Lately I’ve felt like our money has begun asserting itself a bit more. It’s talking back. It drags its feet. It slouches at the dinner table. It ignores me when I’m talking to it. (The purchase of our first home has everything to do with the new bad attitude).
And yes, I often think of my money as a teenager.
You need to show your money respect and recognize its inherent value. Ah, but its deserving respect goes much deeper than that. You must also recognize that money is a part of you — an extension of you — no, a reflection on you. Not completely, but also not in a small enough way that you’re allowed to ignore its behavior.
I will readily admit there are times when money truly is out of control. That just happens. It’s to be expected to a certain degree. However, there are so many things that can be done to reduce those times of bad behavior, that it does much more good to focus on the things to be done and be assertive, rather than adopting some type of “woe is me” attitude.
I propose you do something a little radical to regain your authority. I wrote about this a while back for a non-profit organization, but only as a passing idea, part of a list — now I want to flesh it out a bit.
You will not spend a dime for 72 hours. It’s called a Money Fast.
Don’t start formulating your excuse — you don’t have one.
Plan ahead. By that I don’t mean to go on a spending binge (you all know the Monday diet drill, right? You know that “Monday [you're] going to start eating better” so Sunday you just eat whatever you can get your hands on to fill up the tank, so to speak?). However, if you’ve been waiting for the price of oil to come down and your car’s running on fumes, you should probably fill up before you start. If your refrigerator’s stock consists of half a bottle of ketchup and some old cheese, you should hit the grocery store. If one of your bills would normally be paid during those three days, pay it early. If you’re going out with friends you’re not allowed to say you’ll pay them back. Borrowing money during your fast is the same as spending your money.
I was reminded of the Money Fast after reading Trent’s post over at The Simple Dollar on 100 Things to Do During a Money Free Weekend (this is really great stuff and must’ve taken a ton of time to put together, if YNAB readers find the list helpful, digg it and say as much!).
I think the weekend is a great place to start at trying your money fast, but the real challenge lies in bucking old habits that are ingrained because of your normal weekday routines.
Yes, you’ll save money doing your fast, but we’re not worried about saving money here, we’re worried about regaining, or gaining for the first time, some control. We’re talking about asserting your authority as The Boss.
This has everything to do with your psychology and very little to do with anything else. I’m talking about a 3-day sprint, being totally radical, and just turning off the leaky faucet. Just Say No comes to mind. No restaurants. No movie rentals (library has them for free). No stopping and grabbing a coffee.
Your bank balance will thank you, but the psychological win dwarfs the benefits of a few dollars saved because that psychological win can stick with you — impacting hundreds (or thousands) of future purchasing decisions. The next time you’re tempted to buy that _______________? You’ll recall how you went three days without spending a dime and you certainly don’t need to spend any right now.
Take control. Reverse the bad attitude that your money’s been displaying for the past little while. Go on a money fast! Who’s with me?
It was Tuesday, April 15, 2008. Yes, the infamous “tax day.” It was about 11:00 a.m. as I sat outside on the deck of our office speaking with a client. She was there to sign the last tax return that I had to do for the 2008 season. The feeling of relief was very nice. However, the topic of our conversation muted my joy and saddened my spirits. This client had a story that hurt to hear.
They Had Done Everything Like They Should
Her husband had joined a Fortune 500 company right out of school. He worked very hard in their manufacturing operations until he had become a very essential part of the entire operation. He often worked 12-16 hour days. It got to the point where only he and two others had the knowledge and experience necessary to perform certain critical functions in the operation.
Then, out of the blue the company announced that they would be dissolving that area of their business. My client was not quite sure what to do. He was in his mid-forties and was not mentally prepared to start over, even though the company offered to transition him into a new role. He and his wife discussed their options and decided to take an early retirement.
You see, in addition to working very hard in his career my client had done something else right. During the twenty years that he worked for this company he also put a ton of money away into his retirement plan. Now, facing the choice of a new career or retirement, he had $1,200,000 available to help him make that decision. He had done exactly what any good advisor would have told him to do. He saved really well throughout his working life and, because of that, he had options when life changed. And so he retired.
Well . . . Almost Everything
Now, with a very large sum of money in their bank account, they knew that they needed to invest it. Along came a friend that had recently entered the financial industry. He assured them that he could invest their money in a way that they would have a very comfortable retirement. They trusted him and did exactly what he told them to.
Ten Years at a Glance
He told them that they could invest their money in a way that they could earn 12% a year and withdraw 9% to live on. That way their money would continue to grow at the rate of inflation and they would always have enough. They did the calculation and figured out that they could withdraw $108,000 per year, and so they did exactly that.
In 2002 alone their portfolio value dropped by $500,000. However, they continued to pull the same amount of money out of their investments each year. Well, with $500,000 left that meant they were pulling out 20%, then 25%, then 33%, then 50%, then . . .
In 2007 they were out of money. Now, in a panic, she scrambled to start a business and he scrambled to get trained in a new industry and find a job. They held on for dear life to their house and possessions and did everything they could to keep it all together. They were starting over from scratch!
Who’s to Blame?
Probably both are to blame – the advisor and my clients. My clients made two big mistakes. The first was putting their trust in an advisor who, at best, was doing a lousy job for them. In fact, it seems to me that once his commission was earned he wasn’t doing anything at all for them. But I only know one side of the story, so I will withhold that judgment. My clients, when deciding what to do with their entire financial future, should have at least interviewed a few financial planners and gotten second opinions about the advice that they were about to follow. It could very well have saved them from impending ruin. The second big mistake that they made was not paying attention to what was going on in their portfolio. When they saw the value dropping at a very fast rate they should have clued in much sooner and made adjustments before it was too late.
What did the advisor do wrong? First, he never should have planned for them to be able to take out 9% and have their money last – especially with a 40-50 year time horizon for their retirement. There are multiple studies that show that planning to take out more than 5% is a dangerous prospect. Once you cross the 5% line your likelihood of running out af money increases substantially.
Second, in order to try to achieve a 12% return, he had to invest their money way too aggressively for someone in retirement. When invested aggressively there is too great a chance for a substantial downturn and loss of money, which can devastate the portfolio and which, in fact, is what happened.
Last, he should have been monitoring their situation. To have lost half of the value of their portfolio and then to not advise them to take out less money is like seeing someone hanging off a cliff, clinging to a rope, and then cutting the rope. There is no way that the money could last or recover if they continued to pull it out at that rate. He should have been meeting with them at least annually, monitoring the situation and advising them to reduce the amount they pull out if they want it to last.
Significant, Lasting Effects
A good advisor could have kept this from happening, at least if his advice had been followed. Yes, there could have still been ups and downs in the value of their investments, but they would never have run out of money so fast had they received sound advice in the beginning and continued to receive it on a regular basis. I hurt for them, and after talking with them I am certain that they will not make the same mistake again.
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
I don’t have an answer for the wife of a husband that won’t listen to your worries when it comes to paying the bills, buying the necessities, etc. It boggles my mind that people can be married and live together but still be living (or at least attempting to live) completely separate financial lives. I’m not talking about how you actually manage the day-to-day funds — which accounts you use, who pays bills out of what, etc. — I’m talking about mentally leading separate financial lives. How is that possible while still being productive?
I don’t understand why money is such a touchy subject for a couple. Why do you take offense when your spouse asks about XYZ expense? Why do you assume you’re being attacked? Is it because you feel guilty? Is it because you immediately mentally turn the question around and start holding your spouse up to the same scrutiny, spouting off that they spend on XYZx2?
What do you hear when your spouse tells you “money is tight.” Do you hear blame or shared concern?
What do you hear when your spouse mentions that “this could be a bad month.” Do you hear an accusation that you aren’t earning enough or a message from a trusted friend to ‘hang in there’?
Why do you attempt to exercise control over your spouse through your finances? Do you not trust them? Why?
Why do you hide spending from your spouse? Is it because they’re so controlling? Why?
Why do you make your spouse do all of the financial paperwork? Why do you stick your head in the sand when there’s a financial crisis? Why do you have such a hard time facing the reality that your spouse has been trying to tell you about for the past six months?
Why can’t you talk about money openly with your spouse? How is it that you can talk about your childhood, raising kids, religion, fears, sex, aspirations… but can’t manage to throw together one productive conversation about money without taking offense, or going on the offensive?
Why is money the number one cause of divorce? Why do we tie everything else in life back to money? What makes money such an emotionally-charged topic? Do you feel that money is a reflection on you?
Why?
Talk.
About.
Money.
Openly.
Take off the gloves, step out of the ring, (remove the mouthguard), towel off, and talk. Better yet, simply ask very open-ended questions and listen. Don’t respond to answers, just listen. Don’t begin formulating your next question, just listen to the answer being given. Don’t think of the past wrongdoings (yours or theirs), just listen. Understand what it is that your spouse is telling you. If they aren’t talking a lot, listen to that. And listen hard because it’s a lot tougher to listen to someone that doesn’t (want to) say much.
Confess.
Confess that you take offense too quickly because you’re insecure about money (but don’t, for the life of you, know why!). Confess that you offend too quickly. Confess that you question your spouse’s spending too harshly. Confess that, in your feeling frustrated about money, you’ve carelessly shifted the blame completely to your spouse.
Apologize.
Apologize for not doing more to help with the financial stuff. Apologize for not wanting to talk earlier. Apologize for being a jerk about spending money (apologize for being a hypocrite about spending money). Apologize for always blaming and never taking some of the blame for yourself.
I am not a marriage counselor. Trained as an accountant, I learned to read financial statements, not women (oh that there were a major for that). I do not understand all of the intricacies that make up a relationship as complex as the one you’re currently in.
I do understand budgeting. I have a handle on it. I’ve seen what it can do for marriages. No, I can’t tell you what behavior you’re exhibiting when you do A and your spouse does B and together you get C… but I can tell you what behavior will put your finances back on track.
Sit down every month and give every dollar a job together.
Maybe one person does most of the actual day-to-day entry of expenses, that’s fine. We’re starting small here. But make sure that both of you sit down every month and give every dollar a job. Face reality together.
Your communication will improve. Your guilt will go away. Your finances will recover. Your anger will subside. Soon your goals will begin to be realized.
You’ll be dealing with the same bills, the same income, the same crises…but you’ll be dealing with them together. And there is the secret!
There is a bit of “conventional” wisdom out there that I just don’t understand. I take that back. I understand it. I just don’t understand how seemingly intelligent people subscribe to it. It is even touted by CPAs and Financial Advisors as great advice. The idea is that it is good to get or keep a mortgage because it is a tax write-off.
I have lost track of the number of people that have told me that the reason they are not paying off their mortgage is because it is a tax deduction. Another comment closely related to that on is when people buy things for their business that they don’t really need because it is a tax write-off. It has to just be an excuse to spend the money, or a convenient justification in their minds, because it just doesn’t make sense to me.
So Let Me Get This Straight
Here is an example. A client came to me a little while back and he said that he planned to take out a much larger mortgage on his house. When I inquired why he explained to me that his CPA had told him that he needed more deductions to get his tax bill lower. The CPA suggested taking out a much larger loan on his home and showed him how much he would save on his taxes.
“So,” I said, “you are going to pay $10,000 more per year in interest to the bank so that you can pay $3,000 less to the government in taxes? You must really, really hate paying money to the government!” Why on earth would someone put themselves $7,000 more in the hole to avoid taxes? It seems like they are taxing themselves more in the process.
I’m All for Paying Fewer Taxes
Don’t get me wrong. I have no desire to pay more taxes. I try to find every honest way to save my clients tax dollars and help them keep what they earn. But I wouldn’t suggest that they spend more than the tax savings in order to get those savings.
Now, if you have to have a mortgage, then by all means you should take the tax deduction for it. But please don’t get a bigger mortgage so that you get a bigger deduction. And don’t take out a home equity line of credit to pay for your vacation so that you get a deduction for the interest you pay on the cost of that vacation. No matter how big the deduction, you are still paying more for the vacation! You only get a percentage of the interest, not a dollar for dollar reduction of the price you paid.
One More Example
There is a guy I know that owns his own little business. Almost every time I talk to him he tells me about the new tools or equipment that he just bought. Then he smiles and says, “Hey, it’s a tax deduction.” Maybe he is just taunting me. But it is not like the fact that the tool is a tax deduction makes that tool free. Especially if he is not making a lot of profit on this business, which in turn means that his tax bracket is not very high. So, maybe he saved 20% on the tool when you take into account the write-off. He still spent the other 80% on a tool that he didn’t really need. It is the same logic that leads people to by things that are “on sale” that they never would have bought otherwise. I don’t care how much you saved – if you wouldn’t have bought it otherwise you just wasted your money.
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
Just sending a quick link over to the carnival at MightyBargainHunter. He did a great job hosting and there are a bunch of great articles. A few of my favorites:
Habit: Spend five to ten minutes every night brainstorming ideas, creating a To Do list, and prioritizing the list.
That was my desired habit. Yours may be completely different. I would, of course, like to see one of your habits be the regular recording of your expenses, and a monthly budget meeting.
21, 30, 45 days? Nah. I managed to nail this habit down in one evening with six steps.
My first step was to visualize my daily routine. You’ll find that you do have a routine, even if you don’t think you’re a routine person. I visualized where I showered, dressed, ate, drove, worked, etc. I then strategically placed written reminders in those areas: “To Do!”
This isn’t a new strategy, though I did perhaps take it to the extreme when I spray-painted “To Do” on the overpass I drive under every day (I’m kidding — but couldn’t I hang a sign there or something? All of my fellow commuters are well aware of the fact that Jane loves Steve. It’s working.).
No, the extreme part of the strategy is hitting your routine in multiple places. Several months ago I made a sign that I hung on the wall directly above my main computer monitor: “Are you adding value right now?” This was supposed to remind me to stay on task and do things of value. I never see the sign anymore. It’s there, but I don’t see it. I need to either 1) move it, or 2) change the color of paper. Putting a sign on your bathroom mirror is fine, but also stick one on the fridge, on your car’s sun visor, on the inside of your office door at work, on the back of your office chair, right behind your toothbrush, in a sleeve protector in your shower, and under your pillow.
I’m doing this right now. I’m letting everyone reading this know that I now have the habit of planning my daily tasks. I feel accountable. This really does work. Why do we see so many blogs appearing for getting out of debt, losing weight, and improving oneself? The blog authors are making themselves accountable to their readership — and it works.
You may not have a blog, but you have other methods for getting the word out. Call some friends, send out an email. Make it known! The pressure will be healthy for you.
You probably have some type of appointment book. Write an appointment in there to ___________ [desired habit here]. I wrote mine on the next 30 days at the end of every day. I have a standing appointment with myself and I intend to keep it.
Grab your Outlook software and build in reminders as frequently as necessary. Better yet, use Jott to send you reminders on your cellphone (you likely always have your phone nearby, where you may not be sitting at your computer all day).
(Jott can be used to help you organize “random” ideas you have throughout the day. You just call and tell it you’re jotting to yourself, then start speaking. It will transcribe the message and email you.)
You could conceivably have Jott text you every evening at 9:30 PM:
Dude, you need to do thirty pushups before going to bed.
Voilá. Your pectorals are more defined.
However, more effective would be to market the new habit to yourself a little more effectively. Just talk about benefits:
Dude, with rock-hard pectorals, you’ll have the confidence needed to (finally) talk to ________.
I spent some time honestly telling myself that this is just an experiment: Jesse, this whole task organization thing is just a test. If it doesn’t fit the real you, well, then you can just stop after August 10th. Don’t worry. You only have to keep doing this if you really like it.
In writing down exactly what your desired habit is going to be (both in your visual reminders, other reminders, appointment book, public email, blog, and perhaps in your journal), be sure to outline the parameters for success. Make them doable. This sixth step was key in my cementing my new habit into place.
When first beginning a budget, people are gung-ho about the whole deal. They want to set their spending limits and watch as everything goes just perfectly and they stay under budget in every category (we’re yet to experience that, going on 5+ years of using YNAB). You’re in for some big disappointment if you set your parameters for success too high.
Notice, I carved out five to ten minutes each day. I didn’t shoot for 30 minutes of meditation/visualization. I need something doable, and five or ten minutes each day is doable.
Do less.
My friend Ramit from IWillTeachYouToBeRich said it best,
“Do you know people who get so into their idea du jour that they go completely overboard and burn out? For me, I would rather do less, but make it sustainable.”
If you’re just starting out on your budgeting, pick a single budget category and try and stay under. Don’t worry about any of the others. Just focus on one that you’d like to beat. Prove to yourself that you can do that consistently over a month or two and then pick another one or two categories and focus.
I’m on day one of my new habit. It’s going great. You may say that they say it takes (21, 45, 30) days to form a new habit–that a habit can’t be formed in one evening–but I’m confident you’re wrong! These six steps make it a given.
Oh, I suppose Step 2a is to be so publicly brazen about your new habit that it really is a given.
With YNAB, we don’t get into the nitty-gritty of actually handling the paperwork associated with bills (one way to minimize it is to minimize your bills…like cancel things and stuff like that) — NCN has with his tutorial: Bills-in-a-Box. Check it out. He promises that it’s stress free. I like the sound of that!
I know that those two words don’t usually go together. You may have even thought that I just left the ‘d’ off of the last word. But I actually want to talk about emergency fun. Not that emergencies are ever fun. If you have prepared properly, though, there can be a real element of fun, especially after the emergency has past and you are looking back. There is even fun to be found when there is not an emergency if you are prepared for when there is.
I guess first I should clarify. I think that saving money is fun. If I have outsmarted the foreseeable downturns in life, or jumped across pitfalls that ensnare others, or even just get a great deal on something that I had to buy anyway I think that it is fun.
Hopefully you already understand the absolutely crucial nature of an emergency fund. There aren’t many things that are more critical to success in personal finances and financial planning than a sufficient emergency fund. Perhaps if there is interest I will write an entry just on this. Suffice it to say that right now a good emergency fund is a number one priority in any financial plan.
So where is the fun in that? The fun begins after you have the fund. Once you have the money in place you can sit back and watch the fun begin in all the ways that you can save money.
Here are a few of the ways that you can save money by having an emergency fund. These, and numerous other ways can add up to a significant amount and can more than offset the lower interest rate that you earn by keeping this money liquid.
Home and Auto Insurance
Give your insurance company a call and ask what the difference in your premiums would be if you increase the deductible to the maximum amount that they allow. Add up the savings. Usually the difference in premium makes up for the increased deductible in a short amount of time. And you have more than enough sitting in your emergency fund to pay the deductible should you need to. Also, if you are paying monthly find out how much less it would cost to pay once per year. The difference can be as much as 20%! Pay the premium from your emergency fund the first year and then pay yourself back monthly, plus enough to pay next year’s premium.
Health Insurance
Here is a similar principle. However, the savings in premiums for a higher deductible plan can be much more substantial than with home and auto. Be sure to check out my article on Heath Savings Accounts to see how much money you could really save.
Your Job
Now here is an interesting one. If you have a healthy emergency fund (3-6 months, or more) you have much more flexibility in your employment. If you are not happy with the job, the circumstances that you are placed in, or the pay, you are free to ask for something better. The worst that could happen is that you need to find a new job and you conceivably have 3-6 months to do that without a problem. Or what if you get fired? You can smile and not wonder how you will feed your family. Or, what if you have been working on a side business and you are ready to take it to the next level. You have the ability to do so much more than you otherwise would without substantially increasing your risk.
A Major Repair
In this case you have the ability to find the best deal because you can pay with cash. Also, you don’t have to use a credit card. Just add up the savings in interest that you would have paid on a credit card, plus the better price you negotiated for paying in cash and you will really be having fun.
I have a lot of others. In fact I have held back some of my favorite ones. I want you to think of the fun that you can have and the savings that you can achieve by having a well funded emergency fund. And then I want you to send me your ideas. Even better, send me your real experiences. I will put my favorites in a future entry.
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
Considering the current Real Estate downturn, there is a pretty good chance that some who read this blog are in the process of losing their homes. Hopefully the percentage of readers in this situation is smaller than the national average because you have learned to budget well. Even if you are not in this situation, there is a really good chance that you know someone who is and, if so, this article may help them know what to expect from a tax standpoint.
The IRS looks at all debt that is reduced or forgiven in one way – as taxable income! Why? Because then they can tax it! No, it actually makes sense. If you owe money and the debtor forgives the debt, what that really means is that they paid the debt for you. If they paid the debt for you it is the same as if they paid you and then you paid the debt. So, the debt paid is considered income. (Another way to think about this: If this were not the case then we could all have our employer just by our food, housing, entertainment, etc. and we would never have any income to report and no one would ever need to pay taxes.) Since the debt that is reduced or forgiven is income you may now owe income tax on that portion that was eliminated. So not only did you lose your house because you couldn’t make the payment, but now you have a big tax bill to boot!
Because the housing crisis is so big, and in an effort to lessen the economical impact of the foreclosures, in December 2007 President Bush signed the Mortgage Debt Forgiveness Act of 2007. The act allows for mortgage debt relief to not be included in income for those whose mortgage debt is forgiven between January 1, 2007 and December 31, 2009. So, if losing your house is inevitable, I guess now is a “good” time to do it.
Probably the most important footnote to this is that only the portion of debt that was used for the construction, purchase, or significant improvement of the home qualifies for the benefits of the Act. In other words, if you used part of the money from your mortgage to consolidate debt or pay for a vacation, etc., then that portion is still considered income and is subject to taxes. For example, if the amount of money used for things other than the home is $55,000 and the amount of debt forgiven is $90,000, then only $35,000 of the debt relief is not included in taxable income.
A second important note is that this tax relief only applies to a principal residence. So, if it is a second home or a vacation home then the debt forgiveness will be treated as it always has – taxable income.
There are a few other details to the Act as well, but they don’t apply to most people and/or they aren’t within the scope of this BLOG. My intention is just to give you an idea of the overall tax consequences of debt forgiveness and the effects of this Act.
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
I know normally anyone following the personal finance blogosphere is bombarded with carnival posts each Monday. I thought I’d do a follow-up post today. Maybe you can take a few moments away from your holiday and dig into this a bit! You can find it over at Greener Pastures.
This is The Wallet. My name is Jesse Mecham, founder of YNAB. Here I focus on the YNAB methodology, software, personal finance, and more.
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