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.

 

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.

 

 

Do You Have/Need an Exit Strategy?

Recently I’ve been receiving not so subtle reminders of how finite our lives are, and how much of a difference having a plan can make. I think we can all agree it’s impossible to plan for every eventuality, but I also think we can all agree there is at least one exit we are all going to make – to the best of my knowledge nobody has found the secret to immortality in our present state (this is not meant as a religious or philosophical post).

I remember how torn I was, weighing whether to reenlist or not. I retired with over 20 years, but if I’m completely honest with myself it’s not because I loved the Navy. The biggest reason I stayed was fear – I wasn’t sure what I would do about health insurance for my son – having received the Autism diagnosis in the early 2000’s and there not being much information available (that we were aware of). This had negative consequences – I was not someone anyone would want to be around; I felt trapped and took it out on everyone around me.

I think many, if not all, of us can relate to feeling trapped at some point in our lives – be it in a marriage, or a job or some other contract. And because this can be so overwhelming it’s easy for us to lose sight of options, convincing ourselves there is absolutely nothing we can do to make our situation better – regardless of what those around us may be proposing.

If you have kids, do you let them go through high school without talking to you about what their plan is after graduation? If the answer is “no”, then why are you treating yourself any different? This leads me to having an exit strategy – begin with the end in mind. Sounds trite, perhaps; but it will make a significant difference.

For example, no-one marries with the intent to divorce; but even if you don’t divorce the odds are one of you will outlive the other – even if it’s 50+ years down the road. Have a discussion of what you want, how you want to be remembered and where you want to be laid to rest – and put it in writing. Yes, this is an Estate plan; but it’s not meant to be set in stone – review it at major milestones, or at least every 5 years if you have nothing going on.

Another example I come across is similar to what I experienced in the Navy – people are afraid to leave their jobs (not just the military) because of uncertainty; will they make enough money, what else would they do, etc. In this case, my advice is to build yourself a “freedom fund”. Save money into an account with the strict purpose of giving you a buffer. How much is up to you, but I would suggest at least 6 months of income. I would also recommend you make a list of what is non-negotiable. What do you absolutely have to have – could be a minimum salary, specific benefit(s), etc; and also what you are completely unwilling to have in your life – could be too much autonomy, a micro-managing boss, specific working hours or days of the week, etc.

If you take nothing else away from reading this, please take the time to understand what’s most important to you. Don’t be upset or feel like you’re doing something wrong if your internal values don’t match your coworkers or friends – these are your values. When you are considering a change, especially a major one, take a moment to consider possible consequences. I’m doing this with my clients all the time, as I’d wager most Advisers are. Take it for what it’s meant to be, a glimpse of other possibilities; not finding fault with your ideas.

 

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.

College – It’s not for everyone (and that’s OK!)

If there is one theme I feel very confident in saying I run into in almost every planning encounter I do for families with young children, it’s college planning. Yet the research I’ve done, using Pew Research Center, indicates only “56% of students earn degrees within 6 years”. Combine this with an average student loan debt amount of almost $29,000 per borrower ($28,950, Institute for College Access & Success, 2015) and you have a recipe for financial disaster. Because if these students are not finishing their degrees, are they finding jobs paying enough  to cover the loans, or did they fall victim to a feeling of failure and take unskilled labor positions.

Not too long ago a college degree was not the only answer, individuals were proud to be craftsman and take up trades like plumbing, HVAC, electrical, etc. I joined the Navy as a Junior in High School using the Delayed Entry Program because at the time not only did I not have any interest in pursuing further education, I wasn’t really sure what I wanted to do with my life. And in 20+ years since then I’ve had several transitions – from completing my Journeyman’s as an Electrician, to a Six Sigma Green Belt and finally as a Financial Planner. Admittedly I’ve since gone back to school, and I’ll have my second Masters (MBA) later this year – but I’m doing so without taking on any debt.

I applaud parents for thinking ahead and saving for college for their children, but not at the expense of their own retirements (as so often seems to happen). But I want to raise awareness of other avenues available, especially for those (like me) who are not necessarily inclined to pursue yet more book learning after High School, and/or just don’t know what they want to be when they grow up. Less than 1% of the U.S. population serves in the military (309 million in 2010, NPR); and given the fact we’ve been involved in armed conflicts for as long as I can remember it’s not going to be the best option.

Mike Rowe, the host of Dirty Jobs and much, much more, started a Foundation to help those interested in pursuing a blue collar career. His Foundation, mikeroweWORKS, offers scholarships to help individuals learn a trade – from welding to agriculture. And let’s be real, no matter how advanced our technology gets we’re going to need people who can keep our lights on and water running. This isn’t about unskilled labor getting minimum wage, it’s about learning valuable skills that, although may evolve, will never (in my opinion) not be needed.

I’ll admit my position may be a bit unorthodox and unpopular, but I stand by my assertion those who take the time to learn trades can become very successful. Accumulating wealth isn’t about which school you attended (and are now indebted to), it’s about how much you can save and how well you can live within your means. Next time you sit down at your desk and start your computer, think about those who wired the building your in, or are producing the electricity you’re using – and what you would be doing without them. Success is a destination with multiple paths, don’t feel trapped into pursuing just one because it’s what is getting the most air time.

And finally, this is NOT a dig against college – if you know what you want to do, and you need a degree to do it, then go for it. This is an attempt to raise awareness of other options, and negate some of the negativity associated with blue collar jobs that I perceive. I refuse to believe we all know what we want to do as soon as we leave High School, and although college can help you “find yourself”, do you want to pay over $16,000 per year to do so (National Center for Education Statistics)?

If your child has a 529 plan – don’t despair, according to IRS rules these funds CAN be used for vocational training. “An eligible educational institution is generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education” IRS.Gov. Talk to your Advisor/Planner to get more information about options available for you, and don’t hesitate to think outside the box.

Why it’s tough to save (and how to help)

I think most of us can relate to having wondered if we’d be able to save enough for our goals at some point in our lives. For one thing, it can be much more fun to spend than to save – especially with the instant gratification of receiving whatever it is you just purchased. Saving can seem like it takes forever, and it may not look like the money is growing, or it isn’t growing fast enough.

We need to remind ourselves why we’re saving – be it for retirement, a new house or putting our children through college. One way to do this is assign nicknames to the accounts – label it for what you’ll be using the money for. Some of us need more though, so giving ourselves visual reminders of what the money will be used for could do the trick. Why not make yourself a vision board with your top 3 or 4 goals, and put it where you will see it everyday; as incentive to put away a little more and keep you motivated when nothing seems to be going right (and admit it, we’ve all had those days!).

Don’t make all the goals long-term,  you’ll want to add one or two you can accomplish in the next few months, and in the next few  years. This is another trick to keep your motivation up, by rewarding yourself for doing the right thing. Before you know it your spending habits have changed, and you may find you actually enjoy saving money – because it’s now tied to positive experiences, not just ideas or platitudes.

If you’re interested in instituting a change, here is how I would start. Commit to saving an extra $50/month. Pick out something to spend $100 on in 6 months, say a spa day or a trip to Bass Pro Shop; whatever strikes your fancy. You’ll have $200 left over, and you’ll be rewarding yourself for increasing your savings. That $200 should be set aside for a mid-term goal, something you’ll want to do in 4 – 6 years – even if you don’t have anything on your mind right now.

Continue this for the rest of the year, and increase your commitment by $25 – $50 the following year. Eventually (or so I hope) you’ll see the benefit to saving, and you’ll increase the monthly amount on your own. Continue using 1/3 of whatever you save to reward yourself, because at the end of the day you’re saving 200% more than you were before you started this exercise – and I don’t believe we’re meant to live like monks (unless it’s your lifestyle choice).

By planning to spend 1/3 of what you save you’re teaching yourself how to live on a budget. I’d love to believe everyone has the willpower to save “x” amount from every check because it’s the right thing to do, but I’m not naive. We, as human beings, often need encouragement and rewards to delay our gratification. You CAN do it, I don’t want anybody to believe that they “CAN’T” save money.