Mari: So many workshops and books on financial planning seem to focus on very general advice – reduce debt and spending, increase savings etc. It’s hard to gain momentum with the very fist steps seem so big. What are some things people can do right now, say in the next 15 minutes to an hour, to improve their financial situation?
Mike: The very first thing you need to do before anything else is to decide what you want out of this. What do you want to accomplish? Do you want to early? Do you want to travel? Deciding that will help you make a successful plan. Don’t make the list more than three items – stay focused.
There is tremendous power in writing it down. Having it in writing means you’re committing to it. You’re responsible for it. Now it can look back at you and ask, “What are you doing to accomplish this?” Keep it in sight and make it really alive to you.
Second, find someone to talk to. Either find a professional advisor of some sort or a trustworthy confidante – but someone who has no emotional stake in your financial situation. You want to talk to someone who can be neutral and objective – someone safe to share your financial information with. Most people are really hesitant to talk to a professional and they really shouldn’t be. If the first advisor you speak with doesn’t make you feel well informed and well armed to make decisions, keep looking until you find one that does. Find someone who really listens to you.
Third, pay attention to where your money is going. Many people don’t really look at where all of their money is going. They pay attention to the utility bills, the cable bill, the phone bill – but where they really need to look is at the lifestyle choices. How many times do you eat out a month? How often do you go to the movies? That sort of thing. These aren’t required bills – these are choices. They key is to pay attention to the things you choose. If you need to eat out do to schedules or something, that’s fine – just make those choices consciously.
Fourth, make a plan. This is part of being an adult about finances. The way you live is a choice. This is the perfect time to down with a professional and make a plan. The most automatic plans are the most successful.
One important note during the planning process – don’t spend a lot of time beating yourself up about bad financial decisions you’ve made in the past. You spent the money you saved on something else – that’s okay. We save me to, at some point, spend it on something. Start [making better money decisions] now. There is always time to do something. You’re far more powerful than you think you are. Even the month before you retire, there are things you can do to get in better financial shape. That’s why you find a professional who’s gone through the process over and over. You’ll retire once (probably) – your financial advisor has retired (others) dozens even hundreds of times.
And remember, we’re all completely free to do whatever we want to do. What we are not free to choose are the consequences. Don’t lose site of what consequences your choices today will bring you down the road.
Mari: Now, what can you tell me about dealing with debt? Other than the obvious -reduce credit card spending etc.
Never take anything at face value. Educate yourself on the terms of all of your debts.
Negotiate everywhere you can. Call your lenders and ask them for a better rate – but act in good faith. You have to have built up some credibility to ask for them to reduce interest rates etc. Pay on time every time.
Learn to live on cash. Stop adding to the cards and break the habit of living on credit.
Buy used, especially big ticket items that instantly loose value.
Live within your means. For example, don’t buy the bigger house just because your real estate agent says you can.
A little bit of background on our psychology of investing. Most people investing today have only experience success in the market. We’re on the longest bull run in history – over 25 years. The dot.com bust was only 2 years. There have been, twice in our country’s past, periods of time (somewhere between 1932 and 1964) where the markets fluctuated but overall didn’t gain. We’re all kind of fooled by this constant increase. We don’t always get the concept of investing for a lifetime. We have a very spoiled mentality in a way. We always figure that when it comes to saving we can always make it up, instead of acting consistently.
Say you, at 20 years old, saved $3000 a year for five years (which works out to be $250 a month to end at $15000) and then stopped – put no more money in at all and just left it making about 10% (the S&P 500 has been around 11% for example), for forty years. You would have $1.6 million dollars at 65. The same principle that’s making your debt go up, can make your savings go up as well.
Basically, the key is sacrifice a little now to be more secure later. Our grandparents are reaping the rewards of consistent saving, and so can we. Their children, the baby-boomers, have done sort of a hodgepodge of different financial strategies. Generally, they’ve saved a bit, though not as much as their parents usually, and they tend not have been as consistent. Now, those people in their 20’s – 40’s has been even more inconsistent and add to that more debt. They also tend to be much more skeptical of the financial advice they get. The key to financial success [in that situation] is small, consistent actions.
Most financial advisors will advise a broad, diversified portfolio that’s market based. This advice is based on the market continually going up as it has been. Well, this is the market being up. There are more options than just the market-based products for investors who want something with a guaranteed return. Still, the point is to do something. It’s the habit that counts more than the dollar amount.
It’s also a smart idea to have good tax advice – the new tax laws have changed things considerably and if you don’t understand the impact, it can cost you money and power. Make sure any advisor you get (tax or financial) informs and empowers you. You want to be empowered with information not just told information.
Mari: Thank you so much for your time, Mike.