New TODAY Show Appearance: Talking Debt, Budgeting, Market Highs And Maintaining Motivation

What better way to start off the New Year than in New York with the TODAY Show?  Despite the 18 below windchill whipping through the city streets, I had a blast with Sheinelle Jones and Craig Melvin discussing the most damaging forms of debt, the top two budgeting apps, the best kinds of checking accounts, how you should respond to market highs–and lows–and how best to stay motivated to turn those financial resolutions into long-term habits!

Click HERE or on the box above to watch the segment.

Budgeting Guide for the Rich

Originally in Forbes“You don’t really do this stuff—do you?” The question came from a major network anchor after the camera stopped rolling. The topic was budgeting.

He certainly isn’t obtuse, and he wasn’t being patronizing or condescending. It was a legitimate question that accurately reflects the underlying perception held by most people in any demographic–that budgeting is for those just scraping by and young people just getting started. A tedious chore reserved for those lacking the means to do otherwise. A humble state from which most of us hope to graduate.

But this is a misconception. In truth, the budgeting process can help people at every stage of life and every income level articulate and align their deeply held values with their financial priorities, which is the first step on the path to integrating money and life. However, there is more to be gained from the discipline of budgeting (at least in terms of raw dollars) for those of means. Better said, there is less to be lost by families who earn especially high incomes. 

Level: Can a budgeting app change the way we bank?

Originally in Forbes“Level is dedicated to rewriting the financial rulebook to create a secure future for the next generation.” That’s budgeting app Level Money’s stated mission, which can be found on their website’s “About Us” page. But even as lofty as that objective sounds, co-founder and CEO Jake Fuentes says the company’s sights are set even higher.

“Basic everyday money management,” he suggests, could be “the first step toward changing—or creating—the next generation’s banking structure.”

An app that hopes to change the way the next generation banks? I’m listening.

 

The Keys to Effective Budgeting: Autonomy and Automation

Originally in ForbesMost people avoid budgeting because they consider it an exercise in repressive tedium. But it doesn’t have to be. By applying the science of motivation, economic evidence and the art of creativity, the apparent boredom of budgeting and saving can be remade into part a life-giving financial rhythm.

In his book, Drive, Daniel Pink teaches us that most institutions still use outdated science to motivate. Known as the “carrot-and-stick” approach, Pink demonstrates that the archaic addiction many organizations have to extrinsic motivation is far less effective than intrinsic motivation, which comes from within. The most successful resolutions are those autonomously motivated. In short, the word could is more effective than the overused should.

So, please hear this: Only budget if you want to, on your terms. It’s up to you.

Don’t Disregard Mom’s Financial Instincts

mothers-day-heartThe collective work of moms everywhere is so incredibly significant that it almost seems too limiting to honor them only one day each year.  Thousands of years of paternalism has allowed society to feel entitled to receive the oft unnoticed contributions mothers offer households, while presuming moms’ ignorance in other categories—especially household finances.  It would, however, be a dreadful mistake to ignore the keen financial instincts of moms.

Married couples have a tendency to dole out household duties in the form of roles for which individuals are best suited.  This is an entirely wise strategy that optimally leads to a more efficient and livable familial space.  But while handling household finances has historically defaulted to the dude in charge of changing light bulbs, taking out the trash and removing vermin, it is a mistake to presume that the mother of the house is the non-financial spouse.

Even if Mom is the household member least interested in asset allocation, insurance deductibles and itemized deductions, it’s vitally important to include Mom’s non-financial thoughts in financial decisions.  This is because personal finance is more personal than it is finance, among other things.  Here are three areas of personal finance where a mom’s stereotypical instincts are especially valuable, if not vital:

1)     Insurance – Guys have earned the stereotype for having a higher tolerance for risk and a lower tolerance for paying for that which doesn’t feature high definition pixels, buttons, wheels or triggers.  We also occasionally struggle to admit when we make mistakes, so paying for something that is intended to protect us from mistakes may seem like wasted money.  “I’m not going to die, our house isn’t going to burn down and I’m not going to have a car accident,” so let’s use that insurance premium money to buy a jet ski.  Yes, even if Mom doesn’t know how to read an actuarial table, her instinct to protect the homestead and its inhabitants from harm is a good one.  Of course, we still want to view insurance through the eyes of a risk manager, not a collector of insurance policies for every known fear, but Mom’s sixth sense brings a healthy balance to insurance decisions.

2)     Investing – Here again, Dad stereotypically makes investing decisions by focusing on that which gives the best opportunity for return, downplaying the inherent likelihood that the stock or fund with the greatest potential for return also possesses the highest probability of loss.  But woe to the man who ignores Mom’s gut feeling to make capital preservation a higher priority in the handling of the family nest egg.  The world’s best investors focus more on risk than return.

3)     Nurturing – Financial planning is a process, not a product, and much like moms are often the parent most attuned to the nuanced evolution of their offspring—from newborn to adult—a mother’s nurturing instincts are well suited to seeing that the financial planning process has a forward-thinking trajectory.  While dads are stereotypically project-oriented—occasionally spending weeks, months or even years in a special place called Oblivion—moms are often best suited to get the myriad of financial to-dos produced in a plan checked off.

It’s rare that we’d range as far as household finances to find affirming words for moms on Mother’s Day, especially when considering the plethora of other tangible and intangible benefits they bring to our families, but financial planning is yet another important subject in which a mom’s innate maternal instincts should be recognized and heeded.

Mo’ Money, Mo’ Problems: ESPN Goes “Broke”

This week, in their “30 For 30” special, “Broke,” ESPN expounded on the Sports Illustrated article alerting the nation to the systemic financial problems within the community of elite professional athletes.  Among other frightening observations, Sports Illustrated found (and ESPN corroborated) that “By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress” and “60% of former NBA players have gone broke within five years of retirement.”

The hypothesized causes of these frightening statistics are compelling:

  • Stratospheric salaries create the mistaken impression that the money could never be outlived.  When most pro sports originated, the players didn’t even make enough money to quit their day jobs.  And while pro football, basketball, baseball and hockey players have been making a fine living for a few decades now, the economic boom of the 90s and the corresponding leap in team valuations for owners has led to unimaginable salaries for the top players.
  • But keeping up with the Joneses is an even more gripping problem in the uber-competitive world of pro sports than it is at the country club.  Not everybody is making A-rod’s $32 mil in 2011, but everyone wants to look, eat and drive like they are.  As Jamal Mashburn observed, “The show wasn’t as much on the court as it was in the parking lot.”  Yes, the disease of more is alive and well in pro sports.
  • And unfortunately, even though many of these guys are becoming instant millionaires upon getting signed, they don’t know any more about the complexities of personal finance than any other kid in their late teens or upper 20s.  They may even carry less financial wisdom into their careers, as many young pro athletes hail from broken homes in disadvantaged communities.
  • Because so many athletes have risen out of poverty to their new fame and fortune, this also makes them a target within their communities.  Bart Scott of the New York Jets (but who spent his better years in black and purple) calls it winning the “Ghetto Lottery.”  At its peak, Andre Rison had an entourage of over 40 and Bernie Kosar had over 50 families relying on him financially.  50!
  • But it’s not just known friends and family that hound these instant millionaires—it’s also young ladies with an eye for upward mobility.  One restaurant owner in the nation’s capital confessed that she had 7,000 women who would receive an automatic text message every time Michael Jordan walked into the joint during his stretch as a Wizard.  Typically, over 2,000 women would heed the call.  Of course, these rich, young “ballers” aren’t exactly turning the ladies away either.  Travis Henry boasts nine kids, with nine different moms and $17,000 per month in child support.
  • And for those players who do settle into marriage, striking numbers of them have their assets cut in half shortly after retirement; fully 60% of NFL players find themselves divorced within three years after leaving the game.  This often doubles their expenses and halves their assets without diminishing their lifestyle.
  • Those athletes who do seek financial advice often find it through unscrupulous and opportunistic advisors, accountants, lawyers and agents who insist on taking a cut of everything.  They are often over-exposed in private equity, real estate and alternative investments—including hair-brained business “opportunities” with a 90% failure rate.  These competitive ball field warriors are especially prone to sales pitches with more allure than a bank CD or balanced portfolio.
  • All this happens typically before these men reach the age of 30.  Five years of income needs to last 50 years.

The temptation is to watch “Broke” or read about this and come to one of two conclusions:

  1. These poor athletes!  They’re used and abused to line the pockets of wealthy owners, only to be left with broken bodies and bank accounts.
  2. These stupid athletes!  They’re handed the world on a silver platter and all they do is wreak a path of destruction with their lives and let down the fans and families who support them.

Yes, it was stupid of Evander Holyfield to build a 52,000 square foot house with not one, but two, bowling alleys, not knowing whether he’d ever win another fight.  It is nearly unfathomable how John Daly gambled away $50 million and how Mike Tyson blew through $400 million.  And yes, it is heartbreaking to hear of Keith McCants’s story of being arrested penniless with two prostitutes, high on drugs that were first recommended by doctors to keep him in the game.  Leagues and owners are complicit, but so are universities cashing in on prime-time athletes and sending them away without any personal financial education whatsoever.

The temptation is to think that we’re bystanders or third-party participants, that we’re inherently different.  But we’re not.  What we see in the financial mismanagement of athletes is merely a magnification of the worst that lies in all of us regarding money.  I, for one, can certify that if I had that kind of money in my late-teens and early-twenties, I’d likely have done the same damn thing.  And I didn’t grow up without the benefit of loving parents and wise instruction.  Go ahead, think about the dumbest thing you’ve ever done; and then think about having a seemingly unlimited amount of money with which to do it AND the paparazzi drooling, waiting for you to screw up.

Money is a tool that can be used to great effect to magnify the impact of our foolishness, and also our wisdom and discernment.  But when money becomes an adornment, when richness becomes a personality trait, and when wealth becomes an advertisement or proposition, we very well may end up agreeing with McCants’s final conclusion: “’The love of money is the root of all evil.’ It destroyed everything around me.”

Don’t Sell Yourself Short (Or Long)

Have you ever noticed how likely we are to share our financial success stories, yet how hesitant we become when sharing our financial failures?  Furthermore, have you picked-up on how we tend to attribute our success to our own brilliance but our failure to outside circumstances beyond our control?  If it goes right, we credit ourselves, but if it goes wrong, it’s not our fault.

This syndrome is so common, psychologists have given it a name—the Fundamental Attribution Error—and while we’re inherently averse to recognizing it in our own behavior, it’s the likely culprit in most dysfunction in the realm of personal finance.  But while we might have this innate self-centric orientation, there is something we can do to reconcile our perception with reality.  It’s a little practice called TRUTH.  It often hurts, but it always helps.

Truth has been around for several millennia, but we humans have a nasty habit of running from rather than toward it.  Embracing it is often humbling, but incredibly freeing.  A good friend of mine, Carl Richards, has become a model for truth-telling in the financial industry.  He’s a well-renowned and brilliantly creative advisor who expressed the truth of his own financial missteps to the world in a New York Times article entitled “How a Financial Pro Lost His House.”  He received almost universal support for coming clean, except, interestingly, from the financial planning community, where reviews were mixed and skewed toward condemnation rather than grace.  It saddened me, but it didn’t surprise me from an industry built more on perception than truth.  Fortunately, Carl is undeterred in sharing his story and inviting others to the truth party, to amazing effect.

So, what truth do you need to embrace?  Start small.  Admit that you weren’t actually a stock maven for buying Apple in the low hundreds—you just love your iPhone (or maybe it was an iPod back then).  Then, take a bigger step by acknowledging that you’re not a real estate mogul for buying your house a year before (or after) your now underwater neighbor; nor is he a financial imbecile.

Or has your fundamental attribution error suffered an inversion?  Maybe you’re positioned on the less green grass, suffering from one or more of the punishments doled out by the Great Recession.  You wonder, now months or years unemployed, whether you only ever had a job because you were lucky and are meant, instead, to be an employment reject.  “Maybe I just don’t have anything to offer society, even my family.”  You imagine your short-sale, foreclosure or bankruptcy as a lightning bolt punishment from the cloud-bound Overseer.  “What did I do to deserve this?”  These scripts that run through our conscious and subconscious minds are no more true, and are often a great deal more damaging than financial narcissism.

If it sounds like I may have experienced some of these errors in judgment personally, it’s because I have, and I don’t know anyone who has taken the time to engage in some honest self-analysis in this arena who has determined themselves immune, unscientifically proving the fundamental nature of this attribution error.  An interesting admonishment designed to help us live closer to the truth comes from Martha Beck in The Joy Diet, where she recommends we “create and absorb at least one moment of truth each day.”  Philosopher Dallas Willard suggests—“Earning is an attitude.  Effort is an action.”—and seems to find worth in the latter but little benefit to the former.  Would you, then, consider taking less credit for your successes and failures, instead applying that labor to the work of simply making better (financial) decisions?

Your Path To Financial Freedom: Debt Elimination App

This is the fourth exercise in a series designed to walk you through an entire financial plan.  The exercise is embedded in an Excel spreadsheet you can download and save for personal use.  You can find the backdrop for the exercise HERE or just jump right in with the instructions given below:

If you refer back to the Personal Balance Sheet you created, you will have already compiled your debt information in the liabilities section.  Next to each liability, put an “X” next to bad debt and a check mark next to better debt.[i]  Then, transfer the bad debt to the Debt Elimination App available on our web site and customize your Debt Elimination Plan.  List the debts in the order in which you will pay them off.  If you want to get that ball rolling faster emotionally, take Dave Ramsey’s advice and pay your cards off in order of smallest to largest balances.  If you want to save the most in interest payments, list the debts from the largest interest rate to the smallest.

When you make that last payment, celebrate!  Take your next month’s payment—a significant chunk of cash flow that you’ll now be able to plough into more generous budget categories and investment for the future—and throw yourself a party.  Invite family and close friends who’ve supported you throughout, and enjoy the peace of mind that comes with being debt free.

If you don’t have any Xs on your Debt Audit because you only have better debt, you need not put yourself through a financial boot camp, but deliberate over the debt you do have and consider whether or not a debt repayment acceleration plan may be right for you.  If so, use the Debt Elimination App to plan your course of action.

Click HERE to access the app!


[i] There is no “Good Debt”—just “Bad Debt” and “Better Debt.”  Bad debt is debt on ANY depreciating assets, including automobiles, but especially things like furniture, appliances and unsecured credit card debt.  Better debt is debt on appreciating assets, like homes, education and businesses…within reason.  If you’re curious how to differentiate between the two in your specific situation, email me at tim[at]timmaurer[dot]com.

Why We Do Dumb Things With Money

“How could I be so stupid?”  Maybe you’re looking at a bulging credit card bill after over-spending during the holidays, just hoping your tax refund is enough to pay it off.  Or maybe you’re looking at a budget that simply won’t balance—for the 77th consecutive month—wondering how you made it this far in life without being able to master the simple math of addition and subtraction. 

Why is it that informed, educated and even brilliant people can be so dense when it comes to basic matters of personal finance?

I’m reading a book called The Checklist Manifesto by Atul Gawande, based on his fascinating article, “The Checklist,” in the December 2007 edition of The New Yorker.  On his way to making a compelling case for the use of checklists to ensure accuracy in even the most multifaceted procedures—like emergency room surgery or skyscraper construction—he gives us some insight into why we’re capable of doing dumb things in seemingly simpler processes.  In his words:

Two professors who study the science of complexity—Brenda Zimmerman of York University and Sholom Glouberman of the University of Toronto—have proposed a distinction among three different kinds of problems in the world: the simple, the complicated, and the complex.

Zimmerman and Glouberman give us a tangible example of each type of problem.  Simple is to baking a cake from a mix as complicated is to sending a rocket to the moon.  The latter requires “…multiple people, often multiple teams, and specialized expertise.”  But once you’ve marshaled the necessary manpower and know-how to send a rocket to the moon, the exercise can be successfully repeated.

This is not the case in complex problems, however.  The example they give for a complex problem is raising a child.  “Expertise is valuable but most certainly not sufficient.  Indeed, the next child may require an entirely different approach from the previous one.”  As a parent of two, this news was both heartening and frightening.  But it also helped me realize something groundbreaking, at least to me:

While many matters of personal finance seem so simple on their face, they’re actually quite complex…because WE’RE complex.

Even as a single person with no dependents or pets, our innate proclivity for self-deception is remarkable.  But within the context of a couple or family, it’s easy to see how the “simple” discipline of cash flow management, for example, can become quite complex.

Further complicating the problem is that most areas of personal finance require perpetual decision making, in which each individual decision to save, spend, buy, sell, re-allocate, contribute, distribute, insure, reduce coverage, file, expense, deduct, bequeath, endow, receive or disinherit is its own fertile ground for success or failure that could compound positively or negatively to impact the whole!

So let’s all enjoy a collective “WHEW!” as we momentarily enjoy the fact that making mistakes with money doesn’t mean we’re a complete nincompoop.  Of course, this is an explanation, not an excuse.  We’re still responsible.  Here are three ways we can all keep our financial decision making as smart as we are:

1)     Be cognizant of things financial.  Be present and deliberate when dealing with your money.  Keep these topics at front of mind by reading a good financial blog or two (ha, ha).  And consider reading my friend and colleague, Carl Richards’, new book, The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money.  (It’s the only financial book I know of that is strewn with pictures!)

2)     Develop good habits.  We often need to force ourselves to be cognizant because personal finance either bores us or is loaded with self-deception.  The development of good habits, beginning first-and-foremost with a functional cash flow system, will help us develop the behavior we’d prefer.

3)     Be accountable to someone or something.  Some are willing and able to develop their own system to maintain accountability, but for many, a healthy relationship with a professional financial planner is the key.  In my Forbes post this week, “Hey Financial Planners, Do Your Job!” I gave advisors a gentle nudge, encouraging them (us) to make financial planning a simpler, more client friendly process that eliminates complexity instead of creating it.

What are some other ways you’ve been able to keep from making dumb financial decisions in your life?

A Burdensome Yoke…Or A Path To Peace?

Well, it wouldn’t be the New Year if we weren’t reminded that one of the top resolutions that will be made and inevitably abandoned is financial in nature.  “Improve financial condition” is once again the number two resolution for 2012 in the annual Franklin Covey New Year’s Resolutions study, and the only surprise is that it’s not number one!

But no matter what year I’m asked the question, “What’s the most important thing I could do to improve my personal finances?” the answer is never going to be about tactical asset allocation, navigating the alternative minimum tax or conducting a Roth IRA conversion.  Regardless of your income, your net worth, your age or employment status, the clearest determinant of a successful financial plan for ALL of us is the implementation of an effective cash flow mechanism, or its less sexy if not diminutive synonym—the budget.

So in my first Forbes post of 2012, I shared the shocking story with which you may already be familiar, about my affluent friend who found himself on a path to spending over $1 million at Starbucks, to rebut the common misconception that rich people don’t have to budget.  But here I’d like to address the more honest, unspoken question that I believe leaves most people among the ranks of the NON-budgeters:

ISN’T BUDGETTING JUST AN ANNOYING, BURDENSOME YOKE?  ANOTHER TO-DO WITH LITTLE MORE TO OFFER THAN A REMINDER THAT I’M FALLING SHORT?

The short answer: NO.

The less short answer: MAYBE.

Budgeting may indeed be little more than a burdensome yoke destined to be cast off if you don’t dedicate yourself to it wholly.  For example, if all you ever do is track your spending after the fact, which can be quite depressing.  (“Yup, I spent more than I should’ve…again.”)  Many mistake a monthly review of spending with a glance at the bank and credit card statements for budgeting, but a spending review is barely the beginning of a genuine cash flow system.  The process is really about setting forth a desired level of spending for the future and tracking spending at frequent enough intervals that your course can be reasonably adjusted.  A half-hearted effort at budgeting is likely to net you even less-than-half the benefits.

Although I recommend you find the rhythm that works best for you, my preference is a monthly budget that is reviewed weekly.  Each of my budget categories—food, housing, charity, entertainment, and many more—are given a monthly allotment and then we (yes, if your household is a we, it’s almost impossible to make budgeting work solely as an I) review spending weekly and make course adjustments for the month’s remainder.  If you’re able to maintain a weekly rhythm of review, the process is relatively painless in the short run and you’ll save yourself more heartache (heartache is not an overstatement for many people) than you could imagine in the long run.[i]

But what really takes budgeting from routine to revelation isn’t merely mastering the mundane, but planning for the unexpected…with margin.  With the exception of bills that are identical every period, each variable budgeting category should have a built in buffer designed to weather slight variance.  Then you should also have a separate miscellaneous buffer category for emergencies, auto repairs and other occasions that fall outside the bounds of your expectations.

You’ll fall head over heels in love with the boring process of budgeting when the unexpected becomes inevitable, but you’re prepared in advance.  No wondering where the money’s going to come from.  No turning to debt.  No personal financial crisis.  Just peace.

Speaking of love and budgets, stay tuned for an upcoming post on How Budgeting Saved (And Continues To Save) My Marriage.

Wishing you personal and financial peace in 2012!


[i] The not-so-secret to any habit I’ve ever maintained successfully is that it has to be in some way enjoyable, so every Saturday I take a cup of green tea upstairs with the wooden box dedicated as the receptacle for our household receipts to my office, choose some good music to suit my mood and run the numbers.  WHAT WORKS WELL FOR YOU?