Show Me the Money

39

Show Me the Money

A

t the beginning of each day, it’s all about possibilities. At the end of the day, it’s all about results. And everything in between will help or hinder your journey to greater wealth.

Completing and analyzing the following are essential:

1. Your short-term financial plans.

2. Your long-term objectives and financial goals.

3. Your current income and expenses.

4. Your total net worth.

The worksheets in the Appendix will help you compile this information.

According to Chinese tradition, the world contains cosmic energy, known as ch’i.

Ch’i needs to flow smoothly and freely in order to create harmony. Harmonizing your financial surroundings is easy and produces personal power. Use the checklist “Do You Know Where These Documents Are?” in the Appendix to organize your financial history.

Fuel the Right Plan

A young boy confided to his grandfather that he often felt like there were two dogs inside him. One dog was fierce and mean, hated people, was hard to control, and barked all the time. The other dog was kind and obedient, a joy to have around. His grandfather asked, “Which dog do you think will win the struggle?” The boy replied, “It depends on which one I feed.”

G

ET

R

ICH

S

LOW

40

Developing a financial plan involves shutting off the TV and, if you are married, holding a family council. If they will work with you, include your children as part of your team.

Step 1: Establish Your Goals

Start with the “Current Status Financial Goals and Objectives” worksheet in the Ap- pendix. Decide what you need versus what you want. List all your specific objectives under each of the major categories: retirement, estate, education, income, and other.

What are your family’s most important short-term and long-term goals? Short-term goals have a time span of three years or less. They may include establishing an emergency fund, reducing consumer debt, purchasing a new car, taking a summer vacation, or pay- ing college tuition. Long-term goals, more than three years away, may include savings for retirement, starting a college fund, beginning a small business, or purchasing a first or next home. Where the money should be invested depends on the length of time until the money is needed, not on the nature of the goal itself. For example, the biggest mistake new retirees can make is to try to protect their investment principal at the expense of long- term growth. They may invest in fixed-income investments because they believe these are safer. But they really need growth so that their money will last during their long and expensive retirement years.

Short-term money for goals less than three years away should protect the investment principal, while long-term goals should protect the purchasing power. As you will see later, the investments suitable for each time period are vastly different.

For singles, a single parent, or sole family breadwinner, careful planning becomes even more vital. Make your goals more specific than “keeping your head above water,”

“staying ahead of the tax man,” or “becoming filthy rich.”

Step 2: I Owe, I Owe, So Off to Work I Go

Consumers often ask me what spending limits are reasonable. Is “reasonable” getting dressed in clothes that you buy for work, driving through traffic five days a week in a car that you are still paying for in order to get to the job that you need, maybe hate, so you can pay for the clothes, the car, and the house that you leave empty all week long in order to afford to live in it?

Many folks wish they could simplify their lives. There is a definite relationship be- tween money and a simpler life. If you don’t want to work so hard, don’t spend so much money.

Multiply your annual take-home pay by the number of years you have been working.

Then look at what you have been able to keep. Are you working for a living or for a life?

Whom are you making rich? Maybe everyone else in town.

04 GRS Chap 04.pmd 40 1/16/2004, 3:51 PM

The next step is to create a cash flow statement, which will show you where your money is going. Use the “Monthly Budget and Expense Sheet” in the Appendix.

Creating a written budget may be time-consuming, boring, even depressing, but it is also necessary!

Look at the “Monthly Budget and Expense Sheet.” At the top is a line for net take- home pay. This figure should reflect your monthly income based on a regular work week, not including overtime unless you know you can depend on the extra funds month after month. Gather your current pay stub, prior year’s tax return, or employee earnings state- ment, and use average figures from a normal work week.

If you are paid weekly, multiply your take-home paycheck by the number 52, then divide by the number 12. If you are paid every two weeks, multiply the net take-home by 26, then divide by 12. Both methods will give you your monthly income.

Do not use your gross income figure in these calculations—gross is not what you have to manage; gross is merely what your employer promised when you interviewed for your job. You don’t see gross in your paycheck. You don’t manage gross. You manage net.

Next, go through each expense category and write down what you spend per month—

as realistically as possible. Utilities may vary each month. Average the bills including the highest months, typically winter or summer depending on where you live. By pretending you are spending the same amount per month on certain items, you can pay current bills that may be smaller and have the extra money ready in your checking account when you need to write a bigger check later.

Items such as clothing, entertainment, car maintenance, and house maintenance are harder to predict. When in doubt, estimate higher. A newer car, like a newer home, generally requires less upkeep than an older one. But tires, oil changes, and other inci- dentals add up each year. Older vehicles also need water pumps, temperature gauges, and radiators.

Include a separate category for Christmas, other gift-giving events, and vacations and add them to your budget. That way, you won’t overspend at one time, then take nine months to pay off credit card charges from the previous year.

Though Christmas clubs usually pay an abysmal interest rate, I often recommend them if it is otherwise impossible to save ahead. If all else fails, use the envelope system to “stash the cash” for such special events.

Total all monthly expenses and put that amount at the top of the page after “Monthly Expenses.”

Subtract your net expenses from your monthly income. Hopefully, there is more money coming in than going out. I call that “fritter” money. “Fritter” money is unconsciously spent and depletes a great portion of your wealth over time. But you can redirect that amount toward a financial goal and make it a budget item. This is your wealth-building

G

ET

R

ICH

S

LOW

42

money for savings, college, retirement, your own business, or other future goals. This is one bill you pay to yourself each and every month.

This payment to yourself can create your emergency fund, start a college fund, or add to retirement goals. It is not as important what vehicle (bank savings, credit union, or money market mutual fund account) is utilized, as long as the money is protected from loss and you can get it out at a moment’s notice. Just put something away each and every month. As your income increases pay more to your monthly savings or investing plan than to your spending plan.

Occasionally, the difference between what comes in and what goes out is a negative number—you are spending more than you make, month-in, month-out. You are “out of financial order.” This requires immediate attention and extra effort to reduce expenses as quickly as possible. More borrowing, such as a consolidation loan is not the answer.

That’s why you already have a debt “overload.” Chapter 6 will teach you how to reduce credit card debt and increase your savings at the same time.

Plan only with dependable current income. Do not depend on future raises or bo- nuses. Stay within your budget allowance for each expense category. If possible, try to save 10 percent of net income. The ideal mortgage or rent payment (including property taxes and homeowner’s insurance) should cost no more than 22 percent of take-home pay. Consumer debt (including car payments and credit card charges) should stay under 18 percent. Disposable income expenses (food, clothing, utilities, and other costs to keep body and soul together) will likely require 50 percent or more of your income, maybe more if you are raising and educating children at the same time.

Once the cash flow statement has been completed, star any budget category that can be reduced. Insurance premiums—auto, homeowner’s, health, and life—can often be reduced by raising deductibles or getting rid of an older car that’s not really needed. Some expenses are fixed (mortgage or rent payments, utilities, gasoline, and food), while other areas can be reduced (telephone, clothing, vacations, dining out, entertainment, gifts, and miscellaneous) if every family member cooperates.

Step 3: Develop A Budget That Pays You, Too

What is the first bill you pay each month? If you answered the mortgage or rent, think again. The first bill you pay is to Uncle Sam, who takes your money and redistributes it to others. You can move yourself to the number-one spot if you establish an Individual Retirement Accounts (IRA), a 401(k) plan at work, or a retirement SEP, SIMPLE, profit- sharing, or other type of pension plan.

Most folks pay bills in the following order: the mortgage or rent is usually paid first.

Then utility bills, car payments, and food are paid for. Finally, there is a scramble to cover the monthly minimums on credit cards, time payments, and miscellaneous expenses.

04 GRS Chap 04.pmd 42 1/16/2004, 3:51 PM

Let’s try a different approach to budgeting. Make the first bill you pay a bill to your- self. Even if you can’t save 10 percent of your net income—the amount I recommend as a target—save something. If your emergency fund is low, make that your first bill and build it up before directing funds to long-term investing goals. Every household needs a rainy day fund.

The second bill becomes the mortgage or rent. Then, as you prioritize them, all other necessary expenses will be paid. What you have done by paying yourself first is to re- cover the fritter money that became wasteful spending. Now it works for you.

Paying yourself first is the most underrated way to accumulate wealth over time and is a powerful wealth-building habit.

Step 4: Identify Your Net Worth

Finally, list your assets: short-term and long-term savings, bank Certificates of De- posit (CDs), U.S. savings bonds, stocks, bonds, mutual funds, brokerage accounts, em- ployee retirement plans, other types of securities, real estate, and insurance policies. Use the “What Are You Worth?” worksheet in the Appendix.

Step 5: Commit to Your Plan

It is vital to think out and discuss paying for major expenses. Put your budget up on the refrigerator as a commitment to your wealthy future. It will be a daily reminder of the promises your family has made.

Review your plan at least once a month. Hold an occasional family meeting to praise those who have made an effort to keep the budget in check and to find weak spots on which to improve. Make each member of the family responsible for some part of the plan’s success. If your teenager, for example, has reduced the number of telephone calls to a long-distance friend, recognize her sacrifice and offer praise.

Make up your mind to stick to the plan. Improve it over time. If temporary emergen- cies occur that make the plan impossible to stick to, start budgeting again as soon as possible. (Emergencies do not include getting your hair colored so you can be seen again in public or buying new golf clubs because you are entertaining your boss on the links.)

And next time you see Harry over the backyard fence, drool over his leased BMW and his doubly mortgaged home, wave enthusiastically as he heads out to the mall for another weekend with his friends, Visa, MasterCard, and Amex, and remember how you are building wealth for your future. Harry is compromising his financial future for yours.

What a guy! Spenders sacrifice their financial futures for investors who benefit from the wealth-building forces of capitalism.

You may not be able to control your health, your children, or your job, but you can control the outcome of a successful saving, spending, and investing plan.

G

ET

R

ICH

S

LOW

44

Now They’re Calling It Reengineering

What’s a seven-letter word for merger? The answer is layoffs. With more companies restructuring, rightsizing, and downsizing, no worker is immune to layoffs, job elimina- tion, or even early retirement pressures. How well you survive receiving a pink slip de- pends on how well you plan for your future. Follow the following steps to stay fiscally fit, no matter what your company does.

1. Expect the unexpected. Don’t wait for a warning from your boss to get your financial house in order. Companies often want employees to remain as long as possible before termination notices go out in order to maintain continuity and profitability.

2. Protect your home. Avoid home equity lines of credit with demand clauses, borrowing against your 401(k), or refinancing a larger cash-out mortgage.

If you lose your job and can’t make the monthly payments, you could lose your home.

3. Prepare for retirement as if your last day of work is tomorrow. A lean retirement purse is more easily cured than endured.

4. Build a “sock” fund. Keep a generous emergency fund to pay the bills if you have to look for a new job. You don’t want to depend on taxable distri- butions from your pension, 401(k), IRA, or other long-term investments.

Stash this cash in guaranteed accounts.

5. Dust off your resume now. Draft a current resume and beef up your skills while you are still employed. Your company might even be willing to pro- vide free continuing education in your field.

6. Keep your eyes on your employer. Most downsized workers could have seen their demise beforehand. Watch for changes in your job description, serious health problems for you or for a family member, budget-cutting trends in your salary range or department, shrinking department size, train- ing of new (and cheaper) personnel, outsourcing production lines or support services, loss of company contracts, and merger rumors. All may be signs of lean times ahead for both your company and you.

7. Become a lean financial machine immediately. Defer large purchases unless you can afford them—even if your job disappears.

8. Know your employee rights. Request an employee benefit handbook to- day. You may be able to negotiate a better severance package.

Bankruptcy: A 10-Year Shadow

When debts seem overwhelming, bankruptcy may look like the fastest—or only—

way out. But the process, the toll on your self-esteem, and the financial aftermath aren’t as painless as you may believe.

04 GRS Chap 04.pmd 44 1/16/2004, 3:51 PM

Job application discrimination, family conflicts, and the loss of future credit are byproducts of declaring bankruptcy. A lawyer can maneuver the legal process for $500 to

$1,000, but you may pay dearly in hidden costs not explained beforehand.

If IRS taxes are your major financial problem, a tax repayment plan usually can be arranged.

If debt is becoming too heavy to handle, stop spending at once. Get to a nonprofit consumer debt counseling service and assess your options. Cut up your credit cards or

“put them on ice.” Then, write to your credit card companies requesting a cancellation of future charge privileges and to discuss a payback plan.

Make sure you request from your legal advisor a balanced presentation regarding the pros and cons of bankruptcy—before starting the process. There may be options for re- payment that you have not considered. Because you are walking away from a debt you voluntarily incurred and leaving your creditors in the dust, the stigma of bankruptcy en- tirely never goes away.

Bankruptcy is a very serious issue. Get as much information and professional guid- ance as you can before using this debtor option.

How to Profit From a Recession

1. Stash the cash. Keep the balance in your rainy-day emergency fund high.

Don’t worry about low rates of return. The bigger your financial backup, the more power you will have to choose a new job if you get a pink slip. Put long-term objectives on hold (such as buying a new home or funding a re- tirement plan) until you have enough savings for three to six months’ regu- lar expenses.

2. Protect your budget. Don’t go window-shopping. You will be tempted to buy. Instead, use it up, wear it out, or do without for a while. Defer all large purchases until next year. Buy what you need, not what you want. Learn to live beneath your financial means.

3. Protect your home. Don’t upgrade your residence now. Stay where you are—unless you bought too big of a house, cannot afford it, and need to sell quickly. Buy new-to-you durables (used) instead of brand new. This in- cludes cars, computers, and even clothing. Haggle for lower prices and, if you believe the cost is still too high, walk away, asking the store manager or owner to call you when the price goes down. Wait as long as you can before purchasing expensive items.

4. Keep your credit card under control. Make a list and check it twice be- fore parting with your money. Losing a job is stressful enough without wor- rying about how to make mortgage and car payments and feed your family.

Prepare for such an emergency and unexpected setback.

G

ET

R

ICH

S

LOW

46

5. Prepare for retirement as if it were here today. During bad economic times, many older employees are forced to retire because they cannot find new work. Use every method now to bolster your emergency funds or to fund long-term financial objectives. You can divert the funds either to cash or to your long-term investments as your needs dictate.

6. Don’t envy the neighbors. The bigger the house, the bigger the monthly mortgage payment. The newer the cars, the more likely they are leased or charged for many years. No worker is immune to termination in a bad economy. The more they owe, the harder they may fall. A full cabin is better than an empty castle.

04 GRS Chap 04.pmd 46 1/16/2004, 3:51 PM