Smart Money in Hard Times
As we all try to navigate the Age of COVID, many of us are finding finances to be one of our toughest challenges. Are you one of the millions who have been laid off, let go, had your hours cut, or been forced out of business? Or maybe you have a great job or business but you just don’t seem to be able to get ahead? Regardless of your current financial circumstances, you can likely set yourself up for a better future by using some of the following strategies:
1. Decide on Your Top 3 Financial Goals
If you asked me what my top three financial goals are, I would tell you that the first is to carry no debt - other than a mortgage - that I can’t pay off monthly (we have already achieved this goal); second is to own a home outright; third is to be able to comfortably retire when I’m 60. Do you see how the first two goals directly impact the third? Now, what are the three things you want to achieve financially? Give it some in-depth thought. Talk it over with your spouse or partner if you have one. Brainstorm and get your ideas on paper. This step is number one because it will drive all of your key financial decisions in the future. See where this is going? Excited yet?
2. Get a Handle on Debt
Loan interest never takes a day off. If you have any typical brand of debt, the interest on that debt is compounding every single day no matter what. That is your money working against you in the worst kind of way. And what is your interest rate on that debt? If you have a $25,000.00 car loan at the “good” rate of 3% over 5 years, you’ll pay nearly $2000.00 in interest. Some might say, “no big deal,” but I can think of a whole bunch of better ways to spend 2 grand, can’t you? And that’s small potatoes compared to consumer debt! Consider the following scenario: Let’s say you have maxed out your $10,000.00 limit card with a rate of 21%. Determined to mend your ways, you decide to quit charging money on that card and to start paying $245.00 against the balance each month until it is paid off. What’s the result? After six long years your balance is paid off. Hurray! And along the way you’ve paid nearly $7700.00 in interest. Ouch! Was all that stuff you bought with the card worth it? And how about opportunity cost? How much would you have earned by putting that $245.00 in a simple index fund for 6 years? At an average rate of return of 7% you would be holding nearly $21,700.00 in that investment. Can you see what a killer debt can be?
3. Be Selective When You Spend
Have you ever heard the saying, “Penny wise and pound foolish?” That has described me when I have been so careful about shopping for deals on little items at the market, only to turn around and make a really big stupid purchase. Here’s an example that may resonate with some of you. Let’s say you need a car to commute to work. You could buy your neighbor’s used Honda Accord for $8000, but you see that your co-worker just got a brand new blacked-out F-350 to tow his boat and which also doubles as his commuter truck. He drives you to lunch in the truck and you fall in love with the comfort, the room, the leather seats, and the idea of looking as cool as the Marlboro man when the ladies see you driving it. So, throwing caution to the wind, you go down to the dealership and finance a nicely-optioned Super Duty for $69,000.00 at 3% for 60 months. You don’t haul hay or own a boat but you are going to drop $1240.00 a month to channel your inner Toby Keith. And let’s not forget about Cost-of-Ownership concerns like depreciation, fuel consumption, insurance, repairs, taxes and fees. Not including the price of the truck, your 5 year COO @ 15k miles per year totals about $75000.00. That means you incurred liabilities totaling $144,000.00 to get you back and forth to work over those 5 years. The Accord, on the other hand, with COO costs included, would have only set you back about $18,000.00 or so. Can you think of some alternative uses for the $122,000 difference? Always consider what your decision means when it comes to your top 3 big financial goals. If it takes you further away from your objectives, go back to the drawing board!
Wrap up -
Your financial goals and strategy are completely in your control! Wherever you’re at, just take stock of the situation and start taking baby steps based on your top 3 goals. As far as other suggestions go, I would take a hard look at setting up automatic monthly transfers into investments and tax sheltered financial instruments beyond your 401k, such as an HSA, a Roth IRA, etc. I would try to set aside a minimum of 10% of your salary for investing and more if you are able. Another thing that some people find quite beneficial and freeing is practicing some degree of minimalism. In a nutshell, the idea is less stuff = less worries, stress and problems. You might do a quick evaluation of the things that bring you true joy and the things that don’t. Then get rid of the things that don’t. Lastly, there is tons of great financial advice and info to be found online. Do a little research and see what resonates with you. You can do this!