This the ending on the second month and you’re on a roll. It may be a big goal and big change, but you are on the way! No need to be scared, you are on you way.
Let’s get an update, how’s your plan going? What scary thing have you encountered so far?
Have a great weekend!
While on your path to your dreams make sure to be grateful for those that have helped you along the way. It can be the ones that helped you stay on the path, helped you get back on, or someone that showed you a shortcut. The more thanks you give, the more that you will gain.
You’ve started building your Financial House, starting with a solid foundation after I painted your financial picture, and you’ve got the right material with your knowledge (the bricks not straw), now it’s time to build some rooms. The rooms of your Financial House are your goals in life. It’s arguable what room you would think of first to build depending on your lifestyle, but your bedroom should be all about you and is the place where you (typically) start your day.
If you have a family, you know how often your home transitions. The living room turns into the kids play area, the office turns into a kid’s bedroom. Your bedroom does dual duty as bedroom/office. Closets become half baths. Your home will constantly be evolving, but even if you turn your bedroom into a bedroom/office, it will still be your fort and you won’t be getting rid of the bed. For this reason, I see the bedroom as your goal of a home. A home can be a house, an apartment, a condo, a townhouse, something that you live in and is your responsibility to pay. Homeownership is lots of responsibility and isn’t for everyone, but for arguments’ sake, let’s say that your goal is getting a house. Here is the financial process to get your there.
We always have to start with the basics. Even if you “know” you have a good foundation, you must get in the practice of reviewing your foundation to make sure there are no termites. Are your debts paid down? If you have debt, how much total debt do you have and is it better to pay that off first before looking at houses? How is your emergency fund? If you’re considering purchasing a house, you want to also look at increasing the emergency fund due to the many unexpected expenses (AKA required expenses) houses can obtain. Water heaters going out, roof leaks, A/C out, etc. Having the emergency fund already funded to the level that is needed to purchase a house will help greatly while looking for a house. I’d also like to point out that the Emergency Fund, is for EMERGENCIES, not for a down payment on the house. There are compromises out there, but compromising your emergency fund means you compromised your foundation for your entire financial plan, and when dealing with purchasing a house should be a big “No-No.”
Now that you’ve taken the time to check your foundation, made some adjustments (saving more in your emergency fund possibly) you’re ready to get an action plan in place for getting your house. I know when people really want to get a house they think of all the things they want it to have. 3 bed, 2 bath, nice kitchen, must have gas stove, etc. Before you get into your laundry list of “must have demands” let’s look at it at it’s most basic points. You need to take inventory for your bedroom. Who will be living there (husband, kids, etc) and how much can you afford. How much you can afford has gotten many people in trouble in the past, so let’s not get you into that kind of trouble. How much does your household (you and your spouse) make combined? Let’s say it’s $80,000. As much as you’re trying to keep up with the Kardashians, realize that they’re on the verge of bankruptcy behind closed doors, so you want to live within about 60%-70% of your income (the rest is savings for the fun stuff). That leaves you $48000-$56000 to live by for bills, mortgage, food, gas, etc. Once you’ve done a detailed analysis on your current expenses, make adjustments if you were to purchase a house. If your goal is to have a mortgage payment that is about the same as you pay in rent, realize there are many new expenses such as HOA fees, increased electricity bill, gardening expenses (you have to cut the lawn now), etc. Now you need to factor that into your monthly budget. You pay $850/mo in rent and utilities now, but once you add in extra house expenses it may total $1150/mo. That’s an extra $3600 you spend a year that you don’t now. So instead of aiming for a mortgage payment of $850/mo, aim for a housing expense of $850/mo. This will wrap your housing expenses together. Your mortgage may be $650/mo and all your added expenses bring it up to $850/mo.
You now have an idea of how much money you want to spend per month on your house, now it’s time to shop around on a deal for the mortgage. You’ve got to furnish your bedroom with the bed and curtains and dressers, and you want the best deal possible. If you’ve stuck with your financial plan for a few years, you should have built up some good credit. If you’ve stuck with your financial plan for MANY years, you may have saved up enough money to buy your house in cash (CRAZY!). For those that have stuck with their financial plan for a few years and built up a good down payment on a house but need to finance the rest, it’s time to go shopping for the best deal. This is going to take time and effort. The best is to get a low fixed rate mortgage, if possible for 15 years or less. As helpful as the internet is, all the answers don’t always hide there. Great for research, but person to person in these type matters is much more important. Once you’ve done your research, take a day out of your schedule to visit with as many of the banks you found that had good fixed rates and talk to them in person. Ask as many questions as you need to make sure you understand every point of how they deal with mortgages. If you don’t understand, do not do anything. Figure out the payment schedule, how much the mortgage would be and think about it. Don’t sign anything, go home and think about it over night. As exciting as finding a new house is, it crumbles the moment you realize you got screwed.
Congratulations you were approved for a fantastic loan of $500,000! DO NOT LOOK FOR A $500,000 home! Stay with your budget that you just figured out. Do not get glossy-eyed at the thought of a “dream” home. The Kardashians did that and are secretly going bankrupt. You are more mature and balanced than that and are more than happy to stay within/under your means. You have a great fixed rate and you know your range to keep within your budget, now it’s time to look at houses within that budget. Yes, now look. If you look before you’re going to set yourself up for failure looking at “dream” houses and many houses you think are in your price range, but really are not. A Realtor is exceptionally helpful to help you find the right place because let’s face it, you’ve got a job, your spouse has a job, and you’re crazy busy. Think of the Realtor as the interior decorator/carpenter you hired to create your bedroom. You give them the budget and they stay within it with your vision in mind. Spending your little free time trying to find a house is going to drain you, no matter how excited your are. Realtors have the inside scoop and have their ear to the ground, plus when you’ve done it for many years it’s second nature to you. You’re fantastic at your job, they’re fantastic at theirs because they’ve honed their skills. Make sure your budget is very clear and if you’re going to compromise, compromise your “must-have” list for the house, not your finances. The right house is out there, it will take time, so don’t give up. Once you have found your house and a great offer has been accepted, make sure to understand all the terms and conditions as well as all the fine print. You wouldn’t hire a carpenter to fix up your bedroom, give them a budget, only to find out there was an added finishing fee for finishing the job. The tricks are in the fine print, so make sure to understand them before signing anything.
Congratulations on your first room of your financial house! As tiring as it may have been to plan and have it built, it was well worth the time and effort!
To help keep the energy up like it was at the beginning of the year, here’s a little push. Strive and push for your dreams and stop at nothing to reach them. You can do it! I know you can, just keep on the gas and keep trucking on. You GOT this!
Have a great weekend!
On my previous post, the metaphor of building a great financial plan is like building a house, starting with a solid foundation. This post is to expand on the topic and help you understand that the kind of knowledge you have about finances is the material you will use to build your successful house.
Is your house made of Straw or Bricks?
Remember the story of the 3 little pigs? Each made their houses with different material, straw, wood, or brick. I hope we all learned the valuable lesson of building with the strong, reliable brick to make sure our wellbeing is safe. When you’re building your financial house, your knowledge & the knowledge at your disposal is the material you’re going to build your house with.
Blair is a successful doctor. She’s highly paid for what she does, not only from the hospital she works at, but also from the many speaking engagements given to multiple universities around the country. She’s single, with no kids and spends most of her free time (the little she has) out with friends. She has dreams of retiring one day up in the mountains to be near the outdoors and hiking. She saves some money here and there in a bank’s money market account, but she typically buys whatever she wants, whenever she wants because in her eyes she has disposable income from her jobs. When retirement creeps up on her she takes a look at her “retirement” fund at 60 (5 years before she wants to retire). She realizes that the savings plan she created for retirement 30 years ago has barely done anything for her, and most of money has gone to frivolous whims such as cars, houses, multiple vacations throughout the years. Now with retirement 5 years away, her dream house of retirement has crumbled. Her limited knowledge created her house of dreams from straw.
Gary is a technology guru. He works at IBM in research & development making a good living. At home, he has a wife and 2 kids in elementary school. He enjoys travelling the country to other offices to show off what he has developed. He wants to fund his children’s education and wants to retire comfortably with his wife in 30 years. He talks to his bank about how to fund his children’s education first since that’s the first goal that will pop up. The bank sets up a college fund from their line of services and does not discuss Gary’s retirement goal, because he never mentioned it. When his both his girls graduate from college finally (they decided to get their masters) he goes back to take a look at his retirement that is coming up in 10 years. Even with his pension plan from work and the emergency fund he has been saving his entire life, the bank tell him he’s going to have to work until he is 70 to retire at the level he wants to with his wife. He had some resources available and used how he saw fit, he created his house of dreams from wood. Steadier than straw, but can’t stand up to too much pressure.
Carrie is an executive assistant. She works at a prestigious law firm and is typically called on to train the new assistants as well as the junior associates because she’s that good and has been there for so long. Her family has taught her to budget her entire life and she lives well below her “means” compared to other families her size. She has a husband that is a teacher and 2 kids that are in middle school. She has a savings account and separate accounts set aside for her kids college and their own retirement fund. When she first started dating her husband (20 years ago it seems now) they had some rough times, but always seemed to manage to get themselves out. Before they walked down the aisle, a friend of theirs thought it would be a good idea to just go to a financial advisor to help them get a plan in place so they would stop cycling through tough times. She appreciated the thought, and went to be polite (she is from the south), to see if it would help at all. After a year working with the financial advisor, her and her husband (now) could see small habits changing for the better and wealth being created. When the time came to buy a house, they made sure to consult their financial advisor, not only on what they can “afford” but what was in their best interest based off the other goals they talked about. A few years ago, their beloved car “Rick” died and even though they wanted to fix it because it was like family, their financial advisor showed the impact of repairing compared to buying a different car. Luckily, the way they were saving, they were set up to pay for a quality used car and not effect their financial goal of college for the boys and retirement for themselves. Carrie & her husband had created their house of dreams from bricks, and are ready for their financial goals to come to fruition.
Food for Thought
Blair is very bright and focused, going through that much school to become a doctor, you have to be. Just because she’s good at medicine, doesn’t mean she’s good with money. She focuses most of her time on her job and social life. All work and no play can beat you down. She would most definitely benefit to have someone to call and ask how to efficiently save her money and fund her dreams. She is a very bright individual, she’s just ignorant on what’s available at her disposal to help fund her dreams.
Gary knew he needed help and he went where he knew they dealt with money and was comfortable with them. The one thing he didn’t realize is that banks can be more or less self service. You tell them what you want and they deliver what is available on their menu. They may try to “up size” you by getting you to put in more money than you can afford, but they’re limited to whatever services they offer at the bank. Gary would benefit from having someone look at the grand picture, not just a very small piece of the giant puzzle as well as look at all available options out there, not limiting him to 1 bank.
Carrie was wary at first because it was something she was not use to. Being slightly nudged helped her get into the right mindset though and really helped her and her husband achieve all the goals they wanted. Of course their financial plan changed throughout the years to adjust for their life such as their 2 boys, but a good financial plan is flexible. The best part is they have a great relationship with the planner and can call for advice on anything money related.
In Conclusion
Whether you’re a doctor or an executive assistant, your money should be working hard for you so you can build your own house of dreams. Having the knowledge or access to the knowledge is key to making your house of dreams strong. It’s your decision to take the time to obtain the knowledge yourself, or find someone that has the knowledge to give you, but whatever you do – get the knowledge! Don’t build your house of dreams from straw, build it from bricks.
*Disclaimer*
For all this planning that you’ve been working on throughout January don’t lose sight of your goal. Your goal is ultimately to make you happy. Your goal may be to achieve “stuff” but remember that it’s meant to bring you long lasting happiness. That new TV might make you happy now, but make sure to have a few vacations with friends and family to gain more memories that will last for years.
So what are your short and long term goals? Which ones are created to make long lasting memories to cherish when you get old?
Have a great weekend!
While sitting here on my work computer, it hit me like a brick to the head. People need to understand the importance of their financial foundation, but me saying it a million times isn’t going to do much. How can I get the point across where people can understand and have their “Ah ha!” moment.
Let me paint a picture for you:
Your financial plan for life is like building a house and the most important part of the house is the foundation. If you have a weak foundation, or if you have issues with your foundation, your entire house is going to collapse. All those rooms of goals & dreams you have will collapse with it.
A good financial plan foundation is the money you live by. You want to see what your current situation is with income, bills, savings and any debts such as credit cards or loans. Then you want to take a look at what protections do you have for yourself to make sure you can consistently pay the bills. What emergency fund do you have in place for the short term and for the long term what kind of insurance do you have? Most people don’t realize that their most important asset is their income and that there is disability insurance out there to help keep the cash flow coming when you become disabled to help pay the bills.
The biggest dangers I’ve seen that corrupt a good foundation are debts, lack of disability insurance, and an insufficient emergency savings plan. Of the 3 the biggest monster in the room can be debt. Here’s the thing about debt, it’s like a bug. Some bugs are good such as spiders, and some are bad such as termites. And as strange as it might sound, some debt is “good” debt when you’re thinking about your credit score. Too much debt or the wrong kind of debt is really bad for your foundation. Credit cards can be convenient but not keeping them inline makes it a huge issue for now and down the road. They’re your termites, slowly, quietly eating away at your foundation. Disability insurance is an easy one to fix by purchasing it like home insurance (typically a different agent though). Emergency savings plan is dependent upon different aspects of your life. Based off your income and expenses as well as what insurance you currently have will dictate how big it is and for what length of time is it set aside for.
Once your foundation is set you can start building your house of dreams. Each goal creates a room and as you build your home you’re going to find that you’re going to be changing priorities and goals around like you would in any home. Your plan will constantly be changing to your life, but once all is said and done you’ll be leaving a great legacy for your family or charity that you want to leave it to.
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Keeping in with the planning thing for January. We’re taking this month to set up a plan to help focus and work around all year. Don’t over stress if the first draft of the plan doesn’t seem to work out. A plan can change, but having one to change is the key.
How does your plan look? Do you have gaps or holes that need some help?
Have a great weekend!
As I sit down with clients and prospects I always ask them “What is your experience with your finances?” As straight-forward and awkward as it may seem, it’s a pretty loaded question. Some immediately think of budgeting, balancing the some times delicate act of paycheck and bills, and saving. For my younger clients, it has been “I don’t really know, that’s why I’m talking to you.” For those more experienced clients with “investment” experience, they talk about past advisors and what they were told. I say “investments” because I’ve seen some strange things called “investments.” If you give a person money and don’t understand how the “investment” works, it’s not an “investment” it can be a scam.
I would like to just discuss risk tolerance and outline some common investments.
Risk Tolerance
Investing is a roller coaster ride and your risk tolerance is your willingness to get on different roller coasters.
Higher Risk tolerances means you’re ready for big ups and downs and want that adrenaline at the end of the ride. You like riding Drop Zone or the Hulk. You risk big in hopes of higher rewards. The good thing about high risk/high return is the possible high return, just don’t forget there are a lot of valleys in the way, and if you can handle some dips throughout your time frame the pay off can be big. If you have a higher risk tolerance you’re more aggressive. Just remember that if you are an aggressive investor that you need to have plenty of time to recoup the money if there is a dip before you need it. Young people saving little bits for retirement now typically can be more aggressive now for retirement, because they have time to recoup.
The lower the risk tolerance the more likely you’re going to go on the Dr. Seuss ride (which is still awesome by the way). You don’t want ups and downs you want a steady ride. You’re more conservative. What you lack in dips and peaks you make up for in steady returns, typically small. If you have a small time frame, you want to be more conservative, because you have little to no time to make up the difference.
For those that are in the middle, you’re moderate. Maybe more of a Spiderman ride, with some twist and turns but not as much up and down motion. Some aggressive investors will go moderate on shorter term investing because they can’t really commit to being conservative and some conservative investors may invest moderately because they have a longer time frame but can’t commit to being aggressive.
Whatever your tolerance, you should discuss all investing options with a professional to validate your thought process as well as the options available to you given your situation.
Now on to Investments
Easy stuff: Stocks & Bonds
Stocks – I’m sure you’ve at least seen the S&P 500 channel surfing. A stock is an ownership of the company. What many people don’t realize is that the S&P 500 is a second hand market meaning the stocks traded are not coming directly from that company, but from another entity or person. The price rise and decrease doesn’t increase or decrease the company’s bottom line because they sold more higher priced stock. Most stocks are held not by individuals but investment companies to put in their products such as mutual funds (discussed later). The ups and downs are very volatile depending on many factors. As nice as it would be to have a formula to predict how it trends, it is impossible because of too many uncontrollable factors (war, weather, politics, etc).
Bonds – You don’t own the company but the company/government OWES you money, you’re the debtor. Bonds are rated on an alphabetical scale from Aaa/AAA being the best to Ba/BB+ & below to be “non-investment” grade, meaning (surprise!) you don’t really want to invest with those. Government bonds are rated on the same scale and are Aaa/AAA. There are no guarantees in investing, but government bonds have the lowest risk tolerance out there.
Step up your game: Mutual Funds
Mutual funds are a package of domestic stocks, international stocks, corporate & government bonds, cash, and other assets (such as gold). Individual mutual funds have an investment approach and a fund manager. The investment approach tells you what the fund’s goal is and how it invests. It’s the fund manager’s job to make sure what he/she picks is in alignment with that approach. For example, if you have a Science & Tech fund, the manager will invest in companies that are developing more technology (like Apple, Google, etc.) and the sciences (like new uses for corn) but would not likely invest in paper. Each fund tries to maximize its return on investment, but that doesn’t mean every mutual fund will get a 12% return. Many funds will get 3-5% because their investment approach is more conservative.The nice thing about mutual funds is that it, in itself, is typically diverse. Diversity helps you control the risk. For every higher risk investment you can have an equal and opposite lower risk investment. The mutual fund manager typically will control how risky the fund is based on the investment approach. If you’re investing in government bonds it will be conservative. If you’re investing in science and technology it is more aggressive.
To some people I understand this is common knowledge, to others though I hope I have shed some light on a few things for you. If you talk to a financial person, whether it’s at your bank or at an investment office, make sure they can explain to you completely and understandably what you’re investing in. If they can’t, find someone who can. I’m always open to answer any questions you might have.
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There are always going to be speed bumps on your path to your dreams and then you’ll have the occasional flat tire or engine problems. In your plan, make sure to have wiggle room and a “Plan B” in case of engine trouble. This can be an emergency fund or even as simple as a stash of quick cash hidden in your car for the times where your actual tire has a flat.
What is your “Plan B” in case of an emergency?
Have a great weekend!
