Archive for Cash flow & Spending

Financial decisions: I shoulda done better

 

It’s taken me a while to realize that not everyone loves financial planning. I mean, when I first started this I assumed all my clients would be deliriously happy about what a positive future we were going to plan together, and untangling any knots would be fun along the way. I love it, so everyone else should too, right?

It took me years to realize that many people who came to me were scared, embarrassed, or at least nervous. The great thing about working with people is that, in almost all cases, I can help most people make a good plan and feel much better. But I continually listen and try to learn, and after hearing so many stories over the years, I can distill a few principles which I repeat over and over to myself in my own life.

  1. You can never fix the past. In all the (now) hundreds of people I’ve seen, perhaps one or two had no regrets about their financial decisions. That’s not to say there weren’t regrets about other issues. Nevertheless, you have absolutely no way to rewrite your past decisions. Most of them either seemed right back then, or you knew they were wrong but did them anyway for what seemed like the easier or better way at the time. You have absolutely no control over the past at this point.
  1. The only reason to go over your past mistakes is to learn how to do better in the present and future (and to make atonement if necessary). If you can learn from this review how to make better decisions now and going forward, it’s worthwhile.

My first ex-husband has a wonderful phrase he uses to evaluate his public speaking engagements. If he thinks it went badly, he tells himself I was not satisfied with my performance. This is just a wonderful way to characterize a less-than-ideal effort, with no blame and every possibility to learn to improve. And yes, he’s a wonderful speaker.

  1. If it’s not working for you, you have to change. You can’t keep doing the same things and expect different results. Sure, something may be too hard (break it down into smaller steps), not have taken into consideration all factors (then revise until it works) and the ideal outcome may not be possible (but some improvement surely is).
  1. It’s not hopeless unless you’re dead. I’m not speaking of actual physical illness here, I’m talking about money. You may not be able to create exactly what you want (can we ever?) but you can almost always make things at least a little better.
  1. Any change is more likely to succeed if you can set it up so you make the fewest choices possible. It’s much harder to decide to save every month if you have to write the check or make the transfer, than it is if you decide to set up automatic transfers and forget about them thereafter—you’ve only made one choice, not 12.
  1. The older you are, the more creativity it may take. You can go back to school, relocate, get rid of a car—things that may have been unthinkable in years past can actually become liberating and unburdening. You most assuredly do not need all the stuff you have—no American does. Will a yard sale fully fund your retirement savings? No, but a lot of littles can add up to big.

Bottom line: a financial plan isn’t a punishment where you review all your past sins. It’s a way to wrest control from chaos and fine tune your financial engine to hum along at a better velocity.

Financial resolutions for 30 and 40 somethings

I’ll control the amount of money I spend on a house. What lenders will loan you is not necessarily what you should spend. Your housing decision drives the costs of many other things in your budget: upkeep, insurance, repair costs, and maybe status decisions such as where you send your kids to school and what car(s) you drive. Once you commit, it’s a fixed cost that isn’t easy to reduce. Keep your housing cost (mortgage+interest+taxes+homeowner’s insurance) to 28% or less of your gross and you’ll reduce stress and free up money for savings.

I’ll increase my retirement savings with every raise. Try to add at least half of every raise to your retirement savings. Aim for the maximum allowable contribution of $18,500 to your 401k/403b and fund a Roth if you can. In which order depends on your income, employer match, and investment options in the workplace plan.

I’ll start saving something for my children’s education as soon as they’re born. Just as with retirement savings, the earlier you start, the less you have to save later. No, they won’t earn their own way. No, they’re not so smart they’ll get a full-ride scholarship. Just. No. Save something—anything is better than nothing.

I’ll hold on to my bonuses and any inheritance. Too many people get used to depending on a bonus for their regular lifestyle, but a company can go south and the first thing eliminated is the bonus. Try to regard the bonus as bonus savings—for investment, emergencies, etc. What to do with an inheritance depends on the size, but consider no more than half of it available for spending, and make that spending a worthwhile purchase (such as real estate) that has some potential to grow. Windfalls don’t come that often in life, so don’t blow it.

I’ll do everything I can to become debt free. I don’t think I need to belabor the point about credit cards, but by your 40s it’s time to chip away school debt as well, before you have to start paying for your kids’ college.

I won’t cosign any loans. If the bank doesn’t think the person is creditworthy, why should you? And if were talking about guaranteeing a college loan, understand that if your child drops out, or becomes permanently disabled, or dies, you’ll probably still owe the money. You can always help the kid pay off the loan in the future if you can afford it—just don’t cosign it!

I’ll carefully consider the financial costs before deciding to stay at home with the kids. Deciding to quit employment to be with your children is, of course, not exclusively based on finances. I did it, and I’m glad I did. But there are costs—depending on how long, you can significantly impact your Social Security benefit, as well as your future employability, advancement, and re-entry salary. Most likely, you will have no disability insurance, and if you or the wage earner become ill or disabled, or you get divorced, it can be catastrophic. I urge most clients contemplating this to keep their professional networks alive, keep abreast of their field, and, if possible, get extra training or continue working at least part time.

I’ll expect my kids to contribute to household upkeep and earn money as soon as they’re able. Not only does this build life skills, but it conveys to the children that you respect them as being able to produce value and have worth. Any kind of outside job shows kids a world, life choices, and consequences beyond what they can learn in their family, and gives them the experience of being evaluated without the protection of a family or age cohort. Even the difficulty of finding one, and the perhaps soul-less experience of a really boring or difficult job can teach the kid a lot of motivation.

And, do take a look at my post for millenials–it’s still applicable to you.

Some resolutions for millennials

I thought I might start off January with some financial resolutions for people at different stages of life, based upon what seems to be difficult but achievable. I’m not going to suggest lose weight and get more exercise because I’m going to try to come up with things you and I might actually do. I’ll disclose a secret and say I’m not actually a millennial. But one lives here, and I meet with millennials fairly frequently. Even if you’re not a millenial, some of these will still apply. So here goes:

  1. I will calm down about my student loans. Just about everyone has them, and everyone hates them. It’s probably too late to do anything about what you borrowed, now, so you have to think through how to manage them. They’re not shameful—they were an investment you made in getting a better job. If they’re fairly low, say under $30,000, it’s really the equivalent of paying off a car over 10 years (rather than 3 or 5 for an actual car). If they’re higher, hopefully you have selected a career that made it worthwhile—if not, you should definitely look into the various programs to bring down the monthly payment.
  2. I will assess whether I should pay off my loans early. If your loans are the subsidized kind (under 4%) you’ll probably be better off investing and saving rather than rushing to pay them off—in the long run, the same money judiciously invested will earn more than the loan is costing you.
  3. I’ll make sensibly frugal choices. Don’t buy an expensive car (or even a new one) until you’ve worked out a budget. Watch the rent you commit to paying. Try to downshift spending without denying yourself the fun—go out, but maybe drink beer instead of a craft cocktail. Meet for drinks instead of dinner. Choose a medium priced restaurant and do your gourmet eating and drinking at home—you can buy a pretty darn good bottle of wine for the cost of a glass or two at a restaurant. You get the idea.
  4. I’ll contribute to my retirement plan the day I’m eligible. There will never be a better time in the future when it will be easier. It’s always hard. If you never get used to that 10%, you won’t miss it as much.
  5. I’ll think of that retirement account as gone and locked up. Don’t borrow from it and don’t even think of cashing it in when you change jobs.
  6. I’ll build up an emergency fund before I take a vacation. Or buy a house. Or have kids.
  7. I’ll commit to paying off my credit cards every month, and pay attention to how to maximize rewards. Play that right and you’ll be able to take more vacations.
  8. I’ll manage my career. Think of your career as an investment asset—get all the training you can to continuously upgrade skills. Everyone gets a terrible boss someday, and everyone has co-workers they can’t stand. Get interpersonal skills training, read up on coping skills, and always have a plan B for moving on. Go to conferences and networking events in your field, and learn as much as you can about marketing. If you’re dreaming about a creative or independent job, realize that at least 60% of that job will be selling the product, not creating the product.
  9. Insofar as possible, I won’t quit without lining up another job. If I get fired, I’ll find career services or a job hunting group to get me back on my feet as soon as possible. Losing a job is debilitating and depressing, even if you hate it. Finding a new one is a part time job. Plan for it.
  10. I’ll pay attention to my employee benefits. Employee benefits can be worth 1/3 of your salary. Does the job offer a Flexible Spending Account? Disability coverage? Free life insurance? How much vacation time? What’s the deductible on the health insurance? Decent or crappy investment options in the 401k? Good employer match, bad, or none? Will they pay for more education (which I will definitely avail myself of)? These are things that you should know before you accept a job, because they’re potentially worth thousands to you. I can’t tell you the number of people I’ve seen who have paid for a lawyer to produce a will (or not made one at all) when their employer offers low cost legal service. Just go light your cigar with a $500 bill.
  11. I’ll set savings and required payments on autopilot by setting up auto withdrawals. Making a decision once, by setting them up, is more likely to continue (on time) than if you have to make a decision every month. You can always cancel the auto-pay if you absolutely must.
  12. I’ll learn about investing. Even if you’re a good saver, you need to educate yourself about investing. I can almost guarantee you didn’t learn about it in school, and unless your parents were exceptional, you didn’t learn it at home either. The only way is self-study—and don’t believe anything you hear at one of those free “investing” lunches—nothing in the investment world is EVER free.

 

Happy new year and best wishes for 2018.