Who Wants to Be a Millionaire?

Credit: iosphere at FreeDigitalPhotos.net

Do you remember the game show originally hosted by Regis Philbin called Who Wants to be a Millionaire? The show consisted of contestants being asked multiple-choice questions that got more and more challenging as potential prize money increased, but contestants were also given a series of “lifelines” to help aid them with difficult questions. Well today I thought we’d have a little fun. I have a unique trivia question for every single one of you and I would like to serve as one of your lifelines and offer six tips that can help you reach your financial accumulation goal, whatever it is.

1. Save first, spend second. Live a lifestyle that is below your means and make sure you are steadily saving your money in cash accounts, retirement accounts, and taxable accounts. As Dave Ramsey says, “If you live like no one else now, later you can live like no one else!”
2. Make sure you are saving money in your employer’s retirement plan (401(k), 403(b), 457, etc.). This is a great way to reduce your current taxes and really grow your retirement nest egg over time. Put in as much as you can, but make sure you are at least contributing what is necessary to receive the full value of your employer’s matching contributions if they offer them. For employees under age 50, $18,000 is usually the most you can contribute each year. For employees over age 50, $24,000 is usually the most you can contribute each year.
3. Make sure you are contributing money into an IRA. Whether you are eligible or better off contributing to a Roth IRA or a Traditional IRA may be worth using a lifeline on to ask your financial advisor or CPA, but the important thing is that you are saving and investing money. For people with earned income under age 50, $5,500 is usually the most you can contribute each year. For people with earned income over age 50, $6,500 is usually the most you can contribute each year.
4. Make sure you are saving money in a taxable account. Saving money in your employer’s retirement plan and in an IRA is great, but you aren’t really supposed to access that money until your mid to late 50s. If you do, you may be subject to ordinary income taxes and a 10% penalty, so you want to make sure you invest some savings along the way into a taxable account that you can access anytime you want to or need to. Withdrawals from a taxable account don’t come with tax penalties, and if you withdraw from assets you’ve had invested for over a year, you could receive the usually more favorable capital gains tax treatment.
5. Avoid debt and attack what debt you can’t avoid. Pay off all your credit cards every month. Pay off your student loans as fast as you can. Pay off your car loans as fast as you can or maybe even save up enough cash for your next car. See if you can get your debt down to monthly credit cards and your mortgage, and then put a little extra towards your mortgage whenever you can. It will save you interest expense and help you get debt-free sooner.
6. Protect what you have. Some people try to save money on insurance. That’s very wise to an extent, but you, your family, and your stuff needs to be adequately covered. Having sufficient health insurance, disability insurance, homeowners insurance, and auto insurance is critical. On top of that, having an extra layer of liability insurance (an umbrella policy) equal to the value of your assets is a very wise and surprisingly inexpensive idea. (Sufficient life insurance is important, too, but today we’re focused on making you a millionaire, not your loved ones should you get hit by a bread truck…)

As promised, here is a link to your trivia question. How much money would you have today if you invested $1 in the S&P 500 every day since you were born? I think it’s an interesting thing to know, and I think it helps an investor keep things in perspective as to where we’ve been and where we are now even though all we’ve been through and all that undoubtedly lies ahead.

That’s my final answer.

-Tom

What You Should Do With More

Credit: iosphere at FreeDigitalPhotos.net

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

Is Your Arrow Aimed Too Low?

Credit: Yongkiet at FreeDigitalPhotos.net

I am by no means an archer, but I have shot a bow and arrow from time to time. In Boy Scouts I launched a few arrows as part of a merit badge, and as a college student I competed with my roommates as we slowly made the top of a Styrofoam cooler look like Swiss cheese striving for the bullseye. It was fun, but believe me when I tell you that you wouldn’t want me to be your William Tell!

As you might expect, aim is pretty important when it comes to a bow and arrow. Aim too low and you’ll never hit your target. Aim too high and you’ll overshoot your target. Many people view financial goals as targets, and I think the same principles apply. That’s why I’d like to share a few thoughts with you on the importance of aiming your financial arrows to actually hit your financial targets.

In my experience I’ve found that people usually have more concrete targets than they have arrows. Most people have a general idea where they want to go and they may even know when they want to get there, but they don't always know if they're headed for the bullseye. This is where financial planning comes in to make sure you are not just shooting in the dark.

I meet with many people in their 20's and 30's who are carrying around loads of student loans. They are usually making their monthly payments, and in some cases even putting extra towards their loans, but their payment arrows are often flying all over the place. They know they want to eliminate all student debt, but they aren’t using their arrows as efficiently as they could. By prioritizing paying down the loans with the higher interest rates rather than simply making the automatic payments that are based on the size of the loans, they can ultimately pay less interest and hit their debt-free target faster!

I also meet with lots of people who share with me their goal of paying for their children’s education. It’s an admirable and loving goal, but the problem is that sometimes I find that the parents need those funds for their own retirement. Sometimes I also find out that the "child" we are discussing is a senior in high school. Either way, saving is best done over time with small savings arrows, rather than with a last-second, giant contribution.

My bread and butter is meeting with people contemplating or nearing retirement. Most of the people are not comfortable or convinced that their nest egg, Social Security, and any retirement pensions or income they may have are enough to provide for their desired retirement lifestyle by their desired retirement date. Sometimes I find people’s expectations are pretty well lined up, but other times I find people's expectations way off. I’ve had to tell someone who hated their job that they actually could have retired much earlier because their savings arrows had been aimed so high. I’ve also had to tell someone who had practically cleaned out their desk that they weren’t headed to a beach anytime soon because their savings arrows had been aimed too low. A challenging, but much easier conversation for me (and whoever I’m advising) is sharing with someone several years out from retirement that they need to aim their savings arrows a little higher and push their realistic lifestyle target expectations in a few yards in order to make things work, or better yet, that they really are on target for their retirement bullseye or better.

Aim too high with your financial goals and you could be missing out on opportunities and experiences now. Aim too low with your financial goals and you might not pay off your debt in a timely fashion, you might not be able to send your child to college, and you might not be able to retire with the lifestyle you’ve always wanted. If your aim is just right, you're either incredibly lucky or you’ve done some financial planning.

-Tom

Failing to Plan

Credit: David Castillo Dominici at FreeDigitalPhotos.net

I don’t know about you, but the beginning of the year is when I usually do my greatest amount of planning. New Year’s resolutions, vacation itineraries, home improvement lists, and fitness routines can currently be found in my personal effects. Maybe I’m too rigid. Maybe I’m not spontaneous enough. What can I say? I need a plan of attack. Without one, I feel lost.

A lot of people I meet for the first time seem to view financial planning like a trip to the dentist. It’s not always fun, and you might not look forward to it, but it is necessary to keep your teeth clean and avoid a root canal. I’m no dentist, but I do firmly believe financial planning is necessary to accumulate and grow your assets, and to avoid the many financial potholes lurking around out there.

• Consider someone facing the huge burden of paying for their child’s college tuition the next four years versus someone who started a 529 Plan for their child eighteen years ago.
• Consider someone who wants to retire a year from now, but can’t possibly maintain their lifestyle in retirement versus someone who implemented a debt-reduction plan ten years ago so they could coast into retirement debt-free.
• Consider someone who made a generous charitable contribution the year after they retired when they were in a low tax bracket versus someone who more strategically made a generous charitable contribution right before they retired when they were in a high tax bracket.
• Consider the family of someone who is left in a coma after a tragic automobile accident with no estate plan in place versus the family of someone who took the time to execute a will, a Power of Attorney, and a Health Care Directive.
• Consider the family of someone killed in an automobile accident who never wanted to bother with the health questionnaire for life insurance versus the family of someone who made sure their family would be financially secure in the worst of circumstances.

 

Oftentimes it is better to be lucky than good, but I’m not always that lucky. I need peace of mind and confidence in my family’s financial security. I’m a firm believer in Ben Franklin's famous words that "If you fail to plan, you are planning to fail."

 

Just as a dentist can help a toothache, people often come to me at a time of financial crisis like imminent retirement, unexpected termination, a surprise job offer, a birth, a health tragedy, a death, or a divorce. Yes, I can certainly help, but it’s much easier and there are so many more options if you plan ahead. Maybe it’s me, but I prefer flossing a little along the way and having a few checkups every year to a painful toothache and a drill!

 

-Tom

12 Simple Things You Can Do to Pay Down Debt

Credit: Stuart Miles at FreeDigitalPhotos.net

One of the key requirements to making it financially is to work towards paying down your debt and becoming debt-free. It’s a marathon process, not a sprint, and it’s not very much fun, but it is oftentimes critical in order to really achieve financial success. Financial author Dave Ramsey has a quote related to this that I like a lot: “If you will live like no one else, later you can live like no one else.” With that goal in mind, here are twelve simple things you can do to give yourself more cash to put towards paying down your debt.

1. Request rate reductions. At least once every couple of years, call your auto and home insurance provider, your television provider, your security system provider, and anyone else who is sending you a bill and see if they can give you a better rate. Ask them if there is anything they can do to lower your costs as you are looking at your monthly expenses. Look at it this way, there’s no harm in asking!
2. Plan before you go to the grocery store. This works for any store, but especially the grocery store. Buy what you came to get, and unless it’s truly the deal of the century, nothing else. If you want to take a few minutes and look through the coupons before you go, that could lead to additional savings, too.
3. Unplug the home phone. Other than telemarketers and maybe a family member or two, who calls you at home? This is a real easy way to save some cash every month, so go ahead and call the phone company if you haven’t already. Besides, you’re probably already paying more than enough for your cell phone!
4. Sell your unused items. If you have a possession that has dust on it or you’ve forgotten you own it, you probably don’t need it. If paying off debt means more to you than those types of objects, it’s time for a garage sale and some online listings. Put the cash proceeds towards something you do need; less debt!
5. Grow a small garden. If I had $3 for every time I buy a squash or a zucchini. What? My wife likes squash and zucchini (and now I do, too). Seriously, have you seen how expensive fresh produce can be? I’m not talking about growing your own farmer’s market, but a few berries, a few vegetables, or even some herbs could go a long way towards reducing your grocery bill. Besides, I could use a little sunshine on the back of my neck!
6. Lower your cable package. So many channels, so little time. So many channels, so much cost. So many unused channels. Need I say more?
7. Bye bye magazines. The next time you’re over at someone’s house look at their magazines. More often than not, I’ve observed that they will be in mint condition. Lots of people pay for lots of magazines they don’t read. The savings may not be substantial, but by cancelling unused subscriptions, you save cash, you save clutter, and you save your mailman. Win, win, win!
8. Read a book. I’m serious. It may be the year 2015, but you can’t forget the enjoyment of one of the original entertainment devices. Books are relatively inexpensive, can offer hours of pleasure, and are a lot of fun.
9. When you go out to eat, get two hydrogens and an oxygen on the rocks (just ask Jennifer Lawrence…). Seriously, iced tea, soda, lemonade, beer, wine, and cocktails are all delicious, but they aren’t free. Improve your personal health and your wallet’s health and consider going with delicious, usually free water.
10. Eat at home. In line with my beverage comment, the food from eating out can be expensive, too! Sure, go on those date nights and celebrate the weekend, but if you’re trying to save cash, having a reservation at home is often the frugal way to go.
11. Make bigger meals. Oh I can hear the super health-conscious people screaming already, but please hear me out. If you are making a salad with lots of vegetables and balsamic vinaigrette for dinner, why not make enough for lunch the next day? It is probably cheaper to add another tomato, another bag of spinach, and use a little bit more off that cucumber you’re going to throw away at the end of the week than if you make a totally different meal for your lunch. Yes, you’re eating the same meal twice in rapid succession, but you’re working towards paying off your debt in rapid succession, too!
12. Make your coffee at home. I see so many lattes and chai teas in elevators. They are delicious, there’s no doubt about it, but they’re expensive, too. I once wrote about one expensive cup of coffee turning into a sports car as some of you may recall. Right now we’re focused on debt, not a sports car, but the principle holds true. Like other frequent pleasures and splurges, daily cups of expensive Joe can slow your financial progress.

 

I didn’t title today’s post “12 Easy Things” or “12 Ideal Things” because they may not be easy for you or sound highly desirable. That’s okay. These 12 things are just relatively simple to implement, and they can be good “medicine” for your financial health. It’s not quite Mary Poppins, but a few spoonfuls of these medicines might just help your debt go down.

 

-Tom

Switching to a Single Salary

Credit: Ambro at FreeDigitalPhotos.net

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

How Saving Money Can Cost You

Credit: iosphere at FreeDigitalPhotos.net

I bet you thought I’d lost my marbles when you read this post’s title, but the title is as I intended. Saving money is wonderful, and I often preach the value of saving until I am blue in the face, but not always. Sometimes (hard swallow) saving money may not be so good for you. Saving money can be bad if…

• You buy something with a coupon that you would have otherwise not purchased. You didn’t save money; you got a good deal on an unnecessary expense.
• You buy something that is incrementally or insignificantly cheaper than a higher quality or longer lasting product. I’m talking canned soup, car batteries, air filters, toilet paper, Oreo’s, and other products like these.
• You already have an adequate rainy day fund yet you keep adding to your cash account that is earning you little interest while you have credit card debt, student loans, car loans, and home loans that are costing you lots of interest.
• You already have an adequate rainy day fund, and you are not contributing to your employer’s 401(k) or retirement plan (or you are not contributing enough to get your employer’s match if they offer one).
• You already have an adequate rainy day fund, and you are not investing anything in the stock market. Whether through annual IRA contributions or deposits to a taxable brokerage account, you need to be investing sooner rather than later so you will have a longer time frame to reap the rewards of long-term growth.
• You already have an adequate rainy day fund, but you do not have or adequately have life, disability, property and casualty, and/or excess liability insurance. Having no premiums or low premiums is nice until you need your insurance!

 

Finally, there are two currencies in life: money and time. Saving money is really important, but so is utilizing time. I once had a meeting with an elderly client whose health was beginning to fail, and he asked me what he was supposed to do now that he had all this money and no time to enjoy it. His degree of saving and holding onto his money was self-imposed, so I didn’t feel guilty, but I did feel sad for him. I’ll probably never recommend that you risk your financial security to make a memory, but it is important to be careful how many times you say, “No” or “Next time.”

 

Anything in enough excess can be bad for you. This includes fanaticism for a sports team, chocolate, and saving money. Keep saving, but not too much.

 

-Tom

Compounding – The Good, The Bad, and The Ugly

Credit: jscreationzs at FreeDigitalPhotos.net

• If you were to invest $5,000 per year for 30 years in a portfolio that averaged 5% per year, you’d end up with around $332,000.
• If you were to invest $5,000 per year for 30 years in a portfolio that averaged 6% per year, you’d end up with around $395,000. 
• If you were to invest $6,000 per year for 30 years in a portfolio that averaged 5% per year, you’d end up with around $399,000. 
• If you were to invest $6,000 per year for 30 years in a portfolio that averaged 6% per year, you’d end up with around $474,000. 

That’s the “miracle” of compounding. Sure, investment returns matter a lot, but as you can see from the examples above, how much you save can matter even more! The good part about compounding savings and investment returns is that slow and steady really can win the asset accumulation race in a big way. You might not think you could ever save up $474,000, but do you think you could save $6,000 this year?

 

Recently my wife and I have been looking at houses, and nothing gives me more indigestion than looking at how much a house costs. I’m not talking about the sticker price; I’m talking about how much a house costs over the life of a mortgage. For those of you who have bought a house, this is usually the number that shows up in the top, right-hand corner of one of your loan documents indicating the total amount expected to be paid over the life of the loan. Once interest is baked in on a thirty-year loan, it’s horrifying to see the difference between the initial sales price and what you will actually end up paying. Interest payments alone could be in the hundreds of thousands of dollars! The bad part about compounding interest on a home loan, car loan, student loan, and certainly credit cards is that you keep trying to pay off principal, but you keep getting charged interest. It’s like you have a hole in your bucket. I’ve tried Pepcid, Pepto, and Tums, and the only thing that seems to work is paying off more debt at a faster pace.

 

The ugly part of compounding has to do with the relationship between money and purchasing power. If you have $100,000 in cash and you bury it in the backyard, when you dig it back up, what do you have? That’s right, $100,000. The problem is that while your money was safely hiding underground, there’s a pretty good chance that the cost of goods and services went up (inflation). Think groceries, health care, and education expenses. You might still have the same amount of money, but you are actually poorer than you were because you can no longer buy as many goods and services as you used to since they are now at a higher price. Said another way, your purchasing power has gone down. I don’t see a lot of people burying money in their backyards, but I do see people hold on to exorbitant amounts of cash or an alarming amount of low-interest CDs and bonds. I don’t ever want to take away someone’s “cash blanket,” and I firmly believe that bonds have a place in most people’s investment portfolios to help provide for short-term liquidity needs, reduce overall volatility, and act as an income-producing alternative to stocks. However, just like chocolate cake, too much can be a bad thing. If you have too much invested in cash, CDs, or bonds, your minimal investment returns can lag the rate of inflation, and, compounded over time, you can lose purchasing power even if your assets are slightly growing or staying about the same.

 

That’s the good, the bad, and the ugly truths about compounding.

 

-Tom

 

What If It’s Not Working?

Credit: jesadaphorn at FreeDigitalPhotos.net

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

Credit: stockimages

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

Quit It!

Credit: Stuart Miles

A lot of my posts aren’t meant to get you to actually do something. Most of them are just supposed to make you think about life and your finances, and occasionally laugh a little. Some of my posts are more of a “call to action,” where it is my hope that you will either continue doing the good practices you are already doing or change potentially troublesome ways and proceed differently. Either way, today’s post is a little different. I’m not going to suggest that you do this or that you do that. Instead, I’m going to share several, common, bad financial habits that I see a lot of and ask you NOT to do them.

1. Carrying a Credit Card Balance – You should pay off your credit cards each and every month without exception, period. If there is an exception or you’re not at a place where you can pay off all of your credit cards, you really should adjust your lifestyle until you can. The impending doom of credit card debt and its frighteningly high interest rate(s) just aren’t worth it. Use credit cards for your convenience and to earn perks, but not to buy what you will have trouble affording.
2. Having Too Small of a Rainy Day Fund – Do you really have savings? I’m not just talking about specifically having a savings account – I mean actual savings. If you could not withstand a temporary period of unemployment, you could not afford a used car should something happen to your current mode of transportation, or you would have trouble paying your maximum health insurance deductible, you probably haven’t saved enough. Sure, it’s not fun seeing all of that cash just sitting there, but it does feel good knowing it’s there if you need it, and unless you’re a lot luckier than most, at some point in life, you are going to have a rainy day.
3. Having No Idea Where It’s Going – Want to try something that can be a little scary? Annualize your take-home pay (your paycheck after taxes, insurance, 401(k) savings, etc.), and then back out your annualized fixed expenses such as your mortgage, car payment, and utilities. What happened to all that’s left? Where did it go? If you can’t speak to where a large part of your remaining income went, that may mean you could have better utilized your cash flow towards savings, investing, and debt reduction as opposed to, well, wherever it went.
4. Saving for College, Not Retirement – This one leads me to a serious and not so pleasant question: Would you rather your child have to pay for college or have to pay to look after you in retirement? I know the answer is neither, but in some cases, that may not be an option. Saving for a child’s college expenses is an admirable act of love, but it probably should not be done if it jeopardizes your own financial independence. Children could get scholarships, they could be athletes, they could be artists, and they might not even want or need to go to college. Save for both if you can, but please remember that looking after your own retirement is helping your children in the long run, too!
5. Letting One Spouse Do It All – Unfortunately, I see this time and time again where one spouse is the dominant financial spouse. I’m not necessarily talking the largest “bread winner” here, I’m talking about the situation where one spouse pays all of the bills, balances all of the cash accounts, knows all of the passwords and secret question answers, and keeps all of the files. As long as no one becomes disabled, decides to get a divorce, or dies, having a dominant financial spouse could be fine, but it is a little dangerous. If you have a spouse, I’d encourage you to either split up and alternate some of the duties or at least agree to formally go over your finances once or twice a year. This builds trust, leads to good conversations, and helps make sure the back-up financial quarterback gets some reps should the starting financial quarterback go down.

 

If you’re reading this post, it’s my hope and belief that you are already not plagued with many of these bad habits, but if you are, quit it! If you know a friend or family member who is plagued with some of these bad habits and think of this post, please share it!

 

-Tom

Freedom from Student Loans

Credit: ddpavumba

While reading an article recently published in InvestmentNews, I was surprised to learn that 71% of college graduates coming out of school with a bachelor’s degree have student loan debt. I was also surprised to learn that student loan debt has passed credit card debt and is now the largest form of consumer debt after home mortgages. When considering the 71% of college graduates with student loan debt, the average debt is close to $30,000!

I knew student loan debt was a burden for many people, but I’ll be honest, I didn’t have any idea that it impacted nearly three out of four college graduates. I was also a little shocked by the magnitude of the average debt. So, what if you’re like the majority of college graduates out there, and you’ve got some significant student loan debt relative to your current salary weighing you down? What should you do? I’d like to share some thoughts.

If it were me, I’d get a job after college graduation as quickly as I possibly could. Even if it was not my ideal job and was just a short-term opportunity, I’d want some income so that I could hopefully avoid taking on any additional debt and maybe even begin to think about attacking my student loan debt principal. 

If it were me, I’d look into consolidating my student loans (if I had more than one) so that they would be easier to manage. One check per month would feel less overwhelming, and the interest rate on the consolidated loan could even be beneficial.

If it were me, I’d obviously keep making minimum payments on my student loan debt, but I’d set aside a reasonable cash emergency fund, I’d contribute whatever it took to get my employer’s maximum company match to my 401(k) or retirement plan, and I’d pay down any credit card debt I had before attacking my student loan debt principal. My goal would certainly be to get my student loan debt paid off, but I need to make sure I can survive a “rainy day” and go ahead and begin saving for my retirement, as retirement dollars contributed now have a longer time frame to really appreciate than retirement dollars contributed years from now. After I had my rainy day fund built up, my retirement contributions in order, and my credit card debt zeroed out, it would be full-fledged war on my student loan principal until I was able to remove the giant debt stone that had been tied around my neck as I pursued a higher education and a brighter future.

While I’d do everything I could to eliminate my debt burden, I wouldn’t put my life totally on hold. I admire and respect people who are focused on extinguishing their student loan debt as soon as possible, but putting off things such as getting married, renting your own apartment, and buying a reliable car in the name of paying down student loan debt may not be the best life choice. It may be the best financial choice, but it may not be the best life choice. Do whatever you think is best, but I wouldn’t put off taking the next steps in your life and move back in with your parents solely so you can live as inexpensively as possible and pay down your student loan debt as soon as possible.

I understand that some members of my generation aren’t yet interested in my ramblings about investing, insurance, and estate planning because they are still battling their student loans, but that doesn’t mean I can’t help. Get a job, set aside some cash, start contributing to your employer’s retirement plan, and live thriftily so that you can pay off your student loans as soon as reasonably possible, but don’t “postpone” your life. Once you’re free from your student loans, you’ll have a lot more cash flow free up, and you’ll be ready to take flight towards your other financial and life goals.

-Tom

Start Strong, Finish Stronger

Credit: stockimages

Many retirees (or soon-to-be retirees) have a retirement plan based on what is called a “three-legged stool.” They have their pensions (leg 1), their Social Security (leg 2), and their investment assets (leg 3). They worked hard, they went through a lot, and I don’t begrudge them a bit.

If you’re like me and in the early stages of your working marathon that some people like to call a career, it is easy to get caught up in things such as fancy dinners, “flashy” clothes, and expensive gadgets. It’s a lot more fun to think about surround-sound systems, exotic vacations, and big houses than to think about retirement planning. The problem is, I believe our future well-being depends on just that. I believe the three-legged stool is headed to a museum, and younger people, like me, need a new blueprint. I don’t know many people early in their career who are working toward vested pensions, and I’m not willing to make a big bet on Social Security income as we currently know it still being here 20 or 30 years from now. So, if you ask me, the three-legged stool is looking more like a peg leg for us younger folks. Unless you’re willing to walk the plank (yes, that was a pirate pun), it’s important to realize that the ability to retire in the future is probably going to come down to leg 3: investment assets.

 

If it’s going to come down to investments, you’re going to need to get it right. You need to read the fable of “The Tortoise and the Hare” and take “slow and steady” to heart. You need to invest in an appropriate, long-term strategy. You need to make significant progress towards retirement during the first and second decades of your income-earning life, so you can have a decent chance of having significant assets during the last and second-to-last decades of your life.

• Slow and Steady - Saving $100 a month in your bank account, raising your contributions to your employer’s 401(k) or retirement plan by 1%, and opening a Traditional or Roth IRA account that you’re not sure you can fully contribute to can feel almost silly. It seems like a drop in a bucket, and it is, but it’s a drop in your bucket. It’s the first steps on your journey of a thousand conference calls, staff meetings, and expense reports. The hardest part about beginning a savings plan, implementing a family budget, or taking on a debt reduction plan is starting it! Brief sprints of financial progress and long periods or “naps” where you live at your means (or beyond you means) will make you resemble the hare, and you may not win your race. To be honest, you might not even be able to finish! Dedicated, repetitive steps of saving 10% from every paycheck, increasing your retirement plan contributions every time you get a raise, making those annual IRA contributions, and making 13 payments instead of 12 on your mortgage are how you and the tortoise win the race. I think Aesop may have been a financial planner in his free time…
• Invest Appropriately - I keep reading articles about how the market downturn in 2008 and 2009 has really spooked people in their 20s and 30s (millenials). For example, a recent study by UBS found that on average, millenials have half of their assets in cash and less than one third of their portfolios in stocks. I get it, I really do. Our grandparents’ home values went down like lead balloons, our parents’ investment accounts went down like an ACME anvil on Wile E. Coyote, and we couldn’t get jobs even though we went to college and did everything that was asked of us, but we cannot live in fear. My short-term market crystal ball is still in the shop, but I can tell you that plopping all of your assets under your mattress, in a bank account, in a bunch of bonds, or in an annuity with a minimal, yet allegedly “guaranteed,” return is not going to get it done. Young workers need to make diversified, tax-sensitive, and fee-conscious investments, but they also need to act their age! Long-term, 50% cash, 33% bonds, and 17% somewhere else is for grandpa and grandma - not for working millennials who have a longer time frame for their assets to significantly appreciate.
• Make Progress Early - I cannot emphasize how much higher the odds are that you will be in a good financial position if you start planning for retirement now as opposed to six months before you want to retire. Little things like building up an adequate emergency fund so you don’t have to raid your portfolio and sell when markets are down, making the contributions needed to your employer’s retirement plan to get their maximum match, and paying extra towards long-term debts may not seem like much now, but there will be a day when you look back, and you will smile. I wrote about the unbelievable power of compounding earlier this year, but it is worth restating that a dollar saved in your 50s is not the same as a dollar saved in your 30s! Progress towards your retirement goals at any point is great, but the sooner you can start packing away funds towards your future needs, the greater the chance that you will have meaningful compounding in your favor. If you start strong, you’ll have a much greater chance of finishing stronger.

 

The How to Retire Early Series will continue on next week by considering real estate and the pivotal role it can play in retirement planning. I hope you’ll check it out.

 

-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

What You Should Do With Your Tax Refund

Credit: David Castillo Dominici

Hopefully, you’ve already started working on your taxes. If you’re a real overachiever, maybe you have already submitted your taxes. With a little luck (or conservative withholding), hopefully you’re expecting a refund. If you are, I’d like to make a few suggestions for what you should do with those funds.

1. Go have some fun. Take 10%, take a couple hundred bucks, take whatever you feel is right and go buy that snowboard, get that new dress, or eat at that new, expensive Italian place everyone is raving about. I’m not your typical financial advisor, and I’m not Scrooge: go take some of your check from Uncle Sam or your home state and enjoy yourself!
2. Pay off your credit cards. There are very few things you can do that help your financial health more than paying off that Visa debt you’ve been carrying around since college. Maybe you’ve been making steady progress in recent months and need a surge to finish the drill? Luckily, if you’re getting a refund, the Department of the Treasury could be about to provide that cash surge.
3. Boost your cash / rainy day fund. If you’re working, I’d advise you to have three to six months’ worth of living expenses in cash. If you’re retired, I’d propose one to three years’ worth of living expenses, just to make sure you’re in good shape and can sleep comfortably. If you just checked your account balance and it isn’t at my suggested threshold, take advantage of this unbudgeted (and maybe even unexpected) cash inflow.
4. Put a little towards your long-term debt. An extra mortgage payment every year can sometimes cut five or six years off a thirty-year mortgage! If you’ve got an outstanding car loan or student loan, go ahead and consider putting some of your refund there. Seeing people debt-free or working towards being debt-free makes me happy, and it usually makes them happy as well!
5. Make an IRA contribution (or a bigger IRA contribution). If you’re 49 or younger and have earned at least $5,500, you can contribute $5,500. If you’re 50 or older and you have earned at least $6,500, you can contribute $6,500. Now it’s important to note that $5,500 (and $6,500) is the limit, not the requirement! Every dollar saved towards retirement gets you one step closer to that recliner, newspaper, and having your wife bring you your slippers – wait, strike that last part!

Getting a tax refund is a great feeling and as I mentioned in #1, you should do something fun with part of the money. Don’t just throw it all away on a March Madness bet, a golf weekend, or a shopping spree!

 

Many people, myself included, sometimes view a tax refund as money you were never expecting to have. On some levels, that may be true, but it can also be said that a tax refund is money you should have never agreed to loan the government in the first place! When you look at a tax refund that way, I’d suggest you look at options #2 though #5 and decide for yourself what you should do with your tax refund.

 

-Tom

How to Fix Your Credit

Credit: khunaspix

I know a lot of good people with not-so-good credit. Most people who ask me how to improve their credit are not repeat offenders. They had an emergency, they decided to take a big trip, or they got a little carried away with their first credit cards. Still, some people have serious, recurring credit problems and are headed in the wrong direction. In this post, I'd like to share five tips on how you can right the ship and start improving your credit once and for all.

1. We’ll call this “1(a),” as in order to have credit at all (good or bad), you need to have used credit. If you don’t have a credit card, get one. The sooner you start wisely using a credit card and paying it off every month, the longer your credit history will be. The longer your credit history is good, the higher your credit score, which will help you get the most favorable terms when it comes time to buy that house or car. If you’re solely focused on trying to improve your credit score, you might even consider using your oldest card (the one you’ve had the longest) over your newer ones.
2. Pay off what you owe every month! If you have a mortgage payment or a car loan payment due, at least pay what is due. If you have a credit card bill, don’t just pay the minimum - pay it all off! If you can’t pay it all off, I understand, but you really need to spend less next month so you can pay it off then. Building up credit card debt doesn’t usually end well, trust me.
3. Even if you can comfortably pay off your credit card every month, try to pay it off before it gets near its limit, even if that means making payments several times a month. Some people have low limits (and some people want low limits, which isn’t a bad thing), but believe it or not, letting your credit card bill rise to near its maximum allowable limit can have negative consequences for your credit score.
4. Long-term debt can help. Associated with a long, good credit history is often the steady reduction of student loans, car loans, mortgages, and home equity lines of credit. Steady, recurring payments (with a little extra principal every now and then) are really one of the best things you can do to improve your credit score. Now I’m not suggesting you go take out a huge thirty-year note on a line of credit in the name of boosting your credit score, but I am saying that by steadily paying your long-term debts you are literally showing other lenders that you would likely be a good steward of any funds they lend you in the future.
5. I’ve mentioned this in previous posts (The Best Home Loan You Could Possibly Hope For and TARGETed to cite a few), but you really should check your credit reports from time to time at annualcreditreport.com. You can check your credit once a year with all three credit bureaus for free if you like, but I also like the strategy of people who check their reports with a different bureau each year, and they just rotate to make the task seem less daunting (unless they find an error and then they check with all three bureaus). I would suggest that you check your credit reports at least every several years, but definitely before you buy a car or take on a mortgage. When you get your credit report, you’re looking for errors, to make sure all the types and forms of credit you are using are listed, and to make sure the limits on each type of credit are up-to-date. While we’re not usually talking massive improvements to your credit score, correcting the fact that you made your October 2013 payment on time and that your Visa actually has a $10,000 limit instead of your initial $5,000 limit can only help. If you find an error, here’s a helpful site listing tips and contact information for the three credit bureaus provided by the Consumer Financial Protection Bureau.

Your credit score can range from around 350 to 850, and anything above a 720 or so is usually considered pretty good. Now just like Rome, your credit score cannot be built (or improved) in a day, but unlike Rome, it can be destroyed pretty quickly. Credit reports usually go back about seven years, so unless you find and correct a serious error or two on your credit report, there really aren’t any “silver bullets” (contrary to what some billboards and late-night commercials will try to tell you). If you’ve done a good job handling your debts and you have a great credit score, keep up the good work. If you’ve had some struggles with credit cards and being able to make payments on all of your debts, I’d encourage you to implement these tips and simply do better going forward. As they say, time heals wounds...and credit scores!

 

-Tom

College Applications

Credit: imagerymajestic

It’s that time of year when wide-eyed high school seniors are beginning to realize that all good things must come to an end. Their comfortable little worlds are about to be shattered, and they will soon be tested to see if they have what it takes to be a small fish in a bigger pond. Applying for college isn’t just about the applicant, though: where someone goes to seek higher education can affect their friends, their family, their family’s finances, their finances, their chances of succeeding academically, their chances of succeeding socially, their ability to get a job after college, and the range of their expected earnings for the next thirty to forty years. I certainly didn’t realize all of this during my senior year at Jonesboro High School, and luckily I came through okay, but as my ten-year class reunion is coming up, I want to pass on some things I now realize in hindsight.

I was more than torn about where to go to college; I wanted to pursue music at the University of South Carolina, I wanted to pursue theatre at Florida State, and for a brief period of time, I even wanted to be a business major at Georgia Tech. After spending a lot of time visiting colleges, talking to older friends, talking to my family, praying, and staring at my childhood bedroom’s ceiling, I became an accounting major at the University of Georgia. Looking back, I’m confident (and lucky) that I made the right decision for me, but it scares me how little I knew then about how much my chosen path would direct my future.

First, all schools do not cost the same. The extra costs of tuition and travel for out-of-state schools can really add up. The difference between four years at Florida State and four years at UGA (with Georgia’s Hope Scholarship at my disposal) was more than $100,000! I was making around $6 an hour back then, so I had no concept of what that much money really meant. I chose Georgia so I could pursue business and continue my love of music with their marching band at the same time, and because of its comfortable proximity to my family (and the future Mrs. Presley), but money had very little to do with it. Perhaps that was best, but if I hadn’t had the Hope Scholarship or had parents who were generously willing to help me through college, I could have walked out with six digits worth of debt! Now future lawyers, doctors, pharmacists and others have to do what they have to do, but I wish someone could have gotten me to understand what significant student loans would have meant to my financial situation right out of college.

Second, all schools are not created equal. Sometimes going to a top-notch, top-cost school is a great idea, but not always. I personally know many people with prestigious diplomas (or at least orientation shirts) who aren’t quite as polished as other people I know who went to less elite institutions. Now I know some ivy-leaguers who are the real deal, too, but my point is that a degree in making widgets might not require a school that costs as much as Harvard. I think the ranking and quality of the particular degree program you will be in (if you know what your major is going to be) should partially drive college decisions, not the prestige of the overall college or the ranking of their football team. I’ve already told you the four colleges I was considering back then, and they were all pretty decent in the areas I was considering studying, but I wish someone could have gotten me to understand that the perceived prestige and the overall cost of the college really don’t have as much to do with the quality of your education as you might think. 

Finally, all majors are not created equal. I might catch some flak for saying this, but I think I have a right to say it considering many of my closest friends and I graduated during The Great Recession. I was fortunate and had a job lined up before everything hit the fan, but even so, my start date was delayed several months. As for many of my friends who weren’t fortunate enough to have a degree in death or taxes (the two certainties in life according to Benjamin Franklin), some of them learned firsthand and shared with me the horrors of realizing that a “Bachelors of Underwater Basket Weaving” wasn’t going to cut it. There are a lot of awesome and very crucial majors out there, some that I probably would have even liked more than accounting and finance, but there are some that are only useful for filling up the professor teaching the major’s classroom. The whole concept of be what you want to be and do what you want to do is great to a point, but it has its limits. Unfortunately, you can’t always be hired when you want to be hired or get paid what you want to get paid!

I thought college was important back when I was applying, but I had no idea about the impact a higher education can have on employment and wages. It may be even more than you think, and I urge you to check out these J.P. Morgan charts showing current unemployment by education level and average annual earnings by highest degree earned.

I bet very few of my readers are currently applying for college, but some of you have children, grandchildren, brothers, sisters, and friends who are. Just as my friends and family were kind enough to let college be my decision, I think you, too, should let someone’s college choice be their own, but I also don’t think there is any harm in gently talking to them about the long-term financial implications of going out of state instead of staying in state, the educational cost versus benefit differences of going to a “T-shirt school” instead of a “sweater with a popped collar school,” and the long-term employment opportunity and earnings capacity of being one major over another. If you talk to them it could drastically change their life, and if you don’t, it could too!

-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

Credit: imagerymajestic

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