Walk before you Run

I don’t think very many of us step foot into the gym after a prolonged absence and decide to push yourself as hard and as fast as you can – at least not more than once, especially if you’re older than 40. We know, or at least have a fair idea, if we did it would not be pleasant (to put it mildly). Yet many of us are so quick to think other aspects of our lives, specifically financial, would be any different.

I get it, I hear many of the same “experts” telling us we need to save more and spend less – and we do! But, and this is a very big but, you should not think you can suddenly do a complete shift and sustain it. You need to train yourself, just as you would if you were going to run a marathon.

Saving/spending are just as much habits as smoking or making coffee every morning (my personal vice). Yes, in a perfect world all of us would be saving at least 20% of every check towards clearly defined goals (retirement being just one of them); but this isn’t a perfect world – we all have other “stuff” going on that can distract us. So rather than try to make a drastic change, and then quit because it’s too hard, start smaller.

Although transportation and housing make up a significant portion of our spending, many of you reading this are probably not in the market at this time – so there probably isn’t much opportunity to reduce your spending here. However, if you are in the market, or if you haven’t looked into refinancing and you’re mortgage rate is over 5%; here are a few things you can do to help yourself.

Aim at keeping the house and auto payment down. If you have to finance a car for 60 or 72 months, consider a less expensive option. Cars are depreciating assets – meaning you will never get the money you put into it back. Refinancing your mortgage could free up some cash – and since you’re used to not having it go ahead and put it directly into a savings/investment account; don’t spend it.

For the rest of us, track how often you buy something every day/week. For now, don’t worry about how much you’re spending, this is to determine your purchasing habits. For everything you buy make a note of “need” or “want”. What drives your purchases? Are there certain times of the day you are buying more frequently, is it just super easy because your card info is saved on the website? These are the types of questions you should be asking yourself.

From here, pick one thing to change and commit. Maybe it’s deleting your card info from Amazon Prime, or you don’t hop on the computer right after work because it leads to retail therapy. Whatever it is, just make (1) small change and stick with it for at least (3) months. Easy way to track – Federal holidays. If you start something around the 4th of July, next step is reevaluate around Labor Day or Thanksgiving. No reason to make it super complicated, the easier it is the more likely you’ll follow through.

What you shouldn’t do: don’t suddenly increase your 401(k) from 2% to 15%; that’s too much of a shock to your system. Don’t tell yourself “I’m just not going to shop anymore”. That’s a punishment, not a constructive realignment of your attitude and behaviors (fancy talk for making yourself miserable). If you’re in a committed relationship with joint finances – don’t make any changes on your own. Have an open dialogue, and if necessary, use an impartial 3rd party to help steer it. Pick a pace that leaves you a little uncomfortable and get started. There’s no better time than now.

 

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How to Transition to a Monthly Paycheck

For most of our working years I think it’s safe to say just about all of us receive our checks weekly or every other week; and plan to pay our bills accordingly. Speaking for myself, while on Active Duty my wife and I designated the 1st’s paycheck to the mortgage and the 15th’s to our living expenses. Simple and easy to repeat; and I’d wager many others do something very similar.

I never considered what would happen if I was only paid once per month – and although I “knew” it’s what would happen when I retired from the Navy I wasn’t ready for it. It’s a different dynamic, even if you’re being paid the same or making more; because if it’s something you’re not used to it’s easy to spend like you have another check coming at the halfway point – and if you’re used to weekly paychecks it can be even worse.

To add insult to injury, it’s likely there is going to be a gap of at least (1) month between your last regular paycheck and your monthly check when transitioning to a military pension or social security. It could be even longer if you’ve filed a VA claim, I believe the current wait for fully developed claims is (6) months – a fully developed claim is one in which all supporting documentation has been provided and the VA forms have been completed correctly.

So what can you do to help yourself?

At least six months, a year would be ideal, start gradually transitioning to paying your bills within the first week of the month.

First, figure out your living expenses. Start with tracking all your spending, Mint.com is a useful tool; but many banks will include a similar tool. This will tell you how much you need to earn, and if you’re not interested in transitioning to another job/career; it will help you determine if, and where, you need to cut back. For those who are Active Duty and are being paid BAH cut your expected earnings by almost 2/3 – because you will receive ~50% of your base pay only (whatever percentage you’re entitled to, it’s calculated off your base pay). If your expenses are more than your new income you have two choices – find another income source (not credit cards or other debt instruments) or dial back your expenses.

After you’ve calculated your living expenses and your monthly income, train yourself to live off one pay period.  For most of us this is going to take some coordination, because we don’t have sufficient savings to serve as a buffer. Start small, with a bill or two that are fairly consistent – like phone and/or cable. You know how much you need to set aside, and can plan for it by dialing back accordingly.

When you’re ready to start, set aside 1.5x’s the amount of the bill(s) you’re adding to the first of the month; and I recommend putting this somewhere other than your everyday savings/checking. You’re saving more than you “need” to build the habit and get you used to having less money available from your other checks. This also gives you the extra money you’re going to need to have available on the first of the month. If you cannot afford to save the full amount, then start by setting aside at least an extra $25. The less you can afford to set aside the more time you will need to give yourself for the transition, because we want the habit firmly anchored before the transition occurs.

The goal is a complete transition to paying all your bills on the first of the month before you leave the work force. This isn’t the only way to do this, and if it doesn’t appeal to you my hope is it has at least got you thinking about when you’re only going to have a monthly check. Don’t hesitate to get help if you need it, in this particular case I would recommend a fee only (hourly) planner – Garrett Planning Network, NAPFA, and the CFP Board all have “Find an Advisor” tool; to name a few organizations.

 

 

Why I’d Rather Pay

Over the years I’ve been told, by well-meaning people, to trust in my network of friends and family to provide for my son when I’m gone; rather than hiring professionals. I know they mean well, and I will admit to a degree of cynicism; but when I’m gone I have taken measures to ensure my son has enough money to work with professionals for the duration of his life. This is not meant to imply any mistrust or cast doubt upon the capabilities of anyone in my personal sphere of influence – if I count someone as a friend it’s because they have proven time and again they may be relied upon, and I trust them implicitly.

Seems counter-intuitive, doesn’t it? After all – if I trust them, and I do; why would I not rely on them to help my son out? The short answer is they don’t have a stake in the game. I have no doubt they would do what they can for my son, but if push comes to shove they need to (and should) take care of their stuff first. For example, if they have a family emergency, I would not expect them to put it on hold to address the needs of my son.

Another of my considerations is doing what’s in HIS best interest. Again, I think most people mean well; but it can be easy to project one’s desires/interests onto someone else, especially if they do not have an active voice. This wouldn’t be done maliciously, or even consciously; but in my opinion it would eventually happen in more cases than not. Sometimes doing what is in someone else’s best interests requires them being told “No”; and this can be very difficult if  you have a relationship – because you want to keep them happy.

Using a professional significantly reduces these risks. If they are being paid for a service they have incentive to provide the service, and do so at a certain level of quality or they risk losing the contract. There are no feelings to be hurt by my hiring an impartial organization to monitor the delivery of the services I’ve requested. And there are much fewer acceptable reasons to not deliver the service they are being paid for.

If my son asks for something outside of the scope of the original agreement, I can build in parameters of what is acceptable – and the agency or individual(s) I’ve hired can use those parameters to make a decision. If it’s not in my son’s best interest, or acceptable within the parameters I’ve set forth; I have complete faith they’ll say “No”.

Are there risks, absolutely. It’s incumbent upon me to leave parameters broad enough to allow them to make the best decision; and I can’t predict every eventuality. There are costs associated, these are professionals and I’m asking them to provide a service – and you get what you pay for. To me, though; the benefits outweigh the costs. Being honest with myself about what I want, I took the time to do the research and get a baseline of what I can expect to pay. From there I worked out what I resources would be available when I’m gone; and purchased enough life insurance to make up the difference.

As is the case for anything else in our lives, this is a personal decision and will vary from individual to individual. In my case, I don’t want to rely on family and friends – for the reasons enumerated above; and I’m able to afford what I need to put this in action when I’m gone. Cost should never be the sole driver, but let’s be real – it will always be a consideration. For me, it means I’ve made some sacrifices over the years to afford the insurance; but in my mind it’s an investment towards my son’s future.

And this is what I think we all need to frame questions like this: Is it a cost, or an investment? If it’s a cost, then it can become very difficult to stick with the plan when you encounter challenges (and you will). But you believe, as I do, providing your child(ren) the opportunities they would be able to get for themselves if they didn’t have their disability is an investment you will let nothing get in your way.

Automate This…

I realize what I’m about to say goes against what I perceive to be “conventional wisdom”. When I was Active Duty I earned my Lean Six Sigma Green Belt and I understand, quite well I think, how to become more efficient and eliminate waste. With this in mind, I’m not a fan of having my clients set their bills up for auto-pay, for a couple reasons.

First, if you’re not monitoring it you can’t manage it. If “extra” credits are added to your bills, or if your spending increases incrementally, you may not notice right away – if at all. This problem is compounded if you’re paying your bills via credit card, because at least you’re checking account will notify you if it’s been over-drafted – assuming you live off a budget and are transferring just what you routinely spend.

I don’t buy into the argument that it’s going to save you a lot time; after all – how much time does it really take to pay your bills every month? Speaking for myself, I like to know where my money is going, and it may take me a whole hour (if I’m distracted for 45 minutes) to login to my bank, review my bills and assign the payments from my checking account.

What I’ve noticed over the years, with clients and seminar attendees across the wealth spectrum, is a rise in individuals who admit they are not sure where all their money is going . Will paying your bills solve this; no, not necessarily. But it will force you to acknowledge, if only for the moment you’re transferring the money or writing the check, how much you have spent.

So next time you hear an efficiency guru recommend automating your life, I recommend thinking twice; and being honest with what it’s really saving you. Because, in my opinion, what you’re being saved isn’t time – it’s the sometimes harsh reality you’re spending much more than you would like to admit; and not saving nearly as much as you know you should be.