Sharon Marchisello's Blog, page 4
March 8, 2021
Live Within Your Means
In preparation for the release of the audiobook version of Live Well, Grow Wealth, I'll be sharing excerpts each week on this blog.
This excerpt is from Chapter One, Live Within Your Means. First, you have to look at the big picture:
There is no such thing as unlimited wealth. Even the developers in Dubai learned that lesson after the global financial meltdown of 2008. One catastrophic spill can wreak havoc with the fortunes of a titanic oil company. Famous real estate moguls have declared bankruptcy.
No matter how much money you earn, if you spend more than you have, you will run out. The converse is also true: no matter how little you earn, if you spend less than that, your wealth will grow. It's simple arithmetic.
Think of certain professional athletes who rose from poverty to snare multi-million-dollar contracts, yet found themselves penniless within a few years. Or lottery winners who quit their jobs and proceeded to fritter away their fortunes. Contrast the retired school teacher with a modest home who left millions to her favorite charity. The difference: the teacher lived within her means.
Not having enough money to meet your needs and live the way you want is stressful. It can cause health problems. It can ruin a marriage. Some people are tempted to violate the law, or fall victim to get-rich-quick scams, trying to take a shortcut.
Every time you turn around, someone has a hand out. The prices of basic necessities rise, but your income may not keep pace. Your possessions break or wear out, and must be repaired, replaced, or updated. The best-laid plans can be thwarted by an emergency expense no one could have foreseen, or a catastrophe that was not your fault. How can you possibly live within your means?
The first step is to know exactly how much is coming in, and how much is going out. If you hire a financial planner or credit counselor, he or she may tell you to write down every penny you spend and receive for a specified period of time, and then make a budget: the dreaded "B" word. I must confess I never did this.
The closest I came to budgeting was when my future husband and I purchased a house together. He had money for the down payment; I did not. I had a job, though, so I agreed to pay all our utility bills and buy the groceries after we moved in, in addition to my share of the house note. We kept a log of our household expenses and I'd deduct his half each month from what I owed on the down payment loan.
We still handle our expenses this way. Periodically, we tally everything up and he transfers money into my account for the difference. Once we went to a financial planner and she asked me about our budget; I was able to produce one from this expense log, our bank statements, and our credit card bills.
Whatever method you choose to document your big financial picture is fine; the goal is to understand what money is coming in, and what is going out. Writing down every expenditure and then creating a budget works for a lot of people.
Once you've figured out how much is coming in and how much is going out, it's time to start analyzing. If more money is coming in than going out, you're in better shape than most. If you have more money going out than coming in, the faster you take steps to reverse the situation, the better off you'll be. The magic of compound interest and wealth-building principles are working against you.
So how do you do that?
Can you increase what is coming in? Ask for a raise or apply for that promotion. Take advantage of some overtime. Get a part-time job or start a business on the side. Send the kids out to solicit yard work from the neighbors. Re-structure investments or tap an asset. Organize a big garage sale or start selling your treasures on eBay.
For most people, it's not easy to increase the "coming in" column, and some of those solutions might only be short term. For example, once you've sold all your valuable possessions, if you're still spending more than you make, then what? Therefore, it's more effective to concentrate on shrinking the "going out" column.
First, classify your expenses as absolutely necessary, necessary but reducible, discretionary but important, and totally unnecessary.
Absolutely necessary, non-negotiable expenses probably include your rent or mortgage payment, and other fixed costs like insurance premiums, union dues, tuition, and taxes. Necessary but reducible might include utility bills, gasoline, clothing, and groceries. Discretionary but important expenses are not necessary for survival but add value or pleasure to your life: travel, cultural activities, magazine subscriptions, entertainment, toys, pampering. Totally unnecessary expenses eat up your income and add no value to your life: late fees, fines, excess interest on credit card debt.
To learn more, read Live Well, Grow Wealth by Sharon Marchisello.
January 4, 2021
Countdown to Financial Fitness: Resolution: De-clutter
Resolution: De-clutter
When I retired in 2008, I promised my husband I'd finally get around to cleaning out our "box room." This is a spare bedroom where we stashed excess stuff when we first moved to our house in 1994.
The room is filled with electronics now long outdated, including a turntable and vinyl records. Books languish in boxes because our house doesn't have adequate shelf space, and we've given up on finding a contractor to build some. A decade's worth of National Geographic magazines is stacked against a wall. Boxes of photos, still unlabeled, wait to be displayed in albums. Maps and tour brochures are scattered across the floor with no semblance of organization.
Paintings from my mother, grandmother, and an artist friend lean against each other, hidden from view, because my husband and I can't agree on which ones we should hang--and where. Many need new frames, which can get expensive.
It's now 2021, and I've made little progress on cleaning out the box room. If anything, it's gotten worse, as more unable-to-categorize items have been stockpiled there. This includes a growing TBR mountain of books I've bought from author friends or received free at conferences or from giveaways.
Years ago, I wrote a post on this blog about the high financial cost of clutter. People with too much stuff waste money on storage lockers and moving fees. Not knowing what you own or where to find it when you need it can cause you to make unnecessary purchases. And just looking at a sea of junk and wondering how to pare it down can increase stress, which is detrimental to your health.
I never abandoned the goal to de-clutter, but it seems like something else always took priority. Now I realize I've been going about it all wrong. Instead of trying to find time to tackle such a monumental task, I need to approach it in small bites.
Ten minutes a day, do something to de-clutter. That's my New Year's resolution, and I've written it down to hold myself accountable.
Taking small bites, making small, sustainable changes, is really the best way to achieve any larger goal, whether it's losing weight, writing a novel, getting in shape, or saving for retirement.
What goals have you set for the New Year, and how do you plan to achieve them? I'd love to hear your comments.
October 8, 2020
Countdown to Financial Fitness: Get off the Interest Train
Get off the Interest Train
My husband's VISA account required an intervention last week. When his statement arrived, we noticed an interest charge of 97 cents had been applied. He has set up automatic payments of the full statement balance on the due date, so there shouldn't be any interest charges.
However, this VISA card, issued by his credit union, doubles as an ATM card to make withdrawals from his checking account. Last month, on a trip to Frankfurt, he withdrew euros from an ATM, and instead of a debit to his checking account, the transaction was processed as a cash advance. He was immediately on the interest train.
The interest train is like a snowball rolling down a hill. It's the magic of compound interest working against you. As long as any part of your loan balance remains unpaid, interest accrues. Paying the statement balance won't stop it because interest continues to accrue between the date the statement is prepared and the date the payment is posted. And that interest carries through to the following month's balance, accumulating more interest. Once you're on the interest train, all your subsequent purchases accrue interest.
Unlike purchases, cash advances begin accruing interest as soon as they are posted; there is no grace period. And once you owe interest, there is no more grace period for anything. The only way to get off the train is to pay the account down to zero. As soon as possible.
Fortunately, it's easy to do online now. Payment can be instantaneous, so interest will stop. Although my husband's statement reflected only 97 cents in interest, that amount had grown to $2.27 by the time we noticed it and paid the account down to zero.
These are small amounts, because we nipped it in the bud. But this scenario illustrates why so many financial gurus counsel against using credit cards. An item can end up costing you twice its purchase price if you finance it, use your credit card heavily, and then make only minimum payments, especially if you get behind and incur penalties as well.
I believe credit cards are a convenient, safe form of payment. But only if managed properly. And that means paying your balance in full, on time, every month. And avoid cash advances.
What are your thoughts on using credit cards? I'd love to hear your comments.
September 14, 2020
Countdown to Financial Fitness: Reversal of Fortune
Reversal of Fortune
Only time will tell if they'll go the way of buggy-whip manufacturers after the invention of the automobile.
Event planners and owners of conference halls and theatres are still hurting. With so many free Zoom webinars now available, can organizers really charge as much for a virtual experience? All the businesses that supported large events are now scrambling for customers, and the smart ones are reinventing themselves. Could we see the return of drive-in movies?
My husband works in the airline industry, which has been hit particularly hard. In February, employees received record-breaking profit-sharing checks. In March, the airline cut its schedule by 90% and was burning through $50 million a day. Thousands of employees were encouraged—or forced—to take voluntary leaves or exit packages. Government assistance was the only reason the airline didn't immediately furlough most of its workforce and demand pay cuts from those who remained. We all know that's coming once the assistance runs out.
We used to take a lot of cruise vacations; in 2019, we took four. This year, none. We'd scheduled a cruise for April, but then the cruise line suspended its voyages ahead of the no-sail order. I still receive weekly emails from travel agencies touting enticing sailings—first for fall and winter of 2020, now for spring and summer of 2021—but I'm not biting. It took us over 60 days to get our refund from our April cruise that got canceled, and the no-sail order keeps being extended. I feel sorry for owners of travel agencies and people who work in the tour industry. I believe demand will return one day, but how long can they hang on until that happens?
Stocks in these industries have suffered accordingly. Investors have made money through short-term speculation, but if you purchased these stocks before March, you're still in the red.
No one can predict the future, determine tomorrow's winners and losers, so how do you prepare?
If you're an investor, diversify. Tech stocks are hot now but don't put all your money there. Remember the tech bubble at the turn of the century? If your nest egg is spread out among different baskets, you're unlikely to lose it all if one sector tanks. As I mentioned, the Dow is soaring again, but a different mix is driving the averages.
If you're an employee or a business owner, build expertise that will transfer across industries. Take advantage of downtime to learn new skills or update proficiency. Never stop networking and don't burn bridges.
Having emergency cash is essential. I've done several posts about the value of accumulating and maintaining an emergency fund—at least three to six months' living expenses in a liquid, low-risk account. The only reason most of the airlines are still in business was that they had billions of dollars in cash on hand, accumulated when business was booming. Even so, only government assistance saved them from burning through all that cash before revenues could return. Such a reversal of fortune!
Look for ways to shrink your financial footprint. Cut unnecessary spending, reduce debt. The less money it takes to sustain your lifestyle, the longer your emergency funds will last, and the less likely you are to suffer a reversal of fortune.
What are your thoughts about preparing for the unexpected? I'd love to hear your comments.
July 29, 2020
Working with a Financial Planner
A friend of mine just took an early retirement package and immediately turned all his savings over to a financial planner. He's ecstatic. I'm worried for him.
I'm not saying he shouldn't work with a financial planner. Unlike me, he has no interest in managing his investments. He can rebuild a car's engine; I don't even change my own oil.
But whether you do the work yourself or hire someone to handle it, you still need to know what you're getting, and how much you're paying.
For Christmas, I gave him and his wife a copy of my personal finance book, Live Well, Grow Wealth. They have yet to read it. (The problem with writing about personal finance is, the people who could really use the advice aren't interested, and the people who areinterested already know about most of it.)
Before my friend visited the financial planner, I suggested he ask some questions. The most important one: how does the adviser get paid? I reminded him that in Chapter Six of my book, I cover working with a financial planner/adviser/broker/whatever and provide a list of questions/points to consider. If he and his wife didn't want to read the whole book, they should at least skim those few relevant pages before their meeting.
Right. He barely wanted to talk about what questions to ask, much less read about them.
The adviser came highly recommended. His parents and all their friends have been using the guy for years. He's a vice president at a major financial firm.
"Did you find out how he gets paid?" I asked, after my friends had signed over their nest egg.
"Oh, he doesn't charge us. We didn't pay him a cent."
Really? Is he a relative, doing them a favor? How does he stay in business if he doesn't charge his clients for his services? "Are you sure he doesn't charge anything? Maybe his fee comes out of the investments?"
"Yeah, it just comes out of the investments. We don't pay anything."
"Do you know what percentage he takes for managing your investments? One percent? One and a half?"
"I have no idea. I don't pay attention to any of that stuff. He's a genius, so whatever he charges, it will be worth it."
"Do you know what he's having you invest in? Mutual funds? Individual stocks? Bonds?"
My friend shrugged. "He had us move everything out of Fidelity over to his firm. I guess it's a mutual fund. My parents have been in it for years." (I couldn't help thinking about Bernie Madoff.)
"He sold everything?" I suspect the broker earned some hefty commissions from all those transactions.
"Yeah, he said it's better to sell everything and start fresh."
"Does he use publicly traded mutual funds? Or something proprietary to his firm?" (With publicly traded products, you can track performance independently. And if you ever decide to change brokerages, you can transfer the securities in kind, rather than having to sell everything at once, when it might be an inopportune time for some of them.)
Another shrug. "I don't care about that. He said we're on track to retire at 65 and we don't have to worry. He said we've done pretty well with Fidelity, but it's good we came to him when we did, because now we have the right mix going forward."
My friend is happy, and I hope he's right about being on track. He'll never know whether he could have saved money… or how much.
What are your thoughts about working with a financial planner? I'd love to hear your comments.
Sharon Marchisello is the author of Live Well, Grow Wealth.Sign up for her newsletter at sharonmarchisello.com
