Of Independent Means

Contrary To Popular Opinion You Were Not Born To Shop

I’m a financial planner. But I’m also a normal person just like you, and I know how difficult it is to be an American and somehow not feel it’s your duty to shop. Our economic and social system is based on capitalism, which is partly defined as the creation of goods and services for profit in a market. The consumer (you) is a very important part of this equation because if there are no buyers for the goods and services – what happens to the economy? Economists watch consumer spending like hawks – and no wonder:  it fuels about two-thirds of total economic output in the U.S. Talk about pressure! Consumer spending is so important several indexes have been designed to measure it. The most widely used index is the Conference Board Consumer Confidence Index and amongst other factors is used to determine the direction of the economy.

The perfect agent for promoting consumption is the advertising industry. Advertisers want us to consume. Their mission is to make products and services as enticing as possible so we buy them whether we need them or not. Watch a few episodes of Mad Men to learn the tricks of the trade. Watch T.V, drive down the freeway, listen to the radio, log on to a website and you’re bombarded with advertising messages. It’s almost impossible to escape from the influence of advertising unless you live like a hermit. A quote from Wikipedia describes advertising as the “pillar of the growth-oriented free capitalist economy” and states that “contemporary capitalism could not function and global production networks could not exist as they do without advertising.”

Born To Shop?

No wonder we sometimes feel we were Born to Shop! The problem: economists and advertisers aren’t concerned about your personal bottom line. Just like you, they’re concerned about their jobs, their families, their standard of living and their ability to retire comfortably. We need to adopt a “me vs. them” mentality. When we open our wallet to buy something…..let’s stop and think: do I want “them” to have my money, or do I want “me” to have my money? The person on the other side of the cash register doesn’t know if you can afford the item you are about to purchase – nor do they care. Think of shopping as a psychological battleground – that’s how advertisers think of it.  Do you want to be the victor or the vanquished?

Feeling vanquished when it comes to your personal finances isn’t a good thing.  It probably means that you’re in debt; you’re anxious about your future and you feel stuck. Is all the stuff worth it? Probably not. Excess stuff clutters your environment and the collective environment and excess debt can ruin your credit score and your relationships. So it’s time to denounce popular opinion, admit you weren’t Born To Shop, stop spending more than you earn, and live within your means.

Like anything psychological or emotional, it isn’t easy to change. Read simple truth #2:  “Your Money Personality Affects Your Money Behavior“  for more insights on this topic. But there are things you can do to take control of your spending.

Here’s a strategy to get your started:

Balance Your Budget

1.  Using an excel spreadsheet list all of your expenses subtotaled as follows:  fixed and necessary expenses: these expenses are the same every month and/or are necessary to keep you housed, clothed, groomed, healthy, fed and mobile; other committed expenses: child related expenses, pet care, fees to professionals, adult education, gym membership, insurance premiums, debt payments;  discretionary expenses: vacations, dining out, entertainment, hobbies, electronics, gifts, home improvements, furnishings;  auto-savings: retirement contributions and other savings.

2. Total all the subtotals to come up with your total monthly expenses. Subtract this amount from your total monthly income. The outcome will either be a positive or a negative number.

3. If it’s a positive number, congratulations. You are living within your means.  If you know you’re saving enough for retirement and other financial goals and have no debt to pay off, then you have some discretion as to how you use the money. If the outcome is negative, go back and rework your expenses until it comes out even or positive. A hint: you will have the most flexibility to adjust on discretionary items, but you can also try and negotiate savings with service providers or increase deductibles on insurance policies to save on premiums.   Note: it’s important that you pay off your high interest consumer debt as fast as possible, so if you can increase debt payments do so.

4. Now that your cash flow is neutral or positive, this becomes your working budget. Need help staying on a budget?

Some Tips for Staying The Course

-Use mint.com – software that tracks all of your expenses, income and savings on line. You enter your budget and it will send you an email when you overspend on a budget item.

-Try the envelope system: place your budgeted amount for discretionary items such as clothing and food-out in an envelope in cash. When the cash is gone, you can’t spend on those items again until the next month.

-Leave your credit cards at home. Become more conscious that the money you spend is from a finite source. Try paying cash or using your ATM card whenever possible.

-If you are tempted to buy an item that you don’t really need, leave the store, walk around the block and think about it. Nine times out of ten you won’t buy the item.

-Print out a copy of your budget. Post it somewhere that is visible to you regularly. Keep it top of mind.

Remember: It’s “me vs. them”. Who gets your money?

Reward yourself

Each month that you stay within budget, reward yourself in some small but significant way. Indulge in a nice lunch out, get a pedicure; order a nice glass of wine with a meal.

Earn More

If after completing the budget exercise you find that it’s impossible to balance your cash flow or you don’t want to live so frugally – look at the income side. Can you ask for a raise at work? Find a higher paying job?  Freelance?  Start a small business? Rent a room out? Sell belongings to raise cash?  Explore all avenues. Exercise your capitalist gene by thinking about all the ways you can produce goods and services for profit – for yourself!

Below are some additional resources to help you start living within your means:

Read Your Money Or Your Life by Vicki Robin, Joe Dominguez and Monique Tilford
Read I Will Teach You To Be Rich by Ramit Sethi

Blog to Follow:
Get Rich Slowly

Please feel free to share your comments about how you keep on a budget and/or what you have done to bring in extra income.

Ten Simple Truths About Money

In the course of my financial planning practice, I meet many people who share similar attitudes, fears or misconceptions about money management. It turns out that most people make money way more difficult and scary than it needs to be. So in response to all this, I came up with 10 Simple Truths About Money in order to point out and identify some critical financial concepts that are easy to understand and implement. My next 10 blog posts are meant to inspire you to incorporate these truths into your actions around money.

Ready? Let’s go!

Simple Truth #1:   Procrastination is the Cause of Financial Fuzziness
Does any of this sound like you?

There’s 10 months of accumulated mail  – all unopened – that contain your investment account statements and they are all dumped into a drawer you never open.

You have $30,000 sitting in a savings account at the bank earning 0.15 interest.

You refuse to automate your monthly bill paying on-line, even though you often forget to pay your bills and end up with late fees.

You sold all your stock mutual funds in March because you couldn’t stand to watch them go down anymore and now they are sitting in a money market account earning 0.35% interest.

You know you need to do something, but you don’t.  This is called procrastination.  And, it doesn’t feel good. It generates feelings of confusion, guilt and worry – fuzziness!

If it makes you feel any better, you’re not alone.

However, that doesn’t make it better or okay. This type of procrastination can have serious consequences for your finances:  the spending power of your dollars gets eroded by inflation, your credit score gets downgraded, and you have constant fights with your honey about money. Not good, and even more to the point, not necessary.

Being up to date and clear about your finances can relieve so much stress, and really, it’s just a matter of making it a priority.  This is a great time of year to get started. 2009 is almost over, and January 1 is right around the corner.  If you want to call it a New Year’s resolution, go ahead.  If that doesn’t do it for you, get started anyway!

Here are some tips to get started:

Most time management experts will tell you that the best way to tackle a big hairy project is  to do a little each day, or divide the big project up into smaller ones.
So for a great first example, let’s take that pile of mail.

First day:  Take all the statements out of the envelopes and arrange them in date order, the oldest date on top. See! You’re already making progress!

Second day:  Starting with the oldest statements, glance at the first page which summarizes what’s inside.  Pay careful attention to any deposits or withdrawals – if anything looks strange – investigate.  If not, move on to the next statement. Keep going until you have reached the latest statement and set aside.

Third day:  Spend some time on the latest statement, as it should summarize what went on in your account year-to-date: total withdrawals and deposits, investment gains or losses, total interest or dividend interest earned.

By now, you should have a pretty good idea of the activity in your investment account over the time period that the statements covered.

Fourth Day:  Determine whether you need to make any changes to your investments (or find a financial advisor that can help you with this step). For example, if one of your mutual funds is down 50% year-to-date…go to Yahoo Finance and type the symbol in the search box….read up on this dog-of-a-fund and see if there is a good reason to hold on to it, or chuck it at the soonest opportunity!

From now on, when you receive your monthly investment statement in the mail, open it immediately, glance at the afore mentioned items and file it (in date order) with the others.

I suggest keeping a year’s worth of monthly statements, but hold on to your December statements for 3 years.

I can feel that fuzziness clearing up already, can’t you?

First Lady Michelle Obama - stylish, and prudent!

You wrap your hands around your shopping cart and feel your heartbeat quicken as you enter the store. Your senses are heightened by that familiar junk-food aroma particular to Target. You take the long way to the work-out clothes department. You want a quick peak at the women’s clothing.

You suddenly remember that Target’s latest clothing line is called “Mrs. O.”  It just hit the stores. You love Michelle Obama’s style. You might be able snag an item or two for next to nothing before everyone else does! And there they are! A yellow sheath dress – $34.99!  A teal knit cardigan – $19.99! A black patent cincher belt – $17.99!  Green kitten heels – 32.99!  A teal-yellow-green floral brooch – 12.99! All go flying into the cart. You finally make it to the athletic clothing section and snag some new yoga pants at $19.99 and two work-out bras at $8.99 each. Woo-hoo! Off to Costco!

At Costco, the smell of Polish hotdogs wafts across your consciousness. You make a bee-line for the paper goods section and load up your cart with bulk t.p, towels and facial tissue. You swing by the book section. “Costco always has such great prices on books. If I find a book I’ve been after..”

As luck would have it, The Necklace by Cheryl Jarvis is $12.99. Amazon had it for $ 17.76 – into the cart it goes. “Wow! I’ve wanted the French Laundry cookbook forever! Only $19.99!”  A no-brainer.

On the way to the check-out line, you taste the granola bar samples. “Hey, not bad! I can take these to work and hold off the morning hunger pangs. A 48-pack seems like a lot, but these might save me from pizza at lunch.” Thunk! Into the cart go forty-eight granola bars!

It’s two and a half hours later when you finally make your way to the check-out counter. You look at your overloaded cart and it hits you – most of this stuff you didn’t have on your list.

The rationalization process begins, but this time it’s different. You know you’re fooling yourself. Disgustedly you think, “Jeez, I just met with my financial planner last week. I promised myself I’d stay on my budget. WHAT AM I DOING???!!!!”

Your mother always taught you to put things back where you got them, but Mom isn’t here. She is taking a back seat as you feel overcome with self-disgust and panic. So what do you do? You abandon the cart!!!

You then climb into your car – the one with the back seat overstuffed with the hottest new items from Target’s Mrs. O Collection – and you drive right back to Target and you return every last item. Because from this day forward, you’ve decided you’re going to stay on budget.

Congratulations. You’ve taken some key steps to financial freedom. Pat yourself on the back!

Money, unlike apples, doesn't grow on trees. Remember hearing that growing up? It's true.

A recent article in Barrons, “Boomer Consumer” got me thinking; first, about my own clients and their particular situations, and second, about a key point that rang true: “The recession has left the typical 18-to-49 year old far less flush than the average 50 plus consumer.”

My youngest client is 29 years old, the oldest is 70, with the average age 48 years old.

Cash Flow, Budgeting, Retirement
The primary reason my 20 and 30 year old clients hire me is to help them with debt management, cash flow and budgeting. While my boomer clients definitely have felt the pain of dropping portfolio and home values, most invested before the bubble years and hold less overpriced assets.  My boomer clients are concerned about retirement, but the younger generation is challenged with making ends meet every month and is disproportionately saddled with debt.

Gen X and Student Loans
So are my Gen X clients spoiled spendthrifts knowing that they can fall back on Mom and Dad if things get really tough?  Not from what I see. I see student loan debt (so called “good” debt) that won’t be paid off for 20-30 years, incomes that aren’t keeping up with inflation, jobs that are harder to find and keep, and credit card debt not due to excessive living, but to just living. The easy credit years certainly didn’t help this situation. Young people and students with no credit history were able to use credit indiscriminately, and they did.

To take just one piece of this story, let’s consider student loan debt. This is a huge problem and it has unfortunate echoes to another, familiar financial narrative taking place currently. In a special report in Business Week titled “Student Loans: A Bitter Financial Lesson”, journalist Emily Schmitt writes, “Mountains of student loan debt have an unsettling parallel to another one-time boom market: real estate.  Like those who took out big a mortgage to fund their “can’t miss” investments in pricey McMansions – only to find those homes suddenly dropping in value – those of us who took out student loans to pay for pricey degrees, now find our prospects of securing well-paying jobs with comfortable lifestyles, shrinking every day.”

It may seem like a good bet to go into debt to get a good education, but if the decent job with decent pay is not forthcoming, and the price of admission is tens of thousands of dollars in long term debt, then perhaps the initial proposition is flawed. The recession makes these kinds of decisions truly difficult.

Is Generation X Solvent Enough to be Marketed To?
The Barron’s article that inspired this blog post  is not directly about debt, it’s actually about advertising. (Of course, debt and advertising are very close cousins.) The piece – Boomer Consumer – points out that the advertising industry might be making a big mistake by continuing to focus on the youth market instead of the boomer market.  I have to agree, because until the younger generation is less saddled with debt, and able to repair their collective balance sheets, they’re not exactly an ideal target audience for advertisers. The good news here is that some of these Gen X’ers know they need help or they wouldn’t be hiring a financial planner.

So what’s my financial advice to a Gen X’er trying to make good financial decisions?

1.  The number one goal has to be to pay off your debt.

Start with the highest interest debt first – usually credit cards.
Deferring student loan payments seems like a good idea – but interest is not
deferred on private loans. Start paying these loans as soon as possible, even with
minimum payments.

If you have large amounts of student loan and credit card debt and are also
making a 401k or 403B contribution, consider temporarily discontinuing the
retirement contribution  – on the amount that is not being matched only. Always
contribute up to your employer match…it’s like free money.

2.  Consider your living arrangement.
Can you take on a roommate?
Can you live in a less expensive part of town?
Can you move to a city with a lower cost of living?

3. Watch your cash flow and work within a budget.

4. There are programs that can help grads pay student loans. Do some research, not everyone is
eligible:
Sponsorchange.org
Americorps
StudentLoanJustice.org

Also read:

Is a College Education Worth The Debt at NPR.org

The Irrepressible Trudy

Lots of women know their hair stylist almost as well as they know their closest friends. That’s why we don’t dread haircuts the way men do – we actually look forward to the 1-2 hours when a friendly person will make us beautiful with the added bonus of a good  heart-to-heart. No staring glumly at the mirror until it’s done for us! Topics of conversation in a hair salon run from love life to clothes, movies to food, and of course, my personal favorite, money.

Meet Trudy
So without further ado, please meet my hair stylist, Trudy. She’s 40-ish,  a single-mom (of a 13 year old daughter), a homeowner, a fashionista, and, as you can tell from this photo, irrepressibly vivacious.

On my last visit, we got into a chat about money because Trudy had just completed a loan modification and was more than happy to share the details with me. I was very interested because I knew banks were considering loan modifications, but hadn’t heard of anyone actually getting one.

Trudy’s story is typical of many American homeowners who were enticed by loans that “magically” made debts disappear and lowered mortgage payments.

Here’s what happened. Trudy bought a condominium in Hercules, California in 2003. She paid $248,000. She put $50,000 down and took out a 30 year fixed rate loan for $202,000.

She was thrilled to become a homeowner and excited by the prospect of home price appreciation.

When a Refi is a No-No
Fast forward a couple of years later. Her condo had appreciated but so had her credit card debt. Enticed by all the refinance offers that came in the mail daily, she decided to investigate. Not fully understanding what she was getting into, Trudy refinanced her loan to one that offered a myriad of payment choices, better known as an “option-ARM.” The lowest payment option caused the loan to negatively amortize – which means the deferred interest is added to the outstanding loan balance – the exact opposite of a fixed amortizing loan where part of every single loan payment reduces the mortgage balance.

Like many other homeowners before and after her, Trudy chose this option in order to improve her cash flow and at the same time pay off her $30,000 in credit card debt. It’s understandable why this would seem like a good idea, but unless you truly understand what you’re getting into, the ramifications can be devastating.

By the time she applied for the loan modification in December of 2008, her deferred interest had grown to $22,000, her loan was now $260,000 and the interest rate was 7.11%.

All hell broke loose in September 2008.  Trudy received child support from her ex, which helped make ends meet. But he was a mortgage salesperson and with the fall-out from the credit crisis his income was slashed by $80,000 a year.  He was able to get the court to reduce his child support from $1200.00 a month to $180.00 a month. Ouch!

House Underwater
Trudy notified her mortgage company in October that she wasn’t able to make her payment. She had few options. Her loan balance was larger than her home value (also known as being “under-water”) so selling wasn’t an option.  She knew foreclosure was next and starting thinking about moving in with friends or family to regroup.

She found out about loan modifications and applied with her lender. She was turned down in January – the lender cited “information contained in her credit report.”

With a Little Help From Her Lender, Trudy Pulls Through
Then, as fortune would have it, President Obama’s mortgage relief program “Making Home Affordable” was launched in March. Trudy re-applied and this time she was successful. She received a letter of agreement on April 10 from her lender. Here are the new terms:  1. The lender agreed to reduce her loan balance by $53,442.4 to $208,402.44.  2. A new payment and interest schedule starts with a 2% interest rate and gradually increases (.75) per year to 6.5%. 3. Interest only payments are valid, but the borrower can choose to make a fully amortizing payment.

After hearing Trudy’s story, I did a little sleuthing to get some updates on the Obama administration’s $50 Billion mortgage relief program.  Turns out that Trudy was lucky. So far, the results have been disappointing, as lenders were not cooperating. But there are signs that this is changing.

Lenders have sent out offers to reduce monthly payments to around 19% of 3 million eligible borrowers’ -  – this is up from 15% at the end of July. Here’s the story>>

In the end, Trudy’s persistent and irrepressible self saved the day. She’s learned a lot of lessons from this…one of which is to always read the fine print and to better manage her use of credit cards.

You can find Trudy at the beauty salon at the Claremont Hotel in Berkeley, 510-843-3000 or at Altogether Different in Corte Madera, 510-334-5401.

What Exactly Does it Mean to be Rich? Ramit Sethi Tells All in His Book

Until a few months ago, I hadn’t heard of Ramit Sethi (pronounced Ra-meet, Say-tee) and his blog www.iwillteachyoutoberich.com or his book of the same name. Then one day while I perused the book section at Costco, there it was – boasting a bright orange and yellow cover with black print. It practically screamed out at me. “I WILL TEACH YOU TO BE RICH.” My first thought was, “that sure is an obnoxious title.”  But being the personal finance junkie that I am, I chucked it into my cart in hopes that I would learn something new and share it with my clients.

After reading the first few pages I knew this book was different.  It’s written in an irreverent, breezy style and I found myself nodding my head and thinking to myself, “I so agree with this” as I read each paragraph. It’s written for people in their 20’s and 30’s (Ramit himself is 27) but this book is a great guide for anyone who is struggling with getting their personal finances in order.  It offers great, solid, no-nonsense advice, and an easy to implement 6-week action plan, plus lots of motivating talk about building a life that is “rich.”

Ok, I’ll admit it. I was fooled by the title, which of course is exactly his intent.  A rich life in Ramit’s world doesn’t necessarily mean lots of $$$, it means living the life that makes you most happy – which is different for each person.

Ramit is passionate about two things. He wants younger people to take action NOW and build a solid financial foundation (and he gives them the tools and specific advice to do so) and he is passionate about exposing the financial industry’s flaws. He is determined that his audience doesn’t  fall prey to the nefarious practices of some advisors and institutions.  He doesn’t like big banks, credit card companies, big brokerage companies and most financial advisors (although he does concede that “if you are determined to get professional help, begin your search at the National Association of Personal Financial Advisors (www.napfa.org).”  Full disclosure: I am a NAPFA advisor.

A couple of weeks ago, I was fortunate to have the opportunity to interview Ramit about personal finance philosophy at  the Commonwealth Club of California http://www.commonwealthclub.org.

I wasn’t surprised to find him smart, witty, engaging, and articulate. I asked him to describe his 6-week action program in 5 sentences or less. He said, “I can do it in 5 words.” He then proceeded to do it in 4, “Automate, Negotiate, Spend Consciously.” I asked him  if he was rich. He said “….money is a part of that, but it’s a small part. People seem to think that being rich is only about money, but that is simply not the case.”

To learn more about Ramit’s personal finance philosophy and system, you can buy the book at Amazon.

Or, read his blog or view this video on the Commonwealth Club youtube channel.

Teaser from the book:

Week 1, you’ll set up your credit cards and learn how to improve your credit history (and why
that’s so important).
Week 2, you’ll set up the right bank accounts, including negotiating to get no-fee, high-interest accounts.
Week 3, you’ll open a 401(k) and an investment account (even if you have just $50 to start).
Week 4, you’ll figure out how much you’re spending. And then you’ll figure out how to make your money go where you want it to go. In Week 5, you’ll automate your new infrastructure to make your accounts play together nicely.
Week 6, you’ll learn why investing isn’t the same as picking stocks—and how you can get the most out of the market with very little work.