Of Independent Means

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?

House Buying in the Bay Area | Jim and Annette’s Financially Sound, Thoughtfully Executed, Excellent Adventure

Jim and Annette in front of their new home

“I really admire the conscientious way you bought your first house,” said I. “That’s because we’re really cheap!” said they, almost in unison. Meet Jim and Annette. They’re in their late 30’s and lucky. They both watch their pennies. If only all my clients would…well, never mind.

While many of Jim’s and Annette’s friends bought houses in the last few years, they held back. The market was too frothy and unaffordable, they thought. At the time, life was a cramped one bedroom apartment in North Berkeley. But of course things change. Soon enough real estate prices crashed, and taking the leap made more sense. They started out on their own, found some neighborhoods they liked and found some houses in their price range: no more than $525,000.

Know Thy Numbers
In the meantime, Jim and I worked on their cash flow adding in housing costs (they’ve been clients since 2007).  Both were adamant that they know the numbers and not get in over their heads.  Jim has an inviolable goal, “I want a six month buffer of living expenses at all times.”  As s self-employed graphic designer, www.jameswilsondesign.com he has a about a thousand good reasons for doing this. And while Annette currently works for Williams-Sonoma – layoffs have begun there.  I recommended they get pre-qualified for a mortgage, which they did.

Here’s a few things they learned along the way.

Know your must-haves
Jim and Annette knew what they had to have:

1.  A good location so they could walk to shops and services, and have an easy commute.
2.  A live-in ready house: some work would be okay, but they wanted no delays or additional costs.
3.  They wanted to live near their friends.

What you can live with?
No house is perfect, especially a house in the Bay Area in the $500,000 price range. Here’s what Jim and Annette had to contend with:

Close proximity to Bart meant noise, so new windows are planned.
They lack storage space, typical of older homes (1926).
They have $18,000 worth of work  to do – plumbing upgrades, electrical work, window replacement, foundation repair and some unexpected termite damage. Closing cost credits (due to the fine work of their realtor Carol Parkinson) and first time home buyer credits ($8,000 on their 2010 taxes) will help pay for all this.

Know what you care about most
Jim and Annette are now proud and busy homeowners: they’re refinishing floors, knocking out walls and buying a few new furnishings. They splurged – on a $4,000.00 Thermador Range.   When I questioned the decision, Annette said something to me that I thought was very wise:  “It’s about knowing what you really care about” she said, “and putting resources and energy towards those things, and then making compromises on the rest.” Wise words.

My Take: Top 5 things to consider when buying a home in the Bay Area

1. Know what you can afford before you start looking for a home.  Get pre-qualified.
2. Identify the neighborhoods where you want to live. Get to know prices.
3. Make a list of your no-compromise must-haves.
4. Get referrals for real estate agents and mortgage brokers.  Make sure you’re comfortable and that there’s a level of trust between all parties.
5.  Know that the costs of home ownership don’t end with the purchase.  Endless amounts of money can be spent improving, furnishing and decorating a home. Carefully plan your expenditures based on your income and budget.  Most important: don’t rely on credit.

Everybody needs a vacation. A good financial plan can help you achieve that goal among many others.

They were in their late 30’s with three small children.  He was friendly and open, she was quiet and not terribly happy to be there. He’d orchestrated our meeting after finding my website and liking it so much he called me.

Like many Americans, they are caught in a financial “perfect storm.”  They got married 6 years ago and decided to have a family. After the first child was born 4 years ago, she left her job to be a full time mom. They now have a 2 year old and a newborn as well.

The American Dream
In 2006, they put 20% down on a million dollar home.  Back then, (it seems like another age entirely) not having the income to support the mortgage payments on an $800,000 loan was no big deal. You just “stated your income” and secured an interest-only loan.  And voila! Home ownership was yours – the American Dream.

Fast forward three years.   The ITI (Interest, Tax and Insurance) payments are killing their budget, vacations are out, they’re having a hard time finding the money they need for home improvements and funding college savings accounts.  To add insult to injury, the company she worked for went bankrupt, and all of her retirement savings was in company stock which is now worthless.

Stormy Weather
She tried freelancing,  but with three young children, concentration is difficult and the stress level is climbing. His employer has announced no more matching funds for the retirement account and no cost of living raises this year. Serious storm clouds are gathering on this couple’s financial horizon.

Love and Money
Given what is happening to this couple, I found myself surprised that only one of them – the husband – wanted to meet with me. It was rough sledding with his wife – she wasn’t convinced I could help and was quite firm in her convictions. But credit where credit is due, she did come to the meeting. Truth to tell, it’s usually the other way around. Such is married life, I suppose. You like camping, I like bed & breakfast’s, you  like parties, I like quiet nights at home, you want a financial planner, I want a vacation. Yin meet Yang.

Advice and Consent
Here is my advice to couples who are facing financial challenges and don’t see eye to eye on the value of a financial planner. Work together and see if you can find consensus. Remember one of the rules of marketing: What’s In It For Me? Help your partner understand there are benefits.  Even though the process may be uncomfortable, and difficult to understand, the end results are what matter most.

It’s one thing to say, “We have to have a financial planner because we don’t know what we’re doing” vs “If we get a financial planner to help us, we increase the chances that we can put Peter and Julie through college and have a decent retirement. Without that kind of help, I’m not sure how we can do those things. Will you help me?” Stress the long term and short term benefits.

Or, you can take a different attitude all together…as  another reticent  spouse said to me at the end of a recent interview:  “Oh, you mean I can pay you to listen to him nag about our money…that sounds really good to me.”

Say Good-Bye to Your Money Troubles
Which brings me to a very important reality:  Money troubles are a leading cause of strife in a marriage and often times can lead to divorce.  If an objective advisor can help you to communicate about money and develop a workable plan which in turn leads to a more harmonious relationship…wouldn’t it be worth it?

So what do you think?  Does this couple need a comprehensive financial plan?  Will he persuade her? Will she come around? Would love to know your thoughts.

Can street smarts, charisma and passion stand in for a business plan?  It all depends on who you ask.

Women in the Food Business at the San Francisco Commonwealth Club - From left to right: Kathy Wiley, Christine Doerr, Malena Lopez-Maggi and Mindy Fong

I recently hosted two panel discussions that focused on women entrepreneurs in the food business. Participating were eight vibrant businesswomen in their 20’s and 30’s.  Each had the entrepreneurial bug from an early age, each has boot strapped their business and most had no written business plan before they launched.

Of Passion and Practicality

Molly Fuller of Hands On Gourmet and Kathy Wiley of Poco Dolce are self-described pragmatists. “I wanted to make money,” said Molly. “My father always told me to do it myself, that was the way to make money.” Kathy Wiley said her decision “came down to the stable shelf life and high price point” of high-quality artisanal chocolate. Other participants cited their love of good food, and their lifelong desire to start a food business.

Fire, Ready, Aim

Kika Besher of Kika’s Treats and Christine Doerr of Neo Cocoa are graduates of La Cocina, a food business incubator in San Francisco where eligibility requires a business plan. Kika’s current business profile no longer resembles her first plan and she wishes she had a new one. “So many things change,” she said. Christine Doerr said her plan has changed and there’s a lot of “fire, ready, aim” in her business.  Kathy Wiley (Poco Dolce) started a number of business plans, only one of which she came close to finishing. Malena Lopez-Magg of The Xocolate Bar said, “I did write a long business plan but it was obsolete as soon as it left the printer.”

Recurring Themes

-    Understand the numbers, but don’t get hung-up on producing a document.
-    If you make a plan, be aware that things change and the plan may need updating.
-    Pay attention as you go and you’ll learn.
-    If you are self-funded, the decision to create a business plan is in your hands.

A Different Take

I have no doubt that these amazing women will succeed. Street smarts and passion can take a business a long way. However, as a financial planner I see what bootstrapping can do to a business owner’s personal finances and I am duty bound to counsel caution. Here are  my three reasons why you should consider developing a business plan.

Writing a business plan compels you write down the numbers and
decide which are most important to your particular business – then it’s
up to you to watch them like a hawk.

Taking shortcuts doesn’t work when it comes to growing a business.
Writing a plan helps you to think strategically and decide what’s best for the company in the long term. This can even include an exit strategy.

Assumptions change and circumstances change, but don’t make that an excuse to avoid having a plan.  Even if you launched on sheer gut instinct, step back and create a plan now. You’ll be rewarded with clarity and peace of mind.

What do you think?  Is a business plan an integral first step to launching a business? As always, your comments are welcome. If you have any topics you’d like to see here, feel free to let me know.

Women Entrepreneurs in the Food Business Panel
Molly Fuller, Hands On Gourmet http://handsongourmet.com
Nona Lim, Cook! S.F.  http://cooksf.com
Gabrielle Fuersinger, Cake Coquette http://www.cakecoquette.com
Kika Besher, Kika’s Treats http://www.kikastreats.com

Women and Chocolate – A Natural Combination Panel
Malena Lopez-Maggi, The Xocolate Bar http://www.thexocolatebar.com
Kathy Wiley, Poco Dolce http://www.pocodolce.com
Christine Doerr, Neo Cocoa http://www.neococoa.com
Mindy Fong, Jade Chocolates http://www.jadechocolates.com
Dayna Macy, Author  http://daynamacy.com

Abby is Thirteen and She Understands Money Better Than You Do

Thirteen and already savvy. Abby and her mom Claire with 10 Simple Truths About Money

As a fee only financial planner, I meet far too many adults who know shockingly little about money and personal finance.

A small sampling of the questions I hear reveals the knowledge gap: “What’s an index fund?” “What’s an IRA?” I’ve heard this one too – “I thought the stock market earned 10% a year?”  Well yes, sometimes it does, just not ALL THE TIME.

Why this lack of knowledge? How did we get here?

Two thoughts spring to mind: the schools don’t teach our kids about money. And, parents are a little shaky on this topic too, owing to cultural taboos around talking about money. We’d sooner talk about our sex lives!

I wanted to find out if there were any young people – teenagers, specifically – who were at least marginally educated about money and finances. If we can get our kids squared away on money, then maybe there’s hope for adults. So I set out to interview some teens.

She’s Thirteen and She Loves Talking Money

Meet Abby – she’s 13, and she lives in San Rafael, California, one of the wealthiest counties in the country. Abby comes to the interview with her mother Claire, who co-owns the Hatch Network, a company that provides education for women entrepreneurs.

It becomes quickly apparent that young Abby is most definitely not your typical 13 year old. My first clue — she would love to talk about money, she tells me, and would be happy to meet with me for an interview. How many 13 year old girls do you know who’d say that?

Does her school provide any classes about personal finance or money?

Abby says a Junior Achievement program provided two classes about how to pick stocks and follow them in the newspaper. Other than those two classes, nothing else focused on personal finances.

Why did she like to learn about money? What sparked that interest?

Some time ago, when her mom (single and in her 20’s) had money troubles it made Abby curious to know more.  It was tough for mom to make ends meet. Her mom was always honest and candid with Abby about their situation, explaining, always explaining.

Does She Read About Money?

Abby has read Rich Dad Poor Dad for Teenagers and the Automatic Millionaire. She pays attention to the financial news(!)  Her interest in making a lot of money as an adult is not self-centered, she says.  After she earns what she needs, she wants to give the rest to charity.

Does She Have Savings?

Abby has a savings account and wants to buy a CD with her $1400.00, but she thinks interest rates are too low to lock in a rate right now. She’s earning about .05 % on her savings account. She knows that’s a paltry amount and would like to earn more.  The minimums for money market accounts, which pay a little bit better interest rate, are too high for her, so she’s biding her time.

Have I mentioned that Abby is 13 years old?

Credit Cards

We talked about credit card debt and credit scores. Again, Abby was well versed. She knew that having a high credit score was very important and that the best way to maintain a high credit score was “to pay all your bills on time.” She knew about retirement accounts (401K’s and IRA’s), and what 529 plans were (her grandmother funds one for her). She also likes to follow certain stocks like Google and Apple.

In the Future: Musician, Secret Agent, Saver

Abby is a great student, she receives A’s and B’s in all her subjects. She earns money by doing odd jobs for her mom and she baby sits. She saves all her birthday and Christmas checks and immediately deposits them into her checking account. When she grows up she wants to be either a musician, a secret agent or, maybe a financial advisor.

Final Thoughts

Granted, Abby is not your typical 13 year old. She wouldn’t be typical as a 30 year old either. But her innate curiosity and intelligence, combined with her mother’s candor, patience, and teaching, have paid (and will continue to pay) huge dividends.

So the lesson is this: anyone, kids included, can learn more about money, and how to better manage their own finances. In an ideal world, the schools would teach personal finance and parents would reinforce the lessons initiated in the classroom.
So what about you? What did you learn about money as a young person? Are you teaching your children how to save and plan for the future? Any questions that I can answer for you?

Thanks for reading and stay tuned for more interviews in later blog posts.