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Monthly Archives: November 2016

3 Ways Managing Money Is Like a Mountain Marathon

No pain, no gain

Watching a YouTube flyby of the race course last winter — a video with calming music and breathtaking scenery —I thought it looked like a great thing to do. Having done it, and having had the chance to recover for a while, I know for sure that it was. While I was doing it, though, it was painful. Like, how-the-heck-did-I-get-into-this-mess painful. Going through the pain was what I had to do to make progress.

Ever had to reallocate your portfolio in the middle of market hysteria? Buy stocks when they are down 40%? Buy bonds when stocks are up 40%? It can make you a little ill to stick to your plan in times like that, but that discipline is what makes you successful.

How about going through the painstaking process of tracking exactly how much you spend? Asking your financial planner how much his management fee plus the underlying fund fees are costing you? Asking your insurance agent about the actual costs of that whiz-bang annuity he’s pushing?

These can be difficult tasks and conversations. If you’ve done them and seen the payoff, however, you understand that doing hard things financially is often good for you and gets you where you want to be.

Don’t worry about other people

When I crossed the finish line almost 13½ hours after I started, I felt so relieved and so accomplished. What I didn’t know at the time was that I was the slowest guy to finish the course that day. Dead last. But I didn’t care. While some people were racing other people, I was merely racing myself, trying to finish the course before it finished me.

Comparing ourselves to others can sink us financially. In the investment world, we call this the same thing you’d call it anywhere else: unproductive.

Say you’ve got a friend who’s invested in a miracle mutual fund that’s up so much higher than all the others. By the time you actually buy in, it’s probably just as likely that it’s that fund’s turn to do worse than the rest. Same thing with that hot tech stock. Just because everyone else is borrowing against their house for money to invest in the market doesn’t make it the right thing for you to do. Understand your risks, make your decisions, stick to your plan and experienceyour success.

Don’t quit, no matter how bad it gets

At the toughest point of the race, I was in a the middle of a boulder field that was several miles long, on a ridge at 10,000 feet. What seemed like (but clearly weren’t) hurricane-force winds and rain were blowing from the Idaho side, trying to push me over the 800-foot cliff on my right down into Montana (which I’ve always wanted to visit, but didn’t seem so inviting at that particular moment).

My legs were jelly, and I was moving like my grandpa did in his mid-70s. I felt like quitting, but realized that if I did, I would still have to walk across the rest of those dang rocks to get off the mountain. I thought to myself, “How do I get out of this mess?”

Maybe you’ve found yourself at a similar point financially. I know I have. For me, it was waking up to the amount of credit card debt I had. “At what point did I think it would be a good idea to use these cards like this?” For you, maybe it was a job that didn’t work out. Or you thought there was no way that real estate investment could be bad. Or you were sure you could double your retirement account in that IPO.

Once you’re there, though, it doesn’t do any good to quit. You aren’t the only one who has blown it financially. So lastly, remember that, like me on the ridge, you just have to keep putting one foot in front of the other, get through the position you put yourself in, and learn not to be there again without being better prepared.

But don’t sweat it too much — doing what is right financially can hurt, but it’s a beautiful thing. My run was worth every step, because by sticking to my plan, I found what I was looking for in the first place.

A Smart System to Track Your Money Flow

Part of the reason we accumulate debt is that there are so many distractions in our lives — things we want to buy but don’t need. But we also ring up debt because we simply don’t understand the flow of our income and expenses, so we can’t accurately estimate how much money we have available to spend.
I’ve struggled with this myself. A few years ago, I put in place a “Money Flow” system to help my family track our spending. You may have heard of a system like this before, but follow along on this tour, because it really works.

Putting the pieces in place

1. Set up two free checking accounts:

  • One to pay fixed expenses (such as the mortgage, car payments and utility bills).
  • One to pay variable expenses (groceries, gas, clothing and so on).

2. Set up a high-yield online savings account.

We call this our “curveball” account. It’s an emergency fund for use when life throws us curveballs — large medical bills, a job loss or reduction in income, major home repairs, that kind of thing.

3. Make a plan for big-ticket items.

My husband and I agreed that we would use one family credit card for large purchases, such as airline tickets and hotel stays. We still have our separate credit cards – it’s wise to keep your own credit cards to maintain your credit score and credit history. Using them once or twice a year should be sufficient. And don’t close those cards because it will eliminate credit history you’ve accumulated and affect your overall credit score.

Implementing the system

1. Draw up a budget for fixed and variable expenses.

Add up how much you need in each category. This will be your guideline for how much should be in each of your checking accounts.

Fixed expenses might include:

  • Rent or mortgage payment
  • Property taxes
  • Utilities (gas, electric, water, etc.)
  • Home, auto and umbrella insurance
  • Life, disability and long-term-care insurance premiums
  • Health insurance premiums (if not taken out of your paycheck)
  • Cable TV, Internet, phone and cellphone
  • Gym or yoga memberships
  • Debt payments (credit cards, student loans, car loans, personal loans, etc.)
  • Savings (yes, this is an expense — pay yourself first!)

Variable expenses might include:

  • Groceries
  • Eating out
  • Gas
  • Clothing/shoes
  • Personal services (haircuts, doctor visit copays, etc.)
  • Entertainment

2. Distribute money to the accounts.

When your paycheck comes in, allocate the designated amounts into each checking account based on the budget you created. The sum earmarked for the curveball account can go there directly.

3. Pay fixed costs directly.

 All bills are paid automatically from our fixed-expenses account. We do not have to write any checks, and no debit card is necessary. This account has a cushion of a few hundred extra dollars in case a bill shows up unexpectedly or before we have a chance to replenish the account.

4. Pay variable expenses from the second account.

This account should have a debit card, which you can use for purchases.

5. Link the curveball account to either checking account.

If an emergency arises, you can transfer funds within 24 to 48 hours. You can then access the money with a check or debit card.

Realizing the benefits

Once I implemented this system, the process of tracking expenses wasn’t so cumbersome anymore. Separating expenses into fixed and variable categories meant I didn’t have to worry constantly about checking account balances. Having fewer transactions in each account also made it easier to see the bigger picture of our spending.

4 Reasons Why Renting Is Better than Buying

Have you ever felt pressured to buy a house? Maybe from your friends, your family, your co-workers, or even yourself? Like you haven’t actually made it as an adult until you own your home?

It’s a common feeling, but the truth is that buying a house ISN’T always the right decision. In some cases renting is a smarter move, both for your wallet and your lifestyle. Here are four reasons why.

1. Flexibility

Life changes fast. That great new job you just started might turn into an exciting opportunity in a different city. That big family you planned on having might turn into a smaller one.

Renting gives you the ability to quickly change your living situation to best match the new realities of your life. That flexibility can be the difference between seizing an opportunity and having to pass on it.

2. Cost

Proponents of buying like to say that when you’re renting, you’re essentially paying off someone else’s mortgage. So why not buy and make sure that money is going towards yourself?

There is some truth to that, if you stay in one place for an extended period of time (typically 5-7 years or longer), then buying often results in the lower long-term cost.

In the meantime buying can be really expensive. There’s the upfront cost of the down payment. There’s the cost of handling the fixes and improvements that come with any new purchase. There’s the cost of new furniture. There are the ongoing costs of insurance, taxes, and maintenance.

Renting has costs too, but they’re often much smaller and more predictable, at least in those first few years. And in many markets where housing prices are high, renting can actually be a better long-term financial decision.

You can use this calculator from The New York Times to figure out just how long you would have to live in one place before buying became cheaper than renting.

3. Adjustment

Renting is often a great idea any time you move to a new place.

It gives you the opportunity to figure out which neighborhoods you like and which you don’t so that you can eventually make a buying decision you’ll be happy with for the long-term. There’s no sense in being stuck somewhere you don’t like simply because you felt rushed into buying a house.

4. Stress

Owning a home has plenty of benefits, but it can also come with a lot of stress.

Any time something needs to be fixed, it’s on you to either do it yourself or pay for it to be done by someone else. And of course there’s that big mortgage that can feel like a weight on your shoulders.

Renting comes with fewer commitments and fewer responsibilities, which can lead to lower day-to-day stress.

Social Security Survivors Benefits

Social Security Survivors benefits are paid to widows, children, parents and ex-spouses of covered workers.

The Social Security program actually consists of three benefit programs that make payments for various reasons. They are:

  1. Retirement benefits,
  2. Disability benefits,
  3. Survivors benefits.

This post covers number 3, Survivors benefits. These are not the same as the benefits commonly referred to as spousal benefits.

If a worker, who is covered by Social Security, dies and leaves family members behind, they are the “survivors” and are covered under the Survivors benefits program. Social Security will use the deceased worker’s record to calculate payments for his / her family.

There are four eligible parties that may receive payments after the worker’s death. They are the widow (or widower if the wife dies first), children, parent, and ex-spouse. Each has detailed rules for eligibility.

A widow(er) will get benefit payments if:

  • They are age 60+, or
  • Age 50+ and disabled, or
  • Any age and caring for a worker’s child under 16 or disabled and entitled to benefits on worker’s record.

A child will get benefit payments if:

  • They are under age 18, or
  • Between 18 and 19 and still in secondary school, or
  • Over age 18 and severely disabled before age 22.

A parent will get benefit payments if:

  • They are dependent on the deceased worker for greater than 50% of their support

An ex-spouse will get benefit payments if:

  • They fit one of the three requirements for widow(er) above and were married to covered worker for 10 or more years, and
  • They are not entitled to a larger benefit based on their own record, and
  • Not currently married unless marriage was after they turned 60 or 50 and are disabled.

Another aspect of Survivors benefits that comes into the payment amount is that the “full retirement age” (FRA) for Survivors benefits is different from the full retirement age for retirement benefits.

This chart matters because a widow(er) or ex-spouse can start claiming benefits as early as age 60, but the benefit will be reduced. For the full benefit payment, the survivor must wait until their FRA in the center column above. For some people it is several months earlier than the full retirement age for Retirement benefits and they may wait unnecessarily long to receive their benefits if they are unaware of this anomaly in the Social Security benefits.