I have been sitting in Starbucks for well over two hours, observing as a steady flow of caffeine-depleted patrons streak through the doors of one of my favorite Starbucks locations, as if drawn by some magnetic force. This on a day when much is being said about the "economic melt-down" facing our planet. Maybe Starbucks customers are addicts and cannot stay away, or perhaps they just didn't get the memo, but you'd think people would stop spending $4.50 plus tip on their "iced quad venti sugar free vanilla nonfat melted caramel macchiato" or their "triple tall two pump toffee nut dry misto" during such a horrid economic climate. Maybe things aren't really as bad as they say. From my overstuffed chair, it wouldn't seem people were in dire straights.
I get a lot of questions about the economy from my friends, from people at my church, and from clients. I get the feeling they want to hear some revolutionary concept that has escaped the mainstream, and that they hope some tidbit of secret wisdom they glean will prove to be their pot of gold at the end of their rainbow.
One should be reminded that the "experts" are the ones largely responsible for this mess. So, what is the little guy to do now? Honestly, I'm still spouting the same advice that I have for most of my career.
HAVE A PLAN -
I detest the word "budget" because budgets tend to be reflective (telling us what we've spent ... too late) rather than being PROACTIVE. I like the words "spending plan". The methodology is rather simple. Instead of simply accounting for what you usually spend and repeating the pattern, tell your money where it goes. Start with your income; that's your pie. Now, allocate it based on your values and priorities.
Personally, I start with my tithe. The first 10% as a minimum is given off the top to my church. Why? Because "where your treasure is, there will your heart be also (Matthew 6:21)." For me, this is non-negotiable. Then, you pay your bills, right? WRONG! Then I pay myself. I put money, systematically, into savings or investments according to a predetermined strategy within my spending plan. Why? Because one of my principles is not to work to just pay bills. I am intentional about having something to show for it. So, in order, (1) tithe; (2) save; (3) live.
With 80% of my income still available, I allocate the remainder to my fixed expenses, then to variable expenses, and finally to discretionary expenses. I tell my money where to go, and even take into account those items that do not happen every month. Vacations are a great example of this. Instead of financing vacations (which will occur inevitably), I plan and pay for them monthly. If your annual vacation budget is $600, then you need to set aside $50 per month in a separate account. I call mine my "non-monthly checking" account. The key here is to treat things like holidays, car repairs, emergency medical expenses, furnishings, clothing, etc. as "monthly expenses", whether they happen that month or not. By observing this discipline, you avoid financing those things that were clearly foreseeable. Those are the "budget busters" that cause much of the strain people have on their finances.
For our fifth anniversary, Melody and I went on a 10-day Alaskan Cruise & Land Tour. It was marvelous trip, and we spent the time with some very close friends of ours who planned their vacation with us. People asked me "how much did that trip cost?" They were surprised by my answer. $181. "How did you do an Alaskan cruise for $181?" I explained that I determined how much the trip would cost. I added in discretionary items, miscellaneous, unforeseen expenses as a cushion, extra meals, etc. and divided that number by the number of months we had to save for the trip. We began putting that money away on a monthly basis, and saved it. The point I am making is that it wasn't any more expensive to take that trip when we went than it was any other month leading up to it, because we planned. We didn't finance one penny.
KEEP A LONG-TERM PERSPECTIVE -
We know to "buy low... (say it with me) ... sell high", but emotion causes people to lose sound judgment in the short-term, to make rash decisions, and ultimately to make impulsive decisions with long-term effects. Moving to cash from retirement accounts causes a taxable event that affects your total income, could carry with it additional penalties for premature distribution (depending on your age), and is not the optimum place from which to cover short-term needs. If the "rich get richer", then perhaps we should learn to do what rich people do... keep a long-term perspective. Warren Buffet is not selling.
BUILD LIQUIDITY -
It is prudent to maintain cash reserves to cover yourself in tough times. For most people, economic crises happen on a personal basis, and are not tied solely to the world economy. Emergencies will happen, so keep an emergency fund in a place where you can touch it if you need it. I don't personally like to have ATM access to this money, but I don't want it tied up somewhere where it is tough to reach, like home equity, retirement accounts, or CDs. Keep it in a savings account or money market account. Forget rate of return on these dollars... that's a moot point. You want liquidity over rate of return here.
IDENTIFY YOUR LATTE FACTOR -
In his book The Automatic Millionaire, David Bach writes that the way to create wealth is to automate the process. Through an automatic savings or investment plan, you can have a set amount of dollars taken from each paycheck and distributed into your choice of destination accounts. The method here is simply to make the decision one time, so you don't have to remember to write the check or make the transfer each month. His rise to fame can be credited to Oprah (God help him), as she introduced him to the mainstream on her show. He writes that everyone has a "latte factor", that is, an amount of money each month that we spend on things that we can do without. I know that some things like a high-definition DVR cable package, gym memberships, and our daily caffeine fix at Starbucks SEEM like needs, but they can be fat that may be trimmed from our monthly expenses without really affecting our quality of life. If you spend $4 per day, 5 days per week, at Starbucks, your "latte factor" is at least $80 per month in this one category. He suggests cutting back or eliminating these items all-together and redistributing them to responsible, automated savings or diversified investing. And, unlike many financial books, it's a really quick, invigorating read.
PIGS GET SLAUGHTERED -
A common saying is "Bulls make money. Bears make money. Pigs get slaughtered." I've had a few conversations with people whose sole purpose for beginning to invest in something now was because the market is low and they hope to make a quick buck. I think a time-horizon of less than ten years in most markets or investments is speculative. Few win the lottery. For those who chose to pull cash out of their homes, by borrowing the equity against the inflated values they were experiencing in order to invest it in the stock market, they're learning a very hard lesson.
Both the stock market and the real estate market observe cycles. Please don't tell me we didn't see the collapse in real estate coming. History will prove that it was inevitable. So what happened? In short, we got greedy. We forgot that "what goes up must come down." Perhaps few foresaw the magnitude or broad-reaching effects of allowing anyone with a pulse, without proof of income, to purchase multiple homes for a fraction of their amortized payment and a multiple of their true value, but we surely knew that people would get hurt far in advance. Pigs get slaughtered. Another hard lesson to learn, but learn we must.
I doubt the good people at Starbucks will appreciate me telling you to join me in trading in your "triple venti melted easy caramel macchiato extra hot" for a "venti ice water, please" ... just don't forget to tip the barista.
I welcome your response... comments are open on this post.
ebt, auto payments, savings, and tithe. I found, however, that in the church world a "model budget" was not as easy to come by. 