Viewing entries tagged
cash flow

The Power of Awareness

It's been more than a few times that I've written about the single greatest tool in working toward long-term financial success....controlling what you can control. 

As we all have likely noticed, we don't get to control how much snow falls from the sky, but we do get within reason, the opportunity to decide where we live. If you can't stand winter and you're living in Buffalo there's a fundamental disconnect. True, work may tie us to where we live so that's maybe not the best analogy.  How about this one....

You don't get to pick the direction of the stock market but you do get to decide how much you spend and save/invest.

Many times during my term as U.S. President and Chairman of the Financial Planning Association, I was asked about the "luxury" of dealing with high net worth Clients. My comment was almost always the same; "the only difference between high net worth Clients and my "typical" Client was that the high net worth folks had more zero's after their numbers but roughly all the same problems. As it turns out, the net worth of folks who don't have to worry about either their spending or saving is a strata that few of us will ever attain. It's about as unlikely as it is that your child will be an NBA, NFL, NHL or MLB star.  And trust me, those are pretty daunting odds.

As Wade Slome, CFA, CFP® recounted in a recent Wall Street/CheatSheet article......

"First, figure out when you and your spouse will be laid off or be too sick to work. Second, figure out when you will die. Third, understand that you need to save 7% of every dollar you earn. (30% of every dollar if you're 55 now). Fourth, earn at least 3% above inflation on your investments every year. (Easy, just find the best funds for the best price and have them optimally allocated.) Fifth, do not withdraw any funds when you lose your job, have a health problem, get divorced buy a house or send a kid to college. Sixth, time your retirement so that the last cent is spend on the day you die...."

(The above is taken from a New York Times 2012 article)

Ok, sounds easy enough. 

Or; we could just control what we can control, namely spending and savings. 

How many times I've been told by Clients, both potential and existing, that "I don't want to live on a budget..." is many more times than I'd like to mention. Of course, controlling what you spend doesn't necessarily mean "living on budget" any more than being aware of the fact that high cholesterol will kill you keeps any of us from enjoying fatty food.  What we do however, is to have an embedded understanding that there's only so much of "this" or so much of "that" you can do without there being consequences.  Spending and saving are the same.  You don't have to strap down every line item to a finite dollar amount, never to be under or over spent on ever under any circumstances without the penalty of death. No, it's more like your next rib-eye steak or Wendy's Bacon Cheeseburger......you enjoy it for what it is, aware of the looming consequences for repeated over indulgence combined with the mitigating and complicating efforts of a host of other factors. 

We gravely under estimate the power of awareness in our lives. 

Sound cash flow planning pays off in awareness more than it does that you favor one line item of spending more than another; or that you favor your retirement savings over your personal savings. While exact preferences can have some minor complicating factors, those factors pale in comparison to the consequences of no awareness. I'd much rather have to figure out which "bucket" we're going to take money from to maintain a robust retirement lifestyle than figure out how the heck we're ever going to be able to fund a retirement at all. 

So, my advice would be this....don't think "rules" when you can think "awareness." 

Controlling what you can control could be re-worded I think into- "be aware of what you need to be aware of.."

One thing remains the same, whether we're discussing "budgeting" or "awareness." 

It takes a few things to accomplish either; 

  • Some degree of thoughtful work 
  • A desire to allow awareness to happen
  • An appreciation for adjustments, mis-steps and course corrections
  • A metric for keeping score
  • An appreciation for the "up-ness" and "down-ness" of things

I read a recent article on the value of focusing on your processes instead of your "goals." The point of the article was that if you focused on your process, your goals would come and with much less stress and pressure. The analogy in the article was that if you tweaked your back in your gym workout and your goal was 10 machines, 15 reps per machine, four times a week, you might be tempted to press on if your "slipped disk" happened early enough in the day because you have a goal to keep. But realizing instead that you have a process, you just skip that day's back related exercises knowing that there's always the next work out and the one after that. If you focus on your process as "four workouts per week consistently and I'll be in much better shape" it's a bit easier to see how over the long term, you're likely to get to the same place, without as much stress and worry. 

Build a process for controlling what you can control (aka should be have higher awareness of) and focus on that rather than every detail and appreciate that over time, you're going to get it right much more than you get it wrong.

That's why they say that the plan is nothing...but planning is everything. 

It's all about awareness. 

 

 

Pain v. Gain

Clearly the most arduous part of the Wealth Management proces is having to construct a list of household expenditures. But the question remains, why is it so arduous?  In a world of online tools such as Quicken or Mint, why is budgeting so damn aggravating? 

First off, as you can read here, there are some pretty fundamental reasons, three of them actually, the first of which is clear, "it's not fun." We get it, and we can appreciate it. Few things that are necessary in life are fun in the true sense of the word, eating salad isn't fun, exercising everyday isn't fun and surely, picking that salad over your favorite steak or cheeseburger and fries isn't fun either. 

The second falls into that realm of the "doing v. knowing" gap. You already know where your money is going (out of your bank doesn't qualify as an answer).  But truly, you don't know where its going, you just think you do. And, in the world of the "doing v. knowing" gap, thinking you do virtually makes it so.  

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Clearly the most arduous part of the Wealth Management proces is having to construct a list of household expenditures. But the question remains, why is it so arduous?  In a world of online tools such as Quicken or Mint, why is budgeting so damn aggravating? 

First off, as you can read here, there are some pretty fundamental reasons, three of them actually, the first of which is clear, "it's not fun." We get it, and we can appreciate it. Few things that are necessary in life are fun in the true sense of the word, eating salad isn't fun, exercising everyday isn't fun and surely, picking that salad over your favorite steak or cheeseburger and fries isn't fun either. 

The second falls into that realm of the "doing v. knowing" gap. You already know where your money is going (out of your bank doesn't qualify as an answer).  But truly, you don't know where its going, you just think you do. And, in the world of the "doing v. knowing" gap, thinking you do virtually makes it so.  

For all we may want to ignore it; the reality remains that whatever you earn in your lifetime, whatever you save, whatever you invest is largely meant to do one primary thing....pay for what you spend today and what you'll spend over the remainder of your lifetime.  

Meaningful financial plans are built on accurately judging expenses, today and tomorrow. Not perfectly predicting it, but accurately predicting it would be key. If you're building a house, your "budget" is your foundation, everything else gets built on top of that. The more accurate (level) the budget the more reliable everything from there up is going to be.  

And, as the Carl Richards notes in his article, awareness is seldom ever a bad thing to have.  

 

 

It's Public, It's Policy and It's Damn Important.

Back in the late 70's and into the 80's, the norm was that an American worker was covered by a defined benefit pension plan, more or less a guarantee that they would retire with some measure of their current income assured.

It's time for a public dialogue on the quality of retirement in America

It's time for a public dialogue on the quality of retirement in America

But as with personal financial matters, the exact nature of how that was suppose to work got away from the higher-ups. Few noticed that life expectancies started to increase and the workforce started to age. What had began as a promise to a veritable cadre of people at it's inception, morphed into a promise to a massive group of Americans. And as the promise meant more and was made to more; the cost of the promise escalated, till it was in effect, uncontrollable and out of control at the same time.

The shift was made to 401k and other plans that put the onus on the employee to figure it out. As noted in last weeks blog that didn't go well and it continues to not go well today.

When I hope for things, I tend to not hope in colors. I don't hope "Republican" or "Democrat" I just hope. I'm agnostic when it comes to solutions. 

But before we get to solutions we have to have a national dialogue about retirement and saving for it. Oh, I'm sure that the public programs, Medicaid, Medicare and Social Security will be the lynch-pin to formulate the starting point, but our problem is really so much more than those things. While there aren't many retirees that at this point that could afford even a modest reduction in their "supplemental" retirement systems as noted, that's because their underlying retirement systems is either wholly inadequate or non-existant. A recent MIT study showed that nearly half, 46% of Americans have less than $10,000 in financial assets when they die.  For way too many American's what was meant to be supplemental is in fact primary, and for them today and probably many more in the future, the chameleon like shift will be complete. What had once been "additional" has become "it." 

My hope (again, agnostic hope) is that our leaders can focus on these national problems in the hope of a national solution. For all the effort, it seems we spend way too much time worrying about what Greece has in the bank and not worrying about what our citizens do. And that just seems wrong.