Grow your dough: wealth building strategies

 

Deutsch: Hummer H2, zivile Version des Hummers...

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With the current economy, many of us spend a lot of time worrying. That’s a lot of energy evaporating into the ether. So, what if we directed it to making new plans, plans that might actually make a difference no matter what the economic picture? Last week I was pretty snarky; I’m more straightforward this week.  Basic overall principle at any income level: save a lot, spend less, invest the rest. The rest is all expansion:

Control your housing costs. At any income level, this is perhaps the biggest ticket item for most people, and the place where smart decisions make a huge, lifelong impact on wealth. Once upon a time, I was the first realtor to sell a million dollar home in Lincoln Park. It was fascinating to see who looked at it. Other realtors trotted out clients with some of the most famous inherited-wealth names in Chicago. None of them ever made an offer. Why? Too expensive. As one told me, there were plenty of great homes (at the time) in the $750,000 range and they intended to content themselves with the quarter of a million savings. All of them could have afforded it. And who was interested? Folks who were living large: traders, personal injury lawyers with a recent big win, people who had recently sold businesses. They paid cash, so I have no idea whether they had any OTHER cash.

Be smart from the start. Stay friends with your parents so you can move back in for a year or so after college and save money. Get a roommate. Give your spouse the house in a divorce. Have a house or rent payment 28% of your income OR LESS. Don’t upgrade your housing when you make a lot more. Everyone admires Warren Buffett’s acumen with money—look at how he lives. I see so many people whose entire wealth is their home. We all know what’s happened to that.

Cut the cars. The second one and all subsequent ones are costing you a fortune. How much? The financial writer Liz Weston has suggested that you can estimate your true monthly cost by taking the purchase price, doubling it, and dividing by 60. Whew! That includes maintenance, insurance, wear and tear, etc., and assumes you drive the wagon for 5 years. Now see what happens if you drive it 10 years, instead. If you own a car (or worse, cars) that’s parked most days, really, you don’t need it. A huge amount of families could get by with one car. Nearly everyone did in the suburb in which I grew up, and there was no such thing as public transportation. Kids (gasp!) walked to school, walked to the mall, walked or rode their bikes to friends’ houses.

Unless you drive for a job where you must impress people with your car, or you have more than four kids, you can probably go with a car that’s smaller than what you’re driving now. Really, who cares? Wouldn’t it be more fun to make jokes about your old heap while smiling inside about how much you have in the bank?  At least, more fun than writing out that lease payment every month? Don’t even get me started on Hummers, Suburbans, and Sequoias.

Automate. The more decisions we have to make about finances, the more excuses we can come up with, and the more we can forget.  Why throw it out the window? Put all your bills on autopay, and have your savings goals automatically taken out of your check or checking account every month. BTW, some credit cards have become hip to this and don’t offer auto-pay—they know that sooner or later you’ll forget a bill and they’ll get their interest payment and the penalty charge. Unfortunately, I know about this.

Establish actual goal amounts and segment your savings. It’s easier to feel like you’re getting somewhere if you can see the total rising towards a goal. I see people with accounts all over the place—that’s not what I’m talking about. I mean something much simpler—have a savings account earmarked for short to medium term goals (new furniture, travel, new car), a tax-favored account for retirement and possibly college goals, and an investment account because your 401(k) isn’t going to be enough (really).  And a cash jar. Why?

At least one of the online savings accounts (ING) allows you to create sub-accounts and I highly recommend them: call them estimated taxes, travel, new car, etc. Then, each month you set up an automatic transfer (or transfer a specific percentage of each check if you’re self-employed or freelance). Have enough to take that trip? You can tell at a glance. Keep putting in that car payment after you’ve paid the current one off and you’ll buy for cash next time. The IRS won’t send you letters.

No matter what your paper statements say, having a cash jar is weirdly satisfying. We put all spare change and all credit card cash rewards in it. With the cash rewards added in, it’s definitely not chump change and it’s a great reminder that it’s real money going out the door. Ours is earmarked for vacation spending.

With a specific dollar goal attached to a specific account, you can see how close you are, and know when you’ve achieved it. Also, this helps control the fuzzy math that says, “I have $X in my cash management account, so I can take a vacation/buy a car/new iPad, yadda-yadda”. Problem is, it’s all the same amount. Hardly anyone can really afford “it all”, whether you’re making $50K or $500K. Okay, maybe Bill Gates.

Get some financial education. Okay, maybe if you’re not a financial planner, it’s boring. But even if you get good advice from your friendly fee-only advisor, it helps to have some understanding of what you’re being told. Take the time to understand and learn at least a little bit about investing. It’ll cost you less in both time and money, and it won’t take “the long run”. At least read a magazine on personal finance (I recommend Kiplinger’s).

Don’t put it off. Saving yourself is a lot easier the earlier you confront a mess. If you’re under 30, just take the maximum contribution to the 401(k)—yeah, I know you’ll never get that old and retirement is inconceivable. So don’t think too hard, just do it. By your 40s, you should start worrying. In your 50s or 60s, you ought to be mature enough to take a steely-eyed look at your finances. People can change at any age, and muster the courage to make choices.

Raise kids who are frugal. Maybe the best gift you can give your kids is to limit your giving. Kids who learn the connection between work and price are equipped to make savvy choices. Kids who have mild contempt for consumerism make savvy choices. Kids who see the money they’ve earned grow in investments make savvy choices.  Especially, respect your adult children enough to let them stand on their own two feet. It’ll simplify your financial and estate planning. A lot.

Notice how all this stuff is under your control? No matter what the economy looks like, you have the power to make a huge difference in your personal finances. So, go do it!

 

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How to Go Broke: a dozen things you can do to screw up your finances

English: Wine Cellar in the Jesus College, Oxford.

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Sure you know all this stuff. Me, too. Or do we?

1.    Keep upgrading your house until it’s the maximum (or more) that you can pay for. If we ever needed proof that a house is not really an investment, the current market should have done it. Really, a house is more like a collectable—hard to sell (even in more flush times, it was a lot easier to move a stock), uncertain and inefficient market, and subject to complicated tax consequences. At least with collectables you can give them away to your kids. Also, the bigger the house, the bigger the maintenance and the more likely you are to lay out more money to keep up with it. And then there’s the neighbors—you’ll be keeping up with them, too.

2.    Do a big move, upgrade, or addition to your house while your kids are in high school. You’ll soon find yourself with a big, empty house. Or maybe the kids will move back in. I’m not sure which is worse.

3.    Take out a second mortgage and go spend it. Maybe, just maybe I’m okay with these loans if they’re actually spent on something that adds value, like starting a (well thought through) business or improving the property. Taking a European vacation, not so much.

4.    Take out a big college loan. If it’s more than you’ll earn your first year out, it’s too big. At least you’ll remember your college years forever. Every time you write that check.

5.    Don’t bother reading the contract. Don’t sign on the dotted line until you can explain to me or your ten year old how much it’s going to cost you.

6.    Buy an investment you don’t understand. See #5—if you can’t explain how you’re going to make money on it, don’t buy it.

7.    Get greedy. Bernie Madoff wouldn’t have had so many clients if he’d told the truth. They got returns none of their friends could claim, and paid a lot for bragging rights at cocktail parties. If it sounds too good to be true, well, duh…

8.    Believe that “my broker is a nice guy.” Another duh—do you think he’d sell anything if he had fangs and a forked tail? I’m certainly not against people making money, but your stockbroker has no legal obligation to keep your best interests foremost. Sometimes the correct financial advice is the hardest to hear, and people who are the most pleasant don’t necessarily tell the truth. Friends of Bernie, anyone?

9.    Put your kids first. I don’t mean emotionally, here, but paying for college while not saving for retirement, or habitually bankrolling adult children, or showering young children with material goods—well, don’t do it. You’ll be broke and a burden, and that’s no favor to anyone.

10. Cultivate expensive tastes and hobbies. Buy a boat, develop a wine cellar, develop a fondness for skiing when you live in the South or Midwest, stay at the best hotels—all great stuff. Expensive stuff. Black money sucking holes kinda stuff. If you’re wealthy enough that it’s chump change, fine. Otherwise, as they say in Texas, big hat, no cattle.

11. Don’t give to charity. The world is a terrible place and everything’s in disarray. Don’t try to change that, okay? Much more fun to complain. And that’s one way to economize, right?

12. Spend what you make. Or more. I’m not even going to go there.

Maybe that’s enough negativity for one week. Next week I’ll go with the top things you can do to improve your wealth picture.

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Recovering your retirement

 

Modern Social Security card.

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Ever heard the saying “call a dog a good name”? The theory, I suppose, is that then the dog will live up to it. It works when thinking about retirement, too.

Many of us past 50 regret that we didn’t save enough, or bought real estate at the wrong time or made any one of a variety of (in retrospect) bad life decisions that cost us a ton of money. But, as every talk-show psychologist will re-affirm, you can’t change the past. Also, you don’t have total control over the future.  I’ve been lucky enough to have some really wise older people in my life, and I try to listen up. Here’s what I’ve learned:

  1. Focus on what IS. Coulda’, shoulda’, mighta’ been is totally unproductive and depressing. Imagination is always better than reality. How many people have you heard say, I have this terrific idea for a novel, which never gets written. It’s because making something real requires discarding other possibilities and getting down to the work of it all, which isn’t so fun. The happiest elderly people I know are people who are happy with what they have, and usually, possessions aren’t the first thing on their list.
  2. Stuff isn’t important at all. If you need any confirmation of that, try cleaning out the possessions of a person who has died. You can hardly give away the furniture, the electronics,  the clothes.
  3. It’s never too late to save. Maybe you can’t save tons of money for retirement, but anything helps. $5,000 stashed away can pay for several trips to see the grandchildren, or a decent amount of gardening assistance or…well, in retirement you’ll think of something. Have you EVER heard anyone say I’m sorry I had that emergency fund? An article in a recent AARP newsletter mentioned a guy who even saves during retirement—he budgets so he can squirrel away a little in an emergency/travel/one-time purchase account. It’s a good idea to keep up the habit.
  4.  Start lowering your expenses NOW to what you can reasonably expect to spend in retirement. Let me give you an example: you’re making $500,000 a year, you have $1,000,000 saved and you’re 58 years old. Sure, you’re never going to retire–seriously? You’re still going to toddle into the law office at 85 after a knee replacement and a mild heart attack? So, unless your name is Warren Buffett, humor me. You need to retire sometime, and it’s true that the longer you put it off, the more chance you have of not outliving your money. 

Judging from your level of savings (in the example above), you’ve been spending quite a chunk of your income, but your portfolio is only going to generate about $40,000 per year as a safe withdrawal. Add, say $3,000 a month in Social Security (we’ll assume you’re married) and you’ll have a total income of $76,000 a year—quite a change from living large on $500K. You can either hope for a heart attack or take some serious, helpful action. Cut your expenses now.  Start putting away 20% of your income (in this case $100,000) for the next 12 years and you’ll achieve several things. You’ll find a way to live on less while it’s still a choice, and you’ll rack up another $1,600,000 (assuming 6% interest) to improve your retirement income.  Now we’re at $104,000 a year in income beyond Social Security. Find a way to make it $200,000 and you’ll have about $3.4 million which added to the $1 million of your savings gives you $175K a year in withdrawal income. Reduce now and you’ll have a far easier time later. Not making $500,000? Add or reduce zeros as needed.

It’s about as difficult for most people to lower their lifestyle as it is to lose weight. More people lose weight when they’re facing serious health issues, so we know it can be done. If there’s a yawning gap between your savings and your current spending levels, you’re facing a serious issue! Rule of thumb—you need at least 12 times your annual income to retire anywhere near your current lifestyle, and that’s a pretty tight amount that assumes you’re been saving about 20% (not spending it) and getting Social Security. For example, a person earning $60,000/year would have $720,000 in savings for a retirement withdrawal of $28,800 plus Social Security of, say, $18,000=$50,400. The less you make, the more likely Social Security can replace a significant portion. Once you get used to living on or making more than $100K, the gap must be filled bywithdrawal from investments. Without significant savings, the richer you live now, the more you’ll feel the pinch at retirement.

So, maybe you need to make the hard decisions—sell the house and invest any equity, lower your payments, reduce the number of cars, downsize the restaurant meals, respect you kids enough to let them stand on their own two feet.

You can call it miserable or you can call it liberating—simplifying your life while you are still in charge of the choices is freedom, in my book. Problems don’t go away just because you don’t face them. Facing them allows you the power to choose the changes and re-shape your life into something that can work for you.

 

 

 

 

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