Is money running your life?
Posted on 26 January 2010 | No responses
How do you know if money runs your life?
If you exhibit one or more of the following symptoms consider that money is running your life:
- Regularly procrastinate with paying bills
- Frequently pay bills late
- You earn income but feel you need to make more money to survive
- You frequently go to sleep worrying about money
- You frequently argue about money
- You feel there is no way out of your current financial situation
Why would we even ask ourselves the question? What would be opposite to money running your life?
The first question can be answered easily. When money runs our life the quality of our life is just not what we want it to be; we stress a lot about money. Honestly, we probably wish we could trade places with someone who isn’t in the same situation. As to the second question, when we control what happens with our money we are confident and experience peace about our current financial situation.
When we control our money we:
- Spend less than we earn
- We have financial goals which we pursue
- We save for the future every month
- We have cash saved for emergencies
- We choose our debt wisely
- We do not regret our financial decisions no matter how they turn out
These states are extremes, each giving us totally different experience of life today and a different outlook for our future. Many of us will fall somewhere in between these two states and sometimes we move back and forth on that spectrum.
There is nothing inherent about where we are on that spectrum. No matter what our current situation is we can systematically move forward in the direction we desire and we have to be willing to do that. We often think we have to make dramatic changes to alter anything about our financial situation and the future. Quite frankly, I always want something good and dramatic to happen to change the situation I don’t like. Often times it would require a “divine intervention,” such as winning the lottery or someone I don’t know giving me lots of money (well, I was not born into money so I don’t think I’ll inherit from anyone). Having something unexpected and good happen to me would be so great, but counting on that happening may leave me stuck exactly where I am today, and I don’t like it. The reality is that small changes made (applied) consistently impact our future significantly.
Small foundational steps can significantly improve your financial situation and quality of your life:
- Know how much money you have coming in and where it is going
- If you have credit card debt set a date by when you will pay all the balances off
- If you are earning income increase your savings by 3% of your income (even if you are not saving today).
When reviewing the two states: money running your life and controlling what happens with your money, you may already know what deserves your attention and you may know the next action you will take. If you are uncertain about what to do or how to do it, I recommend you look for financial wellness education, one that provides practical information and teaches you how to move from point A to point B on that spectrum. Financial wellness education goes beyond fixing a particular money problem you are facing today; it will enable you to develop practices and skills that will make a lasting difference in your life. It will “pay you forward.” Wealth Skills offers this unique type of education.
Three steps to reducing financial stress of gift giving this Christmas
Posted on 3 December 2009 | No responses
We enjoy giving gifts for Christmas. Many of us experienced change in our financial situation this year, so Christmas may be even more financially challenging and stressful than before.
Here are three things you can do to reduce stress this Christmas season:
1. Set specific “gift giving” budget and stick to it.
Pick the maximum dollar amount you will spend for gifts this Christmas. Sometimes we get a wish list of what people closest to us would like to receive and that is what determines the “budget.” This year, set the budget based on the cash you have. Knowing that everything is paid for makes for a really good Christmas, a nice gift to give yourself.
If you are willing to spend beyond cash you currently have, do not charge more than what you will be able to pay off by mid February. Know how you will pay for it. For example, you may select an on-going expense you will eliminate or lower and that “saving” will pay for the “extra” money for Christmas gifts. Have it all worked out before you buy the gifts. Avoid spending money you don’t have, such as bonuses or commissions you expect to be paid next year.
2. Prioritize your gift giving list.
There are various groups of people on the Christmas (or holiday) gift giving list: kids, spouse, parents, siblings, friends, boss. Depending on a size of your budget this year you may shorten your list of people who will receive traditional (store bought) gifts. Reach out and make specific agreements with each group, agreements that will work for everyone involved. Agreements could range from “Let’s set a limit of maximum $ per gift” to “We will not exchange gifts this year and will celebrate Christmas by…” Given that we are all affected by what happened in the economy these conversation may be very welcomed. Then use your budget to buy gifts for the non-negotiable list of people, for example kids. As a parent you may have received a long “Dear Santa” list of what your kids want for Christmas. If the list stretches beyond this year’s budget, ask your children to select the most important gift on their list or to prioritize the gifts from most important to “nice to have.”
3. Be creative with your gift ideas.
Sometimes gifts that do not involve money have the greatest value to those we love. “Family coupons” redeemable at your convenience have been a hit with my family. My son gave me “I wash dishes after dinner” and “I wash your car” and “I clean my room” coupons one year. Something he doesn’t like to do and knows I would greatly appreciate. He got “You can drive my car,” “Uninterrupted 3 hours to play games,” I’ll take out trash for you today,” which was something I typically responded with “No” when asked. Each coupon could be used just one time and the recipient got to use the coupon when they wanted. The rule was “no lip service” or conditions attached. When the coupon you gave someone was redeemed you just did what the coupon said. I have to tell you, it was a fabulous gift that made the spirit of Christmas present for few months that followed.
Another creative way to approach gift giving this Christmas is to have a family agree on replacing personal gifts with a contribution to an organization or charity that the entire family can align behind. Rather than spending money on yourself, you jointly give to others or a cause that matters.
These are just some ideas. If you look at what you and others on your list value most, you can come up with your own creative ways to celebrate the Christmas.
Bring play to Christmas, it is much deserved!
Happy Holidays to all.
Ilona Dolinska-Reiser
Is your retirement at risk?
Posted on 26 November 2009 | No responses
Recently Yahoo Finance posted an article by Emily Brandon “4 Reasons Your Retirement Is at Risk.” Based on new analysis from the Center for Retirement Research at Boston College she quotes 4 reasons why Americans will have to significantly cut their expenses when they leave the workforce at age 65–or they will have to delay retirement.
The four reasons are:
- Housing market decline – lower value of homes, which translates to lower equity
- Stock market slump – exposure to stock market investments in defined contribution pensions (employer contributes certain amount each month but the future value of pension and distribution amounts in retirement are uncertain) vs. “traditional,” defined benefit pensions (set amount of distribution)
- Lower interest rates – less income from investment
- Reduced Social Security – availability of full SS benefits are being delayed each year, meaning you have to be older to qualify for the full benefit
Reading this article is just simply depressing. It seems that the only option we have is to cut our spending or work longer, maybe never retire. Life just isn’t going to be good!
In reality, all that this study does is project the current economic circumstance onto the future. What this article and we as human beings frequently fail to recognize is that future circumstances will be different than current circumstances and we do not know what these circumstance are actually going to be. Unless you are already retired, the reality of economic circumstances in which you and I will retire will be different from those we are experiencing today. So stop worrying about what those circumstances are going to be and take actions that will give you the retirement you want no matter what the circumstance.
What actions can you take to prepare for your retirement, at the age you want to retire? And what will immunize you to whatever circumstance may prevail at or after your retirement?
- Housing market:
Plan to have a house paid off by the time you plan to retire and have other sources of retirement income so you don’t rely on home equity in your house for living expenses. Then the change in price of your home does not impact how your day-to-day life goes.
- Stock market:
Have diversified investments in which equity (any more volatile investments) represent progressively smaller portions of your overall assets the closer you get to retirement.
- Interest rates:
Your income from savings and bond investments will vary. No matter what the interest rates are today they will be different at the time of your retirement and will continue to change after you have retired.
Structure your living expenses in retirement to total less than 100% of your retirement income, maximum of 90% of your planned retirement income. This will allow you to maintain your lifestyle during the periods when the interest you earn is lower then anticipated (or average).
- Social Security:
Have multiple sources of retirement income. Take actions today so that the Social Security check is not your only source of income during retirement. The more sources of income you have in retirement and the more they vary by type, the more immune you will be to the changes in circumstances.
Here are some potential sources of income in retirement:
o Social Security,
o Interest earned on investments (income from cash savings, bonds, and dividends from stock investments),
o Income from rental property (no mortgage on rental property),
o Distributions from retirement accounts (pension, 401K, IRA) which are mandatory after age of 70 1/2.
And there are other potential sources of income to consider: income from annuities, direct lending or investment in privately held companies, commercial Real Estate, etc.
Having said that, many retirees today rely on social security as their primary or only source of income and many of them are content with their life and financial situation. We talk about changing lifestyle as if it was something unwanted or undesired. And it seems implicit that we will want more in the future than we want today (thus the concern about cutting expenses).
Today, I am in my forties. What I value, want and lifestyle I have is very different than when I was in my twenties. I look at my mom who is 75. What she wants and values in life today is very different than what she wanted and valued in her forties. Our lifestyle changes as we get older. It just does. Why would we insist that it’d be the same?
I already want less for myself than I wanted in my twenties. My contentment in life is far less dependent on money or things than it was twenty or ten years ago. I sense that this trend will continue. And I prepare and take steps today to have the retirement I want. You can do the same.
Have fun planning for retirement you desire and take actions consistent with your plan. Circumstances change and you can manage to have the life you want today and in the future.
Debt is a choice
Posted on 18 November 2009 | No responses
We borrow money either to purchase an asset (home, car) or to cover our current spending. When we borrow money we enter into a contract to repay the money with specified terms: period of time, cost of borrowing (interest rate), payment schedule and amount. Debt is our liability.
Why do we take on debt? We either want something now and are unwilling to wait for it, or we want to maximize growth of our net worth.
Debt for expenses. Sometimes an unexpected expense happens and we borrow money to pay for it because we don’t have cash. When we don’t have cash for the unexpected expense it is because we spend all the money we earn on an on-going basis.
With any debt comes the obligation to pay it back. The payments lower the amount we have available for other things. Any time we acquire new debt, we’ll have less for other things in the future. It is easy to see how spending all of our earnings can lead to having debt, which in turn will lower what is available for spending in the future. It can quickly turn into a vicious cycle of not having enough money.
Debt to build wealth. Sometimes we are willing to acquire new debt to purchase an asset. Some assets are classified as appreciating assets, for example a house (despite what has recently happened in the Real Estate market houses are appreciating assets in the long run). Other assets are classified as depreciating assets, for example a car. Depreciating assets lose value over time. You know that a car will be worth less the longer you use it.
Taking on debt to acquire an appreciating asset may result in building wealth. To build wealth by taking on debt it is important to consider:
- The cost of borrowing the money (the interest rate) vs. potential appreciation of the asset you are considering buying
- Are there other assets you could purchase with the money?
- Any additional cost of maintaining the asset
- The impact of the new debt payment and maintenance cost on the quality of your life
- The value you’ll derive from ownership of the asset
- Is the value greater than cost?
Debt is a choice. Sometimes it may seem we have to acquire debt to survive a circumstance. In reality those situation may be alleviated when we systematically spend less than what we earn today.
I don’t have enough money
Posted on 12 November 2009 | No responses
We mostly think we need more money to have what we want in life. Frequently, we focus our efforts, energy and thinking on making more money, having more income. While doing that is valid, something else is required to have what you want in life sustainably throughout your life.
In reality, over a period of 5 or 10 years, most of us made progressively more money (individually or as a household) and we still don’t have what we want to have in life. If you find this statement reflective of your situation, you are missing the key component of success for having what you want in life, sustainably over time. So what’s missing?
The foundation for having what you want in life is managing what you have today (the income you currently earn) in a way that allows you to have what you want.
When you manage what you have in a way that allows you to have what you want today and in the future, the formula is:
- Have at least 3-6 months of your total expenses in cash to manage through unanticipated events such as job loss, unexpected medical expense or a major repair. I call it a “safety net.”
- Save for retirement (long term future needs) and the anticipated or planned future expenses (a purchase of new car, vacations, etc).
- Manage your on-going living expenses so they total less than your current income minus savings (for retirement, planned future expenses and the safety net, if the “safety net” is not yet fully funded)
- Choose how to spend money based on what provides the greatest value in your life.
When you manage what you earn today in that way, you will have a solid financial foundation for having what you want in life on an on-going basis.
Focusing only on making more money does not lead to having what you want in life. If you earned various levels of income and you do not experience having what you want your own life is the best proof of it. If right now you are thinking “But when I make the really big money then I’ll have what I want,” you are hanging onto the illusions that money is the determining factor in having what you want in life.
When you manage what you earn today in a way that allows you to have what you want today and in the future making more money will expand your life, in all aspects of it. It is simple. Try the above formula and see what happens over time.
Financial Well Being Tip #1
Posted on 13 August 2009 | No responses
When you are anxious about your financial situation, identify specifically what it is you are anxious about. Then sit down and take an inventory of what you have, what you owe, what’s coming in and what’s going out.
Example:
If you are anxious about being able to pay your bills, after you take an inventory you’ll know if you are or if you are not going to be able to pay them. If you are not able to pay them, think of your immediate options, what steps can you take to mitigate the impact now and what steps you can take to prevent the situation from recurring over time.
Finding Yourself Stuck?
If you find yourself stuck in seeing only one scenario, ask other people about what they think could be done. They will give you scenarios (options) to consider that you have not thought about. Freely consider the scenarios they mention.
Making Homes Affordable: From Lose-Lose to Win-Win
Posted on 13 May 2009 | No responses
Millions of Americans are contemplating leaving their homes, dusting off their hands, and walking away. They can and do make their mortgage payments, but in many cases, the mortgage balance exceeds the value of the home by nearly 20 percent. Homeowners in this situation may feel that they made a bad decision, the consequences staring them in the face every time they walk into their homes.
Their home, once the object of their desire and love, now serves as a perpetual reminder of the bad decision they made. It is no longer a place they want to come to, a place to relax and enjoy life. It is more than a burden. It is an infected wound.
What happened? These homeowners had good credit; they bought their homes near the peak of the real estate market with little or no money down. Their home values plummeted, but the mortgage balances didn’t.
Refinancing or selling a house with an underwater mortgage requires coming up with a large amount of cash. In either case, the owner would have to pay the difference between the current market value and the loan balance. To sell the home, the owner would have to bring cash to the closing table. Look at one real life example I worked through with a client:
- Initial purchase price: $235,000 (also the current mortgage balance)
- Current market value of the home: $199,000 (18% drop in value)
| Potential action | Conditions & Assumptions | Cash needed |
| Refinance the mortgage under the new “Make Home Affordable” government program | Loan balance must not exceed 105% of current home value |
$26,050 |
| Refinance the mortgage-traditional | Max. loan at 100% home value, plus closing costs of 1.5% |
$38,985 |
| Sell the home by listing with R/E agent | Assuming 6% commission paid at closing, sells at the current market value |
$47,940 |
| Sell the home by owner | Sells at current market value |
$36,000 |
This homeowner is stuck. It would appear that abandoning the home is the only logical course of action, and the least expensive one. Though far from ideal, this option at least allows the homeowner to start over.
In reality, this homeowner would incur costs by leaving the home and defaulting on a mortgage. These indirect costs may be harder to quantify, but they add up. The homeowner may lose other assets in addition to their home. Defaulting on a mortgage results in a low credit score, which may prevent financing of significant purchases, such as a car, furniture, or another home. A bad credit score also significantly increases costs of borrowing (credit cards, leases, etc.) for several years to come. Car insurance and other insurance premiums may increase due to the low credit score, and other companies (such as utilities) may require higher security deposits. These costs are ongoing, and they grow quickly.
Lenders don’t want to refinance or originate loans at 125% of a property’s value. This would be unprecedented, and they have no obvious incentive to work with homeowners who currently make their mortgage payments.
The government designs “cautious” solutions partially because we, the taxpayers, say that we don’t want to bail out someone who made a bad decision. After all, these people were irresponsible, and politicians want to be re-elected! The government has not made an effort to use the resources on hand to maximize the positive impact, given the current situation. So, we now have the Making Home Affordable program, intended to keep the creditworthy homeowner at home. However, with a maximum refinance rate of 105%, the program is not available to those who need it most.
In many areas of the country, homeowners continue to see home values dropping with each new wave of foreclosures hitting the market. More Americans find themselves in a bind each month, carrying mortgage balances exceeding their home values. If that happens to you and me, will we look stupid?
It is easy to see that this is a lose-lose scenario, and that it creates a ripple effect on our economy that extends beyond home prices. We are accustomed to this. “Let the stupid person pay for their mistake,” we say. “Let the lender take losses.” “They all deserve it.” We could easily make the case that they earned what’s coming to them. And then, we’ll blame government for running up the national debt.
There’s another side to this picture, however. Owners of foreclosed homes lose their ability to borrow for a long time into the future. The lenders lose capital, so they have less to lend, making it harder for you and me, for businesses, and for local governments to finance operations or purchases. In a prolonged recession, foreign investors (i.e. China, one of the largest investors) are more likely to sell the Treasury Notes they own (or simply decline to buy them). The government issues bonds to raise money in any economy, but it’s issuing more of them right now. If foreign investors stop buying U.S. Treasury Notes, it will send our economy into a new “spin cycle.”
Here’s an alternative win-win scenario.
The Make Home Affordable program “excludes” the homeowner who has experienced the greatest loss, the homeowner for whom there is no conventional help available. I think we are overlooking solutions that offer the greatest economic value. These alternatives would make it possible for creditworthy homeowners who suffered significant losses to stay in their homes. Lifting the 105% qualifying rule would impact homeowners who need the most help, in the geographic regions that experienced the most significant losses. What if, under this program, the loan-to-value ratio was evaluated on a case-by-case basis, set at a minimum of 105%? Keeping these homeowners at home would have the maximum impact on stabilizing home prices, a benefit to all other homeowners in the area and the economy. Then, the challenge would be to devise a repayment schedule that would bring the mortgage balance back in line with home value within a few years. We may not even have to “forgive” the debt. Unconventional? Yes! But let’s face it: the conventional solutions aren’t working.
Implementing an unconventional strategy, such refinancing a mortgage above 105% of a home’s value for a borrower making scheduled payments, is easier said than done. Under present conditions, a homeowner who has mortgage above the value of their home has two choices: accept a heavy loss (assuming he/she has sufficient cash to absorb it), or abandon ship. A homeowner without sufficient cash has only one choice. This leads many creditworthy homeowners to default on their loans, leaving lenders to write off the losses. This may appear easier than working out an unconventional solution, and in the short-run, it requires fewer resources. Refinancing loans at lower rates will reduce lender cash flow over the life of the loan, but isn’t that better than losing the entire revenue stream and taking a capital loss? Once the homeowner leaves the home, lenders typically sell the properties at auction, where they command significantly less than the outstanding mortgage balances. Lenders would benefit from lower default rates. We, the consumers, also would. It makes no sense, in times like these, to go for the easy solution. It’s not that easy any more.
What would happen if we viewed a bad decision as a “mistake?” What is a “mistake”? It is a decision that didn’t produce the result we expected and planned for. The source of a mistake is the assumption(s) we made. An assumption is an expectation about how things will work in the future. In the case of this homeowner, the assumption was that the home price would increase. If that had happened, all would be well, and things would have worked out. For that matter, if home prices had continued to appreciate, we would not be facing this kind of economic downturn, and I wouldn’t be writing this article. So “a mistake” is a decision based on an expected outcome that did not materialize. To say it another way, there are no bad decisions; there are only assumptions we made that did not turn into reality.
In this win-win scenario, homeowners benefit in a way that, over time, will empower them to recoup their losses.
The government now has an opportunity to create a program intended to design unconventional solutions for unprecedented problems. Lenders could retain their creditworthy clients and contain their losses. We could move forward, continually examining the assumptions we make, and inventing solutions that provide the greatest economic benefit.
In these exceptional times, I forgive myself for the mistakes I made, forgive others for bad decisions they made, and vote for win-win solutions.