Drown-proofing your finances

Posted on April 9, 2013April 9, 2013 by Danielle

House on Fire (Photo credit: dvs)

We all know that we should plan for retirement and our kids’ college education. Like many other things in life, it’s simple but not easy and the how-to keeps plenty of financial planners in business. But what about the stuff you never see coming—anything you can do to protect yourself from drowning in the unexpected?

Have an emergency fund. Yes, it’s obvious in theory but apparently most people don’t believe it because few people have an even barely-adequate one. Yes, you have insurance (you do, don’t you? See below!) but there are plenty of things insurance doesn’t cover. A few:

veterinary bills;
dental work (insurance is rarely worth the cost);
deductibles on multiple policies (such as you drive your car accidently through your garage, or the house and the car burn in a fire or float away in a flood);
the cost of repairs or care when insurance doesn’t pay the full bill, one person gets really ill and the other person has to take off work to care for them or investigate or arrange care (unbelievably time consuming),
a loved one needs psychological care (few health policies pay the whole cost of this);
your car develops sudden, expensive repairs or you suddenly need a new one;
the new ones I hear about nearly every week.

In fact, many, many disasters could be avoided if an emergency fund were in place.

You say you have credit cards for that? And so did many of the people now facing bankruptcy because disasters multiplied, forcing them to put more and more on a credit card while they often had less and less income.

You’ll just cash in investments? How about in March, 2009 (market bottom,remember)? Tap your retirement fund? You’ll either get taxed on that or have a loan to repay. And a lot smaller retirement fund.

Continually upgrade your professional abilities. Join and keep active in whatever networking groups are applicable to your profession. Take any opportunities your company or professional association offers for skill upgrades. Take more classes at night or weekend workshops. If you ever get fired, you’ll know people and your resume will be fresh.

Don’t quit the day job. If you want to start a business, write a novel, change careers, do it part time. That way you can test out the viability and find out whether you really like it. Sure it takes time. Sure you’re tired. Sure it’s hard. Sure it takes herculean discipline. All of which are true, but more so, once you do quit the day job.

Also, after talking to oh so many stay at home moms going through divorces, I strongly advise anyone to keep a part-time or consulting foot in the door of their career. It’s far easier to re-activate a career from part-time than from scratch. Sure you’re madly in love, have the perfect marriage, and will never be in that situation. Unless your spouse suddenly becomes disabled. It happens. And, the impact on your future Social Security benefits can be dismal if you take a decade or two off of earning.

Live below your means and especially control your housing costs. Yeah, I know we’ve all heard it. It’s hard to live in a big city. Anyone can cut back on eating out, travel, and electronics purchases but ratcheting back the mortgage is much harder. Instead of living large for the neighbors, smile to yourself when you compare their new car to how much money you have in the bank, er, no-load mutual fund portfolio.

Don’t have all your wealth in your house. In an emergency you can’t spend equity, and it can be very hard to get a home equity loan if you suddenly have no income. People near retirement should be very careful about using significant cash assets to pay off the house if they have no other savings. (Whether to pay off is too complex and individual to discuss thoroughly here).

Understand what’s in your retirement accounts. Some people are very focused on saving, but park the money in investment choices that are absolute crap. Surprise, you’re 58 and your retirement is a disaster. Listen to the presentations, read the brochures, and learn something about investing. It won’t hurt, I promise.

Never, ever sign for your kids’ college loans. They have a lot of time to repay them. You don’t. If your kids don’t have enough initiative to be participants in their college funding, I wouldn’t say the future looks too bright on the employment front for them, either. Better clean up that basement room now.

Don’t borrow more than you will make the first year after college (or any other education). That way, you can pay it off in 10 years with a reasonable kick to your future income. If you can’t make it with that level of borrowing (combined with work, financial aid, individual scholarships, and whatever parental aid can be cajoled), you can’t afford to attend a traditional, full time, four year college. There are plenty of other ways to get an education and you’re going to need to explore them. It’s a good thing—you’ll have more self-reliance, more marketable skills, and you won’t decide to major in something dopey. Really, it’s not as hard as paying off a quarter of a mil for a degree in communications.

Don’t do everything for your kids and don’t pay for everything. You set their expectations too high while destroying their own initiative. The kid that has a job in high school (as opposed to 7 extracurricular, paid-for activities) is, IMHO, much more likely to have a job after college! Would your kid be willing to earn part of the money to pay for all those extras? If not, maybe you ought to save yourself the cost of those music lessons, language camps, etc.

Pay attention to insurance. Make sure you have it. Then make sure you re-evaluate it every 2 years or so for coverage and cost. Get some quotes. Be sure the values are current.

Take advantage of any government program for which you are (or your loved ones) are eligible. Veterans benefits, Social Security disability, whatever—don’t be too proud. These programs are designed to provide a safety net and sometimes we all need that net. You paid taxes for it. I paid taxes for it, so use it already. You won’t be the first person going through a divorce who ever applied for food stamps.

Face up to age. Get your estate documents in order. Sacrifice for long-term care insurance. Talk to your parents about their finances, and let your kids in on your “secrets”, too. (Who do you think will be making the decisions?) Don’t stay in your house until you’re too feeble to walk out on your own. Make some plans while you have choices.

Clean up the place. Junk, clutter and deferred maintenance reduce the value of your assets, damage your possessions, and can cost a ton of money to your heirs and anyone responsible for your care should you suddenly become disabled or need to sell in a hurry. Any realtor can tell you about the beautiful home gone to wrack and ruin by terrible housekeeping and neglected maintenance. Anyone willing to buy and repair a wreck is going to expect a discount far exceeding the cost of repairs. After all, they have to factor in THEIR labor cleaning up and fixing YOUR crap.

Pick any one of the above pointers, do the opposite, and you’re living on the edge. Save yourself now! And be careful out there.

A Tisket, a tasket, a windfall in my basket

Posted on March 25, 2013March 25, 2013 by Danielle

Jackpot (Photo credit: pirate johnny)

A lot of people daydream about winning the lottery, even those of us who never buy a ticket. But like many windfalls, lottery winners often have had a hard time holding on to it. Before we shake our heads at them, let’s see if we’re without sin. Have you held on to your tax refund (which you shouldn’t be getting if you’ve planned correctly, but that’s another matter)? How about that $50 you got as a rebate? The work bonus? An inheritance? Your most recent raise? Ahem.

Wealth is not what you make, it’s what you manage to hold on to. It’s the rare person who dreams about a windfall and thinks to themselves, boy, I can’t wait to invest that! If so, my guess is your profession is either 1) financial planner or 2) actuary. But let’s say you’re a normal person, what should you do? Of course, it depends on the amount (really, $50 is a little different than $500,000), but here’s my advice:

1. If it’s a large amount, park it in an on-line savings account, or CD, or some other safe place for at least 3 months until you get used to the idea. What’s a large amount? Anything where your first thought is OMG. You need time to calm down and think straight.

2. AT A MINIMUM, save half. Ideally, I’d like to see you save 50%, pay off debts with 40%, and spend no more than 10%. If you don’t have any debts, I’m okay with that 40% going to a long term, needed goal (kid’s education, home repairs, etc.). I’d still rather see you invest it.

Then what?

I’d do the following, in the following order. If one is already complete, move on to the next. This applies whether it’s $50 or $50,000. (Legal disclaimer: please see a professional who can advise on your individual situation. The following is intended as general guidelines only, and no specific recommendations are intended.)

Create or top off your emergency fund so that it’s at least 3 months’ worth of living expenses. Better if it’s 6 months.
Pay off consumer debt. DON’T pay off unless you have an emergency fund, or when the next emergency happens, you’ll just put it on the credit card. This is an ideal method to never get out of debt
Invest in a IRA or Roth if you’re eligible
If you’re not eligible, invest at least the same amount in mutual funds (or, preferably, that 50%) so you build an investment nest egg.
If you still have some of that 40% left, pay off student loans. No student loans? Pay down the principal of your mortgage.
Invest in yourself. Get some decent, fee-only advice from someone who won’t sell you a bunch of crap, get savvy tax advice, and nail a good estate attorney to update your documents. Once you’ve got a reliable team working for you, get more education—I don’t care if it’s knitting or an MBA, knowledge is something no one can take away from you, no matter what the market. Consider career counseling. Ignore no-money-down seminars for buying real estate, day trading schemes, and all the other garbage that makes money for the seminar leaders and no one else.
Invest. Educate yourself so you know what you’re doing, and only invest when you understand the reasons for the investment, how you will make money, and what the costs are.
Give something to charity. You’ll feel way better about yourself. If you live in the U.S., you’re already wealthier than most of the world. Check out Peter Singer’s website for guidelines on reasonable giving.
Make improvements to your home, but only if it will increase the value or repair something that’s really falling apart. This would NOT include a hot tub, pool, or Sub-zero refrigerator.
Blow a little. A LITTLE! Max 10%
Maybe consider the pleas of your deadbeat relatives.

So now I’ve covered how you should spend your tax refund, your raise, and the money you inherited from your aunt in Azerbaijan. Call me if you win the lottery. In fact, maybe you should call me even if you don’t! And, good luck!

Can’t get no satisfaction–Consumerism 2.0

Posted on December 19, 2012December 19, 2012 by Danielle

Sometimes I think I could have had a very profitable, though aggravating, career as a professional complainer. I’m not sure if it’s me or the modern world, but hardly a month goes by without some problem with a utility bill, a credit card, a bank account, or some crud that I’ve purchased. I also find that I’m somewhat entertained by columns in newspapers that fix “what’s your problem” or assorted travel snafus.

Actually, I’d like to quit that job (complaining, not financial planning!), but life seems to present me with endless opportunities. Maybe it’s because I spend my days focused on finances, but I hereby admit that I cannot bear to be cheated. I’m not scamming anything, or looking for a free ride or something I’m not entitled to, but when I pay good hard earned money, I think I (and you) should get what you paid for. Not so easy.

A lot of people simply give up because it takes so much time to thread your way through whatever corporate bureaucracy you’re up against. Even worse if the customer service rep’s English is a little shakey (although, in fairness, they tend to be a lot more polite than our, ahem, native speakers). If I’ve talked to the proper channels and don’t get satisfaction, my first line of defense is to ask for a supervisor. My daughter thinks it’s quite a sport to listen to Mom on the phone, and at some point she choruses, “Wait for it….” and holds her breath until I say let me talk to your supervisor. She’s never waited long.

Sometimes this doesn’t work so I share a method that has worked for me every time but one. Email the CEO of the company. The only one I have emailed who utterly failed to respond was Leslie Blodgett, CEO of the makeup company Bare Escentuals. (I’d purchased one of their very expensive brushes, which proceeded to shed bristles like a porcupine). In every other case, I’ve had a prompt and effective response from some competent, knowledgeable staff person or attorney. After all, who should care more about customer satisfaction than the CEO? And if he or she doesn’t, well, I’d certainly consider shorting that stock!

The trick is finding the correct email, so I share with you how I’ve done it. First, google “CEO Widget Company”. Now you have the right name, but rarely will you find the email. So, go to the website of the company and start browsing. I usually start with investor relations or the “About” page. Somewhere in that website you can usually find someone’s email address and this allows you to guess what the pattern is: john.doe@widget.com; jdoe@widget.com; doej@widget.com, etc. Sometimes it takes a few bounced emails before you hit on the right format, but when it doesn’t come back, bingo. If this utterly fails you can send a snail mail letter, but usually an email is faster—the last time I sent a letter, the response took a month, but I’ve never waited longer than 48 hours for an email message. Be sure to include a phone number, as the staff person usually calls.

Sure, I want my problem addressed, but I also think I’m doing them a favor—they could spend a fortune analyzing their customer service, but I’m giving them some real world feedback and hopefully helping them improve their business. And now I’m off to deal with those two year old tires with dry rot.