Why Saving For The Future Matters?

Forty-one percent of Americans believe they would be able to cover a $1,000 emergency with savings, according to a survey conducted by BankRate in January, 2020. The chickens certainly came home to roost with the COVID-19 pandemic! The more disturbing findings of the survey were that 37% of the respondents would use their credit card to resolve the emergency. The lack of savings in the United States has reached critical stages for most families. To prepare your family for inevitable times of critical cash flow emergencies, I am providing you a proven strategy that will provide you with the confidence to weather emergencies in the future.

Some of the most common “emergencies” to strike families are automobile mechanical damages, large appliance failures, emergency medical care and loss of employment. Just one of these instances could spell disaster for your family without adequate savings to mitigate the disruption. During the pandemic, too many people have felt the anxious feeling of unemployment and wondering how their family will survive. Luckily, for many, the state and federal unemployment programs have been far richer in benefits than otherwise could have been. With the temporary additional federal unemployment benefit of $600, some individuals have “earned” more cash flow while being unemployed than experienced from their actual job. 

First, review your expenditures currently experienced by your family and choose one item of lesser importance to you from the list. This is the item that will no longer be purchased and the funds previously spent for this item will be automatically drafted each month from your checking account to your savings account. What this process does is take away the resistance of human nature to change by asking your financial institution to do the hard work for you. How this is accomplished is by visiting (or calling) your bank and asking them to perform an ACH (automated clearing house) transaction for you in a specific amount on the same date each month. Once you have adjusted your mindset to the alleviation of this item, choose the next least desired item on your list and continue this process until your family’s budget reflects only those expenditures that truly provide your family enjoyment. The ultimate goal of the process of saving for your future is to maintain 90 to 120 days of living expenses in a liquid account in case (and they always do) an emergency strikes your family. 

Second, if you are capable, consider seeking a part-time job or side gig. During the summer months you may have an opportunity to work in the evenings or weekends performing odd jobs or lawn work to increase your cash savings. This seasonal employment activity is an excellent method of increasing your cash reserves but may also tempt you to increase your lifestyle. This is where discipline must be exerted. Let’s say you earned an additional $200 in a week on your evening job. If you deposit these funds in your bank account, ask your bank to transfer them to your savings account instead of leaving them in your checking account. By performing this transfer your account will appear as though you have the same amount as always but your savings account will be increasing for your family’s safety. Any incremental increase in income, such as a bonus from your employer, should be treated in a similar manner.

Lastly, you may have accumulated assets which you no longer use such as additional lawn equipment, stored furniture, etc. Why not sell these items and place the proceeds in your family’s emergency fund? You may be surprised what someone will pay for a used piece of equipment!

The key to providing confidence and security for your family is the consistent monitoring of expenditures coupled with a mindset toward saving. Your bank most likely has an app for your phone that you can access with a couple of clicks. The challenge is to forgo looking at the increasing savings account everyday thinking it is available to you for a family vacation or new TV. No, this money is for the next emergency to strike your family. You will be glad you were disciplined and can face the next catastrophe with greater security.

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Strategies for Using Your Stimulus Check

Have we secretly transported to another universe? We can’t sit in a restaurant and eat dinner. We can’t attend a movie theatre. We can’t even visit our friends. All of these changes in life because of one thing – a virus. Have we experienced a paradigm shift in our lifestyle in the United States? I say NO WAY!

The United States Treasury has begun the process of issuing stimulus payments to qualified American citizens. Checks and direct deposit payments started crediting the checking and savings accounts of my fellow countrymen earlier this week. Most of us will receive a benefit of $1,200, some will receive a lesser amount and others will receive nothing. What do you do with this sudden inflow of money?

One of the most basic strategies of using your stimulus benefit is to establish a plan that addresses your most critical needs. For example, if you are in need of shelter, food or medicine, you should utilize the funds for these purposes. What if your mortgage is a federally-backed loan (such as FHA loans)? You may be granted payment relief for 6 – 12 months! If you are renting, perhaps your landlord will allow you to defer a month or two so that you can focus on the more important matter of your health. Any medicines you may require to maintain your health would be the focus for using your stimulus check.

If your basic living needs are met, you should consider saving the stimulus funds to enhance your emergency funds. It is vital that you maintain a minimum of 60 – 90 days of living expenses in a readily available account for emergencies. Guess what? The current pandemic we are living through is one of the emergencies for which this fund would be utilized! By maintaining access to funds that will allow you to live your life as you desire, at least for a period of time despite the ever-changing world around you, is both comforting and empowering. To know that your lifestyle can continue through times of struggle gives you the mental confidence to meet other challenges that may arise in life.

Let’s assume that you accumulated ample savings in your emergency fund. You may wish to review your debts and pay down, or even better pay off, certain high interest debts such as credit cards. I am not a big fan of credit cards due to the ease of abuse of such unsecured credit that allows individuals to live beyond their means. The phrase my father often tells me come to mind pertaining to credit cards – “give a man enough rope and he will hang himself”. During times of economic distress, many credit card companies will lower your interest rate for a period of time, if you contact them, and have been making your payments consistently and on time. Once the card is paid in full, place it in a zip-lock bag, then place the bag in a plastic container of water. Next, place the container in your freezer. This will require some effort on your part to free the card from the ice causing you to expend energy and time thinking about the use of the card.

Should you have none of the above needs, consider yourself a lucky person! The use of your stimulus benefit could be a very positive act such as contributing to an Individual Retirement Account (IRA) for a tax deduction. By saving for your future with an IRA, you will be preparing for the future in a bold way. Your needs are met today, for the next 90 days and for your future!

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Liquidity is Everything!

One of the most frightening stories I have heard about a retiree is the one where her daughter came to our office and her face was ghostly pale. No, this isn’t a fictional character. Sadly, this story is too often told and true. Our client’s mother had been talked into an investment that “guarantees her a return with a bonus paid up front”. This particular investment sounds good but the problem was the mother’s age was 89 years young! Suitability is the key word for this type of investment. 

Investments that require prolonged surrender periods, the time at which you can recover your original investment without a penalty, should be skeptically analyzed for appropriateness for the investor. In the present instance, our client’s mother was 89 years of age and the investment had a surrender period of 12 years. Her mother would be 101 years of age before she could recover her $300,000 original investment. I will admit that U.S. citizens are living longer that that experienced in the 1860’s but the likelihood of living to 101 and not needing her funds for medical care is improbable. 

Not only did her mother invest the $300,000, she had very little liquid funds available should in-home aides be required or nursing home care admittance become a necessity. By investing in illiquid, long-term investments, the client’s mother would not experience the type of lifestyle she was accustomed. Diversification is an excellent tool to minimize exposure to this type of danger. These products are not illegal or unusual. The biggest hurdle for many people is that the products are sold by individuals with a benefit for themselves. Commissions on some of these products can be 10% or higher. 

A better alternative is to utilize investments that ladder or vary in maturity. For example, if you need fixed income interest payments, perhaps you would want to purchase individual, highly-rated bonds with varying maturity dates. Some jumbo certificates of deposit may be utilized for laddering purposes so that your interest rates vary depending on the term of the deposit.

If something sounds too good to be true, it usually is. There is no substitute for sound, independent, financial advice delivered by a fiduciary advisor. Select someone that does not have a vested interest in the sale of the product but rather the success of the client’s investment in meeting their goals. As a Certified Financial Planner™ professional, it is our policy and process to place the client’s interests ahead of our own. There is another old question I ask some of my financial professional colleagues that brings this thought to light: “Would you invest your mother’s money in the same way as you are recommending your 89 year old client?”. 

Don’t take chances with your financial security. Apply generally acceptable and proven strategies for meeting your family’s needs. Let’s end this column with a quote from Warren Buffet, “Risk comes from not knowing what you are doing.” See you on the golf course!

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The Power of Habits

Habits are much easier to form than to change. Good or bad, habits are formed by all of us, sometimes subconsciously. For example, which leg do you place in your trousers each morning while dressing for the day? Do you even think about the process of dressing or is it simply a routine that you follow because you have performed the same process for many years?

What do habits have to do with your finances? Everything! Many of the habits involving finances are passed down from generation to generation. Did you know that by simply saving $200 per month and investing it prudently for a period of 25 years, one could amass one million dollars? My personal habit of saving started when I was a young child. Granted, money was a little more difficult to accumulate in the 60’s and 70’s but I digress.

Analyze your living expenses and keep in mind the following phrase: “If your lifestyle exceeds your income, your outlook will be bleak.” One habit that should be learned by everyone is the habit of saving. For example, lets assume both spouses are working and the family has excessive (or discretionary) cash flow each month. Why not assign that excess to a savings plan for future needs? We inform many of our clients that their income needs in retirement will be approximately 80% – 90% of the pre-retirement income. Many are shocked with this statement! Think about what is happening during the retirement phase of life. Are you simply going to stop driving your car, eating regularly, utilizing electricity and other utilities in your home? Of course not.

Another habit we hope you will consider is the habit of exercise. By “investing” in your physical fitness, you will reap generous benefits later in life. Mobility and wellness are easily maintained in our 70’s and 80’s rather than being developed in the same time period. Start now to develop the habit of quitting, yes, quitting. Quit drinking sugar-loaded drinks and consume water instead. Limit your caffeine intake each day. Stop eating processed foods and refined sugar. If you find your willpower lacking, seek out an accountability partner. These simple steps will start you on a path of fitness that will create adventures unsurpassed in your retirement years. 

By combining your new habits of saving for the future and maintaining your physical fitness, you have conquered a tremendous number of these hardships experienced by most retirees. Don’t fear being in the minority of retirees who maintain their mobility, mental health and financial security. We believe life is far more than money. Actually, to us, true wealth is all those things that money can’t buy and death can’t take away. If you seek to reach your potential in life, seek out a specialist that works with retirees and understands the challenges faced by this amazing group of citizens.

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Three Simple Steps to Secure Your Future

The word “retirement” sounds pretty scary to most people. The reason for this emotion is that they have failed to plan properly and lack confidence in the process. This article will provide you a simple, yet effective, roadmap to reach your retirement objectives.

First, stop thinking like everyone else when it comes to finances. Yes, it is fine to be different. You must understand that your circumstances in life are most likely different from many of your friends. Some employers support their employees in planning for their futures while others do not. Your new mindset should be that of “I will depend on no one but me for my future plans”.

Do you often wonder why the ultra wealthy have the financial security they do when they may have started life in a lesser social/fiscal position than you? Do they know a “secret” formula for success that has eluded you in life? The answer is a resounding NO. However, the ultra rich think far different than the typical person. For example, to accumulate wealth you must do this simple task: 

Invest for retirement first and then spend the rest

If you have a goal of saving ten percent of your income, place this 10% in your retirement and then plan your spending with the remaining 90% of your paycheck. For many of us this will sound very opposite than what we have been doing for our adult lives. Remember, it is OK to be different because you have different dreams and aspirations than anyone else. Don’t listen to the negative comments of the mass population who struggle from paycheck to paycheck with no change. You can make this change rather quickly and simply.

Second, learn to live within your means. This step requires you to know where each of your dollars are spent. To accomplish this, write down every penny spent for a week. Upon the conclusion of the week, categorize the areas you have spent your money and you may be startled when you become aware of where your money went! For example, “Did I really spend $32 on specialty coffee this week?!?” “Do I need all of the subscriptions that I don’t read regularly?” “How did I accumulate a bad habit, like tobacco use, that costs me $40 per week or $160 per month??”

Once you analyze your spending, you will quickly see areas you may derive savings for a better purpose – your future. The most difficult part of this process is writing everything down. To accomplish this, purchase a small notebook and carry it with you at all times. Record every penny you spend for whatever reason. Be honest with yourself. The only person to be cheated by not being honest is your future you.

Remind yourself daily, if not several times per day, the “why” for taking these measures in your life. You deserve a comfortable retirement, in terms you define, and can reach your goals with small steps performed on a daily basis. The action step to take is:

Know where your money is being spent and correct course

Lastly, Step 3 is the most impactful, powerful and simple of the steps to reach your retirement goals – measure your progress and celebrate when reaching small goals. The purpose of this step is to remember that you are on a journey and the lifetime goal is too far away to see. The best method for reassuring yourself of the progress you are achieving is to look for the next step in conquering your next challenge, not the ultimate lifetime goal. The last action step is:

Celebrate small wins frequently!

To assist you in the process of defining your roadmap for the future, you may wish to seek out a financial adviser or CPA that specializes in retirement planning. The price paid by far too many people for failing to plan is very severe. Don’t pay that price, take these simple steps today to design the future you wish to live.

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