How Am I Doing Financially?

I get asked all the time by both clients and prospective clients – how am I doing? Personally, I like Chris Rock’s line on relative wealth: “If Bill Gates woke up with Oprah’s money, he’d jump out the window.” Perspective is an amazing thing.

It’s tempting to benchmark yourself against what “experts” say we should have at each age milestone. For instance, a commonly quoted rule of thumb is “At age 30, you should have 1 times your annual salary saved for your retirement.” The flaw with this is obvious: all of our circumstances are different. Maybe you have saved 1 times your salary by age 30 but your current circumstances don’t allow you to save more right now. Maybe you are a good saver but you are invested incorrectly and your money won’t grow at the rate you need it to.

That’s why we always encourage personal benchmarking. Compare your current situation with where you want to be – now and in the future. So, I usually answer the question, how am I doing, with a quick checklist of items to consider:

Your net worth: Just like establishing a weight loss goal, the first step is determining what you weigh now. In financial terms, your weight is your net worth, calculated as your total assets minus your liabilities (debt). Debt can be a real drag on people’s ability to save for their financial freedom, particularly young people with student loan debt. By using the one-size-fits-all rule of thumb above, you may have 1 times your current salary as an asset but, if your debt outweighs that, you may not be making the progress you should toward your financial goals.

Current cash flow: Examining your monthly and annual expenses can be an arduous, and eye-opening, task but it is a vital step toward evaluating your current situation. First, are you living within your means – spending less than you earn?

What are your financial goals? Would you like to retire at 65, 67? Or, do you dream of changing careers at age 50? Have you saved for your kids’ educations? After determining where you are currently – your current financial weight, if you will – the next step is to determine where you are going. A good financial plan will help you determine how much investment assets you will need to generate enough income to support you after you stop working and throughout your lifetime, specific to your goals.

What is the amount of your savings? While one’s net worth is instructive to your overall financial health, the current amount of your savings, and how it is invested, is an important measurement toward your end goal. But, only relative to your own personal goal, not your neighbor’s.

How much are you saving now? How much investment assets – savings – you require to meet your goals will determine how much you need to save each year to get there. Parkinson’s Law says that “work expands to fill the time allotted for completion.” (Anyone who has ever watched the Kentucky General Assembly at work understands this to the core) The financial version of this law says that “expenses will fill the amount of income available.” Let’s face it, if we have it to spend, we will. That’s why we always encourage clients to Pay Yourself First. Put the amount you need to save to meet your goals in your workplace retirement accounts or some other investment vehicle, and live on what’s remaining. You won’t miss what you never saw.

So, want a real answer to the question “how am I doing?” Rather than compare yourself to an arbitrary benchmark, compare yourself now to where you want to be.

 

Don’t Feel Guilty About Your Debt, Take Control

I have a fond memory of my maternal Grandfather sitting me down soon before I graduated from college and telling me, “Steve, whatever you do, don’t borrow money.” While Grandpa John lived far from an easy life as a dairy farmer in Nebraska, he and his mother did inherit the farm when his father died so he didn’t have to incur debt to get started. Circumstances are just different now. Buying a home or even a car is almost impossible without a mortgage or car loan. According to AARP, larger mortgages, higher student loans and a greater overall comfort with debt than displayed by earlier generations has increased the average debt for households approaching retirement by nearly 160% from 1989 to 2010.

Consider Fred and Ethel, both age 45. While they both have good jobs, they have just paid off their student loans and, as a result, are worried they’re a little behind getting started saving for their financial freedom. In addition, when their two children were born they purchased a home and minivan whose payments are stretching their budget. Plus, because their monthly cash flow can be tight, they occasionally build up some expensive credit card debt that takes a few months to pay off. Now, their situation is quite common and really isn’t their fault. Given a choice of incurring student loans or not going to college, they clearly chose the right path for them. So, if Fred and Ethel asked us for advice here is what we would say:

1. Don’t feel guilty, your predicament is not about the past, it’s about the future. Now is the time to plan in order to get where you want.

2. Create a budget that attempts to limit household debt to no more than 36% of gross income – mortgage, car loans, credit card debt. This might not be possible right away but, when the minivan is paid off, keep driving it for a few more years rather than buying a new one.

3. Create an emergency fund by including a regular payment within your budget until you have accumulated the equivalent of about three months of expenses. This will help you avoid incurring ridiculously expensive credit card debt when unexpected expenses pop up.

4. Pay yourself first by making regular contributions, pre-tax if possible, to retirement accounts. Whether it be a workplace retirement plan like a 403(b) or 401(k) or an Individual Retirement Account, include a monthly contribution in your budget. Make the contribution automatic, preferably taken from your paycheck, as you won’t miss what you don’t see in the first place. So, pay for items you want but don’t necessarily need with dollars leftover at the end of the month, rather than leaving retirement contributions for leftover dollars.

5. Not all debt is bad – read here to learn the difference between good and bad debt:  Continue reading “Don’t Feel Guilty About Your Debt, Take Control”

Take The Right Financial Road In 2018

I recently read about a 28-year old New Jersey man who typed the wrong address into his rental car’s GPS in Iceland and drove six hours in the wrong direction – SIX! – from the airport to a fishing village in the north of the country….when he was just trying to get to his hotel. Now, his first mistake is quite understandable. I’ve been to Iceland and they are apparently too cheap to buy a vowel because every word is virtually unpronounceable. But, despite the long drive and “poor road conditions” he plowed on because that’s, ahem, what the GPS told him. And he never questioned that Reykjavik’s airport would be 6 hours from, well, Reykjavik. That’s like assuming Lexington’s airport is in Detroit.

This was really quite funny until I realized how many people figuratively make this same mistake in their financial lives. Unfortunately, they assume they’re on the right road until told otherwise. Maybe they assume contributing just enough to their employer’s retirement plan to receive the match will eventually produce enough to support them in retirement. Or maybe they’re contributing as much to debt payments each year as their savings. Or maybe they’re invested completely wrong for their long-term goals.

These people aren’t stupid – they usually just don’t have the time to properly plan for what they will really need in the future. To complete the comparison with our Icelandic mis-adventurer, it is quite common for people to be on the wrong road but not know it until they’ve hit a destination that’s figuratively six hours from their desired destination. Only, the stakes are much higher if you don’t realize your mistake until you hit age 60.

So, here are some suggestions for getting on the right road in 2018:

1. Pay yourself first

Automate your contributions to your employer’s retirement plan and any other investment plans first. Then, develop your budget from what’s left. How many times have you heard that cutting out that daily latte will aid your retirement? No, I like that latte, you say. So, don’t make the choice between your financial freedom and your latte. Pay toward your financial freedom first, then choose between a latte and maybe a beer that evening. That approach is not only better for your long-term financial health but you’ll feel a lot less guilty each day too.

2. Pay down high-interest debt

Not all debt is equal and not all debt is bad. In general, if all of your debt – student loans, mortgage, car loan or lease, credit card debt – is more than 36% of your gross monthly income, that’s too much. Additionally, if a loan has a high interest rate – probably about 6% or higher – that should be taken care of too. (Read more on how to determine if debt is acceptable or a problem here -https://lexingtonfinancialplanner.blog/2017/10/27/should-cal-and-rick-pay-down-debt-or-save-for-retirement/.  If you find yourself in one of those situations, make a plan to retire that debt as soon as you can. Again, automate your payments so you don’t have to choose between making that debt payment and your daily latte.

3. Save for some short-term fun

Around the office I’m kind of known as the saver-police. “No soup for you, save!” (A paraphrased Seinfeld reference, by the way) But that’s not true, Lisa and I are good savers, but we also prioritize our spending for fun too. After we save for our future, we have chosen to use our dollars to travel rather than buy expensive cars or buy a bigger house. We would rather enjoy a nice vacation each year, like two weeks in London last summer, than drive a Mercedes. Now, that’s not a choice for everyone, just us. In any case, choose a short-term saving goal for 2018 and make it part of your monthly budget. Recently, new clients wanted to build saving for regular, nice international trips into their financial plan. We showed them how to do that while still making significant progress toward their financial freedom.

If you would like to talk about your long-term and short-term financial goals, please email me at steve@moneywatchadvisors.com or call me at 859-268-1117.