My Money Scripts

Waiting for the Second Dip of the W

In June of 2009 I wrote a column, "Weathering The 'W,'"on the possibility we will have a "W" shaped recession and recovery. This model would have the global stock market crash of fall 2008 as the first dip in the "W" and this year's market rise as the high point in the middle of the letter. The second dip would be another crash, equal to or deeper than the initial one, and the final high point of the "W" would be a sustainable recovery.

I've been telling clients that the next potential down leg could actually be years away, rather than months. One factor that that has me really concerned is the looming tax increases slated for 2011. Once those go into effect they will probably put a real damper on any recovery, if not creating an outright economic decline.

Until recently I hadn't seen this thinking in put in print by any of the financial writers I follow. On December 11, Millennium Wave Investments president John Mauldin blogged an article, "Thoughts on the Statistical Recovery," that is well worth reading.

This is what Mauldin has to say about the "W" recession:

"Finally, this highlights my concern about a double-dip recession. I think we could see one in 2011, as a result of the massive increases in taxes as the Bush tax cuts expire and the Pelosi-Reid-Obama crowd want to raise taxes on the "rich." Their assumption is that if we could grow quite well in the Clinton years with higher taxes, then we can do it again.

First, if there are no changes to the proposed tax increases, this will be a massive middle-class tax hike. Make no mistake, the Bush tax cuts resulted in a huge cut in the taxes of the middle class. The data clearly shows the wealthiest 20% are paying significantly more of the total taxes paid.

If you combine a large middle-class tax increase with an even larger new wealth tax (75% of which will affect . . . small businesses . . .), it will be a one-two punch to the economic body, when unemployment is already at 10%. You can't take out well over 2% (and maybe 3%) of GDP from the consumer without it having significant consequences."

Regardless of whether we will see a prolonged decline, one thing you can count on is a decline of some nature. According to the Leuthold Group, the average rally in the stock market after a bear market low is 55% and lasts 285 days before suffering a market correction of more than 10%. Our current rally has risen about 60% and is approaching 300 days. The second dip in the "W" could begin any time now.

What can you do to prepare for the next down market? The answer is absolutely NOT to get out now and time the market! Those who listened to the conventional wisdom of the experts and got out last March missed the recovery. Most are only now starting to get back into the market, probably just in time to see it decline again.

If you are retired or nearing retirement, however, it would make sense to put one to four years' worth of income into cash, CD's, or an ultra short-term bond fund that doesn't use derivatives.

Otherwise, be sure you have a diversified portfolio with at least five or more asset classes (I use nine). Having cash available for the short term will allow you to leave your portfolio alone to recover, even if the second part of the "W" is slow to come back up.

A Taxing New Year's Resolution

If you're in the habit of making New Year's Resolutions, one that you might consider for the coming year is this: "I resolve not to pay more in taxes than I need to."

When it comes to keeping a resolution, this one might seem like a no-brainer. In fact, however, making sure you don't overpay your taxes requires some planning, research, and attention to detail. Here are some factors to keep in mind, both as you prepare your tax return for 2009 and as you plan for 2010:

1. As always, pay attention to the basics. Make sure you claim the right number of personal exemptions, figure your taxes at the correct rate, and claim all the deductions to which you are entitled. Some of these might include the child tax credit, education expenses, state taxes, or charitable contributions.

2. If you haven't contributed the maximum to your IRA, you can still make contributions. If you don't have an IRA, you have until April 15 of 2010 to open one for 2009.

3. Make sure you aren't having too much withheld from your paycheck. A large income tax refund isn't a "bonus;" it's an interest-free loan to Uncle Sam. Put the same money into an IRA or savings account instead and let it earn interest for you.

4. If you had any investment losses in 2008, some of those amounts may carry over into 2009. Even if you usually prepare your own tax returns, it might be wise to consult a qualified tax professional about reporting investment losses.

5. Make sure you are taking advantage of any special credits or short-term tax provisions that apply to you. As an example, if you made any energy-saving improvements to your house such as a new furnace or new windows, you may qualify for an energy tax credit. Another example is the first-time homebuyer credit, which has been extended until April 30, 2010. Some of its provisions have been changed, including the addition of a "long-term resident" credit, so check it out if you are considering buying or selling a home.

6. If you can, spend some time on the IRS website to find out about current tax provisions. A good place to start is Publication 17, Your Federal Income Tax, which summarizes current tax rates, credits, and other information. You can read this information online or download it. If you don't have Internet access, you can get a free printed copy of Publication 17 by calling 1-800-TAX-FORM (829-3676).

7. If your financial affairs are more complex, there are additional ways to save on taxes. One strategy is to arrange to receive more of your income from sources that are taxed at lower rates. Long-term capital gains, for example, are currently taxed at lower rates than ordinary income. These rates will almost certainly be going up in 2011, so if you have investments, it would be wise to discuss tax strategies with your investment advisor.

8. If you own a small business, make sure you deduct all your legitimate business expenses. These might include use of your car, an office in your home, or travel expenses. You also might consider reducing FICA deductions by taking some of the income from your business as dividends rather than a salary. If you do this, you will reduce your future Social Security income, so it's important to invest the tax savings for your retirement.

Please keep in mind that these ideas are merely possibilities to consider. I strongly recommend that you consult a tax preparer, preferably a CPA, for tax advice tailored to your own situation.

The Secret to Santa's Business Success

This time of year, millions of toys are handed out in the name of Santa Claus. Supposedly they come from Santa's workshop, but let's get real. There's no way that one elderly, overweight man can possibly produce all those toys. It's an enormous task that must require countless hours of work. This, of course, is where the elves come in. In order to turn out so many toys to be given away, they have to be working for little or nothing. There probably isn't even a minimum wage law at the North Pole. And what about the working conditions? Do the elves have health insurance? A 401(k) plan? Paid vacations? Do they get overtime? Or are they exploited and taken advantage of? It's possible they are working hard all year round, meeting Christmas deadline after Christmas deadline, in sweatshop conditions that are anything but jolly. Oh, they seem cheerful enough. Any time you see Santa’s elves in movies or books, they are singing while they work, bustling about with apparent joy in what they do. True, appearances can be deceiving, but maybe they are genuinely happy in their jobs. If the elves truly are as satisfied as they seem, what is the secret? How is it possible that Santa's workshop can produce so many toys year after year, give them all away, and still remain in business? The answer must be that a great deal of the labor that goes into Santa’s toys is outsourced. There's another labor force behind the scenes that makes it possible for Santa's workshop to produce all those millions of gifts. This is a vast army of workers all over the world—all volunteers. These unpaid workers are the ones who venture out to discount stores and shopping malls on Saturdays during December. Some of them even get up at dawn to fight their way through crowds of shoppers on the day after Thanksgiving. Others spend hours creating special gifts of wood, fabric, or yarn, working in secret and putting care and love into every stitch or stroke of a paintbrush. Still others stay up half the night on Christmas Eve to assemble dollhouses or bicycles. Then these selfless volunteers wrap the gifts with care—and label them, “From Santa.” Those generous volunteers are the parents and grandparents who delight in making Christmas a special time for the children they love. Some of them are able to buy expensive gifts without counting the cost. Others squeeze just enough out of their limited budgets to get something small. Still others give what may be the most valuable gift of all—their time. Regardless of what the gifts are or what they cost, the intent behind them is to bring joy to children's faces. Many of these volunteers go even farther, spending time and money in an effort to provide that same holiday delight to children they don’t even know. This outsourced labor force is the real source of Santa’s incredible productivity. It's the true secret behind his ability to bring joy to so many children in so many places. Maybe you are one of those countless Santa’s helpers. Maybe your Christmas this year includes the great pleasure of watching small children open gifts from Santa. Maybe your little ones have long since grown up and graduated to being Santa’s helpers themselves. Whatever the circumstances, may your Christmas be a joyous one that is focused on family and those you love. As you celebrate this year, please take a moment to help me join Tiny Tim in his heartfelt wish: “God Bless Us, Every One!”

Even Scrooge Might Like This Form of Charitable Giving

Charles Dickens has a scene in A Christmas Carol where two charity workers approach Scrooge on Christmas Eve:

". . . "a few of us are endeavouring to raise a fund to buy the Poor some meat and drink and means of warmth. We choose this time, because it is a time, of all others, when Want is keenly felt, and Abundance rejoices. What shall I put you down for?"

"Nothing!" Scrooge replied.

"You wish to be anonymous?"

"I wish to be left alone," said Scrooge."

This year, he isn't the only one. The Great Recession has resulted in many charities stepping up their funding drives to counter their falling revenues. In addition, Congress wants to pay for more and more social programs by raising taxes on the financially sound. The combination may make millions of people echo Scrooge's wish to be left alone.

Nevertheless, there are millions more who want to give. Charitable giving, though, can be more complicated than it was in Scrooge's time.

For example: Would you like to claim a charitable tax deduction this year, but you haven't had time to research which charity you want to support?

Do you support a number of charities and would like to support even more, but find the new IRS requirements for documenting your gifts just too burdensome?

Would you like to set aside a sum of money for your favorite charities that could generate an annual income forever, but assume forming a foundation or charitable trust is beyond your reach?

All the above are possible—and simple—with something called a donor-advised fund. This creates an easy-to-establish, low-cost, flexible vehicle for charitable giving as an alternative to direct giving or creating an expensive and complex private foundation. Donors enjoy administrative convenience, cost savings, and tax advantages by channeling their giving through an existing fund. Initial contribution amounts are typically $5,000 or more.

Let's say you wanted to give small amounts to fifty different charities. Rather than write fifty checks and obtain fifty receipts to file with your tax return, you can make one gift to the fund, which distributes the money to the fifty charities. You only have to provide one receipt to the IRS.

You can also make a charitable gift to the foundation that will qualify as a deduction on your 2009 tax return, but you can delay the distribution of the funds until some time in the future. This gives you the write-off today while giving you time to explore the various causes you may want to support.

What really sets a donor-advised fund apart from other types of charitable giving is that you can decide how your donations are used, much as you would if you set up your own foundation. With the approval of the community foundation’s board of directors, you can create either an endowed or a nonpermanent fund for a particular purpose, such as a specifically-designated scholarship fund in memory of a loved one.

An example of a donor-advised fund is the Black Hills Area Community Foundation, which was started in 1987. It is a tax-exempt 501(c)(3) nonprofit organization that manages and administers charitable funds for individuals, families, businesses and nonprofit organizations in the Black Hills area. The BHACF supports scores of local charities and special projects. Any 501(c)(3) public charity qualifies for a gift from your donor-advised fund.

To find a similar fund in your area, just search the Internet for "community foundation donor-advised fund" plus the name of your town. It's a good way to reduce administrative costs and inconvenience but still give to causes that matter to you.

Not Enough Money? Just Get More from "the Rich"

Over the past year, Rapid City's country club rebuilt its 50-year-old club house. An article in the Rapid City Journal on the opening of the new building elicited several online comments, including these:

• "And for [those] who built this obscene monstrosity right in the middle of a recession for the rest of us, shame on you for flaunting your riches."

• "Can you say 'Lower Class Stay Away?'"

Several others did point out that the country club provides local jobs and its new construction, funded by its members, cost others nothing in taxes. As one person put it, "It is not immoral or illegal to have disposable income."

Maybe it isn't illegal to have extra money, but increasing numbers of people seem to consider it immoral. This small exchange over a country club is a microcosm of a growing class warfare unfolding in America. Sadly, it seems it is no longer a good thing to be viewed as "rich" (which according to some polls is anyone worth over $500,000).

Certainly, it is a normal human trait to have some envy and resentment of those who have more than we do. I believe, however, that an undercurrent of deeper resentment against the rich is spreading in this country. One example is this response I received online to one of my columns: "I wish I have never saved into 401K, I should have just spent everything when I was making it. Rich people in america are financially raping everyone else.(sic)"

For many people, the frustration and fear created by the recession has focused on highly-paid managers of failed financial companies and high-profile swindlers like Bernie Madoff. Instead of being seen as “one-off” unethical operators, these newsmakers seem to have become stand-ins for "the rich" in general.

Successful people are less likely to be viewed as hardworking entrepreneurs who create jobs and opportunities for others. Instead, in a throwback to the 1930's, a growing number of Americans and their elected officials are blaming the rich for the economic crisis and determined to penalize them by raising their taxes.

One example of this was a survey conducted for the Associated Press by Stanford University and the Robert Wood Johnson Foundation on funding for health care reform. The only funding methods supported by a majority of those polled were those that increased income taxes on the wealthy.

With such public support, it's no wonder the health care bill passed by the U. S. House of Representatives is a plan to be funded by a 5.4% income tax surcharge on those making more than $500,000 a year. Some in Congress are also considering an additional tax on the rich to fund the Afghanistan war.

It's as if the country is acting on a money script of, "There will always be enough money—just get it from the rich."

Sooner or later, however, if the seemingly bottomless pool of "the rich" is taxed more and more heavily, it will dry up. Margaret Thatcher once said, “The problem with socialism is that eventually you run out of other people’s money to spend.” The result will make the recent financial crisis look like the good old days. We will see consumers spending even less, businesses cutting back, and more employees unable to find jobs.

I am extremely concerned that this increased resentment of "the rich" is coming just at the time we need to be supporting small businesses in order to preserve jobs and create new ones. If we over-burden those businesses instead, the result will be fewer opportunities for average Americans to prosper and build wealth of their own.

Holiday Money Scripts

Keeping up with the Joneses all year is hard enough. It gets even worse during the holidays, when we feel pressured to keep up, not just with the Joneses, but also with Santa, Mrs. Claus, and all the elves.

Some Christmas shoppers overspend on gifts and end up paying off credit card bills for months. Others drive themselves crazy trying to find exactly the right gifts for the right people. Others hate shopping so much that they find it hard to enjoy the season.

If you fit into any of these categories, the cause may be your money scripts. Last week's column listed some of the most common of these unconscious beliefs about money that we all hold. Additional money scripts are especially likely to kick in this time of year. We are surrounded by expectations and pressures about giving and about "ideal" holiday celebrations. As a result, we are especially vulnerable to making money decisions blindly in response to beliefs we don't even realize we hold.

You may be one of those who regularly end up spending significantly more on gifts than you intended to. You may impulsively buy additional, unbudgeted gifts for people you've already bought presents for. You may not even try to set holiday spending limits. You may overspend on things for yourself while you're Christmas shopping.

If any of these are true for you, you may have some unconscious beliefs about money that drive you to overspend. See whether any of the following money scripts might fit for you:

"The more you spend, the more love you show."

"It takes the joy out of giving if you pinch pennies."

"It's the season for giving lavishly, not for being a Scrooge."

"If I don't buy just the right gifts, people won't like or respect me."

"I need to give my kids more than I got when I was a child."

"More gifts and more spending will make the holidays okay." This belief may especially apply if parents are divorced or the holidays are marked by family tension and dysfunction.

"It's tradition. Everyone expects (whatever) from me."

"I do so much for everyone else; I deserve something for myself, too."

It's also possible you may go to the opposite extreme and be a Grinch when it comes to the holidays. If you hate Christmas shopping, grumble about the holiday being so commercialized, and look forward to January, it's possible you may hold some money scripts that drive you to underspend. Your beliefs may be similar to the following:

"It's wrong to spend money except on necessities."

"You aren't a spiritual or religious person if you spend too much money."

"Christmas shouldn't be about money."

"It's wrong to spend money on luxuries when poor people are suffering."

"It isn't good for kids to get too much."

"My kids shouldn't have more than I had when I was a child."

If you'd like to change some aspects of what you do and how you feel about holiday spending, you may find it useful to take a closer look at your own beliefs about the season. One way to begin this is to quickly write answers (short statements are best) to the following questions: What do I believe about money and each of the following? Christmas? Family celebrations? Presents? Giving? Spending? Receiving?

You may uncover some money scripts similar to the ones listed above. Learning why you tend to overspend or underspend this time of year won't instantly change what you do. Yet understanding what is behind your pattern of holiday spending is an important way to start becoming a more conscious Christmas shopper.

If dealing with money scripts this time of year seems too challenging, just be glad you aren't Santa Claus. Imagine trying to carry out his holiday money script: "I have to get a gift for every child in the whole world--and I have to do it all in one night."

Top Ten Beliefs Behind Poor Money Choices

Each of us has a set of unconscious beliefs about money, or "money scripts." These beliefs, commonly formed in childhood, shape our financial choices in adulthood. Money scripts are partial truths, but one of the reasons they cause problems in our lives is that we unwittingly act on them as if they are completely true.

In our book Wired for Wealth (HCI, 2008), Drs. Brad and Ted Klontz and I include a "Top Ten" list of the most common money scripts. These are:

1. More Money Will Make Things Better. Many of us assume more money will bring us security, happiness, meaning, or whatever else we seek. There is some truth in this money script. For those on limited incomes, more money would indeed make things better. Research shows, however, that once we are able to comfortably take care of our needs, happiness is not related to the amount of money we have.

2. Money is Bad. Like all money scripts, this has many variations, such as "The rich are shallow/greedy/unhappy." Anyone with this belief is likely to unwittingly sabotage any potential financial progress. After all, if we believe money is bad, it is perfectly logical to unconsciously try not to have any.

3. I Don’t Deserve Money. This money script is common in the helping professions and may also be held by those who inherit or otherwise receive money they don't see as their own. It may reflect a belief that it's wrong to enjoy money, because others are less fortunate. It can lead to under-earning and to ill-advised financial decisions.

4. I Deserve to Spend Money. Certainly, one aspect of financial balance is believing we deserve to spend money on ourselves, those close to us, and those less fortunate. However, this script can undermine our financial health when it is used as a rationale for overspending.

5. There Will Never Be Enough Money. The miser Ebenezer Scrooge is a classic example of this money script at its most extreme. When we believe there will never be enough money, we set ourselves up to live a life of deprivation and to experience constant anxiety, insecurity, and fear.

6. There Will Always Be Enough Money. This money script drives the behaviors of many people who grew up in wealthy families and those who have always been taken care of financially by someone else.

7. Money Is Unimportant. This money script is common for those in helping professions, creative artists, and those with religious beliefs that poverty is virtuous. While it acknowledges that wealth doesn’t bring happiness, it also can be used to excuse poor financial planning and money management.

8. Money Will Give Me Meaning. This belief may result from growing up in poverty and seeing money as a magic tool that can open doors to belonging or being treated with respect. It can also be tied to a belief that money is the primary measure of success.

9. It’s Not Nice (or Necessary) To Talk About Money. This script is common in our culture. Despite ample information about earning and managing money, talking about money and our relationship to it is one of our biggest taboos.

10. If You Are Good, The Universe Will Supply All your Needs. This belief is especially common for those in the helping professions or with strong religious backgrounds. It can serve as an excuse not to learn about money or plan for the future.

This list may serve as a starting point for identifying your own money scripts. Knowing those scripts is a useful first step toward a more balanced relationship with money.

Having Enough Money for Retirement

Are you worried about having enough for retirement? You aren't alone; the rich are worried, too. A recent survey shows that half of wealthy Americans consider their retirement planning an area of "high concern."

An article by Tierney Plumb, published October 27 in the online edition of The Business Journal of Milwaukee, reported on the survey, which was conducted by Merrill Lynch Global Wealth Management.

Each of the 1000 participants had "investable assets" (presumably not including homes and other personal assets) of more than $250,000. This survey described them as affluent; by most other financial industry standards they would be considered financially sound rather than wealthy. Nevertheless, those surveyed weren't particularly satisfied with their retirement prospects.

Three-fourths (75%) of these financially comfortable people were concerned about rising health care costs. Over half (54%) worried about their ability to leave an inheritance for children or grandchildren, and 58% feared the economy would interfere with their ability to meet their financial goals. More than a third (37%) believed they would need to postpone their retirement.

If your own income and savings levels don't even come close to putting you in the "affluent" class, you probably don't see many similarities between your own retirement concerns and those of the participants in this survey. Yet the survey results illustrate an important point to consider for anyone planning for retirement. That is your own personal definition of "enough money."

True, for some of those approaching retirement age, the idea of "not having enough" might mean worrying about being able to pay the bills. Others, like the relatively affluent Americans in this survey, are quite unlikely to end up spending their golden years living in two-room apartments and eating Ramen noodles. They can presumably count on having enough to provide adequately and even comfortably for their basic needs.

So why are they concerned? Because retirement is about far more than basic needs. Ideally, having enough for retirement means being able to live where and how you want to live, to enjoy long-deferred hobbies, to fulfill dreams such as traveling, to feel secure that you will have the care you may need in old age, and to leave legacies to family members or charitable causes.

If you are worried about being able to enjoy your own retirement, one way to begin easing those concerns is to think consciously and deliberately about what you want retirement to look like. How will you want to spend your time? How and where do you want to live? Realistically, what do you expect your health to be like? Do you look forward to being free to travel, spending time with family, being more involved in your community, or volunteering? What are your retirement dreams?

Think through what you want in retirement, and discuss these goals with your spouse and other family members. Then, together, you can start to evaluate what you might need to do in order to reach your goals. Be creative; don't reject any possibilities until you have evaluated them thoroughly. You might consider options such as downsizing your home now instead of later, finding ways to increase your savings for retirement, planning to work part-time after you retire, and sharing housing with friends or family members.

Whatever possibilities you consider, keep three important elements in mind: One, take care of your health, because it's your single most important retirement resource. Second, be as realistic about your circumstances as you can. And finally, remember to ask the right question. You can't know "How much money is enough for retirement?" until you answer the deeper question: "Enough for what?"

What You Get From a Financial Planner

What exactly do you get when you engage a fee-only financial planner?

This question seems so obvious that it is rarely asked, yet its answer is important. Fee-only planners, much like attorneys and physicians, are compensated for their knowledge and their services. They do not receive commissions by selling products such as insurance or investments.

For many planners, the decision to be compensated only by fees is based more on ideology and career satisfaction than on profitability. They believe they can do the best planning in a client-advisor relationship rather than in a salesperson-customer relationship.

A real financial planner—as opposed to an investment advisor or financial product salesperson—takes a very broad view with clients, helping them orchestrate everything about their financial lives. This includes such areas as:

• Budgeting and cash flow

• Unbiased insurance advice

• Investments

• Planning for both financial and non-financial aspects of retirement

• Tax planning

• Estate planning in both financial and non-financial areas

• Making educational and career choices and setting life goals

• Using one's resources to build a satisfying and fulfilling life

Advisors who receive commissions typically view the scope of the engagement very narrowly, with the focus usually on investments. Commission planning is less work and more profitable than fee-only planning.

Today, an increasing number of consumers are seeking out the services of fee-only planners. The benefit of being a client rather than a customer is the main reason. A fee-only planner owes you, the client, a legal obligation to be your advocate, to disclose all conflicts of interest, and to work in your best interests. A seller of financial products owes you, the customer, nothing but to treat you fairly.

A secondary reason is that fee-only planners tend to cost less and deliver more. One of the most obvious cost savings is because fees are typically less than commissions. Also, fees can be tax deductible where commissions are not. Fee-only clients also receive comprehensive financial advice, where the customers of a commission salesperson typically receive only investment advice.

Clients also can save substantial amounts by following the advice of their financial planner, which is based solely on what the planner perceives to be their best interests. As an example, in a six-month period this year I may have saved some of my clients enough money to pay my fees for the next 35 years.

Here is how it worked: In early March 2009—which we now know was the bottom of the 2008-2009 market crash—about a third to half of my clients wanted to sell most or all of their stocks and go to cash. As an investment professional, I was convinced that we were near a market bottom and to sell out would mean missing the recovery that was sure to come.

I was able to persuade almost all of these clients to keep all or a portion of their portfolios in stocks. Six months later, those who hadn't sold out were back up 35%. With money market funds paying less than 1%, that same 35% recovery might have taken 35 years had those investments been moved to cash.

As a fee-only planner, I was able to interpose my professional knowledge and experience between my clients and the financial crisis. While I wasn't able to keep their investments from losing value in the crash, I was able to help them avoid making fear-based decisions that would have cost them much more in the long term.

Such unbiased advice—and the very real financial benefits it can provide—is one of the most important things you get from a financial planner.

Novice Investor Loses Shirt, Can't Cover Pork Bellies

Although I was selling real estate instead of attending college in my early twenties, I got a chance to pay a lot of tuition to educate myself about investing. I had some money in savings and some mutual funds in an IRA, but they weren't building wealth fast enough for me. Gold prices were up and going higher, so I took $1000 out of my savings and put it into gold futures. In just a few days, my $1000 had turned into $3000.

My broker suggested putting the $3000 into pork bellies. I didn't really know what they were, but he seemed to know what he was talking about, so I bought pork bellies. For a few days, everything was fine. Then the price of pork bellies tanked. For five days straight, the price fell so dramatically that trading was stopped at the beginning of the day. I couldn't even sell. There was nothing to do except watch the losses pile up.

By the time trading resumed, I had a margin call for $12,500. To pay it, I had to wipe out my savings and cash in my IRA. At least I had savings, so I didn't have to go borrow the money.

I had made a classic beginner's mistake: speculating instead of investing.

One way to look at planning for the financial future is to imagine it as a pyramid with three tiers: the bottom one is saving, the next is investing, and the third is speculating.

Saving is putting money away for future needs, often in savings accounts or CDs. The primary purpose isn't building wealth, it's having money when you need it for emergencies or large purchases. You don't earn much in interest, but you won't lose what you started with.

Investing is diversifying money into stocks, bonds, real estate, commodities, and other asset classes. The purpose is building wealth over the long term. Your returns over time will be more than you would earn from simple savings, but you do risk losing some of your original investment. Having a diversified portfolio minimizes the risk of ever losing all of it.

Speculating is putting money into a high-risk investment in the hope of building wealth quickly. Trying to time the markets through day trading and borrowing to buy stocks, real estate, or commodities are types of speculating. Another is putting everything you have into one investment. True, great fortunes have been made through speculating. More fortunes have been lost.

There is a place for speculation in a diversified portfolio, but it's a small place. Not only can you lose your initial investment, you can—as I did with my pork bellies—lose way more money than you had to begin with.

When novices skip from saving to speculating, chances are good that they'll lose big. Unfortunately, too many of them learn the wrong lesson. They decide, "Investing is too risky," never realizing they were speculating rather than investing.

As a result, in the future they may limit themselves to the "savings" tier. Their money stays safe, but they lose in a big way by not investing and earning the long-term returns that are so important in maintaining purchasing power, building net worth, and achieving financial security.

If unlucky speculators are luckier, they'll realize, as I eventually did, that they have just paid some very expensive tuition. They'll use the experience as a starting point to learn the difference between speculating and investing. Diversified long-term investors may not make huge fortunes overnight, but they do build wealth—and they sleep a lot better while they're doing it.