Mastering Money

Tips for Holiday Shopping

Now that Thanksgiving is over, it's time for the holiday rush.  As if office parties, family get-togethers and trips to the airport to pick up loved ones flying in from Norway weren't enough, there's also the prospect of shopping for the holidays.  Shopping means spending.  Spending means overspending.  Overspending means debt.  Or does it?

Here's some advice for holiday shopping, whether it's for Hanukkah, Christmas or Kwanzaa:

• Create a budget and stick to it!  I know you've heard this before, but it truly works; just make sure to track your spending so you're sure to stick to it.  Start with the total you wish to spend, then create a list of all those to whom you wish to give.  From the total, parse out the amount you wish to spend on each person on your list without going over your total.  Oops...I knew it...you went over.  Nope, you can't increase the total!  Keep the total the same, simply "fine-tune" each of the amounts you wish to spend.  If you're still struggling to economize, read further...
• Don't try to "one-up" your friends.  If they sent you movie passes last year, don't reciprocate by sending them tickets to the hockey game.  Then they send you on a trip to Tahiti, and, well, you get the picture.
• Join a wholesale club.  I think they are great!  Not only can you experience year-round savings on paper towels and cheese, you will find great novelty items at the holiday season that you don't find any other time of the year.  The problem for me is that I tend to treat myself to a bag of the chocolate covered almonds I buy for my friends.  This is a great place to pick up items for friends at the office, the person who delivers your paper, or the person who always waits on you at the cleaners.
• Buy for children only.  After all, the holiday season is for kids.  I know, some of us are still kids at the age of 50.
• If you have a huge family, draw names.  That way everyone won't have to buy for everyone.  Think about it...if there are 12 people in a family, and everyone is buying for everyone else, then there will be 132 gifts to buy (12 people will buy 11 gifts.)
• Shop early, especially if you're buying for out-of-town people and have to ship the gift to them.  If you wait too long, you may pay more for the shipping than the shopping.
• Cut down on the impulse spending.  I mention this no matter what time of the year it is.  Snakes are mere reptiles that have a simple nervous system:  stimulus and response.  Is that not what we're doing when we see something, don't think about it, and buy it?  We have brains that allow us to judge...use that brain!!!  If you think little Betsy will love that $2,000 doll, rest on the thought.  Think about it over night, or better yet, over a week.  Or perhaps, don't even think about it at all...simply walk away from it!
• The most overpriced items are the easiest to find.  This is true in the grocery store, and it is true elsewhere.  The items with the least markup are ones you have to bend over for, or reach for.  (I'm short, so I have to reach for everything.)  Chest-level items are usually the most expensive.
• Sometimes your employer may have discounts on movie passes.  These make excellent gifts and there is usually no policy that a company employee has to use the pass.
• Charitable contributions are another great idea, and you receive a tax deduction at the same time.  I remember when I graduated from high school, I received a donation from the lady who drove carpool on Tuesdays.  Yes, I even remembered what day she drove.  I didn't know her very well, other than "The Tuesday Lady," and she wanted to remember me at graduation.  It would have been awkward receiving a gift of material from her, so this was the PERFECT gift.  So great, I've remembered it over all these years...too many years to want to count them.
• Remember the rebound.  A gift you received in the past and never used because it was a lousy gift for you may make that perfect gift for someone else.  Just make sure you're not giving it back to the person who gave it to you.
• Cookies!!!!!  Yes, I said cookies.  You don't have to spend a lot on gifts.  It's not the law.  Sometimes homemade gifts are the best.  Personally, the only cookies I give would be Oreo's because I can't make anything better that that.  When you go to the trouble to prepare the gift, it truly comes from the heart, and that really means a lot to the recipient...or it should anyway.  Think about this idea the next time you go out and buy something expensive for someone; they may appreciate the homemade stuff more!

Here's to a wonderful holiday shopping season.  May the season and the New Year bring joy and happiness to all!!!

Look Through The Windshield

When Wayne Gretzky retired, commentators asked him what made him a great hockey player.  He stated that he does not skate to the puck, but rather, he skates to where the puck is going.  Interesting perspective.  I use this analogy in my workshops about money and how to spend it wisely.  Information in my workshops is something that is neither taught in school , nor taught in the home.

With that in mind, I'm excited that after five years and three months, the US Patent Office responded to my patent application for my spending management tool.  Although there are some modifications I must make, I'm thrilled they didn't decline my application.  For years I've taught this tool to participants in my workshops and they've asked, "What is the difference between Intuit's Quicken or Microsoft's Money, and The Financial Fuel Gauge TM [my product].  I tell them  that Quicken or Money only allow you to look through the rear view mirror of your car, while my product allows you to look through the windshield, and see where you're going.  I then add Wayne Gretzky's quote about skating to where the puck is going, so they can see that my tool does the same thing by allowing the user to look through the windshield and see where they are going.

In Sarah Kerner's article in the August 7th Dallas Morning News entitled "Real-World Frugality", she states several interesting and helpful observations on saving money.  The article is outlined so that she states the concept (the strategy), then talks about the reality, and concludes with a better way to perform the strategy, all of which I agree.  Kudos to Ms. Kerner.  When she wrote the better way to use Personal-financial software, Sarah quoted CFP Frannie Gardner, who stated the software doesn't do any good unless we step back and analyze the information we've input.  While I totally agree with that, I would like to add my thoughts.

Having worked with numerous clients (and their offspring) about how money works and the best way to use it, so it works best, I believe it's too late to look back and see where we've spent our money.  When we do that, aren't we really looking in the rear view mirror?  I believe what works best when we're driving the vehicle is to look through the windshield.  (Some Dallas drivers aren't fully aware of this concept.)  Thus, we can see if we're getting ready to make a mistake; in the case of my software, that mistake would be overspending.  It does no one any good to have a budget of $600 for groceries for the month, only to end the month and find out we've spent $743.  Well, I guess it does the grocer some good.

Let me ask you.  If you bought an airline ticket to let's say, Maui, got on the plane, watched it pull away from the gate, anticipated your arrival throughout the flight, and got really excited as the plane touched down, only to hear the pilot get on the PA system and say he'd made a mistake, that the plane had really just landed in Boise, Idaho, wouldn't you be more than mildly upset?

Folks, this is what we do each and every day.  We spend, spend, spend, and don't really know where we end up until it's too late and the plane has landed.  This means if we land at the end of each month in a place we didn't intend, we'll land at the end of our careers in a place nowhere near where we intended.

It's important that your personal-financial software allows you to see where you're going and make adjustments along the way, just as the airline pilot.  The only way to invest in your future is to first get out of debt.  The only way to get out of debt is to save money.  And, the only way to save money is to keep track of what you spend, as you are spending it.

How Do I Save Money?

So many people ask me, "Max, how do I save money?"  As a coach, I look at where my clients spend their money and some of the things I see absolutely amaze me.  I realize habits are difficult to break, and luxuries and conveniences are hard to curtail when we are used to having them, but we need to ask ourselves if the purchase is worth sacrificing our retirement.

In Kim Snider's blog entitled You Can't Invest What You Don't Save under her Saving Money category, Kim states she believes financial success includes "prodigious saving" and she further believes that $5 here and there really add up.  I agree.

In my business I see many people spending money right and left and have nothing to show for it, even just a few hours later.  It's called food, and it doesn't stop there.  Now, I'm not one for NOT eating out; I think eating out is great.  As a matter of fact, I love to tell a relevant story about my grandfather who was a philanthropist.  His favorite charity was an orphanage here in Dallas.  He gave to this orphanage throughout the year; however, at the holiday season, when he made his donation he stipulated that it had to go to a party.  The money was not to be used for shoes.  Why?  Everyone needs some luxury in their lives.

That being said, I see clients eating out all the time.  What makes that so special?  Absolutely nothing!!!  If it is a matter of everyday living, then there is nothing special about it at all.  Going to the grocery store can save about 80%.  Yes, that's 80%!  Take chicken.  Okay, I know some of you don't like it, but this is an example.  If you ordered chicken at your favorite "casual" restaurant, the dish would be about $5.99 plus tax and tip.  Oh yes, there'll be some steamed veggies on the side...yuck...(I prefer Oreo's), but by the time you're done, that's about $9 - $10 with tax and tip.  For about $7 you can buy enough chicken breasts for four meals, or about $1.75 per meal.  I know, you gotta clean up afterwards, but also consider the fact you don't have to deal with a wait person who may not be all that pleasant.  Think of the time you'll save as well, not having to wait to be seated, not having to wait on the meal to come, not having to wait on the check to come.  Not to mention the gas you'll save driving to and from the restaurant.  Furthermore, I find eating breakfast out is the worst value.  You can buy a dozen eggs at the grocery store for $1.29; however, the restaurant wants around $7 for that omelet.

Now let's take the electricity bill.  I know many people who are flabbergasted at their bill each month, yet in the summer they insist on keeping the thermostat at 72 degrees.  Try 80...okay, so you may have to drink more water,but that's healthy for you anyway.  In the winter months, try turning the thermostat to a lower temperature and wear a sweater.  You'll survive.  I wouldn't suggest doing this dramatically.  If you keep the temperature at 72 in the summer, try raising it a degree or two for a few days.  Once you've acclimated, then raise it again.  My clients have thanked me profusely for showing them the way to a lower electricity bill.  Sometimes we must adjust in order to make the difference.

Ever try washing your car yourself?  I HATE spending $15 to get my car washed.  Also, believe it or not, I find washing it myself a little therapeutic.  There's a sense of accomplishment, and it is done correctly, because it is done my way.  Although I don't own an SUV, I realize this may be an enormous undertaking.  Perhaps that's another area where you can save money...gasoline.  Do you really need to haul around all that extra cargo space? 

I look forward to your comments.

How to Save on Gasoline

Wow...even 15 gallons of gas costs over 40 bucks!  If you drive an SUV, filling up is equivalent to a night on the town!  It also seems the suburbs are getting farther and farther from town.  It is a fact that one can buy more home for the money the farther away it is from the central business district.  This means that people are living a lot farther from their place of employment, and they're driving gas-guzzling vehicles to go to and from, which forces demand higher.  In absence of moving, or finding another job, here are some tips on how to save money on gasoline:

1)   Consolidate trips by drawing imaginary lines in your city.  Say you're running errands; pick a major thoroughfare north of your home or starting point.  Once you go north of that street, stay on the north side of it and do everything you have to on that side before coming south.

2)   If you have more than one store to visit in a strip center, park in the middle; don't move your car to each location.  I don't care if you drive a Toyota or a Rolls-Royce, starting a car takes lots of fuel!

3)   Gas mileage drops dramatically at speeds over 60 miles per hour.  The EPA says that for every 5 miles per hour you drive above 60, you should add $.20 on the price of a gallon of gas.  Besides, it's safer to drive at slower speeds.

4)   Instead of accelerating uphill, I try and drive at the same speed as on level ground, or ever a little slower.

5)   I know a lot of people who use their car as a spare closet.  For every 100 pounds of stuff in your trunk, you can decrease your fuel economy by 1% to 2%, which adds up in the long run.

6)  For all you Sierra Club members and tri-athletes, this one's for you:  get rid of all that unsightly gear, like roof racks, until you are going to use it.  I know it's a pain to dismantle, but the drag from these appendages can reduce fuel economy by as much as 5%, which really adds up.

7)   Anticipate stops.  When you brake, you're wasting all that great acceleration you've already used.

8)   Accelerate slowly when the light turns green.  You don't impress anyone by being number one at the other side of the intersection.  If you're first in line when the light turns green, make sure you look both ways, as running red lights is quickly becoming an Olympic sport.

Debt and Savings

During a workshop I was conducting yesterday, a bright woman who was asking great questions, asked me something I had never considered:  if you are supposed to save six months of expenses for the unfortunate event that you might lose your job, does that six months worth of expenses include paying off your debt?

I told her that I believe the six months of expenses saved in case of a job loss should include the servicing of the debt.  In other words, the amount you put back should not only cover your day-to-day living expenses, but should also include the minimum payments on your unsecured debt.  The worst thing that can happen is that your credit card debt increases while you have no income.  It makes it very difficult to pay off your debt if you don't at least cover your minimum payments each month.

Credit card companies are usually fairly lenient when it comes to hardships.  If you call them, and in a firm, non threatening tone, explain your unfortunate situation of temporary income loss, they will be glad to make alternative arrangements.  They would rather be paid something than nothing at all.  Remember to stay cool and calm; they will react more favorably to you.

That's One For Savings

Hooray for Danielle DiMartino, columnist for The Dallas Morning News!!!  In the paper on Monday, March 20th she wrote that she receives lots of emails from folks who wish to increase their investment returns by a percentage point or two.  But, she said, they're missing the point.  She says, "it isn't the percentage return of your investment that matters; it's the percentage of your income that you save and invest." 

Last year, in 2005, for the first time since the Great Depression, the savings rate in America was negative.  What does that mean?  That means we spent more than our disposable income, disposable income being that which is left over after taxes.  One of two things happen (or both happen) when we spend more than we make:  either we cash in our investments in order to pay for our purchases, or we go into debt.  Neither one are a good thing.

I must agree with what Dick Cheney said on March 2nd at the National Summit on Retirement Savings:  "The American dream begins with saving money, and that should begin on the very first day of work."

More and more we must rely on ourselves for our retirement.  Our employers and our government are not going to fund our retirement, so we must save for ourselves.  Otherwise, we better get used to eating Little Friskies and sleeping under a bridge.

A New Retirement Saving Vehicle?

I've always said it is far wiser to pay off your debt before you begin to invest, unless, of course, Hillary Clinton is your investment adviser and you can earn an after-tax return higher than the rate your credit cards are charging you.  It's that simple. 

Some credit cards are charging 29.9% interest.  Unless you can find an investment that yields an after-tax return above the rate your credit cards are charging, it is best to invest in yourself and pay off your debt before you invest for retirement.

That said, let's talk about 401(k) retirement plans.  Folks, gone are the days where retirement is funded by our employers.  It used to be we worked for a company for 700 years, then we retired, at which point we would receive a gold watch and a monthly stipend.  Today, it's different.  The burden of saving for retirement has been shifted from employers to employees.  The good news is that many employers will match what the employee puts in their 401(k) plan, at least up to a certain percent.  (Sometimes the employer will match 50% of what the employee contributes up to a certain amount or percentage of the employee's salary.)  That's free money!!!!  That's just like getting a raise.  Your employer is giving you money on top of your salary and you don't have to pay taxes on it until you withdraw it at retirement.

Again, the caveat is:  while it's beneficial to put money in your 401(k), and really good if it is indeed matched, if you are heavily in debt, you're simply digging your hole deeper.  Since this is pre-tax money, you are saving on your taxes; therefore, if your tax rate is greater than the interest on your debt, you'll come out ahead.  According to Hewitt Associates, a management consulting firm, about 30% of eligible employees don't participate in their 401(k)'s.

So what's new? Roth 401(k)'s!  Yes, that's right.  A Roth 401(k) is a 401(k) to which an employee can make contributions; however, these contributions are made after taxes, as opposed to a traditional 401(k) where the contributions are made before taxes.  What's the advantage?  You are betting that your tax rate will be higher in retirement than today, that's why you're paying the taxes on those dollars today, so you won't pay them when you withdraw the money at retirement.  Sound rather counter-intuitive?  Shouldn't my tax rate be lower in retirement, not higher?  Perhaps not:  as Pamela Yip of the Dallas Morning News states, "Most financial planners assume your tax rate will be lower in retirement because your income will be lower.  But given the federal government's ballooning Medicare and Social Security obligations, and the inexorable upward trend ever since income taxes were instituted, the higher-tax bet may not be a bad one."

By contributing to your employer's 401(k) and Roth 401(k), if they offer one (one poll taken by the Profit Sharing / 401(k) Council of America found that only 17% of their members were going to implement a Roth 401(k)), will give you choices later so you can withdrawal from the traditional or the Roth depending on your tax situation at retirement.

Calculating Your Savings

Americans spent more than they earned in 2005, which is the first time that has happened since the Great Depression.  According to The Wall Street Journal, U. S. consumers will have spent $39 billion more than they earned in 2005, yes that is billion, with a "b." 

In order to calculate your own personal savings rate, let's start with disposable income, which is defined as income after taxes.  You can't dispose of your gross income because you owe taxes on it.  Therefore, disposable income is calculated as such (you may wish to use monthly figures since they are easier to obtain):

Gross Income:  Salary, interest, dividends, royalties, rental income and government benefits.

Less Taxes =

Disposable Income.

Now, subtract from Disposable Income all the money you spend in a month, if you used monthly figures to calculate your Disposable Income.  It may be easiest to go through your check book or your credit card statements to see how much you are spending.  You may find this to be very depressing.  Do not include any amounts you spent on investment, as that is considered savings.

Next, divide what is left from Disposable Income into Disposable Income and this is your personal savings rate.

For example, if your total Gross Income is $4,500, and you pay $1,200 in taxes, your Disposable Income is $3,300 ($4,500 less $1,200.)  If your had credit card charges of $1,500 and your bank outlays were $1,000, totaling $2,500, then your savings was $800 (Disposable Income of $3,300 less credit card charges of $1,500, less bank outlays of $1,000.)  Your savings rate would be the $800 divided by disposable income of $3,300, or 24%.  That would be far above average, as last year the average was -.4% of disposable income.

We're saving less because our home values are increasing.  This is very dangerous.  According to Dean Baker, co-director of the Center for Economic Policy Research, every dollar of extra housing wealth translates into a savings reduction of 5 cents.  Many homeowners have borrowed against this increase in home value due to low interest rates on home equity loans, and have spent the funds.  Mr. Baker stated that we saw the same thing in the late 1990's with the stock market bubble.  There was a huge run-up in stock prices, and Americans' saving rate decreased.

To create a spending plan, please check out my web site:  http://www.spendingsolutions.com.  This is a secure site that will allow you to keep track of your spending.  The only way to save is to keep track of what you spend!!!!

Let's get back to saving as we did in the 1970's:  5-10% of our Disposable Income.