Author: Brad

How to make sense of this crazy economy

Brad

The Dow Jones Industrial Average fell 800 points today, the largest of the year.

The yield on the 30-year Treasury bond hit a record low, and the yield on the 10-year Treasury note has been returning less than the three-month bill creating what pundits refer to as the “inverted yield curve”, an indicator of worsening conditions.  

So, what does it all mean? Are we headed for a recession? Is the trade war with China expediting the next downturn? We are long overdue, aren’t we?

There are many questions, and plenty of possible answers. Regardless of whether the next recession comes in the coming months, next year or beyond, the real question is: what does it mean for you and me?

Let’s address a couple of key items.

Investments

If you held financial assets during 2008, you remember all too well how quickly those assets start to drag on you like dead weight. It is completely natural to feel uneasy as financial markets continue to tumble. Stocks are down, bonds are down. If we are headed for a downturn, where is an investor to go?

Consider that, when you are saving and investing in a standard brokerage, IRA, 401k or other account, you are doing so for the long-haul. Also consider that, you are not actually losing any money when things are in freefall. You only lose money in a down market if you actually sell the asset. If you’re 25, 35, or 45 years old, stay calm and ride out the storm. If there is one thing that we can be certain of, it is that the stock market – over the course of time – always goes up. You are far less likely to need the funds prior to any sort of recovery. If you are at or near retirement, recalculate your expected income needs relative to your asset base (retirement accounts, Social Security). If you are unsure or need tailored advice, consider consulting a financial professional.

Mortgage Rates

You’ve likely heard from neighbors, coworkers or others telling you that now is the best time to buy a home or to refinance your existing mortgage. This may very well be true for you, but there are a few things to know and consider.

Yes, interest rates are falling and yes that likely means you can obtain more favorable borrowing terms. If your current 30-year mortgage carries a 5% interest rate, you can now obtain a rate of well under 4% which would save you thousands over the course of the loan. But there are many fees and other costs associated with a refinance, such as a title search, application fees, and closing costs (yes, those again)! If you plan to stay in the house for the next several years or longer, it could be a great move.

For new home buyers, the situation may be a bit more complicated. When rates fall, the value of home prices tends to rise. This is because many people have the same idea…it is time to buy! When considering whether now is the right time to buy, don’t lose sight of the actual amount of home you can afford. The value of homes across much of the U.S. are already quite high. Know your target price, and then factor in how much interest you would save per month in the current environment.

And the bottom line…Control the things you can, and don’t stress about the things you can’t.

What to do with a windfall of cash

Brad

You receive a sudden windfall of money — maybe it’s an inheritance, or perhaps a gift – and you may be experiencing some uneasiness. If you’ve received a large gift, you may feel uncomfortable accepting the money. If you’ve lost a loved one, you may be filled with sorrow and feel uncomfortable receiving the money.

Regardless of the circumstance or the way you feel towards it, you are likely asking yourself…well, what do I do with it?

There are a few key guidelines I would advise as you go to make the decision.

#1 – Don’t get in a rush to do something with it

This may seem silly, but it really is the most important rule. Think back to when you were growing up, and maybe it was a birthday or some other holiday when you received a nice little stack of cash from your parents. Do you remember how eager you were to spend it on something cool? Exactly. Has our attitude really changed much since then?

Until you decide, leave the money in a high-yield online savings account (if you don’t have one already).

#2 – Attack debt first

If you have non-mortgage related debt (car loan, personal loan, credit card balance, student loan etc.), consider using some or all the money to pay down an obligation you have hanging over your head.

Let’s say you receive a $10,000 inheritance, and you have a credit card balance of $3,000 with no other debt. Knock that sucker out!!!

Or, maybe you have a $3,000 credit card balance and a car loan of $9,000. You can’t knock out all $12k with the cash, but you can come pretty darn close! Even if you decided to wipe out the credit card balance, put a few thousand towards the car and save the rest, you have still made some great choices.

#3 – Consider giving

Now, you may be wondering why I am suggesting that you consider giving some of it away. Besides my firm belief that we tend to reap what we sow, the act of giving a portion of the money to a special cause or person in your life will likely release some of that uneasiness you may have been feeling. Even if you weren’t uneasy about the money, the pay-it-forward mentality can only benefit you moving forward.

Financial Goals

Once you have evaluated the guidelines, now is a great time to assess where you stand relative to some of your financial goals. Some of those goals are likely to include paying off debt (and perhaps even giving), so you are already on the right track.

Do you have a savings goal for the year?

Is there a business you have been wanting to start but haven’t had the capital to do so?

Saving for a home?

Whatever the goal, pursue it, but observe rule #1 in the process. There is no rush.

How Much Should You Be Saving?

Brad

If you find yourself contemplating how much money you should be stashing away each month, the answer is simple: it depends.

It depends on your age, debt, spending habits, short-term goals, long-term goals, level of income, and 100 other factors.

Okay, so not the answer you were looking for, but it is the correct one. Where people get lost, is when they hear all these factors and figures thrown around by friends, family, and financial experts on T.V., leaving them not quite sure which one is right for them.

The real question is not how much should you be saving, but rather, what do you value?

You see, most decisions in life can be boiled down to what we consciously and subconsciously value.

Someone who values experiences over things won’t think twice about spending large sums to travel but might cringe at the thought of purchasing a newer car to replace their old beater.

A mother or father who places a high value on spending time with their young children might turn down a new job with more pay, due to longer office hours.

What are some things that you currently value?

You may not value some or even any of these things. The idea here is that you list out the demands on your financial resources (including necessities), so that you can see your personal snapshot.

Once you have identified all that you value in the present, add to that what you know you will value in the future. Some of these may overlap, and that is to be expected.

Combining everything you currently spend money on, with what you would like to in the future will allow you to better determine how much you will need.

Only then can you answer that question for yourself.

A 25-year old might start saving 5-10% of their income for retirement, and an additional 10% for a down payment on a house for a total savings rate of 15-20%.

A husband and wife with adult children, might not be saving at all in order to pay down sizeable debt.

An individual with aggressive financial independence aspirations might save half or more of their income.

So, before you go chasing a figure that may not be right for you, begin with what you value so that you are saving with perspective.

Are You Afraid to Check Your Financial Scale?

Brad

Have you ever been on a long vacation where you ate, drank and barely moved, and toward the end you start to think to yourself…man, I really don’t want to check that scale when I get home?

Me too.

Despite this, you know that you should, and when you finally do check the scale, you allow yourself to come to terms with the damage done so that you can reenter your routine of cleaner eating and regular exercise.

Assume for a moment that, instead of checking the scale, and instead of reentering that healthy routine, you have a series of business trips where the problem gets worse. You continue to eat fast food and neglect the gym at your hotel. What happens then?

You are likely to gain weight by allowing your health to slowly suffer.

The same is true of your financial fitness.

Let’s look at Drew’s.

Checking Your Financial “Scale”

Drew is an IT contractor with an irregular and unsteady stream of business. Sometimes business is booming…other times it is slow.

He works hard to support his wife (Michelle) and kids (Lyla and Leo), and he recently had a string of costly and unforeseen expenses.

It began when his mother-in-law passed away and he and Michelle had to cover the funeral costs (there was no estate). Cost= $7,000.

That same month, the A/C unit for their Florida home went out. New unit + installation= $4500.

Typically, their savings would withstand the $11,500 in costs, if not for the fact that Lyla just started college, and a semester’s worth of her New York dormitory was due upfront.

With little savings and no emergency fund, Drew (understandably) placed the funeral and A/C unit on credit. With this being one of his “slow months” for business, there was already little wiggle room.

Yet, the unfortunateness of those two events is not what ultimately compromised him financially. When business picked back up, he only paid the minimum on his credit cards instead of aggressively paying them down. Months went by and before he knew it, he was $20,000 in the hole. Instead of staying current and reviewing the status of his outstanding credit balances, he didn’t want to look because he knew how quickly the debt was piling up.

Check the scale…regain your health.

The Millionaire Mind: A Review

Brad

I do a fair amount of reading.

The purpose for doing so is simple: there’s quite a bit to learn. And the more I learn, the more excited I become to apply what I have learned.

You’ve likely heard the proverb, “knowledge is power”.

I prefer Dale Carnegie’s version…  “knowledge is not power until it is applied”.

A big reason why I became an instant fan of Thomas J. Stanley’s, The Millionaire Mind, is due to his ability to couple first-class analysis with actionable information. He examines the mindset and disposition millionaire’s have towards life, relationships, and to decision making. How have the highly successful accomplished a feat that many simply dream of?

Through his research, he identifies a few foundational principles that facilitate financial success:

  1. Integrity – being honest with all people
  2. Discipline – applying self-control
  3. Social Skills – getting along with people
  4. Supportive Spouse
  5. Hard Work – work harder than most

Now, some of these likely seem somewhat basic and self-evident and in many ways they are. Each principle has yielded countless works of writing by those preaching personal development concepts.

Not too difficult so far.

He also notes that the successful population, regardless of intellect, is more highly criticized than the unsuccessful.

What does this suggest? It suggests that, along the way, some of the most significant impediments you will encounter will come in the form of opinions from others. Oftentimes, they come from people close to you. Are you seeing how a supportive spouse and developing good relationships in other aspects of your life play in?

Strength in your resolve will be necessary as you pursue worthwhile and challenging goals.

Further, one must learn to think differently from the crowd.

Millionaire’s are, by definition, uncommon. Most people are not millionaires. So, if you strive to be uncommon among common people, you must adopt a mentality that is reflective of that goal.

There are several patterns that emerge from his work. One pattern is that there is a high correlation between the quality and wholesomeness of one’s character, and that person’s ability to accumulate wealth. How best do each of us embody the principles above?

Stanley goes on to identify what he observes as the “8 important elements of the success equation”:

  1. Understand the key success factors our economy continues and will continue to reward… hard work, integrity, and focus
  2. Never allow a lackluster academic record to stand in the way of becoming economically productive
  3. Have the courage to take some financial risk…and learn how to overcome defeat
  4. Select a vocation that is not only unique & profitable, but pick one you love
  5. Be careful in selecting a spouse (mentioned several times throughout the book)
  6. Operate an economically productive household
  7. Follow the lead of millionaires when selecting a home: study, search, and negotiate aggressively
  8. Adopt a balanced lifestyle…many millionaires are “cheap dates”


Again, he circles back to familiar concepts-hard work, integrity, selecting a good spouse. However, what really stood out to me as I flipped through the pages is that, it all boils down to your mentality and to the choices you make as a result of your mentality. It is implied in the title of the work but may be less obvious for any who skim pages looking for a silver bullet.

Seeking to accumulate wealth on a limited income? Adopt a balanced lifestyle.

Trying to find ways to “cut back” and live within your means? Learn to treat your household like a business and operate it in an economically productive way.

Attempting to maintain a positive outlook on life, so that you are constantly at your best? Select a great spouse.

Adopt the millionaire mind.

Avoid Doing the Minimum

Brad

Have you ever heard one of your sports coaches at a practice or game tell you that the expectation was to simply show up and put forth the least amount of effort possible?

Neither have I.

So why would the expectation you have for yourself and for your finances be any different?

Minimum Payments

When you log in to you credit card account each month and you see those two alluring words staring back at you, resist the temptation. Making minimum payments on your credit card each month is putting yourself at a disadvantage financially as interest continues to work against you.

Is it natural that, at some point in time you were only able to make a minimum payment on something because you didn’t have the funds to cover it in full at the time? Sure. The essence of purchasing something on credit is that you can’t cover the cost right then and you need to make payments over time. While not ideal, it does happen, and sometimes the minimum is the best you can do (ohh college…).

The key is not to get in the habit of doing it, and when taking out credit, context is important.

If you find that you are consistently making minimum payments, you may want to spend some time assessing your financial position.

How long have you been making minimum payments for? How many credit cards are you making minimum payments on, and what are their total balances? Are you carrying other forms of debt…perhaps a personal or home equity loan? A student loan or car loan?

If you find that you are making minimum payments on several lines of credit, and on high balances relative to your income each month, you are likely overextended.

Example

Luis has a pre-tax monthly income of $3700.

His total debt payments each month are as follows:

Mortgage – $1200

Car Loan – $450

Student Loan – $300

Personal Loan – $250

Luis also carries credit card balances totaling $10,000. The card issuer’s monthly minimum payment is 1% of the balance, bringing the payment to $100/month.

Credit Cards – $100

Total Monthly Debt Payments = $2,300

To get a feel for where Luis’s debt payments stand in relation to his income, he calculates his debt-to-income ratio by dividing the total debt payments each month, by his pre-tax monthly income. The ratio is then expressed as a percentage.

$2,300 (Debt)/ $3,700 (Income) = .62 or 62%

With his ratio sitting at 62%, it isn’t difficult to see why Luis can only make minimum payments on his credit cards. Over half of his income is already earmarked for debt payments.

Also consider how deceptive each monthly minimum payment is when you look at them individually. $100 each month in credit card bills doesn’t seem like a significant sum, until you consider that the $10,000 in total credit card debt alone that he carries is nearly a quarter of his $44,400 annual salary! This is of course before he pays his mortgage, car loan, student loan, personal loan, food, gas, and insurance…

Be Your Own Coach

Credit should be used responsibly and sparingly.

Doing the minimum is not the expectation. It’s not your expectation.

If you find that you are paying the minimum each month on a large amount of debt, consider ways to downsize your lifestyle.

In the end, be your own coach. Your finances depend on it.

Understanding the Vesting Schedule

Brad

Your employer distributed an email this week stating that some updates have been made to the employee benefits package. As you peruse the document you come across a table labeled, ‘Vesting Schedule’, next to information about your 401k retirement plan.

It has ‘Years of Service’ on one column and ‘Vested Percentage’ on the other, and it might look something like the table below.

Admittedly, you had never done much homework on understanding your plan to begin with, and you take this as an opportunity to self-educate.

Breaking it Down

You already possess a basic understanding of the concept of 401k ‘matching’, where an employer matches an employee’s contribution dollar for dollar up to a certain percentage of the salary. You come to learn that this number is 6% in your case.

If your salary is $40,000, that means your employer will match every dollar you put in your 401k, up to $2,400.

.06 x 40,000 = 2,400

Over the course of the year you successfully stash $2400 in your 401k and, voila, at the end of the plan year the employer deposits $2,400 directly to your account! Pretty sweet!

You also notice that on your plan’s website the ‘Overall Balance’ is higher than the ‘Vested Balance’.

Why is that? What does ‘vested’ mean, exactly?

In the simplest of terms, vested means ownership…and until you are fully vested, you don’t yet have complete ownership.

Looking back at the Vesting Schedule above, you notice that with each year of service (called graded vesting), the percentage of your vesting- or, ownership- is going up. You’ll also notice that you don’t have any ownership until you have completed at least 1 year with the company, at which point, you are entitled to 20% of the funds your employer has contributed to your account. And with each subsequent year, you gain an additional 20% until you reach 100% (fully vested) at 5 years of service.

Note: You are always entitled to the funds that you contribute. The numbers indicate your level of entitlement to funds that your employer has contributed.

Therefore, at the end of your first year of service, you are entitled to 20% of the $2,400.

That comes out to $480.

.20 x 2,400 = 480.

If you were to take a job with a new company halfway into your 2nd year of employment, you are entitled to $480 of the $2,400 from your employer.

Or, perhaps you end up staying with the company and you reach your 2-year anniversary. You are now entitled to 40% of employer-deposited funds and, because of a small salary increase (2.5%; salary is now $41k/year) at the 1-year mark, your contributions (and thus your employer’s contributions) rose to $2,460 by the end of your 2nd year.

Now, pay close attention to the jump that occurred at Year 2.

Your ownership jumped from $480 to $1,944! At Year 1 you were only entitled to 20% of the employer contributions for that first year, whereas at Year 2, you became entitled to 40% of all employer contributions to-date! You can anticipate how that number can continue to climb, as both the vesting percentage and the total amount of what your employer has contributed, increase…

Understanding how these simple figures work can prove highly beneficial when studying your benefits package. Every little bit adds up, and compounded over time, small numbers become large numbers.

Cumulative Advantage

Brad

Have you ever, as a result of hard work and dedication noticed that when you are able to get one thing to go your way, other things begin to follow?

Perhaps it was that first promotion that elevated you to a place where the quality of your work would be seen by an even greater number of people? Or, maybe it was your volunteer efforts that inspired many others to join in, multiplying the impact?

The phenomenon contains an explanation.

Success comes one small advantage at a time.

This profound saying about life provides excellent context for personal finance. If you can begin to move in the right direction, and develop consistently in your approach, positive results are an inevitability.

Let’s look at an example.

Jaclyn’s Journey

Jaclyn is a 36-year old nurse, with a husband and two children. Always a hard worker, she has built and maintained a strong reputation at work, solidifying herself as one of the finest practitioners in the hospital.

But, for the duration of her 20’s, her financial life had no direction. She barely contributed to retirement, saved very little, and was a profligate spender. After meeting her husband and settling down to build a family, she realized…neither of them were particularly effective when it came to managing their financial lives.

Eager to do better for her children, she began to self-educate. She consumed information online, read well-known personal finance books, and found a mentor (a family friend with a penchant for financial well-being). She rapidly acquired knowledge, and was soon educating her husband on all that she was learning. Once on board, he too felt they needed to take action. And did they ever…

They set up time on an on-going basis to discuss financial priorities (defining needs vs. wants), establishing budgets, and finding ways to make their money work for them. Their debt-load is now nearly extinct (except for the mortgage…which they intend to pay off aggressively), with investments growing and compounding while they sleep.

Jaclyn’s net worth (assets minus liabilities) has skyrocketed.

It all began with a desire to learn, and a willingness to take action…each step becoming its own advantage.

When you add up each of these small advantages- the desire to be better, the initiation of the learning process, and then action- you have cultivated your own superpower.

Cumulative advantage.

How to Keep Track of Your Expenses

Brad

There are an unlimited number of ways one can keep track of expenses. Some prefer Microsoft Excel (me!), others use QuickBooks, phone applications like Mint, or good ole’ fashioned pen and paper to balance a checkbook (I actually keep a notebook to track basic cash flow, but more on that in another post).

An expense tracker is really a direct reflection of how you structured your budget. In fact, the template may be one and the same.

In order to create the tracker, you will first need to identify how you will categorize your spending. Below, are the categories I currently use and some of the key items or expenses that would fall within each. Some are recurring, some are not.

It doesn’t matter which categories you choose, or even how many you choose, but I would suggest that you stick with your primary categories once selected, for the duration of the year. Tracking can become unorganized and difficult to manage if the way you are outlining your budget and tracking your expenses is constantly changing. The numbers will become confusing; identifying trend lines or creating graphs as a visual aid (for those so inclined) even more so.

What’s most important is not the way the tracker looks, but rather, the way in which you track. Naturally, there are many ways to do this as well. Students of Dave Ramsey might deploy the envelope method, by taking out cash at the beginning of the month, placing a preselected amount in several envelopes, each representing a category of spending. That way, you can’t spend more than what you have allotted. Others might set the budget and let an iPhone application update them in real-time on their spending in each category as the month progresses.

Find what works for you. It may take some trial and error…(My process has evolved over time).

Finally, have some fun with it. It can be a major stress reliever to better organize this aspect of your finances.

The Accumulation of Assets…a Key Financial Goal

Brad

Goal setting for your finances can seem overwhelming, given all the demands on your time, attention, and resources. However, much like selecting targets in other aspects of your life, identifying key financial goals requires self-reflection – to know what brought you to where you are now – coupled with a forward-thinking mindset.

Where you are in your financial journey will dictate whether you need to, for example, work to aggressively pay down debt or begin the process of saving for retirement. Assuming that your debt – excluding mortgage – is limited to non-existent, there is one financial goal that should be the cornerstone of your financial pursuits.

Accumulating assets.

Assets are things that put money in your pocket. A few examples of assets are:

  • Index fund tracking the S&P 500
  • Bonds that are outpacing inflation
  • Rental property earning more than you spend on it
  • Profitable Business you own

Why are assets such a financial criticality?

They begin as seeds that, once planted, will bear fruit for you in the right seasons.

After purchasing an Index fund, the fund may experience times of turmoil, but over the long-haul that fund will yield tremendously in terms of dividends and appreciation in value.

When you first bought that condo, you may have expended energy and money fixing it up. When it’s time, and you have placed a tenant paying consistent rent that more than covers the cost you incur to own it, you now have an extraordinary financial asset.

Assets are synonymous with the terms “financial security” and “wealth”. The more you have, the higher the level of freedom you have. For most, when they have acquired a certain threshold of assets, they then have the ability to retire. In other words, they can stop trading their time for money. For those fortunate enough to love their work or vocation, they may choose to continue with those endeavors, but they don’t have to.

The freedom of time provides for your freedom of choice.