What Britain’s “Nudge Unit” Can Teach Us About Achieving Goals

May 12, 2017

In a recent episode of the Freakonomics podcast called “Big Returns from Thinking Small,” two members of “The Nudge Unit” (an arm of the British government designed to help save money) talk about the process they use to help improve processes and save money. They also dive into how they take that process home with them and make progress on their personal goals. It’s a 7 step process that could very easily be replicated by anyone to make progress on their own personal financial goals.

Step 1: Set a goal!

What is it that you’re trying to improve? Some examples are reduce your debt, increasing your retirement savings, buying a house, and building an emergency fund. These goals can be very simply stated and right to the heart of the matter.

Step 2: Make a plan.

This is where the goal becomes actionable. Using some of the above examples: Pay an extra $100 per month on your credit cards. Sign up for the rate escalator and increase your 401(k) contribution by 2%/year.

Step 3: Make a commitment (a public one).

I’ve done this with exercise goals. I have used the website stickK.com as well as their phone app to commit to a goal and have a “referee” to hold me accountable. I haven’t used my kids or my girlfriend as a ref because they’d likely be too lenient and let me off the hook. Instead, I’ve used friends and former teammates who will have no trouble telling me I fell short. Whatever your goal is, ask a couple friends to be your “accountability partner.”

Step 4: Have a reward or punishment in place.

For many people, it helps to have a reward or punishment system. Allow yourself to buy a few books or running shoes or something small but fun AFTER you pay off a credit card. Take a nice vacation AFTER you pay off your student loans.

Donate $50 to a charity that goes against every fiber in your being or wear the jersey of your most hated sports team if you don’t reach your financial goal. (If you’re a Game of Thrones fan, you could always ask a friend to get a bell and walk behind you, loudly saying “shame” if you fall short of the goal.) Knowing the consequences – good and bad – of your actions can help you stay focused on the task at hand.

Step 5: Share the goal.

Post your goal to Facebook, Twitter, Instagram, etc. so that you are publicly declaring your commitment to the goal. Ask your friends for support or see if anyone wants to join you in your quest to help make progress in their lives too. When I’m hiking, going uphill always seems easier when I’ve got someone with me to talk to. The same concept applies when trying to reach the top of the hill financially.

Step 6: Get feedback.

Measure your progress. If you have $10,000 of credit card debt and want it gone in 3 years (36 months), do an end of each month measure to see if you’re reducing $277.78 or more of debt. Tracking your progress and knowing exactly where you stand toward your goal can be massively motivating.

Step 7: Stick!

Practice progress. Celebrate it. Course correct when needed. Learn from the process.

Keep doing what’s working and do more of it if possible. Stop doing things that take you further from the goal. Be resolute and gritty on your way to reaching your goals.

This is the process that a unit of the UK government used to improve their processes and save money and helped the members of that unit replicate that success in their personal lives. It works. If you use this rough framework, you can nudge yourself ever so gently into reaching just about any goal that matters to you.

What Tesla and United Can Teach Us About Investing

May 05, 2017

In another of my “grumpy old man” rants here, I’m absolutely mystified by investors and the car company Tesla. Sure, they make cool cars. Sure, they are selling directly to consumers and bypassing the traditional dealership model. Sure, every time I see one I give it a long look and think “that’s pretty awesome.” But in the midst of all of all of that, I just don’t understand how their stock price can be so high.

Tesla passed General Motors as the #1 US car company recently. Last year, Tesla sold about 76,000 cars. GM sold about 10,000,000. GM made over $9 BILLION in profits last year, while Tesla has had 2 profitable quarters…EVER! It is perhaps due to the “cool factor” that Tesla is now the #1 car company in the U.S. based on market capitalization. (Market capitalization is simply the number of shares outstanding times stock price.)

Clearly, the stock market is rewarding more than just financial results. As someone who has all but stopped using Facebook, never liked Twitter and is not a fan of social media in general, it seems that the stock market is moving away from rewarding the old school “logic and reason” of profitable companies seeing their stock price rise and companies who have yet to hit their stride from a profitability standpoint not getting much traction in the market. There are a lot of future expectations built into stock prices. This makes it hard to be an investor.

Heck, one video was able to move the stock price of United Airlines. This is a company with $9.1 billion in revenue in just the 4^th quarter of 2016 and the stock price moved because of one cell phone video. This age of social media definitely has ripple effects in the investment markets. No one could have predicted in advance that United would have been hit by a wave of negativity after a cellphone video went viral or that an unprofitable car company would be worth more than General Motors.

Picking individual stocks and outperforming the market is HARD! Most professional managers struggle to beat their respective index. If you bought Apple very early on, you’re probably a pretty happy investor. If you bought Enron or MCI WorldCom, probably not so much. All of those companies had spectacular performance at some point in their history, but only one is still in business.

That’s why it’s becoming increasingly more important to diversify your portfolio. Having a mix of stocks – small, mid-sized, large, international, emerging markets – and bonds and cash can help you avoid devastating losses like many investors experienced in 2008. Check out my blog from last week and get to know who you are as an investor and build a low cost, non-emotionally driven portfolio.

Since I started with a grumpy old man rant, I’ll end with an old phrase that we’ve all heard countless times in our lives. Don’t put all your eggs in one basket! In the investment world, it simply makes sense.

What’s the Market Going to Do Next?

April 28, 2017

One of the questions I’ve been getting asked A LOT recently is what I think the stock market is going to do. My usual answer is that it’s going to go up, and it’s going to go down. The only thing I don’t know is how much it will go in either direction or when the tide will turn. In essence, I’m useless when it comes to predicting the future movements of the stock market. That usually leads to a conversation around their retirement timeline, their ability/willingness to absorb losses in the stock market and their opinions about the future.

It was right after one of these calls that I read this story about a hedge fund manager who is giving back $1.25 BILLION in cash to the investors in his fund! That’s astounding, primarily because that’s over a billion dollars that the fund will no longer get paid a fee to manage. Even a small fee on over a billion dollars is a pretty big amount of money to give up.

Why is he doing this? He’s concerned that the stock market is overvalued and that he can’t find the right investments to buy in order to give his investors the type of returns he would like to provide. Now, let’s not shed any tears for him. He’s still got over $16 billion invested, and I’m pretty sure that’s enough to keep the lights on and food on the table.

But it is tangible evidence of someone believing that the stock market might be a bit overpriced right now. There are also managers who believe that the market, because of economic growth, job growth and corporate earnings – is poised to move upward for quite some time. (I’m still solidly in the camp of “I don’t know which way the market is going.”)

But whether the market goes up or down or sideways in the next few months to the next 3-5 years shouldn’t prompt you to take any action. The key to long term wealth building (and that’s why we all invest) is to pick a strategy and stick to it in good and bad markets. Investors who did nothing in response to the market collapse of 2008 were better off within a few years than the day before the crash. Those who moved everything out of stocks as the market tanked or after the market tanked may still not be whole.

The first thing you can do is to understand who you are as an investor. Here’s a quick investment risk quiz that can help you figure this out and gives you some hypothetical portfolios that might be appropriate for your particular risk tolerance. When your overall risk level changes due to changing time horizons, retirement goals, age, family circumstances, etc, it’s time to reallocate your long term investments.

When pressed for time, I ask a one question risk tolerance quiz. “On a scale from 1 to 10, where 1 is the most conservative investor in the world (money in the mattress) and 10 is the most aggressive (willing to put all of your money on a couple stocks and see what happens) – what number would you give yourself?” If someone answers 3 or 4 then 30-40% of their long term investment portfolio could be allocated toward high growth/high risk investments like stocks.

It’s by no means a comprehensive approach, but it has a very consistent answer with the other quiz above as well as other similar quizzes. In a former role, I had about a dozen clients take 5 or 6 different risk profile quizzes. They all came out with roughly the same answer and it was pretty darn close to the one question risk quiz.

So in spite of the fact that a hedge fund manager is giving back a big chunk of money to investors because he thinks the market is overvalued and other managers are incredibly optimistic about the markets moving forward, your goal as an investor is to understand who you are, get to an asset allocation that is consistent with your time lines and goals, and don’t get too high when things are good or too low when things are bad. From my experience, emotions are the enemy of good decision making and this applies to investing as well. Markets, like many things in life, are cyclical and if you’re patient and consistent, good things usually happen.

Free College – It’s Not Just a Political Slogan Anymore!

April 21, 2017

In a development that has young people (and their parents) celebrating a little bit, New York state has become the first state in the country to offer free tuition for two AND four year degrees to in-state residents at state colleges/universities. For many families, this is going to open up new possibilities and some kids who thought college was out of reach are going to get a degree. There is no doubt that this program will benefit lots of families. But just like there is with any program that is rolled out, there will be some “catches” or limitations. For those who are thinking of moving to New York in order to take advantage of this program, there are some limitations you should know about:

There is an income cap of $100,000 currently and that will be increasing annually so high income families will not be eligible for this program.
The program is able to be used for two years for a two year degree and four years for a four year degree. So if like ~80% of my college rugby team, it takes longer than four years to graduate, the program won’t be available in your second or third senior year.
Upon graduation, if the student doesn’t stay in New York for two years or four years (depending on two or four year degree), the scholarship money (the program is structured as a scholarship equal to tuition, not room/board/books/etc.) that was received is converted to a student loan.
The scholarship, as noted in the prior bullet, is only good for tuition. Books, fees, housing and incidentals aren’t covered by this so students without a strong support network will be required to work or use student loans to cover the remaining costs.

These are a few of the potential drawbacks of this from the student’s standpoint. New York taxpayers will have the drawback of funding these costs upfront and the goal of the legislature is to increase the overall education level of the workforce, thereby increasing incomes of those remaining in the state after graduation and those incomes will be taxed in New York state. In theory, this program could pay for itself over a long enough time frame. Whether it does or not or whether that even matters is a topic that I’m seeing debated on social media currently and I’ll avoid that debate for now.

There is definitely a lot of discussion, debate and movement toward making college a less expensive proposition. Lots of municipalities are approaching this in different ways. I’m not sure how it will progress, but as the parent of one child in college and two on the way, I’m DEFINITELY interested in seeing how this plays out. As more states propose and pass legislation, I’ll be potentially considering a move to a state that offers a sweetheart deal!

Failure Is All Around Us – And That’s a Good Thing

April 14, 2017

One of the consistent themes in life – in virtually every facet – is failure. It was one of the things that the University of North Carolina basketball team talked about after they beat Gonzaga for the national championship. Last year, UNC lost in the national championship game to Villanova University. This year’s team used last year’s loss as motivation. There are countless examples in the sports world of a failure being used as a motivation for a future success, but it only works if something is learned in the process.

We see that when we are interviewing candidates for positions here at Financial Finesse. At some point in the process, the conversations usually turn toward their biggest successes and failures in life. It’s amazing the stories that we hear about both sides of that equation.

More often than not, the lessons learned from the failures are much more valuable than the lessons learned from the successes. The same concept has proven to be true in the financial lives of many employees I talk to each week. There are a few “rules” that I use when coaching a person through a failure to help them not repeat it and to end up in a better place because of the lesson learned in the failure.

1. Forgive yourself. There is absolutely nothing to be gained from berating yourself and giving yourself negative messages. Say “I messed up this time, but I’ll get better.”

One of the more common “failures” people talk to me about is amassing credit card debt. They view it as a personal failure, and many people think that they’re the only person in the world who has gotten a little bit in debt. When they learn that others have been in this position (and MUCH worse) and then gotten themselves out of debt with just a few slight tweaks, they can exhale, begin to forgive themselves for the debt, and prepare to move forward.

2. Figure out why it happened. What exactly led to the failure? Was it a lack of attention? Was it a disregard for the consequences? A lack of information/education or something outside of your control?

Once you figure out the why, the real learning is possible. In the debt situation, it’s usually a simple lack of attention to detail that created the issue. A $20 purchase here, $25 there, a doctor’s visit with a copay and a night out with friends and all of a sudden there is more month than paycheck – and the need to use a credit card is there. If that pattern persists for long enough, there can be a few credit cards approaching their credit limits.

It’s not malice or blatant carelessness. It’s a gradual slow creeping up of credit card debt that happens when there isn’t a focus on exactly where each dollar is going. I’ve met a lot of people with significant credit card debt. Exactly zero of them woke up one day and said “I’m going to max out four different cards today and then struggle to pay them back.” It’s a slow build, and once there is a realization of that – the pay down can start.

3. Recognize that whatever the failure is, it isn’t YOU. It’s usually just one behavior that if modified ever so slightly, can be turned into a strength/reason for your next success. The tired old movie line “it’s not personal, it’s just business” is important here.

Don’t take a financial speed bump as a personal failure. It isn’t you. It’s situational…and situations can change.

4. Change whatever that behavior is! This is by far the most important step. The old “if you keep doing what you’re doing, you’ll keep getting what you’re getting” phrase comes to mind.

Usually, changing a behavior isn’t as tough as we think it is. I’ve started to use an app to track my exercise and nutrition and as a result, my level of fitness is increasing while my level of body fat is decreasing. One quick change – using an app to log my meals and my exercises – is helping me make very small changes that are providing good results.

5. Stick to the positive change. The world is filled with stories of people who have made progress, only to regress after a short period of time. I’ve had friends lose 25-50 pounds, only to put on 30-55 after burning out of the program they used to lose it. I’ve seen people file bankruptcy because of massive credit card debt, only to rack up another $40-50k in credit card debt within a year or two of the bankruptcy. Progress is best when it’s sustainable.

It’s impossible to go through life without experiencing failure. If someone does, it means they’ve either never tried anything difficult or they have absolutely zero self-awareness and don’t recognize their failures. Neither is ideal. So if it’s virtually impossible to go through life without experiencing it, embrace the failure that is all around us and use it to motivate you to a future success.

Which Health Insurance Plan is Best For You?

April 07, 2017

Recently, healthcare in America has been a rather newsworthy topic. Congress failed in their attempt to repeal and replace Obamacare. Large insurers are dropping out of the exchanges and premiums are rising rapidly.

I’ll leave the fixing to our “leaders” in Congress, but most people don’t purchase their insurance through the exchanges. They have coverage through their employers. When you consider how expensive health insurance premiums are for individuals and families who have to purchase their own coverage, employer-paid medical insurance is a very valuable benefit. In fact, when discussing early retirement packages with employees, the #1 concern – by far – is what health insurance coverage they will have after they leave their employer and how much it will cost.

Taking the time to understand what your employee benefits package offers so that you can choose the best plan for your needs could be time well spent. When open enrollment comes around, carve out some time to evaluate your options. These are some of the things you may see when you look through your options:

Medical Coverage

Medical plans are usually either the indemnity or managed care type. (You may be offered both.) You’ll want to know how the plans differ so that you can choose the one that’s best for you.

Indemnity Plan

An indemnity or fee-for-service plan lets you choose any medical provider. Either you or the provider sends the bill to the insurance company, which pays part of it, usually after you’ve met your annual deductible. Once the deductible has been satisfied, indemnity plans typically pay 80 percent of the cost of covered services, while you pay the remaining 20 percent. The plan may pay for medical tests and prescriptions, but it may not pay for some preventive care, like check-ups.

Managed Care

The oldest form of managed care plan, the health maintenance organization (HMO), offers members a range of health benefits, including preventive care, for a set monthly fee. There are different types of HMOs. In a staff or group HMO model, doctors are employees of the health plan and you visit them at central facilities. In an individual practice association (IPA) or network, the HMO contracts with physician groups or individual doctors who have private offices.

Some HMOs require no payment for doctor visits while other HMOs require a small co-payment (typically $5 to $20) for most services. If you belong to an HMO, the plan only covers the cost of charges for doctors in that HMO. If you go outside the HMO, you usually pay the bill.

Many HMOs offer an indemnity-like option known as a point-of-service (POS) plan. In a POS plan, members can use providers outside the plan and still be covered to some extent. If the HMO physician chooses to refer a patient outside the network, the plan pays all or most of the bill. If you choose to go to a provider outside the network for covered service, you may incur greater expenses than just the co-pay.

Although a part of managed care, a preferred provider organization (PPO) closely resembles an indemnity plan. A PPO has arrangements with doctors, hospitals and other providers who have agreed to accept lower fees from the insurer for their services. PPO doctors can make referrals to other physicians and plan members can self-refer to non-PPO doctors as well.

If you go to a doctor within the PPO network, you generally pay the plan’s standard co-payment. If you choose to go outside the network, you may have to meet the deductible and pay a co-payment based on higher charges. In addition, you may have to pay the difference between what the provider charges and what the plan will cover.

Dental Coverage

Like health plans, dental plans also follow a fee-for-service or managed care model. In a fee-for-service plan, your monthly premiums cover a portion of your dental expenses. Generally, this type of plan will pay 100 percent of the cost of preventive services, 80 percent for common restorative services, and 50 percent for major treatments, such as crowns and orthodontics.

Under a managed care plan, you’re required to choose from a pool of screened dentists and pay a co-payment for treatment. The co-payment amount can vary according to the procedure. While preventive procedures usually are performed without co-payments, more advanced procedures will have higher co-payments, and there may be limitations on coverage of certain major procedures within a given period of time. Some plans are flexible, offering services through an HMO or PPO option.

Vision Coverage

Most vision plans offer coverage for comprehensive eye exams as well as for lenses and frames. The cost of the plans generally depends on how frequently the services are used and at what level the deductible is set. You may have the option to pay an additional premium for added coverage (for things like extra or special pairs of glasses and hard and soft contact lenses). Non-insured discount plans for exams and lenses are available as an alternative to insurance and can provide retail discounts of up to 40 percent.

The bottom line here is that your employee benefits package is worth a whole lot more than you probably think it is. Don’t be one of the people who takes it for granted and just checks some boxes. Find out which health plans and options your employer offers and then study them to determine which provides your family with the greatest benefits. Your employer’s human resource representative or health plan administrator can provide information to help you match your needs and preferences to the available plans. Look at the pros and cons of each option presented to you and make the best choice for your family.

Do the same thing each year. Don’t assume that just because your current plan worked last year that it’s still going to work this year. There is a lot of change in this area on an annual basis, so keep your eyes open for what might be a better choice.

Financial Lessons From a Chess Board

March 31, 2017

I don’t always watch 60 Minutes anymore, but when I do, I am reminded that I have liked it since I was a kid. That brings up a few points. First, the show has been on a very long time! Second, I was a weird kid – watching 60 Minutes while my neighborhood friends rode their bikes. I’d join them before and after so it’s not like I wasn’t social too…just nerdy.

In a recent episode, there was a story about a man teaching chess to kids in Mississippi. Google “60 Minutes chess” and watch the quick story. Here’s a quick synopsis of the segment. What I found fascinating is that while he’s teaching the kids to play chess, he is actually teaching them about far more than that. He’s teaching incredibly valuable life lessons.

I have some odd thoughts on parenting, but I’ve summed it up this way: If I teach my kids how to win with class, lose with grace and think through a decision making process, I’ll feel like I’ve prepared them for the real world. That’s a part of what he is teaching these kids.

Chess, like life, requires patience and constant learning in order to succeed. They kids, like all of us, learn more from their losses than their wins. For them, this is because they review the losses for what they could have done better. The sting of a loss is a great teaching tool.

In a way, conversations about money can have that flavor too. I’ve talked with a lot of people who start their conversations with me by saying “I’m lousy with money” or “I’ve made a lot of mistakes in my financial life.” The good news is that they recognize that they could have done things differently. The downside is that they haven’t worked with anyone, like a coach, who has been able to help them review their mistakes and provide suggestions for ways to improve based on those losses.

When I hear conversations start that way, I immediately stop the conversation and tell people that they are no longer allowed to speak negatively about their financial skills. I ask if they were handed a violin and put on stage with the New York Symphony, if they’d do well or if they’d fare well in a chess match against Bobby Fisher (for those with great memories) or Magnus Carlsen (for a more current reference) if they have never played before. The answer is a universal “NO.” Those are skills that are honed over a lifetime of practicing and learning.

Managing your personal finances is way easier than mastering chess or the violin so it won’t require nearly as much effort or skill. In fact, it’s relatively simple to become a financial success. There have been years worth of blog posts in this space giving little tips about how to become financially well/secure. I’ll close by summing up several years of posts in a few bullet points:

Spend less than you take home.
Save 15-20% of your income for retirement.
Have a healthy emergency fund. (Start with $1,000, get to $2,500, and then get to 6-9 months of expenses over the course of time.)
Pay attention to where you spend money. No one will care about your money as much as you, so guard every dollar that you work hard to earn.
When you mess up, which we all do, figure out why. Learn from it and don’t repeat it.

What Do You Owe You?

March 24, 2017

As someone who loves a good “pregame speech” and has heard and given fiery speeches before and during games, the field of motivational speaking is one that I enjoy. It turns out that one of our newest planners, Vekevia, shares a love of a good fiery speech. We talked about this recently and she shared this with me:

I love listening to motivational/inspirational speakers. They remind me of why I’m working towards a particular goal, which is what helps keep me going when things are tough or just not running as smoothly as I’d like. They drive me to keep pushing forward when what I am seeing doesn’t necessarily look as promising as I envisioned.

That helps in life goals and is especially true with financial goals. I heard one motivational speaker, Eric Thomas, ask the crowd a series of questions to get them to self-reflect. His message was “You Owe You” and I want to share the questions he asked:

“Know ‘what do you want’. What do you want in your marriage? What do you want with your son and your daughter? What do you want in your health? What do you want financially? How much money do you want to make a year?

What do you want to drive? How do you want to live? Stop just waking up like an accident. What do you want? And then, once you find out what you want, spend the rest of your natural life waking up and going after it.”

Managing your finances/financial planning is a life-long process. You don’t get to just plan today and then that’s it. You’re done.

For some, that can sound like a daunting task, especially if you don’t enjoy the process. I think that’s what makes it even more important to know why we have the financial goals that we have. Here are some tips to figuring that out.

Identify the ROOT of your goal. Know your big picture.

How to do it:

Go beyond your need to save to send your kids to college, pay off your student loans or buy a house. Do you want to give your kids a life full of better opportunities than you had when you were growing up? Do you want to be debt free and create or continue growing wealth in your family or simply gain a sense of freedom? Do you want to move into another neighborhood to surround yourself and/or your family with better opportunities? Do you want to live more comfortably?

Determine WHAT has to happen for you to get to that goal.

What to consider:

Do you have to stop spending as much on eating at restaurants or other forms of entertainment? Do you need to get a handle on how much you swipe your credit card? Do you need to sit down with your spouse and get on the same page about your finances?

Tools:

Easy Spending Plan

Expense Tracker

Debt Inventory

Create a clear plan of HOW you’re going to make it happen.

How to do it:

Get Smart About Your Financial Goals

Include some goals that are short-term so you have small wins and give yourself some “atta boys” along the way. Include long-term goals as well so you are always planning for consistent progress. Take advantage of resources you have through your financial wellness program at work. Find out what assistance is available through your employee assistance program (EAP) at work.

Do something daily and make it a HABIT.

How to do it:

List small steps you can take every day or every week to get you to your long-term goal. I live by my calendar. Work tasks are included. Workouts are included…everything. If it’s in my calendar, it’s getting done.

Self-reflect.

What does that mean?

At times, taking a minute to “stop and smell the roses” makes sense. It allows us to reflect on where we are, where we’ve come from and where we’re going. Pausing for a moment to experience the “now” and be grateful for all that we have provides a meaningful context for pushing forward.

Alter your plan if it’s not working.

What to consider:

Why isn’t it working? Do you need to make a simpler goal? Were the steps unrealistic or too ambitious? Do you need an accountability partner? Make changes to your plan accordingly so that your next steps take you closer to your goals.

Reward yourself.

Really?

I’ve found that people who are always pushing toward a goal without acknowledging their own success have a tendency to backslide or mentally break after a period of time. Reach a goal and congratulate yourself in some small way. One of my coworkers is working toward some fitness goals and is watching his food intake and his exercise routine. When he hits a milestone, he allows himself a “go crazy day” without working out and eating a gigantic plate of nachos, knowing that the next day, it’s back to the grind. Knowing that a small reward is ahead allows him to stay focused in between milestones.

It’s up to us to live up to our full potential. We have goals and we have to find a way to make them happen. We have to find a way to work around what we can’t control and do everything in our power to find a way to win. You owe it to you to become financially secure. If this blog post isn’t enough to motivate you toward your goals, watch Dr. Eric Thomas and he’ll light a fire that will help you get started toward your goals.

Have Financial Secrets? Why You Should Just Let It All Out

March 10, 2017

One of my crazy theories of life is that talking to others about your financial life is more intimate and personal than talking about any other topic in life. I have been at holiday parties in the past and learned within minutes of meeting someone that they are unhappily married and having an affair. To test that theory, I have asked about that individual’s job, ballpark annual earnings and amount of debt – only to be told that those questions were far too personal. I explained that I wasn’t being a jerk. I was testing a theory about money being a more intimate subject than intimacy, and they laughed and agreed.

When I read this article about financial secrets women haven’t shared with their closest of friends, it didn’t surprise me. In my role here at Financial Finesse, I routinely hear people tell me that they are coming to me for guidance and direction before they admit their financial secrets to their spouse. In the article, one woman admits to being broke from divorce, one has $100k in student loans, another has a credit card problem, one has no savings, one says her credit score sucks, another says that childcare eats up everything she earns and the last one has been unemployed for two years. These are all issues that I’ve talked with people about over the course of time and helped them develop solutions, but without that initial conversation, the problem remains in the shadows and creates unnecessary tension and stress.

When I’ve had these conversations with people, the overwhelming emotion at the end of the conversation is relief. They feel like they’ve been able to unburden themselves in a safe environment with someone who won’t judge them and who will work with them to help find a way out of the situation. Often, the burden of carrying a secret is worse than the actual secret. Apparently, the old political phrase “the cover up is worse than the crime” has a financial corollary.

If you’re walking around with a secret in your financial life that makes you feel like you carry a heavy weight on your shoulders, do yourself the favor of talking to a financial professional about it. Getting the secret out is the first step. From there, a plan can be put in place – regardless of what your financial burden is – to make progress.

You will be surprised by how liberating it is to just share the secret. (One of my favorite art projects ever is Post Secret, where people share life secrets anonymously and countless suicides have been prevented). That’s the first step in resolving the issue. So get out there and ask for help – whether your issue is credit card debt or trying to figure out how to minimize the tax burden on the sale of a big block of Snapchat stock. It’s a sign of wisdom, not weakness, to get help where help is needed.

Getting Smiles Into Your Days

March 03, 2017

As I sat down to write a blog post, my phone’s text message alert went off. One of my friends sent a message that he was watching the Baltimore Orioles first spring training baseball game of the year. He sent that to a group of us who get together periodically to go to baseball games and that message made me smile. When pitchers and catchers report to spring training, it tells me that warm weather is right around the corner. The first day of spring training games is almost a holiday in my mind.

Opening Day is one of my favorite days of the year. As a kid, my uncle took me to a lot of Opening Day games in Baltimore and that feeling of being a kid taking the day off from school to watch baseball still hits me as an adult. Baseball, to me, means the end of winter and the start of spring and summer which are my favorite seasons. It’s all about renewal and hope (for a winning season). On Opening Day, everyone believes that their team has a shot at winning the World Series.

I’ve seen the spirit of hope and optimism hit employees of our client companies when we have had a few conversations and their debt level starts to come down. A large percentage of people I talk to are coming to me for help with reducing or eliminating their debt load. In those cases, the first meeting is usually one where they come in looking very tense and full of stress. Being overwhelmed with debt, from my observations, is bad for a person’s posture, mood and stress level.

After the initial conversation, we put together a personalized plan of attack for their debt and we check in periodically (the time line depends on the person and the severity of the debt load) for what I like to call “brag sessions.” In a brag session, they come in and tell me how much of their debt they’ve been able to pay down since our last meeting. We celebrate the progress and acknowledge that there is still room to go. The important part is that these sessions are enjoyable and we are always looking for ways to make more progress.

In many cases, after a couple years of check-ins and brag sessions, the debt level is close to zero and you can see their eyes light up when talking about what life will be like when they get to $0 debt. I’ve had a number of people come in to the office and pull up their final credit card balance on their laptop to show me that they just paid their last little bit of debt off. When they show me that or bring in the checkbook and write the last check in the office, their level of excitement about what comes next reminds me of the first days of baseball season when excitement and optimism reign.

Are you’re looking for a way to generate some smiles and some enthusiasm into your days? Check out some spring training baseball or..get one of your debts to $0. Either way, it’s a great idea.

What Do You Really Need?

February 24, 2017

I try to maintain a calm demeanor in most circumstances. Even-keeled would typically be a good descriptor for me. But some things are worth really getting excited about.

When I saw the headline “Nation’s Bacon Reserves Hit 50 Year Low as Prices Rise”, I was no longer so calm, cool and collected. “ARE YOU KIDDING ME??? WHAT THE ***??? YOU CAN NOT BE SERIOUS!!!” That’s just a small and sanitized version of the words that came out of my mouth.

Bacon is good! Most things are better with bacon. (I’m part of the crispy bacon fan club. I don’t like it under-cooked.) But…I digress (which bacon always makes me do).

The good news is that we are in no danger of running out of bacon, which the article points out toward the end. It just took a wee bit of calm to come over me to process that little tidbit. I can’t imagine a world without bacon, and I’m glad that I won’t be forced to live in it. The thought of that, if only a fleeting thought, made me ponder the concept of living without things…and living with too many things.

For most of the developed world, we live in abundance. We don’t have to stalk our prey and kill it in order to eat. We head to the grocery store and come home with bags or we hop on our phones and order take-out. We sit on furniture and have to figure out which of the many articles of clothing in our closets we want to wear on any given day. Painting with a broad brush, we in the United States live in abundance right now.

Yet, that abundance creates some issues. Our near constant state of abundance helps create an instant gratification society, which leads many people to live above their means and incur a fairly sizeable amount of debt. It’s through over-spending that I see far too many people with near-crippling levels of credit card debt.

When someone really wants to reverse that trend and get serious about paying off their debt and building wealth, I sometimes steer the conversation into the concepts of abundance vs. scarcity. The “what do we REALLY need?” question is a fun one to ask. It helps to re-frame the conversation.

In an effort to see if someone is receptive to a radical life change, I will ask (when the person seems like they are willing to engage in the discussion) if they’ve ever considered moving into a very low cost housing situation, selling most of their possessions and trying to live like a minimalist. Most people won’t ever consider that lifestyle, but for my deep debt conversations, it’s a starting point for things that they are willing to live without. (Bacon is NEVER one of the things I suggest living without.)

I know a lot of the personal financial press will talk about small ways to save money (give up Starbucks and pack your lunch), and I talk about that stuff too. But I like to start with the two biggest areas of spending in most people’s lives – housing and transportation. Most of the people I’ve met with who have large credit card balances (except those who incurred the debt because of job loss or medical expenses) pay 60-70% of their monthly income on mortgage/rent plus car payment and car insurance. I’m a big fan of keeping housing costs below 25-30% of take home pay and transportation costs below 10-15%.

If those expenses can be trimmed, progress can happen quickly. Cutting back on some of the small things can add fuel to the fire. Going slightly minimalist and selling “things” at a yard sale or on eBay can simplify life and raise funds to pay off debt. It all adds up. But for me, starting the conversation with the biggest expenses creates the opportunity for the biggest results.

If you’re in debt and looking to get out, think about the things that you REALLY need and the things you could live without. Start big! Look at the biggest expenses in your budget and challenge yourself to reduce them. And if you try to take my bacon, prepare to lose a limb!

Don’t Pay a Multiple of a Car’s Sticker Price

February 17, 2017

Anyone who has ever been a passenger in my car knows that I am not a big fan of buying new cars very often. My last two cars got to 250,000 and 300,000 miles before I sold them for parts. My current car is a 2002 with over 150,000 miles on it and I’m hoping to get this one to 300,000 miles.

Living on the East Coast, with all the snow and salt, bay/ocean water and sand, the exterior of cars can take quite a beating. Mine certainly has. That doesn’t even count the kid who rode his bike directly into my driver’s side rear door, leaving a gigantic dent and paint scrape. Needless to say, my car isn’t going to win any beauty contests, but I haven’t had a car payment in a decade or so. I’m not much of a “car guy.”

That’s why when I read this article about negative equity in car loans reaching an all time high, I found it very alarming. Negative equity, for those who are unfamiliar with the term, is not a wonderful thing. If you owe $10,000 on a car that’s worth only $7,500, you have $2,500 in negative equity. Just about 1/3 of all new car purchases in the first three quarters of 2016 had trade-ins with negative equity and that negative equity was, on average, just over $4,800. That’s nearly $5,000 on top of an already fairly expensive purchase.

To me, this is a huge warning sign about how we think (painting with a broad brush here) about the value of a car. To me, a car is just a way to get from Point A to Point B quickly without needing to walk in the rain. To a lot of people, the type of car they drive is a reflection on who they are as people and they are willing to make questionable financial choices in order to have their car reflect the values that are important to them.

If I owned a coffee shop (I’ve been watching Friends episodes with my kids, so Central Perk is stuck in my head) and would sell you a cup of coffee for $3 but would charge you $8 if you drank half and asked for a new cup, how many new cups do you think I’d sell? I’d hope ZERO! But that’s what we do with cars. We (the folks with negative equity) drive them for a while and before we are finished with them (like getting to 300,000 miles), we trade them in for a much more expensive but shinier model and we add to the cost with that troublesome negative equity.

If a person repeats this pattern a few times, they might end up paying almost twice the sticker price for a car. If you add in the cost of interest on a car loan, it could be 3 or 4 times the sticker price. There’s not a car in the world that I’d pay that much for.

I wrote a while ago about how to save money when buying a car, and I still very much believe in that philosophy when buying a car. If you use it, or something similar, you can avoid the ever-growing problem of negative equity in your next car purchase. As pricey as cars are today, don’t let yourself pay a multiple of the sticker price.

Is Spending $2 Million per Month a Bad Thing?

February 10, 2017

Well, if you’re Johnny Depp, the answer appears to be a resounding…YES! In a case where Johnny Depp and his former agents are making claims against each other (I have no idea which side’s arguments have merit), there are unconfirmed reports that his spending habits are rather lavish, averaging about $2,000,000 per month. He reportedly paid $3,000,000 for a party that ended with firing the ashes of Hunter S. Thompson from a cannon. Sadly, I missed that party. His prior firm is now suing him for an unpaid loan and he’s suing them for mismanagement of his finances.

This will be an interesting case to watch, and if he needs to generate cash, we may see a lot of Johnny Depp in roles that he wouldn’t have previously taken..or he could sell some islands. For those of us who have never spent close to $2,000,000 in a month, the numbers here seem completely absurd. It’s easy for us to roll our eyes at yet another celebrity who spent money on a lifestyle that isn’t sustainable in the long term.

How many times have we seen this? (Answer: A LOT) How can they not know that this is how the story unfolds? (Answer: It’s THEIR first time handling this much money.)

The interesting thing, at least interesting to me, is that I see this same thing happening on a daily basis, just with much smaller numbers, all over America. Here’s a story of someone I’ve had the pleasure to get to know over the last few years. He works for a big company that is one of our clients and is now, at age 50, ready to make progress in his financial life. He has a great job, a great family, great friends…and about $30,000 in credit card debt that is killing him! He is now struggling to make just the minimum payments on all of his cards.

During a conversation recently, we laughed at how we each made less than $20,000 per year in our first jobs out of college and at that time, we felt like we had more than enough money to live a great lifestyle! Fast forward a couple decades and now he’s earning just over $100,000 and feels like he has less discretionary income than when he was 22 and new to the workforce. As his income went up, so did his lifestyle and spending level.

It’s not quite the reported Johnny Depp level of spending, but it’s not tough to see how that happens. We somehow spend as much as we make, no matter how large the income gets. When that income stops, which we see in sports and entertainment, or slows down – that’s when we see headlines about famous people being broke.

It just happens more slowly and without the press when you aren’t famous. While Mr. Depp owes millions, a normal everyday guy owes $30,000 in credit card debt and it’s incredibly burdensome. Some of it was for vacations, some for car or home repairs, and some was books for college for his son, but it all has added up and become close to unmanageable.

We developed a plan to get him out of debt, which involved cutting back on some spending while increasing income for a 6-9 month window. He and his wife have ideas on how to generate some income thru “gig work” and will use every dollar to pay down credit card debt. Between Uber, Lyft, some handyman work and some graphic design, they will laser focus and work themselves hard for a fixed period of time. The reason I tell their story isn’t for the solution, but more for the parallel that I see between them and Johnny Depp. The numbers may be smaller, but the problem stems from the same behavioral pattern.

What can we learn? As your income goes up, pretend that it doesn’t! Rather than increasing your level of spending, how about increasing your savings rate FIRST!

Get to the IRS limit on your 401(k). Max out your health savings account. Contribute to an IRA. Build a serious emergency fund (a year’s worth of expenses). Once you are there, then allow yourself to increase your lifestyle to meet your income.

What It’s Like to Work With a Credit Counselor

February 03, 2017

One of the things that our financial planning team talks about with people in distress about their debt level is the concept of using a non-profit credit counseling service to help them work their way out of debt. This usually happens after someone has had a few failed attempts at different “do it yourself” debt reduction strategies, like the “debt snowball” (pay off lowest balance first and when it’s gone, roll that payment into the next lowest balance debt and repeat till debt free) or “debt blaster” (pay off highest interest debt and then roll that payment into the next highest interest debt, etc.). After trying those and making very little progress, no progress or actually incurring more debt, people can be incredibly frustrated and feel like they need to take their efforts up a notch and get help from an external source.

When considering using an external source for help in getting out of debt, the number of options out there can be a bit daunting. There has also been enough fraud perpetrated by nefarious players who hold themselves out as debt reduction experts to make the landscape a little bit scary. Given that there is a great deal of uncertainty about how this vague concept of “credit counseling” actually works, I figured it would make sense to talk to a few people who have gone through the process to get their perspective. Based on those conversations, here are some observations and things I learned that might be helpful for people who are ready to take that step to help their financial lives.

What did the process look like? The first step was a phone call with a counselor to talk about my situation and they pulled up a credit report. From there, we built a budget worksheet for me and my life.

They contacted my credit card companies, got my rates reduced down to a really low interest rate and sent me a proposal that showed how much I’d pay each month and how many months I’d be paying. I’d pay them once per month and then they pay my credit card bill. If I sent in extra money, they’d apply that to each of my cards.

I’d get statements monthly and they charged a small fee ($25-$35 per month), which I wasn’t crazy about, but I paid it because I was seeing actual progress. While they are non-profit, they aren’t free and that was something I didn’t fully grasp at first. By the time I made my last payment, I had changed my spending habits, I was debt free and my credit score (after the initial drop) was higher than it had ever been.

What surprised you? In order to qualify for the DMP, I had to complete a budget sheet and I had never done that. It helped them structure a plan that I could stick to with payments that I could actually handle. The closing of all the cards was also a surprise, but it makes sense. Once you’ve dug a hole and want to get out, it makes sense to put down the shovel.

What’s the best thing about using a credit counseling service? They helped me get out of debt and I had a schedule that made sense. Before entering into the DMP (debt management program), I was very scattered and would pay a bit extra on some cards but end up using others. It took 4 ½ years, but I went from over $30,000 in credit card debt to $0.

What’s the worst thing? Finding the right provider. My first shot at it, I used a company that called me. I ended up paying them for 6 months, they informed me to stop paying my credit card bills, and they never paid the bills. I feel like I got robbed, but I didn’t do my homework on them, so I take some of the responsibility for that.

Once I got to a non-profit credit counselor, I was able to get into a program that worked for me. I had to close every credit card except for one emergency card. My credit score dropped a lot when I stopped paying the credit cards and it took a while to recover, but once I got all the debt paid off, the initial pain was a distant memory so it probably wasn’t all that bad.

What warnings could you give to people considering working with a non-profit credit counselor? Be VERY careful with who you choose to work with! The non-profit credit counselors at debtadvice.org have a much better reputation than the for-profit wild wild west approach where you don’t know who is legit and who isn’t.

Don’t get into a DMP if you aren’t 100% committed to a multiyear process. If you’re looking for a magic pill that solves your debt issues overnight, this is probably not the right path for you. If you stick to the plan, you’ll get out of debt, but I’ve know people who start and get frustrated after 6 months and bail out of the program because they aren’t seeing results fast enough.

Like any tool out there in the financial world, the world of credit counseling isn’t for everyone. There are good things, not so great things and even the unexpected thing periodically. Do your homework, ask questions until you feel comfortable and get yourself out of debt whether you do it yourself, use a credit counselor, use a debt resolution company (future blog topic) or end up filing bankruptcy. Reducing and eliminating debt is a fantastic step toward getting yourself to a place where you’d call yourself financially secure.

Are Your Job Relocation Expenses Tax Deductible?

January 27, 2017

Editor’s note: The moving expense deduction was eliminated with the passing of the Tax Cuts and Jobs Act of 2018, but would still apply for tax year 2017 and prior.

Many of our client companies have a national presence and it isn’t unusual for employees to have to relocate halfway across the country for a new role. Since moving is expensive (even my local move last year when I bought a little townhouse a few miles away), accounting for those expenses becomes not just a “to do” item that is time consuming and frustrating – but possibly also rewarding! You can potentially get reimbursed for moving expenses, get paid a relocation expense and/or get to deduct some of your moving expenses on your tax return. There are a lot of “moving parts” in this situation.

With all of these potential situations in play, what do you need to know? The first thing you should know is if your move is local, like mine was, and isn’t required for work (mine wasn’t) then there is no benefit to you financially. That’s just the cost of making a transition.

Does your move have deduction potential?

If your move is for business purposes, and this would include a new job, your current job or even your first job (note to recent or upcoming grads…..this means YOU!) – your move has to pass two “tests” in order to be tax deductible:

Test #1 = the distance test. The job must be 50 miles further away than your current home. If you live 15 miles away from work now, the new role would have to be 65 miles away (and on a reasonable route, not a zigzag route through the scenic back roads).

Test #2 = the time test. Once you’ve moved, you have to spend at least 39 weeks working in the first 12 months. If you’re self employed, that bumps up to 78 weeks in the first 24 months.

If you don’t receive money from your employer

If you don’t get reimbursed, keep your receipts and track your mileage. You can use the IRS Form 3903 to track your expenses. You don’t need the Schedule A since it’s not subject to a percentage of income test and it isn’t impacted by income phase-outs.

It’s a pretty straightforward process. Things you can deduct are: the cost of moving, 30 days of storage expenses, insurance for the move, the cost of disconnecting/connecting utilities, lodging expenses during the move, the cost of transporting pets, and the cost of shipping your car (or mileage if you drive). Things you can NOT deduct are: the cost of meals and house hunting. (Boo!)

If you do receive money from your employer

Where it gets a bit tricky is if you get post-move reimbursements or a relocation allowance paid prior to your move. If you get reimbursed and it is a non-taxable reimbursement (like an expense check), you can’t double dip and then deduct the expenses. If you get reimbursed and it IS taxable (you can see if it’s on your W-2 form, box 12, Code P), you then are allowed to deduct the expenses. If you get a relocation allowance in December 2016 and incur expenses in January or February 2017, you can deduct the moving expenses as if you moved in 2016 – so you’d fill out the 3903 for the 2016 tax year, which means you’ll probably be bumping up against the April tax filing deadline.

Having just completed a move recently, I can tell you that moving is no fun. But looking for a new place can be a blast and it’s pretty cool once you’ve settled in to the new place. Remember, if you’re moving for work, it can also be something that can help you around tax filing season.

How to Avoid Taxes on a Home Sale

January 20, 2017

Someone recently asked me if they were going to have to pay taxes on the sale of their home. They were downsizing out of a big house and were going to move into the “in-law quarters” of one of their children’s homes. This person was absolutely 100% convinced that he was going to have to pay taxes on the gains from the sale of his house since he wasn’t “rolling the gains” into a bigger house.

When I told him what the tax code says about capitals gains tax, he told me I was wrong. So with him in the office, I called a friend (on speaker) who is a CPA and asked what the tax implications were for selling a home. The CPA said exactly what I said, without prompting, and the soon-to-be-seller was still dubious.

So what is the real story on how the gains from selling a home are treated? According to IRS Topic Guide 701, you can exclude up to $250,000 (single) or $500,000 (married) of gains from the sale of your house IF it has been your primary residence for 2 out of the last 5 years. That’s it. It’s that simple.

There is no rule today about what you have to do with the proceeds. There were things like that in the tax code in the past, but the tax code is an ever-evolving entity. The biggest test is the 2 out of 5 years, which is very easy for most home sellers. IF the house has been your primary residence for the last 2 years, you’ve got a $250,000 or $500,000 tax-free gain.

If you’re married and your home has appreciated by $600,000, CONGRATULATIONS!!! The tax on the sale of your home will be $600,000 (gain) – $500,000 (exclusion) = $100,000 (taxable gain) * 15% (capital gains rate) for a $15,000 tax upon sale. You can buy a house, watch it go up in value by $600,000 and only pay $15,000 in taxes! The tough part is finding a house that goes up in value by $600,000!

Here’s how you could possibly use this piece of the tax code creatively and to your advantage in a time when housing prices are rising. It’s a hypothetical situation and I can’t imagine anyone really doing this, but it illustrates the tax code’s interesting nature. You’d have to live as a bit of a minimalist to make this work. Moving a bunch of “stuff” can be time consuming and expensive, so the less you have to transport from one place to the next, the easier this is. This only works if your home value increases regularly……

Step 1 – Buy a house.

Step 2 – Live in it for 2 years.

Step 3 – Buy a second house, move into it and rent out house #1.

Step 4 – Live in house #2 for 2 years and buy house #3, renting out houses #1 & #2.

Step 5 – Sell house #1 by the end of year 5 and the gains are tax-free since it was your home in years 1 and 2. You could sell house #2 as well and pocket the tax-free gains.

With this example, you can see that if you’re willing to move A LOT and housing prices rise quickly, you could potentially never pay taxes on the gain from the sale of a house. In the real world, though, the IRS code allows most of us to sell a home with zero or a very small capital gains tax in comparison to our overall gain. Fortunately, for the dubious person in the meeting recently, he used his own laptop, went to www.irs.gov and was able to find that my answer was indeed factually correct. By the time the meeting ended, he was a surprised and happy home seller.

Financial Wisdom From My Grumpy Old Man Side

January 13, 2017

Sometimes I like to have some fun and adopt a “grumpy old man” persona for a bit just to keep everyone around me on their toes. My kids have started to say “OK, Grandpa…” when I get into my grumpy old man role. Sentences starting with “back in my day” or “when I was your age” or containing the words “poppycock”, “shenanigans”, and “new-fangled” are standard when I’m talking as that character.

The funny thing I noticed this morning as I was playing this part is that a lot of what I say as that person is absolutely true. The principles are valid and while I may be joking around and having some fun, there is some real timeless stuff that I wish more people in today’s world would implement as a part of their lifestyle. Here are some of the top nuggets of wisdom from my grumpy old man character:

Back in my day, if you didn’t have the cash, you didn’t buy it. I have seen more people get themselves in trouble financially through excessive use of credit cards than for any other reason. As credit card debt mounts, so do minimum payments as well as stress. I can’t count the number of divorces and therapist visits that people have attributed to credit card debt.

When I was your age, I always saved some money for a rainy day. Having an emergency fund, whether it’s a “starter emergency fund” of $1,000 – $2,500 or a 6-9 month cash cushion, is a great way to ensure that your financial life won’t get blown to smithereens in the event of a job loss, injury or illness. An emergency fund is the #1 barrier to unwanted debt.

What’s with all the shenanigans of picking all these stocks? Don’t put all your eggs in one basket. This is a time honored principle that the folks who worked at Enron or MCI WorldCom wish they had reinforced by senior management. The best way to “get rich” in the stock market is to find the next Apple or Google and put all of your money in that stock, but finding THAT stock is a lot tougher than it sounds and you’re more likely to find one that ends up going nowhere. So spreading your risk out among many different asset classes is a great way to participate in the whole stock and bond markets rather than concentrating your risk (and potential reward) in one area.

Who needs all these new-fangled gadgets that you spend so much money on? Another principle that works every time it’s tried is spending less than you bring home. So many people I talk to are very excited about the next iPhone that is coming out or 4k televisions or new and cool technologies that can make people say “wow.” Those things are fun and cool, but they can improve your quality of life only very slightly and they are usually pretty pricey.

By holding off on those purchases, along with driving lower priced cars and living in reasonably priced housing (the things Americans tend to vastly over-spend on), there will be plenty of room for savings and taking on debt will be a thing of the past. Think about the last “cool” purchase you made and how quickly the cool factor evaporated. Wouldn’t it be cooler to save that money and be able to retire a year or 5 earlier?

Part of the reason that I can act like my grandfather and use some of the phrases I heard as a kid is that the wisdom in those phrases has withstood the test of time. Just like 2+2=4 was true when I was in elementary school and is still true today (although the way it’s taught is different now), these little financial nuggets were true then, they are now, and they will be when my kids are grandparents. (This BETTER be in a long long time!)

How’s Your Financial Life?

January 06, 2017

With today being my first post of 2017, it’s a great time to spend an hour or two over this weekend looking back at the year that was and looking forward to the year that is just starting. I have an annual tradition that I started long ago and will continue for as long as I am lucid. Feel free to use my annual process as a starting point, tweak it, and make it your own.

Each year, I put together a quick “How’s my financial life?” spreadsheet. I only need a few reference sources and in less than 30 minutes, I feel like I have a much clearer understanding of where I stand financially. Along the top of the spreadsheet, I list the year and on the vertical (Column A), I list the things I want to measure annually. Here are the things I measure and where I find the information:

Total Assets – I use this Financial Organizer. The goal is for this to increase each year. Tracking the dollar and percentage increases are things I’ve added to my simple spreadsheet over time.

Total Debt – This is also found on the Financial Organizer. The goal is for this to decrease annually and eventually get to $0!

Net Worth – This is simply the total assets minus total debt. An increasing net worth is my primary financial goal each year. This is another thing I track in dollar and percentage terms.

Annual Income – I use my last pay stub of the year. This is a number that should go up each year and if it doesn’t – that could be a warning sign. Or it could mean that you’ve happily retired or downsized your work stress level.

Estimated Mortgage Payoff Date – I pay a bit of extra principal with each payment and at year end, my mortgage company can calculate when the mortgage will be paid in full at my current level of extra principal payments. You can also build this yourself with an “amortization calculator.” (If you Google that term, you’ll find a bunch of them). This is important to me because when my mortgage is paid off, I’ll consider myself financially secure. At that point, my embedded cost of living will be property taxes, insurance, utilities, food and fun.

401(k) Balance and 401(k) Contributions for the Year – For the contributions, I need my last pay stub for the year and for the balance, I can either log on to the website of my 401(k) provider or quickly check Mint for my balance. Each year, I enjoy seeing the balance go up! (I wasn’t so happy with this back in 2008, though.)

Savings Balance – This is one I like to track in order to make sure I have an adequate emergency fund. I enjoy seeing it go up, although it took a big step backward last year because I used a chunk of savings as the down payment on a house. So while I wasn’t ecstatic when I saw that the balance went down, I understand why it did and will work to build it back in short order. I can check this balance in Mint while I get my 401(k) balance, so locating the info is the easiest part of the job.

Life Insurance Death Benefit – I check this each year to ensure that should this be my last year on the planet, my mortgage can be paid off, my kids’ college can be handled without loans and there could be something left over for them to have a little head start in life, along with a few of my favorite charities getting a few bucks to do the great work that they do. I have to check a file in my desk to make sure that my information is up to date. We had a change in benefits at work and I replaced one policy with another last year so this is a data point that is in flux.

Date of Last Will Update – This is another item that I need to look in my desk drawer files to confirm. Looking at it this year, I’m probably due for an update. The last update of mine was almost 10 years ago, right after my ex-wife and I separated. (It’s amazing how quickly a decade can fly by when you’re having fun!) Hitting the 10 year mark or a significant life change are my triggers for updating this important document, along with my powers of attorney and healthcare directives.

Those are the data points that I can put together in the time that it takes me to watch one college basketball game. (Hey, it’s nice to have a pleasant distraction while working on your financial life.) So pick a game to watch and get busy.

What a Financial Planner Told His Daughter After Her First Job

December 30, 2016

This week, I’m sharing a blog post from my colleague, Steve White:

My daughter is 22 and recently graduated college with a degree in human biology cum laude no less and she has a job working with a medical practice. (I’m a dad so I have to brag a little.) She has done several things that have reminded me why 1) being able to support yourself is important and 2) your kids do listen to what you say.

She called me when she got her first paycheck and said “Dad, I got a paycheck with a comma in it. Now you have to listen to me.” My father used to jokingly tell me that until I got a job with a paycheck, he didn’t have to listen to me, and yes, I jokingly told her the same (full disclosure – my dad did listen to me and I did and still do listen to my daughter). That paycheck with a comma in it meant that she now got to experience adult things that I’ve taken for granted like employee benefits. Her questions (and my answers) that we covered when she accepted her job included:

What health insurance do I sign up for? (the one that fits your situation) Should I check and see which one covers my prescriptions? (yes) If I take the high deductible plan, should I put money into the HSA? (yes) If I take the other plan, should I put money into the FSA? (yes)

How much life insurance should I get? (enough to cover your debt – see this life insurance needs worksheet) Who do I name as beneficiary? (whomever you want to – not me, name your mom) Wow, I don’t like thinking about if I die (Yeah, I know.)

Who is your beneficiary? (Mom) You need to name me as your medical power of attorney [see human biology major – cum laude] (I’ll think about it – aka no, let’s get back to your benefits.)

How do I fill out a W4? (What do the instructions say?) Will I have to file my own taxes? (yes) Can you help? (yes)

Thanks Daddy! (You’re welcome. What other benefit questions do you have?)

Do I need disability insurance? (yes) Why? (You’re statistically more likely to be disabled than die young – 24% chance of being disabled for 3 months or longer.)

Before she got her 3rd paycheck, she called me about budgeting, here’s how that one went:

Dad, I think I’m going to run out of money before I get paid again. (Oh, why is that?) I’ve got $23.42 in my bank account. (Yeah, I’d say that’s a possibility.)

I hate budgeting. (We all do sweetie.) Can you help me set up a budget? (Sure, I do it every day. That is one of the things I’m paid to do.)

(You remember when I decided to start watching what I ate?) Yeah, I remember you arguing with me about how many calories are in a fried pork chop. (Okay, besides that, when I thought about watching what I ate as a diet, I thought about in a negative light. I decided to think about it as an eating plan. That feels positive to me.)

Oh, I get it. I need to think about budgeting as a spending plan. (Yeah, just like you plan what you are going to eat, plan what you are going to spend.) Can you send me that spreadsheet thing you sent me before? (sure: Easy Spending Plan)

When she got her 3rd paycheck, our conversation went like this:

Dad, this morning at work, I was so excited that I got paid that I gave everyone a hug. (That’s nice.) I don’t think they expected that. (They have gotten a lot more paychecks. They have learned to restrain their excitement.)

I’m working on my spending plan and I’ve got a question. How much should I spend on lattes? (less than you do now) But I really like my soy double pump vanilla latte (I know), so what do I do? (Spend less on something else.)

But I need gas and food! (I know.) Dad – sometimes being an adult stinks. (I know.)

(Love ya sweetie.) Love you too Dad.

Should You Pay Off Your Mortgage Early?

December 23, 2016

One of the questions that I have fielded fairly often in my career as a financial planner is about paying off a mortgage vs. keeping it for those who have the ability to write a check and pay it off all at once. I have had a lot of discussions with my friends who are in financially -oriented careers as well as with friends who have no financial background but who always show an ability to use common sense. After years of having this same debate, we have found that there is no true consensus around this topic. But we have come up with the most important points to consider on each side.

In favor of keeping the mortgage: If the mortgage rate is 4% and it’s tax-deductible, the tax-adjusted cost of the loan is around 3%. If you can do better than 3% on your investments, keep paying the mortgage and invest your cash.

In favor of paying it off: For every dollar you pay in interest, you get a tax break of maybe $.25 to $.40. To me, that sounds like losing 60-75% of each dollar. The total interest cost can be 2-3x the amount borrowed over the life of the loan. You still lose over half of each dollar paid in interest with the tax impact factored in.

And in down markets (not that we’ve seen one since 2008), you not only lose money in your investment accounts (think about the -37% S&P 500 returns in 2008), but the interest on your mortgage is lost opportunity cost. Paying off the mortgage in Jan ’08 would have yielded a 4% return with the assumptions above. Keeping it would have cost 41%, the 4% paid in interest along with the 37% lost if your returns were similar to the overall US stock market. A mortgage can be viewed as a means of leverage, and as we’ve seen with the financial markets, leverage isn’t always a great thing.

I have seen dozens of “keep vs. pay off” mortgage calculators. The inputs on the calculators usually include the interest rate of the mortgage, the investment account’s assumed rate of return, and income and/or tax rate of the homeowner, along with other more specific data items. The one thing that is NEVER seen in these calculators is “How are you wired? How would you sleep best at night? Do you like having a mortgage or do you really despise owing money to anyone?”

The most sophisticated calculators miss the single most important factor in this decision. Which option feels best to you? Financial planning isn’t always about the numbers. Sometimes human behavior and psychology are even more important.

In my experience, the option that feels best is the option that individual will choose. This is the same in your financial life as well as with exercise and nutrition. The things that work best are the things that you feel are consistent with your internal wiring.

There is a lot of analysis, discussion, calculations, changing of assumptions, and an enormous amount of time devoted to this decision. In the end, I’ve seen that what matters is the emotional viewpoint of each individual. Almost always, emotions outrank number crunching in this kind of analysis.