`s financial vehicles even if the advisor knows of other vehicles which are far superior.
What are the cures? Firstly, you must educate yourself so that you know when you are getting biased advice. Secondly, find an independent advisor who is not forced to sell the company`s own financial products.

> An expert says, ``Knowing how the tax system works is an essential component in your personal financial planning. The only way to learn how our tax system works is to actually fill out the forms.`` Is it important for every taxpayer to prepare his/her own income taxes? Should investors view tax planning as a strategy to create wealth to meet their future needs?

Should you complete your own tax return? Is completing your own tax return an essential component of tax planning? No and no.

Completing your own tax return is only for those who have the very simplest of returns. For example, if you are an employee and tax has been deducted at source, and you have no entrepreneurial income, no rental income, no investment income, etc. then you may as well complete your own tax return because there are no exciting deductions available to you and your return will be extremely simple and straight-forward.

In all other cases, with any business income, any rental income, any investment income, you must seek professional guidance. Learn from the legal profession which has an interesting saying: ``He who represents himself has a fool for a client.``
If I can borrow loosely from that wisdom: ``He who completes his own complicated tax return is a fool.``

If you have a complicated return, then ask yourself some questions:

Was math my best subject in school?
Have I ever studied accounting or bookkeeping?
Have I ever taken courses in creative but legal and allowable deductions?
Have I updated my knowledge of legislation related to tax for this tax year?

If you are noticing that you getting a rather repetitive no, no, no, no to the questions above then why are you doing your own returns. You know nothing and you are wading into an arena in which professionals study tax for years to get into the profession and then update their knowledge every single year to keep current. How can you hope to do as good a job as an accountant or a reputable tax preparation service can do?

Stated another way, would I personally retain you to do my own tax return? If you replied `no`, then why would you retain you to do your tax return?

I cannot possibly do my own tax planning. My job is to maximize my income and minimize my expenses and serve my clients. My tax planners` job is to advice me how to legally and honorably lower my income tax. I meet regularly with my tax planner and get his advice. I follow his advice. I do not have his wisdom; I use his wisdom. And, I do not wish to attempt to gain his wisdom to do my own tax planning because it is not my interest. I want to do what I love doing and I want to have a powerful tax planning professional and a dedicated tax return professional serving me.

> What aspect of your work gives you the most satisfaction? What is next for Raymond Aaron? Do you have other plans that people should know about?

I personally derive greatest satisfaction from hearing from my mentored clients around the world and learning of their great success. I love hearing that they couldn`t do something before they began using my mentored guidance and then were able to do it with the benefit of my mentored guidance.

I love hearing from my clients who were in debt and are now debt-free. I love feeling the glee of my previously-overweight clients who are now slim and far healthier. I love getting testimonials from mentored clients who are hugely wealthy after only a short time with my mentoring program and previously they were floundering and usually in debt.

I love developing new concepts to teach to my mentored clients around the world so that they can have their dreams fulfilled.

I love challenging myself to go way beyond what I have ever done before. For example, when I was 48 years old, I learned how to ride the unicycle. It is an extraordinarily difficult vehicle to master - it took me every evening and every weekend for a year. As soon as I learned it, I wanted to learn how to ride the 5-foot-tall giraffe unicycle and I did indeed learn it at age 49.

More recently, at age 62, I competed in Polar Race, which has been dubbed as ``possibly the world`s toughest race.`` It is a month-long 350-mile foot-race to the North Pole. The average temperature during the race was a bone-chilling -40 Celsius. We had to haul behind us a sled weighing 100 pounds containing our needed supplies like food and tent.

I remember, years ago, registering for a water ski jumping class. I`ve wild cave explored. I`ve mountain climbed. I`ve rock climbed. I`ve competed in many long-distance cross-country ski races. I?ve run three full marathons of 26 miles. I`ve completed one ultramarathon of 100 km (or 62 miles). I just love challenging myself like this. It excites me.

What challenge am I facing right now? I just got married and I am taking on the thrill of creating a spectacular and uplifting marriage. Since the divorce rate is a shocking 50%, this may be my greatest challenge and I intend to achieve being a great husband in a wonderful marriage. Also, in my personal life, I have just become a grandfather to one little girl and also a pair of twin girls. Being a great grandfather is an easy job; nevertheless I intend to be a wonderful granddad.

In my business, I am excited about my new clients in Dubai, in Abu Dhabi, and in India. What a joy for me to be helping new friends and clients in that part of the world.

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