Assets – Liabilities= Net Worth

Liabilities are your debts. Debt reduces net worth. Plus, the interest you pay on debt, including credit card debt, is money that cannot be saved or invested—it’s just gone. Debt is a tool to be used wisely for such things as buying a house. If not used wisely, debt can easily get out of hand. For example, putting day-to-day expenses—like groceries or utility bills—on a credit card and not paying off the balance monthly can lead to debt overload. Lots of people are mired in debt. In some cases, they could not control the causes of their debt. However, in some instances they could have. Many people get into serious debt because they:

· Experienced financial stresses caused by unemployment, medical bills or divorce.

· Could not control spending, did not plan for the future and did not save money.

· Lacked knowledge of financial and credit matters.

Tips for Controlling Debt

· Develop a budget and stick to it.

· Save money so you’re prepared for unforeseen circumstances. You should have at least three to six months of living expenses stashed in your rainy day savings account, because as the poet Longfellow put it, “Into each life some rain must fall.”

· When faced with a choice of financing a purchase, it may be a better financial decision to choose a less expensive model of the same product and save or invest the difference.

· Pay off credit card balances monthly.

· If you must borrow, learn everything about the loan, including interest rate, fees and penalties for late payments or early repayment.

I owe, I owe, so it’s off to work I go.

SPEAKING OF INTEREST AVOID CREDIT CARD DEBT

When you take out a loan, you repay the principal, which is the amount borrowed, plus interest, the amount charged for lending you the money. The interest on your monthly balance is a good example of compound interest that you pay. The interest is added to your bill, and the next month interest is charged on that amount and on the outstanding balance.

The bottom line on interest is that those who know about interest earn it; those who don’t, pay it. Planners, like Betty, rarely use credit cards. When they do, they pay off their balances every month. When a credit card balance is not paid off monthly, it means paying interest—often 20 percent or more a year—on everything purchased. So think of credit card debt as a high-interest loan.

Do you need to reduce your credit card debt? Here are some suggestions.

· Pay cash.

· Set a monthly limit on charging, and keep a written record so you don’t exceed that amount.

· Limit the number of credit cards you have. Cut up all but one of your cards. Stash that one out of sight, and use it only in emergencies.

· Choose the card with the lowest interest rate and no (or very low) annual fee. But beware of low introductory interest rates offered by mail. These rates often skyrocket after the first few months.

· Don’t apply for credit cards to get a free gift or a discount on a purchase.

· Steer clear of blank checks that financial services companies send you. These checks are cash advances that may carry a higher interest rate than typical charges.

· Pay bills on time to avoid late charges or increased interest rates.

The Tale of Two Spenders and the Big-Screen TV

Betty, the planner, saved up for the “extras.” When she had enough money in her savings account, she bought a big-screen TV for $1,500. She paid cash. Her friend Tim is an impulsive spender. He seeks immediate gratification using his credit cards, not realizing how much extra it costs. Tim bought the same TV for $1,500 but financed it on a store credit card with an annual interest rate of 22 percent. At $50 a month, it took him almost four years to pay off the balance. While Betty paid only $1,500 for her big-screen TV, Tim paid $2,200—the cost of the TV plus interest. Tim not only paid an extra $700, he lost the opportunity to invest the $700 in building his wealth.

BEWARE THE PERILS OF PAYDAY LOANS AND PREDATORY LENDERS KNOW WHAT CREDITORS SAY ABOUT YOU

People can get deep in debt when they take out a loan against their paycheck. They write a postdated check in exchange for money. When they get paid again, they repay the loan, thus the name payday loan. These loans generally come with very high, double-digit interest rates. Borrowers who can’t repay the money are charged additional fees for an extension, which puts them even deeper in debt. Borrowers can continue to pay fees to extend the loan’s due date indefinitely, only to find they are getting deeper in debt because of the steep interest payments and fees.

Predatory lenders often target seniors and low-income people they contact by phone, mail or in person. After her husband died, 73-year-old Pauline got plenty of solicitations from finance companies.

She was struggling to make ends meet on her fixed income. To pay off her bills, she took out a $5,000 home equity loan that carried a high interest rate and excessive fees. Soon she found she was even deeper in debt, so she refinanced the loan once, then again, and again, paying fees each time. Pauline’s children discovered her situation and paid off the loan. The lessons here are:

· Don’t borrow from Peter to pay Paul.

· Never respond to a solicitation that makes borrowing sound easy and cheap.

· Always read the fine print on any loan application.

Seek assistance from family members, local credit counseling services or others to make sure a loan is right for you. Those who have used credit will have a credit report that shows everything about their payment history, including late payments. The information in your credit report is used to create your credit score. A credit score is a number generated by a statistical model that objectively predicts the likelihood that you will repay on time. Banks, insurance companies, potential landlords and other lenders use credit scores. Credit scores range from under 500 to 800 and above and are determined by payment history, the amount of outstanding debt, length of your credit history, recent inquiries on your credit report and the types of credit in use. Factors not considered in a credit score include age, race or ethnicity, income, job, marital status, education, length of time at your current address, and whether you own or rent your home.

What’s on YOUR Credit Report?

Consumers have the right to receive annually a free copy of their credit report from each of the three major credit-reporting companies:

Equifax: 1-800-685-1111; www.equifax.com
Experian: 1-888-397-3742; www.experian.com
Trans Union: 1-800-888-4213; www.transunion.com

The three nationwide consumer credit reporting companies have set up a toll-free telephone number and one central web site for ordering free reports:

1-877-322-8228; www.annualcreditreport.com

KEEP YOUR GOOD NAME

A credit report that includes late payments, delinquencies or defaults will result in a low credit score and could mean not getting a loan or having to pay a much higher interest rate. The higher your score, the less risk you represent to the lender. Review your credit report at least once a year to make sure all information is accurate. If you find an error, the Fair Credit Reporting Act requires credit reporting companies and those reporting information to them to correct the mistake. To start the process of fixing an error:

· Contact the credit reporting company online, by fax or certified letter, identifying the creditor you have a dispute with and the nature of the error.

· Send the credit reporting company verifiable information, such as canceled checks or receipts, supporting your complaint.

· The credit reporting company must investigate your complaint within 30 days and get back to you with its results.

· Contact the creditor if the credit reporting company investigation does not result in correction of the error. When you resolve the dispute, ask the creditor to send the credit reporting company a correction. If the issue remains unresolved, you have the right to explain in a statement that will go on your credit report. For example, if you did not pay a car repair bill because the mechanic didn’t fix the problem, the unpaid bill may show up on your credit report, but so will your explanation.

Every month, go back to your budget and plan carefully to ensure your bills are paid before their due dates. Betty, the planner, makes sure she pays her bills on time. Betty gets paid twice a month. She has her paycheck set up for direct deposit so she doesn’t have to scramble to get to the bank on payday. With her first paycheck each month, she pays her mortgage (which she has set up on auto debit), cable TV and utility bills. Out of the second check, Betty makes her car payment (also on auto debit) and has a monthly deposit automatically made to her savings account. Betty has found that “autopilot” really simplifies budgeting and saving. If you believe you are too deep in debt:

· Discuss your options with your creditors before you miss a payment.

· Seek expert help, such as Consumer Credit Counseling Services, listed in your local telephone directory.

· Avoid “credit repair” companies that charge a fee. Many of these are scams.

SAVE MONEY BY CHOOSING THE RIGHT LOAN SAVE MONEY BY PAYING LOANS OFF EARLY

If you have good credit, you may want to take out a loan to purchase a house or to cover educational expenses—both are investments in the future. But regardless of how the money is spent, a loan is a liability, or debt, and decreases your wealth. So choose loans carefully. Shop and negotiate for the lowest interest rate. The interest you save can be invested to build wealth. Take a look at the chart to the left. In this example, it is obvious that Pixley Bank and Trust would charge the lowest interest over the term of the loan. What’s not obvious is that your credit score may determine which interest rate you are offered. Use an online auto loan calculator to compare rates.

You can save interest expense by increasing your monthly payments or choosing a shorter payment term on your loan. Betty, the planner, knew her new car would cost more than the sticker price because she would have to pay interest on the loan from the bank. After checking her options, she chose a shorter payment term with higher payments. Betty budgeted enough money each month to make the higher payments. By doing this, she will reduce the amount of interest she ultimately pays. The chart on the left shows how shorter terms with higher payments would affect the total amount and interest on Betty’s $15,000 car loan. Avoid the trap of getting “upside down”—owing more on the car than it is worth when you sell or trade it in. Betty’s car will be paid for in three years, and she plans on driving it for at least eight years. Once her car is paid for, she will continue to budget for the car payment but will invest the money to further build her wealth.

TAKE STEPS TO CONTROL YOUR DEBT GUARD YOUR IDENTITY

As you can see, a big part of building wealth is making wise choices about debt. You need to maximize assets and minimize liabilities to maximize net worth. To manage debt, you need to know how much you have and develop strategies to control it. When Bob decided to reduce his $3,000 credit card debt, he analyzed his debt and developed a strategy. He listed the balance, interest rate and monthly interest on each credit card. He checked his credit score and shopped for the best rate on a new credit card. Then he transferred all his balances to that card. He cut up the old credit cards and used the interest he saved to pay toward the principal balance. He used the new card only for emergencies. What is your credit card debt situation? Using the chart to the left, do an analysis of your own.

My strategy for reducing credit card debt includes:

Just as you protect the security of your home with locks for your windows and doors, you should take steps to protect your identity. Secure your financial records, Social Security number and card, account numbers, and all passwords and PINs (personal identification numbers). A periodic check of your credit report can alert you if someone is illegally using credit products in your name. If you suspect unauthorized access, contact the three major credit reporting companies and place a fraud alert on your name and Social Security number.

Some Tips to Protect Your Identity:

• Shred or destroy your bank and credit card statements and all other private records before tossing them in the trash.

• Give out your Social Security number only when absolutely necessary, and never carry both your Social Security card and driver’s license in your wallet.

• Pick up mail promptly from your mailbox, and never leave outgoing mail with paid bills in an unsecured mailbox.

• Don’t give out personal information on the phone, through the mail or on the Internet unless you’re sure you know whom you’re dealing with.

Your credit cards are maxed out and you’re only paying the minimum. Failing to settle your bill in full can lead to whopping finance charges. And if you skip a payment you can be on staggering late fees in addition to the interest.

An increasing amount of income goes to paying your debts. Only 10 - 15 percent of take-home pay should be spent on fulfilling credit obligations.

You’re using one card to pay off another. Don’t fool yourself into thinking you squaring away your debts. All you’re doing is borrowing more money.

You decide that your next trip to the doctor will have to wait. If you’re jeopardizing you health because of a lack of money, it’s time to reevaluate your credit situation.

To help you achieve your financial resolutions:

First Take Stock.

Take a comprehensive inventory of all current savings and investments, along with interest rates and projected growth. Are you able to meet your financial goals with the investment tools you currently own? Do you have substantial debt? Have you begun saving for your retirement and children’s education? Your goals change at different points in your life, so review your savings and investments regularly and adjust when necessary.

Assess Your Parents’ Fiscal Health

Many people with living parent have not discussed financial issues with their aging parents, yet most people say they provide or anticipate providing financial support to an aging parent.

Talking about money is essential to families that increasingly rely on one another for financial support. Involve all family members in communicating your objectives, which revolve around your parents’ well-being. For a family discussion, consider calling in a neutral third party, such as a professional planner, lawyer or close family friend. Compile a checklist of information you should discuss with or gather from your parents: legal documents such as a will, trust documentation and durable power of attorney; insurance policies; and contact information for attorneys, bankers, insurance agents, executors and tax preparers.

Give Your Kids a Healthy Start to Financial Success

Nothing will teach your kids more about money than letting them have it and spend it. By providing an allowance, you teach your children to manage money and budget properly. Receiving a finite amount of money on a regular basis helps kids learn to weigh decisions carefully about purchases and other expenditures. As your kids get older, you can provide them with a larger weekly allowance, but tell them this money has to cover all their expenses, including incidentals such as gas, entertainment and clothes.

One of your most creative ways of moving away from happiness has been through consumer debt. Your fixation with spending, gives you little time to contemplate being whole, until it hits you in the face with a debt load that you can no longer manage.

The Black Plague of the industrialized world is debt for consumer goods and services. No matter how you may reason it, going into debt to buy a big screen TV or stereo system, a new boat, or lawn furniture, just is not necessary. You have been taught that all of these things are necessary to be happy and successful. You have moved away from happiness in order to feel it again by learning how to be miserable. Now that you are up to your ears in bills, you think that you would be happy again, if only you did not owe all this money.

As adults, you spend one third of your lives paying of loans and mortgages, another third of your life paying taxes. The last third is supporting someone else. The fourth third you get to keep for yourself. Debt is the majour contributing factor in marriage and business break-ups. Where is there room for happiness in this chaos?

Consumerism feeds the fat pockets of debt. It is like bulimia, you eat and eat and eat, then puke it all back up, only to start over again. Consumerism is the industrialized world’s version of happiness. Because humanity has moved so far away from happiness, he no longer understands what it is, and believes that “things,” make him happy. He cannot live without things. Because he is unhappy and notices that other people appear to be happy with their things, he believes that if only he had one of those, he would be happy also.

The insanity is that you have been collectively doing this thing repeatedly for so long, you do not believe you can be happy without spending and going into debt. Humanity has not learned from this mistake. You cannot buy happiness. You must be happy first, and then your spending will reflect that happiness and will not be dependant on the spending.

Debt is the cancer that kills your happiness. Move away from spending and debt and get in touch with your true feelings and basic needs. When you begin to move to this place of wholeness, you will never do anything that could jeopardize that happiness. Money does not buy happiness in place of a failed belief system. At best it is only a temporarily relief like debt consolidation until you start the cycle over again.

Life lived simply, allows lots of room for happiness, it is the playground of happy people. Happiness comes naturally to all beings at birth; you then learn how to be unhappy before you can move back to the experience of happiness.

What about those interest charges? Paying off a $7000 credit card debt charging an interest rate of 18% and paying $20 a month towards the debt, you will pay over $18,400, more than TWICE the original debt, just in interest.

If you have more than one card? If your debt is over $7000? What can you do? How can you get out of this hole?

There are some techniques that can help you pay off your debt and do not require expensive loans, invasive credit checks, or expensive financial planners and accountants. You can also save on interest charges by paying off your debts in a certain order.

The most effective technique is sometimes called the “snowball” method. The snowball method suggests that when you pay off one debt you apply that payment amount to the next debt. Thus the amount you pay on a debt grows like a snowball rolling down a hill.

For example, you have three credit cards with debts of $5000, $4000, and $3000 which are charging you 18%, 27%, and 12%, respectively, and you are paying $150, $125 and $100 each month. By paying these required monthly amounts you will pay off your $3000 credit card first.

Now that the $3000 card is paid off you have an extra $100 a month. Put that extra $100 toward paying off your next credit card debt. Now you are paying $225 a month on the $4000 card and the $150 on the $5000 card. With this accelerated payment on the $4000 card you will pay off the card earlier and save some money on interest charges.

Then apply the $225 payment to the $5000 card for a monthly payment total of $375. Soon this card will be paid off and you will have $375 extra each month to pay off other debts or better yet, INVEST!

So, which debts should get paid off first?

Generally, you want to pay off the debts that are charging you the highest interest rates first. In the above example you could have added the $100 payment to the $5000 credit card rather than the $4000 credit card. But the $4000 credit card is charging you 27% where the $5000 credit card is charging 18%. By paying off the card charging the higher interest rate first, you will save some money on interest charges.

How to Alleviate Debt Problems The first thing you need to do in order to begin a debt elimination plan is to have your situation professionally analyzed. Your particular debt situation is much different from anyone else’s. A general plan will not suit your debt reduction needs.

Look online for a debt management firm that specializes in creating custom programs for consumers with debt problems. Working with a personal representative is the best way to get advice specific to your situation. A tailored debt elimination plan will help you get rid of your debt in just a few years!

Your individual debt manager will show you how to consolidate your credit cards, close accounts that are hurting your credit, and quickly add few points back to your credit score. A quality debt management firm will also provide you with educational tools. Insightful articles, monthly newsletters, and personal advice will all help to get you out of debt and stay that way.

The Real Rate of Return is the one number that determines the safety of principal. It is calculated by taking the current BOND YIELD and subtracting the expected INFLATION rate from it. The result is the REAL return on guaranteed money from the government.

Interest Rates are on the rise as we have been expecting and this pressure has put a tremendous amount of pressure on the stock market. The essential simplicity at work here is very, very basic. If Interest rates on Bonds are yielding 5.14% and inflation is forecasted at 5%. The difference is the REAL RATE of RETURN, (in this instance we are speaking about .14%). The REAL RATE of RETURN is what sparks major rallies and declines on Wall Street.

The reason for this is that the Bond market is the largest financial market in the world. There are literally trillions of dollars invested in debt denominated assets. These investors are primarily interested in the security of their principal and taking as minimal risk as possible. They historically have been thrilled with REAL RATES of RETURNS that would be in the 2% - 5% annually. During the 1970’s this indicator went NEGATIVE for a while indicating INFLATION was rising faster than interest rates and BOND INVESTORS actually had substantial negative returns. During this time there was much “screaming and gnashing of teeth.”

It has always been my estimation that Federal Reserve Chairman, Alan Greenspan’s key task is to keep the REAL RATE of RETURN as high as possible. HE has been extremely successful at doing this. If you read back over any history of the financial markets you would be WISE to view events through this indicator. The economic climate becomes remarkably different and people’s opinions change dramatically when the REAL RATE of RETURN on the most SECURE investments is threatened.

A thorough understanding of this simplicity is necessary for success in any kind of investing as IT is the basic building block from which all other analysis is based. Although it is always difficult to forecast what will happen in the future, the one factor you can count on is that when THE REAL RATE OF RETURN is falling there is much SWEAT on the brows of Money Managers who monitor the trillions of dollars entrusted to them.

At this point KEEP YOUR EYES on this indicator and make your own forecast of INFLATION. You’ll realize that your ANALYSIS can be better than the Big Boys.

You?ve got plenty of company. There are more than 30 million people in the United States with credit blemishes severe enough (score under 620) to make obtaining loans and credit cards with reasonable terms difficult.

Or maybe your credit is OK, but you’d like to make it better. After all, the better your credit, the lower the interest rates you can score on mortgages, car loans and credit cards.

New glimpses into the once-secret process of credit scoring have made it easier than ever to improve your credit — and reversed some of the advice we personal finance journalists once gave consumers about managing plastic.

(For the uninitiated, credit scores are three-digit numbers increasingly used by lenders when evaluating your creditworthiness. Insurers, employers and landlords also use the scores in evaluating the applications they get. Scores range from 300 to 850. Only about 11% of the surveyed population ranks above 800; 29% ranks between 750 and 799.)

Anyone who wants to improve a credit score should first do some basic housekeeping: Get a copy of your credit report from one of the three major credit bureaus, scour it for any mistakes and ask the bureau to remove incorrect information. Once that?s accomplished, you can start to work on burnishing your score.

Here, then, are the five steps to credit repair:

Pay your bills on time
Payment history is the single most important factor in determining your credit score, making up 35% of the total. Since recent history carries more weight than what happened five years ago, getting in the habit of making on-time payments is an incredibly powerful way to start rebuilding your credit rating.

Likewise, delinquent payments can devastate your score. Missing even one payment can knock 50 to 100 points off a good score. Skipping payments for a single month on all your bills can lower your number from a respectable 707 to the dismal range of 562 to 632, according to a new credit score simulator at MyFico.com, a joint venture between leading credit scorer Fair Isaac & Co. and credit bureau Equifax.

The simulator lets you see the impact of various credit behaviors on a sample score. For $12.95, consumers can order their own scores and see how a wider array of actions, from opening new accounts to maxing out their credit cards, could affect their numbers.

Tip: I?ve found the best way to avoid late payments is to put as many of our bills on automatic as possible. Our mortgage lender, utilities and phone service providers are happy to take their payments directly from our checking account each month. Online bill-payment systems are another way to ease monthly check-writing chore, and many provide reminder services so you don?t forget a bill. The latest versions of Quicken and Money have good reminder features, as well.

Pay down your debts — and consider charging less
Lenders like to see plenty of breathing room between the amount of debt reported on your credit cards and your total credit limits. The more debt you pay off, the wider that gap and the better your credit score.

What many people don?t know is that credit scores don?t distinguish between those who carry a balance on their cards and those who don?t. So charging less can also improve your score — even if you pay off your credit cards each month.

Your credit-card issuer takes a look at your account once every month or so and reports the outstanding balance on that day to the credit bureaus. This snapshot doesn?t reflect whether you pay off that balance a few days later or whether you carry it from month to month.

Tip: If you plan to apply for a mortgage, car loan or other major credit account in the next year, start paying down those balances now. And if you?re in the habit of charging everything in sight to your cards — to gain more frequent flier miles, say — consider switching more to cash in the months before you apply. Depending on your situation, the loss of a few miles could be more than made up for by a better score, and thus a lower interest rate.

This kind of advice, by the way, makes the folks at Fair Isaac more than a little nervous. Credit scorers and lenders don?t want to see people ?artificially? changing their behavior to pump up their scores. Moderation in using plastic is never a bad thing, however, and if the desire for a better score has you using credit more wisely, who?s the loser? Oh, other than the fee-charging, interest-rate-boosting credit-card companies, of course.

Don?t close old, paid-off accounts
We used to tell people to close accounts they weren?t using. Now here?s the word from Craig Watts of Fair Isaac?s consumer affairs office: ?Closing accounts can never help your score, and often it can hurt.?

This knowledge is frustrating to those who want to simplify their lives and reduce the opportunities for identity theft by closing unused accounts. But credit facts are credit facts.

Shutting down credit accounts lowers the total credit available to you and makes any balances you have loom larger in credit score calculations. If you close your oldest accounts, it can actually shorten the length of your reported credit history and make you seem less credit-worthy.

Of course, perhaps you can afford not to care too much about the effect of closing an account. If you don?t use your cards much and your score is already high, the damage caused by shutting down more recent unused accounts will be minimal and may be well worth the peace of mind.

If you do carry balances or charge a lot, however, leave all your old accounts open, especially if you?re about to apply for new credit.

Tip: Keep all this in mind the next time a department store clerk offers you a 10% discount for signing up for a new card. Each new account can put a small ding on your credit score, and offer a new opportunity for credit thieves. Since closing accounts can hurt, it?s better to apply only for credit you really need.

Don?t be afraid of credit counseling
If you?re overloaded with high-interest debt and are in danger of falling behind on your payments — or you already have — consider working with a nonprofit agency such as Consumer Credit Counseling Service to set up a debt repayment plan. These services can negotiate lower interest rates and help you pay off your bills within a few years.

Contrary to what you might have heard, credit counseling probably won?t hurt your credit score. It used to, but about three years ago Fair Isaac discovered that people in debt-repayment plans were no more likely to default or go bankrupt than other consumers.

?Today the FICO score ignores any and all references in a credit report to credit counseling or debt management programs,? Watts said.

Those references to credit counseling, by the way, are typically removed from a credit report after a consumer has successfully completed a repayment plan. That means there?s no lasting reminder on your credit history.

Watts notes that a few lenders still use the old scoring system, which punishes folks on debt repayment plans. Others, particularly mortgage lenders, simply won’t work with people in credit counseling until their plans are completed, regardless of their credit scores. For more information, check out “The consumer’s guide to credit counseling.”

Tip: Don?t confuse legitimate, nonprofit credit counseling services with fly-by-night outfits or so-called debt settlement firms. Debt settlement will hurt your credit score, since you?re paying less than you owe, and fly-by-night firms can disappear with your payments, making your credit even worse.

Stay out of bankruptcy if you can
Bankruptcy is the nuclear bomb of the credit world — worse than delinquencies, loans or collections. Its impact, however, depends on how many black marks you made on your credit before you filed.

Bankruptcy can knock 200 points, or more, off the score of someone with otherwise good credit. People with multiple delinquencies or collections on their reports will see less decline because their scores are low to begin with. Either way, recovering from a bankruptcy can be tough. Once a score is pushed below 620, which bankruptcy inevitably does, credit becomes scarce and far more expensive.

High-interest lenders love recent bankruptcies, because they know consumers aren?t allowed to file again for another six years — plenty of time to squeeze out lots of high-rate payments.

Mainstream lenders, however, generally will reject consumers with a bankruptcy on their record — and bankruptcies are reported for up to 10 years.

Knowing your credit score, and the potential impact of a bankruptcy, might help you steel your resolve to pay off your bills and improve your credit situation. Or you may decide you can?t make matters much worse, and file anyway.

One last tip: Once you know the impact on your score, get good objective advice before filing for bankruptcy. Attorneys may be overly eager for you to file, while consumer credit counselors may be overly eager that you not. Books such as Robin Leonard?s ?Money Troubles: Legal Strategies to Cope with Your Debts? offers a more balanced view of the risks and benefits of bankruptcy.

1. Trading with money you can’t afford to lose.

One of the greatest obstacles to successful trading is using money that you really can’t afford to lose. Examples of this would be money that is supposed to be used to pay the mortgage, bills or your child’s college tuition. This is sometimes referred to as “trading with scared money” and there is a very good reason for that. Ultimately what happens is that when someone knows in the back of their mind that they are risking the rent money, they trade out of fear and emotion versus logic and no emotion.

If you are in this situation I highly recommend that you stop trading until you earn enough to put into an account that you truly can afford to lose without causing major financial setbacks. You can start with as little as $2000 and trade stocks under $30.

2. The need to be “certain”.

We all have the need to make sure that the trade we want to make is going to be a good one. Therefore we look for signs that will give us a confirmation to enter. This can come in several forms, for example… Tuning into CNBC or the Wall Street Journal to give us news that our stock is on the move or waiting for a couple of extra days to make sure that the stock is really flying and just not on a false breakout. Other traders will get opinions from friends, family or broker. Others will wait for ten technical indicators to line up and give the “green light”.

All of these are okay to a point, however the big mistake to avoid is taking so much time that you let the trade take off without you. Interestingly, what ends up happening as a result of waiting too long is that you actually increase your risk. This is because as a stock moves higher and higher there are fewer buyers left in the market and it can come tumbling down until more buyers step in. It is like a game of musical chairs; eventually someone gets caught without a chair.

Traders who wait and wait and wait to make extra sure are usually the ones buying the top tick just before the stocks sells off. They then beat themselves up thinking they picked the wrong stock. Odds are it had nothing to do with their selection, just bad timing.

The thing to keep in mind is that there can be no absolute certainty in any given trade. All we ever can do is take a very educated risk along with a leap of faith!

3. Spending profits before you make them.

Nothing is more exciting then getting into a trade that blasts off and puts you into a highly profitable situation. This can cause major problems however, because this type of trade puts you in a highly euphoric state and leads to daydreaming about the huge profits still to come. You say “Wow I’m already up 15% in two days; I’ll be up 50% in a week and probably double my money in no time!” Then the next thing that happens is you are deciding on the great new car you are going to buy or perhaps telling your boss that he can stick it… Well you get the idea!

The real problem occurs as you get caught up in the daydream and expectations. This causes you to not be prepared to get out as the market sells off and eats up your profits because you have convinced yourself of the eventual outcome and will deny the reality of the situation.

The simple remedy for this is to know where and how you will take profits once you enter the trade. Also, realize that the market will only go up as long as it wants and not how high you think it should go.

4. Forming an opinion.

I’m here to tell you that the market does not give a damn about you or your opinions. Even if they are based on painstaking research or from a “Wall Street Guru”, it doesn’t matter!

Maybe your opinion on market direction for the long term is correct, but it doesn’t mean that in the short term things can’t move against you. Remember that there are tens of thousands of traders out there who also have an opinion. It is all these different opinions that can cause great fluctuations in price on any given day or week regardless of your outlook

5. Three 4-letter words that will kill you! HOPE—WISH—PRAY

If you ever find yourself doing one or more of the above while in a trade then you are in big trouble! As I have already said, the market doesn’t give a damn. All the hoping, wishing and praying in the world is not going to turn a losing trade into a winning one.

When you are wrong just use a simple 4-letter word to correct the situation-SELL!

6. Not sticking to your plan

A big source of trouble arises when a trader starts to deviate from their strategy. Maybe for a week they will trade according to one set of rules and the next use something entirely different.

This flying by the seat of the pants always ends up backfiring. This is because the trader can never be certain what is working and what is not.

You must never deviate from your methodology once you start. As long as it is a good one statistically there is absolutely no reason to change it. The way to make money from it is to trade it over and over again to exploit the edge it gives you.

One thing to also be aware of is that a trader is most vulnerable to switching approaches after a few loses. So, pay special attention at these times.

7. Not knowing how to get out of a losing trade.

It’s amazing how many people I have talked to who don’t have any clear escape plan for getting out of a bad trade. Once again they hope, pray wish and rationalize their position. As I keep saying the market does not care what you think. It does what it does and when you are wrong you are wrong!

The easiest way to keep a bad trade from going really bad is to determine before you get in, where you will get out. You can use a dollar amount or at some target point such as the low of the previous 15-minute bar.

***Make sure you don’t get the “stunned deer in the headlights syndrome”. This is where you see the stock fall to your stop loss point, but you are unable to take action. Maybe this is due to fear or disbelief that you are wrong, but unless you get out ASAP you could end up I major financial trouble!

8. Having an ego.

I have seen a number of individuals enter the trading game that were extremely successful in other business ventures. Because of this they had a fairly big ego and thought they couldn’t fail. Their egos became their downfall because they couldn’t except that they were wrong and refused to bail out of bad trades.

Once again, whoever or wherever you came from does not concern the markets. All the charm, powers of persuasion, number of diplomas on the wall or business savvy will not budge the market when you are wrong.

9. Falling in love with a stock or trade.

Let me give you an example of what I mean. Back in the spring of 1999 EFAX was a really hot stock. I waited to buy it on a dip and did so at $19/share. It started to move up strongly and life was great!

After a while though, it started to come back to my entry point and then below it. Here’s the problem. For some reason I really liked EFAX and sort of became attached to it. Ultimately I couldn’t let go of it even though I knew I should. I justified and rationalized why my dear friend should bounce back, but it never did. I finally had to break off my love affair when the stock hit $9. (Ouch!)

The moral of this story is never fall in love, let alone get married to any stock. It can cost you dearly!