Money Make-Over Lessons
When the Times was publishing the Money Make-Over series, we learned firsthand that there is a strong appetite among Southern Californians for help organizing their finances, and that even knowledgeable investors and savers want to make sure they are on the right track.
Often, we are asked what kind of lessons emerge from our experience reviewing and editing these make-overs. Although every person’s financial circumstances are unique, there are certain questions and problems that come up frequently.
Here are some common strategies in personal finance that have been frequently recommended in Money Make-Over columns and summarize what experts often say about them:
1. Some kind of spending plan, however informal, is essential.
Where does the money go? Many people have no idea.
Planners often suggest that clients track expenses. That doesn’t mean you have to enter everything on a computer software program like Quicken or write it down in a notebook. But you should list your expenses at least occasionally so you can review costs and question whether you actually need everything on the list. You might be surprised at how much you’re spending on things that don’t really matter to you, while important goals--vacations, retirement, college educations--are being put off for lack of funds.
An alternative to making lists is the indirect, “out of sight, out of mind” approach. Use automatic transfers to whisk money to your savings and 401(k) accounts, and make a commitment to live on what’s left, without tapping those savings or going into debt. Many people who profess to be clueless about money say this is the only approach that really works for them.
Debt is a killer.
Many people’s financial plans are undermined by the amount of debt they carry--particularly credit card debt. Planners say that borrowing for a home, a car to get you to work or an education can make sense. Most other debt simply prevents you from achieving your goals. Home equity loans can be especially dangerous for people who don’t have the discipline to stop spending above their means.
And even otherwise “good” debt can louse up a financial plan if taken too far. People who borrow to fund a too-expensive house or a succession of fancy cars should consciously weigh their value against using more money to fund other goals, such as a comfortable retirement.
Your standard of living is flexible.
Sometimes we hear that someone “can’t do without” something, or, alternatively, “can’t afford” something. But we tend to forget the truth: You can do without most everything and can often afford more than you think, especially if you are willing to make the required trade-offs.
It’s always more enjoyable to raise your standard of living than lower it, but both directions are possible, and you can lead a happy, satisfied life at any number of levels of income and wealth.
Strike a reasonable balance between saving for your own retirement and for your children’s college education.
Readers have told us they agonize about not saving enough for the kids. But keep this in mind: Millions of successful adults paid for their own college education. Your children can too.
It’s true that students who graduate from college or graduate school with little or no debt have an enormous head start on saving for their own retirement. Parents who can afford to help certainly give their children a wonderful gift. But not all children take advantage of such a gift the way parents intended. Some children might even prefer that you ensure your finances first so you don’t need their financial help later on.
In articles published in The Times, planners have repeatedly argued that retirement should be funded before college savings. That keeps the parents in control of any potential college funds and maximizes the advantages of tax-deferral plans.
Remember, too, that college savings is not the only good investment in your children. Maybe you prefer to invest some during their youth--say, in the form of a special vacations, a summer camping experience or by supporting a hobby. Such spending may be as--or more--important in the long run than minimizing their future college-debt loan.
Don’t leave money on the table.
While there is no such thing as truly “free money,” there are ways to reap big financial returns for relatively small sacrifices.
Most companies that offer 401(k) plans, for example, will match a percentage of employee contributions. Maximizing such matching is about the easiest way to get instant high returns on an investment--often 50% to 100%.
There are several other easy winners. Workplace tax-saver plans--sometimes called flexible spending or 125(c) plans--allow you to put aside pre-tax money to pay medical or child-care expenses. Tax breaks such as the child tax credit, education credits and the earned-income credit are available to many people, depending on their incomes.
Just being a savvy shopper can also pay dividends. People who comparison shop for insurance, cars and even homes can save thousands of dollars over time.
Don’t rely on one source.
Too many people have written us to say that they lost money by relying on the advice of a friend, a relative or a broker.
The lesson: You should never rely on a single source, particularly one who may not know your entire financial situation. This applies to friends, brokers, Internet chat rooms--even newspapers and other media.
Often, you can evaluate the idea just by reading a chapter from a finance guide, or making a quick call to your accountant, or doing a little research on the Internet.
Just don’t check and recheck so much that you become paralyzed.
Don’t forget pensions and Social Security.
Although more than 40 million workers are covered by a defined-benefit pension, many people do not know how much to expect from their company’s retirement plan. Pensions, which are different from employee-funded 401(k)s or 403(b)s, could replace 30% or more of your working income, reducing the need to save on your own or at least providing a safety net for your retirement years.
Likewise, expect Social Security to survive in some form; lower-income workers in particular are likely to get the biggest proportional benefit.
Don’t take projections too seriously.
When it comes to predicting what your portfolio will earn in the future, it’s all basically guesswork.
Most planners and retirement calculators base their figures on historical returns for the stock market, which have averaged about 11% over the last 100 years. Real returns--what you get after inflation--have averaged 3% to 4% for bonds and 7% to 8% for stocks.
Because even a small difference in returns can make a dramatic impact on your standard of living 20 or 30 years from now, you may want to err on the side of caution by keeping your projections low and resolving to save more or work longer to meet your goals if your returns don’t come in as expected.
At the same time, no one has a crystal ball. Don’t be panicked by planners, Web sites or brokerages that imply you’re doomed if you’re not saving, say, half your income for retirement. Some of these naysayers are using extremely conservative assumptions in their calculations; their real goal may be to get you to invest more with them.
Don’t despair if your goal seems unattainable; often just getting started is half the battle.
Not much is customized for you.
It takes real wealth--as in tens of millions of dollars--to get a truly customized financial plan. Most planners and other financial professionals make at least some “boiler-plate” recommendations; they often propose the same mutual funds or insurance solutions to a variety of people. The ideas may be perfectly fine for you; in fact, the more skilled the planner, the better his or her “routine” solutions tend to be.
Where you need to watch out is when the financial advisor has an incentive to push a particular investment, whether or not it suits your goals. Any investment that pays the planner a commission can create this conflict. While commissions are a legitimate way to pay a planner for his or her advice, they can become a problem when the investment wouldn’t be recommended otherwise.
How do you know? Get that all-important second opinion.
By the way, personal finance software such as Quicken or Microsoft Money offer nothing but boilerplate solutions, nominally crafted to your situation based on the data you type into the program. Asset allocations services at Web sites such as https://www.schwab.com, https://www.quicken.com or https://www.financialengines.com also rely on boilerplate. If your portfolio is small and your financial situation straightforward, these resources may be all you need.
There is no substitute for learning a bit of finance.
Sometimes, a reader just wants to be told what to do. If you really have no head for numbers, it’s understandable. It’s also not realistic. Putting your financial affairs blindly in someone else’s hands is a recipe for trouble.
The alternative is to learn enough to know the overall issues, even if you don’t know the details. Many professionals will spend time to explain issues to you in such a way that you can help them make the best choices for you. Good basic personal finance books, like Eric Tyson’s “Personal Finance for Dummies,” also can help you learn the basics.
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