As you all know, I am a big proponent of focusing your efforts on the things can control.Read More
'Tis the season to start with all of those self-improving resolutions. Aargh. If you're like me, you are still fighting off the sugar crash from an overdose of green and red frosted products and wondering if your house will ever look the same again after a trail of visiting family. So, I'm scrapping the financial resolutions and focusing on finding the easy path. Here are a few ways to put in less effort around your finances.
Open a spending account
That's right, a spending account. For years (generations?) wise people have been hammering away at us to have a savings account in which we diligently put 10% of our pay every week or two so that we can (somewhat magically) become tycoons in our old age. In actuality, it's pretty good advice. But there are two problems. For one, most of us would be hard pressed to reach tycoon status on our annual pay. And that fabulous .06% interest rate the banks are paying these days can make the savings process can be a little demoralizing in the short-term. Worse yet, it is really, really hard for a lot of us to find an "extra" 10% of our income.
If this sounds familiar, flip the advice on its head. Have your paychecks deposited into your regular account as usual. If you don't already, use online bill pay to have all of you fixed expenses paid automatically (that's your rent/mortgage, monthly subscriptions, health insurance premiums, car or transport payments, memberships and monthly credit card payments). Then put in one more automatic payment—a monthly amount that goes every pay period from your regular account to your new spending account. The spending account will be for anything you want to buy until the next pay check. Some of these are necessary expenses, like groceries. But all of the rest should be for fun stuff—entertainment, nights out, new clothes, gifts for friends, comic books, flowers—whatever makes your day better. And better yet, you can spend every dime of the money in that account. Because the amount you put in for auto-transfer to your spending account left a little extra that wasn't needed for the fixed expenses I mentioned earlier. That little extra just accumulates as savings in your account, growing a little more every week while you aren't looking.
The great thing about this system is that the savings happens without you paying any attention to it. And the spending account is just that—a license to buy whatever the heck you want to get between paychecks—guilt and mathematics-free.
It does happen, though, that we hit times when saving is just not possible. And that brings me to point #2...
The experts are a bunch of jerks
In the enthusiastic crusade to get us all to save for retirement, financial experts, banks, employers and nosy family members have bombarded us with frantic messages about how our failure to be "responsible" with our money will end in cat food and a home under a bridge. Unfortunately, all this advice tends to overlook the fact that in real life, people have good years and bad years. In good years, you really should be putting aside some money, whether it's for retirement, a new house, a new business or just a rainy day. But unless you are very fortunate (and probably had a little parental help with stuff early on), you are going to have some bad years, too. These are the years when medical crises hit, when you or another family finds yourselves between jobs, or maybe just when you are starting out and your paycheck is too crappy to cover much more than ramen noodles and bed in your parents' basement. That doesn't make you financially irresponsible. It just makes you busy with life.
So, ignore the stories about people who socked aways thousands of dollars by eating from trash bins after closing time. If you are that person, you don't need financial advice anyway, but you might look into a good health plan. Recognize that some years are savings years and some are spending years. If you are in one of those years, decrease the amount you are putting aside or eliminate the savings altogether. Measure your financial progress instead in terms of career growth, or personal growth, or just getting back on your feet. After all, those things are all just as important, if not more so, than building your retirement account. Now mark your calendar to check every 6 months to review your situation. When things are looking up financially, it's time to start the savings again, but feel free to start small. And until it is that time, give yourself a break.
Stop expecting to know everything
The whole point of this blog is to help people understand and feel more comfortable with financial issues. As a former professor, I love it when people decide to really dig in and teach themselves more about the financial world and their own investments. But it does take a lot of work and time. Financial questions involve rapidly changing tax regulations, new investment types, new investing laws and constantly renamed and re-jiggered products. That means that unless you are dedicating regular time to reading and research, it's going to be hard to keep up. And that's true even for people who are in related fields like law and banking. If you are interested in the field or just committed to doing it yourself, that's great. But if don't want to spend your evenings learning about index funds, who can blame you?
For those of you who don't want to put in the time, stop feeling guilty and hire an expert. As self-serving as it might sound coming from a financial advisor, the cost of having someone qualified go over your financial situation and goals with you is almost always a tiny fraction of the extra money you can earn, save, or make by following professional advice. This is just as true for those of us in who work for a living as it is for the mega-rich we usually think of as having financial advisors. And let's face it, there's a lot more at stake for us.
Skip the stock brokers and the insurance agents and look for an RIA rep, or at least a CFP, who is focused on planning, as opposed to focused on selling you a particular investment or account. Ask how much a plan costs and what that process involves. A good plan will finish with something in writing you can take away, but should also involve more than one conversation with you to really understand your resources, your debts, your concerns and you goals. All good planners offer a free initial consult—use it, and don't be afraid to keep shopping until you find someone with whom you feel good about working.
And once you've got the pieces of your plan set up for the year, your savings or non-savings strategy in place, and your spending account on auto-pay, treat yourself to one more sugar cookie before you embark on any of those fitness resolutions.
One of my clients told me the other day about a conversation she had recently with her teen. The conversation began as a typical mother-daughter talk about a purchase and had every chance of devolving into an equally typical argument. But suddenly, my client decided to take the conversation in a different direction—into the sort of conversation she would normally have with me, her financial advisor. She was surprised at the results. Most of us don't talk to our older children about money because we don't want to share worries and anxieties or because we've been trained to keep the information "private." But very few of us live without financial limits. What we do within those limitations—the planning, the discipline and the constant adjusting for unexpected costs and opportunities that crop up in our lives—these are exactly what a young person in our society needs to understand. Next time you get a chance to mentor a young person about finances, resist the urge to hide the realities that you've been managing (whether skillfully or not), and try sharing your own experiences:
Don't be afraid to share how much you make
We train ourselves to hide how much we make, and most of us have suffered at one time or another from our resulting ignorance of how others in our community are faring. Besides, you might not be impressed by your modest income, but the teen who counts out spending cash one bag of chips at a time probably is. Enjoy the rare moment of respect when you tell them that you make more than a three-figure salary.
Show them the real costs of life
You build your choices around some pretty heft and inescapable costs—housing, health care, transportation, groceries and taxes just to get started. When you share these figures with a teen, you are often giving them their first real look at the baseline for getting by as an adult in our society. This is also a good moment to reflect on how much you ask of yourself as a breadwinner.
Have a dialogue about the choices
Our choices are where we become who we are. Every day we decide what is important to us: because that expense makes us healthier or saves us time we badly need elsewhere, because we are afraid of what might happen, because we believe in something outside ourselves. We make financial choices because we dream of changing our lives some day or just because that little expense makes us happier. None of these choices are things to be ashamed of, even when we aren't completely sure those choices are the right ones.
And this, I think, gets at the root of why we are so reluctant to talk to our teens about these things. As a society, we have been floundering along under the assumption that we should be better at managing our money than we are. Money has a way of squirming its way into every worry and challenge we face in life. And yet, the vast majority of us somehow find a way to get through. We probably all need to give ourselves a bit of break. We definitely all need to talk about it more—not just for our teens' sake, but as a reminder that every day, no matter how many unexpected obstacles crop up, we are there figuring out a way to make things work all over again.
Well, not everyone, necessarily. But all of those chatty economists. And your grandma, of course ("Why is this store so expensive? You know, I used to be able to buy a loaf of bread for a nickel!"). But we are seeing signs that inflation is on the rise after years of a whole-lot-of-nothing. So what does it mean and why should you care?
Inflation, of course, is that phenomenon whereby the loaf of bread your grandmother could by for a nickel now costs $4.25. As economies grow, there is more money moving faster amongst more people. More dollar notes swirling around means they aren't as hard to come by, which means you have to give up more of them to get the same thing. If you are an average shopper, this doesn't sound great. I personally would love to go to the grocery store without wondering if my son will actually eat his inheritance. But really bad things happen if inflation goes too low. Consider this story from your great-grandmother's era—
Inflation in the U.S. has averaged about 3.32% over the years from 1914 to now. But in between there have been a few times when things went crazy. In June of 1920, the price of all sorts of products skyrocketed by 23.70%. That's like watching your neighbor by a car for $20,000 and four weeks later, having to pay $24,740 for the exact same car. It gets worse if you think about the fact that the CPI (Consumer Price Index) by which we generally measure inflation includes a lot more than cars—groceries, rent, medical costs, clothing, services and supplies are all in there getting ridiculously expensive all of a sudden.
It was a moment of spectacular political failure—the feds had slashed spending and raised interest rates to try to balance the budget, and everyone panicked. But what followed was equally bad. By June 1921, prices had dropped to the point where it became obvious that no one was buying anything. That month, the lowest inflation rate in U.S. history came in at -15.80%. Over the 18 months that the recession lasted the wholesale price of a lot what we buy fell by well over a third. Things were cheap because no one was buying. And the jobs disappeared as a result; unemployment went from a pretty normal 5.2% to a painful 11.7%. That's almost 12% of American who could work not being able to find a job.
All of this brings us to our current predicament. Our own Great Depression (after the 2008 crash—thank you, Wall Street) pretty much killed off inflation. The money just wasn't moving. And as much as we enjoy the lower prices, we've been counting on inflation to make a return (along with some more jobs, thank you). Fortunately things are finally looking up. Inflation has gone from -2% this past April to .1% in June (total for the past 12 months). Still not impressive, but better than the goose egg we've been looking at since 2008. And speaking of eggs— they accounted for most of the inflation in food this summer (it was a tough spring for chickens). So you might do better to stick with that loaf of bread after all.
I am not sure why the first week in August became the week of quizzes on this blog, but I can't resist sharing a link to this one with you. It appears in Bloomberg Politics today and is meant to surprise us with some real information about where are tax dollars are going. To be sure, the methods are pretty crude—the authors looked up the annual costs of a number of our high-profile budget items and then divided each by the number of U.S. residents (321.4 million these days). But it's a pretty good way of understanding how easily we lose track of the costs of running an entire nation. I spend a lot of time thinking about politics (and a little too much time mouthing off about them, too). Still, I was caught out by a few of these questions. I figured the Supreme Court is not particularly expensive (there aren't that many of them, for one thing), but I had no idea how our law enforcement dollars were being spent. Give it a try—you don't have to confess your score afterword: http://www.bloomberg.com/politics/graphics/2015-budget-quiz/