Your Monkey Brain and THAT Guy

Our monkey brain gets really excited during the holidays. And like that one guy at the office holiday party, he's not thinking about the violent hangover that awaits.

But with 4 easy steps you can trick your monkey brain into enjoying the holidays, while your grown-up mind sticks to a budget and enjoys a spending-hangover-free January.

Step 1) Write down all the people on your gift list (don't forget your financial planner! I kid, I kid).

Step 2) Next to each name write how much you want to spend on them.

Step 3) Go to the bank and withdraw your entire holiday budget.

Step 4) Go shopping. If you're going to stores, pay in cash. If you're shopping online, remove whatever you spend and put it in a separate pile to pay off your credit card next month.

"Budget" is a four-letter word. Even the most disciplined of us hate budgets.

So don't will yourself to stick to a budget. Your monkey brain won't let you. It's an exercise in futility.

Instead, trick yourself into sticking to a budget. Your monkey brain will be too busy enjoying the holidays to notice.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation

Stop Throwing Your Money out the Window

Pull out your wallet. Take out all the cash you have. Go to the nearest window. Open it. Throw it out the window.

If you have money sitting in a savings account at a big bank, that's exactly what you're doing every single day.

The average interest rate in a savings account at a big bank is 0.1%. If you're storing a $50,000 emergency fund in there you are earning a mind-blowing $75 per year.

Online banks don't have to pay for their brick-and-mortar branches, so they typically offer rates on savings accounts that are much higher.

For instance, Ally Bank and Capital One pay 1.9% interest on their savings accounts. That's $925 per year in annual interest.

Don't throw your money out the window. Keep your emergency fund some place that's paying a good interest rate.

If you don't like Ally or Capital One, then click here to check out Bankrate's list of high-yield savings accounts.

They'll pay you an extra $850 a year to do it!

DISCLAIMER: This publication is for educational purposes only and should not be considered financial, tax or legal advice. These statements have been simplified for illustration purposes. Consult your financial planner or tax advisor for help with your specific situation.

Income Is Not the Same as Wealth

How much money you make is not important.  

How much money you have is.

From The Millionaire Next Door:
"Wealth is not the same as income.  If you make a good income each year and spend it all, you are not getting wealthier.  You are just living high. Wealth is what you accumulate, not what you spend. 

How do you get wealthy?   Wealth is more often the result of a lifestyle of hard work, perseverance, planning and most of all, self-discipline." 

If you're "income rich, savings poor" you are not going to enjoy the last 20-30 years of your life.  At some point, the income runs out.   "Working until the day you die" is not a feasible retirement plan.  Your body or your mind isn't going to let you. 

At that point, you will live off what you saved and Social Security.  If you haven't saved, then you'll have Social Security, which for a couple maxes out at $88,752…pre-tax.

The solution?   Save 20% of your income.  If you're over 50 and "lived high" for too long, save 30-35% of your income. 

It won't feel good at first.  It'll be a frustrating journey finding the things in your lifestyle you're willing to sacrifice.  But after the first year or two, you'll see your wealth build, and the progress you've made will motivate you to keep going.   You just need to get over that two-year hump.

The best time to start saving and accumulating wealth was yesterday. 

The second best time is today.

Pay Yourself First

The concept comes from The Millionaire Next Door, a very famous personal finance book.   It studies 1,000 "ordinary" millionaires and how they got that way.  (Hint: none of them got lucky working at the right startup.)

Pay yourself first simply means save, THEN spend.   Most of us pay everyone else first.   We pay the Whole Foods cashier and the contractor and the golf course attendant and the waiter and our lawn guy and pool guy and the list goes on.

For the next 6 months, try paying YOURSELF first THEN pay everyone else. 

If you hate it, then in 6 months go back to normal and enjoy spending all the money you just saved.  

Here's how: 

  1. Multiply your monthly take-home pay by .05
  2. Set up an automatic, monthly transfer from your checking to savings for exactly that amount
  3. Don't look at your savings for 6 months.

On August 22, I'll send you a reminder to tell me how much you saved and how good you feel.

4 Steps to Avoid the Holiday Spending Hangover

It's official - the holidays are upon us.  We've got a lot to look forward to over the next few weeks - holiday parties, eggnog, gifts giving, great food, holiday cookies, Christmas trees… the list goes on.  

The holidays are a season of generosity.  Americans spent $656 billion on holiday shopping in 2016.  (The next biggest shopping season is Back to School, which "only" roped in $84 billion.) 

The downside of all that holiday generosity is the dreaded January spending hangover. 

Below are 4 easy steps to avoid the post-holiday spending hangover and still enjoy giving your loved ones really cool stuff.

  1. Create a spending goal - Humans are wired to enjoy achieving goals.  By setting a spending goal, you trick your subconscious into enjoying not going overboard. 
     
  2. Save then spend -  Your spending goal should be whatever you've saved up for the holidays.  Haven't saved anything?   Then "splurge less" in equal amounts to your holiday spending.  If you normally eat out 6 times a month, then eat out 3 times in December instead.
     
  3. Track your spending - The simple act of "witnessing" your spending has a self-regulating effect.  And it's really easy to track your spending these days - use www.financialzengroup.com  or www.mint.com or www.youneedabudget.com or any of the other spending tools out there. 
     
  4. Reward yourself - To reinforce your goal, decide ahead of time how you'll reward yourself for achieving it.  Treat yourself to a massage or a nice dinner out or whatever else slides your sleigh.

Don't let your January credit card bill kill your holiday afterglow.   By thinking ahead and using a little financial technology, you can enjoy all the fun stuff that December brings without having to pay for it in January.  (See what I did there?  Ho! Ho! Ho!)

What's Your Favorite Color?

KEEPER

Stop! What is your name?

 

GALAHAD

Sir Galahad of Camelot.

 

KEEPER

What is your quest?

 

GALAHAD

I seek the Holy Grail.

 

KEEPER

What is your favorite color?

 

GALAHAD

Blue. No yel-- Auuuuuuuugh!

 

The problem with managing your passwords is you can't win.  You have to choose between doing it right or doing it easy.    Do it right and it's a pain the butt.  Do it easy and you'll get hacked. 

If you do it right, you use unique, long, random passwords for every website you use.  But then you have to keep track of them somehow, which probably means a massive sheet of paper hidden in your coffee table.

If you do it easy, you use some variation of the same password which is probably short and contains personal information so you can remember it. 

Does any of that sound familiar? 

Most people choose "easy" because "right" is such a pain in the butt. 

If you choose easy, you'll eventually get hacked.  And it won't be because of a data breach at a big company.  It'll be because your password sucks and a hacker guessed it. 

Hackers hack by finding out your personal information from social media and then "guessing" with special hacker software that tries hundreds of combinations of your personal information.

How hard is it to figure out your kids' names?  Or your birthdate?  Or your hometown?  Or your favorite sports team? 

Not very.

So if you don't want to get hacked, you have to do it "right".

Lucky for you, we live in 2017.  Doing it right is no longer a pain in the butt.  In fact, doing it right is actually easier than doing it easy. 

Two words:  Password. Manager.

There's a lot of them out there.  Personally, I use the one by Intel called TrueKey.

Here's how they work:

  1. You download the app.
  2. You memorize one login - the one to the password manager.
  3. Each time you enter a login on a website, it will save the username and password to the password manager.

The next time you go to that website, it automatically populates your username and password. 

It will also randomly generate a password for you.  You can then create passwords like the ones all the cybersecurity experts recommend:

  • 16+ digits
  • Upper and lower case
  • Numbers and symbols
  • Random combination

Instead of using three variations of "joeybobby1952" for all of your passwords, you now have "9IibsIOJD9fW!x$o4W8JDmQyElxYq9" for one of your passwords and something totally different and completely random for every other login you use. 

To keep you safe, I will be providing all of my financial planning clients an annual subscription to the one I use - Intel TrueKey. 

If you'd like to take me up on my offer, please let me know and I'll help you get set up. 

Just don't forget your favorite color…

Lions & Tigers & Hackers, Oh My!

One of the three major credit agencies - Equifax - got hacked a few weeks ago.   If you've just emerged from under your rock, here's an article to catch you up. 

I've received a bunch of calls and emails from concerned clients about what to do and how much should they be concerned. 

Personally, I'm not losing any sleep over it.  These hacks happen all the time.  Many of them make the news, and many more don't.

The two ways getting hacked could affect your finances is:

1) It screws up your credit or
2) You get robbed

Of course, that doesn't factor in non-financial things like posting embarrassing pictures of you on Facebook.  But this is a personal finance blog, so you're on your own for that one. 

Credit agencies, banks, and credit card companies deal with fraud on a regular basis.  It's just a part of doing business in 2017. 

When bad things happen to good people, most financial institutions will fix whatever the bad guys did to you.  (Double check with yours to make sure though.)

If your credit gets dinged, the credit agencies will fix it.

If you get robbed, the bank or credit card company will reimburse you.

The real downside to getting hacked is the time it takes to call three different credit agencies and work with the financial institutions to reimburse the charges.

So how can you protect yourself? 

Simple.  Do what you should be doing already:

  1. Review your credit report annually.   The federal government allows you one free credit report each year from www.annualcreditreport.com.    There are three credit agencies - Transunion, Experian, and Equifax.  Your credit report will consolidate information from all three of them.  
     
  2. Review your credit card and bank transactions daily (or at least weekly).  Lucky for you, it's 2017 and technology makes it really easy.  An account aggregator like your Financial Zen Client Portal consolidates all of your financial accounts in one place.   Login and 3 clicks later you're looking at all your transactions.  If you're not a Financial Zen Group client, you can use sites like www.mint.com or www.personalcapital.com.   And if you're old-fashioned and still get paper statements, you'll have your work cut out for you, but you should still check every transaction, every month.

I'm not losing sleep over the weekly hack headlines and neither should you.   Just make sure you're on top of your stuff. 

If you get hacked it will most likely be from someone guessing your password.   More on that next week…

Use Your Credit Card

Excuse me!?!??   What kind of crazy financial planner would ever RECOMMEND using your credit card?!  

Hear me out.

You're going to spend money to buy groceries, pay Comcast and get yer hair did.  Why not get a 2% discount on all that stuff?

The best credit card deals out there offer 2% back either in cash or miles.  If you spend $10,000 per month, that's $120,000 per year which is $2,400 you could get back by buying everything with your credit card. 

However, there are several caveats:

  1. You MUST pay it off every week.   That's right - not every month, but every week.  Pick the same day and same time every week and schedule an appointment with yourself to pay it off.  Paying it off every week will keep you conscious of your spending and prevent you from feeling like you have a bottomless pit of money which is how people get into credit card trouble. 
     
  2. Get a card that pays 2%.  They are hard to find, but get back as much as you can.  Some cards pay as high as 3%, but only on certain items like groceries or gas.   The best deal you'll find on everything you buy is 2%.    Feel free to do your own research, but two cards that pay 2% and get good reviews are the Citi Double Cash Card and the CapitalOne Venture card.
     
  3. Know thyself.   Some people have a tough time maintaining the discipline required to responsibly reap the benefits of a credit card (see #1 above).  If you're one of them, then disregard everything you just read and use your debit card.  (If you're not sure if that's you, then ask yourself if you've ever carried a credit card balance for longer than 3 months.  If you have, then that's you and you should stick with your debit card.) 

A 2% discount for life is a pretty good deal and will add up over 30, 40, 50 years.   Not so crazy after all, am I? 

Disclosure: This blog is for educational purposes only and should not be considered financial or legal advice.  These statements have been simplified to illustrate the concept.  Consult your Financial Planner or Estate Attorney for help with your specific situation.

It only costs...

Have you ever justified an impulsive purchase with "It only costs…"?   I know I have.  

And it's always something I don't need and only kinda, sorta want. 

But "It's only…" pushes me over that purchasing edge. 

Financial success is achieved by good financial habits.  It's not the big ticket items that push back our retirement 5 years or force our kids to get student loans. 

It's a lifetime of little things… habits that are imperceptible in any moment, but add up over a lifetime.

Bad financial habits are like smoking.  It's never that one cigarette that leads to lung cancer and heart disease.  It's all the cigarettes added up over a lifetime.

The last three weeks I gave you some tangible, actionable tips to save more (Save 5%) and spend less (Try Generic).

This week's tip is less tangible, but more important.  

Healthy Spending Tip #2: The next time you catch yourself about to buy something preceded by the thought "It only costs…", just stop.   Use that thought as a red flag.

Then ask yourself- are you mindlessly obeying a marketing department's command like a rat in a cage or is it something you really, truly can't live without?  

And remember that decision is NOT permanent.  If you walk away and decide later you made a terrible decision and that you really, truly can't live without it, you can go back and buy it later.  

But I'd bet you won't even remember what it was you almost bought that you only kinda, sorta wanted.  .

Saving More / Spending Less Greatest Hits

Try Generic

Two weeks ago we talked about increasing your monthly savings until you find your optimal, pain-free savings rate. 

If you check that off your list, you can then find pain-free ways to decrease your spending.  And once you establish healthy spending habits, then you can save even more.

Healthy Spending Habit #1: Try generic

Do you buy Advil or generic ibuprofen?  Q-Tips or Walgreens cotton swabs?   Starbucks coffee pods or Safeway pods?  Hefty Cinch Saks or CVS garbage bags? 

When you buy brand name products, you are probably just a sucker for good corporate marketing.  Often the product quality is no better than its generic, no-name cousin. 

So an easy way to save money is buying generic - same quality product, no sucker premium.

But notice I said TRY generic.  Some generic products are truly awful - generic cottons swabs are like cleaning your ears with a tree branch.  So I "indulge" on Q-Tips.  On the other hand, ibuprofen is ibuprofen. 

So look for ways to buy generic.  If you decide the product is inferior, then go back to the brand name product. 

But first, TRY generic

Financial success or failure depends on your financial habits.  Saving a few bucks on garbage bags might not seem like a big deal.   But saving a few bucks every week over 30, 40, 50 years adds up.  And I don't know about you, but I'd rather splurge on retirement vacations than Hefty (Hefty) Cinch Saks.  

An Easy Way to Save More Money

The blog request I receive most often is suggestions on saving money / spending less. 

That's encouraging since the most common financial ailment I see is people who have the "income rich, savings poor" disease    The first step to recovery is realizing you have a problem.   

So for the next few weeks, I'll focus on writing simple, easy-to-implement tricks to get on the path of true wealth, which is not how much you make, but how much you have. 

Trick #1:  You won't feel, what you don't see. 

Right now, log into your 401k and increase your savings rate by 5%.  If you're contributing 5%, then increase it to 10%.  If you're at 10%, increase it to 15%.  And don't worry if they match or not.

If you're already maxing out your 401k (good for you!), then log into your bank account and create an automatic transfer from your checking to your savings that's 5% of your monthly income.

After you increase your savings, let it ride for 3 months.    I bet you won't feel it.    

If I'm right and you don't feel it, then bump it up another 5%.  Let that ride for 3 months. 

Rinse and repeat until you finally start dipping into your emergency fund to make up for all the money you're saving.  (A good problem to have!)  Then just dial it back a little.

Once you get there you've found your savings sweet spot.   

When the Stuff Hits the Fan

In a world of participation trophies and half-full cups, it's taboo to be negative.  But what if negativity is actually GOOD for you?   What if focusing on a negative outcome can help you do what's right?

I tell my clients "first we'll plan for the bad stuff, then we'll plan for the good stuff."  In other words, first let's make sure you're holding a sturdy, "stuff"-proof umbrella for when the stuff hits the fan (because it always does). THEN you can go dance in the…err…"rain."

Knowing you have a plan for the worst, doesn't just help you sleep well at night.  It also gives you the steadfastness to stick to your plan.  When it hits the fan, rather than executing on an emotional decision (which is also always a stupid decision), you look up at the fan and you go "Huh.  How about that?" And you open your umbrella. 

If you're a young family, that means getting life insurance before starting a college fund.  If you’re a retiree, that means knowing your annual budget before booking all your trips.  If you're an investor, that means knowing how much downside you can stomach, before swinging for the fences.  And if you ever plan on retiring, that means saving 20% before buying a $15 salad for lunch.  

Spend Less with Just 45 Seconds A Day

How are your New Year's resolutions going?  Still going strong?  Good for you! 

Was one of your resolutions was to "save more and spend less"?  Did you take my advice last week to bump up your retirement plan contributions by 2%?  If you didn't, then do it now!  (You'll feel really good once you do.  You'll already be "saving more" and at 50% to your goal.)

"Spending less" is a bit harder because you can't put it on autopilot.  But you can get close…. 

First, let's adjust your resolution.  Why?  Because "Spending Less" doesn't meet the experts' requirements for successful goal setting.  They say goals should be:

  1. Specific
  2. Ambitious, but achievable
  3. Related to behavior, not results

"Spending less" is related to behavior, but it's awfully vague so who knows if it's ambitious?

Let's improve "spending less" to "I will login to my Financial Zen Client Portal every day and look at my transactions until 12/31/2017."   (You can also use www.mint.com if you're not a client.)

It's:
1) Specific - once a day until 12/31/2017  
2) Ambitious - be honest, that's more attention than you've ever paid to your spending
3) Related to behavior - you're just logging in and observing

That commitment will take you 45 seconds each morning.  (I know because I do it.) 

How can something so simple have such a positive effect on your behavior?  Because what you think about becomes reality. 

Think and Grow Rich by Napoleon Hill first explored this concept in 1937.  Since then every self-help guru from Tony Robbins to Zig Zigler has also preached it's gospel.

What you think about becomes reality.  Mr. Hill explains that if you think about becoming wealthy every day, the universe conspires in your favor and opportunities present themselves.

Similarly, taking action each day by simply logging in to look at your spending, you will keep your goal top of mind.  By keepingyour goal in focus, you will find yourself making daily decisions which will move your towards your goal of spending less.  

It sounds like voodoo, but it works.  I know because I do it.  I have successfully stuck to my spending plan every month since I started.  (For the record, I am NOT a saver by nature.  I'm a spender like most people.)

It will require a little bit of extra work up front.  But once we get you up and running, 45 seconds a day is all you'll need.

Schedule 30 minutes with me and I'll help get you set up.  After that you'll be onyour way to both spend less AND save more in 2017. 

DO NOT Save More & Spend Less This Year!

According to Nielsen, 84% of us made New Year's resolutions, and 29% of us made a resolution to spend less and save more. 

Good on you if that was one of your resolutions! 

Unfortunately, only 8% of us will stick to our resolutions long enough to have them create a positive change.

Why do so few people see them through?  Because we set ourselves up for failure! 

Do you want to set yourself up for success and see your resolution through in as little as 45 seconds a day? (Cue infomercial jingle.)  I can show you.  No seriously.  45 seconds a day. 

First let's adjust your resolution a bit. 

The experts say goals should be:

  • Specific
  • Ambitious, but achievable
  • Related to behavior, not results

Spending less and saving more is certainly related to behavior, but it's not specific.  And since it's not specific who knows if it's ambitious? 

Rather than "save more," change your resolution to "save 2% more of every paycheck"  because it's:

  • Specific - 2% of every paycheck
  • Ambitious - if you're like most people and only contributing 6% to your 401k, you'll increase your annual savings by 33%!
  • Related to behavior - in this case you're actually putting the behavior on autopilot. 

Easy enough, right?  If you agree, then bump up your 401k contributions by 2% today.  Like right now.  While you're thinking about it.  Go ahead, I'll wait….

Spending less is trickier because you can't put it on autopilot.  The first step is to understand that you can't improve what you don't measure.  

So let's toss out "spending less" as a goal this year.  Let's replace it with "I will track my spending this year."

That's the 45 seconds part.  With account aggregator technology like Mint.com and your Financial Zen Client Portal, you can stay on top of your spending with just 45 seconds a day. 

No joke - I eat my own cooking.  I spend 45 seconds each morning logging into my Financial Zen Client Portal to look at my spending.  I can tell you exactly how much money I spent and where I spent it last month. 

Next week, I'll show you how.

Enjoy Responsibly

Don't you just love the holidays?   There's so much to enjoy - holiday parties, time with friends and family, eggnog, presents, great food, cookies, Christmas trees…and the list goes on.  

The holidays are also a season of generosity.  Need proof?  Americans spent $626 billion in holiday shopping last year.  (For perspective, the next biggest shopping season is Back To School which "only" roped in $76 billion this year.) 

The potential dark side of all that generosity is that it can conflict with financial responsibility.  If you've ever experienced a "spending hangover" in January, you know what I mean. 

So how can you avoid the hangover AND enjoy giving your loved ones really cool stuff?  

Here's 4 easy steps to avoid financial hangovers during the Holidays and for that matter anytime of the year:

  1. Know your limits - Don't spend with reckless abandon.  Know what you can afford before you get to the mall or log into Amazon.   What's your limit?  

    Holiday savings + December/January Cashflow = Holiday Spending Plan
    (If you're still paying off the holidays in February, you've spent too much.)

  2. Track your spending - FinTech (financial technology - it's athing.  Google it) makes tracking your spending so easy you have no excuse for not knowing where you spend your money.  All you need is a log in and an account aggregator service (like your Financial Zen Client Portal or Mint.com). 

  3. Stay within your limit - Once you know your limit and you're tracking your spending, stick to your spending plan.  Personally, I log into my Financial Zen Client Portal as part of my morning routine.  (Yes, I eat my own cooking.)  It takes me 45 seconds, and I get a daily update on how I'm tracking for the month.

  4. If you go over, make up for it next month - Stuff happens.  Your car will need brakes.   Your son will break his arm and need a visit to the ER.   Your golf clubs will get stolen.  Your hard drive will fry.   Your granddaughter can't live without getting a puppy for Christmas.  You won't be able to stay perfectly within your spending plan each month.   That's why you have an emergency fund - so you can have a buffer for unexpected expenses.   But in the months when stuff happens, make up for it the following month.  If you go over $500 this month, eat out a few less times next month.  

Spending hangovers are the worst.  If you follow these steps to avoid the holiday spending hangover, then you can follow them to avoid month-to-month spending hangovers.  And avoiding the month-to-month hangovers is the only way to avoid the most painful hangover of all- the retirement hangover - that's when you knock on your kid's door asking if they have room in their basement for you. 

Enjoy the friends and family and presents and good meals and giving this holiday season.  But to steal from the beer commercials - Enjoy Responsibly. 

As Human Beings, We're Wired To Be Spenders

Ever upgraded your seat on flight?  Ever bought a $10 salad for lunch?  Ever get Starbucks instead of drinking your office coffee?  How about paying a $4 ATM fee?  

We've all done these things.   And as long as you are paying yourself first, who cares?  If you're saving 20% of your annual income, then make all the "lifestyle purchases" you want!  But if you're not paying yourself first, then you better hope they don't invent a time machine between now and your retirement because your future self will come back and kick your butt.

In my experience, 95 out of 100 people don't pay themselves first.  So if you're in that group who spends first and then saves, congratulations!(?)  You're just like everyone else!

Why are most of us spenders?   There's a very good reason.  And you'll be happy to know it's not even your fault.  It's because we're wired that way as human beings.   

Universal Truth #3 - As human beings, we're wired to be spenders

In the psychology and behavioral finance community, it's called hyperbolic discounting (also known as Present Bias).

People place more value on a smaller reward NOW than a bigger reward later.

As in you really, really want to lose 10 pounds before your reunion in 3 months….but the cake is right in front of you right now!

Or throwing some finance in the mix - your brain fools you into thinking is that a $10 salad today is better than three $10 salads in 20 years.   (If you put that $10 into your retirement savings instead, it'll grow to $67 in 20 years.  With inflation, the salad will cost $18.    So you can get one now or 3 in the future.)  

Behavioral finance is really the study of our monkey brains.    A lot of the instinctive behavior we learned as early humans actually hurts us today.  

When there's a chance you'll be eaten by a sabre tooth tiger, it's good that your instinct is to run from fear.  But when the markets tank, selling everything and running for the hills is the worst thing you can do.  

If you've hunted for two days for your next meal and you don't know when the next meal will come, it's good that you eat now instead of saving for tomorrow.  But when you spend all your money now without saving for tomorrow, you'll be eating cat food in your kids' basement the last 20 years of your life. 

So how can you outsmart your monkey brain?   By not giving it a choice.  If you're dieting, don't walk into the cake shop!   If you're prone to overindulging in "lifestyle spending," pay yourself first!   Pay your future self 20% of what you make before you spend a single dime on salads, or flight upgrades or ATM fees.  Your present self would probably agree it can live comfortably on 80% of your income.

Budget is a four-letter word to most people.  Tracking your spending and saving what's left is a great recipe for failure.   It's much easier to save what you need FIRST and then spend the rest. The feedback I get from clients who have set up automatic savings plan is always "I don't even notice."

So do your future self a favor and pay him or her first.   And then your present-self will thank you for avoiding a time-machine butt-whoopin.  

Your Savings Rate Will Determine Your Financial Success

Harry decided it was finally time to lose the extra 10 lbs he'd been carrying around since his kids were born.   So he went to his local gym and hired a personal trainer. 

Harry religiously met with Jill, his trainer, for 6 weeks.  He did everything she told him, including his routine on the days he didn't see her.  He initially lost a couple pounds, but soon gained it back.  Frustrated, he confronted Jill. 

She agreed that he was working his butt off in the gym.  "But," she asked "what's your diet like?"

Harry then went on to describe the muffins he eats for breakfast and the burritos he eats for lunch and the cookie (or two) he eats when a coworker brings some into the office.   And don't forget the pizza and a cupcake every Sunday night.

Jill explained that losing weight is 80% diet and only 20% exercise.  Without eating right, Harry could spend 24 hours a day in the gym and not lose a single lb. 

Last week, we explored one of the universal truths about behavioral finance (the study of why people do the wrong thing even when they know what the right thing to do is).   If you missed it, you can find it here.

This week's related. 

Universal Truth #2:  Your Savings Rate Will Determine Your Financial Success

How much you save is your diet.   Your portfolio returns is your exercise.    

You can't possibly lose weight by only going to the gym.  You have to eat right too.  In fact, if you want to lose weight, you don't even have to go to the gym. You can just eat right.

Similarly, it's possible to invest all your money in low-yielding CD's and as long as you are saving enough, you could still enjoy a fulfilling retirement.

Alternatively, you could get 20% annual returns and if you're not saving enough you'll be eating cat food in your kid's basement when you retire. 

Focusing on how much you save means you're free so spend whatever you want on whatever you want with all your other money.  If you are saving (and not going into debt), then you know you are living within your means.

So what's a good savings rate? 

20% of your annual income is ideal. 
15% is okay. 
10%  - you're sacrificing tomorrow for today. 
5%  - pick out your favorite cat food

A 20% savings rate is your "maintenance diet" if you're at your perfect weight.  But are you at your perfect "financial weight?"  In other words, how much should you have already saved?

According to the personal finance classic The Millionaire Next Door, your current savings should equal 10% x your age x your income.  So if you're 50 years old and make $100k per year, you should have $500,000 (10% x 50 x 100,000).

If you hate math like most people, here's a cheat sheet:

If you're below your number, then you need to save more than 20%.  If you're aboveyour number, then you've got some wiggle room.

If you're really far from your number, talk to me before you freak out.  The advantage of working with a financial planner is not having to use rules of thumb.  I've got all sorts of levers we can pull to get you caught up. 

That said, there are no silver bullets.  Historically market returns average 8-10% annually.  And that's not something you can increase, which is why it only determines 20% of your financial success. 

The other 80% is how much you're saving. 

I can tell you how to exercise and eat right, but at the end of the day you're the one getting on the treadmill and putting food in your mouth.  

You Can't Improve What You Don't Measure

"If you can't measure it.  You can't improve it."
       - Peter Drucker

"Behavioral Finance" is a relatively new field in the financial planning industry.   It seeks to explain why so many people do the wrong thing even when they know what the right thing to do is.

As a financial planner, people financially undress in front of me every day.  I know things about my clients no one else knows.  Not their friends.  Not their neighbors.  Often, not even their family.

This puts me in a unique position to see how people behave financially.  After many years of observing people's behaviors towards their money, I've discovered some universal truths which I'm going to explore with you over the coming weeks.

Here's the first one:

Truth 1) No one spends LESS than they think they do.  (And neither do you.  Promise.)

Whether you make a lot or a little... whether you're old or young… whether you're a spender or a saver - it doesn't matter who you are - you spend more than you think you do. 

I think we can universally agree that knowing how much you spend is pretty important.   At a minimum if you don't know how much you spend, you don't know how much money you need to retire.   And if you don't know how much you need to retire, you don't know WHEN you can retire.  

We all know having and sticking to a budget is pretty important.  So how come so few people actually have one, much less stick to one?  Why do most people think "budget" is a four letter word?  Because it's boring.  It's tedious.  It feels restraining.  And lastly - because it's hard.

Wouldn't it be great if there was an easy, even fun way to track your spending and come up with a realistic "spending plan"?  Well now there is!  (cue infomercial jingle)

Yet ANOTHER benefit of being a client of The Financial Zen Group is the ability for you (us) to track your spending in an easy, low maintenance way. 

Here's how:

Step 1) Log into your Financial Zen client portal at www.financialzengroup.com
Step 2) Click "Add" in the lower, left-hand tile of your dashboard
Step 3) Type in the name of your financial institution (banks, credit cards, 401k, etc)
Step 4) Enter your log in information
Step 5) Give yourself a pat on the back.  You are now on the road to financial zen.

The system will automatically start tracking your spending . No guesswork.  No spreadsheets.  No downloading.   It will pull in transactions as far back as your financial institution will let it (usually 12-18 months of data).

Not only that, but it will automatically create a budget for you, based on your spending habits.

If you're like most people, you'll be surprised where your money is going each month.  It's an eye-opening experience.  And most importantly adds a whole new level to our ability to plan for your financial success.

My clients who have already done this have all told me they have never felt more on top of their finances.

So I encourage you to join them and get on your own path to Financial Zen!