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

Compounding – The Good, The Bad, and The Ugly

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• 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

 

How Famous People Lose Their Money

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One of the saddest lessons I’ve learned during my time in the wealth management/financial advice business is that no amount of money or income can make someone immune from overspending. If you don’t live within your means, you can blow it; if you don’t properly diversify your assets, they can vanish; and if you do something that’s just plain stupid, you can make a lot of dollar signs go bye-bye, too. When I started writing this post I was going to give you some specific examples of how some famous people lost their fortunes, but the more I researched, the sadder I got. I just couldn’t believe what I was discovering. So, I’ve decided I’ll give you the examples, but I’ll remove the celebrities’ names. This will protect the identities of the personally innocent, but financially guilty. After all, they don’t need any more pain; they’ve already lost most of their money.

• Can you believe that an actor who has been in films grossing more than $4 billion has been reduced to having to take almost any role thrown at him because he lost tons of money on highly speculative investments and wasn’t paying his share in taxes? Maybe so, but he also bought a castle, a dinosaur skull, 22 cars, 47 pieces of art, and a bunch of real estate. Are you kidding me?
• Can you believe that a pretty famous golfer nearly lost it all as a result of gambling away $60,000,000? Sorry, but the zeroes were for effect!
• Can you believe an actress walked away from a movie she had agreed to be in knowing it would cost her $9 million not to honor her previous commitment? Oh, and by the way, she probably could have written a check for the $9 million if she hadn’t recently purchased part of an actual town!
• Can you believe a boxer could throw away $250 million through a bunch of divorces and alimony and child support payments? Of course, there was also a 109-room house…
• Can you believe a really successful musician would buy a $30 million mansion? Actually, I can. What I can’t believe is that he paid 200 people to be part of his “entourage,” and it cost him $500,000 per month! How could anyone maintain that sort of lifestyle? Better yet, why wasn’t I invited to be part of his entourage?
• Can you believe a world champion (and likely hall of fame) pitcher would invest almost everything he earned in his entire career in one, single, solitary investment? Guess what? It didn’t work out! And now he’s too old to pitch…
• Finally, can you believe an actor who has made millions and millions of dollars since 1999 thought it would be okay not to file a tax return reporting his income until 2006? Did he think what happened in 1999-2005 would go away? A lot of back taxes (with penalties and interest) and a little jail time just rocked his oblivious world!

Like I said earlier, I started this post intending for it to be funny, but the stories aren’t funny – they’re sad. I can’t help but think of what I could have done for them if they had sought some genuine, unbiased advice. I can’t help but think about what they could have done for themselves if they’d just lived within their ample means, prudently diversified at least a portion of their assets, and avoided doing things that just aren’t smart. They had it, and they threw it away. Grrrrrrr.

 

-Tom

 

Retirement Cash Flow Strategies

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For most people, cash flows in retirement look different from cash flows while working. The difference is a transition that I have helped many clients through. Cash flow strategy is one of the most important parts of planning for retirement, but it can be complicated since cash flows frequently come from different sources, start at different ages, and carry varying tax implications. People who develop a good plan and stick to it can often add stability and peace of mind, take advantage of tax saving opportunities, and even generate more income in retirement. Let’s look at a few areas:

• Pension Annuity vs. Lump Sum – For retirees who get to choose a pension payment option, this can be one of the most important decisions they ever make. Actuarially speaking, there’s a good chance that your employer is thinking they are offering you the same amount of money whether you elect an annuity or the lump sum, but there are still things to consider. A lump sum offers a surge of money at retirement that can be more easily passed on to your heirs and better protect your purchasing power against inflation if it is properly invested, but a majority of clients I work with seem to find comfort in choosing the annuity option. In most cases, the monthly annuity amount will remain the same until the day you die. This may not help you against inflation, but if you live long enough, it could eventually mean more total money for you. In the meantime, an annuity feels like a paycheck, which is what retirees are used to, and the mental comfort that brings is the main reason I am usually a supporter of a pension annuity election. I also advise most clients to select a “joint and survivor option” if it is available so that a surviving spouse won’t lose their loved one and the benefits of their loved one’s annuity at the same time. This tactic usually costs the spouse whose pension it is a little bit of cash each check, but it can be a tremendous comfort to the other spouse.
• Required Minimum Distribution Planning – I’ve discussed this before, but age 70 ½ is an important half-birthday! I won’t take you back through all of the details we covered in my post “Required Minimum Distributions,” but I will say that you should factor this into your retirement planning. If things are a little tight on you before you have to start these distributions, or if the distributions are going to put you in a higher tax bracket once they begin, it may make sense to start prudently withdrawing from your retirement accounts before 70 ½. This could save you tax dollars and allow you a steadier lifestyle throughout retirement as opposed to cutting it close in your 60s and rolling in cash in your 70s. It’s just a thought, but one you should consider if you’re over 59 ½ (there could be penalties if you withdraw from retirement accounts before 59 ½).
• Social Security Strategy – Many people, including me, are concerned about the long-term solvency of the program as we know it going forward, but there are some Social Security strategies you should consider if your retirement cash flows are doing just fine when you turn 62. If you decide to claim Social Security retirement benefits at age 62 (the earliest applicable age), you are deemed to be collecting benefits “early,” and will only receive around 75% of the benefit you would receive at your “full retirement age.” (Currently, full retirement age is usually between age 66 and 67 for most people, but take a look at this chart to find your specific full retirement age.) If you wait until your full retirement age, you can receive 100% of your benefit, but if your retirement cash flow is still doing just fine at your full retirement age, it might be worth waiting until age 70, when you could receive around 132% of your benefit! That’s around 8% growth per year from age 66 to age 70, and that’s not a bad investment return if you ask me! Putting off claiming Social Security could provide you with more money in retirement if you live long enough, but at the same time, you could be shooting yourself in the foot if you end up passing away relatively young. I would suggest you consider your health and family history, and then consider how much Social Security income at age 62 would help before you decide to delay filing. If you do decide to delay, you can always start before your full retirement age or age 70 if you need to with a partially higher amount of benefits, but it’s probably not worth having beanie weenies in your 60s so you can have filet mignon in your 70s.

I hope you’re beginning to see that if you consider your spending and saving now versus later, the importance of starting off strong, your humble abode(s), your health insurance, and your retirement cash flow strategies, that there are many things you can do to put yourself in the position of having a chance to retire early. That being said, I’ve met plenty of people who could retire early but don’t and plenty of people who did retire early and wish they hadn’t. Some even went back to work! The How to Retire Early Series will conclude next week with a look at why you might not want to retire early even if you followed the advice of my previous posts and could. I hope you’ll check it out.

-Tom

Your Humble Abode(s)

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I want you to think about a few things with me. Think about how much the property taxes are on your home. Think about how much your homeowner’s insurance costs. Think about your monthly water bill, gas bill, and electric bill. If you pay someone to mow your lawn, think about that. Do you have an exterminator or a cleaning person? What about the annual fee for your alarm system monitoring? Do you have HOA fees or neighborhood dues? Do you need a pencil and paper yet to add all of that up? Don’t forget there are also those periodic home maintenance surprises that come up like replacing an air conditioning unit, hot water heater, dishwasher, or roof. The point I’m trying to make is that owning and maintaining real estate is expensive.

If you’re a homeowner you already knew that, but have you ever thought about the significant portion of your living expenses that is tied to the upkeep of your residence? Even when not considering any outstanding debt you might have on your house, having your own place requires a lot of cash flow and chews up a lot of assets. It’s important to realize this when you are working, but it is absolutely critical to understand this when you are planning for retirement.

In order to make it in retirement, you have to live off of any income you have coming in (like pensions or Social Security) plus small portions of your investment assets. Some people can live solely off of their retirement income streams, but most people slowly draw down their investment assets over time to supplement their lifestyle in retirement. The thing is, you don’t want to outlive your investment assets, so you’ve got to have a plan to make your nest egg last. A big part of making your investment assets last in retirement is by reducing your fixed expenses, and as we just discussed, a big part of your fixed expenses is often tied to your humble abode(s).

Whether you are planning for retirement, nearing retirement, or finding that you're eating up your nest egg too fast in retirement, here are some tips that might help:

• Pay off your mortgage(s) before you retire. This will likely reduce your fixed expenses significantly and help you make ends meet in retirement.
• Do major capital improvements to your real estate before you retire. If you’re going to redecorate, finish a basement, or get a new refrigerator, do it while your working cash flow is still coming in. It will make you feel better and give you peace of mind. Think of it as investing in staying put.
• Don’t keep multiple residences if you find it difficult financially or physically. Dusting one house stinks. Dusting two houses is awful! Pick one. Think of all of the property taxes, insurance premiums, utility costs, and lower back pain you will save!
• Get out of town. Sure, stay near the kids, but move to the suburbs or the country. Homes are cheaper, property taxes are lower, and the cost of living is likely lower, too. You’ll feel like you have more purchasing power, and you can add the difference between your urban home selling price and suburban home purchase price to your nest egg to strengthen your overall financial position.
• Consider state taxes on retirees. It’s probably not worth moving states just to save on state taxes, but if you’re on the border or a good portion of your family is in a different state, why not consider it? Take a look at this interactive map, and you’ll see that all states’ taxation is not created equal!
• Finally, think about downsizing. All I’m saying is that if you no longer need five bedrooms, why have five bedrooms? If all of the kids come at once, you can help fund their stays in a nice hotel, and you’ll probably still save money versus maintaining your own five-bedroom “bed and breakfast.” If you do decide to downsize, be careful and make sure you don’t more elegantly furnish a smaller house as opposed to actually downsizing and leaving yourself with some extra proceeds to put with your nest egg.

 

Personally, I plan to have a place on the beach when I retire. If my wife and I can swing it, we’d probably like to keep a place near my parents and her parents and/or near our eventual kids and their families. If we can’t swing it, we’ll just visit a lot because it is often a lot cheaper to pay for a hotel or even rent a place for a few weeks than it is to maintain an extra humble abode!

 

The How to Retire Early Series will continue next time with a look at an important piece of everyone’s retirement puzzle: health insurance.

 

-Tom

Dealing with Debt

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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

Household Spending Breakdown

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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

Love and Marriage (and Finances)

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You know that game everybody makes you play at weddings and showers where you give couples marriage advice? I’ve contributed advice on several occasions, and in fact, my wife and I asked others to pass on their relationship wisdom to us at one of our wedding showers. Either way, I’d say the most frequent tidbit is probably “Don’t go to bed mad.” While I often try to follow that piece of advice, I must say that occasionally going to bed mad might help prevent an "ant hill" from becoming a "mountain," if you know what I mean. In the end, though, I think the best piece of advice I was given was “When you’re wrong, say you’re sorry; when she’s wrong, say you’re sorry.”

All kidding aside, I’m a very happily married man for many reasons. Part of this has to do with my wife’s Toll House Pie, but part of this also has to do with the way my wife and I handle our finances. According to divorceguide.com, “Money” is the #2 reason for divorce, so today I thought I’d share 5 tidbits that might help your wallet or purse, while also strengthening your relationship with your spouse.

1. Communicate. Communication is actually the #1 reason for divorce, and I’d be willing to bet that a lot of those communication problems had to do with communicating about money! When you get married, your separate assets will most likely become commingled with your spouse’s separate assets, whether you like it or not. From that point forward, it’s important for both spouses to realize that there is “yours,” “mine,” and “ours.” If both of you take the time to define and enforce these boundaries, you will likely save yourself and your spouse a lot of unpleasant emotional and financial surprises.
2. Set a mutual spending limit. You may think that’s crazy, but I have personally seen this work in my marriage and with many of my friends. There is no discussion needed for our utility payments, car maintenance expenses, or grocery bills, but my wife and I have a $50 discretionary limit. If I want Braves tickets, we discuss it before I order tickets behind home plate. If she wants a new pair of shoes, we discuss it before she goes on a shopping spree. We trust each other when it comes to gifts for one another, and we don’t wage war when the $75 expenditure that one of us couldn’t pass up occasionally happens, but we usually talk first. $50 may not be the right value for you, but the limit amount isn't what matters - the working together does.
3. Talk about vacations. I can tell you that you will have a more relaxing vacation if you are spending money you both saved in advance as opposed to worrying about how hard you are going to have to work when you get back home to pay off the trip. I would also advise you to make sure you’re not always forgetting about a destination your spouse really wants to go or likes going. Expectations of how great things are going to be when you’re vacationing are already sky-high without risking financial arguments. If you agree on how much you can afford to spend on vacation, how you are going to save up for vacation, and where you are going, you’ll have it made in the shade (or sun).
4. Decide who does what. Who pays the bills? Who keeps the checkbook? Once you have decided, stick to it. If someone is consistently responsible for managing a part of your finances there is less of a chance of a bill falling through the cracks. If you make a mistake doing your task, admit it, and if your spouse asks you a question about something you are “managing,” respond openly and fully. This way you are a smooth-operating financial household. Your spouse may even gain additional trust and confidence in you and be appreciative of your efforts in the process.
5. Agree on what retirement looks like. This vision may change abruptly, slowly, or stay the same depending on how your life plays out, but you at least need a plan. If both of you feel as if you are working towards a mutual finish line, the pain of extra hours or stashing away additional savings so you can meet your retirement goals won’t hurt so badly. Maybe even set aside some time with each other to discuss your current financial situation and where you stand versus your finish line. If everyone is on the same page and everyone is on board, there won’t be very much room for fear or blame in your finances or your marriage.

I have a lot left to learn about finances. I have even more to learn about marriage. However, I can tell you that successful marriages more often than not have their financial houses in order.

I hope these tips will help you and your spouse financially and in your relationship. Believe me, I can get in enough trouble on my own for zoning out and not listening when I’m watching “the game” without bringing finances into it!

-Tom