Steps to Becoming Financially Stable
YOUR FINANCIAL PICTURE
You, too, are ready to actively plan for your future.
First, though, you’ll want to do some thinking about your current lifestyle and the role money plays in it. Think about what truly has value in your life—the things and people who give you joy, peace, and happiness—and what doesn’t. Especially take note of what is valuable in the long run. This is what you value and guides your planning.Let’s begin by taking an inventory of your financial life. We’ll use the Lifestyle Expenses worksheet provided below. Grab a pencil, print out this page, and ﬁll in the blanks.
First: What does it currently cost you to live? In other words, how much do you need each month or each week times four to support the lifestyle you’ve chosen or grown accustomed to? If you’re like many people, the answer to that question will be easy: your entire paycheck! Those like Maggie O’Neal need not only their entire paycheck but whatever else they can pick up from parents or friends or from a dwindling savings account.
On the other hand, you might have income beyond what you require for basic expenses, and some of that money can clearly become part of a regular money-building plan. In any case, take some time to think about all of the ways you currently spend money. Then list them. Be honest and as realistic as possible. To get control of your finances, you need to know where your money has been going each month so you can see what you’re doing.
Monthly Costs for Amount You’re Spending*
Ballpark the numbers. A rough but realistic total will suffice.
Second: Which, if any, of your assets create money for you? This includes anything that generates profits, interest, or income, like certificates of deposits (CDs), an interest-bearing bank account, stocks, bonds, mutual funds, a qualified retirement plan, or rental property. Fill in the numbers on the Income-Producing Assets worksheet on the next page.
Don’t count as an asset anything you own that does not have the potential to produce income. Your car, for example, is not included here; neither is your house. These two items are not going to produce any income for you. That’s why I call money spent for your house and your car “money in jail.” The wealth they represent is stuck there; it won’t provide you with cash to support you later in life.
Of course, owning a house and a car is worthwhile, even necessary, for many people. They allow you to live comfortably by providing shelter and transportation. I call them “tickets to life.” Others, perhaps your children, grandchildren, and heirs, may realize cash by selling them. But as far as you’re concerned, their value is locked in. The goal of owning a house and a car is to have them fully paid for by the time you’re no longer working. That’s a wealth-building strategy.
How about that eighteen-foot skiff you own for tooling about the bay on Sunday afternoons? When you bought it, the salesman called it “a great investment.” Is the boat an income-producing asset? Nope. But if you charter it out for fishing trips or waterskiing sessions and thereby earn some income from it, it becomes so.
As for that little mountain, beachfront, or lakefront cottage you just bought, put some rent-paying tenants into it, and you’ll have an asset that works for you. Otherwise it doesn’t.
So, at this moment, which of your assets produce cash for you? Assuming that you envision not working someday, your objective must be to replace your salary with cash ﬂow from income-producing assets in order to continue your current lifestyle. If you don’t have any investments to begin this process, you’re in trouble. If you do, you’re in motion.
Income Producing Assets
Assets Amount Invested*
Ballpark the numbers. A rough but realistic total will suffice.
Freeing Yourself from Consumer Hype
Unfortunately, many people have few items on their list of income-producing assets because they fail to value long-term goals over short-term desires. They get seduced by the moment and the quick-ﬁx feeling that a new purchase can inspire. Have you noticed that shopping can change your mood just as eating sometimes does? And advertisers and retailers certainly do their best to intensify and multiply our short-term whims.
Over consuming may mean buying too many things. It can also mean insisting on “only the best” when buying clothes or other products. Too often, a well-intentioned quest for quality degenerates into a wasteful pursuit of prestige. A great deal of the money people used to save for their futures has gone to “labels and logos.” We have been lured into thinking that we will somehow feel better about ourselves if we wear a T-shirt by Nike or a suit by Armani, if we carry a purse by Fendi, or if we drive that mean machine with an Italian name. What people might have saved in the past, they now spend to be “designered.”
That was part of Betty’s challenge. She had bartered her soul for labels and logos to such an extent that needless spending threatened her long-term financial security. Her credo was “If it costs a lot, it’s good.” She was a woman who would rather pay $200 for a small Prada knapsack than $35 for a larger no-name brand that would wear just as well. She poured out cash for the label du jour without blinking or thinking.
We’ve all met plenty of people with Betty’s point of view. I know one woman who spent $7,500 for a wedding dress, which she wore one time and then folded away in mothballs for all eternity. Her maid of honor told her, “I’d rather spend $500 on a nice dress and invest the other $7,000 in a good investment.” But the woman didn’t understand her friend’s reasoning. Unfortunately, her attitude toward spending borders on the pathological: To cover her spending tracks, she destroys all bank statements and credit card bills so that her husband won’t know how much damage she’s done. This individual needs not only rewiring as far as financial planning and investing for the future are concerned, but serious counseling, because she has a labels-and-logos addiction and a profoundly serious case of irresponsibility. Maybe someday we’ll have an L.L.A.—Labels and Logos Anonymous.
Sadly, our society’s obsession with labels and logos doesn’t stop with adults. Kids, too, are willing victims. When you agree to drop $140 on those Air Jordan sneakers your ten-year-old just “has to have,” what are you teaching that child about satisfying her or his own needs? Advertising gets all of us to buy by promising to change the way we feel for the moment, and then, a second later, it encourages us to do it all over again. The emotional buying cycle induced by advertising—“Buy/Feel Good/Want/Buy Again”—is not a long-term fix for security and happiness. Take it from me, though— money working for you is!
Look closely at your spending patterns and consider how much you could save by not being seduced by a designer name or the hot item of the day. Instead of paying $75 for a sweatshirt with a trendy logo, you can buy an equally good one for $35. Rather than get soaked for $30 for a bottle of shampoo at a popular hair salon, you can pick up something just as good at your local drugstore for $8. Already, you have $62 set aside to invest. Do the same with pricier goods, like suits, dresses, shoes, sports equipment, furniture, stereo equipment, cars, and computers, and you’ll see just how much you can accumulate for your own wealth building.
One more example: Why should you pay $2,000 or more a year for membership in the most popular health club in town, when you can work out on the same equipment for a few bucks at your local Y or a modest gym? If you’re really serious about being in good physical shape, then it doesn’t matter where you work out. Are glitz, glitter, and glamour more important than your financial future? Imagine what you can save for yourself if you cut out one or two extras.
Here’s what Fortune magazine found: If a married couple, both forty, went to a restaurant and a movie two times a month instead of four and invested the difference, they would net more than $150,000 by age sixty-five.
As you examine your spending habits, the operative money-building question is: “What’s really going to add joy, peace, and tranquility to my life, not just at the moment but down the road?” The trick is to keep what gives you true pleasure and enhances your being, but pare back what gives you only a false sense of status. And learn to enjoy the possessions and activities that add a little spring to your stride for what they are and not for any prestige that may be attached to them. With this positive approach, you’ll free yourself from the grip of consumerism and take charge of your financial life. The more strongly we value ourselves and not an image based on someone else’s standards, the better we’ll be able to temper the incessant hammering of merchandising.
You have the power, then, to make some radical but necessary changes. You already have the first tool to make it happen: the first financial jewel—“Spend less than you earn and invest the difference.” Most people ignore it. According to the Huffington Post on December 7, 2015, “Half of Americans are spending more than they earn, but don’t realize it”. If these statistics apply to you, plan to make a change—and do it now.
If your spending plan is in place and you’re still short of cash to invest, try this approach: Think about how you can generate more money through “creative” sources. How can you add more value where you work so that people will want to pay you more? What skills, talents, and resources do you have to supplement what you’re already doing to increase your income? How can you think creatively about your situation so both you and others will benefit from your energy? Maybe it’s simply a matter of taking a good, hard look at your work environment, finding something that could be done better, and volunteering to handle it. Then, once you’ve demonstrated your added value, ask to be remunerated for it. Or you might consider starting a home business or expanding the services that your business offers. If you “noodle” this—let it roll around in your mind for a while—you’ll come up with something.
A woman named Jane, for example, came to see me one day. We talked at length about her lifestyle and where her money was going. Jane works for a software company and decided she could easily start a newsletter that would educate and help people using her company’s software; she would provide a real beneﬁt for which she could be paid.
Then there’s Lori, who found that by simply taking long walks along the beach during low tide, she could collect sea glass—broken bits of glass from bottles, glasses, and other objects that have been transformed by the sea and sand into smooth, translucent, frosty, colored “gems”—and recycle it into beautiful jewelry. With a small investment for silver wire, she’s fashioned one-of-a-kind earrings, pendants, bracelets, and brooches that fetch from $10 to $150. She’s attracted a group of steady customers who look forward to buying her crafts at Christmas time to give as gifts. The money Lori makes from her jewelry designs is earmarked for her money-building plans and goes directly for her financial future.
And my dear friend Susan, who owns a cooking school, decided she could increase her income by selling spices, bowls, platters, pots, pans, placemats, and napkins at her school. Linda’s students now happily buy flavored olive oils, herbes de Provence, and garlic presses from her so that they can create the delicious dishes she teaches them to cook.
What can you do to spice up your life for yourself and others?
I had the opportunity to apply that philosophy when Maggie made a surprise call to my cell phone. I say “surprise” because of all the women I met at the Ranch (the spa in Mexico), I never expected to hear from the irresponsible Maggie. But she had had an epiphany of sorts.
For about seven or eight months, Maggie had gone to her employer and borrowed against her next paycheck so that she could cover existing bills. Her boss handed out the cash and suffered the bookkeeping complications to oblige Maggie, whose work she valued. But the last time Maggie made the request, she had a harsh awakening.
“She said no. I couldn’t believe it!” Maggie said. “She told me, ‘If you ever expect to get yourself out of your money problems, you’re going to have to learn how to manage your money. Stop buying junk and start saving. And stop drawing from your future paychecks.’ At first, I was mad as I could be, and I stormed out of her office and ran to the phone to call my mother. I knew she would give me money. But something stopped me from dialing. I’m not really sure what it was, but I think my boss’s rebuff was the first time anyone had ever said no to me. It was like a good, swift kick in the butt, and maybe that’s just what I needed!”
So now Maggie seriously considered what she was doing and began to view it as a challenge and to think about changing it.
“Hey, I’m so frightened and confused”, she said to me. “I don’t know how to start getting myself straight,” she said.
“Confusion is good,” I told Maggie. “It means that your brain is considering something new and it’s not yet fully integrated into your thinking yet. So let’s work on that.”
We did a quick financial inventory. I learned that Maggie had $6,500 in credit card debts; three cards had been canceled, and she was a month behind on her share of the rent and two months behind on her utilities. Any day now, she would lose her telephone service and electricity. Some immediate steps had to be taken to stop the bleeding. I advised her to use part of her next paycheck to pay her utilities and rent, and to cut up her two remaining credit cards. She did it right then and there and agreed to use only cash from then on.
Then we turned to consider longer-term solutions. We talked about Maggie’s skills and talents to see whether we could turn some of her creative juices into income. I discovered that Maggie often does the mounting and framing at the photographer’s studio where she works. Maggie is very good at these tasks, so good that I encouraged her to call around and offer her services to others. This way, she’ll have a second job, which will be a ladder for her to climb out of the well of debt she has stumbled into. Better still, it’s a way for Maggie to add more value to her life and to regain the sense of control that spending and ballooning debt have stolen from her.
How can you add more value to your life? How can you rechannel your resources to make your energy and your money work for you?
Take a look at what happens when you suddenly get a $10,000 bonus or raise, or a $10,000 inheritance from a favorite grandparent, aunt, or uncle. Do you invest all or some of the money? If you don’t, you’re not alone, because not many people do. Some take that bundle and indulge in the dream vacation that’s haunted them for years. Others add a wing to their house or buy a new home entertainment center. Unfortunately, none of these things will give you a cash ﬂow in your future. But if you’re like most people, you spread out the extra money over the year: You buy a nice Bordeaux or Barolo instead of the Gallo jug; you stop wearing L’eggs and start sporting Donna Karan; you go to more movies; you eat in nicer restaurants, and do it more often. Before the year ends, you’ve blown ten thousand bucks on a hundred small treats. You say, “I have no money. Where did it go?”
Once you get that extra income, bonus, raise, or inheritance, consider what importance you attach to it so that it can make a difference in your life. Here’s an alternative to consider. See what happens if you splurge a mere $2,500 for a few bottles of nice wine, several new outfits, and a short holiday and invest the remaining $7,500 in an investment. At a conservative growth rate of 8 percent per year, you’ll end up with $11,019.96 in only five years. Imagine your return if you find a faster-growing opportunity that pays you 12, 15, or 20 percent!
The quality of your life hasn’t dramatically changed, but you’ve begun to ensure that you will be able to have the same life or a better one in the future. You’ve begun to run your life like a business, by earning a proﬁt at the end of the year. You’ve started to “grow” money so that you don’t have to do all the work yourself.
Making Your Mortgage Work for You
You can creatively grow money, too, by retooling how you allocate certain payments. Let me tell you another story. It’s a good one with a happy ending. Once again, it happened during my visit to the Ranch.
I was out hiking with Betty Scott early one morning. She has a bum knee, so she had to pause for a brief rest. I was glad to stop so I could witness the sun’s incredible orange rays, which were just beginning to pierce the purplish haze draped over those gorgeous Mexican mountains. We plunked ourselves down on a smooth rock, and Betty began talking to me about my work.
“I see you’re no longer running Perry Investments but are writing a new book and teaching. How does this ﬁt?” she asked as we started up the trail once again.
“Well, we are about developing and teaching really good strategies so we can help people create their financial futures, and we’re changing the language so people can get it, employ it, and achieve measurable results,” I said. “Just a small task,” I added with a grin.
“That sounds really interesting. Can you give me an example of what you mean?” asked Betty, ever the lawyer.
“Sure. Listen, you bought a house a few months ago, right?”
“Yes. A gorgeous Victorian with lots of potential. I’m having the back porch remodeled as soon as I can handle the expenses.”
“Thirty-year mortgage, $180,000,” said Betty, as she sidestepped a huge gray boulder.
“Well, by the time your interest is paid, you’ll be in your seventies, and that house will have cost you over half a million dollars. But if you pay the principal and the interest each month, plus the principal of the following month’s payment, you’ll cut your mortgage about half—in both time and dollars.”
Betty turned to me and said, “Oh!” She was tumbling the information around in her brain.
We started up the last steep grade that leads to the “pig,” a big granite rock formation that really looks like a pig. It was so welcome because seeing it meant that we were at the top of the long climb. We hikers always kiss the pig when we get to the top, it’s a tradition. From there it’s a loop back to the Ranch, around the edge of those rock-ribbed mountains. We hiked in silence for a few minutes, drinking in the glorious morning air. Suddenly, Betty turned around and said enthusiastically, “I got it!”
Because my head was already off in another direction, I asked, “Well, what did you get?” The scenery—and the air—had put me in a pleasant daze.
“What I got, first of all, is that if I follow what you say about paying my mortgage, I’m going to own my house when I’m fifty-five or so, and not when I’m seventy or seventy-five, which is a huge difference. Second, I’m going to save about two hundred thousand dollars or more, which is a lot of money for my later years. I think I can do what you say. I’d rather beneﬁt me than the bank! If I remember the way my mortgage works, it means initially paying only about eighty dollars more each month. I can definitely do that,” she said, glowing.
Betty was right about how her monthly tab breaks down in terms of principal and interest. You can easily determine what your principal is by reading your statement. It should tell you how much you have paid toward interest and how much you have paid toward your principal. If your statement does not provide this information, then call your mortgage company or bank and find out.
You, too, can save a bundle by using this simple mortgage-repayment strategy—and retain money you’ll need for your future.
Since money can grow for you to meet your future needs, let’s figure out just how much money you’ll need when you reach the time that you’ll want to be free from working for income. For most of us, that age is sixty-five or seventy.
Lately, however, an increasing number of Americans are easing out of working as young as thirty-five or forty. Why? As a Wall Street Journal article published, said, these young “retirees” are responding to two contemporary phenomena: “New Age values” and a “robust stock market.” They are lucky enough to have made their fortunes in the stock market when they were young—and now understand that time, friends, family, and love are commodities more precious than cash. They stop working to enjoy what matters most to them, and they are financially able to do so because of the commitment and skill they employed to plan for their financial futures. Some stop working altogether; some simply cut back and work part-time or do a little consulting or community service; others stroll the boulevards of their dreams.
Obviously, these early “retirees” are a fortunate few who began investing when they were youngor built thriving internet businesses. But you, too, can work toward the same goal, regardless of your age. You might not be able to stop working at thirty-five or forty, but maybe you’ll be able to stop at fifty fifty-five, or sixty.
Consider this question: When you do leave the workforce, do you want to preserve your current lifestyle, or are you willing to live on less money and cut back on certain extras or simple pleasures? Culturally, we’ve all been led to believe that we have to spend money to be happy. But now we’re taking back power by discovering what is truly important to us. For some people, it may be a simpler life, less encumbered with possessions. Does this notion appeal to you?
I asked Betty to envision her life ten, twenty, or thirty years from now.
“That’s a toughie,” she admitted. “Up until now I always thought I’d work because that’s all I ever did. Now, though, I don’t know. I don’t think I want to be a workaholic, and I know I’d like to do some traveling, but I’ve never really thought beyond next month or next year.”
Betty sat back on the sofa by the sun-splashed bay window of my office. My cats, Gizmo and Muggs, curled up around her. She was very relaxed—an unusual feeling, she confessed. A smile danced across her face. “You know something—I’ve never really discussed this with anyone before—but I’ve always wanted to do pottery. I have this picture of myself sitting outside, looking up at the mountains with a mound of wet clay in my hands, fashioning bowls and plates. Can you picture me, the big-time lawyer, living like that? But maybe I could someday. And here’s another thought: I’ve also considered a change in order to become a mentor to inner-city high school and college-age girls who might desire a career in law.”
I was happy that Betty was exploring new and creative highways in her life, and with my encouragement, she decided to take a few days to examine her current lifestyle and project what her needs might be in the future, especially if she modifies her life as a highly charged lawyer and becomes an artisan and a mentor. Will she want to change her lifestyle? If so, what are the financial implications of this choice?
What are the financial implications of the choices you are making — time to thoroughly consider them.