7 Habits of the Financially Successful

January 24th, 2014 admin

This article, written by Keith Whelan, was recently posted on Wise Bread’s personal finance site.

If you think about it, achieving success in some of our most important life activities requires two key ingredients: Knowledge + Behavior.  Knowledge by itself isn’t enough; knowing what to do only gets you halfway there…you also need to follow through by taking action.

Take a job, for example.  On paper I might be an expert at my profession.  Very knowledgeable.  But if some aspects of my behavior are lacking – say, weak organization or communication skills – and they lead to poor or failed execution, then my chances for rapid career advancement are slim.

The same holds true for financial success.  There’s certainly no shortage of information and advice on managing our finances.  But what are the behaviors that contribute most to turning that knowledge into successful results?  A good place to look is among people who are financially successful.    Read the full article at: http://www.wisebread.com/7-habits-of-the-financially-successful

Use the “80/20 Rule” to Focus on Your Big Financial Opportunities

January 13th, 2014 admin

 

This article, written by Keith Whelan, was recently posted on Wise Bread’s personal finance site.

A number of years ago, when I was working for a big company, we had a team of people working on a project with a fairly simple goal: to keep our customers longer.  I knew someone on the team and I remember asking repeatedly – for over 2 years – how things were progressing.  The typical reply was “Oh, this is very complicated.  We’re trying to classify every customer and predict when they are likely to leave us.  Once we do that we will have to find out why they are likely to leave us.  And then….”  That’s when I usually changed the subject.

Needless to say, the project was never completed.  All that time and effort wasted.  I suggested to the colleague, “Why don’t you just ‘80/20’ it?”  That is, first focus the effort on just the relatively small number of customers who generate the vast majority of profits for the company and deal with the remaining, less profitable customers later.   In fact, for most companies 80% of profits do come from only around 20% of its customers.

I like the 80/20 Rule because it can help us manage things more effectively.  Things like our finances.  Focusing on just a few high-impact assets and liabilities, and the cash flow associated with them, can pay handsome dividends.  On the other hand, if you spend all or most of your time trying to micromanage hundreds of smaller daily expenditures…   Read the full article at: http://www.wisebread.com/use-the-8020-rule-to-maximize-your-financial-opportunities

2 Things You Must Know Before Making a Major Spending Decision

November 4th, 2013 admin

 

This article, written by Keith Whelan, was recently posted on Wise Bread’s personal finance site.

Most would agree that successfully managing your finances is near the top of the list of important things to do in life.  In fact, for most Americans only two other things, family and health, are more important.   But how do you define success?

Without a clear and measurable definition of financial success, like Alice in Wonderland you risk falling through the looking glass and losing your way.  Or as George Harrison paraphrased the book’s author: ”If you don’t know where you’re going, any road will take you there.”

So, what should your financial goal be?  And what’s the best road to get you there?

Read the full article at:  http://www.wisebread.com/2-things-you-must-know-before-making-a-major-spending-decision

Ask the Experts: Money Management for Young Professionals

October 5th, 2013 admin

Young ProfessionalsThis article by Kimberly Rotter of “The Insider” includes a contribution from Keith Whelan.

The milestones of growing up are different for everyone, but they tend to share the same basic characteristics.  Key parts of the transition from child to adult include moving out on your own, embarking on a career, paying for your first solo vacation and, certainly managing your own budget and bills.

Taking responsibility for yourself and making “adult” decisions are indicators of maturity.  While the journey to full independence is a long and winding road, money management is a critical aspect of adult life and must not be taken lightly.

In today’s highly unforgiving job market, recent grads know they’re lucky if they land a full-time job with a nice salary.  Huge congratulations are in order for anyone who is young and gainfully employed in is or her chosen field.  When you receive those first few paychecks that are larger than any you’ve ever earned before, celebrate.  But not too much.  Be your own fierce advocate when it comes to protecting this new asset, and take the time to plan and build a foundation for financial health that will – literally – last the rest of your life.

Read the full article at:  http://www.creditcardinsider.com/insider/ask-the-experts-money-management-for-young-professionals/

How to Raise Your Kids to Be Financially Independent

September 1st, 2013 admin

This article, written by Keith Whelan, was recently posted on Wise Bread’s personal finance site.

A recent Pew Research study* confirms what most of us already know:  A growing number of adult children are either delaying their departure from home or are moving back after a false start.

In all fairness to this generation of young adults, they just happened to enter adulthood during a deep, prolonged recession.  To make matters worse, this recession has also been accompanied by a fundamental restructuring of our economy; so unfortunately things don’t look much better for the generation that follows either.

That’s something the children can’t control.  But what can be controlled is how well prepared they are to deal with it.  And their success or failure on that score will impact not only their own financial future but also yours – for the longer your children remain financially dependent on you the more it can delay or even jeopardize your retirement.

So, what can you as a parent do to reduce the “boomerang” risk?

First, set expectations: Share the bigger goal

When raising our two boys we established and tried to achieve three broad goals.  We communicated these goals to them early and often.  The hope was that if they had a clear understanding of what was expected of them it would help to anchor them and give them focus.

We summarized our goals as “IRC”:

– Independent (learn to live independently)

– Responsible (take responsibility and be accountable for your actions)

– Caring (care for and respect others…and yourself)

An important part of achieving the first goal – of becoming Independent – meant learning how to manage their own finances.  For help with this we were fortunate to receive some well-timed advice… Read the full article at: http://www.wisebread.com/how-to-raise-your-kids-to-be-financially-independent

 

Get Ahead When You’re Young, Part 1: Share an Apartment

August 12th, 2013 admin

Reduce Your Biggest Early Cash Flow Drag and Put the Extra Savings to Good Use

If you’re in your 20s you’re probably facing a number of unique economic challenges.   Through no fault of your own you’ve been hit with the proverbial double-whammy: a deep recession that just won’t quit AND a major restructuring of the U.S. economy as we try to adjust to an increasingly competitive world.   As a result, good jobs are in short supply.  And wages are low.  Oh yes, and benefits are shrinking as companies exploit every opportunity to cut costs.

To make matters worse, with a projected average of 11 job changes by age 42,* job security appears to be a thing of the past.   As are defined benefit pension programs.  So unfortunately, when it comes to financial security you (and the next generation or two) just have to fend for yourselves.

As if that weren’t enough, if you have education debt (the average is now $25,000) you face years of sacrifice just to get back to break-even.

Okay, now that you’re sufficiently depressed, what can you do about it?  Fight back, that’s what.  You can still overcome these challenges – by working not just harder but SMARTER.

Start by keeping in mind your longer term goal: financial independence.   You want to get there as soon as possible – and you can…maybe even as early as your 40s or 50s.  But doing so requires squeezing out as much monthly savings as possible, especially when you’re young.  How?  This is where doing things smarter comes in.

Don’t accept the norm, challenge it

Alright, you want to maximize your savings.  You can do that by increasing your income or reducing your expenses (or both).  For now let’s focus on the expenses.

A common savings approach involves micromanaging every expense.  That can work, but it isn’t the most efficient use of your time and effort because it doesn’t establish any priorities.  Alternatively, you can employ the “80/20 rule” to identify the relatively few expenses that inflict the greatest cash flow damage, and explore some creative ways to slash them significantly.   That’s the smart way to go.

What’s the biggest of the big? Housing.

Whether you rent or buy a home,

your cash outlay in just 5 years

can be as much as $60,000 to $100,000 –

unless you outsmart the system

Option 1:  Rent

If you rent an apartment or house at, say, $800 per month plus another $200 for utilities, after 5 years your total cash outlay will be a whopping $60,000.  Ouch!   And not a penny goes towards building wealth.  Talk about a double-whammy…a massive negative cash flow together with zero wealth accumulation.

Wealth Outcome: $0 (no asset acquired)

Cash Flow Outcome: $1,000 per month negative cash flow; $60,000 total 5-year outlay

Option 2: Buy a house

Alternatively, you could buy a house.  Let’s see what that does to your wealth and cash flow.  A $150,000 house would set you back $30,000 for the down payment.  Hmm…where’s that coming from?

In addition to the down payment you need to make monthly housing payments.  Assuming a 4.4% 30-year mortgage ($600 per month) plus $400 per month for property taxes and $100 per month for insurance, then your monthly housing cost will be $1,100.  The 5-year total cash outlay?   $101,000 ($35,000 down payment + $66,000 mortgage/taxes/insurance).

That’s a substantially larger cash flow loss – $41,000 larger – than renting, but at least you’d be accumulating some wealth in the form of equity (partial ownership of the real estate asset).  This is why a house is only a “2nd Best” asset; it appreciates in value over time but it also generates negative cash flow, and lots of it.  Because of the large negative cash flow, Option 2 is still far from an ideal solution.

Wealth Outcome: $35,000 equity in home

Cash Flow Outcome: $1,200 per month negative cash flow; $107,000 total 5-year outlay

But you still need a place to live.  So how can you do so while minimizing the cash flow drain?  Answer:  Share.

Option 3: Share a rental

A 2-bedroom apartment will be a little costlier than a 1-bedroom – let’s say $1,200 per month vs. $1,000.  But if you share the apartment and split the cost down the middle you’re monthly rent falls to only $600.  That savings can really add up over time.  (And into savings is exactly where the money should go, by the way.)

Wealth Outcome: $0 (no asset acquired)

Cash Flow Outcome: $600 per month negative cash flow; $36,000 total 5-year outlay

Sharing a rental still yields a negative cash flow, but compared to the other options it is clearly the least negative.

But what about wealth creation?  Be patient, you’re working on it.  Here’s how:  Over 5 years you will have accumulated $24,000 in savings.  That’s almost enough for a down payment on a house.  (See our “Get Ahead of Vehicle Debt by Staggering Purchases” article for savings ideas to get you all the way there.)  Your wealth will come from a house, but not just any house — one that also creates a positive cash flow opportunity.

Your next step: Leverage housing to build both wealth and cash flow

In Part 2 we’ll discuss how you can get even farther ahead on the path to financial independence by increasing your housing wealth while also moving your cash flow from negative to positive.

 

*  Source: U.S. Bureau of Labor Statistics

Cash Flow Management Advice from Ben Franklin: Prepare for the Worst

June 3rd, 2013 admin

Way back in the ‘60s the TV show “Bewitched” was mandatory viewing for baby boomers like me.  After all, how could you resist a series that regularly showcased the latest model sports cars (Chevrolet sponsored the show), driven by two completely different looking husbands with the same name,  while also featuring guest appearances by Napoleon, Willie Mays (who we learn is actually a warlock) and, in one of my favorite episodes, Benjamin Franklin?

In the Ben Franklin episode a well-intentioned but absent-minded Aunt Clara tries to fix Samantha’s broken lamp but bungles the spell and instead delivers Mr. Franklin to the Stevens household.  Then, in an ill-advised move, Sam escorts their guest on a tour of the town.  Ben is arrested – for attempting to steal a fire engine.  Yes, that was TV in the 1960s.

But as silly as the plots were, occasionally there were pearls of wisdom in the dialogue.  For example, as he was preparing his legal defense Ben Franklin offered a perspective on setting expectations that has stayed with me ever since.  Here’s what he said:  “Optimists believe that all will turn out for the best.  I on the other hand prepare myself for the worst.  Should it not occur I am delightfully surprised.”*

Expect – and plan for – unexpected monthly

and long-term cash flow shortfalls.

This advice might not apply to all things but I’ve found it very helpful when managing cash flow, particularly in the current economic environment.  Another way to look at it is to expect – and plan for – the unexpected.   Here are some typical sources of both short-term and long-term cash flow shortfalls.  (The larger and more dangerous long-term cash flow risks are shown in red with an exclamation point.)

Interruptions to INCOME                                                             Unplanned EXPENSES

Job-related                                                                                         Job-related

. No raise in salary, no bonus                                                     . Increased health care costs

. Reductions to employer savings/retirement account          .  Increases in other employee benefit costs

!  Loss of job                                                                                    !  Income tax balance due

Housing                                                                                                Housing

! Tenant vacancies in rental properties (plan on 20%)        .  Increased property taxes and insurance

!  Home repairs/improvements                      

.  Utility price increases (heat, water, electric)

Supplemental Income

.  Changes to alimony, child support or othersupport payments

Transportation                                                .

.  Public transportation price increases        .

!  Vehicle repairs or replacement               .

Communication                                             .

.  Computer repairs or replacement             .

. Cell phone expenses                                    .

Medical                                                          .

!  Unanticipated medical expenses          .

 

You might ask, “Why should I even estimate my short term, or monthly, cash flow?”  Because your monthly cash flow is your budget.  It’s your number.  If you don’t already know it, it’s important that you learn it now.  Not only does it define how much you can currently afford to save each month (if any), it also helps you determine what your monthly living expenses will be during retirement.

To help you measure and manage your monthly cash flow, we created the 80/20 Worksheet™.  If you haven’t already done so, just visit the Cashflownavigator website to fill it in.  It’s quick and easy – and free.  But when doing so, follow Ben Franklin’s advice and be sure to build in a cushion.  Better to be pleasantly surprised at the end of the month than to find yourself scrambling to cover a cash flow shortfall.

Larger, long-term cash flow disruptions pose an even greater risk to your financial security.  If you’re unprepared for them, you put at risk the achievement of your ultimate goal, financial independence.  Fortunately, you can build a cushion to offset this risk as well, by always keeping at least 6 months of living expenses (6 times your monthly “number”) in savings.

As much as we might hope that our household’s income will be uninterrupted, and that we won’t incur unplanned expenses, hope sometimes must give way to reality.  Unexpected things do happen.  Be sure to prepare for them by following the advice of founding father, inventor, and cash flow philosopher Ben Franklin:  Prepare yourself for the worst.   If it doesn’t happen, at least you’ll be pleasantly surprised with a cash flow surplus.

In Part 2 of this series, Cashflownavigator’s roving reporter C. Florence Gaynor (C. Flo for short) tracks down Ben Franklin in person – or at least virtually – for an exclusive interview in which he shares additional insights and advice on maximizing your cash flow.

 

*”Bewitched,” season 3 episode 13, December 1966.  Screen Gems Corporation.

 

The Secret to Winning at Monopoly™

January 9th, 2013 admin

The Famous Board Game Offers Lessons on Real Estate’s Rewards – and Risks

Monopoly is one of the most popular board games of the past century.  And why not?  It gives you the opportunity to acquire wealth in form of real estate AND to generate cash flow not just from the properties but by also by passing “Go”.  What’s not to like?

But time moves on, and to stay on top you need to adjust to change .  The length of a typical Monopoly game is often over an hour, and can stretch to 3 or 4 hours.  I remember playing a game with my childhood friends that lasted two days.  Now that might have been a good thing in the 20th century but to maintain a leadership position among games in this new millennium where sound bytes and multi-tasking rule, sitting in one place for 3 or 4 hours or more just won’t do.

So I’d like to share a secret strategy to help you win at Monopoly, and to win quickly.  The secret:  Get a hotel, any hotel.  It’s only a matter of time before others check in, pay you loads of rental income, and then check out…of the game.

WARNING: This secret strategy doesn’t work all of the time.  Why?  Because, like life, Monopoly is a game of chance (hence the dice).  That means there are risks. But if you understand what is behind the risks you can manage them in order to nudge the odds in your favor.

Monopoly is mainly about acquiring and managing real estate.  Importantly, real estate has an edge over many other investments:  leverage.  Leverage allows you to acquire a property by paying only a percentage of its total price up front and borrowing the rest.

Here’s an example of how it works.  Let’s say you put a $20,000 down payment on a $100,000 property.  (You borrow the other $80,000 in the form of a mortgage.)  If the property appreciates 5% in a year you benefit from 5% growth on the full $100,000 value of the property; so your investment grows in value to $105,000.  That’s a $5,000 increase on your cash outlay of $20,000, so the return on your investment is 25%.

If instead you had put your original $20,000 into a savings account that pays 5% interest, the account would have grown by $1,000, not $5,000.  There is no leverage associated with the savings account so the return is, in this example, five times less than the return on the real estate investment.

Real estate has an edge over many other

investments: leverage.  But while leverage

can be your best friend, if mismanaged

it could turn into your worst enemy.

Leverage allows you to accelerate the timeframe to purchase multiple rental properties, and this in turn creates the opportunity to potentially grow the total amount of your rental income.  That’s what you’re doing in Monopoly when you upgrade from a house to a hotel.  In the game, hotel rents are so high that most other players can’t afford to land there more than two or three times before it cleans out their bank accounts.

So that’s the strategy for winning Monopoly. Trade up to a hotel and rake in the cash.

Oh, but I forgot to address the risks.  While leverage can be your best friend, if mismanaged it could also be your worst enemy; for while it enables you to grow your real estate portfolio rapidly, by doing so you could be increasing your debt at an unsustainable rate.  That is, the income from your properties isn’t enough to pay for the cost of carrying the assets – you can’t make your monthly mortgage payments.  In that case, it will be your bank account that is cleaned out.

For a real-world illustration of this, see our “Wealth and Cash Flow Lessons from Donald Trump” article.  In the meantime, enjoy the game!

 

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