Living Within Your Means

I am often asked what the #1 thing you can do to improve your finances. After thinking about it, the first thing that comes to mind is to live within your means. Not doing so is the root cause of much of the financial stress and heartache we go through. It can be really really hard to live within your means, but that doesn't negate the need for it. So to start off a new year I want to talk about how we can all do this better this year.
What does living within your means actually mean? Obviously, it means not spending more than you earn, but I want to take it a step further to include living on less than you earn. The goal shouldn't just be to live on the cusp of your income because at the end of the month, you'd have nothing to show for it. A good rule of thumb is to live on 80% or less of your income. This allows you to give 10% and save 10%. Some of you might be thinking right about now, "How am I supposed to do that? I can barely make it as it is." Chances are if this is the case, then you have been living on the edge or above your income for some time.
So here are some things you can start doing this month if you're in that boat.
1~Get organized. Read this for more specifics of getting organized. Financially speaking, it's a great place to start because a little organization goes a long way.
2~ Create a Budget. If you've never had a budget or let it slip in recent months, then do one today. Start with your income. No matter how much or little you make, the principles are the same. It needs to be month specific and realistic. Cover your four walls first (read this for details). Then debt payments, and/or savings & giving goals. Be sure to include non-monthly expenses because they can wreck your best laid plans. Remember there are only two sides of the equation- Income and Outgo. If something comes up, make adjustments.
3~Clean House. This might be literal if you're coming up short and need to sell some stuff or are looking for a part time job. Most likely there will be some categories you need to thin out to bridge the gap. This may include drastic cuts like selling a car or house that you're struggling to pay for. At the very least there will be little things that add up quickly, like buying a drink at the gas station or daily lunches. Maybe it even means trimming utilities and grocery bills by lowering energy usage and better menu planning to avoid eating out and impulse purchases. No matter the category, short term sacrifice is always worth long term gains.
4~Learn to just say no (to yourself and your kids). Children can be one of the biggest reasons for getting off track financially. Part of being a good parent is teaching your children that the world does not revolve around their wants. Even if you did have loads of extra money, do you really want to raise those kind of kids? Likewise, adults can behave like children by "needing" things too. Be realistic and remember that family needs and goals come first.
No matter where you are in your financial journey living within your means should be one of your top priorities.

Caught in the Middle

I was talking to my neighbor yesterday about the delicate balancing act between paying off your home, saving for college and saving for retirement.  She posed the question that I'm sure you have asked yourself, "How do you do it all?"  It got me thinking about all of you who are caught in the middle between saving for yourself and your kids' future.  How do you plan?

There are a couple of things you need to take care of before you'll be ready to juggle these well.

1~ Be completely out of debt, except for the house

2~ Have 3-6 months of expenses in an emergency fund

Not having an emergency fund or having debt payments detract and distract you from your savings goals.  It's a lot harder to juggle 4 or 5 balls than it is to juggle 3.  You end up feeling spread too thin and discouraged.  It's easier to tackle one thing at a time.  If you have a pile of debt, it's hard to save for anything, period.  The last thing you want to do is to borrow from your retirement or kids' college fund to cover an emergency.  If this sounds really simple and unsophisticated, it is.  But once you are out of debt and have that emergency fund, you have two less things pulling you away from your goals.  Remember, there is great power in focus.

Once you are focused, it becomes a question of priority.  Ideally, you do it all at once- retirement, college, and pay off the house early.  But if you have to choose, put your retirement first.  This will always trump saving for anything else.  It's like the reminder we get when we fly, about the oxygen mask; always secure yours first before helping others.  After retirement is taken care of and depending on what phase of life you're in will determine if you're more aggressive with college, the house or other goals.

One last note on college savings.  If you do have the resources and desire to also save for college, set limits.  Decide what you can and are willing to pay for.  Let your kids know early and often that they will be expected to work hard to get scholarships and get a job while in school.  You may choose to limit the funds to pay for an in-state college or university instead of a costly private school.  Remember, companies hire more based on experience, work ethic, and attitude than they do from where you went to school.  Besides, who wants to raise pampered trust fund babies? I don't, and I wouldn't no matter how much money we had.  Looking back on my own college experience; the lessons of discipline, hard work and seeing something through to the end were just as important as the content itself.

A Parenting Lesson From Warren Buffett

I know, I know you're probably thinking, "another week of children and money? enough already!"  I couldn't help myself because I saw a very interesting and informative interview with Warren Buffett and his son Peter.  It got me thinking, how do you successfully raise children, when you have money?
  
We all know Warren Buffett is one of the wealthiest people in the country and currently ranked 3rd in the world, worth an estimated $47 Billion.  At the age of 79, he is The Oracle or Sage of Omaha.  He is world renown for his savvy investment firm Berkshire Hathaway, his philanthropy and of course his frugality.  While I'm not endorsing anything he has done or said, when it comes to children, he did a great job in my opinion.   He raised 3 children (although he was only a millionaire at the time) to be successful adults in their professions.  I heard him say that when it comes to children, you should give them enough money to do something, but not enough to do everything.  That's just what he did with his children.
  
When his youngest son Peter was in college he was given 600 shares of stock in Berkshire Hathaway.  At the time, in the 70's, this was worth about $90,000 and a proverbial drop in the bucket compared to the Buffett fortune.  Peter, who wanted to be a musician, used this money to start his very successful music career.  Oddly enough, if he hadn't done anything with the stock, it would be worth several million today, but Peter doesn't regret that fact at all.  His father taught him how to work and follow his passion in life.  Above all the Buffett children were taught the core values that money is just money and not everything.  As a result, they have the character and independent identities to withstand the immense weight of their father's fortune.


Another great example of this was in the mid 90's Warren announced he was going to give away his fortune before he died.  To jump start that, he gave each of his children a billion dollars (yes, with a B) to give away to whatever charity they wanted.


Now obviously we aren't Warren Buffet and it's not likely than anyone reading this will amass the kind of wealth that he has.  The lesson, however, is the same, just on a smaller scale.  Teach your kids to have the character to withstand the responsibility of their inheritance, whatever the size.  If you don't they will crumble under pressure and it will be a curse instead of a blessing.

The High School Graduate

Well it's that time of year again- Graduation.  Whether you, your children or even grandchildren have graduated from high school, the stats are very alarming.  America is the most marketed to country in the world.  Everyday we are bombarded by things we 'should' buy, consume and finance to pay for later, because we 'deserve it'.  As a result, many of our young people fall into the idea that they have to have everything at once.  These ideas just cause a real mess!


The average 18 year-old leaving for college is one of the most susceptible and vulnerable groups simply because they are young, inexperienced and have never had any training on personal finance, in school or from their parents.  Thankfully, some states, seeing the need, have started to change their high school curriculum to include a semester of personal finance required for graduation.  Utah is one of those states.  A few years ago when the state was deciding what course to use, Zions Bank (a local bank) stepped up and paid to have Dave Ramsey's high school course put into every high school in the state.  The competition?- curriculum put out by the credit card companies.  Talk about a conflict of interest.


In the past, these young freshman have been subjected to a mine field of credit card offers on college campuses.  You probably remember the tables set up the first week of school- sign up for a card and get a free t-shirt or pizza.  Talk about being sent to the slaughter.  Thanks to the legislation passed last year, it is now illegal to get a credit card if you are under 21 without income verification and a parent co-signer.  This in effect is cracking down on the marketing on college campuses.  We have yet to see if this is actually working, but I hope it will help somewhat.  Sadly, some enabling parents will gladly co-sign for their college student to give them 'experience' and to use for 'emergencies'.   First of all,  for the inexperienced college student, going out with friends every weekend  is an emergency. Secondly, this is like giving your child a loaded gun, it could kill their financial future.  Many students end up dropping out of college to get full-time jobs to pay for the credit card debt they have accumulated.  Of course doing so activates repayment of any student loans they have taken out.  So it ends up being more of a burden.  As you send off your freshmen to school this fall, please remember that nationwide only about 50% of those starting college actually get a degree within 6 years.  Looking back, and I'm sure many of you can relate, I only wish I new then what I know now.  That is partly why offer a counseling package for graduates and newlyweds.  After all an ounce of prevention is worth a pound of cure, isn't that how the saying goes?

What is Your Financial Legacy?

While I was in Nashville last month, I read a very interesting article in USA Today about Generation Y's challenges with money.  The average college student now days graduates with over $23,000 in student loan debt.  On average they have more than 3 credit cards, with 20% of them carrying balances over $10,000 (source: Fidelity Investments).  Now to some of you, this might not seem so bad, but remember, many of these kids don't have jobs to repay this debt so the parents end up picking up the slack.  


A few years ago, there was a documentary made called "Maxed Out".  If you haven't seen it I would recommend it (with the caveat that it does have some language in it so try to get an edited copy of it).  It talks about a lot of things regarding credit card debt and the problems it causes. But it also spotlights the dangers of college students' financial illiteracy when it comes credit cards.  Some of the stories (and others like them) in this documentary spawned the new credit card legislation that went through last year.  While this act is a start as far as prevention, it WILL NOT replace the need for you to educate your children about money.  If you don't teach them, who do you think will?  Would you really trust the credit card companies to teach your children about financial responsibility?  That seems like the ultimate irony.  You wouldn't want drug dealers to teach you kids about the dangers of drugs?  So why is this any different?  


Did you know the fastest growing segment of the population to declare bankruptcy is 18-24 year olds?  That's right, fresh out of college, just starting out and crushed under the weight of debt.  This is so sad because I firmly believe there are certain things a teenager should know how to do before they leave home. Things like basic cooking and laundry skills are good, but if you don't want your 30 year-old to be living in the basement make sure they have a basic understanding of personal finance.  Some of you have experienced this with your children and others of you are currently on the child end.  Teach your children to build good financial muscles, this is vital whether they are 3 or 30 (it's just a lot harder if they are 30).  Wherever you are on this spectrum, start today to make changes for the better!  This is not an easy process because it's easier in the short term to give in to their demands.  Ask yourself, what will my financial legacy be to my children and grandchildren?  Remember that true financial peace starts with financial independence.