2011 – Page 7 – Beyond Dave

One Measure of Wealth

If I were training for a 5k, I could find lots of people willing to show me their training diary. I could pretty easily find someone at about my level and see their training distances and times. I could use this information to gauge my own performance.

When it comes to finances finding this kind of transparency is tough. Employers don’t want employees comparing pay rates. Most of us have been trained and conditioned to keep our money life secret. This lack of transparency makes it difficult to learn from the few that are doing really well with their money.

If you knew one of your friends had no debt and lots of savings, you might be inclined to find out how they did it – or perhaps even more motivating, if you knew your friend or neighbor with the nice clothes and the new cars was being harassed by bill collectors every night, you might want to learn how to avoid following in their footsteps.

If you don’t have a good measure of where you should be, there’s no way to know how well you are doing. A few years ago I thought I was doing really well. I was paying my bills on time and I certainly had a bunch of stuff. It turns out, how much stuff you have is a pretty poor measurement of your financial health.

In the book, The Millionaire Next Door they used this assessment:

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be. You can use this calculator to find out where you stand.

For example, if Mr. Anthony O. Duncan is forty-one years old, makes $143,000 a year, and has investments that return another $12,000, he would multiply $155,000 by forty-one. That equals $6,355,000. Dividing by ten, his net worth should be $635,500 if he were an Average accumulator of wealth.

If your net worth is twice what is expected for your age and income , yeah you, you are a prodigious accumulator of wealth! If your number is significantly less than predicted by the formula, it may be time to scrutinize your relationship with money.

Rising Gas Prices

There has been a lot of angry discussion recently about why gas prices are going up. In our area, they are are up 7% in just the last week. Many predict they will to go higher still. I understand your anger, but after you scream and yell and stomp your feet you must face the problem and decide what to do about it.

How is this going to affect you?

If your gas budget has been $200 a month you are going to be $14 over budget if prices stabilize. Or, maybe you operate a small business with a $2000 a month fuel budget, in which case it’s a $140 problem. Either way you must determine where you are going to get the additional money.

Maybe a 7% increase in your gas budget won’t break you, but that money comes from somewhere and living intentionally requires that you acknowledge the increase and make a decision what to do about it.

I have been told by small business owners about similar increases that they will “just absorb” them. What exactly does this mean? Does this mean they will reduce their profit predictions by the expense increases? That is a perfectly acceptable way to handle the increase if that’s what the owners want to do, or they could increase prices or they could reduce another expense or they could find another way (other than price) to offset this expense. The one thing they must do if they what to run an efficient and profitable operation is to make a reasoned decision about the situation. If you don’t take notice of a 7% increase for a single expense, what is your threshold, 10%, 20%?

Like a business, you personally need to be aware and decisive when the cost of an expense increases.

Here are some possible courses of action:

I will take the difference from my blow money. This means a couple less coffees this coming month or skipping a lunch out or missing a movie, if these are things you buy with your blow money.

I will drive a least 7% less. If this is your plan how will you accomplish it? How much is 7%? What trips will you eliminate?

I will carpool this coming month saving _______ miles, which is ___________% of my gas budget.

I will ride my bike either to work or for errands, saving _______ miles, which is ___________% of my gas budget.

I will use public transportation for the following trips_______________ saving _______ miles, which is ___________% of my gas budget.

This is what living intentionally is about. It is making decisions and controlling your life and your money, not just letting things happen to you.

The first step in all of this is to know what you have been spending on gas. Do you really know or are you guessing? Can you quickly and easily tell me what you have spent the last year?

Be aware. Make decisions. Follow through.

A Tale of Two Families

Young Ned and his wife Sally really want a home of their own. Ned has been at the same job for a couple of years and Sally stays home with their 1 year old. They have been reasonably careful with their money. They have an old, but reliable, Honda Ned’s parents gave him when he graduated from college and no credit card debt. Ned makes $50K a year and Sally’s parents have given them $10K to use as the down payment. Ned and Sally go to an online lender to get pre-qualified for a mortgage. Using the lender’s “Home Affordability Calculator” Ned and Sally are told they can afford a monthly payment of $1,499.76 including taxes and insurance. Estimating taxes and insurance at $5,500, Ned and Sally start shopping for a $200,000 home.

Not too far away another young couple is dreaming of a home of their own as well. Paul and Janet have a new baby and are finding their tiny apartment rather cramped. Paul makes $50k a year but has 15% of his pay going to his 401K. Paul and Janet never see that money, so they budget as if it doesn’t exist.

Paul and Janet have recently struggled and sacrificed to pay off the credit card debt they ran up when they were in school.

Janet has been reading money management books and knows that they should put at least 10% down on a house and that their mortgage should be no more then 25% of their take-home pay. Using Paul’s take-home pay after taxes and the 401K deductions, Janet calculates a maximum mortgage payment of $764. She knows they can afford a $100,000 home with a 15 year mortgage.

Before they can go home shopping, they know they must save the down payment and build their emergency fund to equal at least three months of expenses.

Paul takes on as many overtime hours as he can get at work and Janet takes the baby to the neighbors three times a week to watch their 3 year old. With this additional income and cutting their expenses as low as they can go, Paul and Janet are able to save $2000 a month for 8 months.

Ned & Sally end up with a $200,000 home. Their mortgage payment is $1,019 a month and taxes & insurance add another $450 per month. Paul & Janet have found a nice little starter home for $100,000. Financing their home over 15 years gets them a lower interest rate and shortens the term by half. Their mortgage payment is $671 and taxes and insurance add $200 a month.

Ned & Sally Paul & Janet

Take Home Pay	$3550	$3056
Housing Cost	$1469/41%	$871/29%
401K After 5 years	$0	$43,436
Interest paid on Mortgage after 5 years	$45,614	$16,185
Principal Paid after 5 years	$15,526	$24,083
Net Worth Increase	$25,526	$77,519

Ned & Sally’s budget allows them to live on $2031 after housing costs. Paul & Janet get just a hundred dollars more but their utilities and maintenance costs are about half of Ned & Sally’s. They have their retirement saving working for them and enough room in their budget to save and pay for a better car.

Paul & Janet were careful, after learning their lesson with credit cards, not to be lead astray by lenders who make more by lending you more. By the time they managed to pay off the old debt, they could not even remember what they had bought. They swore it would not happen again. They vowed to live on less then they make, to save aggressively and to give. We hope Ned & Sally get a wake up call soon.

How low can you go?

I want to teach you a cool game. The winners of this game get huge cash prizes; I won a paid-for house.

The game is called, “How low can you go?”

To play, we need to create a low or no-income budget.

I hear some of you saying, “Wait, what, another budget? I haven’t done the first one.” Well, since this one is easier than your real budget – get going.

In some instances this really is a worst-case budget – as in you have unexpectedly and unhappily lost your source of income. In other cases this is a best-case budget – as in you have joyfully taken the leap to a new venture or retirement. Either way, let’s play the game.

If you lost your income, how little could you live on?

With no income, entertainment becomes a walk, a bike ride, a trip to the library. So scratch the movies, the bars, and the vacations.

Eating on as little as possible does not involve fast food or restaurants or steaks. E-Mealz (a really cool menu planning system) can provide menus and shopping lists that will feed a family of two for as little as $30 a week.

If you had no income would that AC be set to 68? Would you be jumping in the car and motoring across town 4 times a week; or might you consider exploring the use of the city bus?

Really get radical here – consider what you spend on clothes and nails and hair color; how can you look presentable for less?

Itunes, Netflix, Redbox ? Not with zero income.

Take a look at that cell plan; you have no income. You don’t know when you will have some again. Can you get it lower? Do you really need it?

Do you have an extra room? What if you got a roommate? No, not forever, could you do it for a while if you needed to?

Things you can’t give up:

Insurance: you need health coverage. If you have dependents you need term life. If you drive, you need auto and if you own a home you need homeowners.

Taxes: you must pay you property taxes, auto tags and renew your license etc.

If I stayed in our home (paid for), kept both cars (paid for) and the cell phones I could go as low as $2,100 a month.

Fully half of my as-low-as-I-can-go expenses are insurance (home, car, health and life) and taxes (property, tags). If I needed to go lower we could easily live with one car (saving insurance, tag and maybe some gas) and ditch the cell phones. But to go any lower than that would require a housing change.

Ok here’s the fun part.

It’s just a game (hopefully you haven’t lost your income or if you have you had already worked out a plan) but what if you played for real? What is the monthly difference between your as-low-as-I-can-go expenses and you normal expenses?

What if you went only half way to as-low-as-I-can-go and applied the rest of the money to reducing debt or increasing savings? If you played for 6 months what would your financial picture look like? How about a year?

This is how we paid off our house. We played the: “How Low can You Go?” game for two years. It really wasn’t about huge sacrifices because it was just a game; we knew we didn’t have to live that way but we wanted to win.

Riding the bus or your bike, going to the library, carrying your lunch, having friends over for dinner and a board game instead of going out is not a drag. After you do it for a while, you may find parts of your low income life that you actually enjoy more than your old free-spending ways.

Can you beat me? What’s your as-low-as-I-can-go number?

The Long Haul

I sometimes struggle with consistency in my efforts – and I bet you do to. Making the decision to change your financial future isn’t all that hard; a moment of clear thinking is all that it takes to understand that you can and should be doing more with your money. Setting up a plan to accomplish your new found goals isn’t all that hard either; you know you need to spend less then you make, pay off debt, and save.

The hard part is to follow the plan long term – way past that first month. Why is this so tough? Because in order to accomplish this, or any other behavior changes long term, you must change the way you think. That’s hard enough by itself; but you also have to maintain this new attitude in the face of incredible pressure from others to go back to your old non-thinking, fun-loving, easy-spending ways. Dang it! How’s somebody supposed to do that?

Slowly

In our enthusiasm for change, or distaste for the stuff required to accomplish it, we often try to do it all in one night. So, you know that debt it took you 4 years to accumulate? Chances are you are not going to wipe it out tonight. And, if you did by some unexpected windfall have the ability to do so, chances are you would just run it up again. We need to change our thoughts and behaviors and the best way to do that is a little at a time.

Your first spending cuts should not be to expenses that are near and dear to you. Cut things you won’t notice much or find lower cost substitutes. In an earlier article, I named my first three cuts; I substituted purchased books for library books; I ironed my own shirts and we changed our phone service. The phone service never bothered me for a minute; the books took a little effort; but I found that if I kept several unread library books at all times, I could easily talk myself out of the temptation to pick up a paperback when I was out. The shirts were a different story.

Of the three cuts, eliminating the laundering of my shirts offered the least significant savings, but it may have been the most important in terms of behavior change. Every Sunday, I spend 45 minutes ironing my shirts for the upcoming workweek. Sometimes I really do not want to iron those shirts, but once I get started, it’s not so bad. This active participation serves to remind me what our financial goals are and what we are willing to do to achieve them. If I spend four hours a month saving $35, I am much less likely to go over budget for something unnecessary. If you don’t have shirts to iron, what can you do that you used to pay someone to do? Find a way to be happy accomplishing the task and remind yourself about the mission you are on.

When you are comfortable with the first round of cuts, you can start round two. Don’t be in a hurry, deeply cutting an expense that you really care about can led to rejecting the whole plan.

Together

Work has always been important in our house. Much of our fun has been working together on projects. We can even find enjoyment in everyday chores of cleaning or yard work as long as everyone participates. In our house, you won’t find anyone kicked up in the lazy boy while the vacuum is running.

The same goes for financial goals, we are all pulling in the same direction. Change is so much easier when you surround yourself with others on the same path. Seek out friends and family that can understand and support your efforts. It’s imperative that your spouse or significant other is on board; fighting their reluctance while trying to change is like waging war on two fronts. Put your whole plan on hold and get on the same page. You might have to go slower than you want in order to walk together – but it will be worth it.

Simply

Keep your plan simple. Do one thing at a time. It’s really easy to get sucked into trying to accomplish a whole lot at one time. It won’t work. Diluting your effort across a whole bunch of goals means nothing gets accomplished quickly. We need some quick wins to stay motivated. Focus with laser intensity on one small goal at a time and get it done.

The Monster under the Bed

Whatever sneaky, creepy, grow in the dead of night, problem you have, there is there’s a way to solve it and keep it from ever coming back.

Some problems seem to just sneak up on you; that little bit of credit card debt that quietly over months or years somehow becomes $10,000. Those papers that you just can’t find a minute to deal with that take over your desk and then the credenza and then the multiply creating several baby piles on the floor. Maybe your sneaky problem is that 5 extra lbs that is now approaching 50.

These types of problems grow because when they are small they don’t really command our attention. “It’s no big deal, I’ll handle it next month” is what we think about the $300 credit card balance we don’t pay off. And then, next month rolls around and something else seems more fun or more important and that $300 becomes $360. Before we know it, that little non-problem has become something big and daunting. Now it’s an unruly monster that is going to take a lot of time and effort to tame. Our issue that was once too little to worry with has now become a problem too big to tackle – so we continue to ignore it and it continues to grow.

Awareness and Your Accountability Partner

To avoid being blindsided, regularly take stock. In our house, we have a budget meeting the last day of every month. Sometimes I’m lazy or disinterested and don’t want to attend. My accountability partner makes me. We spend 10 minutes and look to next month’s spending, deciding on any unusual or large purchases. We also record the current balance of all our accounts and calculate our net worth. It is quickly clear if we are headed in the direction we want to go. I also use Mint.com – who’s annoying little emails tell me in real time if I’ve exceed a budget amount; allowing me to get back on track before the next budget meeting.

Your accountability partner can be your spouse or a friend or family member. Just someone you can trust that will help make sure that you actually do the necessary regular measurement.

Cut the Monster down to Size

“That’s great!” you might say, “I’ll measure weekly from now on to be sure my monster doesn’t grow. But what am I supposed to do with the 500lb beast I have right now?”

My advice is to shave – don’t chop. Drastic changes in diet or lifestyle rarely work. It doesn’t take long before you think, “I’d rather be broke and happy”. So start small. Make a few cuts this month, see how they feel and make a few more next month.

Some of my spending that was cut first in the first round:

Books – I had a book-or-two-a-week habit, usually on impulse. I still read a lot and I still buy some books, but most of the time I read library books – Savings $50 per month.

Cleaners – I like my shirts crisp. I used to have five shirts a week laundered and pressed. I wash and iron my own shirts now, frequently hanging them on the clothesline when the weather is nice. Not only do I save the money not taking them to the cleaners, but my shirts last longer – Savings $35 per month.

Phone – We dumped the home phone for our cells and the real fax line for an internet fax service and bundled our business line in with the cable – Savings about $100 per month.

We went through several rounds of cuts and what works for us is: If something really matters to you, be OK with spending money on it – but cut sharply on those things that aren’t crucial to your happiness.

No matter what you issue is; whittle away at it, charting your progress as you go. Regular measurement insures that monsters don’t quietly grow under the bed.

Charting your progress makes it much easier to stick with your plan. A little success is very motivating.

I Can’t Pay

If you are currently in the very uncomfortable position of not being able to pay all your bills on time, here’s how to get through this valley with the least amount of pain and scarring,

Do not allow the current situation to redefine who you are.

You are a person of integrity. Your word means something; you take care of your family; you honor your commitments. This doesn’t mean that you never stumble or lose your way. It does mean that when you do fall short of your own expectations you change course and re-commit.

Protect your relationships and rely on your faith during this rough spot.

Take Responsibility

If they hadn’t cut your bonus, eliminated your job, if housing prices hadn’t crashed, if you mother hadn’t gotten ill…. you would not be here. But it happened and you are – so start right here today with where you are. You made a promise you cannot keep and now you need to get to control over the situation.

Make a Realistic Plan

Winning the lotto, scoring a new job that pays twice what the old one does, or selling your car for twice what it’s worth, are examples of events that are not likely to happen.

You need to create a Crisis Spending Plan based on your actual income.

Develop your plan starting with basic food – no restaurants, no fast food, no steaks, no beer, just beans & rice, mac & cheese, PB&J; cut the budget to the bone.

Next you need to pay your utilities, water, electric, gas, not cable not internet. If the utilities are behind, catch them up before doing anything else.

Shelter is our next priority. Pay your rent or your mortgage.

Finally, secure your transportation. Make your car payment; get your bus pass; set your gas money aside.

Now that you have your four walls (food, utilities, shelter, and transportation) in place, you can start your battle against your debt.

Who Gets Paid?

Make a list of all of those you owe; how much you owe them and how far behind you are.

If you can’t make the minimum payments on all your debts, you may choose to pay them each their pro-rated share of the money you do have available.

List each debt. Divide each debt by the total debt to get the debts percentage of the total. Multiply each percent by amount of money you have available to pay debt. This will give you your new payment. Send a copy of your worksheet with each payment.

Like this:

Contact your Creditors

Some creditors will be much more willing to work with you if you can state your hardship case and your plan for overcoming it. Some won’t. Typically credit card companies, big banks and Sallie Mae don’t care about your problems and will treat you in whatever way they think is most likely to get them a payment. They may appear to be warm and understanding today and then become belligerent and abusive tomorrow.

If you owe money to local businesses or individuals, you may be able to negotiate a payment plan.

As much for yourself as for the creditor, always communicate honestly with the creditor. Calmly tell them why you haven’t paid, when you expect to send them some money and how much it will be. Send them a copy of your pro rata worksheet with any payment that is less than the minimum.

When Sears calls about the past due payment on your credit card, your side of the conversation could sound like this:

Yes, I’m aware that the payment is late. My hours have been cut at work and we are unable to pay all our bills. When I am paid next Friday, we will be sending you $21.06.

No matter what they say, you stay calm and repeat that’s all your able to do. Keep your four walls in place and do not put your family in jeopardy because of some collectors ranting. Never give them electronic access to your accounts.

Once you have a written plan in place – follow it.

Get a Runny Go

When we were kids we had this funny phrase: “Runny Go”. It referred to the backing away from a hill and pedaling like crazy so you could maintain just enough momentum to get over the top. Starting at the bottom of a big hill from a dead stop, without a Runny Go, is torture. You have to stand up in the pedals and grind so slowly. If you let off at all, gravity pulls you back down the hill. Lots of things in life may require a Runny Go, including your first successful budget.

Instead of starting from a dead stop, spend a month building up some momentum. The goal is not to cut expenses – just record them. But if you feel the need to cut something, it is not against the rules.

Do a look back budget (time required 1-3 hours)

Set up your budget on paper or excel and do the last two-three months using your bank statements, credit card statements and memory, as best you can. Make a “don’t know” expense for the money you cannot account for.

Keep a journal (30 seconds for each purchase)

If you have expenditures you cannot account for, keep a little journal for the rest of the month – where you write down every dime you spend. It doesn’t need to be fancy, just scribble down what you spent the money on. Or, you can take a picture of every purchase as it happens.

Set aside 5 minutes every day

Spend 5 minutes updating your spreadsheet using your journal data

Mark the calendar

The expenses that destroy most budgets aren’t really unexpected; they just occur at irregular intervals. Pull out next month’s calendar and mark it up. Have company coming in? That will affect the food budget and maybe the entertainment budget too. Car insurance or tag renewal due? Write it down.

Armed and ready

As you approach the end of the month, you are getting ready to crest the hill. Gather all this new information and use it to make your budget for next month. Doing this prep work will make producing your first real budget much easier.

Don’t Save for Retirement

One of the big mistakes we all make when considering making a change is trying to do too much at one time. We decide we need to eat better so we plan to eat less meat and more vegetables – better make those organic, and even though I don’t cook, I’ll make it all from scratch. On and on, our plan gets bigger and better and as a result, less likely to be executed.

What we should do is plan in baby steps. Start small and celebrate your successes.

Today while listening to a coach advise one of his clients, I just wanted to yell, “Baby Steps”.

The client was a 28-year-old living in Chicago making 45K a year. She has a student loan balance of 30K, a $1000 emergency fund and a very generous employer who monthly pays an amount equal to 15% of her gross into a 403b. The coach was harping on and on about getting this student loan paid off so she could save more for retirement.

Really? Come on; she’s trying to live in Chicago on 45K. First thing we need to do is throw this girl a party; she is a rock star – 28 with 37K in retirement and no credit card debt. Who does that? The answer is very few.

The coach was right when he said that she needs to focus on paying off those student loans. But let’s not try to inspire her by tempting her with calculations of how much she could be worth when she’s 67. She has a lot a life to live before 67. Maybe a really cool vacation, a wedding, a condo? Live a little, girl.

We need to give this young woman a chance to learn that saving is not a bitter pill; it is not a diet devoid of chocolate. Once she sees herself as a saver, her financial future will be much more secure.

The way to learn to be a saver is to start small. In the beginning, it is a lot easier to save for a want rather than a need. So what do you want that we can get in three paychecks? How much can you set aside out of each check?

Swim with Manatees – $35 plus lunch and gas, $35 out of each check

Take your mom to Julio Iglesias – 2 tickets at $60, $40 from each check

4 night Cruise with your friends – $300, $100 out of each check

Try it. Pick a three paycheck goal, something fun and get going.

Once you can successfully do the three paycheck goal, try a six paycheck objective.

Visualization helps a lot; so draw a thermometer, post it on the fridge, and color it in after every check. Get the kids involved and they will naturally grow into savers.

It is easy-peasy to learn to be a saver:

1) Pick a little goal

2) Set the time period and the amount from each check

3) Record each increment as you save it – in color on the fridge door.

4) Party! You are a saver!

Of course you know that we do need to save for cars and retirement and less fun things like roofs and medical needs, but once you become a saver the rest is easy.

Should I stay or should I go?

Yesterday the Huffington Post published an excellent follow-up article about strategic default: Learning To Walk: Fear, Shame And Your Underwater Mortgage. In this post the reporters followed up with 48 of the 58 families who were considering walking away from their underwater homes in January of 2010. Seems a lot of people are singing that old The Clash song, Should I stay or should I go?

If I go, there will be trouble.

Many homeowners interviewed felt a moral obligation to continue to pay their mortgage. Some drained their savings; including the raiding of their retirement accounts to keep the mortgage fed. This housing market has many homeowners trapped. In Florida 46% of the homes with mortgages are underwater – making it very difficult for people to move for better job opportunities, to upsize to accommodate a growing family, or downsize due to divorce or the empty nest.

Some of this moral commitment has faded in the face of situations that seem hopeless. Strategically defaulting (not making the payments even when you can afford to) on mortgages to force the bank to accept a short-sale is happening with increasing frequency. The article states, “Data suggest that wealthier Americans, not those with lower or mid-range incomes, have a greater proclivity for punting their mortgage obligations by embracing strategic defaults.” It goes on to list the multiple occasions where commercial entities, indeed the mortgage companies themselves, have walked away from commercial mortgage obligations.

The questions to be answered are: “When will the market recover?” and “How bad will a default damage my credit?”

When will the housing market that I am in recover?

A randomly chosen Sarasota, Florida Zillow listing clearly shows a 38% increase in market value in the short 24 months between July 2004 and July of 2006. Fifty-six months later, it has lost all that gain and then some. There are no strong signs of recovery and this home is now valued very close to its 2002 price.

Even long time homeowners who did not buy at the top have been hurt. If this home had appreciated at just the rate of inflation since 2002, it would be worth $76,000 more than its current value. People who were depending on the appreciation of their home to fund a large piece of their retirement might have to wait quite a while to recover even modest gains.

How much does a default affect your credit?

Because the FICO formula is secret, there is no way to accurately calculate the affects of different default routes. It is generally advised that a foreclosure has the most damaging affect on your score, followed by a deed in-lieu, and then a short-sale. Generally, a bank will report every month you are delinquent and each report pushes your score down – a deed in-lieu may do less damage than a foreclosure because it happens faster.

And if I stay, it will be double.

Strapping yourself to the deck of a sinking ship never makes sense. If there is a way to right the ship – DO IT! Work like crazy to get and stay caught up. But, you MUST do a honest and thorough evaluation of the situation. If you continue on the same trajectory, where will you be in 6 months – 12 months – 48 months? What do you think is going to change? Are your expectations realistic? You need find someone intelligent, who is not emotionally invested, to review the hard numbers with you.

Should I cool it or should I blow?

In the end, make a reasonable decision based on what is best for your family and quit listening to judgmental people who have neither been there nor done that.