Your Margin Should be Your Financial Priority

You’re in charge of HOW you spend your money. I’m just concerned with HOW MUCH you spend.

People try to convince me how important Junior’s pan flute lessons are and honestly, I’ve heard it all before. It’s okay, I don’t begrudge anybody their “must-haves.” I just want you to have enough financial cushion between what you earn and what you must (or choose to) pay for. It’s called your MARGIN. You’ve heard companies worry about their profitability margins, and this is similar. Your household should focus on and protect its Margin. Too many “must-have” expenses will erode your Margin, and it’s your Margin that is the key to your financial well-being.

Add up all your direct deposited (after tax) income for a month and subtract EVERYTHING you spent. Subtract some necessary savings for annual expenses like vacations and camp. Fingers crossed, you end up with a positive number. That’s your Margin. Your Margin should be about $500-1000/month AT A MINIMUM. Yup, you heard me: $500-1000/month depending on your savings and goals, because your Margin is the best way to save for goals.

If you can drive what you drive, eat what you eat, play the way you play and still have AT LEAST $500-1000/month of Margin – have fun. I would not stop you. It’s when people come to me spending either exactly what they earn or a bit beyond it, that I recommend we trim. If you do not have enough Margin, you will have to rely on credit cards.

Or, maybe you just feel like you are living check to check. It’s stressful, and it’s because your Margin is definitely not $500-1000/month. The only way to get off the check-to-check treadmill is to spend less than you earn consistently month after month and build enough of a cushion that you have liquid savings set aside if you have a Rainy Day Expense.

If you don’t have the $500-1000/month Margin I recommend, start prioritizing. Next post I will talk about how to figure out what to trim, but for now, think about what expenses are most important to you. Remember, focus on MARGIN!

Trapped by Your Lifestyle – Washington Post and Top 3 Tips for Your Tax Refund

Fearless Finance, my web-based personal finance platform and mobile app designed for the majority of Americans who want clear insight into their financial health and don’t see a simple path to financial freedom, is now available. I designed Fearless Finance to fill the gap in the financial planning space: a platform and app that would give users a complete 360 degree look at their finances (spending, saving and goals), a simple mobile app for tracking the two expenses that matter most for staying on plan and ultimately, control of their own financial wellness.

This weekend, Tom Heath of the Washington Post’s Value Added column interviewed me and talked about Fearless Finance. Take a look!

As my newsletter subscribers, i want to extend a limited time offer to you. Use promo code “Launch20” and get 20% of a one-year subscription or a one-time run of Fearless Finance. You get the mobile expense tracking app free with your monthly or annual subscription. If you’ve been hesitant to see me in person, Fearless Finance may be a great option for you.

Users on the platform:

  • Only have to run the program once a year or whenever there is a major life event like a new job or marriage.
  • Don’t need a budget just need to track two things each month with the easy to use mobile app.
  • Linking your accounts is optional, no pressure

The mobile app (available for IOS and Android) allows you to track full discretionary spending and groceries through the month to stay on target and not overspend. If you stay within your targets on groceries and discretionary spending, and use your Rainy Day Savings for unexpected expenses, you should be able to save as planned and therefore reach your goals. If you choose to link your credit card and checking account, the app will automatically scrape transactions, which are then auto-categorized to make it as easy as possible. If you choose not to link, you can add your transactions manually. No line items or budgets to worry about.

One of the best reasons to run Fearless Finance is to see if you are “Savings Secure.” You have some money for unplanned, required stuff that happens like root canals, and car repairs (Rainy Day Savings), and 3-6 months of expenses in case you experience a total loss of income (Emergency Savings). Now, it’s tax time and you are looking forward to a nice refund check. How do you decide how to best use the money? Vacations, debt pay off OR savings security?

  1. Make sure you have $3k for Rainy Day Expenses ($1500 if you rent) and at least ONE MONTH of expenses for Emergencies
  2. Save for large upcoming one-off or Annual expenses (e.g. CAMP! or braces), because if you don’t have money when these expenses come up, you will charge them and you’re back on the cycle of credit card debt
  3. Pay down credit card debt when #1 and #2 are satisfied.

Here’s the key: you MUST have some liquid savings for stuff that happens and big upcoming expenses to KEEP YOU OFF CREDIT CARD DEBT. There’s no sense putting your tax refund toward credit card debt FIRST when you’re going to have to charge more stuff as it comes up. Having liquid funds is the only way to get off the credit card/debt dependence cycle and it usually means putting off paying down debt for a few months to amass some savings. It’s seems odd to hear a financial planner tell you to wait to pay off credit cards, but it’s okay to do if you are trying to amass some liquid savings first.

Your Children & Your Financial Well-being: 3 Ways to Make it Better

Nothing is more important than your kids, right? Well, yes, but… The real question is far more complicated, of course. If your child needed a specific medicine, I would advise you to sell the house to buy it, but if your child wants to go to a certain sleep-away camp… not so much.

You get the picture, it’s a matter of prioritizing. I see a lot of clients who say they “prioritize their children,” which is a convenient way to deflect questions about your spending. But, not here. I’m the mean lady who still questions your spending. What I see is they do not say ‘no’ to their kids, and don’t want their kids to think they are not “rich” (I’m using quotes, because what is “rich” anyway?). Sometimes the child didn’t even ask for special activities, but the parents think they have to do it to keep up with the “Joneses.”

Essentially, they are hiding behind “prioritizing their children” instead of facing hard confrontations and setting limits. Sometimes, that can result in becoming indebted or possibly bankrupt. I’m nobody’s parenting counselor, but I have to think that setting limits for children and saying “no” occasionally, especially for the financial good of the entire family, is not a bad thing. he children have a stake in the financial well-being of the household, because it affects their emotional lives, too. It’s not just about stuff, it’s about reduced stress, time together, etc.

Okay lecture over. There are 3 things I recommend when facing your children and hoping to prioritize, not just your children’s desires, but your family’s overall financial wellbeing:

  1. Discuss limits with your co-parent BEFORE the questions come up. Before kids are old enough for sleep away camp, discuss what the family policy will be for sleep-away camp. You have no idea how strong you sound, when you’re not making it up on the fly.
  2. Say NO early and often. It’s hard to spring a NO on your child for the first time at 14 years old. I wouldn’t blame the kid for freaking out. Start when your kids are really young (4, 5, and 6 or earlier) to say NO sometimes to make sure they understand that they do not get everything they ask for. Try to be consistent and predictable about what you are willing to pay for and what you’re not. “Yes” seems like the easier path in the moment, but it will not be when the credit card bills come in.
  3. Teach your children how to prioritize. If you never say NO, they will grow up thinking the world owes them something and it will be tougher for them to manage their own finances. The best tool for learning financial responsibility is allowance. Give them some money each week, not for chores, but for teaching responsibility with money and tell them what they have to pay for (Pokemon, latest cool shoes, Xbox, whatever). Watch how quickly they learn!

Here’s a good test: if you carry balances on your credit card and they are not because of medical bills or emergency hot water heater replacement, chances are you are not saying NO to yourself and/or your children in a way that is in line with your income. Step back and figure out how much fun money you have each month while still being able to pay down credit card debt, save a little and have a small cushion at the end of the month. Within that “fun money” amount, share with your children, but make sure it’s fair to the family as a whole.

Lastly, don’t tell yourself fulfilling your children’s every need is a good enough reason for whatever financial situation you are in now. You’re the adult. It’s your responsibility to know how much can be spent on fun, camp, eating out, travel, etc., and how much has to be spent on boring things like insurance, as well as how much has to be saved. Saying NO sometimes benefits everyone. Will your children remember the Xbox or that mom and dad were stressed out about money all the time?

Holiday Financial Hangover… 5 Tips to Prevent It

If you were like me, last weekend, you spent way more than you should have for the month and chalked it up to the “holiday season” and pre-buying holiday gifts when the sales are on. From a practicality standpoint, that may make sense, but from a financial one, it may not.

I’m not going to act like scrooge by telling you to not buy things your loved ones (and you) want for the holidays and rain on everybody’s happiness (I do that all year round in my practice). What I am going to do is give you 5 tips for staying out of credit card debt this holiday season.

  1. Don’t count on money you don’t have today – don’t make your gift list assuming you will get a year end bonus or tax refund (that’s all up in the air!). Set your limits (#3) and make your list (#4) based on money you have NOW.
  2. Manage the rest of your life – this month is not the time to replace towels, or running shoes or anything else that is not a safety issue and not holiday related. Spread those non-essential, non-holiday expenses over the winter when things are calmer. Or turn those replacement needs into holiday gifts!
  3. Set some limits – generally families of 4 in an urban area can spend $500-1500 on the holidays including decorations, gifts, clothes related to the holidays and food for get-togethers. Pick an amount that fits your household finances and get other family members to agree.
  4. Make a list – sounds familiar – but there’s a reason why all those holiday songs talk about making a list. It works. Do not go into a store or online and just buy things that seem okay. Think about what your loved ones want and write it down. This doesn’t mean you can’t be spontaneous, but try not to be ONLY spontaneous.
  5. Track IT! – It’s not hard. Use a spreadsheet, this Iphone app, this Android one or even a pencil and paper and write down what you’ve bought. Believe it or not, it’s not that much to track and the mere act of tracking it will make your financial judgment better. Stay within the limit you set in #3.

Bonus tip: ‘Tis the season to think sustainably financially and otherwise. Reuse décor from last year, make more than you buy, do a Secret Santa, or set a price limit for gift giving. I guarantee a lot of loved ones will appreciate you suggesting a limit. It takes the pressure off.

Try to do the suggestions on my list and you will see that your holidays will be less frantic, riddled with guilt and pressure and importantly, less apt to give you a financial holiday hangover in January. Credit card debt is like walking into a cob web, it takes just a second to get into it and a long time to get out.

Next year, make a resolution to save each month for the holidays. If you need $800 for holidays, save $65/month. You will feel great once December comes. Happy holidays and I will be back in the new year!

So Many Voices on Personal Finance – 3 of My Favorite Money Podcasts

It may be because I’m in personal finance that I feel like everyone and their cousin is podcasting, writing books, and doing videos about finance. There are a lot of voices out there and it’s hard to sift through them all, but I have found a few podcasts I really like.

First, personal finance is a huge subject area. I try to focus on the information I can use to help my clients (and my own household) save money, reduce debt, increase earnings or stay better organized. I like specific recommendations that regular people can implement because they can see how the recommendations fit their specific lives.

I know liking a podcast is by definition subjective, and can be hard to define. I tried break down what I value in a personal finance podcast and came up with the following:

  1. subjects relevant to my clients’ or my life – no hot stock tips or discussions about the yield curve
  2. specific tips my clients or I can use right away
  3. keeping my interest – the podcaster is charismatic enough to keep my interest for 20, 30 or even 60 minutes.

With that in mind, here are my top three podcasts for personal finance in no particular order, because they are very different types of podcasts:

  1. Freakonomics Radio – I find myself quoting some of their research on index fund investing all the time. They also take up non-financial topics like medical trials, language and philanthropy and look at the economic implications. Good dinner party fodder.
  2. Easy Money with Elisabeth Leamy – she helps you actually find money. I took her tip on searching for my own unclaimed money and found over $400! Her podcasts are also shorter (20-30 mins) and very to-the- point, which is something I highly value.
  3. Who Knew? – life hacks and money saving tips you can use right away. Did you know you should buy plane tickets on a Tuesday or Wednesday, because studies show fares are lowest on those days. It’s also about 20-30 minutes, which is great.

I also like Planet Money from NPR, but did not want to fill my list with NPR entries, which I could easily do. Take a listen and let me know what you think. Let me know if you have a favorite podcast or blog about personal finance or saving money. I’d love to hear it.

Back to School, Back to Meal Planning: Try to Keep Your Groceries Bill in Check

Hi all,
I hope you had a great summer and are ready for Back to school, and back to “normal” schedules. It is the perfect time to discuss one of the biggest areas we all tend to overspend: Groceries. My top 5 tips for reducing your groceries spending are the following:

  1. go with a list
  2. leave the kids at home
  3. do some basic meal planning before you write your list (e.g. “pasta Tuesday, chicken Wednesday…”)
  4. do a quick inventory before you head to the grocery store
  5. MOST IMPORTANT: Go only 1 or 2 times per week! Don’t go whenever you need one thing, you will come home with 10 things, 9 of which you did not need.

Although all 5 tips will help reduce your groceries spending, number 5 is critical. If you can stop yourself from running out every day or every other day for “a few things,” you could drop your spending by a couple hundred dollars per month. Using Instacart or Peapod can help reduce overspending by impulse buying, too.

When my daughter says we’re out of whatever she MUST have that minute, I tell her it takes 2-3 weeks to starve and mommy will go to the store within that time frame. Done. It may be harsh, but patience is a good life skill for all kids to learn.

To help you with item #3, I recommend a recipe planning site like 6 O’Clock Scramble, an online meal planning service that provides quick, easy, and delicious meals recipes. To make it as easy as possible, The Scramble sends you a weekly email that links you to your customizable meal plan. From there, you can pick which recipes you want and generate a shopping list. Recipe sites are a LOT cheaper than meal kit services that deliver meal ingredients like Blue Apron.

I recommend 6 O’clock Scramble because you are doing the cooking, which means you saving money. I am NOT AFFILIATED with 6 O’Clock Scramble and do NOT make a red cent if you decide to try it. I just like the service and they were kind enough to give subscribers to my blog a discount code. If you want to try it, use this subscription discount code GL30031 and get $3 off any term of subscription. Let me know what you think!

Lastly, from a financial perspective I recommend people try to stay away from meal kits services e.g. Blue Apron, Hello Fresh and Purple Carrot, etc., if possible, because it’s easy to get hooked and it’s expensive over the long haul. If you decide to use a meal kit service, consider it “training wheels” to teach you good cooking techniques. These services are far more expensive than cooking, because in addition to meals you buy from a meal kit service, which may have a decent per meal price tag, you still have to buy toilet paper and snacks and everything else. If you must, try a meal kit service for 6 months at most and see if you learned enough to cook for yourself without it after 6 months.

Remember, you want to spend $250-300/person/month on groceries (any child eating solid food is a full “person” for this). If you are a family of 4, you should be spending $1000-1250/month on groceries including non-edible items like laundry detergent and plastic wrap. If you are over that amount, there’s more than the typical amount of waste unless someone in your house has diabetes or Celiac or another condition that requires a special diet.

We all like to eat well, just make sure you are eating smart financially, nutritionally, and environmentally.

3 Pieces of Great Advice That Can Ruin Your Finances

For my last post before summer break (I will be back posting in September, as usual), I want to talk about the saying, “no good deed goes unpunished.” That old saw holds up in personal finance, too, in that there is a lot of great advice out there, but unless it fits your finances specifically, it could backfire.

Here are three pieces of excellent advice in certain circumstances:

  1. Pay more to your mortgage each month
  2. Save for college
  3. Save more to your retirement plan to reduce your taxes

All three pieces of advice are excellent IF you have the cash flow to do it. If you don’t, all three can get you into a mountain of credit card debt.

If you do not have enough cash flow to pay for all your monthly expenses plus some full discretionary money (everyone needs some!), plus some savings for Annual Needs and a small cushion, then you could be “robbing Peter to pay Paul.” You could be saving $200/month to your child’s 529, paying $500/month extra to your mortgage and maxing your retirement, but if you do not have $200+$500 ($700) EXTRA each month AFTER maxing your retirement AND paying ALL your monthly expenses, saving for Annual Needs, and having a small cushion, you will inevitably have to charge expenses that come up like plumbers, kids activities, birthday parties and other lifestyle expenses.

All that good saving could squeeze your cash flow each month and force you to charge regular expenses that come up. Instead, KNOW if you have an extra $700/month after paying for all your monthly expenses (including some full discretionary funds to cover your child’s activities and birthday parties), saving for Annual Needs and having a small cushion. Only once you know you have enough left over, can you confidently follow any or all of the advice listed above and NOT risk amassing more credit card debt.

Think about whether you are saving more than you can afford to each month. More about real money casino on! That happens to well-intentioned people everywhere, especially if you are in a cash flow heavy period of your life (e.g., kids in daycare or college). If you are saving more than you can, reduce your savings and make sure you can handle your monthly expenses. It’s more important. Look at your monthly expenses, you may be able to trim some to free up more money for saving (woohoo!), but if you can’t, don’t follow the good advice listed above (however, you should always save at least 15% total to retirement including your employer match, but anything over that can be trimmed, if necessary). Instead, make sure you don’t get into more debt due to monthly expenses.

There, I said it. Don’t save… until you know you can.

3 Pieces of Great Advice That Can Ruin Your Finances

For my last post before summer break (I will be back posting in September, as usual), I want to talk about the saying, “no good deed goes unpunished.” That old saw holds up in personal finance, too, in that there is a lot of great advice out there, but unless it fits your finances specifically, it could backfire.

Here are three pieces of excellent advice in certain circumstances:

  1. Pay more to your mortgage each month
  2. Save for college
  3. Save more to your retirement plan to reduce your taxes

All three pieces of advice are excellent IF you have the cash flow to do it. If you don’t, all three can get you into a mountain of credit card debt.

If you do not have enough cash flow to pay for all your monthly expenses plus some full discretionary money (everyone needs some!), plus some savings for Annual Needs and a small cushion, then you could be “robbing Peter to pay Paul.” You could be saving $200/month to your child’s 529, paying $500/month extra to your mortgage and maxing your retirement, but if you do not have $200+$500 ($700) EXTRA each month AFTER maxing your retirement AND paying ALL your monthly expenses, saving for Annual Needs, and having a small cushion, you will inevitably have to charge expenses that come up like plumbers, kids activities, birthday parties and other lifestyle expenses.

All that good saving could squeeze your cash flow each month and force you to charge regular expenses that come up. Instead, KNOW if you have an extra $700/month after paying for all your monthly expenses (including some full discretionary funds to cover your child’s activities and birthday parties), saving for Annual Needs and having a small cushion. Only once you know you have enough left over, can you confidently follow any or all of the advice listed above and NOT risk amassing more credit card debt.

Think about whether you are saving more than you can afford to each month. That happens to well-intentioned people everywhere, especially if you are in a cash flow heavy period of your life (e.g., kids in daycare or college). If you are saving more than you can, reduce your savings and make sure you can handle your monthly expenses. It’s more important. Look at your monthly expenses, you may be able to trim some to free up more money for saving (woohoo!), but if you can’t, don’t follow the good advice listed above (however, you should always save at least 15% total to retirement including your employer match, but anything over that can be trimmed, if necessary). Instead, make sure you don’t get into more debt due to monthly expenses.

There, I said it. Don’t save… until you know you can.

Spending Gives You Life Experience! Yes, I Agree, But…

There’s a fair amount of chatter on social media and articles being written about how life is about experiences and not stuff. I couldn’t agree more and I’ve written about it before. There was a great article in the New York Times about it just a few weeks ago.

The essence of the article and much of the current thinking on happiness is that happiness is tied to experiences (as well as other things like relationships, purpose, etc.) not things or objects. Buying another object won’t make you happy, but having a great life experience just might. Both objects and experiences usually cost money and the more life-changing either is, generally (and I know there are exceptions) the more money either costs.

The argument goes: “spend it and don’t worry about saving because you are adding to your life experience and that’s more important than some number on some account somewhere.”

My position goes: Yes, once you are savings secure, you can decide if you want to spend that extra dollar on an experience or on growing your savings more (I would probably vote for the experience personally!). If you spend on experiences before you are savings secure, you could be risking credit card debt or even financial ruin.

People should have experiential goals and they may even help you keep your focus as you get saving’s secure so you can spend your NEXT bonus on climbing Everest. Here’s what savings secure looks like:

  1. spend less than you earn each month consistently
  2. have a few thousand set aside for Rainy Day expenses like home or car repairs, root canals and emergency travel
  3. have 3-6 months of your total monthly expenses saved in cash/money markets for a total loss of income
  4. save 15% of your pretax income (including employer matches) for retirement
  5. save monthly or have enough annual income (bonuses, tax refunds, etc.) to pay for your Annual Needs like camp and vacations.

Once all that is in place, any dollar over that amount can and should be spent on experiences and other goals like saving for college or a home renovation. Bottom line, you can’t have financial goals, whether they are experiences, new cars or college, until your are savings secure. Until numbers 1 through 5 above are complete, your only financial goal should be getting them completed.

I know everyone needs to blow of steam and that’s why everyone needs some fun money each month and money put aside for vacations each year.”Experiences,” within the amount you have for fun money each month or vacations each year, is great. Additional experiences, require savings security. Besides, how much fun is white water rafting when are freaking out that you can’t really afford the trip.

Goal 1: Savings Security. Goal 2: All the life has to offer.

If You Have Revolving Credit Card Balances, Do NOT Use those Cards for Daily Purchases. Here’s Why

I see this all the time in my practice. Clients come to me with some credit card debt. Usually, it is spread over more than one credit card and sometimes it is just one. They want to pay their credit cards down. Great, I say, and we figure out how much they can squeeze out each month to pay down their balances.

Then, they say they still use the card with the balance for their daily credit card. They ask if that’s bad. YES, it is a bad idea. Here’s why:

  1. You could be adding to the balance because you have to charge “stuff that happens” like car repairs and root canals. If you do not have a RAINY DAY SAVINGS account for Stuff that Happens, paying down your credit card becomes two steps forward and three steps back because you pay $300/month, but had to charge $450 for the brake job.
  2. You charge everyday expenses and you don’t know how much you charged. Are paying extra towards the revolving balance or just paying the current purchase or not even paying the current purchase and thus adding to your revolving balance?
  3. Psychologically, it’s probably causing you stress just seeing that card in your wallet without a plan to really pay it down. Maybe you either just throw up your hands and say, “whatever, let’s buy it” or never buy things you really need. Either is bad.

What should you be doing if you have credit card debt you want to pay down:

  1. Make sure you are spending less than you earn each month. Know how much you have extra each month to put towards credit card pay down. Try to make it the same amount each month.
  2. Have $3k ($1500 if you rent) of savings for RAINY DAY expenses. If you don’t, save for it BEFORE YOU TRY TO PAY YOUR CREDIT CARDS DOWN. Without the RAINY DAY fund, you will only amass more credit card debt with your first brake job or root canal.
  3. Have a DIFFERENT credit card (or ONLY use your debit card) for every day use. Take the card with the balance and stick it in your drawer. Figure out what you can pay on it each month and just start throwing payments at it. No more purchases.

Sometimes it is a good idea to get a zero percent card and transfer the revolving balance to a 0% card AS LONG AS YOU CAN PAY THE BALANCE BY THE TIME THE 0% PROMO ENDS. If not, just get another card or use your debit card for daily purchases. If you get another card, YOU MUST make sure you are spending less than you earn each month and pay that new card in full each month. Let me repeat: pay the new card in full each month. If you don’t do that, this whole strategy falls apart.

This recommendation of getting a new card is not license to spend more. That’s the issue in the first place. For many, credit card debt is unavoidable (e.g. medical, repair bills, etc.), but for most, it is the result of not cutting spending when necessary and THEN being hit by a medical or repair bill.

First things first: cut spending, then get a card that you can use daily and pay it off each month. Hammer away at your revolving debt by KNOWING how much extra you can send to it each month and try to make that amount consistent. It’s not easy, and it’s not fun, but it will relieve stress, and that’s pretty good, too.

4 Ways to Spend Less than You Earn – Hint: Only One Really Works

I was talking to a friend (yes, I talk about this stuff on my free time, too) and I was saying that the most critical thing about being financially secure is making sure you spend less than you earn every month, consistently, have a little bit to save and have a small cushion each month.

She said, “what if they can’t spend less than they earn?” I said people have to cut expenses until they spend less than they earn and she replied, “what if they can’t?” and I looked at her as if she had six heads and said, “what do you mean? You can’t spend money you don’t have, indefinitely. You will eventually go bankrupt.” It’s shocking to me that someone would say “what if they can’t,” because you can ALWAYS cut even if it means moving, selling a car or public school.

Her comment reminded me of something I’ve seen with clients and I think it’s important and common enough to write about it: feeling entitled to continue spending more than you earn because you’ve decided something is “non-negotiable.” I often hear, “Johnny would not survive in public school.” Okay, that may be true. Then move to a smaller place, sell your car and commit to Johnny’s education. Do not run up credit card balances trying to do it all.

Feeling shame or embarrassment because you move to a smaller place, although very hard emotionally, is still not a good enough reason to pile up debt. There I said it. “Keeping up with the Jones'” is not a good enough reason. “Shame” is probably not the right word either, because think of the pride you will feel at being financially secure and prioritizing your family’s needs.

Ok, so what can you do if things are that tight and you are consistently spending more than you earn each month? There are only 4 ways I can think of to cover yourself if your expenses are more than your income on an ongoing basis:

  1. Steal
  2. Print money in your basement/counterfeit
  3. Earn more and/or cut expenses
  4. Borrow money/charge stuff

If you are doing either of the first two, please do not tell me and STOP! If you are doing the fourth, you’re going to end up with a pile of credit card debt. You can only use debt to cover your expenses when it is TEMPORARY, as in 2-3 months at most between jobs or something like that. Even then, if you have been reading my blog, you know you need 3-6 months of emergency funds for exactly that situation, i.e. a total loss of income.

The only solution that makes sustainable financial sense is increasing your earnings and/or cutting expenses. If you cannot cut enough, and that happens sometimes especially in large urban areas when you have young kids, you have to increase earnings. That means you have to get creative on the income side by doing things like AirBnB or taking on consulting work, or whatever makes sense for you. But, raising income or cutting expenses are still the only smart ways (not to mention legal ways) to handle the problem.

There is NO indefinite situation where it’s okay to just live bigger than you earn. None. It’s part of the social compact. If everyone overspent with no end in sight, we’d have a lot of people who end up bankrupt (anyone remember 2008?). Check your feelings of entitlement and see if they really fit your wallet. Then, look at what you are spending and see where you can trim and what is really important. Wouldn’t it be great to feel less stress about your finances? Here’s how you start.

Trashing the Fiduciary Rule – Yes, It Will Affect You!

I know I said last week I do not usually resend other people’s articles, but please read John Bogle’s Op-ed in the New York Times about the administration’s trashing of the Fiduciary Rule. I’ve been meaning to write about this and now is the time. The new administration has slowed the progress (and could possibly stop altogether) a Department of Labor ruling that was supposed to go into effect in April 2017. The ruling (referred to as the Fiduciary Rule) says that brokers and investment advisers (a.k.a. “your guy who manages your money”) MUST put client interests FIRST before their own interest when recommending investments for a client’s RETIREMENT account.

There are 2 things to note in the sentence above:

  1. client interests
  2. retirement accounts

Let’s discuss both. “Client interest” means your interest. It means that right now your broker or adviser is legally allowed to recommend investments (e.g. mutual funds, bond funds, stocks, etc.) for your retirement funds that make him a lot of money in commissions and may not make you the most money in the long run either because of lackluster performance OR high fees that erode your gains in your RETIREMENT funds. You should be furious. Retirement funds are the ones that will keep you from eating cat food in your dotage. It’s pretty damn important.

If you are paying a bunch of commissions (also referred to as “loads”), high expense ratios (different than loads, these are fees charged by the actual underlying mutual fund manager) and possibly a wrap fee or a percentage of your entire account to your broker, you may not get the best return because the fees are crushing you. People are investing for 30 and 40 years and having 4% returns TOTAL (not each year) and can’t figure out why. The reason is usually fees, and now the administration is saying we do not need to rush into a rule that forces investment advisers and brokers to forego their largest commissions and concentrate on getting the best return for their clients, which many times means low cost index funds.

Next, the second important concept: Retirement Accounts. These are your 401ks, IRAs, SEP IRAs, TSPs, 403bs, and several others. The rule, if it ever happens, only governs your retirement accounts. Your regular investment accounts, also known as brokerage accounts are not even affected by a rule that should never have to be a rule in the first place. Those non-retirement accounts can still be raked over the coals for the highest commission mutual funds and investments possible.

Doesn’t sound fair, does it? It’s not. It should be illegal. It’s not. What if your doctor didn’t have your best interests in mind when she prescribed medicine. What if she gave you a bunch of prescriptions you didn’t need because she made a commission or worse, gave you the wrong medicine because she made more commissions from the wrong medicine than the best one. Clearly, that would be illegal, but this is somehow not. Yet.

Always question your “guy who manages my money.” How much is the commission on the product? Is there another way to achieve the same thing. Why is an index fund not appropriate? You have to be your own best advocate here, because clearly the regulators will not be.

Student Loan Repayment Pitfalls – Don’t fall in…

Usually, I do not resend articles written by other outlets, but in this case I am, because I think it is so important and I get asked about student loan payback plans a lot.

If you, or your child, have student loans, please read 6 Tips for Avoiding the Worst Student Loan Repayment Traps by Ron Lieber, in the New York Times, January 20, 2017.

My general advice on student loan payback plans, which this article only touches on, is to get on and click the “use the repayment estimator.” Once you are at the Repayment Estimator, go through EVERY student loan repayment program with your eligible loans and make a table with the name of the repayment program down the side of the table and across the top have a column for each of the following information types:

  • First Payment
  • Last Payment
  • Total Paid
  • Forgiveness
  • Period of Repayment

Fill in all the data list above for your loans and compare each program. You want to optimize the following TWO items:

  1. monthly payment; AND
  2. total paid

Don’t worry about forgiveness not being on my list of two items to optimize. If you are eligible for forgiveness, it will be reflected in a much reduced “total paid.” The reason I ask you to “optimize” both monthly payment and total paid, is that when you are just out of school or maybe you’ve just started a family, monthly payment matters A LOT, but at the same time, you do not want to pay tons in interest over the life of your loan, which may be up to 20 years. Try to find a payment plan that allows you the lowest monthly payment you can manage while also giving you the lowest total payback possible. That’s optimizing.

There may be plans with lower monthly payments, but over the life of your loan you end up paying thousands more in interest because you paid so little each month. That’s not optimizing. Each case is different and you might be in a period of life where monthly payment is all that matters. I get that, but, in general, try to optimize both total paid AND monthly payment.

We live in uncertain times and all these program might change or go away altogether. It’s worth the ONE HOUR it will take you to fill in this table and make sure you are on the right repayment plan before that repayment is potentially eliminated. You may still be able to be grandfathered in if you enroll before any changes are made.

Student loans are not to be messed with. These things stay with you even if you were to go through bankruptcy. Yep! They never go away until they are paid or forgiven (if you are on a forgiveness plan). Speaking of forgiveness. Do not assume you are eligible for a forgiveness plan and if you are eligible, do not assume you are enrolled. You have to enroll in the plan and make sure they count all the years for which you are eligible.

Student loans, like many other great benefits offered by our government, have to be monitored, checked and generally stayed-on-top-of throughout the time you have them. Email me if you have questions or would like my template for the table i discussed above.

Are you a McGyver or an Anyway/Anyhow person?

I’m going to describe a certain type of person. I know it’s not you, but maybe you know someone like this. I call this person Annie, short for “anyway, anyhow.” Annie’s daughter comes home from school and needs to find something to wear for a school play. What does Annie do? She finds an appropriate costume online and buys it and pays for quick shipping.

Annie is planning a vacation for her family. She wants to go to Europe. She books the trip for next month, books the hotel and walks away thinking about how exciting her trip will be.

Annie back is hurting. She needs to see a doctor. She asks her friends who their favorite orthopedic surgeon is and books the next available appointment. She books acupuncture and a massage as well. One of her friends tells her about some supplements that her cousin’s neighbor took, so Annie buys them online, hoping they will help.

What I’ve described here is Annie’s Anyway, Anyhow personality. When she wants something, she does it when and how she wants and does not think about the cost or. The challenge is that Annie probably overspends every month with her Anyway/Anyhow personality.

Buying your kid the best costume without first seeing what you have at home, is expensive. Trips booked without comparing flights and hotels, or even considering another destination where a special is being run, are expensive. Going to doctors recommended by friends and not checking to see if they are on your plan can be REALLY expensive, not to mention supplements and other therapies that might not be appropriate. You get the picture, right?

If you think like someone who can just do whatever you want whenever you want, you will end up with credit card debt. Don’t fool yourself into thinking you have enough money. Nobody does. Even if you are rich, the amounts would just go up to just beyond the limits of your wealth. Happens all the time.

Instead, think about being more like McGyver (old TV guy who uses whatever he has on hand to get out of whatever jam he’s in). Here are my 3 McGyver rules:

  1. Keep your mind open – keep your mind open to other ways of accomplishing the same thing that do not involve buying new stuff. Open your mind to using stuff you have at home already, or wearing the same dress to a party where nobody has seen it before.
  2. Think before you buy – take 5-10 minutes to think about whether you need this item, how it fits in with other items you have or if you have something similar. I like to have 3 occasions, reasons, outfits or whatever that the item works with before buying.
  3. Consider options – Always comparison shop even for tin foil. Look around on the same shelf and compare brands at least. Convince yourself you are getting the right deal (not necessarily the cheapest, but the best). With the internet, it’s easy.

Here comes that overused word, but… be mindful of how you are spending your money. You work hard for it. Do not throw it at whatever comes your way. I’m not telling you to be cheap or live with a sense of scarcity. I’m suggesting you think a little more before you buy and see what happens.

Happy Holidays – Here are my 5 Financial Wishes for You in the New Year

Happy holidays and I hope you have a wonderful New Year. I will be off for the next 2 weeks enjoying some holiday cheer as well.

These are uncertain times and 2016 was a turbulent year. I do not expect life to get smoother or more predictable in 2017, but you can still be less stressed about your finances, no matter what. Remember, you have more control than you think. You are in charge of the biggest things that affect your financial life like how much you spend, how much you save, and how much you borrow.

Let me leave you with my 5 financial wishes for you in the New Year:

  1. I hope you do not mistake not owning a Maserati or shopping at Gucci for not overspending. One hundred trips to Target is the same for your finances as one trip to Tiffany’s. Do not fool yourself.
  2. I hope you prioritize saving appropriately for retirement, especially over saving for college for your kids. If you are over 30 years old, you should be saving 15% of your pretax toward retirement to avoid eating cat food down the road. Now, more than ever, finances in retirement are unpredictable, save now.
  3. I hope you feel how empowering it is to know how much you can spend each month on fun and feel at peace when you spend it because you know you are spending within your means. Instead of feeling scarcity if you limit your fun money, i predict you will feel freer and less stressed. Try it and see!
  4. I hope you do not panic about market ups and downs because you are invested in index funds and know you do not have to touch that money for decades. You will be in retirement (hopefully) for 15-25 years nowadays. Do not try to beat the market and end up lining the pockets of some broker. Set it to index funds and forget it.
  5. I hope you understand that financial security is about making adult trade-offs when you cannot afford everything you want. Postpone one thing today in favor of another, instead of buying both (on credit perhaps). Take the long view of life and finances and you will be better off and less stressed out.

I wish you all the best in the new year and will be back with more blog posts in January. For now, I hope you enjoyed my financial wishes for you, especially #5, as I believe it is the key to financial security.

I Love Negotiating for a Car – Here are my 5 Tips on Getting the Best Deal

Yes, I’m sure I am either alone or in the minority when it comes to this, but I LOVE negotiating with dealers for new (or used) cars. Friends have often asked me to come with them to the dealer to negotiate. I just love getting a good deal, and most times you are in control of whether you get a good deal or not.

Here are my 5 tips to getting the best deal on a new (or new to you) car:

  1. Do not fall in love – the best deals are on leftovers (new cars from the previous model year), loaners, and other low mileage cars that can be considered new. NEVER go in thinking you want the orange one with the purple interior only. Be open to a good deal on the car you want with most of the options you want and not a specific car.
  2. Negotiate total price NOT monthly payments – Dealers will dazzle you with all sorts of numbers. Without a financial calculator and a thorough knowledge of time value of money calculations, you cannot keep up. Always negotiate the actual total price for the car and do not worry about the monthly payments until you have agreed, let me repeat, AGREED the total price.
  3. Do your homework – Get on a site that tells you what other buyers in your zip code paid for the same car with similar options. I like, but there are other sites as well. Do not just use Kelley Blue Book and get the dealer price. Figure out what others are actually paying. Generally, you should pay INVOICE PLUS A FEW HUNDRED DOLLARS BEFORE THE DEALER ADDS DESTINATION AND OTHER CHARGES. Reread that sentence before going to the dealer.
  4. Do not be in a rush – generally, you know if you need a new car soon. Give yourself 3 months to look. You will know if you have only 3 months left on your old car. You can’t do this if your car is stolen or totaled, but even then, see if you can borrow a car or use public transportation to avoid being desperate when you head into the dealer.
  5. Buy at the right time – if you can, buy your car in the fall, between Thanksgiving and New Year’s Eve as car dealers are caught in a bad spot between new cars coming in October and accountants forcing them to get inventory down by January 1st. Any time around Black Friday is excellent.

BONUS TIP: Be ready to walk away. If you cannot get the price you know is right for the car, walk out of the dealership. Another dealer WILL give you the price you want. I guarantee it, as long as the price is invoice plus a few hundred dollars AND you do not want a specific orange car with purple interior, but are open to a specific model with certain options.

I’ve had dealers run after me as I walked to my car after leaving their showroom. Guess what? I got the deal I wanted. Always be able t walk away. That tip goes hand in hand with tip #3. Emotions drive car sales and it’s also how people get saddled with big monthly payments.

Also remember, what your down payment may buy you, may not match what your cash flow can handle. They are different. IF you have $5k to put down and the dealer assures you that you can afford a $50k car because you are putting 10% down, do not be fooled. A $45k loan at 2% over 60 months is a $787/month payment and you may not be able to afford that on a monthly basis. Know both your down payment AND monthly payment range that’s right for your specific financial situation BEFORE you head into the dealer.

Happy car hunting!

A Mutual Fund Different is from an Index Fund – 6 Terms to Know

You may be hearing a lot more suddenly about mutual funds and fees. You may even be hearing about how it’s more efficient to be in index funds because their fees are lower. I’ve even sent out the excellent piece by John Oliver on retirement funds and fees.

But the question I keep hearing from clients when they ask me how they should invest their retirement funds or even non-retirement funds, is, “mutual funds are fine, right, that’s what you’re supposed to be in?” I then ask a few questions and realize sometimes people do not know what a mutual fund is or how it differs from an ETF (another term thrown around a lot lately) or an index fund. Let’s do a quick primer… impress your friends.

  1. Qualified Funds – IRS qualified accounts hold money and assets that grow tax free. Some examples are retirement plans, IRAs, 529 college savings plans.
  2. Non-Qualified Funds – all other money and assets usually held in bank or brokerage accounts
  3. Brokerage accounts – hold NON-qualified funds and you can buy mutual funds, stocks, bonds, ETFs and other assets into the account. You can also hold cash in the account. This is the account you use if you are investing in the markets.
  4. Mutual Funds – Money given to a mutual fund manager to buy stocks, bonds, or other assets and hold a lot of different ones all at once thus exposing the investor to greater diversity than he/she could get by investing in single stocks or bonds. There are equity (stocks) mutual funds and bond funds and natural resource funds, etc. Mutual funds have expense ratios, which is the amount the fund manager takes off the top to pay him/herself and they can have “loads” like 12b1 commission fees and management fees. Expense ratios can be 1-2% and loads are added onto that, thus eroding whatever gains you may make in that fund. It adds up quickly.
  5. Index funds – A mutual fund where the holdings directly correspond to an index like the S&P 500 index or the Russell 2000 index. If 2% of the S&P500 is made up of XYZ company, then 2% of the S&P500 index FUND, will be made up of XYZ shares. Index funds have low fees, about 0.05 – 0.17% compared to 1.00-2.00 % on actively managed funds, and Index Funds have no load. In most cases (some say about 80% of cases) S&P index funds outperform actively managed (meaning a fund manager picks holdings in the fund) mutual funds.
  6. ETFs – ETFs are like index funds split up into actual shares. You own one share of the mutual fund (in most cases, an index fund) if you own one ETF. The key with ETFs is they have even lower fees than index funds and can be traded on the market at any point when the market is open. A mutual fund is priced at the close of the market on the day you place the order.

Fees can kill your return over long periods of time, sometimes as much as 10% of your gain can be eroded by fees over long periods. It’s a lot of money. Money you need for retirement and most mutual funds do not outperform the S&P 500. Have you ever glanced at your retirement savings statement and wondered why it hasn’t gone up that much when you hear about the Dow going through the roof? It’s fees, usually.

In addition, the S&P 500 provides plenty of diversity through its 500 different companies. PRetty cool, huh? The first index fund was introduced in the late seventies and now more than 30% of all stock and bond mutual fund investment is in index funds. Remember, index funds are not a cure for everything and you need to think about your specific situation. It’s just an option most regular investors should consider.

Just owning mutual funds, and thinking you’re fine because you are supposed “own mutual funds” instead of picking specific stocks (which is true, the last thing you want to do is pick stocks), may not be enough. You have to know how much you’re paying for those mutual funds and whether they are performing enough to beat the index NET of fees. If not, try index funds. Cheap and cheerful.

Digits, Dobot and Stash – Is Secretly Saving Helpful?

I see a lot of clients with apps like Digit, Acorn, Stash, Dobot, etc. These apps “secretly” or more aptly, without your noticing, take small sums of money from your checking account and either put them in an account held at the app (e.g. Digit and Dobot) or invest the funds in a brokerage account where the app will buy stocks, ETFs, or mutual funds for you (e.g. Stash and Acorns). I’m only going to discuss the ones that put your money in their bank savings accounts today (e.g. Digit and Dobot)

I am all for saving. Let me repeat, saving is good, but as with everything in life, we have to smart about it. If you are young, single, working, having fun and saving because you know it’s a good thing to do, these can be great apps for you. From what I can read online, you save $100-250/month depending on how much you earn and spend, which is about $1200-3000/year.

If that amount of savings covers you for Holidays home to your parents and a vacation with some friends, you’re golden. But, if you are a little further down the road of life and have kids, HVAC repairs, cars that need to be replaced, and camp, these little apps could fall painfully short. And, by taking small sums every few days, they can derail you from the more significant saving you need to do.

Here’s the thing: until you know what you need to save each month for your Annual Needs (e.g. camp, vacations, life insurance, car registration, etc.), you do not know what you need to save JUST FOR THINGS THAT ARE PAID THIS YEAR. Secondarily, you need to save for Emergencies. Generally, 3-6 months of your monthly expenses including your Annual Needs monthly saving.

As you can see, as life goes on the numbers get bigger. Chances are Digit and Dobot, cannot find $1-2k laying around in your checking account each month to cover what a family of 4 in an urban area might need to actually save each month. Chances are you are living pretty much month to month with maybe a couple hundred dollars of cushion. Any of that sound familiar? If the app cannot find the money, it won’t save it. YOU have to find the money by cutting some expenses to save adequately.

As your life progresses, you earn more (woohoo!), you spend more… and you need to SAVE more. Usually, more than any of these apps can manage. You should have a plan to save the amount YOU specifically need for your family. If it’s $1200/month, you should AUTO-TRANSFER that amount to a separate savings account. Any bank is happy to set that up for you. You do not have to remember to do it, just like the apps, BUT the amount is right for your situation, not some 28 year old app developer’s idea of your situation.

Because I’m a bit OCD, I also do not like the fact that $100-$250 slips out of your account in drips and the amount changes each month. It’s difficult to plan like that. You also run the risk of depleting your cushion and possibly running out of money on the lowest day of your financial month if you are adequately saving by auto-transfer. If you are anxious about such things, having some bot grab a few dollars here and there could make you more anxious.

Generally, I like to people to deliberately save a certain amount each month by auto transfer (again, you do not have to do anything and it happens automatically), that makes sense for their household’s Annual Needs. These apps approach savings from the opposite direction: not from your household’s needs, but from an opportunistic “a few dollars here a few dollars there” approach. Chances are it is not enough.

If you are young, have few Annual Needs and already have your Emergency Savings set, then it’s fine. But, for most of us, the need is greater than these apps can fill and guess what… filling your household’s actual savings needs may require some sacrifice in spending. These apps try to stay neatly away from the possibility that you might actually have to change your lifestyle. Convenient, isn’t it!

The 5 Ways We All Sabotage Our Own Good Financial Intentions

We all want to do the right thing. We all want to save appropriately, spend less, have money for important or emergency expenses, but we don’t. We have all the right intentions, many of us know what the right strategy is and yet we get tripped up.

Sometimes the world trips you up with a recession, a job loss or an injury, but many times we trip ourselves up. Here are my top 5 ways we trip ourselves up. Any of this sound familiar?

  1. Our life style expands just a little more than our income expands-
    • What Happens: we know a raise is coming and we start enhancing our lifestyle first with house renovations, or new cars. We deserve it, right? We worked hard.
    • What SHOULD Happen: live on the same amount and save the increase if you are not in already in a stable savings position.
  2. Feel you are failing as parents if you do not give junior a certain life –
    • What Happens: Junior expects sleep away camp and ballet. She’s always had them before.
    • What SHOULD Happen: It’s your job as parents to set appropriate limits that allow you to save. The greatest life skill you can teach junior is to spend less than she earns and she has no chance of doing that if you do not. She is watching you.
  3. You feel entitled to keep up with the Jones’ –
    • What Happens: Entitlement is a financial killer. You are not entitled to live beyond your means just because someone else lives a certain way, your upbringing was challenging, or your self-esteem needs it.
    • What SHOULD Happen: Screw the Jones’. Relieve financial stress by having enough savings, and living within your means. Buy things you love when you are financial able to afford them. You will enjoy them more and see that living within your means is living richly.
  4. We succumb to the idea that we are all too busy and have to throw money at solutions to the challenges that result.
    • What Happens: We love being ‘busy.’ If you do not respond to the question of “how are you?” with “busy” you feel uncool. Busy, is shockingly expensive.
    • What SHOULD Happen: Slow down, take time to plan for big expense like braces, vacations and college. Have cash on hand for car and home repairs. Save consistently and habitually. Busy is financially uncool.
  5. We earmark funds for more than one purpose –
    • What Happens: Everyone does it. You know a tax refund is coming, or a bonus and you say, “I’ll make that my Rainy Day Fund,” but you also know you need to pay for camp and you think, “well, I have that bonus coming, I’ll make it work.”
    • What SHOULD Happen: Money can only serve one purpose at a time. Plan for each expense and save deliberately each month for upcoming expenses.

Each of the five deserves an entire post (and I will do that at some point), but the bottom line is each type of sabotage is related to not knowing what your financial situation really is and not knowing what it should look like. When most people see their actual financial situation, they can change their behavior. When they just have a feeling things might be wrong, nothing ever changes. You have to know.

Know what your financial situation is and be honest with yourself about your needs. The peace of mind that comes with it is worth far more than anything (and I do mean ANYTHING) listed above. Knowing is better than not knowing when it comes to your finances.

Calculating Interest (snooze) Except It Is Really Important and Here’s Why

Let me start by asking a question:

if you take a loan out for $1000 at 5% APR for 5 years, do you think you will owe the lender $1000 plus $50 of interest for that 5 year period?

If you answer ‘YES’ you are not alone, but you are wrong. APR stands for Annual Percentage Rate, which means 5% is applied to the outstanding balance each year. At the risk of boring you rigid, this is called the Compounding effect.

This is not a math lesson and I’m not going to explain the Compounding here, but suffice it to say you owe a lot more than 5% of $1000 over the life of the loan in the example above.

In our sample loan, you borrowed $1000 over 5 year with an APR of 5%. You will owe about $100 in interest over the life of the loan (5 yrs.). Why does this matter? Because if you have credit card debt or you take out a consumer loan or HELOC to pay off credit card debt, you are going to pay A LOT more than the interest rate multiplied by the principal loan amount over the life of the loan, which MAY change your mind about the loan.

Also, it underscores the need to pay off debt as SOON as possible not just paying when you can. If you take out a $500k mortgage over 30 years at 3.75%, all of which would be considered perfectly reasonable, you will end up paying… you might want to sit down… $333k in interest over the 30 year life of that loan. Not pocket change.

You can see you do NOT pay $3.75% of the $500k you took out as a mortgage (which would equal $18,750). The compounding “pain” is generally worth it for a solid mortgage or student debt that allows you to earn more with your degree, but consumer loans should be a very last resort because of this hideous compounding effect.

On the other hand, compounding is your friend if you are a saver. If you save, especially when you are young, over time your savings grow A LOT. If you save $2000/year at age 30 until age 50 and earn 5%, you will have about $69k, not $2000 * 20 years plus 5%, (incidentally, that’s $42k).

Do not be fooled by low APR rates. Low APR rates are great, but remember another critical piece is how long it takes you to pay the loan back. Pay back quickly, save slowly over time.