The Money Maze

by Jim Stovall

The current turmoil in the financial markets has created more confusion and controversy surrounding money, wealth, and personal finance than ever before.  Surprisingly, money is not the key to wealth.  Knowledge is the key to wealth.

People who are wealthy have a high degree of knowledge and understanding as it relates to money.  They did not obtain this knowledge because they have money.  They have money because they obtained this knowledge.

If you divided all the money in the world up equally among those of us in a capitalistic, free enterprise economy, within a few short years, those dollars would find their way home again, and the rich would continue to get richer while the poor got poorer.

Whether you’re dealing with medicine, mechanics, or your money, knowledge is power.  When you visit your doctor or auto mechanic, the more you know, the better off you are and the more likely you become to have a positive outcome from the encounter.

I have written 16 books, and as they are released into the retail marketplace, they all take on a life of their own.  Recently, I have written a book with my co-author Tim Maurer entitled The Ultimate Financial Plan.  When it hit the marketplace, it began getting a lot of attention from high places.  Here are the reviews from USA Today and the New York Times.

This type of publicity for a brand new book is indicative of the hunger in our society of people looking for answers for evermore perplexing questions.

In The Ultimate Financial Plan, we do not seek to give you the answers to all of the questions, but instead, we seek to equip you with the knowledge you will need to evaluate investments and investment professionals.

In today’s financial realm, it’s not enough to simply evaluate financial advice.  You have to evaluate financial advisors.  Financial decisions are among the most important you will ever make for your family and your future.  Unfortunately, if you make the wrong decisions today, you may not know it until you get way down the road toward college expenses, family emergencies, or retirement.  At that point, it’s too late to correct a poor decision and recover.  You can’t wait until you’re thirsty to start digging the well.

We humans have a tendency to avoid perplexing life questions that confuse and frustrate us.  Always remember that doing nothing is never a good financial plan, and to not decide is a decision, in and of itself, and rarely a good one.

As you go through your day today, commit to obtaining the basic knowledge you need to create your own customized money strategy, and then you will have the ultimate financial plan.

Today’s the day!

Black Thursday and the Value of Time

This past Thursday—Thanksgiving 2011—I was fortunate enough to spend the entire day with family.  We spent the morning as our household of four and shared the afternoon and evening with my parents, brothers and extended family on my mother’s side.  After our fill of family and food, we headed home just before 8:00pm (not without purpose, mind you—the Ravens game was set to kick off at 8:20pm).  As we drove through the town of Bel Air, Maryland we passed a Target and a Best Buy, amazed to see lines wrapping around each building with prospective deal-seekers spending their Thanksgiving night huddling for warmth, embracing the side of a big box store.

This phenomenon, I assume, was driven by a desire to be one of the first in each store when they opened their respective doors at midnight.  That’s midnight—the earliest possible moment a store could open and still call it the Friday after Thanksgiving.  Not to be outdone, in an act of supposed consumer benevolence (and arguably outright employee exploitation), the world’s largest retailer decided just to break the barrier by opening at 10pm on Thanksgiving.  Should we just get it over with now and rename Thanksgiving Black Thursday?

Unlike many of my personal finance blogosphere colleagues who’ve justifiably brought their wrath down upon the consumption worship that has become Black Friday, calling for an outright boycott on moral or frugal grounds, I’d like to take a different approach.  In my financial planning class, we talk a great deal about the “time value of money”—the impact of compound interest gained and lost over time.  This concept is practically the centerpiece of all financial planning (rightly or wrongly), but a topic that receives precious little attention is the monetary value of our time.

How valuable is your time?

How valuable is your time?  Well, for starters, how much are you paid?  Take your salary, add any bonuses or commissions and divide it by the number of hours you work.  (This is only a rough approximation not applicable for many who are unemployed, underemployed, retired or working for reduced or no pay.)  Glancing at the Bureau of Labor Statistics, we learn that “Management Occupations” have an hourly mean of $50.69 (or $105,440 per year).  “Computer and Mathematical Occupations” demand an hourly mean of $37.13 (or $77,230 per year) while “Mathematical Science Teachers” derive less annually ($73,480) but more per hour, thanks to summers off, at $41.75 per hour.    While you may very well be blessed with substantially higher hourly/annual compensation than those mentioned above, there are many who make far less. If you’re among them, I don’t need to remind you that though you may receive less compensation, you don’t work any less, so for the sake of argument, let’s assume a reasonable vocational hourly rate of $40 per hour.

Now take a moment to ponder this question: Is the time you spend at work your most valuable?  You may answer yes, but many will prioritize their time engaged in service or worship or pursuit of their favorite hobby as their most prized.  How about drinking in a new book, movie or long-awaited album from your favorite artist?  Or what about that 30 minutes each morning with nothing but your hot cup of coffee or tea and your thoughts, catching up with an old friend over a glass of red wine or toasting the birth of a new addition to your best friend’s household?  Many will rank their daily exercise or sleep as highly valued and even more will rate time spent with family and friends as priceless.

What is a reasonable premium that we could place on this time?  Even though it’s impossible to know, isn’t it likely that we’d value some of this time as at least double or even triple the hourly value of the very important time we spend on the job?  We could easily assume our most valuable time—time that we’ll never get back—is worth over $100 per hour!

How about the time spent at Best Buy from 5pm until 2am on Thanksgiving night and Black Friday morning to secure a savings of $300 on a 42 inch flat screen TV?  From a financial perspective, with an eye for the value of our time, those eight prime-time hours would appear to net a guaranteed LOSS of at least $500!

Let’s also not forget that whatever goods we capture in the hunt, whether at a full or discounted price, are depreciating in nature.  Their value begins to fade the moment we take them out of the box and we’ll likely be tossing them aside as worthless in under a decade, while our premium time is very often a legitimate investment in ourselves and those we love accompanied by compounding memories over the years.

Let me not oversimplify this to suggest that all things consumption-oriented are bad and the activities I tend to prefer are universally good.  After all, I do tend to spend “several” minutes each Thanksgiving Day engaged in the ritual of football spectatorship.  I’ve also heard from friends who enjoyed a rich time of fellowship joining a family member or friend on an early-morning shopping excursion.

But let us not forget that every minute of every day is spent—it’s up to us to spend it well.

______________________________________________

*This article also appeared on Tim’s new blog on Forbes.com. Check it out HERE!

There Is No Panacea!

We continue our exploration of the inherent conflicts of interest in the business of financial advice in this next 90 Second Finance video depicting the Economic Bias of Fee-Only Financial Advisors.

YES, in doing so, I’m turning the sword on myself—I am, indeed, a fee-only financial advisor.  Having spent time as a commission-only, fee-based and now fee-only advisor, I don’t shrink from my belief that the fee-only model is the best…but that doesn’t mean it’s perfect.  And as I mentioned in the introduction to this series, EVERYONE is biased; it’s a fact of money and life!  The goal should be to acknowledge biases where they exist and reduce them to the greatest degree possible.

Enjoy!

The Economic Bias of Commissioned Financial Advisors

What do a used car, an old television with rabbit ears and an annuity policy have in common?  You’ll have to see in this new 90 Second Finance video in which I discuss the Economic Bias of the commission-only financial advisor.

Last week, I introduced the topic of Economic Bias in the financial advisory realm.  I discussed each of the three primary compensation models for financial advisors, and this week we take a closer look at the Economic Bias of those who earn their compensation solely from commissions.

I’d love to hear your feedback and any experience you may have had to support OR contradict my thoughts.

Real Financial Planning

This is the last in a September series[i] that has featured guest posts from some of the most prolific bloggers and authors in the realm of money and life today.  If you missed any of them, I encourage you to revisit the wisdom Derek Sivers, Chris Guillebeau and J.D. Roth shared with us on TimMaurer.com.  And we complete this series of superstars with the person who I believe has taken the most unique approach to enhancing our understanding of personal finance—certainly the most artistic!

Carl Richards is a financial planner, blogger and the founder of the elusive Secret Society of Real Financial Planners.  Armed with a Sharpie and cardstock, Carl used his limited artistic skills to communicate some of the more complex and profound truths of financial planning and investing to clients with simple sketches.  His building body of work at www.BehaviorGap.com received more notice than he expected, and he was invited to become a regular contributor to the New York Times.  In January 2012, Portfolio/Penguin will publish Carl’s first book, Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money.

Thankfully, I’ve also had the privilege of getting to know Carl personally, and through that relationship, I can certify beyond any doubt that Carl’s means, methods and message are not merely a smokescreen for attracting followers or selling books, but based on the foundational values upon which he grounds his life at work and home.  He’s been kind enough to share a sketch and a few words with us:

 It seems like making important financial decisions should be easy. After all, it’s just simple math, right? We’ve all been taught that one plus one equals two. Consequently, we often think that the process of making good financial decisions is as simple as plugging a few numbers into a spreadsheet or an online calculator. After hitting enter, we’ll have the answer.

The problem, of course, is that it doesn’t seem to be that simple. Making good financial decisions requires that we consider the implications of those decisions within the context of our lives. My life and your life do not look the same; therefore, they don’t fit into a spreadsheet.

What may be a good financial decision for me may be a disaster for you and vice versa. In my day job as a financial planner, I’m often asked by friends or people in the media, “What are you telling your clients to do now?” Recently I found myself becoming increasingly agitated by that question. Because of course the answer is, “It depends on the client you’re referring to,” because the answer will be as unique as their situation.

Real financial planning happens at the intersection of your life and your money. The problem of course is that this intersection is an emotional place. I think this is a challenge because most of us were raised with the idea that money, sex, and politics are not things that we discuss openly or in polite company.

Most of our parents felt like it was their job to protect us from the financial side of our families. We didn’t talk about money at the dinner table and chances are we didn’t talk about money at all. Our parents’ well-intentioned desire to protect their kids has left most of us ill-equipped to deal with the emotional issues that surround financial decisions and with the distinct belief that financial decisions can and should fit into a nice clean spreadsheet.

But they don’t. Dreams, fears, and our most cherished goals for our children don’t fit into a spreadsheet. Often those things are what financial decisions are really about. It’s not about finding the best investment; it’s about asking ourselves why we’re investing in the first place.

So in light of this fact, how do we go about making good financial decisions? It starts with taking the time to get really clear about where we’re trying to go and, maybe even more importantly, about why. So my suggestion is to stop watching Jim Cramer scream about nothing important and to put down the latest research report you received from the brokerage firm. Instead, take that time to have meaningful conversations with the people you love about money, your values as a family, and the kind of life you want to live together.

The subtitle of my first book was “The Intersection of Money and Life,” but I’m not sure I’ve seen anyone encapsulate it better.  Many thanks, Carl!


[i] If you missed the last couple weeks, you might not know that to celebrate the release of my new book, The Ultimate Financial Plan, co-authored with Jim Stovall, I’m featuring guest posts from some of the bloggers and writers who’ve most inspired me of late.    

Mastering the Mental Game of Money

In this special September of guest posts from four noted authors and bloggers on money and life, you’re in for yet another treat.  J.D. Roth is an accidental personal finance expert. For over five years, he’s been writing about smart money management at Get Rich Slowly. He’s too humble to tell you himself, but his blog was chosen by Time magazine as one of “The Best Blogs of 2011.” 

He’s the author of Your Money: The Missing Manual (O’Reilly Media, 2010), the personal finance columnist for Entrepreneur magazine, and a regular contributor to Time’s Moneyland blog. Really, though, he just wants to write about travel, but he’s been kind enough to give us a synopsis of the most potent lessons he’s learned as a personal finance blogger.

***

Last weekend, I attended my twenty-year college reunion. In 1991, I graduated from Willamette University with a degree in psychology (and a minor in writing). I also graduated with debt. Not student loans—I was fortunate enough to have earned scholarships to pay my tuition—but something far worse: credit card debt. Yes, it’s true. I was one of those proverbial college students who was suckered into a life of debt by credit card offers in the student center. By the time I graduated from college, I had three credit cards, and was desperate for a job to make my payments on them.

And so it began. For the next five years, I accumulated more and more credit card debt, topping out at over $20,000 before I got fed up and cut up my credit cards. Even that wasn’t enough to stop me from spending. I borrowed from family and friends. I took out personal loans. By 2004, I’d acquired over $35,000 in consumer debt. It wouldn’t have seemed so bad if I’d used this $35,000 to pay for medical bills or to start a business. But I didn’t. I used the money to buy computers and comic books and other crazy stuff.

Getting Smart About Money

My story isn’t unique, and I know that. Lots of people make dumb mistakes. But when you’re living the dumb mistake, you feel all alone. You feel helpless. When you’re in debt, it feels like you’re drowning, like you’ll never make it to shore. Here we are in 2011, though, and things have changed. Seven years ago, I had over $35,000 in debt, and I was falling further behind every year. Today, I have over $35,000 in savings — and I pull further ahead every year.

How’d I do it? Well, I didn’t win the lottery, and I didn’t rob a bank. Instead, I spent several years making small, subtle changes. I learned how to live a frugal lifestyle, cutting back on the things I didn’t really need (like cable television). I discovered the debt snowball, a sort of mind game that allows people like me to finally pay off their debt instead of just wishing they had. I started to save for emergencies, for retirement, and for fun. I worked long hours to bring in extra income. All of this was hard work, but it paid off. In December 2007, I became debt-free, and I’ve remained so ever since.

Along the way, I’ve written about my progress at Get Rich Slowly, my personal-finance blog. I’ve shared my triumphs and my failures. Because let’s be very clear: I’ve made many mistakes over the past few years. Even today, I still do dumb things with money. These mistakes used to get me down, but that’s not true anymore. Now I know that the mistakes actually help me learn.

Lessons Learned

After more than five years writing about money, I’ve learned quite a bit just from personal experience. I’ve also learned by talking with my friends and neighbors, and from exchanging e-mail with hundreds thousands of readers. My financial education has come from their stories. What have I learned? Here are some of the most valuable lessons:

  • Money is more about mind than it is about math. Financial success is more about mastering the mental game of money than about understanding the numbers. The math of personal finance is simple — spend less than you earn — it’s controlling your habits and emotions that’s difficult.
  • The perfect is the enemy of the good. Too many people never get started putting their finances in order because they don’t know what the “best” first step is. Don’t worry about getting things exactly right — just choose a good option and do something to get started.
  • Do what works for you. Each of us is different. We have different goals, personalities, and experiences. We each need to find the tools and techniques that are effective for our own situations. There’s no one right way to save, invest, pay off debt, or buy a house — and don’t believe anyone who tells you there is. Experiment until you find methods that are effective for you.
  • You can have anything you want — but you can’t have everything you want. Being smart with money isn’t about giving up your plasma TV or your daily latte. It’s about setting priorities and managing expectations, about choosing to spend only on the things that matter to you, while cutting costs on the things that don’t.
  • Nobody cares more about your money than you do. The advice that others give you is almost always in their best interest, which may or may not be the same as your best interest. Don’t do what others tell you just because they hold a position of authority or seem to have a persuasive argument. Do your own research, get advice from a variety of sources, and in the end, make your own decisions based on your own goals and values.

What makes personal finance interesting to me is the personal side of it. We’re not robots. We’re not computers. We don’t make financial decisions based solely on logic. Instead, we allow passion and emotion to sway our decisions. Don’t believe me? What are your hobbies? How much do you spend on them? How is that logical? Do you have pets? Children? Do either of those make much financial sense? And have you ever loaned (or borrowed) money from a friend or family member? How did that work out? Was that a situation you evaluated solely with logic?

I feel fortunate to be debt-free today. I intend to remain that way for the rest of my life. But that’s not enough for me anymore. I want to help others become (or stay) debt-free. To that end, I’ll continue to write about money at Get Rich Slowly (and various other places around the web). There’s a lot of practical information out there about the nuts and bolts of personal finance, but I feel like there isn’t much written about the mental game of money. That’s too bad. Because ultimately, it’s mastering this mental game that’s most important.

The Forbes Formula

Over the last decade, I have been fortunate and privileged to develop an ongoing friendship with Steve Forbes.  We first worked together in 1999 when he was producing a book entitled Great American Success Stories.  After that, I began visiting Mr. Forbes in his office on each of my trips to New York City.  Over the years, we have had many wonderful conversations sitting around the table in the library on the second floor of the Forbes Building.  I have often wished I could include the readers of my books, those who watch my movies, and you who read these weekly columns in those wonderful discussions with Steve Forbes.

Earlier this year, Mr. Forbes did a small cameo role, playing himself, in a movie based on one of my books — www.TheLampMovie.com.  After we shot his part in the film, Mr. Forbes and I sat down at the library table for another of our treasured conversations, but I captured this one on film to share with you and those who will buy The Lamp movie as the interview will be one of the special features on the DVD.

Steve Forbes is probably more associated with money and finance than anyone in the world today.  I believe his views on how our money relates to our lives are priceless.

Recently, my coauthor Tim Maurer and I have written a new book designed to help people take control of their lives and their futures by taking control of their money —The Ultimate Financial Plan.

I’m a firm believer that no one ever had a money problem.  They may have had an idea problem, a motivation problem, a management problem, or a lack of direction problem, but money is never the cause of your problems.  Money is a result.

Last year, there were several million quarter-inch drill bits sold in North America.  Ironically, no one really wants a quarter-inch drill bit.  They simply want a quarter-inch hole.  In much the same way, no one wants money.  They want the things and the security that money can bring.  We would be foolish, if not insane, to desire a huge pile of dirty, crumpled-up slips of paper with pictures of dead presidents.  What we want, instead, are the homes, cars, vacations, college educations, and retirements money can buy.  In The Ultimate Financial Plan we give readers the tools that they need to make their money start working for them as hard as they have worked for their money.

These are confusing and frustrating times in the financial world.  Your retirement plan has probably lost value, your savings may have dwindled, and you may be questioning the value of your home.  It is more important than ever that you keep your financial goals in mind and make sure that your money plan is custom designed to get you from here to there.

The current financial cycles will inevitably change, and there will be better days again and difficult days will follow that.  The important thing is that you know where you’re going and how you’re going to get there.

As you go through your day today, remember:  Money is a tool and a vehicle.  It can serve you if you will harness and control it.

Today’s the day!

— by Jim Stovall

The $30 Hotel and the Battleship Slumber Party

Continuing in this special September series[i], this week I have the pleasure of introducing you to Chris Guillebeau.  Chris is the most unassuming revolutionary I’ve ever met.  He’s soft-spoken and appears not to have a self-interested bone in his body, yet a couple-hundred-thousand people follow his every move online each week through his blog, “The Art of Non-Conformity.”  He lives the title—he quit high school and then finished his college degree in two years.  Still in his early-thirties, he’s traveled to over 150 countries in support of his goal to visit every country on the planet, educating his audience on travel and life every step of the way. 

Chris is the author of the book, The Art of Non-Conformity, and I love the way he describes the central message: 

You don’t have to live your life the way other people expect you to. You can do good things for yourself and make the world a better place at the same time. Here’s how to do it.

If  you don’t want to pay a dime for some of his wisdom, read the manifesto that kicked off his writing career—A Brief Guide to World Domination—or the sequel, 279 Days to Overnight Success.  And of course, read this post from Chris, written just for you!  

***

When I went to Vietnam several years ago, I was excited to find a local hotel that offered nice rooms for $25. An upgrade was available for $5 more. Sight unseen, I took the upgrade—and was glad I did.

My own balcony! Free soup for breakfast! And truth be told, for someone who usually lives in the Pacific Northwest, the air conditioning while visiting Southeast Asia was nice too.

When I came home, I told the story of my $30 room. Some people said, “That’s awesome!”

But others had a different take. “I wouldn’t feel comfortable staying in a place like that,” a friend of the family said. “Wasn’t there a Western hotel nearby?”

Well, yes, there was a Marriott—and it cost $270 a night.

Others were unhappy for a different reason: “Dude, you got ripped off!” a fellow student in my graduate program told me. “I paid $5 a night for a bed when I was there.”

Truth be told, I didn’t need the $270 Marriott, and I didn’t feel bad about the “overpriced” $30 room. I was happy to exchange the money I did for the experience I received; I walked away satisfied with the exchange.

On countless other trips around the world since then, sometimes I’ve paid next-to-nothing, and other times I’ve paid a small fortune. It all comes down to a question of mindfulness, something I believe is the most important skill of personal finance. You can learn about exchange-traded-funds or DRIP investing whenever you’re ready (and if you never learn, you’ll probably be OK). But if you get clear about what you value and how your relationship with money is intertwined, you’ll go far—no matter which tax bracket you find yourself in.

Discussions about frugality and values tend to get weighed down by competing values: “save money at all costs” versus “live a little.” Tim’s work on this blog, his radio program, and in The Ultimate Financial Plan is smarter than that. It’s all about deciding what you value—and making sure your spending relates to those decisions.

I enjoyed reading about Tim’s choice to spend the night on a battleship with his son. He probably could have had a better meal elsewhere, or he could also have saved the money for a distant future. Speaking for myself, I’m not so sure I would have enjoyed the battleship slumber party—but I think it’s clear from the post that Tim made the right choice for his family adventure. Don’t you?

***

Some things are worth the money and some aren’t, and these decisions will always be relative. I don’t need to pay $5 a night in Vietnam… $30 was just fine with me. Sleeping on battleships isn’t my style, but I can see why it would make a fun memory for a parent and child.

I’m not in the business of telling people what they should value—and thankfully Tim isn’t either—but I’d encourage you to think long and hard about what you value and how your money will be used in support of those values. The poet Mary Oliver might have put it best: “Tell me, what is it you plan to do with your one wild and precious life?”

Well? It’s your turn now, and your life.


[i] If you missed the last couple weeks, you might not know that to celebrate the release of my new book, The Ultimate Financial Plan, co-authored with Jim Stovall, I’m featuring guest posts from some of the bloggers and writers who’ve most inspired me of late.  If you didn’t see last week’s post by Derek Sivers on why he decided to give his $22 million company away to charity, it’s a read both humbling and inspiring. 

Winner’s Wisdom — The Ultimate Financial Plan

Recent turbulence in the financial markets has caused us all to question our financial plans.  We are bombarded daily with advertisements and sales pitches from self-proclaimed experts, financial gurus, and all manner of miracle money managers wanting to sell us their financial plans.  Buying someone else’s financial plan is much like buying someone else’s shirt.  Odds are it won’t fit, you won’t like it, and the process is somewhat distasteful.

Recently, my coauthor Tim Maurer, who is a certified financial planner, and I have completed a new book — The Ultimate Financial Plan.   In our book, we do not provide answers as much as we pose questions and give readers the criteria to develop their own strategies and surround themselves with their own team of experts.

In The Ultimate Financial Plan, I focus on what I call Timeless Truths.  These are the age-old principles that guide our lives and, therefore, our money.  Over the years, I have found that it is easy to manage my money, but it is difficult to manage me.  Money is a tool or a vehicle.  It has no use other than to do what you want it to do and take you where you want to go.  Any decent financial plan has, therefore, got to be customized for you.  No one else knows your hopes, dreams, and ambitions or the plans that you have for your family or your future.

Once you’ve decided where you want to go in your life, then you’ve got to make your money work for you as hard as you have worked for it.  My coauthor, Tim Maurer, has all of the credentials, certifications, and experience that I would want from any financial planner, but the reason I am pleased to have Tim as my coauthor is the fact that in his financial practice and in his life, he puts people first.

In our collaboration, Tim deals with Timely Tips designed to help you financially get from where you are to where you want to be.  He also helps you look beyond the smoke and mirrors created by bias in the marketplace.

You have got to understand that everybody who wants to sell you a financial product or charge you to manage your money has a bias.  This is not bad.  It is simply reality and a part of human nature.  We all know that when we wander onto a car lot, we will be invariably approached by a sales person wanting to sell us a car.  We all understand that the car dealer and his sales people have an ulterior motive in having us buy their car.  The same is true in the financial services industry.  Whether it be a broker, banker, insurance salesman, financial planner, or a guy like me who sells books, we all have built-in motives to get your business.  This can be healthy and natural when you begin to understand how the finances work and how the profit is structured behind the curtain.

It is my hope that The Ultimate Financial Plan will be entertaining, informative, and serve as your ongoing roadmap to reach your financial destination.

As you go through your day today, realize that the ultimate financial plan is the one that will take you on a customized route from where you are to where you want to be and will make your money work for you.

Today’s the day!

This is the latest “Winner’s Wisdom” column by Jim Stovall — co-author of The Ultimate Financial Plan.

Why I Gave Away My Company To Charity

A Guest Post From Derek Sivers

Tim’s Note: In last week’s post, “It’s About You, Not Me,” I announced that to celebrate the release of my new book co-authored with Jim Stovall, The Ultimate Financial Plan, I’d be featuring four consecutive guest posts from some of the most compelling authors and bloggers you’ll read today.  I can’t tell you how honored I am that any of them—much less all four—would’ve accepted my invitation, and we get kicked off today with a post that will blow your mind from entrepreneur and best-selling author, Derek Sivers.

In short, Derek is a musician with enough technical ingenuity, passion and vision to have truly changed the way music is delivered today.  (You’ve probably benefited from his work without even knowing it!) 

Frustrated that there were no online outlets on which independent musicians (most of the musicians out there who haven’t received a big record contract), could sell their music, Derek created one, simply to sell his own music.  After a few other bands asked if he could replicate the trick on their websites, he realized he may be able to create a company that would provide this and other services to independent musicians.  Years later, Apple’s famous leader, Steve Jobs, was knocking on Derek’s door asking him to make his extensive online library of independent music available on iTunes.[i][ii] 

At the peak of his success, Derek felt the call to leave his baby—CD Baby—in the qualified hands of others and he sold the company.  For $22 million! (Not bad for a “struggling musician.”)  But get this—he had already placed CD Baby in a trust that would irrevocably give the proceeds to charity.  Here’s a piece of his story:

Two friends were at a party held at the mansion of a billionaire. One said, “Wow! Look at this place! This guy has everything!” The other said, “Yes, but I have something he’ll never have: enough.

When I decided to sell my company in 2008, I already had enough.

I live simply. I hate waste and excess. I have a good apartment, a good laptop, and a few other basics. But the less I own, the happier I am. The lack of possessions gives me the priceless freedom to live anywhere anytime.

Having too much money can be harmful. It throws off perspective. It makes people do stupid things like buy “extra” cars or houses they don’t use – or upgrade to first class for “only” $10,000 so they can be a little more comfortable for a few hours.

So I didn’t need or even want the money from the sale of the company. I just wanted to make sure I had enough for a simple comfortable life. The rest should go to music education, since that’s what made such a difference in my life.

So I found a great way to do this. I created a charitable trust called the “Independent Musicians Charitable Remainder Unitrust.” When I die, all of its assets will go to music education. But while I’m alive, it pays out 5% of its value per year to me.

(Note: 5% is the minimum allowed by law. It’s still too much. I would have preferred 1%, but oh well. I’m free to use it to start new businesses to help people, or whatever.)

A few months before the sale, I transferred the ownership of CD Baby and HostBaby, all the intellectual property like trademarks and software, into the trust.

It was irreversibly and irrevokably gone. It was no longer mine. It all belonged to the charitable trust.

Then, when Disc Makers bought it, they bought it not from me but from the trust, turning it into $22 million cash to benefit music education.

So instead of me selling the company – (getting taxed on the income, and giving what’s left to charity) – that move of giving away the company to charity then having the charity sell it saved about $5 million in taxes. (That means $5 million more going to music education.)

Also, the move of giving it away into a trust now – instead of holding on to it until I die – means its investments get to grow and compound tax-free for life, which again means more goes to musicians in the end.

I’m only writing this article because many people have asked why I gave it away, so I thought I’d write my long explanation once and for all.

It’s not that I’m altruistic. I’m sacrificing nothing. I’ve just learned what makes me happy. And doing it this way made me the happiest.

I get the deeper happiness of knowing the lucky streak I’ve had in my life will benefit tons of people – not just me.

I get the pride of knowing I did something irreversibly smart before I could change my mind.

I get the safety of knowing I won’t be the target of a frivolous lawsuit, since I have very little net worth.

I get the unburdened freedom of having it out of my hands so I can’t do something stupid.

But most of all, I get the constant priceless reminder that I have enough.

I have not seen anyone more personify “The Gift of Enough,” as Jim and I discuss it in The Ultimate Financial Plan.  I encourage you to indulge in more of Derek’s story outlined in his book, Anything You Want.  The surprises don’t end with his massive gift, and whether you’re a successful business owner or a starving artist, you’ll find a ton of money-and-life wisdom in his book and his blog.

Thanks for sharing part of your story with us, Derek!


[i] Since when does Steve Jobs have to ask for ANYTHING??  (Except, of course, for rights to the Beatles library…which he eventually got.)

[ii] Interestingly, I’ve had the privilege to see Derek’s brainchild at work.  Outside of personal finance, my foremost hobby is music, and as the drummer for my brother’s band—The Jon Maurer Band—we were recently able to release our debut EP through the company Derek created, CD Baby.  For little more than peanuts, here’s what our profile page looks like on the CD Baby site: http://www.cdbaby.com/cd/thejonmaurerband.