I visited my sister in car-obsessed Los Angeles over the weekend.  Cars are a daily fact of life in L.A.   Los Angelenos practically live in their cars because it takes so long, both in distance and traffic jams, just to get somewhere.  It took us 40 minutes to get to the nearest Target from my sister’s house!

My sister is a dentist and over the weekend, we went to meet her dental assistant at her office.  We pulled up to the parking garage so that my sister could let the dental assistant, “Monique,” into the garage.  Monique was driving a Ford Expedition.  I marveled at how large her car was.  My sister remarked that usually Monique takes the bus to work because she can’t afford to fill up her tank, but that because it was a Saturday, she chose to drive to work.  My jaw dropped - what is the point of having a car if you can’t afford to fill it with gas?  I take public transportation to work, but that’s because I don’t want to deal with parking or the horrendous traffic jams.  If it came down to “I can’t afford a tank of gas,”  I can’t drive the car; therefore I wouldn’t have the car.  My sister told me that Monique actually wanted an even bigger car, i.e., the Ford Excursion, but her mother said she shouldn’t.  What’s the lesson?  You should always listen to your mother. 

This week’s Carnival of Personal Finance is being hosted by Gather Little by Little.  There are lots of informative and entertaining posts by personal finance bloggers all across the web.  You’ll find some new blogs worth reading.

Now that I’ve written about some of the habits of people who have accumulated and maintained their wealth, here are some of my observations on how people destroy wealth.  When I say “destroy wealth,” I am including not just the habit of taking a lighter to the dollar bill in your pocket, but also those habits that prevent the creation of wealth in the first place.

• Buying homes, cars, and other things just to “keep up with the Joneses.”  I knew a lawyer who decided to purchase a much larger home with six bedrooms in a swanky neighborhood even though her old house was more than large enough for herself and her mother.  She was bothered by the fact that several families, including her own brother, had recently purchased larger homes and she felt that she had to keep up as well.  At the same time, she decided to upgrade her Lexus 300 SUV to the larger Lexus SUV, even though she is a single person and has no reason to acquire extra car space.
• Engaging in instant gratification payoffs while shunning long-term investments:  A friend of mine invested $2000 in an S&P 500 index fund.  However, when the fund value dropped to $1,600 a couple of months later, he became very nervous and decided to sell the fund rather than wait out the volatility.  Of course the S&P 500 index rebounded and surpassed the price at which my friend made his original investment.  Meanwhile, he has no qualms about traveling to Vegas or other gambling hotspots (Niagara Falls, anyone?) to drop several hundred dollars at the craps table.
• Failing to acquire the necessary education to move up in your profession:  If you are an entrepreneur, this point may not necessarily apply.  But for those of us working in a profession, the surest way to increase your paycheck and therefore your bank account is to move to a higher position in your work organization.  However, some people don’t see that further training and education is often the key to moving up, particularly those positions in professional fields, like engineering or accounting.  My husband, an engineer, has seen several lower level technical employees in his company complain about their inability to move into engineering positions.  These employees, however, lack a four-year college degree, which is a basic educational requirement for an engineering position.
• Failing to take advantage of new opportunities because of fear:  I see this problem a lot, even with my own actions.  It’s a lot easier to stay put in a dead-end job or not take the plunge into becoming self-employed, because the “known” is more acceptable to us, even if it’s crappy, than the “unknown.”  Because of this fear of risk, we miss out on all kinds of new opportunities.  I am actively working on getting myself to move forward and not spend so much time dwelling on why a particular business idea might be a bad one.  I find when I do take a baby step in a certain direction (like starting this blog), it usually turns out to be a much more positive experience than I anticipated.
• Letting someone else control your financial destiny.  This is a rather extensive topic and probably will address it again in a separate post.  But I’m writing about it here because I just had a conversation with a friend about her finances.  My friend, sick with pneumonia, was concerned about job security because of all the days that she had taken off this past year to deal with her divorce and health issues.  Unfortunately, during her marriage, her husband controlled all of the finances, including much of the “spending.”  He bought a fancy car and squirreled away money in separate stock investment accounts.  When he demanded the divorce, my friend only had $30k in a 401(k) account and an old car that was ready to break down at any moment.   

Probably the one common thread throughout these habits is the failure to focus on the ”long-term” picture.  But even if you do have that long-term plan firmly seared into your brain, it still isn’t a cakewalk.  Chances are it’s going to be two steps forward, one step back.  Hey, I just splurged on a new outfit last week, even though I had vowed to spend no money on clothes for the next two months.  We’re all only human! 

The Frugal Duchess, another blog that I enjoy reading, recently posted CNN’s profile of a middle-class mother with two kids.  In the CNN piece, Patricia Guerrero describes how she was forced to go to a local food bank for groceries after she lost her $70k a year job.  A commenter on the Frugal Duchess blog noted that the video accompanying the CNN article showed Guerrero describing how she took off her Tiffany bracelet and ditched her Coach handbag in her car before entering the food bank.  The CNN footage of Guerrero’s house showed luxury fixtures and appliances, including black granite counter tops, a flat plasma screen tv, a stainless steel refrigerator and hardwood floors.  Guerrero also talked about how, at the food bank, the lady helping her offered to pay her utility bill.  The commenter naturally wondered why Guerrero didn’t try to sell her luxury possessions before having someone at the food bank, who might be even poorer, pay her utility bill.  The Frugal Duchess posted a follow-up on this comment and listed some items she would sell if in the same situation and things that she has already cut back on.

I had read the same article on CNN.com and marveled at how quickly Guerrero’s life unraveled.  Were her finances that bad that she would have to go a food bank one month after being laid off?  After reading the Frugal Duchess blog, I went back to CNN.com and watched the video of the woman’s interview.  Guerrero said that she had used her tax refund to pay bills for the last month and that with her unemployment check and rental income from her mother’s house, she can only afford to cover her $2,500/month mortgage.  There is no other money to pay for food or utilities.  Guerrero also complained that she applied for but was turned down for food stamps because she owned her house.  However, what struck me about the interview was Guerrero’s obliviousness as to why she is in this situation.

     1.  She said that she didn’t take her Coach bag into the food bank.  “[The handbag] isn’t worth anything because [I] don’t have a dime.” 

     2.  Describing how she applied for but was rejected for food stamps:  “I never used the system…I needed it now and it let me down.” 

     3.  In response to the food bank employee’s offer to pay her utility bill: “This is really where I’m at?”

I’m channeling a little Suze Orman here, but Guerrero needs to shake off the deer in the headlights attitude and take control of the situation.  Guerrero may or may not have learned her lesson about lacking a rainy day fund or spending beyond her means, but what about what she can do now to feed her kids? 

• Sell the Coach bag or Tiffany bracelet on Ebay or at the consignment store - they’ll certainly fetch more than a few bucks.  Guerrero probably has many other nice outfits, handbags, and jewelry in her closet that she could sell.
• Get a job, any job, whether at the fast food joint, Home Depot, or the department store to make money to buy food.  With the mortgage covered and her mother at home to take care of the kids, Guerrero should be able to make enough for groceries and utilities, even making minimum wage.
• Demand that her estranged husband contribute to the household expenses, including paying child support.  If he refuses, go to the local government agency that handles child support cases and file a complaint against him.  If the husband is working, his wages can be garnished.

These are just some ideas off the top of my head; I’m sure there are others.  It’s easy to fall into the trap of feeling sorry for oneself when bad luck strikes, but the bottom line is that Guerrero, just like the millions of homeowners who bought or borrowed too much house, need to do what they can to help themselves first before turning to the government.  Going to the food bank should be a measure of “last resort,” reserved for those people who have already exhausted every other avenue and are hanging on by a thread.

My post on money-saving tips for new parents is part of this week’s Carnival of Personal Finance, which is hosted by Stocktradingtogo.com and features tips on how to select an online broker. It also contains great posts from other personal finance bloggers on topics ranging from saving and budgeting to stock investing and real estate. Check it out!

Bripbrap is another personal finance blog that I enjoy reading.  In a recent post, he makes a lot of excellent points about how to make your workday more productive and pleasant.  As a full-time member of the “rat race,” I going to elaborate on a couple of Bripbrap’s points.

Point 14: Take off your shoes, wash your hands and shower when you get home.  Bripbrap advises you to incorporate this routine into your workday to slough off all of the nasty germs you may have picked up in the subway.  Another reason to get out of your work clothes immediately is so that you can get out of “work” mode and relax.  It’s hard to unwind when you’re still donning your starched shirt and itchy wool suit at the dinner table.

Point 12: Leave work early.  Bripbrap advises you to take the evenings for yourself and create your own wealth.  I wholeheartedly agree, which is why I ditched a job that required 70 to 80 hour workweeks for a (more or less) 9 to 5 job, where I could go home at a reasonable hour.  In my old job, I could never predict when I would be able to go home on a daily basis, and most weekends were devoted to more work.  Pretty bad, eh?  It got so bad that I worked 45 days in a row with not a single day off.  I was putting all of my energy and time into the job at the expense of my personal life and my finances.  Even though I was making more money at that job, I ended up spending more money to manage my life outside work.  Because of the hellish hours, I had to spend money hiring a cleaning person, gardener, etc., to do the tasks that I had no time to do.  With no time for comparison shopping, I also found myself spending more on purchases purely because of the convenience factor.  Moreover, I had no time left over to manage my finances.

However, I now have a more humane work-life balance, with more time to spend on developing business ventures and researching investing opportunities.  The result?  My net worth has increased significantly!  Being a dedicated employee is a good thing; devoting yourself lock, stock and barrel to your employer at the expense of all else is not a healthy or financially smart existence.  A job is just a job; it could disappear at anytime for any reason (as Bripbrap notes, witness the unfortunate employees of Bear Stearns).  But the opportunities and wealth that you build for yourself in your downtime stay with you.

How do the wealthy get rich?  A few of us hit it big through God-given talents like singing or acting.  Others, like Mark Zuckerberg of Facebook, merge a skill, e.g. computer programming, with an innovative idea and buyers willing to pay mind-boggling sums for his or her creation.

Others try to become wealthy quickly by flipping houses or becoming day traders.  Eventually, however, most of these get-rich-quick dreamers crap out because the market they invested in has collapsed, they borrowed too much money, or they went out and spent every dime they had (and more) on fancy dinners, designer clothing, limousines, and extravagant trips.

Most wealthy people, however, do it the old “boring” way, choosing to accumulate their money slowly and steadily.  This is the thesis of the book, “The Millionaire Next Door” by Stanley J. Thomas and William D. Danko.  Through interviews with hundreds of millionaires, Thomas and Danko concluded that many of them accumulate wealth through living below their means, shunning conspicuous consumption, and allocating wealth in a productive way to make more money. 

I can see this from personal observation of my Uncle Frank, a self-made millionaire many times over.  He never read “the Millionaire Next Door” but seems to represent the classic example of one, with habits such as the following:

Living below his means:

• Has always socked money away, even as a civil servant making a paltry government salary with three kids to support.
• Refuses to buy coffee at Starbucks.  McDonalds coffee will do just fine.
• Has never incurred credit card debt.
• Has lived in the same home (like Warren Buffet) for decades, even after he became wealthy.

Shunning conspicuous consumption:

• Brushes off random comments by business associates that his clothes are not Brooks Brothers chic.
• Has never driven an expensive European vehicle like Mercedes or BMW.
• Doesn’t sport expensive cuff-links or a gold Rolex watch.

Allocating wealth in a productive way:

• Used savings from his job as a civil servant to start his business and make investments.
• Reinvests his profits in his business instead of spending it on purely consumer items, like a boat or a second home at the beach.
• Funded college and graduate school for his kids, instead of buying them fancy cars and clothes.
• When he travels for work, he’s more likely to stay at the Hampton Inn over the St. Regis, unless he gets a very good deal on the hotel rate.
• For international trips, he uses a consolidator to get the cheapest business class seats.

Some may ask “does this guy have any fun?”  Others may question why make money if you can’t enjoy it?  However, this presumes that everyone wants to buy Hummers and live in McMansions with debt up to their eyeballs.  People like Uncle Frank don’t get their kicks by going to the mall every weekend.  They derive enjoyment and satisfaction out of the challenges of building wealth and the accruing benefits of financial freedom.   They have shunned instant gratification to achieve their long-term goals.   

The wealthy approach money and their lives differently than the average working Joe.  Check out Ryan Taylor’s Millionaire Money Habits for ways that millionaires think about their money.

The New York Times advises readers not to panic over their finances, amist growing worries about a prolonged and painful recession.  Instead, the Times recommends that people take stock of their financial situation by doing the following (I’ve added my comments in bold):

• Take a hard look at your job situation.  Could a layoff be in your immediate future?  If you’re not sure, it’s probably a good idea to dust off your resume, update it, and begin networking now.  As I’ve recommended in prior posts, consider creating other streams of income that have nothing to do with your current job, such as teaching at your local community college or becoming a mystery shopper.
• Review your debt situation - ask yourself, can you afford your lifestyle?  Are you struggling to cover your monthly expenses?  If you are unsure, check out www.about.com’s post on the warning signs you have too much debt.  The Wall Street Journal recently reported on the increased demand at food banks from middle-class families.  One family who bought a house that was too big and a car that was too expensive had to go to the food bank because they couldn’t afford both the loan payments and groceries.  Not being able to afford food in this country is pretty shocking and sad.  However, if I were to choose between a BMW and food, I’d take the food.
• Resist the urge to stop investing in the market.  Do not let your emotions get the better of you by buying high and selling low.  I’ve heard several people complain about the recent declines in the stock market.  One friend wanted to stop investing altogether because she couldn’t bear the $20,000 haircut that her 401(k) account just took in the last month.  This is precisely the wrong time to stop investing.  The Oracle of Omaha, Warren Buffet, has said that the stock market is the only place where people run away when there are bargains to be had. 
• If you are planning to refinance your home or buy a new home, borrow the proceeds using a 30 year fixed rate mortgage, not an ARM.  This should be a no-brainer, with all of the fallout over the subprime mess.  If you currently have an ARM loan, start researching interest rates for 30 year fixed loans.  The Federal Reserve’s recent interest rate cuts should trickle down in the next three months.  However, because Wall Street and investors are so jittery about mortgage loans, interest rates have been fluctuating day-to-day.  The key is to lock in a rate during a dip, which may be as brief as one day.

If your job is stable, your mortgage and other living expenses are manageable and you are continuing to invest in your 401(k) without worry, then stay the course.  As the Times advises, keep doing what you’re doing. 

The Times article also says don’t panic in these recessionary times.  However, my view is that if you are living paycheck to paycheck, you need to scare yourself silly into taking action.  Conjure up images of soup kitchens and homeless shelters, if you have to, because you may be one paycheck away from living in a tent like other former homeowners in so-called “subprime shantytowns.”  They are apparently cropping up in Los Angeles and other hard-hit areas in California.

Winning the lottery is the ultimate dream of most people who plod along in their jobs and get excited when the Powerball lottery hits $200 million.  Like them, I used to buy lottery tickets in a pool with my co-workers, dreaming of the day that I could leave work and utter that famous Johnny Paycheck line “take this job and shove it.”  However, I stopped shelling out the dollars after my Uncle Bill, the real estate tycoon, advised me that I shouldn’t do it because “buying lottery tickets is for poor people.”  He didn’t elaborate, but I interpreted his comment to mean that instead of relying on an impossible windfall, I needed to work for my money.  Upon further reflection, I puzzled over why so many of my colleagues, who are well-paid, educated professionals, play the lottery.  All of these people have a roof over their heads and plenty of food.  There’s nothing so dire in their lives that it requires $100 million to fix.

What is the appeal of the lottery?  To pay off those college loans?  How about a cushion for unexpected medical expenses?  Hardly not.  When was the last time you saw a lottery winner on TV say “I’m going to put aside the cash for my retirement or unexpected health care costs or my grandchildren’s college tuition fund.”  It’s usually more like ”I’m getting a Hummer and she’s getting a Mercedes, and then we’re going to buy mansions for our 12 grandchildren.”  Lottery winners are like kids in a candy store and the candy is FREE.  The problem is that you end up eating way too much candy.  The lottery winner usually overspends on yachts, jets, homes, leacherous relatives and friends, and winds up even more broke (or broken) than before he or she won (Bankrate.com’s Unlucky lottery winners who lost their money).  Being independently wealthy when winning the lottery doesn’t seem to help.  Look at Jack Whittaker, a West Virginia businessman who was the winner of what was then the biggest Powerball jackpot in history.  Whittaker, already wealthy, took home $113 million in a lump sum payment in 2002, but since then has been plagued with personal problems arising from that lottery win, including the death of his granddaughter, numerous lawsuits, and marital difficulties.

Not all windfalls are bad karma.  Depending on the source of the windfall, you might spend it differently.  Look at the bonus you receive from work.  Would you spend it in the same manner as lottery winnings?  Because that bonus is your hard-earned cash, you might not burn through it as quickly.  Instead of putting a down payment on a gold-plated hummer, you might fund your IRA, pay off some credit card debt, and splurge by going out for a nice dinner.

So, before you go out and buy 50 lottery tickets, think about why you’re buying these tickets.  Is it because you want to become the classic overconsumer that many lottery winners have become?  Do you want to run from greedy relatives and friends who want a piece of the lottery pie?  Or was taking a match and burning up the cash instead not an option?  What I’m doing now is taking that money and investing it in an S&P index fund.  That investment may not reach $100 million by the time I’m 65, but it’ll be worth more than some shredded lottery tickets.

The biggest financial news story today?  The breathtaking collapse of Wall Street firm Bear Stearns, which JP Morgan agreed to buy over the weekend for a mere $2.00 a share, a pittance compared to the trading price of the firm one year ago - a whopping $170.00 a share and even last Friday, when it was still at about $30.00 a share.  So, investors big and small alike are certainly being burned in this mess, but what about the employees of the firm?  It’s a virtual certainty that with the buyout by JP Morgan, a large portion of the 14,000 employees of Bear Stearns will lose their jobs.  What’s more, the firm is one-third owned by its employees.  Most Wall Street firms, including Bear, pay employees a large portion of compensation in company stock.  So if the stock tanks (recall Enron), there goes your hard-earned salary.  All in all, it’s a pretty bad picture for the employees, who are facing a double whammy - -layoffs and the shocking plunge in value of their company stock.

CNBC reported today that employees of the firm were commenting off camera that their retirement and college savings funds had been wiped out and that after decades of work, they would “have to start over.”  If this can happen to a large investment bank like Bear Stearns, who isn’t vulnerable?  What’s the lesson learned here?  As the financial experts say, don’t have your job and all of your investments tied up in the same company.  If the company is going south financially, that means its stock is probably not doing very well.  In good times, everyone is flush with cash and excitement, but the bad times can hurt a lot more.  When my husband’s tech company filed for bankruptcy and went through eight rounds of layoffs after the tech bubble burst, the employees were reeling from the loss of jobs and stock options.  To add salt to the wounds, for the employees that were spared, my husband included, the company suspended its matching contributions on employee 401(k)s and raises were minimal to nonexistent until the economy picked back up.  Considering that many of us derive most of our money from our jobs, it makes sense to spread our cash around a little, and not rely on the bigwigs in the corner office to shape our destiny.  To me, that means:

• Don’t invest all your cash in company stock.  Be diversified.  Open an account at Vanguard investments and buy index funds.
• Create a second source of income, like teaching yoga or, hey, blogging, so that the cash stream doesn’t completely dry up if you do lose your job.
• Look into buying rental property that can generate some extra cash for you.  Make sure that the rent you charge more than covers your mortgage, taxes, insurance, repairs, and tenant vacancies.  That way, you can breathe easier with some positive cash flow from an investment that is not tied to your job.  For us, having the cash flow from rental property puts us at tremendous ease.
• Network, network, network while you still have a job (I have got to work on this too).  That way, you’re not scrambling to call everyone you ever met and their buddies to beg for job help if you are suddenly facing a layoff.  It just smacks too much of desperation.

 Of course you cannot spend your nights worrying about whether you are going to get the ax at work.  There are macroeconomic problems, such as the subprime mess and ensuing credit crunch, that many of us did not create and cannot control.  However, with these “uncertain economic times,” one cannot be too prepared in the event of a personal financial tsunami.