Three Steps to Wealth & Financial Security

by Gary Laturno

  5. FINANCIAL PLANS THAT FAIL

  “The first defense is diversification”. John Longo, investment strategist, MDE Group, Morristown, New Jersey

  Do not put all your money into one investment. Diversify! We have seen many focus their investment portfolio 100 percent on real estate and not invest in their company 401(k) or an IRA. We have seen some focus their entire investment portfolio on one stock or one private equity or business opportunity. Big mistake!

  We have seen some invest everything into their business or law practice, believing those entities will take care of them forever. Big mistake! See, for example, the 2012 character-driven documentary film, The Queen of Versailles, about David Siegel, founder of Westgate Resorts, a real estate and timeshare company. Siegel—hugely successful—lived like a king until the crash in 2008. Unable to get funding for the buyers of his timeshares, his company collapsed. Siegel had no plan B; he had no other investments. The film shows the fallout from his failure to consider the possibility that his business would be unsuccessful.

  Be wary of investing in private equity opportunities or startup companies that “cannot fail”. I have listened to people who invested 100% of their money (or put a second mortgage on their home) in an enterprise that was going to make them rich. What happened? The enterprise failed. They lost their money or were stuck with a second mortgage on their house.

  Do not try to beat or time the stock market. The pros on Wall Street try and fail at this. See our discussion on this topic in Part 3 below.

  Be careful about flipping houses. If you do flips, ensure that you have a plan B. We have seen many try to flip houses and seen many fail. Costs to rehab may come in above budget, market conditions can change quickly, and prices may fall when you try to sell. Then the question: Do you have a plan B? Will you be able to rent the home with a positive cash flow and make a profit? If not, your financial problems may be just beginning.

  Do not buy investment property with negative cash flow hoping for appreciation. The plan will not work. You will lose money. See Part 1, Chapter 6, “Lessons Learned: Houses a. Biggest Mistakes” for examples of ordinary people who made this mistake.

  Lastly, be careful with self-directed IRAs. You can put almost any investment into a self-directed IRA. This fact does not make it a good investment. If you are thinking about putting an investment into your IRA, read Connor Dougherty’s article, “Is That a Condo in Your IRA?”, The New York Times, February 1, 2013.

  6. SOUND MONEY MANAGEMENT – Get Started

  “Savvy money managers don’t spend a lot of time looking for ways to save a few pennies. They charge right ahead to the big-ticket items, looking to make high-impact changes in the shortest period of time”. Elizabeth Warren, U. S. Senator and former Harvard law professor

  What are your financial goals and timelines? Retirement, an emergency fund, education, housing, travel, a vacation home, weddings?

  What are your short, medium and long term goals?

  What can you afford on a monthly basis to get you there?

  Audit your finances! Where does your money go? Track all expenses for 30 days.

  Use a pen and paper or an Excel spreadsheet. Know where every penny is going.

  Consider asking your CPA or a fee based financial adviser to review your expenditures and give you his/her view of where your money goes. You might be surprised by what an objective observer sees that you do not. Note this person must represent you. S/he must be a fiduciary - not someone who sells financial products.

  In a relationship, open communication is vital. Talk to your spouse or partner about money. Agree to disagree. Attempt to compromise. One may be a “saver” and the other a “spender.” Every individual has personal feelings about money that may not change but can perhaps be refocused in the light of a larger financial plan or goal.

  For additional information on couples and money, including suggestions on how to resolve financial disputes, see “Couples Need More Than Love” in the Appendices. Recommended reading: “Financial Opposites in a Life Together”, Tara Siegel Bernard, New York Times, April 26, 2013.

  Talk to your kids about money; teach your kids about money. They need to understand what is realistic and in the family’s best interest. Spending money you do not have is not in your best interest. It is not in your children’s best interest. Do not keep them in the dark. Bring them into the family’s inner circle. Teach them financial planning and sound money management. Send them into the world with skills that will benefit them a lifetime. See “Teach Your Kids About Money” in the Appendices.

  7. SOUND MONEY MANAGEMENT – Trim the Fat

  “Write your budget down. Sometimes people don’t really know what’s coming in and what’s going out. One new client had a $1500 monthly gap”. Jeanne Gibson Sullivan, Certified Financial Planner

  Focus on the big ticket items - houses & cars. Warren Buffett, for example, still buys used cars

  My friend David rented houses

  Houses: If you are like most Americans, your biggest expense will be your house. The key: you cannot spend a large percentage of your income each month on your house – whether for a mortgage or rent. You must have money each month to save and invest. See “The Millionaire Next Door” and “The Millionaire Teacher” for examples of people who spent a small percentage of their income on housing and as a result were able to save and invest.

  Gary’s story: Twenty years ago I lived in a luxury home near the ocean in La Jolla, one of the most expensive neighborhoods in one of America’s most expensive cities, San Diego, CA. Even though I could afford to make the monthly mortgage payment, I was unable to save and invest. I had purchased “too much” house and ignored what my parents had taught me about living modestly and saving and investing. Several years after I purchased the home San Diego experienced a recession and my income fell. The amount that I had to pay for my home now exceeded 50% of my monthly income. In some months I had to borrow to pay the mortgage. I struggled and was depressed. I eventually realized that I had no choice but to downsize and sell the house.

  I moved to a rental property, started over, and fortunately met Vikki. We purchased an entry level home, live a modest lifestyle and save and invest.

  I learned the hard way: I could not achieve wealth by living in a luxury home overlooking the ocean in La Jolla. The secret to achieving wealth for me: live within my means, spend a small percentage of my income on a house and invest.

  Cars: Here are four options to consider:

  1.)Buy a used car with cash; invest the money saved each month. Recommended reading: “Dump Your Car Loan and Pay for Your Next Car with Cash” by Carrie Smith located at PTMoney.com.

  2.)Use public transportation. Some have given up their car, relying on public transportation. For example, an attorney in San Diego who lives in a neighborhood near downtown Gary M. Laturno, Esq. and Victoria K. Kuick, MBA San Diego dumped her car and now uses public transportation, saving $450 a month. A study released in early 2013 by the American Public Transportation Association and the National Association of Realtors revealed that homeowners who live near public transit save significantly on transportation costs. Homeowners in Boston saved an average of $351 each month; homeowners in San Francisco saved an average of $346 each month. Takeaway: Take advantage of inexpensive public transportation and invest the money saved each month.

  3.)Buy a scooter. Large numbers of people use scooters to get around in European cities. My youngest daughter who lives in the South of France drives a Mini, and her husband uses a scooter. He explains the price of his scooter was a great deal less than a car, and both insurance and fuel for the scooter are significantly cheaper. Another big bonus: unlike a car, he can park his scooter anywhere.

  4.)Bike to work: You do not have to be poverty stricken to use your bike to get around. My oldest daughter, an avid cyclist who lives and practices law in San Francisco, often rides her bike to work. It gets better: Brian Parker, a financial planner, reported to Andrea Coombe
s of the Wall Street Journal: “I’ve found that Ferrari owners can struggle to make payments, and multimillionaires may choose to ride their bike to work”. See “Mom and Money: Lessons I Wish She Had Taught Me”. Amdrea Coombes, Wall Street Journal, May 12, 2013.

  Look for other ways to free up funds to save and invest.

  Impulse shopping, insurance, vacations, credit cards, using stamps rather than on line bill pay – the list goes on.

  Do you own expensive toys? I have talked to people who have no savings or investments, but they make significant payments each month on RVs and boats. In addition, their toys are expensive to maintain.

  Restaurants & alcohol: Are you eating out often at expensive restaurants? Drinking expensive wine? Drinking is highly overrated! Cut back or eliminate alcohol consumption. Save money (invest the money saved.), lose weight, sleep and feel better.

  Take your lunch to work. Learn to cook. Eat at home. Eat out less often. Save money, lose weight, and feel better.

  Cable and cell phone bills: Do you use all those minutes? Do you really watch all of those extra TV channels? Stop magazines you do not read. Reduce memberships.

  Do you mismanage your debt? Assuming 18% interest, it would take twenty- four years to pay off a $2,000 credit card balance making minimum payments. ConsumerReports.org

  A financial “tune-up” should be at an annual project to keep things in check.

  8. SOUND MONEY MANAGEMENT – Move Forward

  “It is imperative that you spend less than you earn”.

  Hank Coleman, financial writer and blogger

  “Any rich person will tell you. It’s not how much you make. It’s how much you keep. Saving is the road to wealth creation”. Elizabeth Warren, former Harvard law professor and U. S. Senator

  Kick start the process. Pick one short-term goal to get yourself started and create a sense of urgency about the importance of saving money. Use your tax return wisely.

  Establish an emergency/rainy day fund. Depending on your age and financial situation, it should be at least three to six months income.

  Focus on paying off debt. Pay off your high-interest credit cards first. Prioritize. Retails store cards are often one of the highest. Student loans typically are the lowest.

  Create separate savings accounts for short-term goals: A down payment on a house, money to buy a used car, a vacation and holiday expenses.

  Make smart, not impulsive, purchasing decisions. Buy only what you can afford and pay cash for it. Live within your means.

  Start to invest. Take advantage of “free money” in your employer’s 401(K) or open an IRA.

  Open a 529 College Savings Plan for your kids. See Part 3, Chapter 6, “The 529 College Savings Pan & the ROTH”.

  Recommended reading: “Seven Resolutions to Get Your nest Egg in Shape” by Anne Tergesen, The Wall Street Journal, January 14, 2013; “Best Way to Stick to a Budget”, Rachael Louise Ensign, Wall Street Journal, June 10, 2013.

  9. FINANCIAL PLANNING SOFTWARE VS. A SPREADSHEET

  “Taking the time to track and analyze your income and where it’s going is a crucial element of managing your personal finances”. Len Penzo, money blogger

  Set aside time on a regular basis – once a day or once a week - to review credit or debit card statements and receipts. Keep track of every penny you spend using software, a spreadsheet or paper and pen. You must do it.

  Mint.com is by far the most popular and well-known home money management software available today. Mint brings all financial information into one place including savings, checking, investments, auto, and home.

  Mint helps you know how much money is left for each of your budget categories.

  Mint helps you save money by reviewing spending and making recommendations.

  Two excellent additional resources: (1) “The Best Way to Manage Your Money” by Ian Sherr, Wall Street Journal, August 27, 2012; and (2) Len Penzo’s money blog; in particular see his article http://lenpenzo.com/blog/id14307-why-i-prefer-a-spread-sheet-to-track-expenses-manage-my-finances.html

  10. SECRETS TO SAVING

  “Nickname your savings accounts. . . . The key is to automatically funnel money into those accounts each month”. Liz Weston, LizWeston.com

  SmartCookies.com, a financial website, interviewed top money bloggers to discuss what prevents most people from getting ahead. “Let’s be real—it is just not easy to save money, but there are proven methods one can use to get ahead.” SmartCookies. com.

  Adam Baker—ManvsDebt.com: “Write down all of your spending by hand, immediately after you make a purchase. It might seem old school, especially with all of the tracking technology and apps available, but it’s more tangible and makes a bigger behavioral impact if you have to stop and physically write down every purchase. Do it for 30 days.”

  Carrie Rocha—PocketYourDollars.com: “Check your tax with holdings NOW. Sometimes we’re of the bigger-is-better mindset where tax refunds are concerned. Some even expect upwards of $7,000 back at the end of the year; that is $583 per month you could be saving. Even a more modest tax refund of $3,000 is $250 per month that you could use towards your savings.”

  Well Chen—WiseBread.com: “Start with one small goal each week. Don’t set yourself up to fail; start with one small goal you can realistically complete and build confidence to move forward. One goal might be to open a savings account.”

  Liz Weston—AskLizWeston.com: “Nickname your savings accounts. Each one of your savings goals should have its own savings account. It makes it easier, and frankly more fun to save. Have as many accounts as you want. The key is to automatically funnel money into those accounts each month.”

  J.D. Roth—GetRichSlowly.com: “Practice conscious spending. Impulse spending is tricky; you think you’re focused on your saving’s goals, suddenly you’re in line at the grocery store mindlessly buying five packs of gum and a cheesy gossip magazine. It’s important to think not just about how much money you’re trying to save, but what you’re saving for. Chances are it’s something you LOVE.”

  11. USE CREDIT WISELY

  “Pay bills on time; avoid debt; maintain good credit; buy modest vehicles; begin investing early”. Rob Berger, founder of the personal finance blog, the Dough Roller

  “Don’t use a credit repair company offering a quick fix for a fee. There is little the company can do that you can’t do yourself free”. Ann Carrns, New York Times

  Credit remains an important factor in your financial profile. Using credit wisely can boost your credit scores.

  Credit scoring systems are complex and somewhat of a secret but here are some tips. Make small purchases and pay off the balance in total each month. Do not max out the available balance. Keep balances low relative to the available balance.

  Do not close old, paid off credit cards. Your credit score will go down. The longer you have “established” credit, the higher your scores. Those cards also contribute to your maximum total available credit, which is another metric tracked by credit reporting agencies.

  Paying the minimum on credit cards each month will put you into a hole, a big hole. Minimum: 2 percent or 4 percent; as you accumulate interest charges, interest compounds on both purchases and the interest.

  Assuming 18% interest, it would take 24 years to pay off a $2,000 balance making minimum payments. ConsumerReports.com

  Additional fees such as late fees and annual fees drive the cost of credit even higher.

  Monitor your credit. Go to AnnualCreditReport.com. In December 2012, the Federal Trade Commission issued a report revealing that one in five consumers have confirmed errors in their credit reports. So, check your reports regularly. See FTC. gov.

  Recommended reading: “12 Debt Myths That Trip Up Consumers” by Rachel Louise Ensign, The Wall Street Journal, February 25, 2013; “Fixing Your Error Ridden Credit Report” by Anna Maria Andriotis, Market Watch, The Wall Street Journal, February 11, 2013; “Tips for Disputing Credit Report Errors” by Ann Carrns, New York Times, Ma
rch 4, 2013, and “When Bill Collectors Knock” by Karen Blumenthal, The Wall Street Journal, February 12, 2013; “Can Bad Credit Hurt a Job Search?” Jonnelle Marte, Wall Street Journal, June 14, 2013.

  12. HOW WILL YOU PAY FOR MAJOR MILESTONES?

  “Nearly half of America does not have enough savings to cover three months of expenses”. Bankrate.com

  Graduations, college, and weddings are wonderful but expensive. They need to be a part of your overall financial plan. We have seen people lose their home after paying the bill for their daughter’s $50,000 wedding.

  Set out a clear picture about what you can or cannot afford in age appropriate language to your children.

  Start the conversations about expectations for college and weddings EARLY.

  When will your responsibility end? High school? College? Graduate school?

  Set out what you expect of your child as to any contributions needed by them for college. Will they need to get a summer job? Will they be expected to work during the school year?

  Recommended reading: “For Parents to Be, a Few Financial & Legal Tips” by Tara Siegel Bernard, New York Times, March 8, 2013