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To reach your goals, it’s time to think (really, really) big!

To reach your goals, it’s time to think (really, really) big!

It’s mid-January—that time of year when, at least for most of us, New Year’s resolutions begin to fall by the wayside. The surge of gym-goers and dieters has faded, and we’re back to the same old routine. My question today is this: are you taking steps to get a clearer picture of your financial life? If not, then now is a perfect time to begin changing how you think about your money.

Two years ago, in January 2017, I introduced Jonathan Clements’s book How to Think About Money. Since then, I’ve shared three of the five steps in his approach to what has been called “financial feng shui.” Step Number One: Buy More Happiness. Step Number Two: Bet on a Long Life. Step Number Three: Rewire Your Brain. At long last, it’s time for Step Number Four: Think (Really, Really) Big. As we kick off a new year, there couldn’t be a better time to be sure you’re not only thinking big, but thinking big in ways that can help you build a stronger, more confident financial life that lasts not just the next 12 months, but a lifetime.

Clements suggests (and I have witnessed this time and time again, so I wholeheartedly agree!) that the reason most people struggle to think big about their finances is that we’re programmed to view our financial lives as a series of disconnected pieces. Insurance. Property. Debt. Investments. Cash. Because we rarely talk about how all of these pieces fit together, we end up making decisions that make no financial sense at all. We over-insure our cars but under-insure our lives. We carry credit card debt (an average of more than $8,000, according to a recent study by WalletHub) while “saving” money in low-interest savings accounts. We struggle to save for retirement but don’t hesitate to claim Social Security as early as possible—sacrificing a guaranteed opportunity to nearly double the monthly benefit in retirement. (Read more in my post, Social Security and Women: Tackling the Challenges.) We buy lottery tickets with the hope of getting rich quick but balk at investing in a “risky” stock market (which has returned a compound annual rate of return of 11% since 1980, despite multiple downturns and the 2008 financial crisis).

Of course, “we” doesn’t mean “you” or “I.” Or does it? Chances are that at least one or two of these examples resonates with you. If it does, it’s time to start thinking really, really big about your money.

Where should you start? With your paycheck. Your lifetime earnings is the primary source of every dollar you spend, save, or invest from your first job through your first day of retirement. According to Clements, over a 40-year career, our “human capital” is the source of more than $2 million (in today’s dollars). That’s a big number! And the younger you are today, the higher that number will be. To think big, begin by considering and carefully planning what you want to do with those millions. It can suddenly feel a whole lot like winning the lottery after all!

While Clements offers lots of excellent guidance (I highly recommend reading his book cover to cover), here are the most important takeaways from his Step Number Four:

  1. Consider the tradeoffs.
    Even when retirement is in the distant future, funding retirement should be everyone’s first goal. It’s daunting, it’s far off, and it’s not fun. Plus, it absolutely must be done using current income. But during our working years, other immediate goals often take priority. Buying a home. Educating your kids. Keeping up with the Joneses (and the Jones’s kids). Suddenly that 50th birthday rolls around, you’re nowhere near your goals, and time is no longer on your side.

    To gain perspective, start by taking a look at your net worth. (Check out this net worth primer from Yahoo! Finance.) Add up your assets, subtract your liabilities, and you have your total net worth. Next, look at your short- and long-term goals to determine how much of your $2 million paycheck should go to each one. In most cases, retirement and housing will top the list. (Notice that retirement is #1, always!)

     
  2. Remember that all debt is debt!
    Almost every day someone asks me this: “If I can get 0% interest, isn’t it smart to buy the [fill in the blank]? It’s free money!” No. It isn’t. No. No. No. To stress the point, all I need to do is refer to net worth. A 0% loan may feel free, but that debt spent on consumption reduces your net worth. If the purchase is part of your long-term plan, it may be fine to take on new debt and “smooth consumption” by spreading out payments over time. If it doesn’t fit into your plan, it’s simply debt, and it is anything but free. Keep debt service within reasonable boundaries. Banks use 36% when qualifying borrowers for mortgages, and Clements recommends student loan payments shouldn’t exceed 10% of your expected income after graduation.

     
  3. Manage spending.
    At every age, one of the biggest financial levers at your disposal is the ability to vary your spending. If you’re retired and concerned about the recent market downturn, rather than toying with your investment strategy, look at how you can reduce your spending. Avoiding debt and living within your means allows for more discretionary spending. Keep your eyes on your biggest goals, and manage your spending to support the things that matter.

     
  4. Permit yourself to rethink retirement.
    It may be the case that funding all of your goals requires increasing your lifetime paycheck by working longer than planned. Working past the 65-year mark is more common today than ever, and that’s not necessarily a bad thing. The “greatest generation” may have retired with pensions at 65, but they also expected to live for only another 5 or 10 years. I imagine spending my next 20 or 30 years being as relevant and engaged as I am today. Read more on how rethinking retirement can work for you in my post, Is “retirement” the only answer? Take time to rethink the possibilities.

The New Year isn’t the only reason to focus on thinking big. Today’s stock market has newscasters and financial pundits making lots of noise about how to avoid losses and make the best moves in the face of an economic downturn. Remember that the market is cyclical. There will be ups and, yes, there will be downs. By planning based on your paycheck and goals, market volatility will not affect your financial big picture. Commit to thinking (really, really) big and start building a fantastic financial future today. 

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Ready to be a successful investor? It’s time to rewire your brain

Ready to be a successful investor? It’s time to rewire your brain

If I asked you to make a list of your biggest financial mistakes, what would be on it? Overspending today and not saving for tomorrow? Taking on too much debt? Pulling your money out of a down market, or being guilty of too much hubris when the market was up? Investing in that “sure thing” that wasn’t so sure after all?

No, I’m not psychic. (If I were, I’d most certainly have beaten the market into the ground years ago!) The sad truth is that everyone can add at least one of those mistakes to their list at one time or another. Why? Because so many of the most common mistakes stem from the fact that we are hardwired for financial failure. And hardwiring is extremely tough to fight.

Jonathan Clements does a great job explaining this phenomenon in his most recent book, How to Think About Money. I covered Clements’s Steps 1 and 2 in my blog posts Money really can buy happiness and How long do you plan to live (and are you planning for it?), and while those steps were certainly important, Step 3, Rewire Your Brain, deals with issues I see my clients struggle with every day.The good news according to Clements (and I wholeheartedly agree) is that it is possible to be more sensible about how we manage our money, but changing that wiring takes great mental strength. Rewiring does not mean you need to be smarter or more educated than anyone else—you just need to stay focused on the right things at the right time. Here are four things you can start doing today to start to change your thought patterns and truly begin to think differently about money:

  1. Save like crazy. It sounds so simple, doesn’t it? But unfortunately, our brains aren’t nearly as rational as we’d like to think. Many people lack the self-control not to overspend, so they take on too much debt. My friend Lydia was always one of the most “fabulous” people I knew. She always had the best clothes, the cutest shoes, and the fanciest car. But Lydia was a victim of her own fabulousness. While she was dressing to impress, she wasn’t saving enough for retirement. Now in her late 60s, she has to continue to work—not by choice, but by necessity. In contrast, there’s the story of Carol Sue Snowden, a librarian who lived modestly and then made headlines for gifting the library where she worked over a million dollars in her will. As Clements says, “Growing wealthy is ridiculously simple, but it isn’t easy.” It requires saving early, saving often, and focusing on becoming wealthy tomorrow—not appearing wealthy today.
     
  2. Embrace humility. Are you a victim of the Lake Wobegon Effect? In Garrison Keillor’s fictional town of Lake Wobegon, “all the women are strong, all the men are good-looking, and all the children are above average.” The Lake Wobegon effect is the tendency to overestimate your capabilities and see yourself as better than others, and it’s a common affliction. The antidote? Embrace humility—and require anyone managing your money to do the same. Because when it comes to investing, average is good! But our hardwired brains want so badly to be above average that we feel a need to beat the market, or we hire someone who says they can beat it for us. But historically, active investors lag the market indexes. That means that “buying and holding” almost always wins in the end. While your neighbor may be bursting with the news of an approach that helped him beat today’s market, you can bet he’ll be quiet as a mouse when his returns fall behind. “The meek may not inherit the earth,” says Clements, “but they are far much more likely retire in comfort.”
     
  3. Find value. If you find it difficult to ignore fluctuations in the market, you’re not alone. It can be a challenge to turn off that voice in your head that starts making noise when the market dips. Remember this: your goal is to seek long-term value in your portfolio. Ultimately, the market is efficient (really!), and that efficiency makes it extremely difficult for anyone—even the most seasoned money managers—to beat the market over the long term. Focus on investments that are poised to deliver value, and then stay put. (For more on how to win this battle with your brain, see my blog post Market volatility making you crazy? 5 tips to managing your emotions.)
     
  4. Stay grounded. When the market does bounce around (and considerable bounces are inevitable), think like a smart shopper: when the market is down, the companies who offer stock haven’t fundamentally changed, which means their stock is on sale! Avoid mental errors such as over-confidence, loss-avoidance, anchoring, confirmation bias, and more. Stay focused on the long term, secure in the knowledge that market prices of securities will fluctuate, often wildly, in the short term. Over decades, the trajectory has always been up. By staying grounded in the knowledge that you own shares in real businesses whose value is derived from dividend yields and earnings growth, you will achieve the investment success to which you are entitled.

It’s natural: every time you think about money, your hard-wired, reptilian brain tells you that your very survival is threatened. But in this case, following your instincts may be the very worst thing you can do, leading to financial mistakes that can truly threaten your future. It requires great mental effort to save, stay humble, find value, and stay grounded, but by challenging your thought patterns, you can train yourself to think differently about money and help drive your own success.  And if you need help with the rewiring, give me a call. I’m here to help!

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Money really can buy happiness!

Money really can buy happiness!

We’ve all heard it said a million times: money can’t buy happiness. Well, I’m here to tell you some great news! It seems money can buy happiness after all. There’s a catch, though. It doesn’t happen in the way you might think. But stop. Let me back up for a minute to share with you how all this started swimming around in my head, and why I can’t stop thinking about it.

Last weekend, I had some precious time to read, and I picked up Jonathan Clements’s book How to Think About Money. What drew me to the title wasn’t Clements himself, or even the fact that I’m always up for new ideas about money and finance. The attraction was the fact that William J. Bernstein wrote the foreword to the book, and I’m a big fan of his. (His book If You Can: How Millennials Can Get Rich Slowly is simply fantastic.) So I dove in, and I am absolutely thrilled I did. One of the reviews of the book called it “financial feng shui,” and I agree completely. The book includes five steps covering “how to think about money.” The first step covers (you guessed it) happiness. Specifically, how to buy more happiness. If you thought it wasn’t possible, Clements offers some valuable food for thought.

First, he points out that we simply aren’t very good at figuring out what will make us happy. That’s probably no news to anyone. So many of us live the majority of our lives doing work we don’t enjoy, commuting way too many hours of every day to get to that work, and then coming home exhausted to a home that costs us way too much time, energy, and money to afford and maintain. Clements recognized the conundrum, and he turned to research on happiness to put the pieces of the puzzle together. Here are just a handful of the things he learned from the academics:

  1. “Money can buy happiness, but not nearly as much as we imagine.” 
    All of us have purchases that make us happy, but how happy do they make us over the long term? Is buying the new car more exciting than how we feel driving it six months down the road (pun intended!)? And how dependent is our happiness on our own comparison of the “stuff” we own compared to our friends and neighbors? I may be thrilled with my new Hyundai…until I look around and see myself surrounded by BMWs and Mercedes. And yet, if my parents always drove older cars because they couldn’t afford new ones, I may feel thrilled to realize I’ve upped the ante, at least in this regard. Happiness is complicated! But ultimately it’s up to us to choose how we lead our lives—including how we live and, yes, how we spend our money.

  2. “We’re often happier when we have less choice, not more.” 
    Think about it: decisions are stressful! Even little things like deciding what to wear each morning can cause some stress. Bigger decisions—like where to live or which job to take—can keep us up at night and lead to some very real anxiety. I remember when I first read The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing by Marie Kondo, I was struck by just how much stuff I’d accumulated… and spent my hard-earned money on! When I started asking myself if all of these belongings really “sparked joy,” I was surprised at how little of them did. (For more thoughts on getting rid of all that stuff, read my blog It’s that time of year: change is on the horizon.) Ultimately, it’s not the stuff that brings us joy. There’s something much better that money can buy.

  3. “We place too high a value on possessions and not enough on experiences.” 
    So if our “stuff” doesn’t define us and make us happy, what does? Experiences. Specifically, experiences with family and friends. Interestlingly, anticipation is a big part of the equation. I know when I’m planning a vacation, the anticipation is half the joy! But even more, experiences create memories that become part of the fabric of who we are. At Christmas, I decided to take my whole family to see Disney’s wonderful new movie Moana. We all went together, sat in the big, comfy seats, munched on treats, and had a great time. Every one of us walked out of the theater happy and filled with memories that will last a very long time. Was it expensive? Yes! But no more than an Apple watch. And while my grandson may have been happy in the moment as he slipped a new watch on his wrist, I know this experience was much more worthwhile. It made us all truly happy.

That’s just the tip of the iceberg— just step one out of five—but I hope it’s enough to get your wheels turning and wondering “what really makes me happy?” Everyone wants and needs to have enough money to live. That’s a given. But how we spend that money really can buy us happiness, but only if we make careful, deliberate choices based on what will bring us happiness over the long term.

I must add that being able to make these choices in the first place requires achieving some level of wealth to begin with. As Clements writes in his introduction, “Growing wealthy is embarrassingly simple: We save as much as we reasonably can, take on debt cautiously, limit our exposure to major financial risks, and try not to be too clever with our investing.” And if that seems simple, but not easy, This email address is being protected from spambots. You need JavaScript enabled to view it. . As always, I’m here to help!

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All written content on this site is for information purposes only. Opinions expressed herein are solely those of Lauren S. Klein, President, Klein Financial Advisors, Inc. Material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. Read More >