When we think about investing for our future, we make the assumption that there is actually money available to be invested in the first place. Where does this money come from, and how much money can you allocate to your investments? Do you try to invest money that is left over at the end of the week, month, quarter, or year? Rather than end each month investing what is left over-if anything- why not start your month (financial playbook in hand) saving for your future? In fact, what if we save first, invest second, and then spend? What would that kind of plan look like? Does that make you uncomfortable just thinking about it? Consider, for a moment, if you will, how and what you plan to eat, on any given day. Do you eat dessert, first? Probably not. Don’t you attempt to eat the foods that provide energy first, then eat the foods that help produce long-term good health, second, then, and only then, do you eat dessert? If not, we’ll save that topic for another day….
When we plan for our long-term goals, more often than not, our short-term necessities and desires get in the way. “Why do I want to wait so long to enjoy life?” we ask ourselves. In reality, if we focus, consistently, on planning for our future needs, we will be able to greet our future self with a big congratulatory pat on the back, and maybe, just maybe, a big hug! If we fail to stay focused, we might resent and grumble at our future self, because we have failed to plan. To arrive, in style, to greet our future self, we might just consider revising our financial playbook from “invest whatever is left,” to: save first, then invest, then spend.
We’ll explore these three principles, in detail, over the course of the next week. Hopefully, we’ll even make the process fun.
Before we get started on burn rates, check out this article in today’s The New York Times. Roger Lowenstein, a favorite financial writer of mine, articulates the many emotions and decisions confronting investors today.
He says that although we are facing serious challenges getting our collective financial house in order, investors who bet against the engine of corporate growth by abstaining from ownership in common stocks are likely to miss out on one of the best performing asset classes of the next decade.
Now, back to getting our personal financial house in order . . .
After you make a personal commitment to keep track of your monthly burn rate, the next step is to figure out an easy way to accomplish this. This is important, because if it becomes a laborious, time intensive activity, chances are you are not going stick with it throughout the year. A simple approach that works for me is that, instead of using cash for purchases and transactions, I always use a credit card or write a check.
The reason why this works for me is because it is amazingly easy to download your credit card expenses or checks to an excel spreadsheet, which can then be uploaded to a financial planning software, such as Quicken or mint.com, unless of course, you want those programs to capture this data automatically.
Once in a while I use cash for purchases, but then am faced with the onerous task of keeping track of the receipts, and then manually entering these little slips of paper into excel or a financial software tracking system.
Transferring credit card transactions and on-line bank check registers to an excel spreadsheet takes 15 minutes a month at the most. More importantly, you have begun the essential task of keeping track of your burn rate and have taken a “giant” leap on your journey to financial freedom.
In the past I have used Quicken to categorize my expenses, but even that became a little cumbersome. Instead, I created my own program in excel to do this for me. The upside is that it extremely easy to operate. The downside is that it doesn’t produce the wide array of charts and reports that software programs create, which can be useful at times.
In the August 25thblog, Lou mentioned that his family uses clearcheckbook.com to record transactions. I haven’t checked it out, but will, and report back. Do you have a system that works for you? Send in a comment, and we will send you the latest edition of The New Coffeehouse Investor.
This week’s headlines were filled with more economic bad news. But, did you see the good news buried underneath, or did the bad news “noise” drown it out? Did you see the news that landlords are raising rents in many cities across the country? In some areas, vacancy rates are below 4 percent. The next logical scenario is that, in those neighborhoods, the increased rents will encourage some renters to become buyers, due to low mortgage rates. The buyers will purchase the existing inventory, which will cause increased demand, which may cause builders to get back to the business of constructing homes.
Last week’s blog focused on “Green Shoots” in Seattle. There are many “Green Shoots” throughout the country, and yes, there is, and always will be bad news, as well. If we focus solely on the bad news, our emotions tend to get the best of us, and we tend to make decisions that aren’t aligned with our long-term objectives. The same is true if we get caught up in euphoria. Our best decisions tend to be made when we are able to evaluate the advantages and disadvantages of a situation, and how that situation relates to our goals. If we are basing our decisions on bad news-or even good news-in a vacuum, we may be getting in the way of obtaining the best results for ourselves.
We can develop systems to help us filter through the daily “noise.” Questions such as: “How does this impact my situation, short and long-term?” “Will this piece of information help me achieve my goals?” “Is this information presented to a general audience, or does this speak to me, specifically?” If we continue to filter the news through our series of questions, sometimes the news has less impact on us, and those we care about.
Review your life, and all of your accomplishments. Were you at your best when you listened to everyone else, or when you were very focused on your own goals? When you needed to lose weight, did you go on one diet after the next, just to replace it with the next latest fad? Or, did you settle into a eating plan that worked, long-term? What about your financial situation? Are you following today’s “guru” or do you have a long-term financial roadmap? Today, I encourage you to reflect on your life goals, and seek out a system that will work for you and your long-term objectives. Granted, it isn’t easy to do-especially in our complex and ever-changing world. No, it isn’t easy, but it can be simple.
Have a great weekend,
This morning, as I sat down to write the blog, I said to myself, “Hey, wait a minute, the blog is already written!”
And it was, in the form of a comment a Coffeehouse Investor submitted in response to my August 21 entry of keeping track of the infamous burn rate.
Ever since the Coffeehouse Investor was established, about 12 years ago, I have encouraged folks to keep track of their burn rate, in the form of a financial plan that allows direction on reaching goals. This exercise is by far the most important of the three Coffeehouse principles.
In the below post, Lou shares a journey he and his wife embarked on many years ago to reach financial independence. His comments are so profound that I didn’t want them buried at the end of a previous blog. Here is his story . . .
Being able to retire early was a goal of ours since the early 1980’s. In the beginning, we just lived below our means and invested what was left over. Most of the time there wasn’t much left over. The kids were young, the mortgage was expensive, etc.
In 1991, we were ages 39 & 36, we really became focused on being able to retire early if we chose to or if we were forced to. The economy was very bad. People were losing their jobs… even people in their 50’s who were very well established in their jobs were being encouraged to quit (layoff’s, golden handshakes, early retirements, etc.) It became quite apparent to me that even though companies claim to be “Equal Opportunity Employers” they really don’t want you on their payroll when you are in your fifties. We decided that we wanted to be able to retire in 20 years. Our target was the year 2010 when we would be ages 58 & 55. In order to achieve this goal we decided to set up a more measurable investing plan. We would still live below our means but now we had a yearly goal that we strived to meet. Our plan was to invest 10% of our gross income that year and then increase the amount by 1% each year thereafter. We found that this was fairly easy for us to accomplish, in fact we far exceeded that…. probably because we were already in the mode of living below our means, but also because any time one of us got a raise in income we also raised our investment amount.
In 2001, even though the stock market was down, we were in a good position to meet our target of 2010 retirement. I realized that I needed to get a better idea of what our “burn rate” would look like if we decided to stop working. I decided to track our spending for a few years and that would give me a basis for estimating our spending if and when we decided to leave our jobs.
I started tracking our spending using the popular Quicken software. I found that Quicken wasn’t very user friendly so I tried using Microsoft Excel. That didn’t work out as easy as I had hoped so I went back to Quicken.
In January, 2006, we were ages 53 & 50, we felt that we were in a financial position to retire. This was a major decision so we decided to work with a fee-only financial planner to see if he could confirm this, which he did! It was very important that we had a good handle on our “burn rate”, which we did because of the tracking that I had been doing.
To make this long story short, my wife and I retired in January, 2007 at the ages of 54 & 51. This was 4 years earlier than we had planned. In 2008 we purchased a vacation home in Florida so we could get away from the New England winters. Knowing our current “burn rate” and how a purchase of a second home would affect it was very important in making this decision.
I still track our spending and I expect that I always will, but I’m no longer using Quicken. I found something simpler and better for my needs. I am now using ClearCheckbook.com which is a free on-line money management program. There is also a premium version that offers more features but I’ve found that the free version does everything I need and it’s very easy to use. You have to register and create a password before you can use it. Then you create your accounts that you will be tracking. I think you can track as many accounts as you like but I’ve found that three accounts (Checking, Savings, and Cash out of pocket) works for me. Next you create your categories that you will be tracking (like Clothing, Gas, Groceries, etc.) You can create as many categories as you need for your situation. Once you’ve created your accounts and categories you can enter your transactions (deposits & spending) just like you would with a checkbook register. After recording some transactions you can then start making meaningful reports. I found that the one report that gives me everything I need is the Category report with a report type of Text.
Living below your means, saving for a rainy day, having a diversified portfolio, having a goal, tracking your spending …..it worked for us. My wife and I had decent jobs but we were not highly paid professionals. We just used some common sense.
I hope this helps someone.
We all face various times in our lives when important decisions must be made regarding health, finances, asset protection, etc. What is our process for determining whether or not we need an expert? How do we determine the experts with whom we will entrust our personal information? We might be able to start by reflecting on the process we use to select a physician. Did you select your physician as a result of a referral by a friend or relative? Was this person someone you know from school, or from a group in which you both participated? Do you continue to visit your doctor because you know, trust and like him or her?
Most people-even extremely healthy people-realize that they need to visit with a doctor on an annual basis, at least. Our doctors create a database with our health information, and note changes in our health, as we age. When required, our primary care physicians refer us to other specialists that will assist us when we have a specific need. Many other experts are needed during a lifetime. Perhaps you’ve had the need to create a will, which may have required a visit to an attorney. Did your golf buddy or business partner recommend her favorite attorney?
When selecting an advisor or expert of any kind-doctor, investment advisor, attorney, veterinarian, hair stylist, golf professional, CPA-it is important to determine how well you know, trust and like your advisor. Once you have confidence in their knowledge, it’s all about the relationship. Will your advisor put your interests in front of their own? What is their reputation? When selecting an investment advisor, will he or she connect with you on a regular basis? Will the advisory process be transparent? Will you look forward to meeting with your advisor, because you genuinely respect and like him or her, or will you find reasons to procrastinate.
What happens when your situation changes? Can you count on your advisor to help you navigate the new path? Can you rely on him to listen to your changing objectives? Listening. Understanding. Serving your needs. Someone you can trust. If you’ve surrounded yourself with advisors who treat you as their best client, then you just might have a relationship that will last a lifetime.
Have a great Tuesday!