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Archive for November, 2015

Getting Out of Debt, Part II

November 17th, 2015 at 10:45 pm

Ok, lets do the most important thing first. Figuring out how you're going to reward yourself as you proceed! That's part of the taking the grind out of it, that you have a little reward for yourself at each step. So think about something special that *doesn't* cost much money. That would defeat the whole purpose. For me, it would be a brownie. For you it might be skipping the gym for 2 days. Or binge watching 3 hours of Gilligan's Island. We're talking guilty pleasures here. I'm not worried about your diet, one self help process at a time. Pick something you would really look forward to, and really indulge as you go. It's another way to make this a little fun.

There are two ways to get out of debt. More income, or less spending. But more income has taxes and expenses associated with it. If you increase your pay by $100 a month, you'll have taxes, social security, medicare, unemployment and disability insurance deductions. So in reality it might only be $60. But the money you save, you've already been taxed on. You can think of it as 1 penny saved is 2 pennies earned. It makes a bigger difference. So we're going to go after expenses first.

What expenses are important? Answer, the ongoing ones. I mean, it's all fine and good to save $25 on your new garbage disposal, but that won't get you out of debt. But saving $25 a month on your cell phone bill? That might. That doesn't mean you shouldn't shop for major expense items. Of course you should. But it's the continuing expenses that will just kill you. They are also the ones that go from luxury to necessity almost overnight.

So here's what to do. Do a rough budget of your ongoing expenses. This is where my caution about knowing yourself comes in. If you won't do it to the penny, don't let that stop you. If all you do is estimate things off the top of your head, that's better than stopping because it's too complicated and too boring. Make a spreadsheet of all your ongoing expenses. For example:

Cable bill
Phone bills
Gym fees
College expenses
Eating out
Storage space
Hair Salon
Magazine and Newspaper subscriptions
Dry cleaning
Etc, etc, etc.

This is of course not an exhaustive list, just some ideas to get you started. And break out each individual item. Insurance should be broken out into car, health, homeowners and life insurance for example.

Ok, now for the challenging (but I think fun) part. Your goal is *not* to eliminate those things. Your goal is to figure out how to get each one for 15% less than you are spending now. 15% is your stretch target. Some of those things will be difficult to reduce much. Some can be dramatically reduced. It requires some creativity and legwork. We're going to go after that 15% goal very hard. Remember we're after the wealth creator, living on 85% of your money. Here are a few examples of the types of things you can do:

Your local library has a ton of DVD's to check out for free. Netflix maybe can go by the wayside for awhile.

Your local sanitation department may give you a discount for using smaller trash barrels.

Cell phones is an easy one. Look into one of the pay as you go plans, which are usually even cheaper than they look. Pay as you go has no extra taxes and fees. You know that a $80 a month Verizon plan actually costs $90 a month. But a $40 pay as you go plan costs $40.

Call your local newspaper and ask for a discount. The LA Times cuts my fee in half just for asking.

Did you know that dry cleaning isn't good for your garments? They wear out faster. Instead, get them pressed if they are not dirty. It costs less and your clothes will last longer.

For your work clothes you of course need to look nice. But for your workout outfit or the kids play clothes? Nice stuff for dirt cheap at the thrift store.

Haircuts? Shop around. Maybe you can do Supercuts every other visit instead of the expensive salon.

College expenses? Two years of community college before the university will cut that bill by 40%.

If you and your SO eat out once a week I'm about to put $300 a year (equivalent to a $500 raise) in your pocket. That ice tea with tax and tip is $3 x 2 or $6 each time x 50 weeks a year. Here is your new drink order "Water with lemon please".

In general a lot of this will be shopping. Shop your health insurance, car insurance, cheapest local gas station.

Be creative. Think outside the box. Keep that stretch target in mind.

Get family members and friends involved. In fact that is a really key thing. Let people know you are doing this. It can help remove some of the awkward problems that come when friends invite you out for drinks or to that expensive new restaurant.

Done all that? Great! Time for a brownie!

Be careful of one trap. Spending a lot of money to save some money. I know people who have sold their old car and bought a new Prius to save on gas. An old car is free. A new Prius is $25,000. If you improved your mileage from 20mpg to 45mpg by doing that, and if you drive 15,000 miles a year, your payback period is about 12 years. Factor in increased insurance, and registration costs plus financing that car, and your payback period is never. If you can"t get a payback from a new expense in say, 6 months, skip it. We're trying to reduce expenses here, not incur new ones that you'll probably have to finance. Always do the math.

I'm going to give you a bunch of links to help with some of this. But I'll do that next week, as this tip is already long enough. Next week we'll look at how to execute the plan. We'll also look at what to do if you're deeply in debt and this still isn't enough.

Getting Out of Debt, Part I

November 11th, 2015 at 10:28 am

Getting Out of Debt - Part I, Preparing
There is a lot of stuff on SavingAdvice.com about dealing with debt. Here is my take on the process. Many people have found this to be useful.

We can't invest until we have money to invest with. And for many, possibly most people, that's a dream because they are drowning in debt. So I'm going to do a 3 part series on how to get out of debt. My intention is not to make this some dreary thing like going on a diet. What I hope I can do is make it as painless as possible, and maybe even a little fun. In fact getting out of debt is easier than a diet. On a diet, as you lose weight it gets harder. But getting out of debt, as you pay off debts you have more money. It gets easier.

To start you need to be completely honest with yourself about yourself. You cannot deal with debt if you start doing what you 'should' do, rather than what works for you. My analogy for this is as follows. You walk into the store to buy a package of light bulbs. One is $3 with a $3 rebate. The other is $2. Which one is cheaper? The 'obvious' answer is the $3 package of light bulbs. But for most people, it's the wrong answer. Why do they offer a deal like that? Because they know that most people will not send in the rebate. For most of us, the $2 package of light bulbs is cheaper. The key is to know yourself. If you will send in the rebate, buy the $3 package. If you won't, don't sweat it about what you 'should' do, and then feel guilty because you don't. You buy the $2 package and call it a day.

So the you need to know yourself and what will work for you. If you decide you are going to eat at home for the next 3 months, and you're happy doing that, fine. But if you'll chafe at it, and then decide to heck with the whole thing and quit, it's not helped you much. So with every change you make you need to ask yourself the honest question "Will I keep it up?". If the answer is no, find another way. If impulse purchases are a problem, maybe you need to take the credit cards out of your wallet, or just don't visit those stores where you will spend. Out of sight, out of mind. Figure out what will work for you. That's the key.

Ok, now I will reveal to you the great financial secret of the ages. The single rule that can take you from being in debt to being wealthy. All wealth flows from this one rule. If I was doing an infomercial I could probably get people to send me $29.95 plus shipping and handling to reveal this secret. Are you ready? It's this. Live on 85% of your income. That's it! Almost anyone, if you live on 85% of what you make, you will become debt free, and eventually have real wealth. The average NFL player blows through his millions in a few years after he retires. That's because he lives on 110% of his millions. But someone with even modest income can eliminate their debt, save and eventual be wealthy if they live on 85%.

Of course, that's the trick isn't it? It's *hard* to live on 85% of your income when the roof leaks, you need a new cell phone, and you are paying for the kids college. So what we're going to do is this. We're going to try to figure out how to reduce your existing expenses so that you're living on 85% of your income, giving up as little as possible. This is not going to be about eating macaroni and cheese every night be candlelight and playing cards for entertainment. This is going to be about figuring out how to have most (or even all) of what you have now, but just doing it for less money. I think of it as a game, and I think it can be pretty fun.

Now that said, there may be some areas where your expenses are just too high and there are things you need to cut back. And that's always so hard. Luxuries become necessities in a big hurry. But I want to you keep this in the back of your mind "What makes me really happy?". What things in your life have really made you feel good. Your first date? Your time with your best friends? Finally running a mile in under 6 minutes? Now think, how many of those things were about money? Probably not very many. I think money is about security and freedom. And for that security and freedom, we need to get the debt monkey off our backs. And man, you want to talk about making you feel good? Getting rid of the grinding worry about debt is way up on the list.

Next time we'll talk about the process of getting to 85%.

Changes to Social Security

November 6th, 2015 at 07:42 am

This is from my email newsletter, "Don Steinmann's Investment Tip of the Week". I thought it was important enough to post it here as well.

In the budget deal that Boehner negotiated at the last minute, there is a change to Social Security. In the past, a couple who were both retirement age had a way to work the system. One could ‘file and suspend’ and the other could then collect half of that spouses Social Security until age 70. Then they could switch to their own, higher payout. This is one of the few ways you could ‘game’ the system and get some extra payouts over your lifetimes.

But this is quickly going away. For the next six months, anyone who uses this strategy will be able to stay on it for their lives. But after that, it’s gone. Under the new rules, when the second spouse files, they will get whatever the higher payout is, with no chance to switch later.

So here is the deal. If you and your spouse are turning 66 in the next six months, and haven’t filed for Social Security, get moving. The difference using this strategy can be $50,000 or more over your lifetime.

You Need a Fiduciary

November 3rd, 2015 at 09:59 am

One of the really important concepts when dealing with professionals and your money is that of a fiduciary. A fiduciary has both a legal and ethical requirement to put your needs before their own. They *cannot* profit at your expense. Here is the tricky part. The list of people who actually are fiduciaries is pretty short. Attorneys, CPAs, Enrolled Agents (not an insurance agent, and Enrolled Agent is someone who can represent you when the IRS is involved) and Registered Investment Advisors (RIAs). That's the list. *Anyone* else, is legally allowed to put their needs first. That means that CFPs, Registered Reps, Financial Advisors, CLUs, Investment Managers, etc, etc. are not held to the fiduciary standard.

Here is a scenario. A Registered Rep (stock broker) has determined that a utility mutual fund would be suitable for you. A registered rep has a lesser standard of 'suitability'. He has narrowed it down to 2 mutual funds. One will pay him a $500 commission, the other will pay him a $1,000 commission. There is no problem with him recommending the one with the higher commission (which of course comes out of your pocket). It's suitable, so it's fine. A fiduciary can not do this. He/she must recommend the one that's in your best interest, the one that costs you less.

Now that does not mean that those other professionals are working against you. But the point is they are not legally required to always put you first.

So what I recommend is, if you're not dealing with a fiduciary, get one involved to check out who you are working with. Paying a CPA or an RIA for an hour of their time to look at what your guy/gal is doing might be a really good investment.