Have More Finance Dates With Your Partner

As a couple, it can be difficult to get on the same page financially and agree upon sensitive financial topics. We may have different backgrounds, experiences, personalities, and preferences when it comes to money. Fortunately, there are ways to stay on track, keep focused and have fun. My wife and I have monthly check-ins we call Finance Dates. We’ll describe what they are and why they’re important.

What Is a Finance Date?

My wife and I have a monthly Finance Date on the calendar to check in on our financial progress from the previous month, assess our current status, and review our progress toward our annual goals. There’s an element of the past (what we did last month), the present (where are we now) and future (where are we trying to go). This keeps us laser-focused on our financial goals so that we can make adjustments along the way, as opposed to setting the same goals and resolutions year after year.
One of the advantages of being in a relationship is having a built-in accountability partner. It is an opportunity to leverage each other’s strengths to keep making progress. For example, for Finance Dates, if one partner is more of a planner and detail-oriented, they could take the lead in organizing the finances. I’m a personal finance nerd, so reviewing our spending, updating our budget, tracking our net worth and forecasting ahead is actually fun for me. If the other partner is more free-spirited and spontaneous, they can take the lead in organizing the date. Whatever your strengths are, BOTH partners need to be involved in understanding and agreeing upon your financial goals. It is essential that each person understands all the financial accounts, where they are, how to access them and their purpose. Just because one partner takes the lead in organizing doesn’t absolve the other partner of their responsibilities. Talking about money doesn’t have to be stressful, judgmental and depressing. It can actually be fun!

How Do You Make Finance Dates Fun?

Use your Finance Dates as an opportunity to celebrate! Any time you set long-term goals, it’s really important to celebrate the small wins. The small wins are what keep you motivated along the path to achieving the big goals! Paid off a credit card? Celebrate! Saved $200 by making breakfast and bringing lunch to work? Celebrate! Paid off a student loan? Celebrate! Increased your credit score? Celebrate! As the liquor commercials say, Please Celebrate Responsibly! This is where the strengths of the more spontaneous, free-spirited partner can come in! Ice cream and a mid-afternoon dance party at home? Yes, please! Your favorite evening go-to romantic activity? Oh yeah! Be creative and find ways to enjoy the process of moving toward your goals. Even if there isn’t all that much to celebrate on paper, the very fact that you two are coming together to review your finances and discuss how to improve is, in fact, a WIN!! Consider all the couples that are not doing it!
We know that finances are one of the top reasons for divorce and the biggest source of stress for most individuals and couples. We created a Finance Date checklist to help you in these discussions and recommend a monthly cadence to both improve the relationship and make progress on your financial goals. Use your advantages as a couple to turn that potential source of stress into an opportunity to get closer and celebrate each other!

4 Reasons Financial Literacy is Essential 

April is Financial Literacy Month! The purpose of Financial Literacy Month is to bring awareness to and promote the importance of establishing and maintaining financial healthy habits. Unfortunately, in our country, financial literacy has not been prioritized as an essential topic of learning in Public K-12 or higher education. Too many are left to fend for themselves when it comes to managing money.

“College graduates spent 16 years gaining skills that will help them command a higher salary; yet little or no time is spent helping them save, invest and grow their money.”
Vince Shorb, CEO, National Financial Educators Council

1. Personal Finance is 20% knowledge and 80% behavior

There’s a big misconception that personal finance is about math. Some people will shy away from financial topics because “they’re not a math person.” This could not be further from the reality. Avoiding personal finance because you’re not a math person, is like avoiding learning to drive because you’re not a car person. You don’t need to know how to rebuild an engine to get a license and become a safe driver.
Personal finance is much more about the habits and behaviors utilized with our limited resources. Some of these are so ingrained that you may not even see them as habits.

  • Do you use cash or debit/credit cards?
  • Do you have a written budget monthly or do you just pay bills as they come?
  • How often do you check your financial accounts? Do you use an aggregator like Mint?
  • How often do you check your credit score? Credit reports?

Many of our personal finance habits are learned when we’re children. In many ways, we model what we see from our parents and older siblings. If you grew up in a household of spenders or if you grew up in a frugal household, you’ll likely carry some of those same habits today. In order to change those habits, we have to have the requisite knowledge of how to properly manage our finances, but knowledge alone isn’t enough. Much like weight loss, knowing which foods are healthy and how to workout is only the first step. Making the behavior changes into consistent habits is what makes the difference.

2. Some of the most important financial decisions you make are when you’re young

Another reason financial literacy is so important is because there’s another big misconception:  ‘We can deal with the financial stuff when we’re older.’ If you talk to just about anyone over the age of 50 about money, they will tell you they wish they had learned about managing their money when they were younger. The chief financial complaint of older Americans is that they didn’t start saving or investing early enough.

40% of Americans are counting on the lottery, sweepstakes, getting married, or an inheritance to fund their retirement
– Money Magazine

Money Management should be a required curriculum in Junior High, High School and College in every school in America. If the purpose of school is to train you to prepare you for the real world, it doesn’t get much more real that how you manage your money.
Decisions such as your level of completed education, financing higher education, choice of career, location, marriage, children, first home purchase are all decisions that can have a serious impact on your long-term finances and for many are decisions made while relatively young. Don’t make the mistake of waiting until you’re “all grown” up to take responsibility for your finances, you’re already making important financial decisions.

3. Companies are providing fewer guaranteed benefits and shifting risk to employees

We’ll spare you the history lesson, but companies used to guarantee retirement benefits in exchange for years of service. They’re called pensions and they are extremely rare today. Essentially, if you worked for a company for, say 25 years, the company would fund a percentage of your salary in retirement until death. It was completely managed and paid for by the employer.

46% of Americans have less than $10,000 saved for retirement.
– 
Employment Benefit Research Institute

Today, you are totally responsible for your own retirement. Which means you have to save enough money so that you live off your savings. If you participate in your employer’s 401(k), you might get some help from your employer in the form of a 401(k) match, but that’s optional.  You choose what to invest in, how much to invest or whether to invest at all. You have to fund your own account and none of the investments are guaranteed, so all the risk and responsibility of funding your retirement is on your shoulders.
If that wasn’t depressing enough, the safety net of Social Security will likely not be enough to live on for anyone under the age of 50 today, if it exists at all. It is essential that we fund and properly invest early and often to manage that big responsibility.

4. Consumer debt is devastating wealth

Another reason it is vital to learn and master your personal finances is that it has never been easier in to spend money we don’t have. We live in a consumerism culture and our natural inclination is to acquire more stuff. In generations past, cash was the major option. If you wanted to purchase something that you didn’t have cash to purchase, you had to physically walk into a bank, convince the banker for a personal loan and fill out loads of paperwork, and/or put up collateral.

60% of Americans spend about equal to or more than their income.
– FINRA Investor Education Study

Today, in order to spend money you don’t have, you can use a piece of plastic in your wallet or swipe your phone. You may never have to physically walk into a bank. Financial products like credit cards, leasing, payday loans, student loans, interest-only mortgages, adjustable rate mortgages are all products created in the last 30 or so years which allow more and more people access to credit. The downside of having access to credit is that if not used responsibly, it reduces the ability to save and leads to crushing debt. We only have to look at the most recent economic recession of 2009 to see the impact of having too much debt.
 
From a financial standpoint, it’s not at all a rosy picture. There’s no sugarcoating the fact that 76% of US Citizens are living paycheck-to-paycheck. 20% of them earning more than $100K per year. That means more than 3 out of every 4 Americans are essentially broke. This is why financial literacy is essential in order to avoid the traps that many Americans find themselves in. Again, financial literacy is essential, but it’s just the first step. One has to use that knowledge to change their mindset and their behaviors in order to be truly successful. Finally, financial literacy is a continuous process, it’s not one course, it’s not one topic, it’s ongoing. We hope you take the first of many steps in that ongoing journey.

Financial literacy is not an absolute state; it is a continuum of abilities that is subject to variables such as age, family, culture, and residence. Financial literacy refers to an evolving state of competency that enables each individual to respond effectively to ever-changing personal and economic circumstances.
– Jump$tart

3 Ways to Increase Your Compensation Without Talking to Your Boss

Not everyone gets salary increases every year, but that doesn’t mean you can’t increase your total compensation. Most of the focus on compensation is on salary, but your employee benefits can account for as much as 30% of your total compensation.

Remember when you started at your company and in your orientation, you had a meeting with HR to discuss your benefits? They likely gave you a thick folder of information and depending on how long you’ve been with your employer, you may not remember a single thing from that meeting, but that folder is likely buried at the bottom of your desk drawer. You may not realize in the fine print of those handouts are some really important benefits that can either put money back in your pocket or improve your overall financial standing. If you want to increase your compensation without having to talk your boss, it’s time dust off that folder and/or set up a meeting with HR. 

We’ve created a detailed FREE guide to maximizing your employee benefits, which explains common employee benefits in plain English, but here are three of the most unused benefits which cost can cost us thousands of dollars each year.

1. 401(k) and Employee Matching

If your employer matches your 401(k) up to a certain percent, you are actually turning down free money if you don’t take full advantage of it. Let’s give an example of how this works:

Example: John Doe makes $50K in salary. His employer matches his 401k at 5%. So if he invest 5% ($50K * 5% = $2,500), his company will match that investment up to $2,500. If he invests less, the company will match less.

So in that example, if John decides not to invest in his company’s 401(k), he just reduced his total compensation by the $2,500 match each year.

We recommend building a base emergency fund prior to long-term investing, but it is important to take advantage of your company match as soon as possible.

2. Wellness Programs

If you have health insurance through your employer individually or your family, your employer likely pays 70-80% of your health insurance premium. The portion that comes out of your paycheck is closer to 20-30% of the total cost. This is important because that means your employer is financially incentivized to have a healthier workforce. Healthier employees equal lower insurance premiums for the company. In order to accomplish this, employers have created incentives to get you healthier and many of these can take the form of financial incentives.  Examples include discounts or reimbursements for gym memberships, discounts on home fitness equipment, healthcare reimbursements, cash rewards, weight loss programs, smoking cessation programs. Think about it this way, your employer is willing to pay you more money to be healthy.

3. Corporate Discounts/Partnerships

Most people are familiar with receiving employee discounts if they purchase products or services from their employers. However, employees are less familiar with discounts they may receive from other companies because of their employer. Particularly with larger companies, they often have sizable contracts with different vendors and often as part of that contract, they will offer discounts to their client’s employees as well. So you may able to receive a 20% discount on your monthly cell phone or cable bill because your employer has a contract with Verizon. It’s not solely cell phone or cable bills either, this may include electronics, rental cars or even group insurance policies such as auto, home, and life insurance. Also, employers sometimes have internal online portals where you can purchase products with the discounts built-in instead of purchasing in-store or from the company websites directly.

Saving money on your expenses, particularly fixed monthly bills, is not much different than increasing your salary. Instead of increasing the income bucket, you reduce the expense bucket. The result is the same, more money in your pocket. So whether it’s retirement, wellness programs or corporate discounts, make sure you dust off that HR packet in your desk drawer or give a call to HR to learn more about your benefits and how you can increase your total compensation.

For more detailed information on maximizing employee benefits, check out our FREE 15-page guide including details on Retirement, Health, Life, Disability benefits and more, which we call Give Yourself A Raise!

3 Money Lessons for Thanksgiving

Thanksgiving is my favorite holiday. It’s a holiday with the least pretense or pomp and circumstance and is almost exclusively focused on family, gratitude and quality time (a.k.a. the things that really matter). That focus is also extremely important for our finances. There is no shortage of distractions when it comes to things we can do with our money, so here are three lessons Thanksgiving can teach us about money.

1. An Attitude of Gratitude

Pilgrims arrived and anchored near Cape Cod, MA in 1620 arriving just before a brutal winter, which many spent on the ship. Between the 66-day voyage and that brutal first winter, half of the 102 passengers and 26 crew members died. In the Spring, when the remaining passengers moved ashore, they were greeted by Natives, who taught them to hunt, fish, farm and survive in this new land. Thanksgiving’s history begins with a celebratory feast where Pilgrims invited local Native tribes to a feast to celebrate their first successful harvest. These were not people of wealth or high status, they went through a traumatic voyage and a brutal winter and lost many lives. One would imagine they would be heavily reconsidering their decision to leave everything they knew in England to risk life and limb for freedom and opportunity. They were grateful for their freedom, they were grateful the gift of life and they were grateful to their gracious hosts, who without them would have certainly not survived.

The money lesson here is gratitude. Gratitude is free, unlimited and enhances your life immeasurably.

Gratitude unlocks the fullness of life. It turns what we have into enough, and more. It turns denial into acceptance, chaos to order, confusion to clarity. It can turn a meal into a feast, a house into a home, a stranger into a friend. – Melody Beattie

2. The Beauty of Simplicity

There are only three requirements for Thanksgiving – food, family, and fun. Each one of those can take different forms. Whether you have a turkey or go vegetarian. Whether you have a traditional family, or your own community, and fun can mean anything from falling asleep watching football on the couch to card games and uncomfortable conversations about politics. Either way, there are no religious requirements, expectations of gift exchanges, costumes, candy, ceremonies or fireworks. Thanksgiving is simply about spending quality time with the people you love and sharing a feast. There is a simplicity of Thanksgiving that makes it so appealing and universal.

The money lesson here is that money is just a resource if we break it down to its simplest form. Money doesn’t define who we are and it does not make us better than anyone else. Money doesn’t have to be complex and complicate our lives. If we use money wisely, we use it as a resource build or enhance things of real value like time, relationships and community. The very same things we are grateful for on Thanksgiving.

 

3. Death to Black Friday

Commercial interests have all but ruined Christmas, but over the last decade, those same commercial interests have made a full push to commercialize Thanksgiving. People are actually leaving their loved ones to stand in line at a retail store overnight to buy products. Think about the irony of leaving the dinner table after giving thanks for everything and everybody in your life to stand in line at a store overnight to buy more stuff.

[bctt tweet=”Don’t go from being grateful for what you have on Thurs, to buying things you don’t need on Fri!” username=”moneyspeakeasy”]

Make no mistake, Black Friday is a retail scam. It’s been proven that major retailers steadily raise their prices in the weeks and months before Thanksgiving for the appearance of steep discounts for Black Friday. Let’s not forget the reason for the season – Thanksgiving is about spending time with your loved ones, not camped outside of Target or Wal-Mart. One more benefit to not Black Friday shopping is that fewer employees will have to work crazy overnight hours on a holiday! Let these folks spend time with their loved ones.

So for this Thanksgiving, both with your loved ones and your wallets, be thankful for what you have, enjoy the things that really matter and let’s all sleep in or play flag football on Friday morning!

4 Money Lessons from the 2016 U.S. Presidential Election

The 2016 Presidential Election was historic on multiple fronts. Two of the most unpopular candidates battled in one of the most contentious, divisive and unconventional campaigns in modern history. For some, the result was a deeply shocking and painful event, for others it was redemption for voices long ignored. In all, nearly 120 Million Americans voted and the popular vote was separated by less than 200,000 votes, which is about the population of Little Rock, Arkansas. Regardless of your politics or preference of candidate, there’s no question that the country is divided politically. Whether you’re extremely disappointed or excited by the result there are lessons to be learned from the election and how it can affect our wallets and thus our livelihoods. How can the lessons from this election make us better managers of our finances?

1. Conventional Wisdom Isn’t Always Wise

Nearly every political expert and reputable polling firm who had been polling voters on a weekly basis for 18 months were completely wrong about the actual results of the election. Polling models that were used for the electorate in 2008 and 2012, became obsolete in 2016. Conventional wisdom can often be generalized and not specific to our individual situation.

There are certain standards of conventional wisdom in our finances that are also outdated or need to be challenged based on our individual situations. For example, conventional wisdom often stresses going to the best college one can get into (regardless of cost), pursuing a degree in a field of interest (regardless of expected future salary). This is not to say that people shouldn’t go to college or pursue a major solely based on expected future salary. It is to say that mode of thinking was developed at a time when people could pay their full student tuition by working part-time. That’s a 1970’s/80’s model, which needs to be challenged and may not take into account the realities of increased tuition costs and the impact of student loan debt on your future livelihood.

Our motto is Reject the Status Quo. In order to manage your finances well, there are times when you’ll make decisions that are not popular. The status quo embraces consumerism culture in which many people equate spending with projecting wealth or building relationships. It may be tough to navigate being the odd one out if you don’t subscribe to that mode of thinking. You may find that unnecessary spending actually doesn’t project wealth or make you happier, but rather delays and extends the time it takes for you to reach your personal and financial goals.

2. Prepare for the Unexpected

To say that Donald Trump becoming the 45th President of the United States was unexpected is a dramatic understatement, but life can often be very unpredictable. It was the Greek Philosopher Heraclitus who said, “Change is the only constant in life.” Sometimes change is good and sometimes it isn’t, but regardless, we have to plan for the unexpected. [bctt tweet=”Being unorganized with your finances is like playing Russian Roulette. ” username=”moneyspeakeasy”]

One of the lessons learned from the 2008 Great Recession was the people that were impacted the most were folks who carried high levels of debt and lived above their means. That’s not a judgment on them personally, but we need to ask ourselves if we have recession-proofed our finances. The following questions can help you assess your readiness:

Do you have 3-6 months living expenses in an emergency fund?

Do you have more than one source of income?

Do you have a written budget and track your spending?

Do you have life and disability insurance?

Do you have revolving credit card debt?

3. Depending on Government is a Losing Strategy

One of the truly negative impacts of having a divided country and a divided government is that even topics of general consensus may not get accomplished. There are serious financial issues, such as the cost of higher education, the cost of healthcare, student loan debt, social security, increasing wages and tax reform that can have dramatic effects on our finances, both positive and negative.

We believe the best plan of action is to treat your finances as if you will not get any assistance from the government and if you do, it will be a bonus. If you are under the age of 50, you should have no expectation that you’ll receive any social security benefits in retirement. If you have student loans, you should have no expectation that the government will help reduce the cost or forgive any portion of it, unless you are in a loan forgiveness program, have it in writing and understand the nuances.

The point is that our government is not a nimble organization, even when there is a consensus. Big changes can often take years, if not decades. Therefore government assistance should not be an important part of any financial planning.

4. Your Money, Your Values

Finally, if you want to know what someone truly values, you may listen to their words, you may even look into their actions, but one of the most revealing aspects of a person’s values is their spending. As they say, follow the money! We may vote for a Presidential candidate every four years, but we vote daily with our financial resources. [bctt tweet=”The more we control of our finances, the more resources we can direct toward causes we value.” username=”moneyspeakeasy”] For example, if a company decided to move a factory overseas or company funded organizations that were contrary to your values, an organized voter base could decide they were no longer willing to purchase products from that company and impact that decision. Just as many Americans believe that every vote counts, your dollars and purchase decisions count. Make sure your bank statement reflects what you value most.

4 Reasons You Need to Start Investing

Let’s face it, for many investing is a difficult topic. The financial services industry has done an excellent job creating lingo and products that seem overly complex. Part of it is to justify their services; ‘If this investing stuff is too complex, give me your money and I’ll handle it for you!’ Technology is changing that dynamic and people are starting to realize that investing, particularly retirement investing, doesn’t require a Ph.D. in Math or Finance. The first step is to understand why investing is important and then to develop an openness to learning over time. This is not a forum for specific investing advice, but rather to discuss why investing is essential to reach our long-term financial goals.
Before we get into the reasons to invest, let’s make sure we are all on the same page what we mean by investing.

  1. Prior to investing funds in the stock market, make sure you have at least a base level emergency fund in place (in a separate savings account). Many people make the mistake of saving for retirement without building the foundation to prepare for the present. If you have enough money to build both at the same time, by all means, do so, but top priority should be to build an emergency savings foundation to avoid using credit cards or tapping into long-term investments.
  2. For our purposes, when we discuss investing, we are talking about long-term investing. We would not invest funds in the market needed for short-term or medium-term goals (i.e. less than five years). We’re discussing investing for goals such as building a nest egg for financial freedom or retirement.
  3. We are also not referring to the purchase of individual stocks or day trading. While that may be of interest to some, it is not advisable for the vast majority of the public. Investing has different levels and complexities. The majority of adults can develop the skills to drive an automobile safely on the roads, but we can all agree that most people shouldn’t try to become NASCAR drivers.

Now that we’re all on the same page, let’s talk about why you need to be investing!

1. You Can’t Build Wealth by Spending

Money is a resource, and like fire, it can both build and destroy. In order to be financially successful, we have to learn how to use our financial resources to build. There are really only three things you can do with money and how much of each you do can make all the difference in the world.
Spend – We do it every single day. We use our money to acquire products or services that we believe are of equal or greater value. The problem with spending is that most things decrease in value over time, so after we part with our hard-earned money, we’re left with a product or service that is immediately less valuable. If you use too many of your financial resources to purchase items that decrease in value, you cannot build wealth. This is why keeping up with the Joneses is so poisonous; it’s a race to the bottom.
Give – Interestingly enough, studies have shown that giving actually brings more and longer-lasting happiness than spending. You likely still remember the feeling of joy when you gave someone a great gift they really appreciated or truly helping someone in need. Giving also forces discipline with our finances, when you give money away, you become keener on how you manage the remaining funds. Giving is a very important aspect of personal finance and is a driving force for many to build wealth.
Save – There are different types of saving, but the idea is that you are using your financial resources with an expectation or goal of increasing its value in the future. That can take the form of a savings account, investing in the stock market, buying real estate, or even lending. This is the primary way to build assets and thus build wealth.

2. We’re On Our Own

If you are under the age of 50, it’s likely you do not have a pension and the future of Social Security is very uncertain, it may not even exist by the time we would be eligible for it. We also know that advances in health and technology that we are likely to live longer lives. We will need funds to provide for ourselves for a longer period of time without the financial assistance from business or government. If that’s not scary enough, let’s say you want to retire at 65. You work from age 25-65 (40 years), during that time you need to save enough money to live without new income for potentially 25 years (ages 65-90). People are having enough trouble building 6 months of expenses for an emergency fund. How about building for 25 years (300 months) of expenses or more? Putting a few dollars in a savings account here and there isn’t going to get the job done. You need a plan and you need to start as early as possible.

3. Inflation Can Drown Your Savings

When planning for the long-term future, people often forget to account for inflation. This can be a big mistake and can have serious consequences. Inflation is the increase of prices or the decrease in purchasing power over time. For example, 20 years ago one could go to a gas station and purchase gas for less than $1/gallon. As of this writing, it’s about $2.30/gallon, so a $20 bill that was more than sufficient in 1996 would not fill the gas tank today. Inflation (typically 2-3% per year) is like an ocean tide that is continuously raising the financial sea level. If the sea level is ankle-deep today and you stand still (don’t invest or grow the value of your assets), the tide of inflation will continue to rise and eventually you will be completely submerged. Like quicksand, standing still financially is actually sinking because inflation decreases the value of yesterday’s dollar. The only way to counteract inflation is to make sure your long-term savings are earning more than inflation.

4. Compound Interest Can Save You

So far we have given you some pretty dire news, spending won’t help, you’re all alone and the winter of inflation is coming for your assets! The good news is that you have a force of nature available that can fight the good fight and help you win and reach your financial goals, her name is compound interest. However, there are two sides of compound interest coin and you have to be on the right side to win.
If you have ever paid the minimum payment on a credit card, paid student loans, car loans or a mortgage, you have experienced being on the wrong side of compound interest. When you borrow, the investment the lender made earns interest that compounds and you pay them more in the future. This is why debt can kill wealth; your financial past is stealing from your financial future.
The right side of compound interest is much more appealing. When you invest, the earnings on your investments compound such that your future earnings also earn interest for you in the future.
Let’s use a simplified example.  You save $500/month every month for 30 years. After 30 years you would have saved $180,000 cash. Now let’s say you invested the same $500/month every month for 30 years and it received 9% interest annually, it would total over $850,000.
The difference between the $180,000 and $850,000 is the power of compound interest. Compound interest is the sunlight that provides the energy to your investment seed to grow and harvest. The two major ingredients for compound interest to be effective are regular payments and time.
While saving is important, especially building the foundation of an emergency fund or short-term goals, investing is a necessity to build real wealth. Imagine a 15-year-old family member after watching a NASCAR race said to you they don’t want to learn how to drive. They explain that “It’s too technical, too dangerous and I’m not a car person!” You would probably explain to them how not learning to drive can negatively impact their quality of life. You would also likely explain to them there’s a huge difference between daily recreational driving and professional racing. The same applies to investing, excuses like, ‘I’m not good at math’, ‘it’s too complicated’, or ‘it’s too risky’ no longer hold. There is a huge difference between day-trading and retirement investing, technology has made investing accessible to many more people and because of headwinds like inflation and government uncertainty, in our opinion, it is riskier not to invest.

7 Do’s and Don’ts of Managing Your Finances

Money management can be difficult. There are lots of opinions on how to manage your money successfully, but sifting through all that can be a challenge. We have boiled down our 7 top recommendations for managing your finances.

1. Do: Plan Your Spending Before the Money Arrives

You are the CEO and CFO of You, Inc. Think about running your personal finances like a business. Companies plan their revenues and expenses well in advance. Budgeting gets a bad rep, but successful, profitable businesses formally plan their finances and make decisions in advance of their spending.

Money is like a toddler. If you don’t monitor it carefully, it will wander off and disappear quickly!

2. Do: Aggregate Your Accounts and Track Your Spending

Aggregating your accounts, allows you to see the big picture and a number we highly recommend you track regularly – your net worth. It can be difficult to make tough choices if you don’t have the bigger picture in mind. Tracking is also important. You cannot change what you do not measure. In order to make meaningful change, know exactly how much you spent last month versus the month prior. Guessing doesn’t work well with personal finances. Once you build a habit of tracking your finances, making smart decisions about your money becomes much easier.

3. Do: Understand and Deal with Your Impulse Purchases.

For some it’s the mall, for others it may be online shopping. Have you ever gone into a store planning to spend $50 and come out spending $300? Evaluate how and why that happened. Keep in mind; it is a marketer’s job to turn a “want” into a “need.” Notice on television commercials, often the product or company isn’t revealed until the very end of the commercial. Instead of selling a can of soda, they are selling happiness. Instead of a gym shoe, they are selling peak athletic performance. Instead of selling their own product, they may have a celebrity endorse it as if it is heaven-sent. Companies hire social scientists who study how to influence human behavior, emotions and decision-making to get an edge in selling their products and services. Here are some examples to protect yourself and your wallet:

  1. 24-hour rule – Wait at least 24 hours before making purchases over a certain amount
  2. Do not go grocery shopping on an empty stomach
  3. Deconstruct advertisements: what are they really selling?
  4. Use cash for non-regular expenses
  5. Don’t fall for terrible excuses (“I deserve it”, “it’s on sale”, “I’ll pay it off next month”)

4. Do: Develop a Habit of Saving and Automate It.

Even if you start small (i.e. $25/week), put systems in place that force you to save. The government understands this very well, which is why employee payroll taxes come out of your paycheck even before you are able to touch it. Apply the same strategy for your savings. Some employers will allow splitting your paycheck to different bank accounts (i.e. 75% checking, 25% savings). Another idea is to set a recurring transfer from your checking account to your savings on the same schedule as your paycheck. There are other automatic features to consider such as:

  1. Auto escalating your 401k contributions – some employers with a 401(k) offer an option to automatically increase your retirement savings by a certain percentage on a regular basis (i.e. increase 1% annually)
  2. Keep the change features in checking accounts – Some checking accounts will round up your purchases and put the change in your savings account. It is the e-version of the piggy bank. If you purchase an item for $5.60, it will round up to $6.00 and $0.40 will be deposited in your linked savings account.

5. Don’t: Ignore Your Credit Score and Credit Report

A credit score is very important to be aware of and to know how to improve. Credit scores have traditionally been used to evaluate credit-worthiness for extending loans (e.g. personal loans, mortgage, car loans, credit cards) and the higher the credit score, the more financially credit-worthy one is. The reality now is that both credit scores and credit reports are being used beyond financial transactions. Credit scores and reports are being used for employment decisions, housing, insurance premiums, and even utilities such as cell phones and cable. The challenge is credit reports often have mistakes which can negatively impact your credit. Check out our Resources Page for resources on checking both your credit report and credit score.

6. Don’t: Ignore Your Workplace Benefits

If you work for a company and do not understand the full scope of your employee benefits, it may be time to check out your HR Benefits website or set up a meeting. Particularly with larger companies, there are often benefits that go underutilized that can save you hundreds if not thousands annually. One of the largest ones is the 401k match. For most people, this is a no-brainer to at least invest as much to maximize the match as it is a 100% return on your investment. Wellness Initiatives can often mean big savings as well. Many companies are offering rebates on health insurance premiums for wellness activities, such as physicals or wearing fitness trackers. Let’s think about that for a second, companies are paying additional cash to employees to be healthier. There are several other types of benefits, and we’ve created a FREE Guide to help you maximize benefits that are offered to you.

7. Don’t: Keep up With the Joneses

Most people are familiar with the term ‘Keeping up with the Joneses,’ but just so we are all on the same page, it refers to making material comparisons to your social circle. The idea that if your neighbors or friends buy a new car, you should too. We call this the comparison trap and its one of the lessons we learned paying off our student loan debt. Part of the problem with comparing your financial status with others is that it is very difficult to know someone’s complete financial picture. Money is still a private topic and everyone has different income, expenses, debt obligations and assets. The people you are comparing yourself to could be completely up to their eyeballs in debt or fund their lifestyle through an inheritance. Making comparisons, not only could be comparing apples and oranges, but it also casts your own possessions in a negative light.

“Comparison is the thief of joy” – Mark Twain

A few reasons why keeping up with the Joneses is a bad idea:

  1. The Joneses are broke! According to a recent Bankrate survey, 76% of Americans are living paycheck to paycheck with little to no emergency savings. Why keep pace with people that are one emergency away from financial catastrophe?
  2. When you compare yourself to others, it’s much easier for wants to become needs. Wanting a car becomes needing a brand new SUV. Technology like smart phones, that didn’t exist 10 years ago, are a now a need. We have a desire to show off and have our success validated by others.
  3. Companies are spending billions of dollars to market their products and services to you. Many luxury brands are selling a temporary feeling of exclusivity in exchange for premium pricing. For example, a luxury shoe could be made in the same factory as an off brand shoe, but once they slap the logo on, they can charge five or ten times more. Luxury and quality are not the same. It is easy to get sucked into the consumerism culture. Happiness from possessions is always temporary and fleeting.

This leads us to the fundamental challenge of managing your finances. We live in a consumerism culture and an economy fueled by consumer spending. On one hand, we have many of the influences we described (social, corporate, psychological, economic) with a clear mission to separate you from your income. Those influences contend with our own goals to keep our income and grow it for the future. These recommendations will help you be better equipped to keep more of your income to reach your financial goals.

If You Hate Maintaining a Budget, Track these Two Numbers Monthly

As personal finance nerds, we are interested in where every dollar goes, what bucket it falls into and how that compares to the previous week, month, and year. Most people are generally not interested in tracking every dollar. Some people say, “I’m just not a math person” or “that’s just more detail than I care to know.”

If forced to come up with two metrics to evaluate your financial progress, we would have to say without a doubt, it’s your net income and net worth. Let’s define both and then let’s talk about why these are the most important financial measures to track.

What is your Net Income?

Your net income is simply taking your monthly after-tax income (the amount that comes into your bank account) and subtracting all of your expenses during the month (housing, food, utilities, transportation, debt payments, personal, etc).

Net Income = After Tax Income – Expenses

If you were a business, your Net Income would be called ‘profit’. You need to know what your profit is each monthly. You don’t want to run a business that’s losing money each month. You want your net income to be positive each month and you want it to be growing over time.

A common mistake people make is that as their income increases, they increase their spending along with it (a.k.a. lifestyle inflation). So if you get a 3% raise at work, but you increase your spending by 4%, you could actually be worse off financially, that’s why tracking net income (profit) monthly is so important.

 

What is your Financial Net Worth?

Your financial net worth is simply adding up all your financial assets (everything you own) and subtracting all of your financial debts (everything you owe).

Net Worth = Assets – Debts

Financial Assets can include real estate, securities (stocks, bonds, mutual funds), vehicles, checking, savings, cash or anything you can sell and turn into cash. Alternatively, your debts can include mortgages, credit card debt, personal loans, home equity loans, student loans, etc.

Let’s be clear about a few things, first, never confuse your financial net worth for self-worth. Regardless of whether you’re a millionaire or your net worth is negative, it says nothing about who you are as a human being. We live in a ‘more is always better’ culture, we glorify millionaires and condemn the poor, but that is not the goal of this measure. Your financial net worth is simply a number that applies to you individually or as a family to track and increase over time to assess how close you are to reaching your financial goals (i.e. financial independence).

Second, the majority of Americans have either zero or negative financial net worth, so if they sold everything they owned, they would either have nothing left over or would still owe money. Many young professionals fall into this bucket due in part to student loans. Building your savings and getting out of debt both increases your assets and reduces your debt, thereby increasing your net worth.

Why are net income and net worth the most important numbers to track?

Good question! Why not Salary? Savings? Credit Score? The answer is simple, your net worth is the bigger picture goal, net income is how quickly you’re moving towards that big picture goal.  In your financial journey to your financial destination, your net worth would be the miles traveled to your destination, your net income is how fast you’re driving.  There are all sorts of metrics that you could measure if you were taking a cross-country journey, but if we had to choose only two, we would want to know how far we’ve gone (net worth) and how fast we’re moving (net income).

Both Net Income and Net Worth are simple formulas and there are only two ways to increase them:

  • Increase income/assets
  • Reduce expenses/debt

Increasing Income/Assets

Unfortunately, the majority of our expenses (after our essential expenses) are for items that decrease or depreciate in value. So when we buy a pair of shoes or a phone, if we were to sell it used a month later, we would receive much less in return than we paid for it. On the other hand, if used the same money to purchase stock ownership in the company that manufactured that shoe or phone, that stock could potentially increase or appreciate in value over time. When you hear phrases like ‘the rich get richer and the poor get poorer’ that is partially because wealthy people are more likely and able to purchase appreciating assets (e.g. businesses, securities) and the middle class and working class are more likely to buy depreciating liabilities (i.e. debt – a.k.a. stuff that makes us look/feel rich, but actually make us less wealthy). A depreciating liability, such as a car note, is a double loser because not only is the car rapidly declining in value, but it’s also financed from a bank, which means paying additional money in interest (increased cost & reducing value).

We have to change how we look at what we buy and whether showing off our expensive stuff is more important than actually growing our wealth. Recent studies have shown that 76% of Americans are living paycheck to paycheck, that includes high-income earners, so the people we compare ourselves to or try to impress are likely broke.

We also have to change the way we think about our income. It’s often said when talking about investing, that ‘you don’t want all your eggs in one basket’, you have to diversify your investment assets to reduce risk. Well it’s much less talked about, but just as important to diversify your income because having one source of income is just as risky as having all your investments in one stock.

In order to put more wins in the asset/income columns, the focus should be to develop multiple sources of income and free your income to purchase assets that appreciate in value. Building an emergency fund, increasing your 401k contributions, contributing to an IRA, are all ways to increase your assets in the near term.

Reducing Debt/Expenses

The other end of increasing your net worth is reducing your debt. Everyone has different types and levels of debt, but the most advantageous position to be in financially is having no debt. There are entire industries that rely on people getting and staying in debt. Credit cards, auto manufacturers, mortgage lenders, banks are examples. In fact, the credit card industry calls people that pay their balance in full every month, deadbeats. They are deadbeats because the card companies aren’t making any money off them in finance charges. If you choose to use credit cards, please be a deadbeat! Unfortunately, in our culture we have become accustomed to debt as a way of life. When we start to understand how much debt impacts our ability to reach our financial goals, we begin to make different choices. Keep in mind, our debt is someone else’s asset (i.e. banks, credit cards, auto companies, mortgage lenders), just like your loss is someone else’s win.  If you are a lender, the loan contract is an asset that appreciates. You lend someone $20K for a car purchase and you’re paid back $22K over 5 years.

In order to reduce losses in the debt/expenses columns, the focus should be to free your income to pay off debt more quickly and avoid additional debt. Also, reduce the purchasing of items that depreciate in value. Tracking your spending for a month, using only cash for 60 days or selling possessions are all ways to increase income or reduce expenses in order to reduce debt.

The Bottom Line

The bottom line is that we cannot wear or drive wealth. In one camp, the majority of millionaires live well below their means, drive used cars, and live in modest homes (read: The Millionaire Next Door).  However, in the other camp, the majority of Americans live far above their means, live from paycheck to paycheck and finance their lifestyle with debt. There are free online financial aggregators such as mint.com that will allow you to centralize all your financial accounts and calculate your net worth automatically. Tracking your net worth monthly allows you to become more aware of not only which camp you’re in, but also allows you to know how close you are from moving from one to the other.