That’s where our nation is today and the current crisis is just the tip of the iceberg. Here are some staggering numbers to which no one seems to want to pay attention. As of November 2011, after all the bailouts, the federal debt was just shy of $15 trillion, but that doesn’t include the unfunded portions of Medicare, Medicaid and Social Security. When these amounts are added the total rises to $116.3 trillion. That’s over $1,000,000 per taxpayer. But wait! There’s more. Add to this nearly $3 trillion in state and local government debt and almost $16 trillion in consumer debt and you have a nation facing eventual bankruptcy unless we rein in spending and start paying off the debt.

Over the past 40 years, we have created the most envied standard of living in the world. The problem is, it has been done with massive debt. The current financial crisis is nothing more than a gentle breeze rattling the house of cards compared to the inevitable collapse that could come if we don’t start getting our house in order. Just as the family in the earlier example will eventually exhaust their ability to borrow and be forced to take drastic and painful measures, like Greece, so will our country.

Currently over 25 percent of our federal debt is held by foreign countries. Japan and China hold over $1.5 trillion of it. Imagine what would happen if either country stopped investing in US treasury back securities and decided to unload the ones they already hold. It would make today’s financial crisis look like a mosquito bite compared to a rattlesnake bite. It probably wouldn’t kill us, but it would sure create a painful experience that practically everyone would feel. Don’t think it couldn’t happen. Neither did the Greek population. The moment the rest of the world fears that we are becoming overextended, they will do like any other lenders and cut off our credit.

Today’s dilemma is how to get politicians to make responsible decisions when those decisions may cost them reelection. Reining in run-a-way spending and asking constituents to make sacrifices is not popular. Lacking basic financial literacy, it’s impossible for most people to understand that the euphoric feeling which accompanies an increasing standard of living is unsustainable when it’s done with borrowed money. That’s why I’m such an advocate of placing special emphasis on teaching personal financial literacy in our public schools. An educated populace will be better able to understand and accept the tough decisions that are needed to put our financial house in order.

Until elected officials stop putting reelection ahead of what’s best for the citizens, we are going to continue having economic problems. More government intervention is not the answer! As Gerald Ford said in his address to a joint session of Congress on August 12, 1974, “A government big enough to give you everything you want, is big enough to take away everything you have.” We have to educate ourselves so we can understand and deal with the problems. Thomas Jefferson said, “If a nation expects to be ignorant and free…it expects what never was and never will be.” We need more personal responsibility and fewer government bailouts.

Here’s a tip! Visit the website www.usdebtclock.org to see the problem and how rapidly it is accellerating. Then think! Individually, there may not be much you can do to influence out of control government spending, but you can put your own house in order. A good place to start is by learning basic consumer economics. If you have been living above your means and have racked up a pile of consumer debt, now is the time to go on an austerity program. Reduce your spending to a bare minimum and start paying off your debts. When you become debt free, your future will belong to you instead of being owned by your creditors. Tomorrow’s income can be used to start a regular program of saving and investing instead of making debt payments. That’s the way to secure your future. The more wealth you can build, the less impact tough decisions will have on you when they finally have to be made.

As many Americans are now discovering, the dream of owning your own home can quickly turn into a nightmare when you don’t follow sound financial principals. I believe lack of financial education has contributed as much to people losing their homes as the unscrupulous lenders who made them their loans. We all have to take the blame for tolerating this major failure of our educational system, but we don’t have to keep tolerating it.

When buyers are abundant and money is easy to obtain, buying becomes competitive and leads to the same type hype and enthusiasm an auctioneer can create. The difference between asking and selling price is small or non-existing during these times. Conversely, when inventory abounds, money is tight and buyers are few, the price difference can be quite significant.

Real estate has three types of buyers. The first is retail buyers who buy homes in which to live. They typically make offers that, within reason, are based more on how much they like a property than whether it is a good deal. The second is investors who make offers based on the amount of income a property can generate. And the third is speculators who buy properties hoping to sell quickly for a profit.

Don’t confuse investors with speculators. Investors buy and hold for the income real estate can provide. People who have to sell properties to make a profit are speculators. Flippers, rehabbers and wholesalers fall into the speculators group and are the ones impacted most by market movements. When prices rise rapidly, speculators make huge amounts of money, but when conditions change and prices fall or just hold steady, they can suffer big losses.

The difference between asking and selling prices is largely determined by retail buyers and speculators. Investors are wholesale buyers who base their purchases on the income stream properties can support and therefore are rarely affected by volatility in the market. They hold their properties for the income and don’t sell. On the other hand, retail buyers forced to sell due to job loss, divorce, transfer, rising interest rates or other factors and speculators facing falling demand are often forced to take huge discounts in order to sell. This price cutting causes the gap between asking and selling prices.

Investors aren’t swayed by appraised values, the way retail buyers and speculators are. They know that appraisals are nothing more than calculated estimates of market values assuming sufficient marketing is conducted and reasonable time is allowed to find a buyer. Appraisals, especially ones involving single-family homes, establish retail values and are of little use for anything other than obtaining conventional financing from banks or supporting a retail sales price. They have little to do with the investment value of properties.

Appraised values often give new investors a false sense of accomplishment. They become very excited when they make a purchase a few thousand dollars under the appraised value, especially if they can finance it so that the payments are less than the rent. They quickly learn the value of appraisals when they start having to dip into their earned income to pay all the expenses. Many sell their properties for less than they paid, take big losses and become ambassadors for the crowd who proclaim, “Real estate investing is not for me.”

With the market growing colder by the day and unsold inventory on the rise, now is a great time to buy. Sellers are becoming increasingly flexible in both price and terms and rents are rising. While the outlook for real estate investors is very good; for speculators it’s very bad. It’s also bad for retail buyers who are forced to sell, especially those who bought using interest only, adjustable rate, or sub-prime loans. But the biggest losers are the financial institutions who caused the mess. They are awash in foreclosures and there is no letup in sight.

Here’s a tip! Forget all the negatives you hear about investing in real estate, it’s still the surest way to wealth. If you’re an investor or want to get started investing in real estate, now is the best time I’ve seen in my lifetime. Forget about appraisals or asking prices. Determine a property’s value based on the income it can produce after all expenses are considered. That’s the money with which you’re going to pay for the property, so structure your offers so the net operating income, not the rent, will cover your payments. If you plan to pay cash, divide the annual NOI by your desired rate of return and that will determine what you can pay.

Even if you’re buying a home in which to live, the market is so flooded with inventory and there are so many speculators in trouble, you should have no trouble finding a good deal on a house you like, especially if you will think and make offers the way an investor would. Assume you might need to rent the house in a few years. If you determine its value based on the amount of income it can produce, you won’t get in trouble.

Stick to your determination of value and don’t let seller dissatisfaction deter you from making offers. Wholesale offers offend some sellers! This is understandable, because most sellers base their asking prices on appraisals or optimistic estimates of value by real estate agents. Many also attach sentimental values that mean something to them, but have no value to a buyer. Just remember when making offers that a low offer is better than no offer. You don’t know what sellers will do until you ask and the way to ask is with a written offer.

When a teenager is given a car as soon as they become old enough to drive, it denies that young adult the opportunity to learn the value of patience and it takes away that feeling of exhilaration that comes when you finally get something you want very badly, but have had to wait and work to get. Schools can’t keep parents from overindulging their children, but they can teach the young people about the cost of ownership and I’m not just talking about making the payments.

With a car, comes the cost of fuel, tires, maintenance, inspection, insurance, depreciation etc. If it’s financed, add the cost of interest, which buys nothing but time. The economic lesson not being taught by our schools is that all assets have a cost of ownership. Individuals own homes, cars, boats, recreational vehicles and other assets. Governments own schools, office buildings, roads, bridges, airports, ferries, and numerous other assets that like a teenager’s car must be serviced and maintained. When young people fail to learn about the cost of ownership, how can we expect them to understand the cost of owning a home or car or be savvy enough to elect officials who will be concerned about the cost of government initiatives?

Granted, we live in the most prosperous nation on earth. Our standard of living is the highest mankind has ever known. We are the envy of the world. But what nation wouldn’t be after running up more than $17 trillion in personal, city, county, state and federal debt. Shouldn’t educating our children about the effects of all this debt be mandatory in our public schools? Imagine what our standard of living would be if we suddenly had to pay off the debt? Why do we keep running up consumer debt and urging government to spend more to make our lives even better?

During this election year you can bet candidates will be promising all sorts of perks to entice you to vote for them. I doubt this tactic would work so well if voters realized that nearly every function of government has an ongoing cost that has to be paid sooner or later. Teaching teenagers about the cost of owning a car could be a good way for them to start learning this lesson. Mom and dad aren’t going to be around forever to help pay the expenses. When things come too easily they lose value. We’ll never wean ourselves from debt as long as we live a lifestyle that’s above our means and saddle our children with the bills.

As I said in the beginning, it’s a huge problem that threatens the economic well being of the nation. It’s a much larger problem than can be addressed in a short article like this, or even in a hundred more articles for that matter. But there is a solution. That solution lies with you and me and our children and our children’s children. We must bring common sense fundamentals of consumer finance back to our individual households and demand the same from government.

Our problem as a nation didn’t happen overnight. The massive federal debt has grown the same way an individual’s credit card debt grows a little at a time over a period of years. State and local government debt has done the same. A new program here, an expanded department there, new laws that must be administered, social programs that frequently destroy initiative and create economic cripples are a few examples. We have to learn say no to things we might want but can’t afford. In our households, we cut back on spending when our finances get out of control or we aren’t able to build a nest egg for the future. Government needs to do the same and we need to demand it.

Here’s a tip! Whether it’s an individual household, a city, county, state or the nation, you can’t borrow your way to lasting prosperity. Thomas Jefferson said, “I place economy among the first and most important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt.” Today, the federal debt alone is a staggering $14,000,000,000,000 plus and growing rapidly. It takes over $400,000,000,000 annually just to pay the interest, money which buys us nothing. Think about it! Shouldn’t we be educating our children about this threat to their future, or are we afraid it might expose how we have enhanced our lives at their expense?

A very unusual part of this visit occurred on our way to be seated. We were taken on a tour through the kitchen so we could see how our food would be prepared. Then we were led to a dining room section that contained seating for about 40 people where we were directed to a large booth that could easily seat six people. As you can imagine, after a hard day of training, we were ready for little refreshment and a good meal. When I turned to look for a server, Pat suddenly appeared from just behind my left shoulder.

Before I continue with this story, let me say that Pat, although attractive, was not a youngster working her way through school. She very efficiently took our drink orders, told us about a couple of specials and invited us to look over the menus while she got our drinks. Before she left, she made it a point to let us know that after bringing our drinks, she would leave us for another couple of minutes while she checked on her other tables, but would be ready to take our orders when she returned. I was amazed at the way she assured us of good service while tactfully letting us know she had other customers to serve as well.

I watched as she turned in our drink orders, and then methodically moved through the dining room checking to see if anyone at the other tables needed anything. Without back tracking or wasting a single step worked her way back to server’s station just in time to pick up our beverages. She arrived at our table with our drinks on her tray and a smile on her face. As she was placing the drinks on our table, she asked if we had dined at Buca di Beppo before. We told her we had not, so she proceeded to give us a brief but informative history of the place along with her assurance that it would be an experience to remember. Then she was off to make rounds to the other tables as she had told us she would do.

We looked at each other and I said, “Wow, that woman is good!” A conversation ensued about what it takes to be a great server and even though the evening was just beginning, we knew we had one. In the ten minutes or so that we had been seated, we hadn’t seen another server come in or out of the room. When she returned to take our order, I asked Pat how many other servers were helping her in the room. I told her that I hadn’t seen anyone but her since we sat down.

“Honey, I’m it,” she said. “This is my section and I take care of everyone.”
“How do you do it,” I asked, because in most restaurants there would be three to five servers handling that many tables.

“I’ve been doing this for years,” she replied. “I don’t need help from a bunch of these youngsters who make three trips to do what can easily be accomplished with one. They just get in my way. Please let me know if you find anything lacking in my service.” I knew immediately there wouldn’t be.

We watched Pat work the entire section without anyone, including us, having to flag her down or wait for service. She was like a finely tuned and well oiled machine as she anticipated every need and responded without having to be asked. There was no comparison between Pat’s service and the service I had received the evening before at another restaurant. When I left a tip that was about 50 percent of the price of the meal, Pat thanked me profusely and said, “I’ll bet you understand what T.I.P.S stands for, don’t you?” I said, “To Insure Proper Service,” and she just smiled and thanked us again for allowing her to serve us.

Here’s a tip! It doesn’t matter whether you’re building houses, working in a factory or waiting tables in a restaurant, if you strive for excellence and your performance delivers it, you will be rewarded. After watching her work the room, seeing her interact with customers and observing the pleasure they were receiving from her service, it wouldn’t surprise me if Pat makes more in T.I.P.S. than the restaurant manager makes in salary. She was a marvel to behold.

Here’s another tip! If you want a fine meal, the most awesome service you will ever get, and an opportunity to see what perfection and performance is all about, visit Buca di Beppo in Orlando, Florida and be sure to ask to be seated Pat’s section.

If you have lived frugally, saved and built cash reserves, you are in a position to take advantage of some unprecedented opportunities. If you have been living above your means and supplementing your earnings with debt, your outlook for the future may not be quite so rosy. If you have cash and good credit, now is the time to start looking at long-term real estate investing as a way to provide income and secure your future. If you are in debt and struggling, now is the time to tighten your belt and get your personal finances in order.

A couple of years ago, Mike wrote about a friend who had just purchased a new truck (Of course, there was nothing wrong with his old one, which was only 2 years old.) and was excited because his payments had only increased $32 per month. He lost a bit of his excitement when Mike pointed out that he would have to make the new payment for three additional years after the payments on his old truck would have ended. His comment was, “Oh well, everyone makes car payments all their life.”

When Mike told him that he hadn’t made a car payment in over 30 years, he wanted to know more. Mike explained that when he was young, he struggled to get his first car paid off and then kept making the payments into a savings account. He didn’t get a new car until he had built up enough to trade in his old one and pay cash for the difference. He’s been doing that ever since. This led to a more in depth discussion and he told Mike about several other debts on which he was making monthly payments. These included two VISA cards and two Mastercards with minimum monthly payments of $30, $26, $15 and $22 respectively. In addition, he had a furniture store account with a $41 monthly payment and a home equity loan on which he was paying $120 monthly. All together, including the payment on his new truck, he was paying over $1000 per month on consumer debts, which was more than half his take home income.

He said he had been trying to get out of debt by paying an extra $10 per month on each account. Mike suggested that instead of paying an extra $10 on each account that he take all the extra money and apply it to the account with the smallest balance. Then when that account was paid off, apply the total he had been paying on it to the one with the next highest balance and keep doing this until he gradually got out of debt. A few months later, he called to let Mike know that he had all of his accounts paid off except for the truck. He said he was now putting the money he was paying on the credit cards, store account and equity loan into a saving account so he could pay cash for his next vehicle.

Mike congratulated him on getting his financial house in order. He told him that what he is doing now to avoid debt will ultimately allow him to have more over time; plus he will avoid the pressures that come with owing money. He said he had just turned 50 and wished they could have talked 20-30 years ago. He said the austerity program he had been on for the past couple of years had been well worth it; that just knowing he doesn’t have to make all those payments each month has given him a fresh outlook on life.

A few years ago when he was trying to explain the economic meltdown, President Bush said, “Wall Street got drunk and is now suffering a hangover.” He should have said, “The American people got drunk on easy credit and are now suffering a hangover.” Millions of people have propped up their lifestyle with debt because their incomes wouldn’t support the way they were living. Now their foolishness has been exposed when the economy cooled and credit became difficult to obtain.

Here’s a tip! Living on borrowed money makes you vulnerable to outside forces over which you have no control. Like a flag on a flagpole, your life’s course is dictated by the direction the economic winds are blowing. This is true of both countries and individuals. The only way to change this is to take control of your future income. A debt made today is a surrender of part of tomorrow’s income. The sacrifices you make today to avoid debt are insignificant when compared to the price you will pay in the future to get out of debt.

The way to control your future is by taking charge of today. If you’ve been living above your means, stop! Force yourself to adjust your lifestyle to live on less than your income and use the difference to get out of debt. If you aren’t in debt, use the money to build wealth, because with wealth you can control circumstances, but without wealth circumstances will control you.

In case you’re not familiar with the Greater Fool Theory, it’s a phenomenon that occurs in all financial markets, not just in real estate. It starts when a few savvy speculators buy stocks, bonds, real estate or other investments, then sell them in a relatively short timeframe and make a huge profit. Other not so savvy speculators see their success and try to get in on the gravy train. This begins a flurry of buying and selling based on the theory that it doesn’t matter how much you pay, a greater fool will come along and pay you more than what you paid.
As additional speculators enter the market, it precipitates a frenzy of buying that seems like it will never end. Guess what? It does! Then when the market collapses and prices fall, the fools who bought last start crying for help. The savvy ones, those who started the whole mess, have probably taken their profits and moved on from speculating in real estate to speculating in oil or other commodities. What makes the real estate collapse such a crisis is the fact that it has engulfed average working Americans who just wanted to buy a home. Many of these people are now losing everything.
Greedy lenders were as much to blame as speculators for enabling ordinary people to become ensnared in the euphoria of rapidly rising home prices. Sub prime loans, interest only loans, undocumented loans, home equity loans and lines of credit that could bring financing to over 100 percent of appraised values, all contributed to flooding the market with cash that couldn’t be justified. Adjustable rate mortgages (ARMs) with low introductory rates enabled individuals to qualify for loans they couldn’t afford.
This easy money attracted more buyers and super heated the market. Prices were rising 10-15-20 percent per year or more in several areas. In a few markets, buyers were making offers that were higher than asking prices and sales contracts were often signed the day a property went on the market. Unsophisticated buyers armed with easy credit jumped on the bandwagon and their exuberance enticed builders to flood the market with condos and spec homes. That’s when the Greater Fool Theory finally hit full throttle.
Anyone with a little common sense should have been able to see that this was a recipe for disaster, unless they allowed greed to cloud their vision. From individuals who bought properties they couldn’t afford to lenders who loaned them the money to do it, all were at fault. Finally, the bubble burst, prices began to fall, builders who couldn’t sell their inventories started going under, homeowners defaulted on their exotic loans and lenders were flooded with foreclosures. The greater fools were the ones left holding the bag, and there were many.
I’ve experienced four of these boom and bust cycles in the real estate market and I’m happy to say that I’ve never experienced a down year. The reason is simple. I don’t participate in the Greater Fool Theory. I’m an investor, not a speculator, and have been for over 40 years. The difference is easy to define. With the exception of your primary residence, if you have to sell a property to make a profit, you’re a speculator, not an investor. Investors invest! They buy and hold for the income stream an investment will produce. Speculators buy in anticipation of selling for a profit. Most speculators consider themselves investors until prices fall and their speculative purchases turn sour.
We’re now in a period of correction in the real estate market. Investors stand to build tremendous wealth during this period and speculators will lose their shirts. The real estate crisis has created great opportunities for those who know how to evaluate and purchase real estate investments. Whether you’re looking for a home in which to live or ones with which to build wealth, the coming months will be a fantastic time to buy.
Here’s a tip! You wouldn’t go to the bank and buy a Certificate of Deposit that you had to pay interest on while you owned it; likewise you should never buy an investment property that you have to subsidize for the privilege of owning. Unfortunately, that’s what many people do. They get the false notion that appreciation will bail them out of an otherwise bad deal and it just doesn’t happen. Real estate may have created more millionaires than any other investment, but betting on appreciation has probably bankrupted more people than any other investment.
There’s only one safe way to buy real estate as an investment. We teach this in all the Weekend Millionaire books and audio programs. You first must determine how much gross income a property can produce. Then reduce this amount to allow for vacancy between tenants to arrive at a realistic net rent. Then subtract all anticipated expenses from the net rent to arrive at a true Net Operating Income (NOI). Unless you can structure a deal that will let you buy with the NOI, it’s not a good investment. It’s that simple!
If you’re buying a home in which to live, your earned income should determine what you can afford under normal market conditions. Don’t be enticed into buying a bigger home because you can get an interest only loan or an ARM with a low introductory rate. By following this advice you won’t get in trouble and you can take advantage of the current situation to secure your future.

Transportation includes cars, trucks, motorcycles, recreational vehicles, boats, planes and other modes of travel. Everyone has transportation needs throughout life. Most people will own several automobiles or light trucks, and some will have one or more of the other vehicles. This is a known fact, which makes it something for which you can plan and prepare; if you don’t it becomes an obstacle.

Children present obstacles to financial independence, which like transportation can be anticipated and estimated. When children get old enough to drive they will want a car. Parents often help them with their first purchase or make it for them. College tuition is another big expense that comes with children. So are weddings, especially with female children. These can be quite costly and become major obstacles for parents who ignore them until the need arises.

Retirement looms far into the future, which makes it easy for young workers to ignore it until it’s too late. Programs like Social Security, Medicare and company retirement plans provide a false sense of security and discourage starting a savings plan at an early age when it can return the greatest benefits. In the beginning when earnings are limited, finding the motivation to set aside money that won’t be needed for decades is nearly impossible. The mantra is, “I’ll wait until I get a raise, a promotion, a better job, etc.”

This type thinking leads to a spend everything now lifestyle that becomes so ingrained it leads to the silent killers of credit card and other consumer debt. When living paycheck-to-paycheck, there is no cushion or buffer to absorb large or unexpected expenses. When these arise, people habitually meet the needs by incurring debt. This leads to a recurring cycle of debt that can increase rapidly. Many times the debt load becomes so burdensome that it results in bankruptcy. You can’t buy prosperity with consumer debt.

The secret to avoiding these impediments is to start early. You know they are coming, so why not develop the habit of living on less than what you earn and setting aside money now so you won’t have to go in debt later? Granted, the amount you save might seem small when compared to the predictable needs you anticipate arising, but developing the habit of saving will make you or break you financially as you grow older.

It’s always easier to move up in life than to come down. By living below your means, and saving for anticipated expenses, you don’t become accustomed to a standard of living your earnings won’t sustain. The expenses associated with transportation, children and retirement are real, not imaginary. They will occur! You can’t avoid them! The longer you put them off, the greater the chance that you will subject yourself to the silent killer of debt by financing them.

It takes earned income to make the payments on consumer debt. This forces you to lower your standard of living. Transportation is an expense you will have all your life. You’re going to have to pay for it one way or another. If you pay for it first, by saving, the interest you earn is a reward for planning and it reduces your cost. If you finance it, the interest you pay becomes a penalty for failing to plan and it adds to your cost. The cost difference between planning and saving versus waiting and financing can be huge and prevent you from ever achieving financial independence.

The expenses of children are different from transportation expenses because they don’t (or aren’t supposed to) continue throughout life. If you start early and save for a child’s first car, college tuition, wedding, etc. when the time comes to pay the expense, the money is there. Once the expenses are paid, your standard of living can improve by the amount you had been saving instead of being reduced in order to make payments on loans.

Here’s another fact! Social Security, company retirement plans and Medicare won’t provide financial independence in your golden years. If you think they will, you might as well plan to work until you die. Starting young and saving small amounts regularly throughout your working years can provide the supplemental income needed to turn Social Security into financial security.

Here’s a tip! The theme throughout this article has been to save for anticipated expenses if you want to achieve financial independence. This tip requires developing the three Ds of success. You must have the Desire to achieve financial independence, you must acquire the Discipline to make the required sacrifices and you must possess the Dedication to stick with it until you achieve the goal. It takes all three Ds, to be successful. One or two won’t get you there. As the old Chinese proverb says, “Man sit in chair with mouth open for very long time waiting for roast duck to fly in.”

Invariably, the people who don’t save are the first ones looking for help when the going gets rough. These are the people who took out sub-prime loans or low teaser rate ARMs to buy more house than they could afford. Then when the real estate market cooled and the loans began to adjust they couldn’t make the payments. They also probably bought expensive vehicles and financed them over six or seven years instead of buying something more practical that would allow them to build up some savings.

The reason financial advisors recommend building up comfortable cash reserves is because they know that everyone experiences periods when funds are tight or expenses soar. But, how do you build cash reserves when it’s taking everything you earn just to live? I’ve written extensively about the importance of planning and budgeting; it’s not rocket science. You can’t save unless you live on less than you earn. Saving and investing are the only sure ways I know to get ahead financially, but when you’re already stretched to the limit, how do you do it?

I have yet to meet someone who didn’t waste money, me included, but the most interesting thing I’ve learned is that people who say they can’t save are the ones who tend to waste the most. It’s not that they intentionally squander money or fail to have good intentions, in most cases; they simply don’t know how to analyze their spending. For this reason, they don’t see themselves as spendthrifts. I had this same problem when I was young. So have my sons and most of the other young people I’ve known.

Early in my adult life, although I was a hard worker, I always seemed to come to the end of the money before I got to the end of the month. I didn’t see myself as a spendthrift, but no matter how much I earned, I just couldn’t seem to get ahead. I wrote about this a couple of years ago, but in light of the current economic conditions, it’s time to discuss it again. With the country mired in a deep recession, I’d like to share a simple technique I learned as a young man that might help some people survive this difficult time.

Here’s a tip! Go to any store that sells office supplies and purchase a small spiral notebook, one that you can carry in your pocket or purse. For the next 30 days, write down every penny you spend. I mean everything; candy, drinks, gum, cigarettes and beer as well as groceries, house payments or rent, car payments, other loan payments, everything. Just doing this will open you eyes, but the exercise has a much bigger purpose.

After keeping this register for a full month, sit down with your notebook and categorize each expenditure as necessary or unnecessary. Be honest with yourself when doing this; remember, bad habits like smoking and drinking are not necessary. Expenditures for things required to live, like food, water, electricity, clothing, and house payments or rent are necessary. It’s fun to spend money for movies, Starbucks lattes, bowling, skiing, golf, or payments on boats, RVs and other similar items, but these aren’t necessary expenses.

Once you have categorized all of your expenditures, add up the ones marked unnecessary. Whether it totals $100 per month or $1,000, it is by adjusting what you spend on these items that will allow you to start building the cash reserves needed to smooth out the rough times. I’m not advocating giving up all of your pleasures, only some of them. Just by taking half of the money spent on unnecessary items and putting it into a savings account, you’ll be amazed at how fast your cash reserve will grow.

I did this over 40 years ago and found that in a single month I had spent over $600 on unnecessary items. Several soft drinks, candy, a pocket knife and a new bowling ball were among the items on my list. That was a lot of money back then and it still is today! By adjusting my spending and starting to save part of the money instead of wasting it, I gradually built a cash reserve that allowed me to pay my bills on time even when my income was erratic. This improved my credit rating and eventually allowed me to take advantage of other investments that required good credit to finance.

Try this simple method for just one month, and see what it does for you. I think you will be just as amazed as I was, plus it may help you get started saving. Remember, until you identify your spending habits, it’s hard to improve them.

The biggest reason it takes time is the cyclical nature of the economy. Just because you have a great track record through a boom period, it does little to establish your ability to perform during recessions, and recessions are usually when the best real estate deals can be found. Until you’ve been through an entire economic cycle, bankers won’t view you as a professional investor. They know that most anyone can do well during a boom period; it’s the ones who go through a down period without missing a beat that make the most attractive clients for the banks.

Here are 8 tips to help you establish great banking relations:

1. Be Honest. Don’t pad your financial statements and paint rosy pictures that you can’t deliver. It only takes one false statement to make future statements suspect for years to come. Furthermore, providing false statements to secure credit is illegal.

2. Pay in a timely manner. Establish a record of paying on time and regularly. Everyone knows that you need to pay your bills on time to establish good credit, but how you pay on time is just as important. Technically, payments made 10 days early some months, on the due date other months and just before they become past due other months, are all “on time,” but when reviewed, that payment record is not as good as one in which payments are consistently made within a day or two of the same date each month. Consistent payments indicate you aren’t dependent on this months rent to make your payments.

3. Keep you bankers informed. Whether it’s good or bad, let them know how you’re doing. Don’t make them have to ask for financial information. There are so many mistakes made in real estate investing that bankers tend to be very cautious about letting new investors become over leveraged, even when the debt is well secured. If you’re doing things right, there’s no reason not to ease their caution by keeping them informed.

4. Build cash reserves. As quickly as possible, build up a cash reserve that will let you make payments on time even if rents are late. A good rule of thumb is to maintain enough cash to cover 3-6 months of expenses even if you have no income. This may seem like a lot, but you can do it in a few short years by allowing your profits to accumulate.

5. Maintain your properties. Professional investors know that a deal is not a good deal unless the income from the property will allow you to set aside cash reserves to handle maintenance, especially deferred maintenance. Money for big ticket items, like roofs, carpet, heat and air conditioning systems that only need to be replaced every several years must be reserved to avoid getting in a cash flow bind when they come due.

6. Take your bankers for a ride. As your real estate portfolio grows, periodically invite your bankers to go with you to inspect the properties. By doing so, you will be showing them that you are acquiring good properties and keeping them in good condition. If you buy run-down properties that need fixing up, make before and after pictures so you can show what you’ve done.

7. Be fair. Understand that bankers are businesspeople just like you. They have to make a profit too. Their job is to get the best return for the bank, while yours is to get the best deal for you. While you may be able to squeeze them and shave an extra quarter point off the interest rate occasionally, deals that only benefit one party don’t build lasting relationships.

8. Don’t put all your eggs in one basket. Again, keep in mind that banks are businesses too. Smaller community banks may have more flexibility, but these banks also have smaller lending limits. Larger banks that can handle any size transaction tend to be less flexible and credit decisions are often made by analysts who never meet the customer. These are just a few reasons why you should develop relationships with more than one bank. In time you’ll learn that banks appetite for real estate loans ebbs and flows. The bank that would do anything for you this year may not want to do anything next year and it has nothing to do with your or your credit. They may be simple overextended with real estate loans.

The longer you follow these suggestions, the stronger your banking relations will become. Don’t think of bankers as adversaries. Many people’s first reaction when a loan request is turned down is to blame the banker. The truth is bankers want to make loans as much as you want them to, but they want to make good loans that they can put on the books and forget about.