Boost Confidence, Improve Your Finances

 

Which comes first, confidence or success? I believe that in most facets of life, confidence is a prerequisite for success. This is true whether you are a business executive, athlete, musician, teacher, or any other profession. Of course, there is a virtuous cycle where success reinforces confidence, but it has to begin with confidence in the first place.

The Benefits of an Older Car

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The average car on the road today is 11.5 years old today, according to USA Today. Today’s cars are more dependable and long-lasting than ever and yet for many consumers, transportation remains their second largest expense after their home.

Last November, I purchased a used car, and not the typical 2-3 year old gently used vehicle, but a 2002 Toyota 4Runner with 179,097 miles. I wanted a larger vehicle to transport my three big dogs and wanted something I wouldn’t worry about getting muddy or scratched.

Admittedly, I have been leery of older cars. What if they break down? The last thing anyone wants is to have unexpected large expenses trying to keep a dying vehicle on the road. And I especially do not want to have an unreliable or unsafe vehicle when it is 102 degrees in July or 20 degrees in January.

Well, I’ve lived with my old car for a year now and will give you a full report, including a breakdown of all my costs. I drove the car almost every day and put just over 11,000 miles on this year (the photo is my current odometer reading: 190,182 miles). During that time, it has been 100% reliable (knock on wood…). The car has always started and worked perfectly. I have had zero breakdowns and no unplanned maintenance.

As a student of behavioral finance, I think people’s car buying choices are interesting to study. Most of us buy what we want, but then create a rationalization that sounds good for why we “need” a new car. Oftentimes, it’s really about projecting an image of success or trying to fit in with others in the office, neighborhood, or group of friends.

Many people prefer a new car, under warranty, to avoid the unpleasantness of having to pay for car repairs. This is known as “loss aversion”, which means that the pain of a $500 loss is much more intense and memorable than the satisfaction of a $500 gain.

Getting a new car every three years may cost $400 or $500 a month regardless of whether you lease, finance, or pay cash. With an older car, your depreciation can be very small, and instead your main expense is typically maintenance. You may end up spending $800 twice a year in repairs and upkeep. That sounds terrible, but which costs more: $400 a month, or $800 twice a year?

Having a used car may leave you on the hook for unplanned repairs, but the chances are good that those repairs will be a small fraction of the ongoing cost of getting a new car every three years. It’s loss aversion that makes $1,600 a year in unplanned repairs feel much worse than the fact that you might save $400 a month ($4,800 a year) by not having a car payment.

I paid $4,500 for my Toyota, and had to pay $316.75 in sales tax and registration fees. My biggest expense for the year was for a set of four new tires, $744.84. I did all the work on the car myself, including three oil changes, replacing the rusty radiator, hoses, and thermostat. I changed the fluids, including brake, transmission, power steering, and differential oil. I installed a new air filter, PCV Valve, and wipers, and cleaned the intake twice. In total, I spent $521.23 on maintenance, which was quite low since I did the work myself.

According to Kelly Blue Book, the current value of my vehicle is $4,044, so my estimated depreciation for the year was $456. Including depreciation, my cost for the year was $2038, which works out to 18.4 cents per mile (not including fuel). My insurance cost was much lower with this car; I kept the same high level of liability coverage as my other vehicles, but dropped collision. The annual insurance premium was $510.40, less than half the cost of our other vehicles.

What are the takeaways from this experience? A couple of thoughts:

  • A well-maintained vehicle can certainly last 150,000 miles or more. Your best choice is always to keep your current vehicle for as long as possible and remember that even if you spend a couple of thousand on repairs per year, that is a small amount compared to the costs of depreciation associated with the first 5 years of a new cars’ life.
  • Buying a used car is always going to be a bit of a gamble. Do your homework and choose a vehicle known for its dependability and ease of repair. Keep up with routine maintenance, using the manufacturer’s recommended schedule. Get to know a trustworthy independent mechanic.
  • I know that keeping a car for 10 years is a great idea, but for me, I just get bored with a vehicle after a couple of years and want something different. Knowing this preference, I can buy a used car every couple of years and not have the staggering depreciation costs of new vehicles.
  • It’s okay to spend money on cars, but if you think that retirement, paying down debt, saving for college, or growing your net worth are more important, than you need to make sure to prioritize those goals ahead of new cars. Every financial planner has met lots of people who have a new Mercedes but who “can’t afford” to contribute $5,000 a year into an IRA. Make sure your spending reflects your values and goals, and is not based on what you want others to think.

Don’t Budget; Focus on Saving

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I used to feel a bit sheepish when clients asked about my personal household budget, because I don’t have one and never have. I always worried that I was being lazy and a poor role model for my clients. I’d see articles, books, or CFP materials touting the benefits of having a budget to be able to track your spending. Some said that without a budget, you would not be able to plan how to achieve your financial goals.

Eventually, I came to recognize that you don’t need to have a budget to accomplish financial goals and that creating a budget would be a waste of time. It’s true, I don’t know how much I spend on dog food, and I don’t have a set amount that I plan to spend on clothing, eating out at restaurants, or for car maintenance. Over the years, I’ve found that many successful investors skip making a budget and that it is not the prerequisite that many people would have you believe.

If you follow these three steps, you won’t need a budget, either:

  1. Put your saving on autopilot. Figure out how much you need to save to accomplish your goals. Set up your contributions to your 401(k), IRAs, and other accounts. If you are saving your target amount (or more), don’t worry about spending the rest of your income. I think of this as reverse budgeting. Save first, and then whatever is leftover is yours to spend.
  2. Don’t ever deplete your cash. While I don’t have a set monthly budget, I am aware of our spending and follow our credit card transactions weekly. We pay our credit cards every month and never carry a balance. In months when there are large expenses, we can always reduce discretionary spending or postpone other purchases. We keep an emergency fund, but after 17 years of marriage, we’ve never touched it. We won’t make a purchase if it requires dipping into the investment portfolio; we will have to build up cash in checking before making a large purchase, such as a vehicle.
  3. Live frugally. Luckily, I don’t enjoy shopping, so I am not often tempted to buy new things. When I do want to make a purchase, it is never an impulse buy. I’ll do my homework, research online, and make sure we are getting a good deal. For me, the knowledge of how $50,000 could grow over the rest of my life is much more attractive than a $50,000 boat. So, I’m not sure I’ll ever be willing to sink huge amounts of money into depreciating assets.

I know that for some people, spending is like a gas that will expand to fill whatever space you allow it to have. For these folks, creating a budget is helpful so they actually know where their money is going. Many people have benefited from having a budget, and if it has benefited you, that’s wonderful. I am all about empowering people to take control of their finances and make informed changes for a better life. My point is not that no one should have a budget, just that not everyone needs to have a budget if you are meeting your savings goals without one.

Not sure how much you need to save to reach your financial goals? Check out the Savings Goal Calculator on Bankrate.com. Enter your current portfolio value as the “first deposit” and your ending goal under “How much do you want to save?”. Want a more sophisticated analysis to consider market fluctuations? Contact me for a consultation; we have terrific goal-based financial planning tools!

Five Ways to Be Richer in One Year

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When I tell people I’m a financial planner, I often get a response like “I wish I needed that service”. I know a lot of people live from paycheck to paycheck, including people who have graduate degrees and good jobs. It’s tough to have a conversation about something as far away as retirement when someone is worried about how they’re going to pay their bills two months from now.

No matter where you are today, it is not a hopeless situation; anyone can change their position for the better. It requires a plan, the willingness to make a couple of changes, and the determination to stick with it. If you’d like to be richer in one year from now, here’s how to get started.

1) Get organized. Do you know how much you owe on credit cards or what the interest rate is? How much money do you need each month to cover your bills? How much should be left over to save or invest? Establish a filing system, or use a tool like Mint.com or Quicken so you know how much you are spending and where. Like a lot of things in life, preparation is half the battle when it comes to personal finance. It can feel a bit daunting at first to take an in depth look at your finances, but ultimately it’s empowering because you will discover for yourself what you need to do.

2) Start tracking your net worth. There are two parts of your net worth: your assets (home, savings, investments, 401(k), etc) and your liabilities (mortgage, credit cards, other debt). Your assets minus your liabilities equals your net worth. If you take 30-45 minutes to calculate your net worth every month, it will change how you think. Just like starting a food journal or an exercise diary, tracking your net worth will make you mindful of your behavior. When you create a higher level of self-awareness of your actions, you will automatically start to change your habits for the better. And of course, if you don’t track it, how will you know if you are richer in one year?

3) Plan your spending. Most of us have a fixed salary where our ability to save depends on spending less than we make. People assume that if they made more money, it would be easy to save more. Unfortunately, what I have actually found as a financial advisor is that families who make $100,000 are just as likely to be broke as families who make $75,000. They may have a bigger house or a fancier car, but they’re no richer. If we want to save more, we have to learn to spend less.

The key to spending less is to find a system or process that works for you. For some people, creating a detailed and strict budget is key. For others, it may work best to become a cash consumer, where you leave the credit cards at home and only spend a set amount of cash each week. It can be helpful to comparison shop all your recurring bills and look to switch providers to save money. (For example, home/auto insurance, cell phones, gym membership, electric provider, etc.) Lastly, people are saving money by dropping their landlines, or dropping cable for Netflix.

4) Put your saving on autopilot. Money that you don’t see can’t be spent. You’re more likely to be a successful saver when you establish automatic contributions, versus waiting until the end of the year and hoping that something will be left over to invest. If your company offers a 401(k) match, that’s always your best place to start. If a 401(k) is not available, consider a Roth or Traditional IRA. If you don’t have an emergency fund, set up a savings account separate from your checking account, so you can’t easily access those funds. Even if you can only save $100 or $200 a month for now, that’s okay, because you’re creating a valuable habit. When you get a raise or receive a bonus, try to increase your automatic contributions by the amount of your raise.

5) Don’t go it alone. People are more successful when they have help, good advice, and accountability from another person. That may mean hiring a Certified Financial Planner, joining a Dave Ramsey Financial Peace class at a local church, or finding a knowledgeable friend who can lend an ear. If you’re looking for help with debt and improving your credit, contact the National Foundation for Credit Counseling at www.nfcc.org or by phone at 800-388-2227.

If you make these five changes today, you will be richer a year from now. Habits are important. For most people, wealth isn’t accumulated suddenly or through significant events, but by years of getting the small decisions right. Build a strong financial foundation, then you will find that a financial advisor can help you take the next steps to creating the financial life of your dreams.

The Best Way to Get in Shape

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In December, after years of good intentions and a couple of false starts, I finally joined a gym and hired a personal trainer. I meet with my trainer once a week and workout two or three times separately. Previously, I thought I could just get in shape on my own, but it was always too easy to find an excuse why today wasn’t a good day to exercise. And then days become weeks, you find other demands more pressing, and you just never get around to it.

Working with my trainer, Clint, has been great. I’m getting in shape and feel very confident that I’m now on the right path. Looking back, my only thought is that I wish I had gotten started much sooner with this process. Why are people more successful with a personal trainer than on their own? Here’s what a coach has to offer:

1) Knowledge. Clint has spent thousands of hours in education and his certifications demonstrate commitment to being qualified and skilled to help others. As for me, I have neither the time nor the interest to learn this information. Since you don’t know what you don’t know, it’s smart to seek out expert, objective advice.

2) Experience. Clint has worked with many clients and knows what works. While everyone’s individual situation is slightly different, a professional trainer has probably seen a lot of clients who have similar needs to mine.

3) A written plan. We started with a physical assessment to document my starting point, and after discussing my goals and commitment, developed a plan unique for me. Now I know what I need to do on a daily basis in order to reach my long-term goals.

4) The right tools. My trainer selects the most appropriate equipment for me to use and makes sure I use them correctly for maximum benefit and to avoid injury. When you combine discipline and consistency with doing the right things, good results happen.

5) Motivation. We have a workout schedule which has become a habit and routine. It’s rewarding to see our plan working, and when there are occasional set-backs, it’s helpful to have Clint’s patience, support, and encouragement to get back on track.

While I certainly suggest others take good care of their health and bodies, here’s what I want people to recognize: just as using a personal trainer is the best way to get in shape physically, using a financial planner is the best way to get in shape financially. What we offer is very similar. As a CFP(R) practitioner, I help individuals accomplish their financial goals, bringing professional knowledge, years of experience, a written plan, the right tools, and ongoing motivation.

Can you get in shape on your own? Of course it’s possible, but you’re more likely to be successful with professional guidance. You can be sure that athletes and actors always have a personal trainer or a team of trainers. Likewise, many of the most financially successful individuals I’ve met, including multi-millionaire entrepreneurs, board members of Fortune 500 companies, and Harvard-trained surgeons all use a financial advisor. It’s not a question of whether or not they’re not smart enough to do it on their own, it’s that they recognize the value in hiring an expert and the benefit that relationship can bring to their financial well-being.

If you are like I was, having good intentions, but procrastinating getting going, it’s time to give me a call. We will put together a financial plan you can understand and I’ll be there in the months and years ahead to help you stay on track with accomplishing your goals. If you’re waiting for tomorrow, don’t. Aside from yesterday, today is the best day to get started.

Setting Your Financial Goals

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No achievement occurs by accident. It takes intention, planning, hard work, and perseverance to accomplish a significant task. For this reason, I have always been a big believer in setting goals in writing. For something to be a “goal”, it needs to be concrete and not merely a vague desire. Your chance of achieving a goal is dramatically improved when it is SMART: Specific, Measurable, Attainable, Realistic, and Timely. This simple, perhaps corny, acronym has guided many for decades because it works.

When a goal meets the SMART criteria, you can lay out a blueprint of steps you will take to accomplish your goal. We can break these steps down further into long-term, intermediate, and short-term goals. If your long-term goal is to graduate from college with a certain major, that will require a series of required and elective courses and credit hours you must complete. That is a four-year goal. The intermediate goal might be to pass specific courses this semester. You have to pass Econ 101 before you can take Econ 102. The short-term goal is to do the reading and homework that is assigned for this week. If you don’t do the short-term work, you cannot pass the course this semester, or graduate in four years. Your short-term goals feed into your intermediate goals and into your long-term goals.

This concept is so basic and universal, that it seems almost unnecessary to even need to mention this. Unfortunately, when it comes to finances, many people don’t apply this same thinking and planning process that has enabled them to succeed in other areas of life. They don’t set SMART goals, nor do they work on short-term objectives which will enable them to achieve their long-term goals.

Instead, they hope that the finances will magically take care of themselves. Or that they don’t need to worry about it now, because it will be easier later. Or fatalistically, that the game is rigged and that they shouldn’t even bother trying.

The desire should be to become wealthy. Unfortunately, this statement carries a social stigma for many of us. It’s not something we’d want to say in public, put on our resume, or post as our Facebook status. We are taught to be humble, eschew materialism, and reject greed, as we should. We have heard that the love of money is the root of all evil. We may sub-consciously believe that people who have money have gotten it by exploiting others, cheating, or deceit.

Unfortunately, these beliefs are ultimately self-limiting. They create an excuse for not setting financial goals and keep smart people poor. Chances are that you simply have not looked at finances as an area where you have as much control as other areas of your life. Many people spend more time planning their next vacation than they do planning their financial goals. Granted, a vacation is more fun than organizing your finances, but financial planning has to start with you. No one else can make you do it.

You need to sincerely have the desire to become wealthy. Without that strong drive, you will not be successful. It is like training for a marathon – you don’t just wake up one day and go run a marathon. It takes planning, training, perseverance, and dedication. If you cannot imagine yourself as deserving to be “wealthy”, you may find that another term may be more meaningful for you and resonates with you personally. Consider: financial independence, security, or abundance. As in “my desire is to create a life of abundance for my family”. Let’s avoid framing a goal in negative-terms, what it is not, but you could also say that the goal of financial independence is to eliminate stress and fear of running out of money. Whatever terminology or mantra fits best for you, it is essential that you adopt this desire earnestly.

I view money like water – it is the most abundant resource on the planet, available to us in vast and limitless quantities. The world is literally awash in money. However, it is also true that many of us live in a desert where water is scarce and hard to come by. We can bemoan this fact, but that will not get us any closer to the water. Even worse, we may have decided to live in the desert, but then claim that we have no choice. We think that because there is no water here, that there is no water anywhere, which is false. We may give up, since there is no water here. Or, we may stubbornly keep digging a deeper well, even though our efforts are getting us nowhere.

We have to empower ourselves to recognize that there is no one holding us back from finding water. We should stop blaming ourselves if we do not find water where it isn’t located. But we do have to move on, and accept that we will go to where the water is. Some people seem to be natural at finding water, and once they have that skill, they don’t ever have to fear being thirsty again. They have created a well that provides them abundantly. Even if they lost all the water they have now, they could go out and find more. It is there for the taking.

Many people fail to realize that they are in a desert and think that those who have an abundance of water are smarter, harder-working, lucky, or just born with it. And while that may sometimes be true, I can tell you that many, many people who lead a life of abundance are not better educated or any of these things. They simply have taken a step back and made deliberate choices to be where the water is located. They believe that they do deserve abundance and will take the steps to earn all that they can.

A desire for wealth will not take you very far by itself. For this to become a goal that you can use to take actionable steps, it must be more concrete. A SMART goal gives you the road map and lays out your short-term, intermediate, and long-term goals.

When I started Good Life Wealth Management, a few advisors told me to set high account minimums and only accept clients who had $500,000, $1 million, or more. I understand their business rationale, but previously working at a firm where a $1 million account was considered a nuisance, I missed the thrill of helping investors set goals and chart their own road map.

If you’ve been waiting to get started, afraid to find out how much you should be doing, don’t delay further. Let’s get started on your goals today.

5 Techniques for Goal Achievement

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Goal Setting is a key step to the financial planning process, and helping clients achieve goals is the value I provide.  Everyone would like to be wealthy, but that is not a goal.  To me, it only becomes a goal when we can state a clear, tangible objective.  So, if you’d like to retire, we’d calculate how to make that happen and develop a specific goal like “accumulate $2.1 million dollars by 2026.”  That long-term goal gives us a timeline and dictates what we need to do each year and month to make your goal a reality.  We can observe if you are on track and make adjustments as needed in the years ahead.  The key step though is translating an ambiguous desire into a goal which is measurable.

Below are 5 Techniques For Goal Achievement, starting with high-level and moving to detail-oriented.  The key is finding not the tool which you like the most, but the tool which helps you address the area where you are most likely to fall down or become distracted or disillusioned with your goal.  If you need motivation and confidence, focus on the the high-level tools; if you need help with implementing goals, focus on the daily tools.  And while I’m writing about financial goals specifically, these concepts could be applied to any goal you want to achieve.

1) Visualize your goal with a daily reminder and affirmation.

For the retirement goal above, write a check to yourself for $2.1 million, with a date of January 1, 2026.  Put the check someplace you will see it everyday.  Over time, our goals will naturally start to shape our behavior.  Daily repetition helps internalize the goal and we come to see it as inevitable, rejecting any fear or self-doubt.

2) Chart your goal road map.

Why do you need a road map?  Imagine you wanted to drive from Dallas to New York.  You could just start driving and figure you’ll get there eventually through trial and error.  But most people prefer to know where they are going and to choose the most direct route.  This makes perfect sense for a long drive, but most people haven’t taken the same step of putting together a plan of how to accomplish other long-term goals relating to their finances, career, or health. Sometimes our destination is not on the road we are on today and we have to know when it’s time to change direction.  This is the difference between hoping we accomplish our goals versus knowing what we need to do today and tomorrow to get to a destination that may be years away.

3) Keep a daily goal journal.

Often times, to reach our goals, it requires that we upgrade our daily habits.  This can apply to financial behavior, but also to improving your diet, exercise, or your performance at work.  Making a change is challenging because our habits become ingrained and second nature to us.  It’s helpful to be able to see ourselves and our behavior from an objective, outside point of view.  The best way I’ve found to increase our self-awareness is through keeping a daily journal.  The journal becomes a mirror to see ourselves better.  Write down what you do each day relating to your goal, your progress or set-backs, and how you felt about the day’s activity.  This focuses your attention on today which is the only day that you can really control.  A journal motivates you to do what you need to do and feel good about your progress.  Sometimes, simply knowing that you have to write down your day’s activities will keep you on track and prevent you from old behaviors which you want to change.

4) Focus on accomplishing the essential with the 90% rule.

Imagine a pyramid of goals, with long-term at the top, supported by intermediate goals, and short-term goals at the base.  Start each day with a short to-do list of what is essential to complete today to advance your goals.  It’s easy to get bogged down in putting out fires and responding to issues, rather than following your own agenda. For a perfectionist, it’s difficult to leave a task, email, or project, until it is 100% complete to the best of your abilities.  The reality is that there is not enough time to be a perfectionist about everything and it is a better use of time to focus on touching everything that is on your essential to-do list.  The 90% rule is asking yourself if each task truly requires 100% perfection or if it just needs a 90% summary.  Do you really need to write a 10-page essay with footnotes, or will a 2-page overview accomplish the desired outcome?  It may take 2 hours for a “100% job”, but only 45 minutes for a “90% job”.  Some tasks do require 100%, but recognizing the difference allows you to spend more time on the essentials that will get you closer to accomplishing goals.

5) Stop procrastinating by using a timer.

Oftentimes, a task seems so monumental that we don’t even know where to begin.  Or it’s something we don’t enjoy doing, so we put it off for as long as possible.  We become so concerned about how long it will take to finish that we never even begin.  Take the pressure off yourself!  Instead of worrying about finishing the task, just pick an amount of time you can spend right now: 15 minutes, 30 minutes, whatever. Set a timer and let yourself to focus exclusively on that one item, with no checking email or other interruptions, until the timer rings.  You can do anything for 15 minutes.  You’ll surprise yourself how often you can complete a dreaded task in 15 minutes, or get 90% of it done.  This tool takes advantage of the fact that we have a limited amount of concentration (often only 15-30 minutes) on any subject. Our use of electronic media today can often hinder our focus. Consider setting specific times each day to check email, Facebook, etc., to avoid having your schedule hijacked by distractions.