Time for a mid-year financial checkup

Time for a mid-year financial checkup

Well, we just past the halfway point of 2020.  Five months to go.  Time for a mid-year financial checkup.  I’m a big proponent of doing an annual review each January, but this year has been a bit…unusual…so I encourage you to look things over now and make sure that your retirement plans are still on track.  Here are a few things to focus on as well as a free Financial Checkup Checklist to help.

Investments.  If you’ve been afraid to open your statements or log in to your accounts, it’s time.  Look at where you are, but more importantly, look at where you’ve been.  Markets plunged and then rallied, so you’ll see volatility for sure.  But if it’s more than you can stomach (or more than your plan can handle), it’s time to rethink your risk and allocation.  

Work.  If you lost your job or changed jobs due to the pandemic, you need to re-run your retirement plan and make sure that it still works.  A new job means a different income, different benefits and a different 401k.  Those are all variables in your plan.  If they change, your timeline for retirement might change. 

Savings.  It’s natural to get defensive in the face of uncertainty.  When markets are plunging and the economy looks shaky, it’s easy to quit saving and investing.  I see it all the time.  It’s one thing if you lost your job or your income shrank considerably.  But if you’re still working and you just quit saving out of fear, turn those automatic investments back on.

Budget.  Did your spending change during the lockdown?  Mine sure did.  When you have no idea how bad a downturn will get or how long it will last, it’s natural to reevaluate your spending and reconsider your wants vs. needs.  Ultimately, that’s a good thing.  Nothing impacts your ability to retire quite as much as your retirement budget.  The leaner you can make it, while still doing the things that are important to you, the better off you’ll be.  Cut the fat and optimize your spending for the lifestyle you want.  Here’s a budget worksheet to help.

Debt.  Divide your total debt by your income.  That ratio should get smaller over time.  According to research by Charles Farrell, your Debt/Income ratio should be around 1.0 by age 45 and zero by age 65.  How are you doing?  What would your finances look like if you were debt free?  How would you feel?  What would you do with the extra money?  How soon could you retire?  Make a list of your debts and put together a plan to pay them off.  And if you have a mortgage, consider refinancing while rates are at historic lows.  

Insurance.  Review all your coverages, but pay particular attention to your life insurance.  The pandemic is a good reminder that unexpected things happen.  If your family is depending on your income, then you need to have a plan to replace that income if you die.  A general rule of thumb is to have 7 to 10 times your annual income in life insurance, but you should meet with a trusted adviser to discuss the specifics of your situation.

Legal affairs.  Again, the pandemic is a good reminder that unexpected things happen.  Make sure that your will, powers of attorney and estate plan are accurate, up-to-date and reflect your current wishes.  

One more thing before I go.  Don’t just focus on your finances or legal affairs.  One of the most important ingredients to a successful retirement is to decide what you really want out of life and to start taking those things very seriously.  COVID-19, while terrible, has likely helped you in that regard by forcing you to reexamine your habits, routines, priorities, purpose, relationships, finances, lifestyle, career and any number of other things.  What have you learned about yourself?  Don’t just ignore those lessons and slowly ease back into your pre-pandemic rut.  Design a lifestyle—home, work, leisure—that reflects your priorities and is faithful to what you want out of life.  You still have plenty of time to do that before the end of the year.  Redeem 2020 by turning the disasters and difficulties into a better, more secure, more fulfilling life.

Be Intentional,

Joe

Strategies of retirement super savers

Strategies of retirement super savers

The general idea behind retirement is to reach a point of financial independence where work is optional and you control your time.  How fast you get there depends largely on how much you save and how much you need to live on during retirement.  The math is pretty simple.  The more you save and the less you need, the faster you will be financially independent.  How can you ratchet up your savings and reach your goals faster?  For some ideas, let’s look at the habits and tactics of super savers (people who save 30-50 percent of their take home pay).

How to save half your income

First, let’s address the elephant in the room.  “Wait Joe, Did you say 50 percent!?!”  Indeed I did.  That might sound ludicrous to most of you, but let me prove to you that it’s possible.  Think about how much money you make.  Got it?  Ok.  No matter what number you have in your head right now, there are millions of people in the U.S.—some of whom no doubt are your friends, neighbors and co-workers—living on half that.    Say your income is $100,000.  Almost half the country is currently living on half that.  Or maybe your income is $50,000.  There are tens of millions living on half of that.  So living on half of whatever number you have in your head right now is not only possible, it’s apparently pretty easy.  Millions of people are already doing it.  The trick is to spend like them, even though you’re making twice as much.  Do that and your savings rate will skyrocket.  Let’s look at how super savers do it and then consider how to apply those lessons.

Strategies of Super Savers

They focus on maximizing income.  Super savers focus on income, not just expenses.  They realize that the more money they make, the easier it will be to cover a comfortable lifestyle and still have plenty left over to save.

They avoid lifestyle bloat. Most people allow lifestyle bloat as they get older.  As income grows, so do expenses.  Bigger paychecks mean better houses, cars, vacations, wardrobes and gadgets.  If you spend everything you make, you’ll never be financially independent.  Super savers try to buy their freedom as soon as possible by capping their lifestyle and saving the rest. 

They have clear priorities and goals.  Super savers understand what’s important to them and what’s not.  They have clear retirement goals.  They have a vision for their future.  They know what they really want out of life and they are taking those plans very seriously.

They are self-aware and secure.  Because super savers take the time to think about what’s important to them, they are less likely to make purchase decisions based on expectations, peer pressure, vanity, a pushy salesperson or the need to keep up with the Joneses.  Instead, they spend liberally on things that provide them with a solid ROI and miserly on things that don’t.

They make things simple and automatic.  Super savers automate their savings by having the money automatically deducted from their paychecks and/or bank accounts.

They are organized and intentional.  Saving large chunks of your income doesn’t just happen.  In fact, the path of least resistance is to spend everything you make.  Super savers are disciplined and intentional about earning, saving and spending.  They track their progress and regularly try to improve.

They have aggressive goals. I have a theory.  Our collective failure to adequately prepare for retirement is partly due to the fact that our target (mid 60s) is so far out in the future when we start our careers.  There’s no sense of urgency.  Super savers have aggressive goals that don’t allow for complacency. 

They use debt sparingly.  Debt allows you to bring future purchases into the present.  You get the fancy doodad now in exchange for the promise to keep working so you can pay for it over time.  Super savers understand this calculus.  They realize that you don’t add debt, you exchange future years of your life for it.  And since they hold those future years dear and want to control their time, they use debt very sparingly.

It’s not about the job.  For the most part, super savers aren’t trying to quit working.  They’re trying to get to the point where work is optional and they have greater leverage in choosing the type of work or other activities that they do.

How to buy your freedom faster.

I wrote this article, of course, in the hopes that it would inspire some of you to ratchet up your savings rate and thus buy your freedom faster.  Here are a few simple ways to apply the strategies discussed above.

Inventory.  The first step is a quick inventory of your current financial situation.  The goal is to get an overview of how much you earn and where that money is going.  Grab a pay stub and calculate your annual after-tax income.  Make a list of what you’re currently saving in your different accounts (e.g. 401k, IRA, etc.).  Review your budget to see where you’re currently spending.  Again, the idea with this is just to get a clear picture of how much money is coming in and where it’s going.

Define your priorities.  Next, think about what’s important to you.  What do you actually want to do in this life?  When would you like to retire and how much money do you need to fund that lifestyle?  What goals do you have?  What types of purchases do you view as most worthwhile?  The idea here is to define your priorities and goals so you can allocate your resources more efficiently.  You want to invest in things that are important to you and stop spending on things that aren’t. 

Set an audacious savings goal.  How much are you saving?  Nothing?  3 percent?  10 percent?  Whatever the number, set a stretch goal to drastically improve your savings rate.  Something that will give you a sense of urgency and force you to put forth major effort. 

Track. I’ve been experimenting with savings rates myself for the last two years.  To help, I created a simple spreadsheet that has a column for my income, columns for each of my accounts and a column for my mortgage.  Then each time I get a paycheck, I list my after-tax income in the income column and then enter the amount of savings in each of the other columns (e.g. 401k, IRA, HSA, etc.).  I’m trying to pay off my mortgage quickly, so I count extra payments there as savings. 

Reallocate. Increasing your savings rate takes time because the extra money you want to save is already allocated somewhere else.  In some cases, it will be easy to reallocate it.  If you eat out regularly, but that isn’t a high priority, then stop eating out and send that money to savings instead.  Other things take a little more time (e.g. paying off credit card bills) or more effort (e.g. lifestyle changes like downsizing your house).  As you get rid of past indiscretions and reorder your priorities, your savings rate will rise and you’ll reach your goals faster.  Not only that, but you’ll also be less stressed about money and more satisfied with your lifestyle because you’re spending on things that matter to you.

Be Intentional,

Joe