A Daddy's Financial Tips

Hello. Hello. I know it’s been a while, but it has been for good reason. I’m excited to announce my wife and I welcomed our second child into the world a couple of weeks ago, and Daddy has been busy! Well I’m back, and since I’ve now gone through this miraculous process twice, I thought I would kick things back off by sharing a few financial tips when it comes to having a baby.

• Be prepared before your due date! This isn’t just a financial tip, and as I can now attest with our second child coming two weeks earlier than originally expected, it is critical. Have the nursery ready, have some essential supplies purchased, and have some clothes bought. Have the car seat properly installed and your personal and professional calendar winding down. It’s truly awesome to welcome a little one, but it’s also hectic, overwhelming, and exhausting. You don’t need unnecessary stress that can be avoided, and financially, you don’t want to be in the position of having to buy and pay for things out of necessity without careful consideration and without the opportunity to thriftily shop around.
• If your income will be impacted due to maternity leave or paternity leave via unpaid time off or disability insurance versus your typical salary, budget for this before the baby! I would suggest you work towards boosting your cash reserve so that your lifestyle can remain the same even though your income will be reduced. Frankly, I might even suggest that you save up more than you think you’ll need to offset your lower income because having a baby is an expensive time between all the medical expenses, all the necessary purchases, and the one-off’s that become needed, but weren’t originally expected.
• If you’re buying nursery furniture that can be converted as the child gets older, do you really intend on utilizing that feature? If so, you may want to consider going ahead and buying the additional pieces before they become discontinued and you end up getting stuck with the typically pricier, convertible furniture you didn’t use or couldn’t convert.
• Similarly, before you buy the car seat, consider the car seat’s life expectancy. When does it expire (yes, most have expiration dates)? How big of a child is it made for? Will it last until the child can face forwards, will it last until the child no longer needs a car seat, or is it just for the first couple of years? We ended up purchasing two car seats the first time around, and I’m glad that we did, but as an inexperienced dad-to-be, I can tell you I didn’t know I’d need more than one car seat for one kid when we bought the first car seat.
• This is a little opposite to my message of urging you to be prepared, but don’t be over prepared for the first few months of life. By that I mean don’t go crazy buying insane amounts of newborn diapers and 0 – 3 months’ clothes. Your child will likely need a size 1 diaper at some point, and then size 2, and then size 3, and so on. Your child will also need clothes for the rest of their life, not just the first three months, and they grow quickly! All I’m saying is that those newborn diapers and super tiny outfits may not be useful for very long, and they are not free!
• Realize that all baby outfits likely face the same fate: spit-up or worse. There are some latest and greatest name brand baby outfits out there that cost quite a lot, and if you want a few, or you can afford lots of them, then go for it. That said, there are a lot of very reasonably priced very nice looking outfits that aren’t nearly as expensive and will share the same fate of being at the mercy of stain-removers and the washer and dryer. Dress your baby how you want to dress your baby, but don’t let their fashion derail your finances!
• I don’t often recommend specific companies or services, but get Amazon Prime. The ability to order extra baby mittens, diapers, wipes, formula, a baby scale, or an outfit for your favorite team’s game and get it without leaving your house in a day or two is unbelievable. They cannot be making money on my family right now with all the shipping fees that are free through Amazon Prime, and don’t worry, we do recycle our cardboard!
• Take care of the new baby’s business. This starts with the application for a Social Security Number and a birth certificate in the hospital, but your homework is not done. You need to get your baby added to your health insurance, dental insurance (if you have it), and vision insurance (if you have it), and most of the time this has to be done within 30 days of the birth and requires a Social Security Number and a proof of birth. The forms are long and the interactions with these government agencies and insurance carriers is not particularly fun, but it must be done correctly and in a timely manner.
• If you don’t have wills, power of attorneys, and health care directives, now is the time (your will is how you name a guardian for your children). If you do already have these documents, go back through them and examine your retirement plan and insurance beneficiary designations to make sure your wishes would be fulfilled and your child would receive what you would intend them to. If, like us, you now have more than one kiddo, make sure you have the proper wording in your documents and beneficiary designations to not accidentally exclude any of your children!
• Finally, be careful with unnecessary extras. “Unnecessary” can be a matter of opinion, but with all the digital sharing of everyone’s baby’s everything and all the “super cute” products available for purchase out there, be careful. I would suggest you not order anything after 9 PM to make sure you’re not sleep-buying and anything terribly pricey without talking to the other parent to keep the peace.

Having a baby is one of life’s most amazing experiences, but without careful preparation, thoughtful consideration, and prudent restraint, it can be financially challenging. Certainly, get your precious baby what they need, and splurge and get them a few things that are just neat or fun to have to celebrate the occasion, but be sensible. Remember, your new baby is going to need you for at least 18 more years, and anything you don’t spend now can go towards their car, their college, or their wedding!

I’ve got to run. Someone’s awake and it’s my turn!

Tom

The Best Piece of Financial Advice You’ve Ever Received

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Many of you who know me personally are familiar with my love of quotes and one-liners. What can I say? I like simple statements that can be remembered and candid statements that cut to the chase and don’t beat around the bush. That’s why I asked a number of friends, family members, and people I work with what the best single piece of financial advice was they had ever received. Here are some of the responses:

“Little pigs get fat, but hogs get slaughtered.” – This can have to do with greed or pressing your luck.
“Live below your means.” – This is the number one response for me personally because it’s so short, so powerful, and so true. If you spend less than you make, financial planning becomes a matter of determining the optimal order to go about achieving your financial goals, but if you spend more than you make, financial planning simply becomes a question of how best to take on water.
 “No one on their death bed has ever said they wished they had spent more time at the office.” – There are a lot of disenchanted former employees and retirees that can swear to this one. Then again, there are a lot of friends, spouses, and children who probably can, too.
“If you do something you love, you’ll never work a day in your life.” – There is much more to choosing an occupation than salary, bonus opportunities, vacation days, and benefits, and life moves pretty fast.
“Money often costs too much.” – Don’t let money cost you your happiness, your health, your friends, your family, or your faith. Don’t clinch your fist so tightly that you miss out on what really matters.
“An investment in knowledge pays the best interest.” – Especially right now given where today’s interest rates are!
“Wealth is the ability to fully experience life.” – I know some multi-millionaires who would be willing to admit they are poor and I know some people living paycheck to paycheck who seem to be quite rich.
“Never spend your money before you have it.” – This can lead to credit card debt and emotional disappointment. Don’t count on gifts, inheritances, bonuses, or equity awards tied to future performance until the money is in the bank!
“The stock market is designed to transfer money from the active to the patient.” Frequent action in a portfolio may feel good, but I firmly believe investing with a long-term approach gives you the best chance for investment success. Sure, make an occasional tactical move and rebalance your portfolio when there has been a sizable move in the markets, but be cognizant that transaction costs, fees, and taxes can kill investment returns.
“If you will live like no one else, later you can live like no one else.” You are going to have a finite amount of money pass through your hands during your life. It’s either more now or more later, and you’re going to need some later.
“Know what you own and why you own it.” I truly believe everyone wants a basic understanding of their finances. If you don’t know why you have something, you should find out why you do, or you probably shouldn’t have it. In practice I don’t ever suggest a technique, strategy, or investment to someone unless I can explain it.
“Try to be greedy when others are fearful and try to be fearful when others are greedy.” This is Buffettesque contrarian investment strategy at its core. It is usually "warmer" if you are in the herd with other investors, but it does often make sense to head in the opposite direction of the herd when it comes to investing. Buy low and sell high. Don’t buy high, sell low, and repeat until you are broke with the rest of the herd!
“Keep giving while you’re living so you’re knowing where it’s going.” – Giving to other people or even charitable causes can be quite fulfilling while you are still alive. It can also be a great way to test your potential beneficiaries and heirs with a little to see if they would be good stewards with a lot.
“Money is nothing more than a tool.” – If you can come to the realization that money is nothing more than a mechanism for peace of mind and a tool to purchase experiences, provide experiences, and further causes, your whole financial, social, and spiritual outlook could look a lot different.

It is my hope that these pieces of financial advice will be as valuable to you and your friends and loved ones as they are to me. If you have one that's not on the list please share!

-Tom

What You Should Do With More

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Earlier this fall the U.S. Census Bureau released exciting data showing that real median household income grew an average of 5.2% in 2015 versus 2014. This represented the first statistically significant increase in income for the middle class since 2007. For the first time in almost a decade, most people have gotten a raise! This good news coupled with it being near the end of the year when sometimes employees are lucky enough to get a raise or a holiday bonus got me thinking that it might not be a bad time to suggest some things you might want to do with your additional income.

If you are fortunate enough to have additional income coming in, in general, here is what I would recommend you do, and in this order:

1. If you are getting a raise, do a little math and see how much more money you will be bringing in each pay period after taxes. That is valuable information to know as you consider your budget going forward.
2. Have some fun! Sure, I’m a numbers guy and a financial advisor, but I also know you only live once. Celebrate your hard work paying off and go eat at that new Italian place, buy that outfit you’ve had your eye on, or get that latest device. Now I’m certainly not suggesting you should blow all of your additional income, but I do think you should live just a little.
3. If your cash rainy day / emergency fund is still not up to at least 3-6 months’ worth of your living expenses, it’s probably a good idea to direct your additional income to rectifying the situation. It’s not an exciting use of assets, but trust me, you will be glad you have a cash safety net in place when life throws you a curveball, and it will!
4. As long as your modified adjusted gross income (MAGI) is below $132,000 if you are single or $194,000 if you are married and file a joint tax return, you should be eligible to contribute up to $5,500 to a Roth IRA ($6,500 if you are over age 50). This is a great way to save for retirement, and with any luck, your savings will compound over time into a larger tax-free asset.
5. If you have any high-interest credit card debt or you are close to paying off a student loan or car loan and that will erase a fixed, monthly expense, I’d suggest you plow your additional income into your liabilities. It will save you interest expense and improve your financial situation.
6. Top off your 401(k) or retirement plan. Unless you are already contributing the maximum amount, with additional income you should be able to contribute more to your retirement plan. This is a great way to boost your retirement savings and defer having to pay taxes on your additional income until you withdrawal money from your retirement plan later on.
7. Put some extra towards your mortgage or other long-term debt. Again, it’s not an exciting use of your assets, but it will save you interest expense and speed up your progress towards being debt-free!
8. If you are already charitably inclined, consider paying it forward and using your additional income for enhanced charitable giving, greater support of a cause you feel passionately about, or just helping out someone who you know could use a little help.

 

They say with more power comes greater responsibility. I agree, but I’d also say with more income comes greater possibility! If you are fortunate enough to have experienced a bump in your income or know you are about to get a raise or a bonus, use it thoughtfully. Have a little bit of fun, but also make it count!

 

-Tom

Switching to a Single Salary

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I’ve had a number of friends and blog readers ask me about switching from a two-income household to a one-income household over the past few weeks, so I can’t help but wonder if this is a topic many more of you may be interested in. Sure, this post is going to be primarily directed towards a family where one spouse has decided to stay at home, but many of the thoughts and tips I’m about to offer can also be applied by a family if one person thinks they are about to be laid off, a family if one of the breadwinners’ health is failing, or even an individual who is going from two jobs to one. Here are some suggestions:

• If you can, experiment before you try it. If Mom is considering staying at home to look after the newborn, agree to stop spending Mom’s current take-home pay for several months to see what it’s like. Except for an absolute emergency, I’d really urge you to hold true to not spending Mom’s take-home pay because lessons you may learn such as not being comfortable with your remaining emergency fund when you had to unexpectedly pay for that new HVAC unit are important lessons that may affect the overall decision and/or timing of going from two incomes to one income.
• Make a painfully detailed budget and see if you can make one income work. If Jane’s career is soaring and John’s career is painful, Jane and John should take a look at what would happen before John tells them to take the job and…, well take the job. There are going to be relatively fixed expenses such as mortgage payments and utility bills, and family revenue will be going down if John quits, so unless Jane makes enough to cover all of the fixed expenses and the discretionary expenses, it’s likely some of the discretionary expenses are going to have to go or at least be trimmed in order to make ends meet. Look to things like shopping, golfing, massages, lattes, unused gym memberships, vacations, and eating out. In happier news, if income is going down, it’s quite possible your taxes will naturally go down, too, so that will at least help a little! This is also a time where it could be beneficial to finish off debts such as student loans or car loans to reduce your fixed expenses and help the math work.
• In some ways, realize up front that you cannot keep up with two-income families. That being said, realize that they cannot keep up with you, either. What I mean is that if one spouse quits working in Family A, it’s possible that Family A’s financial trajectory and spending power may go down when compared to two-income Family B. However, when it comes to the percentage of the family’s time taken up by work, the flexibility of the family, and the amount of time on the weekends the spouses have to spend doing chores around the house, Family B may be a little jealous of single-income Family A. I’m certainly not saying one approach is better than the other. What I am saying is that from the onset, you need to realize there are often pros and cons that can make you different from other families you are close to.
• Put it all out there with your spouse. Going from a two-income household to a one-income household temporarily or permanently is far more than a financial decision. Why are you doing this? Do both of you want this? What if it doesn’t work for the stay-at-home spouse emotionally? What if it ends up not working for the family financially? Do the household chores/responsibilities change? Should they? What will the stay-at-home spouse do for entertainment and social interaction in light of the loss of friendly co-workers? Will the new entertainment and social interactions add to the family expenses? Should they? These are deep questions, and only you and your spouse can hack through them. The hacking does need to be done, though, as I’ve seen some serious resentment and jealousy fester from the employed spouse vs. the non-employed spouse and vice versa.
• Make sure the working spouse is properly insured. There are many careers where once you leave the working world, you become a little “stale” and lose some of your ability to become gainfully employed in the future. With this in mind, the breadwinner’s income stream usually becomes a little more valuable and, accordingly, needs a little more protection. I’d suggest you take a long, hard look at the employed spouse’s life insurance, short-term disability insurance, and long-term disability insurance. Don’t go crazy, just make sure you are adequately protecting the non-employed spouse’s financial well-being should the employed spouse become disabled or meet the proverbial fatal bread truck. If the stay-at-home spouse is providing a service such as looking after children that would still be needed if they were to become disabled or unexpectedly pass away, some additional insurance may also be needed on that spouse to protect the-income generating spouse's financial well-being!

Thank you to those of you who asked me about this topic. I’m always happy to help, but sometimes I can only help if you ask.

 

-Tom

When the Stork is Looming

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I don’t know about you, but I know a lot of pregnant people right now. Maybe it’s my age and stage in life, maybe there is something in the air, or maybe there is something in the water! I don’t know what it is, but there are going to be some overworked storks in 2015!

If we know one another personally, you probably know that my wife and I just had a child of our own. I'm still working on my swaddling technique and I haven't quite figured out how to shove the “pack and play” back in that tiny little bag, but I have learned a few things over these past several months. For my currently pregnant and maybe one-day pregnant readers out there (and their spouses), here are seven financial tips:

1. If possible, get health coverage where the insurance company will pay 100% of your costs after your deductible and copayments have been met. Call me Captain Obvious, but births are significant health care events, so they are going to have a price tag. If you’re on a plan that covers 100% after you reach your deductible, you have the comfort of being able to back-in to what your birth medical expenses will likely be without having to wonder how much it could cost if there are complications. If you are planning to have children, health insurance is a good thing to address before you are pregnant because you don’t always get an open enrollment period before the baby arrives. You can also go ahead and strategize about whose plan the baby is going to be on if both parents have health insurance.
2. Boost your life insurance or get life insurance if you haven’t already. If Mom is going to stay at home for a while or shift to part-time, Mom needs to have some significant life insurance on Dad should something happen to Dad and his paycheck. If Dad is going to keep working and Mom is going to look after the baby, Dad needs to have some significant life insurance on Mom should something happen to Mom and her child care services. Interchange “Mom” and “Dad” here as needed, but you get the picture. An article I recently read pointed out that going ahead and boosting a woman’s life insurance early in her pregnancy may be a good idea as complications such as gestational diabetes could arise during the pregnancy and obviously, situations could occur at birth. As you would probably expect, it’s cheaper and easier to get life insurance if you have fewer health issues and less treatment history.
3. If Mom is going on maternity leave, there is a good chance she will be drawing short-term disability that will very likely not be 100% of her pay. This means you have a pay cut coming, and you need to plan accordingly! I’d suggest ratcheting up the savings now if Mom is still working so that you can offset your upcoming pay cut when the time comes and not have to significantly change your lifestyle.
4. Many of our friends that are already parents have warned us about looking after “us.” A baby can be a wonderful addition, but he or she takes time and energy, and can subtract from what you can offer your spouse and your friends. In that spirit, I’d also start saving for date nights and friend nights. It’s not just dinner and a movie anymore! It’s going to be dinner, a movie, and a babysitter. Look after the baby, but look after your marriage and your friends, too!
5. Pay off your credit cards! You should do this whether you are having a baby or not, but I can already tell you that you’re going to want to have as much spending power available to you as you can. Baby stuff is expensive! I’m sure you’ll get some gifts (and my wife and I are very appreciative of what we have received), but you’re not going to get all that you need without buying some of the stuff yourself.
6. In the spirit of my comment about baby “stuff” not being terribly cheap, don’t overspend or overbuy baby stuff, either. It makes me sound like an old man, but I can tell you for a fact I wasn’t raised with all the gadgets and gizmos that some of these baby stores tell you that you “have to have.” My wife asked a good friend of hers who was a recent Mom to accompany us as we started considering what we would need for our new family member, and I think that was one of the best ideas we’ve had. My wife may have invited her friend for comfort, support, and wisdom, but every time she told us we didn’t need the premium plus version of that bottle, or the spa edition of the bath apparatus, or the nuclear-powered thermometer, I literally felt money going back into my wallet!
7. Try to figure out what the new normal budget is going to look like. Whether it’s pay cuts, health insurance expense increases, double income households becoming single income households, daycare expenses, or lots and lots and lots of diapers to be purchased, your budget probably won’t look the same after the little one arrives. No matter how cute those little hats and booties are, your financial principles need to stay the same: spend less than you make and live within your means.

I’ve got a feeling I’m going to be writing a lot of posts at strange hours over the next few months…

-Tom

What If It’s Not Working?

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Money comes, money goes. You get paid. Wahoo! Then the cable bill comes... Then the phone bill... Then the water bill, power bill, car payment, and house payment all come on one, lovely day. @#$%! This is the month when homeowner’s insurance premiums come in? Did you forget about that? (I know I did!) Wow. There’s just not that much more left than before you and I got paid! And we’re supposed to go to that new, pricey restaurant this weekend with our friends… Do you ever feel like this? I think most people do.

So what should you do when it’s not working? You’re certainly working hard, and you’re reading all of those helpful financial blogs every time your friend pumps one out (hopefully), but your financial situation is just not improving that much. What should you do? In three words:

Try something different.

If you’re having trouble saving money, open a second cash account and direct deposit a portion from each pay check into it. Pretend it’s another one of those deductions on your check no one really understands, and I bet your cash will finally build!

If you’re having trouble paying down your credit card debt or you keep “overusing” your debit card, play rock, paper, scissors with your plastic cards and go with scissors! Cut them up into a lot of pieces (to help reduce the chance of identity theft), and try using cash. When you see how many pictures of Andrew Jackson or Benjamin Franklin something takes, it may feel different and help your self-restraint.

If you’re having trouble actually increasing your contributions to your retirement plan at work, think Nike - just do it! As long as your increased contribution isn’t horribly unreasonable, you’ll probably naturally figure out how to make your reduced income work once you have less income actually coming in.

The one I’ve actually seen a lot of lately is someone trying to do too many good things at once. I admire people who do this, but let’s be realistic; you can’t boost cash, pay down debt, save for a new car, save for a new house, save for your kid’s college, save for your kid’s wedding, and save for that long overdue dream vacation all at the same time. I mean you could, but unless you’re making really big money, that “shotgun approach” isn’t going to work. Based on my experience, most people taking the “shotgun approach” end up feeling like they aren’t making any progress, get frustrated, and then return to spending what they make. Instead, I’d suggest that you go with a “surgical strike approach,” and go after one or only a few items at a time. Boost cash, then pay down debt while keeping your cash up. Save for a car, buy a car, and then save for the new house. This way you will feel like you are making financial progress because you are accomplishing something that is tangible and observable. Things will get checked off your list, and you may find that your rate of financial progress seems to pick up momentum.

If what you are trying to do financially isn’t working, don’t feel bad. When talking about his many attempts to invent the lightbulb, Thomas Edison said that he had not failed, he’d just found 10,000 ways that didn’t work! Edison also said, “Our greatest weakness lies in giving up. The most certain way to succeed is always just to try one more time.”

If you don’t want to listen to this Thomas, that’s fine, but please listen to Thomas Edison. Try one more time!

-Tom

My Default Savings Plan

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I don’t know about you, but I often do better with a plan. To my wife’s credit, she’s helped me become more able to enjoy going along with an unexpected or unanticipated opportunity, but there are still some areas in my life where I need some “navigational buoys” so to speak. One of those areas is savings, and I don’t think I’m alone in that regard. Without a savings plan in place, money seems to burn holes in pockets and disappear.

With that in mind, I’d like to offer up my default savings plan. Now, this plan is not exactly what I always do, it is not what I always advise accumulating clients to do, and it might not even be what I’d specifically recommend for you, but I do believe it is a good place to start for most people. Here goes:

1. Try to live off of 60% -70% of your take-home pay. If you so choose, tithe or donate 10%, spend 10% on fun, and save 10% - 20%.
2. Of the 10% - 20% I recommend you at least save, I’d suggest you consider doing the following, and in the following order:
1. Save six months’ worth of your monthly expenses in a cash savings account separate from your day-to-day checking account.
2. Pay down any and all outstanding credit card debt you may have and keep it paid off!
3. If applicable, make sure you are contributing to your employer’s retirement plan the amount or percentage you need to in order to maximize their matching contribution.
3. Once you’ve addressed number two, I’d propose making maximum IRA contributions (probably to a Roth IRA if you can, but it could depend…).
4. Once number two and number three are checked off, I’d propose you utilize your savings in the following ways:

• 1/3 as additional contributions to your employer’s retirement plan.
• 1/3 as contributions to a taxable brokerage account (after all, you may want to be able to access some of your investments penalty-free before your 50s).
• 1/3 as additional principal payments to reduce your school, car, home, or other debt(s).

Sure, there might be a college fund for a little one, a pending basement renovation, or an upcoming anniversary trip that needs some of your savings firepower, but this should at least get you started. It is my hope that you will use my plan as your plan. It is my hope that you will use this plan as your policy as your personal and financial situation progresses, so that one day, you don’t look back and wonder where all of that hard-earned cash went. However, if you want to talk specifics about your situation, I’m happy to. You know where to find me.

 

-Tom

Landing the Plane

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Many of you know that I love analogies. One of my favorites that I use with people who are nearing the end of their careers is that they should think about entering into retirement like landing a plane. Whether the gainfully-employed ride has been smooth sailing or more than a little turbulent doesn’t really change the fact that you need to be prepared to land the plane. The retirement landing can be graceful and you can reach your home destination smiling, or the landing can go pretty poorly and even end in a fiery crash of sorts. Most people prefer the graceful landing that ends with smiling, so if you’re thinking about retirement, I thought I’d share a few tips on how you might want to land your very own plane.

1. Get Your Cash Up – When working, I recommend most people keep around three to six months’ worth of their core living expenses in cash. In retirement, I’ve found that most people prefer a little more. If you have a particular cash number that helps you sleep better, go for it, but otherwise I normally recommend one to two years’ worth of your core living expenses in cash. That may sound a little crazy to you, but when your paycheck goes away (or goes down) when you do retire and there is a cyclical pullback in the stock market, you might feel differently.
2. Have a Plan for Where Your Income Will Come From – If you have a pension, that’s really great, but where is the rest of the cash you need to fund your lifestyle going to come from? Randomly pulling cash from various investment accounts and haphazardly deciding when to turn on an annuity or start drawing Social Security is usually not a good strategy. You need a plan! There are tax implications and timing implications that need to be considered if you want to land as efficiently and effectively as possible!
3. Strive to be Debt-Free – This may require using a decent chunk of your assets, or you might even decide that you want to work a year or two longer so you can do this, but if you can go into retirement debt-free, it is huge! Imagine how it feels to still get that mortgage bill you’re used to when you’re not getting that pay check you’re used to. Being debt-free going into retirement not only really seems to help many of my clients psychologically, but it also helps take pressure off cash and investment accounts. If your monthly mortgage payment is making up a sizable chunk of your fixed expenses, and you can make it disappear before you lower your landing gear, I’d be willing to bet you’ll feel a lot better.
4. Make the Big Purchases Before You Retire – What? I’m telling you to spend money? Well, sort of. This may also sound a little batty, but if you are going to need something such as a new car or a new roof in the next couple of years, I’d probably suggest you go ahead and accelerate that purchase while you’re still working and making the big(ger) bucks. Assuming your retirement income will be a little lower than your working income, I’ve found that going ahead and taking care of some of the big ticket items can make your landing feel a little smoother. Put simply, big expenses can hurt the psyche and the pocketbook, but they seem to hurt less if you’re still working.
5. Get to Know Your New Boss/Co-Worker – I’m certainly not a therapist, but I am observant enough to have noted that some people’s transition to a little more family time seems to go better than others. Sure, you’ll have to get used to spending a lot more time with your husband or wife, but that knife cuts both ways; they will have to get used to spending a lot more time with you, too! Working to improve your relationship with your spouse and developing some mutual and separate activities before you retire are probably really good ideas. I’ve heard it said that retirement is twice as much spouse and half as much money! I don’t know about that, but you get the point. Consider some relationship planning before you exit your plane and head to baggage claim.
6. Think About What You’re Going to Do Once You’ve Landed – I know I said I’m not a therapist, but you need a plan for you when you retire. My busy, ambitious, and hardworking clients who eat, sleep, and bleed what they do for a living tell me that retiring can feel like jumping off of a moving train. The emotions of that jump and coming to a relative stop can be a tough adjustment. Take a trip, sleep in for a few weeks, do the crossword, but have a plan for after that. Things such as volunteer work, periodic consulting, gardening, car restoring, or woodworking can be good things. You’re going to want to have something to do. Retiring is a treat for some, but I’ve seen it be a difficult pill for others to swallow. Do as you wish, but I’d suggest you have some hobbies and groups lined up before you bid your boss adieu.

 

I don’t know about you, but I think the landing is one of the most important parts of a flight. If you’re beginning your descent and could use a little help making your approach, please let me know. This has been your captain speaking.

 

-Tom

Savings is a Bill!

Credit: stockimages

I’ll be the first to tell you that I have some quirks. For example, I have to write out a to-do list every week, my office desk has to be clean before I can go home (I throw stuff in drawers), and seeing a lot of unread emails causes me a lot more angst than it probably should. Another one of my quirks is that I cannot stand unpaid bills. Paper or electronic, if a bill comes in, it gets paid that very day (unless I’m on vacation or seriously ill). Maybe you’re not quite as crazy as me, but if you’re reading this post, I trust you pay your bills pretty promptly, too.

My wife and I are also pretty good savers, but even I must admit that my love for saving money pales in comparison to my hatred of unpaid bills. That’s why when I heard about a new approach, or more accurately, a new twist on how to think about saving, I got excited. The twist is this: What if we viewed savings as a bill?

When the power bill comes in, I pay it. When the mortgage statement comes in, I swear, and then I pay it. When my wife’s credit card bill comes in, she pays it. At the end of the pay cycle, or month, or year, we usually have a little bit more income left over than we have expenses, so we try to save it, but that doesn’t always work out. Luckily, my wife and I have been blessed to have enough coming in to be able to save a little, but we also have to constantly work at being disciplined and diligent enough to save. Even though we’re pleased with our savings efforts, at times, we could do better, and I bet viewing our savings as a bill would help.

The “savings is a bill approach” is not earth-shaking, and it’s certainly not complicated, but if you or your family are struggling to save enough to meet your financial goals, or to save at all, I’d recommend you try this tweak. If savings is a bill, it comes out at the front of the pay period, not at the end. If savings is a bill, it’s a regular expense and must be viewed as a recipient of part of your income pie, not just the residual crumbs. If savings is a bill, I bet you and I will both save more, and more regularly.

Sorry, but I’ve got to run. The water bill calleth!

-Tom

How to Plan an Affordable Trip

If you know me personally, you probably know that I love to travel. Travelling is awesome. You get to experience historical sites, visit beautiful and exotic places, and eat a lot of delicious food. Well, like most of you out there, I’m not lighting my proverbial cigars with $100 bills, so when I travel, my budget has to be within reason. Luckily, my wife shares my love of visiting new places and doing new things, so we save specifically for trips and spend less in some other areas of our lives. Even though this extra saving allows us to spend more on vacations, a lot of our travelling escapades are also the result of careful planning and a few tricks of the trip-planning trade. With this in mind, I thought I’d share a few tips on how you can plan an affordable trip.

• Plan and book your trip really early. That may sound crazy to some of you, but when it comes to getting a good deal on a trip, I really believe the early bird gets the worm. You can sometimes get sweet deals and complimentary upgrades, but if you make your plans early you can also get the aisle seats on airplanes, the window seats at restaurants, and more central seats for shows and concerts. Aisle seats, window seats, and more central seats don’t usually cost that much extra, if at all, but they can certainly make a trip that much better of an experience. Some of you will probably counter that you can get good deals at the last minute, and you’re absolutely right, but last-minute deals aren’t always available for what you want or need. Personally, I don’t want that last-minute stress when I’m trying to enjoy a glorious trip or vacation.
• Don’t make things more expensive than they have to be. Tote your own bags to the room (if you don’t, keep it classy and tip the bellhop), don’t buy the family picture at every landmark you visit, and go with the full-sized rental car instead of the mid-sized SUV. Little things like that can save a little money and not reduce the overall quality of the trip.
• You don’t always have to have a drink. Alcoholic beverages can certainly be a fun treat, but they aren’t always required. Have a few more waters and a couple fewer drinks, and you’ll have a few more bucks and maybe even a few more memories.
• Travel light. Oh my goodness! Nothing irritates me more than baggage fees, so I do everything in my power to avoid them. Pack just carry-on luggage if you can, but if you need to check a bag, make sure it fits the weight requirements so you don’t get charged even more! If you’re travelling on multiple airlines or internationally, consider going with the airline(s) with friendlier (and more economical) bag policies.
• Be careful of tourist traps. Some tourist traps, such as shops or restaurants, are a great part of the experience, but don’t fall into the costliest of tourist traps, such as a gas station at the Grand Canyon or a camera equipment shop at the top of the Eiffel Tower. Think ahead and gather what you need before you travel.
• Look for coupon codes. I know they’re a nuisance to look up and they work a lot less often than I’d like, but a few minutes on Google can save you some real money. In the last few years I’ve found and used promotional codes intended for the guests of a hotel that was hosting a video game convention, for being a return customer, and for being a CPA. If you’re a member of a group such as AARP, have served or are serving in the military, or are an active or retired government employee, there are lots of promotional codes out there for you! It doesn’t hurt to look!
• Consider currency implications. If you want to travel internationally and are trying to decide where to go, look at the currency exchange rates and find somewhere favorable. Not only will doing this make you look smart now, but it could also make you look smart when you arrive somewhere and trade in a few Greenbacks for a lot of local currency.
• Look at websites like TripAdvisor.com. I don’t often specifically “plug” things, but Trip Advisor is my homeboy. It’s the best and most accurate source I’ve found for vetting hotels, restaurants, and landmarks. Look for options with lots of stars and not so many dollar signs. Look for a reasonable number of reviews and make sure the reviews are recent, too. I used to be skeptical, but now I’m a believer. You may think you want the hotel restaurant now, but after looking at a site like Trip Advisor, you may find that hidden jewel of a place that costs a lot less, has better food, is a lot more fun, and is within walking distance.
• Go to National Parks. If you want to feel small, you want to be awed, and you want to experience natural beauty, go to national parks. They usually cost close to nothing to drive in, and visiting them can be a really good and enjoyable way to chew up a lot of time you could be using seeing less amazing things that cost a lot more!

 

These are a few of my tips. What are some tricks of the trade you other travel enthusiasts out there utilize to see the world without taking out a second mortgage?

 

-Tom

Now or Later

Credit: Stuart Miles

Over the course of your life, a certain amount of money is going to pass through your hands. Obviously you could make this amount be larger or smaller based on how long you decide to work, but regardless, someone should be able to say “X” number of dollars went through your hands after you’re dead and gone. What that means (if you go into a financial vacuum and put investment returns and cash flow strategy on the sidelines) is you are going to have a finite amount of money to spend during your days on this earth. I’m not trying to be morbid, but I am trying to point out that if you are only going to have a finite amount of money, you can choose to spend more now or you can choose to spend more later - you can’t do both. This now or later concept plays a huge role in saving for retirement - especially in saving for early retirement!

In order to retire early, you need to:

• Live within your means - I know I go on and on about this, but it really is one of the keys to long-term financial success. Simply stated, if you want to be in a position to retire early, you need to be make progress almost every two-week pay period, not break even, and certainly not lose ground. You need to spend less than you make and you need to save the surplus, invest the surplus, or pay down debt with the surplus. It’s okay if you don’t make financial progress every once in a while when your spouse has an unplanned surgery, your car has an unplanned blowout, or your very favorite sports team makes an unplanned appearance in the playoffs and you decide to attend, but that must be the exception, not the rule. If you can’t always get the new shoes, go bar hopping every Friday night, or go golfing every weekend with the guys and make financial progress, then don’t! I guess you can get the shoes, bar hop, and golf if you really really want to, but please remember, if you choose now versus later, you are hurting later.
• Annihilate your fixed expenses - Sorry for the strong wording, but sometimes words such as reduce, pay down, or extinguish don’t have quite enough “oomph” to them. Fixed expenses are all around us. They can be phone bills, television plans, HOA fees, gym memberships, minimum credit card payments, car payments, and mortgage payments. If you want to be in a position to retire early, you need to wage war on fixed expenses. Sure, there’s not a lot that can be done about some fixed expenses such as HOA fees and phone bills, but you can try to cut back on some "fixed" expenses like an under-enjoyed cable package or a neglected gym membership (better yet, keep the gym membership and go exercise instead of watching television). As for credit cards, I always say pay them off entirely, live within your means, and don’t abuse them again unless it’s truly an emergency. Consider putting extra principal every month towards any student loans, car loans, or mortgages, so you can pay them off more quickly and reduce your interest expense. Fewer fixed expenses means you will need less income in retirement to support your lifestyle, so you could probably retire sooner and with fewer assets.
• As good things happen, live below your means - With any luck and a decent strategy in place, good things should eventually happen to you financially. Maybe your company will do really well and you’ll get a nice bonus, maybe you’ll receive a surprise check in the mail from your sweet great aunt in Kentucky’s executor, or maybe a bull market will cause your investments to really soar for a few years. When this happens, stick with your strategy and do as my late grandfather often said and “keep on keeping on.” Just because you are making more money or have more assets doesn’t mean you have to act like it! Keep yourself grounded and keep telling yourself that what you are experiencing is financial progress and momentum towards your goal of not having to work. All I’m saying is why get a Mercedes if your Toyota is still doing fine? Why go to the Caribbean when you could have a better time in the Gulf of Mexico? If you want to retire early, I’d keep those champagne tastes in check, and stick with your beer budget!

Next week we’ll continue the How to Retire Early Series by taking a look at why you need to save and invest sooner rather than later and what you should do with those savings and investments so you can start strong and finish even stronger.

-Tom

Dealing with Debt

Credit: Stuart Miles

One of the most common questions I receive is about paying down debt. If you only have one debt, be it a student loan, a car loan, or a home loan, it’s pretty easy: make the monthly payments and pay a little extra when you can until you don’t owe any more. Paying off that loan will remove a recurring, fixed expense from your monthly cash flow, eliminate your interest expense, and free up some more cash for you to save or invest. However, if you have multiple debts, things can get a little more interesting…

Let’s say you have a car loan for $15,000 at a 4.5% interest rate and a $200,000 mortgage at 4.75%. What should you do? Any financial advisor with any sense at all would encourage you to make the minimum payments on both of your personal liabilities at the very least, but if you ask some of the great financial minds out there which debt you should focus on beyond your minimum payments should you have a little extra cash lying around, you would probably start hearing conflicting answers. What I mean, is that from a longer-term point of view, you should always attack the debt with the higher (or highest) interest rate to maximize your net worth, but from a shorter-term point of view, you should probably go ahead and pay off the smaller (or smallest) debt to lower your fixed expenses a little bit and take some pressure off your cash flow. Every case is different, but if the interest rates of the two debts you are trying to decide between paying more towards are very close AND the amount owed on one of them is significantly smaller than the other one, I’d usually recommend you go ahead and eliminate the smaller debt. The interest rate savings you are giving up are most likely minimal compared to the satisfaction you will feel and progress you will see by eliminating a debt.

Credit card debt is often another matter entirely. Let’s say you have six credit cards with balances on them that you can’t pay off at the end of the month. What do you do? First, read this blog more often, and unless you find yourself in a really, really bad situation, don’t ever rack up a credit card bill you can’t completely pay off at the end of the month! Just say no! Seriously though, what should you do? I’d get a sheet of notebook paper and write down the name of each credit card, the balance you have worked up, the interest rate you will be charged, the minimum payment due, and the maximum credit limit of each card. Make a nice little chart if you like. Either way, I’d advise you to make minimum payments on all of them and then go after whichever credit card has the highest interest rate regardless of the balance you owe. Credit card interest rates have teeth and fangs, so when we’re talking 15% to 25% interest rates or higher, you should really focus on stopping the “interest rate bleeding” as quickly as you can. One other thing probably worth mentioning is that if you have some credit left on some of the cards with lower interest rates, you could potentially take advantage of that remaining credit and try to pay down (or pay off) some of the cards with higher interest rates if your particular credit card(s) will allow you to do so. It’s a creative approach, and you’d need to be careful, but it could work and save you some interest. If you actually resort to this tactic, don’t just pat yourself on the back: go get a pair of scissors and cut that paid-off credit card down its back!

Everyone with debt is in a different financial position with different cash flows and different assets at their disposal, so my proposed debt reduction strategy is not always the same. Whatever path I advise, or more importantly, whatever path you choose to take, I encourage you to take that “freed-up” cash you have every time you pay off a debt and go ahead and put it towards paying down your next debt. This practice is often referred to as a “snowball,” and if you hold true to this strategy, you can really pick up some momentum towards becoming debt-free. 

Almost everyone has debt or has had debt. Please don’t hesitate to let me know if I can help you come up with a plan tailored to deal with your debt.

-Tom

Lessons from Black Friday

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A couple of years ago my wife and I agreed to add two holidays to our calendar: Husband’s Day and Wife’s Day. On Husband’s Day, I can create a day where we do whatever I want (within reason), and on Wife’s Day, the day is hers. In 2013, we decided to celebrate Husband’s Day in June (it’s a floating holiday), and it was truly glorious. The highlights included trips with my wife to the driving range, the bowling alley, the shooting range, and a golf superstore, with guy movies and greasy hamburgers intermixed. Wife’s Day, on the other hand, seems to have become more of a “fixed” holiday, as once again my sly wife somehow settled on Black Friday. Being one that is always happy with bargains and sales, and already in my wife’s debt for her participation in Husband’s Day, I hesitantly agreed to enter the land of competitive shoppers and “door busters.”

This year was my second Black Friday experience, but I still don’t consider myself a veteran - I consider myself a survivor. However, Black Friday isn’t all bad. There are a few things you can do to help make sure your future Black Fridays are successes and not financial burdens you’ll carry into the New Year. 

First, make a list of stores you want to visit. My wife took the time to make a list of stores she wanted to visit in a relative order of importance, while also considering their locations relative to each other and our home. I’m a lucky man for many reasons, but the fact that my wife took the time to have an efficient game plan on Black Friday is certainly another one. It saved us time, it saved us gas, and it kept us from shopping more than we needed to (or I could stand). Sure, we walked in a couple of stores to see something cool we saw from the window, but we primarily stuck to the plan. Sticking to your list of stores is a simple way to prevent overspending.

Second, make a list of the items you’re looking for. We still needed a few Christmas gifts, and my wife and I were both looking for some things for ourselves that we knew could be discounted on Black Friday, so we made a master list of what we were looking for. My wife walked away with a beautiful jacket (that was even more beautiful on sale), but outside of that one, unplanned bargain purchase, we stuck to our list. Limiting your shopping to a single list of items can also be critical in keeping you from overspending.

My third suggestion for you is to have a hard purchase limit. We had a couple of gift cards from birthdays and previous holidays, but we also had a dollar cap in the back of our minds. It doesn’t matter how cute the purse is, how real the leather boots are, or how soft the sweater is, what matters is how far below the “Black Friday cap” you are. My wife and I are careful, thrifty, picky shoppers, and I’m proud to say we got almost everything on our list without coming anywhere close to our self-imposed limit.

Finally, do not open any store-specific credit cards, regardless of how sweet they make the offer. There may be a couple of stores that have decent-enough perks if you are a frequent visitor, but for the most part, just say no. The additional credit inquiries you’ll generate and constant mailings and emails you’ll receive are bad enough, but the main reason for my stance is that I don’t believe people need any more temptation (or capability) to go into short-term debt than absolutely necessary. I’m not one of those screaming debt management gurus who is going to tell you to cut up all of your credit cards, but I am going to tell you to cut up the mostly useless ones, or better yet, don’t even sign up for the mostly useless ones. When my wife and I visited Old Navy on Black Friday, they opened an express checkout line for people willing to apply for an Old Navy credit card, and you should have seen the masses flock. That was dirty, and very well-played by Old Navy, but I waited in the longer line instead of taking the bait. The new card holders may have saved a few minutes, but at least I don't have a new, tempting line of credit!

Black Friday is not all bad, and it does offer a lot of great deals, so fighting the crowds can help you get a bigger bang for your buck. Just remember, 30% off of something you don’t really need is NOT savings – it’s a 70% expenditure you weren’t planning for! If I were a betting man, I bet I’ll get to do Black Friday again on Wife’s Day 2014, but I’ll be ready. Don’t tell my wife or my very manly friends, but I’m beginning to look forward to it.

-Tom

Two Nickels

Credit: Gualberto107

Anyone who knows me at all knows I love quotes, one-line “zingers,” good stories, and witty jokes. The chances are pretty high if I’ve heard a “good one” in the last few days, and you and I come into contact, you’re going to hear it, too. I’m sorry, but it’s just the way I’m wired. Unfortunately, in the last 48 hours I heard a saying that I really didn’t care for. I heard this same idiom twice, and both times, it made me cringe: “He doesn’t have two nickels to rub together.”

That phrase obviously means someone isn’t doing so well financially, but what stood out to me is how different the two scenarios were that people were describing to me using that same phrase. In the first scenario, someone was busting his tail to make ends meet, but he couldn’t seem to catch a break. In the second scenario, someone was making a lot of money, but he was choosing to spend all of his nickels before he ever thought about rubbing a couple of them together. Both instances of this phrase made me pause, and they led me to think about the advice I might give in these two very different scenarios.

Unless your last name is Rockefeller, you will probably go through (or have already gone through) at least one period in your life where it’s hard to rub two nickels together. I was fortunate enough to grow up in a family that could give me all that I needed, but even so, there have been times where things were tight. I remember in high school how quickly a weekend trip could eat away at my hard-earned minimum wage, maximum hour check from the local dry cleaners where I worked. I remember in college how serious things got when gas crossed three dollars a gallon for the first time, and suddenly going home was a little bit more of a financial commitment. I remember when my wife and I were just married, and our dining room had no light fixture, no table, and no chairs. I consider myself very blessed, and frankly, a little lucky, to have had as few lean times as I have, but I don’t take anything for granted and know that what I’ve been given can also be taken away. If you’ve been dealt a tough hand, even if you’ve been repeatedly dealt tough hands, I urge you to press on. Hard work will eventually pay off. You will eventually get that break. Your dining room will eventually have light, a table, and chairs. You will eventually get through the financial wilderness you have been walking through. In the words of my iconic role model Winston Churchill, “If you’re going through hell, keep going.”

As for non-savers, a recent talk at the Terry College of Business Leadership Speaker Series by Dan Cathy, the President and COO of Chick-fil-A, comes to my mind. Mr. Cathy was explaining the differences between wages and profits and the importance of future business leaders and future employees recognizing those differences. These are my words, not his, but what he was getting at is the fact that a company is only profitable if it makes more than it spends to sell or produce what it offers. Essentially, a company is no better off than it was if it doesn’t make a profit. How true this also rings on an individual or family level! I know there are hard times and bad things happen to good people, but if the waters are relatively calm and you are fortunate enough to have a good job, I might make the argument that you and your family are no better off financially if you don’t make a profit. How do you make a profit as a person? By spending less than you make and saving the surplus, investing it, or paying down your already-incurred debt and obligations with it. I can hear it now: “That’s great Tom, but I don’t have a surplus or that much of a surplus.” To continue my company/individual comparison, I’d tell you that a company can only increase its profitability by increasing revenues or cutting expenses. I believe an individual’s situation is very similar, and an individual or family can only increase their profitability (which increases their surplus, which improves their financial situation) by increasing their revenue or cutting their expenses. Now feel free to ask your boss for an increase in revenue, but personally I’d advise cutting those living expenses however much you need to until you have two nickels to rub together.

If you’re going through a tough time, keep your head up and keep on trying. If you’re going through a good time and not taking advantage of it, I’d encourage you to think about those people who would love to be in your position. As the country duo Montgomery Gentry says in their hit song “Something To Be Proud Of:” “You don’t need to make a million – just be thankful to be working. If you’re doing what you’re able and putting food there on the table, and providing for the family that you love, that’s something to be proud of.” And if you keep working hard and make sure you are earning profits and not just wages, I bet you’ll have two nickels to rub together. And if you keep on a little longer, I bet those nickels will become dimes, dimes will become quarters, and quarters will become real dollars.

-Tom

How to Spend It All

Credit: scottchan

Usually I try to write something about how to save money, budget, or invest. Occasionally I’ll go a little further out on a limb and talk about tax-saving opportunities, the importance of adequate insurance, or even some estate planning considerations. I try to make my messages timely, truthful, fairly upbeat, and hopefully, helpful. Today I’m doing something different: I’m throwing a changeup. I’m going to tell you how you can spend it all. Based on my personal experiences, situations I’ve heard about, and things I’ve read, I’m going to try to convey to you a shockingly simple lesson I’ve learned: No amount of money is so large that it cannot be spent.

• If you own so many pieces of real estate that you can’t rattle off all of the zip codes, you could probably spend it all. Even if you can afford the properties, the upkeep, additional insurance required, and property taxes might whittle away at your financial position over time. Also, as we relearned in the mid-to-late 2000s, real estate does not always appreciate.
• If you are so concentrated in one (or even a handful of stocks) that an Enron-esque fiasco for your holding(s) would literally bring you to tears, you could probably spend it all. I know, “They’re a great company, always have been and always will be,” but please go talk to some undiversified General Motors, Wachovia, and Lehman Brothers shareholders and get their perspectives.
• If you can’t say no to a single charitable call-a-thon or “urgent” donation request form in the mail, you could probably spend it all. Giving to charity is great on so many financial and personal levels, but if you are giving more and more, and your income and assets are not keeping up, you might find yourself someday needing charity.
• If you frequently “binge shop,” you could probably spend it all. Whether it is shoes, purses, hunting equipment, or the latest technological gadgets and gizmos does not matter; whether you can control your spending or not when times get a little hard does.
• If you can’t possibly have fun at a restaurant, hotel, or golf course that is not 5 stars, you could probably spend it all. Sometimes a peanut butter and jelly sandwich, a Holiday Inn Express, and a countryside course without a “19th Hole Bar & Grill” can suffice.
• If you can’t stop giving money away to your family, you could probably spend it all. Helping those you care about can be such an admirable act and very much appreciated by the recipients, but sometimes tough love and an occasional “No” will actually help them more in the long run.
• If you can’t ever achieve emotional peace when it comes to how you are invested, you can probably spend it all. I once saw a cartoon sketch that showed a stock market chart where the individual kept buying at the top of the market and selling at the bottom of the market. The punchline read something to the effect of “Repeat until broke!” Life is too short to not have peace of mind and the ability to focus on what is truly important. Sure there are market ups and downs, but if you are ever invested in a way that leaves you constantly uncomfortable, you shouldn’t be.  

I’m not trying to be Scrooge. I just thought I’d take a different approach to my usual message of saving and being fiscally responsible, and instead, share a few, common ways on how you can make hard-earned assets disappear.

Being broke and working is bad. Being broke and retired is even worse. Potentially leaving a little to your heirs may not be your goal, but it isn’t the worst thing in the world, either. Remember, if you really don’t like your heirs, you can always bequeath whatever you have left to your friends or to charity.

Please, whatever you do, just don’t spend it all!

-Tom

Household Spending Breakdown

Credit: jannoon028

One of the things I sometimes ask clients for is a breakdown of their living expenses for several months. Just like a tax return, you can actually tell a lot about someone based on their living expenses. Think about it - if someone had a few minutes with your checkbook or credit card statement, don’t you think they could develop a decent theory about your current income, paint a rough picture of how you typically spend your money, and maybe even infer a few things about your personality? Scary to think about, huh? (Don’t worry; I treat all client information with the highest degree of confidentiality.) Anyway, back to living expenses…

I usually ask clients for a breakdown of their living expenses for one of a few common reasons. Maybe I’m trying to figure out if they can retire, or why they’re finding it difficult to hit their saving goals. Perhaps they have a consistently negative cash flow (they are spending more than they are taking in) that is threatening their financial independence, or, sometimes, they simply have no idea where all their money is actually going. I don’t judge anyone’s expenses as I wouldn’t want anyone to judge mine, but it really can be eye-opening. I’ve had clients go through this exercise and realize they can retire if they pay off their mortgage and get rid of that fixed monthly expense, I’ve had clients realize to their horror they are spending more than five digits in a year at a particular discount retailer, and I’ve even had clients who appeared to actually spend more on drink than food. It’s their money, and I would never attempt to tell anyone how to spend their hard-earned money, but I’ve seen many people right before my very eyes become truly enlightened after we have taken the time to break down their household spending.

Rewind to the 2012 holiday season - sometime between Thanksgiving and Christmas: I harassed my very selective, very thrifty, and always-conscientiously-saving wife about how many “bargains” she acquired in a relatively short period of time. It wasn’t an accusation, and it didn’t lead to a “domestic difference of opinion,” but it did help motivate me to take the time to perform the very same analysis on our living expenses that I've done for so many others. I would later find out that I was dead wrong about my wife's spending and the magnitude of our joint discretionary spending relative to our living expenses. As a CPA and CFP, I didn’t even know my own household spending breakdown as well as I thought I did! As a friend of mine in college often used to say, “How embarrassing!”

I won’t bore you with all the details of the Presley Household Spending Breakdown, but I will share with you a few observations:

• Gas and automotive expenses are considerable. When I was a kid, I remember when gas was $.79 a gallon… I must be getting old.
• The costs of going out to eat can add up. I think I’ll ask my wife for a few more homemade dishes and cook a little more myself going forward. It’s probably healthier, too!
• University of Georgia football expenses for tickets and tailgating should not be a separate category from discretionary (optional) spending. Anyone who knows me at all knows I’m a loyal alumni and a huge fan, but I realized that I was actually viewing UGA expenses separately from our discretionary spending, like a normal person would view utility bills. I bet I’m not alone in this twisted logic, as trying to convince some people I know that golfing, hunting, tennis, and seasonal clothes shopping are not required would be a “tough row to hoe.” I’m still trying to convince myself that I really don’t have to go to every home game, but it’s still a work in progress.
• As many of you have probably picked up on from reading my other posts, I’m not a big advocate of debt. My wife and I work really hard and save really hard to try to put additional principal towards our mortgage whenever we can. This analysis actually showed me that we were putting unnecessary pressure on our cash flow and probably saying no to some opportunities that we should take advantage of as a relatively young couple. I still hate debt, and everyone should still have an emergency fund, but by closely examining our living expenses, I came to the somewhat obvious realization that taking a little more time to pay off our mortgage and having a full (and less financially stressful) life would probably be a better choice than paying off our mortgage as soon as absolutely possible and having a lot of spare time.

 

I hope you will take the time to look at the entries in your checkbook for the past few months, view those spending reports that are available online through many bank accounts and credit card accounts, or look at last year’s W-2 to see if you can figure out where all that money went. It can be helpful financially, but it can even be personally enlightening, too.

 

I still want to know what one client was feeding her cat. It had to be surf and turf!

 

-Tom

Out of the Mouths of Babes

Credit: stockimages

A few weeks ago, I had a pretty neat experience.  I had the opportunity to go with some of my coworkers to a local middle school and teach a group of seventh graders for four hours. The program was sponsored by Junior Achievement, a nonprofit organization that teaches students about money management and how business works, and featured a basic curriculum that covers the different ways people can pay for things, the importance of budgeting, and the relationship between different jobs, their required levels of education, and their average salaries. I hope the students learned a thing or two from their substitute teacher, but I actually heard some refreshing things from them that I think are worth sharing with you today.

The lesson on mechanisms people can use to pay for things was primarily designed to teach the kids to be careful using credit cards. I figured this would be a tough sell, but I was wrong. One kid told me that his mom told him never to use credit cards and to pay for everything with cash. (Now that’s a little extreme, but it’s better than piling up credit card debt.) Another kid told me that her parents always pay off their credit cards every time they get a bill because “the interest is bad.” Impressed, I asked her what interest was, and she told me that “it’s the extra money people have to pay for spending too much.” (Well I don’t know many people who haven’t paid some interest towards a student loan, a car, or a house, but when it comes to credit cards, the girl had a point.) For the record, they all thought writing a check was really cool.

I thought the concept of budgeting would be pretty complex for a group of seventh graders, and I was right, but sometimes it even takes me quite a while to come up with appropriate budget proposals that are sustainable and can achieve most or all of my client’s goals. I’m proud to say that by the end of the activity, every single kid was able to make a budget that saved a little money or at least broke even, but they left me with two specific takeaways. First, every student except one put something on the charitable donation line without me even having to explain the potential tax benefits or discuss the moral and religious obligations many people feel towards giving charitably. (Wow, maybe there is hope for the world!) I should also tell you that the one kid who did not budget charitable donations wanted to, but could not, because his randomly-drawn “occupation card” did not make enough money for him to look after his family’s needs and give to others. Second, I got to see our country’s ongoing philosophical debate about taxes that we hear about every day on the news through the eyes of seventh graders. When I asked the students to define taxes, one kid told me that taxes were “money the government takes from your check to give to the army and other people.” Another student waving her hand quickly told me that taxes were “money everyone gives to the government to help those who need it.” I thought I was in a room with middle schoolers, but what I heard sounded a lot like the differing views of many opinionated adults I know. (I guess you start forming your political beliefs at a young age!)

The last lesson also featured the “occupation cards” I previously mentioned. Essentially, every kid drew a card that had a profession on it and an average monthly salary before and after taxes. While I had an improbably high number of doctor and lawyer “wannabes” at first, we had a surprisingly diverse workforce by the time I was done. Some of the kids were more interested in higher education, some were more driven to do something they were good at, and some were more focused on doing something they enjoyed. Sure, I gave them the lines about being whatever you want to be and doing something you love, but we ended up having a fairly deep conversation about the importance of balancing your interests and skills with your capability and probability of making a living. I knew I had delivered my assigned message of teaching them to balance interests, skills, and financial practicality in planning for the future when the most outspoken girl told me she was going to “do her favorite thing that paid her enough money to buy a BMW.” Mission accomplished, sort of.

Finally, I have to tell you one last thing I learned during my experience: Being a teacher is hard work! Even though I believe Junior Achievement’s program is much-needed and a great idea (and I plan on volunteering again), I was exhausted, a little low on patience, and had a splitting headache by the end of my four hours with twenty-four crazed twelve- and thirteen-year-olds . Go find one of your old teachers, tell them thank you, and by all means, give them a bottle of ibuprofen. They deserve it!

-Tom

Price vs. Value

Credit: digitalart

My Georgia Bulldogs recently clinched a berth to the Southeastern Conference (SEC) Championship Game to be held in Atlanta on December 1, 2012. I, like many of my Bulldog brethren, am very proud and excited that they have the honor and opportunity to play in such a game. Since I’ve been a true Georgia fan, I’ve only seen the Bulldogs actually win one SEC Championship. The game on December 1 is not a once-in-a-lifetime opportunity, but it’s a very valuable and rare opportunity to say the least. That is what got me thinking about the value of the $90 ticket to the game.

Don’t get me wrong - $90 is a lot of money for a football game, but when it means I’ll have the chance to see my favorite team win a championship in person, $90 doesn’t seem that expensive anymore. Why is that? It’s because price does not equal value, and that’s what I’d like to talk about today.

Price can be defined as the sum or amount of money or its equivalent for which anything is bought, sold, or offered for sale.

Value can be defined, in this case, as the usefulness or importance to the possessor, the utility, the merit.

In the case of $90 SEC tickets to see the Georgia Bulldogs, the value of owning tickets and the thrill of being able to go to the championship game greatly exceed the money I will spend and the sacrifices I will have to make going forward to cover my unplanned and unbudgeted expenditure.

If the $90 tickets were to see another team that I don’t passionately root for (and wear lucky garments for) in the SEC Championship, there would be no way I’d pay that price to go to the game! The value of being at a championship game that my team isn’t in is easily dwarfed by the money I would have to fork over.

Price and value decisions are part of our everyday lives, and everyone needs to understand the differences. The price of a manicure and pedicure may be worth it to you, but for me, the value of such services is minimal. The price of a really nice bottle of wine may be worth it to you, but for me, the value that I would get out of a glass or two just isn’t there. You might be perfectly content with a serving of apple cobbler at a lower price, but the value of that ice cream a la mode deliciousness is worth the extra cost to me! No one is right or wrong as long as they can afford their price and value decisions, but when it comes to living within a budget and cutting back expenses, you need to take a close look at all of your expenditures and make sure the value of each of your purchases justifies its price.

As MasterCard might say, “SEC Championship tickets: $90 a piece, parking pass: $30, seeing my Bulldogs win a championship: priceless.” Well not priceless, but in my book, worth a few sacrifices over the next couple of weeks to make happen.

Go Dawgs!

-Tom

Making Your List, Budgeting It Twice

Credit: Kittisak

I ran out this past weekend to grab some paper towels and cough drops at a local store, and I saw something that would make Dracula, Frankenstein, and even Edward Scissorhands writhe in horror: Christmas merchandise already for sale. I’m as jolly of an elf as they come when it’s December, and I’ll be blaring those catchy Christmas tunes the day after Thanksgiving, but I could have sworn we were still in the middle of October! Yes, next to the Halloween decorations, candy, and costumes were Christmas cards, wrapping paper, and lights. I had planned on saving this post for a few weeks down the road, but the stores have left me no choice. Today, we’re going to look at how to budget for Christmas gifts.

Some say you should keep the Christmas spirit all year long. While I tend to agree with the sentiment, many families take their credit card bills from the holiday season with them into the next year, and I don’t want you to start the new year like that! Even many families who do not overspend around the holidays, or have more than enough assets to smoothly absorb the financial damage taken during the twelve days of Christmas, still don’t have any idea how much Christmas costs. Christmas is expensive! I’m not trying to be the Grinch or Mr. Scrooge, I’m just trying to make sure you have enough cash left over at the end of the holiday season to buy your favorite financial planner a gift, or at least start 2013 in good shape.

In order to spread your Christmas cheer effectively, you need a budget. Figure out how much you can, or want, to spend on Christmas gifts. This amount is totally your call, but I really don’t think you should go into debt for Christmas beyond what you can immediately pay off. Once you have your budget, get some cute Christmas stationary, a nice sheet of notebook paper, download a Christmas list template, install a Christmas list app, or make your own spreadsheet and start listing who all you will be shopping for. Once you’ve done this comes the hard part - putting a dollar amount next to each name, and when you are done, seeing how the sum of your dollar amounts next to names looks versus your originally budgeted amount. If it’s higher, keep tweaking or crossing “naughty” people off your list until you get within your budget. If it’s lower, keep what you have; chances are you forgot someone or will end up spending a little more for “the perfect gift” for someone else anyway.

Now you’ve got a really organized and financially responsible map on how to Christmas shop. Hit all the stores and do your worst, but always take your list with you to keep you on track. Do not deviate from your original budget no matter how great the sale, how pretty the handbag, or how swank the new electronic device. Otherwise, this process really won’t help you.

Feel free to pay with credit cards you already have (Do not open up all those store credit cards for their little, one-time discounts, no matter how tempting), but paying with cash isn’t a bad idea either to help keep your spending in perspective. Also, save your receipts. The receipts will help you reconcile your spending and allow someone on your list to return the argyle socks and T-shirts you got them should something else strike their fancy.

I know these suggestions may seem pretty obvious and fairly simple, but not a lot of people take the time or invest the effort to do this. Trust me; writing up a Christmas list budget can really help the craziness of holiday shopping go a lot smoother and faster, without the overspending.

This is going to sound weird, but Happy Halloween… and Merry Christmas!

-Tom