Friday, February 29, 2008
Wednesday, February 27, 2008
I live a lot with financial uncertainty. I'm a consultant. Sometimes I don't know whether I'll have a job at the end of the month. I always have so far, and I'm pretty good at predicting when it's time to find another job, but I take a large amount of risk every day. Great rewards, but very high risk.
Over the last few years, I've managed to become more comfortable with rampant job and income uncertainty. Eventually you grow some thick emotional skin about it - sitting around worrying all the time is just too stressful to sustain. But having gone through enough rounds of what-will-happen-next-itis, there are some things I have learned about how to be okay with it.
The first is obvious. Guess what? You personally can't change the way the economy is going. You can't prevent a future job loss. So let it go. That doesn't mean you shouldn't be updating your resume, fishing for opportunities, and watching your portfolio, but it does mean that you can't control what happens next, so let go a little.
But you absolutely can control your personal little economic sphere right now. And doing so may make you happier. That means maybe changing some things. Toss the catalogs, no more internet shopping, no more quick trips to the mall. Start transferring more money to savings and stop using credit cards. What you want is to start building up enough to get you through a rough time.
If you have a lot of debt, and a little savings, that can feel daunting. But literally, every $1 you save, and every $1 you don't owe is something, and will make a difference.
Which brings me to the other thing I have learned about how to stay positive when things look grim - start thinking small. Very small. Celebrate every little thing you save. Celebrate every bit of debt you pay. Celebrate 2 hours of overtime that gets you closer to your goals. Think going for a walk instead of a big night on the town. In other words, downscale your expectations.
Why? It works like this: If you need big showy displays of wealth or constant new clothes or or or...to be happy, you are always upping the ante. It's like those extreme sports people - what they are doing is never good enough, it's the next big thing. In contrast, the people who are happy with the mountain they ski every weekend are probably more happy - because they have what they need, right there, not over the next mountain peak.
And that's what you want - to want what you have.
That doesn't happen overnight, but once it does, you realize that the economic risk hits only your wallet, not your well-being. At first, it may feel boring to be home on Saturday night. But then later you may find that going for a walk before making dinner and watching reruns of CSI: Miami feels pretty cozy, relaxing and good.
After the economic crisis is over, you may, like Sander and I, find you prefer date night at home in front of the fire most of the time. That you actually enjoy the small things better.
So accept what you can't control, change what you can, and think in the small scale. Your wallet, and your well-being will thank you.
Tuesday, February 26, 2008
That comment, along with a conversation I recently had with someone who presented compelling numbers about why it's not in my financial best interest to pay off a house early hit an interesting nerve, and I've been mulling it over ever since.
So, is it ever financially smart to do what is not mathematically optimal when it comes to money?
I believe the answer is yes.
That said, let me be up front here. I don't like debt. It may be considered a 'fact of modern life' but I disagree it has to be - at least it shouldn't be a permanent addition.
I think a lot of really smart people have really good points when they say things like "if you can make more in the stock market than your interest rate on your debt, you should invest that money". It's not a bad point, but it's a point that has more holes in it than swiss cheese. Here's why:
- First, it assumes your portfolio is going to have the gains to offset the debt.
- Second, it assumes you can weather a financial crisis and still maintain the minimum debt payments for as long as that crisis lasts, or otherwise always be able to maintain your expenses.
- Third, it underestimates what can be accomplished with the savings and investments for the rest of your earning life that step up when you no longer have to send in a car payment, a mortgage payment, or pay a credit card bill.
- Fourth, it makes personal finance purely about the finance. It isn't - there's a lot of human emotion involved in our financial life, which study after study shows. It makes the assumption that we humans make decisions purely on logic. Nothing could be further from the truth.
Over time, this has been historically true. But in practicality, sometimes it will, and sometimes it won't, is the more likely reality. Few of us are Warren Buffett. I spent several years in the early part of this century watching my 401k balance just stay the same, no matter how much I deposited - and that was with some serious deposits, and highly rated funds. Now, I was in it for the long haul, but I bet there were a good many people who probably had investments that they intended to have use during that period.
I believe in saving and investing - very much. I believe if you aren't saving an absolute minimum of 10% of your gross income for retirement, and another 10% of your net for a rainy day and your goals, you aren't saving enough.
Investing in index funds is the only way to fly, in my opinion, as they statistically outperform actively managed fund.
Still, there are no guarantees. Past performance does not indicate future results, as Wall St. likes to say. And a bird in the hand.....
Assumption 2: I will always be able to make those debt payments, no matter what
Really? So you will never experience a job loss? Or a chronic medical condition that forces you to stop working long before you planned? Or a family crisis that comes just when the big bills are due? Or a reduction in pay?
Oh, and you are sure your emergency fund (assuming you have one) will hold out for as long as it takes?
Well, best of luck to you. I certainly hope you are correct, and all those bad things happen to other people.
Maybe you could lower your outgo so that a job loss wouldn't send you under?
Many people manage to live on one income, and that's a great way to do protect against a financial crisis. But unfortunately, unless you are living on one income and saving the other, and the other is sufficient to cover your expenses indefinitely, the risk of losing that income you live on is tremendous to you.
We now live in what has been dubbed 'the uncertainty economy'. Stagflation seems to be heading our way. I personally don't see a bright and cheery future for every person's job over the next few years, but hey, whatever works.
Assumption 3: Even with no debt, the years of compound interest on the investments will be worth more.
There's some actual hard math to support this one. But let's take my mortgage payment. We spend about $3600 a month in a high cost-of-living area. Now let's say in 15 years I no longer have that mortgage. So I invest the money...in addition to everything we currently invest.
And I have no mortgage. I still bet I retire mighty comfortable. And I've had 15 years where I can tell a bad boss to take this job, 15 years of taking the work I like over what I need, or 15 years off my work life all together. Seems like a good trade.
Assumption 4: The math, and the money, is what matters
If that's what drives you, good. If you can get past the three hurdles I listed above, and you still think that maintaining your low-interest debt is worth it, then it works for you. And that is what counts here most in personal finance - applying what works best for you.
There is no single answer. Me, I'm security minded. I grew up with very little, and a huge amount of insecurity and lack of stability. The peace of mind I will buy with a big old zero in the debt column is worth more than the Sultan of Brunei - to me. And the freedom? I can taste it.
Still, I acknowledge it isn't for everyone. Sometimes the math matters. The only one that can search your soul and figure out what is most important is you.
There's more than one way to live, that's for sure. But for me, there is no greater freedom than the freedom to choose what to do with all of my money because I owe no one anything.
As for you, well, you'll know what the right thing to do is.
Friday, February 22, 2008
Tuesday, February 19, 2008
Downshifting is defined as making major changes to your lifestyle caused by accepting a reduced level of income by Wikipedia. (Downshift is also the name of a Transformer Omnibot, circa 1985, but that's just some brain lint I picked up with the help of Google).
But I don't think Wiki gets it quite right. I think it's trading money for time. Most of us trade time for money every day when we get up and go to work. 40 or more hours spent working, plus time getting ready for work, travelling to and from work, and so on.
When you downshift, you trade money for time, giving up some income to have more freedom.
We're on a 10 year plan to get there. And we will need every minute.
I'm a believer in setting goals. I think having something to look forward to, and to work towards is a tremendous motivator. Especially over the last few years, as I have watched some long-desired goals come to fruition, the pull towards setting and acheiving targets has become more and more a part of my - and our - life.
Downshifting is, for us, an uber-goal. It's the goal to beat all goals. It means that we can sufficiently afford for me, and potentially Sander, to not get up and go to work in our fields. It means we can live on less, or we've saved sufficiently to cover the shortfall between our income in the IT fields we are in, and what we move towards in the future.
Some people manage to downshift right at the start of their lives and stay there. They decide that time is worth more than money to them always, and live their lives accordingly. Others decide early on that earning money is what matters. And then there are those of us who never made a definitive decision either way, but have somehow landed in one camp or another - working too much or working too little.
Sander and I fall into the camp of those that found themselves very busy somewhat unintentionally. I landed in a project-based, feast or famine field, and he, while having somewhat better work/life balance, has a long commute and stressful job.
For a while now we've been daydreaming about what happens when we're ready to get off the treadmill, and we finally chose a date to make it happen. From ten years out, many things could happen, including not being ready for a multitude of reasons from the financial to the 'just not ready to quit yet'.
But we have a plan. Some parts are detailed, some less so. The highlights of the plan to get us there are as follows:
- Pay off all cars, and have enough saved to pay cash for at least one replacement car.
- Pay off our 2nd mortgage.
- Pay off as much of our mortgage as we can.
- Have a minimum of a year's worth of savings in a high interest savings account. Two years is preferable.
- Have reached our target retirement savings goal for the time period (we intend to keep adding to it).
- Have some seed money in the event my husband decides to open the bar he daydreams about.
- Fund college savings accounts for our future children for an as-yet-undetermined-but-sufficient-in-our-eyes amount.
- Have done all the major work on our house that we plan for in cash, so that the investments we need to make are primarily cosmetic.
Needless to say, this is a heckuva punch list. We're pretty far away from a lot of it. But...we have time. And we have a plan that we're working towards, a dollar and a day at a time.
On December 24, 2018, I intend to leave the world of full time work and long commutes for the last time. That doesn't mean I have no intention of working again. If I cannot provide the income we will need by writing, which is my goal, I will take a job that supplements whatever writing income I have coming in. But it won't be full-time, and it will be something that requires a few less Saturday evenings spent on a plane for work.
We are not sure if we will both downshift at the same time, and my husband may not choose to at all. We are preparing as though we both will, and can adapt our plan as needed.
Why? Well, that's more complicated for us. For me, it's because I actually think it's terribly important to be available, engaged and around as children get older, and we intend to have children that are heading towards their preteen years at that point. My husband agrees.
We also see how busy we are now, and we know it will only get more chaotic as we start our family. We're working on some flexible work options for the meantime, but at some point we may need to stop the roller coaster for a while.
Lastly, while we both enjoy what we do, there are things we love better. For me, writing is the job I will do no matter if it pays me or not. My husband hasn't chosen the dream he wishes to follow yet, but when he does, we will be ready.
A lot can happen in 10 years and 10 months, so we're keeping open minds and staying flexible. As time passes, we'll add detail to our plans, and adjust where needed.
In the mean time, I look forward to a VERY Merry Christmas that year.
Monday, February 18, 2008
Saturday, February 16, 2008
Wednesday, February 13, 2008
Her husband to be was Jewish, and traditionally, jewish weddings come with a Ketubah, or contract. Ketubahs were actually the first contracts that spelled out a woman's rights in a marriage. A fairly profound idea at the time, that women had rights.
So these contracts were originally typically negotiated in livestock. After some haggling, we came up with the right price - 12 goats, 2 chickens, and a camel.
I'm fairly glad I never had to pay up. I'm still not sure where exactly one finds a camel in the Boston area. Stealing from circuses was never my style, and after that I ran out of ideas.
What drove the negotiations was the perception of value - and to be honest, lots of liquor on the negotiators part - of the commodity that was being contracted for. In this case, I think my sister is well worth quite a bit of livestock. I'm sure I'll get hit for that later.
But regardless, we negotiated not based on what other brides had traded for, but what the perceived worth of THIS bride was.
And I believe that it's a good approach to carry forward in your life. For example, we're in a slightly fuzzy housing market now. Prices are down, but loans are harder to come by. Sellers are afraid to lose money, buyers don't want to buy too high.
So they look at 'comps' or comparable prices. I think that's a great idea. Fabulous. Good to know what your market is. But it isn't all the picture, and perhaps it's not even most of the picture. There is this ephemereal thing in negotiations that is much more emotion than it is fact or deliberation. And that is where the room to wiggle comes in.
When we bought our house, the market was slowing. We signed our purchase and sale agreement in January of 2007. Things were coming down, but sellers still expected a spring boom, not unlike they hope for now.
We offered not quite 20% below asking. And the price had been reduced once already.
When we did this, we knew the seller had several options:
- Walk away from our offer
But she countered, we countered back, and we ended up with a significantly reduced price.
Before we started the offer process, we set our 'walking away amount'. As in: if this house won't go to less than x, we're walking away.
We love the house. We're thrilled to live there. But we were willing to turn our backs. Because ultimately, this wasn't about her feelings or ours. It was a business deal. She wanted out, as the house had become too much for her to maintain. We wanted in. The house had been on the market for a while. It would sell, that was sure - the question was when.
And when was important to our seller.
We didn't know that, but we thought it might be. We took a risk, and negotiated based on what we thought the house was worth to us, rather than what the comps told us. And we came out with a deal that made everyone happy.
Now, I think it's important to be realistic. We had a strong sense of our market.
But we gambled - because we were willing to lose. And I think that is important when plunking down money.
You have to know what your walking away point is. You have to know what you are willing to do to get what you want. And you just might want to look at perceived value as well as the 'comps' on what you are buying. Because I guarantee you, the deal is out there. You just have to be willing to be dissapointed.
And you have to try to find the set point that makes everyone feel like they won. There's a little wiggle room in business deals, all kinds of business deals. You just have to look for an opening, and know your hand. And belive in what you are doing.
Look for the opening, the negotiating point. And make a plan.
Oh, and if you come across a camel, let me know. I still haven't paid up.
Sunday, February 10, 2008
Sunday, February 3, 2008
- Locking yourself into a weekly or monthly menu where every night has a pre-defined meal may work for some, but it does not for us. Deciding today what I want to eat in 3 weeks is impractical. I might find a fabulous sale on something we love between now and then. Or there are leftovers we need to use up, or a veggie that will go south if not used.
- That said, I do have a menu plan that I fill in slowly over the course of the month. I really like the calendar meal plans at www.cindysporch.com and www.calendarsthatwork.com. It helps to be able to look at the month.
- I constantly try new recipes. I flip through my collection of cookbooks or look online. One of my favorite sites is www.epicurious.com. I've gotten some really great recipes there. I try to add at least one new recipe a month. It gives us variety, justifies my cookbook addiction, and has added some fantastic recipes to our monthly repertoire.
- If you buy meat in bulk, immediately break it up into meal-sized portions, even if you don't feel like it. There's nothing less enticing than a 5-lb block of frozen chicken, you, and a chisel after a long day at work.
- I make a monthly grocery list, divided by both category and store. I literally start mine for March the day after I go do a big stock up shop for February. This means anything I decided we don't need more of quite yet, or I forget is rolled onto the next month's list. If it can't wait a month, I leave it on the current month's list.
- While you are making your list, actually check your cabinets and pantries. I'm all for a deal, but if you can't fit more kleenex and shampoo in your cabinets, you probably have enough.
- Aim for the ability to eat for 2-3 months out of your pantry in an emergency. That means buying things you like to eat, and cycling through them, not buying 10 cases of macaroni and cheese and sticking them in a bomb shelter and forgetting about them. The former is practical. The latter makes you Captain Nuttybananas, the weird neighbor with the bomb shelter full of mac n cheese loving rats. It's a fine line, don't cross it.
Saturday, February 2, 2008
- I have limited free time. Shopping on a weekly basis for a full week's worth of groceries is a huge time sink - about 90 minutes to 2 hours, not including meal planning. This method allows me to spend about 2 1/2 hours one week shopping and putting away groceries at the beginning of each month, and then maybe 20 minutes a week for the remainder of the month.
- It also limits my temptation. I'm easily distracted from my list, so I try to spend as little time grocery shopping as I can.
- I often don't have time to spend on the weekends checking out farmstands and co-ops if I have to go to the regular grocery store too, but by getting the bulk of the shopping done in one week, I can go check out what is available for local food the rest of the month. It's important to me that we try to buy local, but I recognize that our time issues need to be taken into account.