Ideas to Stay Afloat

Some of the hardest conversations I have with people is telling them they cannot accomplish the goals they’ve shared with me; even worse are those I have to have a conversation with about how they can reduce their living expenses – foregoing the lifestyle they’ve grown accustomed to. It tears at me, because I wonder if they really had no clue or have they been in denial? Either way, it’s not easy being the harsh voice of reality.

How do they get there? How does anyone? For some it could be medical expenses, or other things they had little control over. However for most I believe it’s an unwillingness to delay gratification. It’s difficult to deny yourself, especially to set money aside for something that will “probably never happen”; but these rare events occur with frequency. Cars are going to require more than routine maintenance (oil changes, brakes, etc) – own one long enough and something major will need to be replaced. Mechanical systems break down.

Same is true with anything else in your life – from owning a house, to having a child. Childcare is expensive, I think most of us understand that. But what about clothes, hobbies, food (especially for teens). We should know these things are going to come up, but so many seem surprised by how much everything costs.

So what to do? Few of us are going to win the lottery, so how can we prepare. Start small – save money into both your retirement account and a “rainy day” fund. The retirement accounts are usually the easiest to maintain, because most employers will withdraw funds before paying you – so you never “miss” it. It’s the savings you have to be intentional about that’s more difficult.

If you’re new to saving, start with 2% of your income to the retirement account. No, this isn’t going to fund your retirement, but it’s small enough most of us won’t notice it’s gone. The goal is to scale over time. Same is true with the “rainy day” fund. Open an online account and start an automatic transfer set for (5) days after each pay check (6th and 20th if you get paid on the 1st and 15th). Generally this is far enough to provide a buffer if there are holidays, or other delays to the money hitting your account.

I’m partial to Ally, because they’ve made it very simple to enroll and they’re offering a 1.6% interest rate (as of 5/13/2018). However, I encourage everyone to do their own homework – I like Bankrate’s website. Start with an amount small enough not to be missed, but large enough to be meaningful. For most, I wouldn’t save less than $25/pay period – but you will have to decide your own threshold. The more you can afford to put aside, the better prepared you will be for life’s “oh craps”.

Build your support network too. Try to surround yourself with positive people – not Pollyannas, but with people who understand life happens and it’s best met on your own terms. I prefer to be around people who have overcome adversity, although they haven’t necessarily had my experiences. We keep each other grounded – allowing a brief “pity party”, followed by a shoulder and non-judgmental ear. This network is best built before you need it, because when you’re in a dark place it seems to mostly attract “Emotional Vampires” (Orloff, J, 18 Jan 2011).

The most important take-away is this – shore yourself up, using small steps. Take some time to get to know yourself – what sets you off and what makes you feel great. Surround yourself with people who can help you feel great, not small. And invest in yourself financially by setting money aside. Little amounts first, increase by at least 25% every quarter (if it helps, go by key dates: Martin Luther King, Jr Day , Tax Day, Independence Day, Halloween).

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Adult Disabled Child Benefit

Social Security offers special benefits for those who were found to be disabled (meeting Social Security’s definition)  before the age of 22. In certain circumstances the child – which could mean adopted child, stepchild, grandchild or even step grandchild – may be eligible to be paid on a parent’s (grandparent’s) Social Security earnings record. In my experience the easiest way to prove this is applying for SSI when the child turns 18, IF the child has a significant disability limiting his/her ability to work. I will ALWAYS encourage individuals to work if they are able, because it ultimately provides much more freedom (my opinion).

These benefits are paid on the parent’s earnings, so it is not required for your child to have earned any credits. There is a catch – the child cannot have “substantial earnings” – in 2018 this means they cannot be working and earning more than $1,180/mth. As with any program, there are exceptions; but rather than try to explain them please check out Social Security’s pamphlet on “Working While Disabled“. Another caveat – if the individual marries he/she may lose their benefits; again, there are exceptions and the best source is going to be the Social Security Administration.

A frequent question I get is “will my child’s payout affect the amount I receive?” Short answer – no, generally not. However, Social Security does have a family maximum payout, which is usually between 150 – 188% of the worker’s basic Social Security benefit. The formula is complex, and if you’re interested here is a link to a Social Security Bulletin explaining it (Vol 75 No 3). What I would like you to take away is this – in MOST cases there should not be an issue; but if you have any doubts or concerns the Social Security Administration, or an attorney specializing in disability benefits, is your best resource.

Another benefit to someone receiving adult disabled child benefits, if they were previously approved for SSI – they become eligible for Medicare after they’ve received the adult child social security benefit for (2) years. This is another complicated area, and best left to a discussion with a professional – but it’s important to know the option exists. Here is a link to Social Security’s overview of Medicare.

I didn’t do as deep a dive as I normally try to, because there is so much complexity with Social Security, Medicaid and Medicare. I do not want anyone to rely solely on something I’ve written to decide if they should apply or not; or what benefits they are eligible for. The options I advocate for are (1) talk to an attorney specializing in disability law and/or (2) contact your local social security administration office.

Too Much House?

As so often is the case, inspiration for this post comes from personal experience. I’m in the market to purchase a home for my son and I, something he can stay in long after I’m gone. I’m shocked, to say the least, at what mortgage companies are willing to offer prospective buyers; it’s easy to see how people can become “house poor”. In the buyers’ defense, “dream homes” are expensive and from what I’ve been hearing many purchasers are looking for “move-in ready” – which further drives up the price.

Why am I concerned? Because we’ve had a very flush economy for the last (9) years, and I’m afraid people have short memories. Recessions, or US Business Cycle Contractions as defined by the National Bureau of Economic Research, happen; they are not freak events – although I cannot predict when the next one will occur I feel absolutely 100% confident we will see another one in the not too distant future.

When it does occur, and people are down-sized or retire early, will they be able to afford the home they’ve bought? This isn’t a mortgage company’s problem, nor should it be. The mortgage company is evaluating a buyer to determine how much the buyer can afford to pay the company each month for the loan they give. It’s not their business to figure out your living expenses; and although they will consider your debt to income they do not project future car or other major purchases.

Here’s a breakdown I think anyone can use. Most experts agree we should be saving 20% of our income for the future. This leaves 80%. If you spend 30% of your income on mortgage payments (let’s include taxes and insurance), and if you don’t consider income tax; this leaves you 50% to spend on a car payment, groceries, cable tv, eating out – you get the picture. So let’s put some numbers to this.

The following calculation is not a perfect representation, it’s meant to provide a rough overview. The median US household income is $57,617 (source US Census Bureau). For simplicity we’ll assume they are married filing joint returns, so in the 22% tax bracket (source Tax Foundation). We’ll also assume they are saving the recommended 20% into a Roth 401(k). So after taxes and Roth contributions their estimated net income is $35,953, or $1,382.80 if paid biweekly (26 pay periods). This is what is available to pay a mortgage, buy groceries, etc.

Some will use the first month’s paycheck to cover their mortgage, and their second month’s paycheck for everything else – which works out to be about 29% of their gross income. This is as high as I would want to see it. Unfortunately, many families are NOT saving 20%, and still using an entire paycheck to pay the mortgage – for my fellow nerds approximately 36% of gross income. This leaves very little wiggle room if something negative (translation life) happens.

This is the drawn out version of why I recommend people rely on no more than 30% of their current (not promised or estimated future) income when accepting a mortgage. If you want more house, use a bigger down payment. The mortgage company will almost certainly approve you for more than this, but YOU DON’T HAVE TO TAKE IT. You are the master of your financial destiny, don’t let yourself get caught up in the emotion of buying a home. Yes, this is a major decision, and yes this will have a significant impact on your family’s quality of life – but it’s not the ONLY influence. Give yourself enough financial breathing room to enjoy life (without going into further debt).

 

“Normal” Markets = Volatility

In the past few days the markets have reminded us of the potential risks of investing – things can lose value, sometimes dramatically. Unfortunately too many people needed the reminder, having grown complacent with the steadily rising returns – so comfortable they may have even changed their asset allocation to hold more equities because they were not seeing the returns their friends, neighbors or loud guy on the Subway were getting.

Chasing returns is, in my opinion, an exercise in futility. Instead, determine the appropriate amount of risk necessary to achieve your goals (removing greed from the equation) and start there. Most (I’m pretty sure this is really all, but just in case) reputable firms offering investments will have a tool to help you determine your risk tolerance – so be honest when completing it.

You will see more impact over time from how much you invest, so get your money working for you as soon as possible. If you have children, start having the conversation with them about saving – anytime they receive money (job, gift, allowance, etc) take 10% and set it aside for future goals (doesn’t have to be college, could be 1st car, 1st apartment, etc).

No matter what you do with your money there will be risk. If you stick it in savings you have the risk of its value not keeping up with inflation. If you spend it, because after all you can’t take it with you, there is the opportunity cost (risk) of the potential growth you could have experienced and the value it would have grown to in your later years. And we’ve already covered what could happen if you invest.

So what to do? Keep money you’re going to need in the near future (< 3 years) relatively liquid (available) – that could be CDs, savings accounts, etc. The further down the road you need the money, the more risk you can take – as long as you factor in your risk tolerance (how accepting you are of risk).

The worst thing you can do is use someone else’s investment philosophy without consideration. Determine what your goals are, how long until you need the money and how much you potential loss you can accept to get there. None of this is meant as investment advice, I have no way of determining what is/isn’t appropriate for the reader. If this resonates with you, and you want help, find an Advisor you can trust (this includes online options like Betterment or Wealthfront).

Next Steps (Saving More Part 2)

You should be feeling pretty excited, you’re building momentum and financial independence is on your horizon – not just a dream to be lived by someone else. You’re becoming more aware of your spending habits, and this awareness is allowing you to identify what’s a want vs need; and make the harder decision of postponing gratification for a future goal. You’ve not only identified the goal(s); you’ve also set up account(s) for them and you can now watch the money – bringing you closer to accomplishment!

Now, let’s tackle debt. If you don’t have any – stop reading here. There are several methods of attacking debt, the (2) I focus most heavily on are highest interest rate and lowest balance. I think paying the highest interest rate first is pretty self-explanatory, these are costing you the most money. However, many people need help staying motivated; so paying down the lowest balance first will give you a “win” and show you what’s possible in the shortest amount of time.

You could build an excel spreadsheet to graph out  your options, work with a debt counseling agency or use an online debt snowball payment calculator. The online tool I’m most familiar with is undebt.it, however if you Google debt snowball you will find many more options – pick the one you are most comfortable using (and is free). All of the tools listed only work if you are honest and realistic about your current situation. If you only have $25 extra each month, then use that number. Using a higher, unsustainable, number will only lead to this being discarded.

Initially don’t include your mortgage. If you have a higher than average interest rate (> 6.5%) on your primary residence, consider talking to a mortgage lender for a refinance – but don’t start adding additional payments to be mortgage free (again, this applies to those with a lot of other debt). Typically the first debts you are going to want to address are going to be your credit cards, because they generally have high interest rates – especially store cards.

Understand your spending habits (see part 1). If you are still using the card(s),  you will need to stop to realize any success with the snowball. You want to get the balance down as quickly as possible so the finance charges stop – if you get to a state of equilibrium, where you have a balance but it’s not increasing through purchases; you are still paying additional amounts in interest every month. Once you’ve got the card(s) paid down, if you want to continue using it – and you can pay it in full each month – go ahead.

When you’re using a tool like the debt snowball you should focus on (1) debt at a time. This allows you to maximize the amount you knock down each month. When the first debt is paid off, you will take the payment you had been making and add it to the payment of the second debt (and so on). This is the power of the snowball – you gain momentum over time, and can in some instances shave years and tens of thousands of dollars of interest off – if you are disciplined and consistent. Good luck.

Holiday$$

Sometimes I feel like I’m talking to myself when I get on my soapbox about saving (period, not just for retirement); especially when holidays are approaching. I think it’s fantastic people are seemingly so generous; but because I’m jaded I ask myself if people are feeling this generosity out of a sense of responsibility, or because they really want to give. The core of this cynicism – why wait until an arbitrary date on a calendar? Why not give when the mood strikes you? Could it be the mood only strikes you when the calendar (and mass marketing) says it’s important?

For those who the holidays have more significance, what if you were to buy gifts right after major holidays when stores are trying to clear their shelves; or at least spread the spending throughout the year avoiding the holiday hangover come January? I think we’ve been conditioned to look forward to Black Friday and Cyber Monday; but I would argue deals could be found all year round – especially for items not in season, or going out of season.

Is it a sense of competition driving us to spend so much money? Perhaps we’re worried about what other people will think if they give us something of more value? I can almost hear the rebuttals (having had them in person on more occasions than I can count); about how it’s a season for giving, and people are doing it because it makes them feel good. Perhaps – I won’t pretend to know how others feel. But how would you friends and loved ones feel if instead of buying more “stuff”; you made a contribution in their name to a non-profit they support?

Or better yet, took steps to secure your own financial future by increasing contributions to your retirement account by 2%? I’ve also had it drilled into me this season isn’t about the money; but toys are temporary and most of us are going to get to a point where we are either unwilling, or unable, to work any longer. And when we get there who is going to remember who bought the biggest gift 20 years ago? Especially if those family members are now foregoing their own financial welfare to support you?

Perhaps you think I’m painting too dire of a picture? According to an Economic Policy Institute 2016 report, nearly HALF of American families have NO retirement savings at all! Conversely, an American Research Group 2017 study says the average American family will spend approximately $1,000 this year.

Let’s put this in perspective. The average US median income, according to a 2016 US Census Bureau American Community Survey; is $57,617. It may be higher or lower where you live, but this is the country’s median (average taking into account high and low outliers). Families are spending almost 2% of their income for (1) day; yet cannot save at least as much for the 20 – 30 years when they will not be working.

This doesn’t make any sense to me, especially given how many are probably putting some or all of their purchases on a credit card – contributing to an existing balance they are making payments towards.

I’m not saying don’t give gifts; but I’m imploring everyone to help themselves first. Using the same numbers from above – 2% of the median income ($56,617) – the average household would have approximately $90 per month withheld from their check. No, this isn’t going to be enough to retire one; but it’s a start. The harsh reality is we need to do things that are not fun or sexy to be successful. Sometimes it means we have to be selfish; but it also means you’re not alone in being selfish.

What’s Holding You Back?

I’ve lost track of the resource fairs and other events I’ve attended, sponsored or both over the years; yet without fail I have witnessed the same reactions as people walk by booths manned by Financial Advisors (not just me). There is a quick look, then look away while muttering “I’m good” or “I have a plan”.

Yet studies have shown the majority of Americans are not prepared financially, with the majority unable to cover a $400 sudden bill because they don’t have an emergency fund. This bothers me, a lot; because I was in those same shoes the year my wife died. I don’t know if I would’ve reacted any differently than those I see at the Resource Fairs, because I didn’t know about them until after everything occurred and I was faced with becoming a civilian, and a single dad of a child with a disability.

There has to be something keeping people from making the connection – and I don’t know if it’s fear of being sold to; shame or fear of being shamed; belief they need money to talk to an advisor (in some cases this is true); etc. What I do know is without help it’s unreasonable to think anyone can change their current circumstances, especially if they feel like they’re swimming in oatmeal with a 50 lb weight strapped to their waist (how I felt on/off for the first year after my wife passed – and truthfully still feel at times).

Planning (financial or otherwise) is not the same for families with significant disabilities. It’s not because your situation is worse than anyone else’s; it’s because you have different challenges than most and unless someone is familiar with those challenges the advice you receive (although well-intentioned) can set you back.

Maybe that’s what’s holding people back – they’ve been burned and don’t want to get screwed over again. Unfortunately I don’t have a guaranteed solution for how to avoid this – my best advice is find people who have overcome similar challenges and ask them how they did it (understanding it may not work for you).

However I can say this with absolute assurance – if you continue on the path you are on, and you are not seeing the results you want, nothing is going to change on its own. At some point you will need to make an adjustment, and the sooner the better; because the correction is less painful the shorter in duration or scope you can get it. So I challenge all of you, rather than simply saying “I’m fine” take a deep, hard look at where you are and ask yourself if you’re comfortable because everything is as it should be; or you’re comfortable because this has been the status quo and it’s so much easier to just go along with the flow.