Extend Your Car Warranty for Free

When it comes to saving money, there are two expenses which will make or break your budget: your home and your cars. If you keep those expenses below your means, you will have a surplus to save and invest. That’s how you generate wealth. 

Unexpected car repairs are the worst. You can spend thousands and it feels like you are just flushing your money away. That’s why we love car warranties: they help extinguish our fear of repair bills. For a lot of people, when their car warranty runs out, they want to get a new car because they can’t stand the thought of a catastrophic repair bill. 

But buying a new car every three or four years exposes you to the steepest part of the depreciation curve. Most cars will lose 50 to 60 percent of their value within five years. Owning new cars is trading the mere possibility of car repair bills, which might not happen, for the certainty of significant depreciation, which is inevitable.

Of course, car dealers would love to sell you an extended warranty. It’s one of their most profitable areas. That alone makes me think they are not worth it. You are spending $2,000 to buy a $1,000 warranty. And the insurer probably only pays out 50 to 80 cents in claims for every dollar in premiums it receives. It seems like you would be betting against yourself. 

I don’t usually endorse products or services here in my newsletter, but I came across a benefit which I think many of my readers might enjoy. It’s a way to provide protection against unexpected car repairs. This might allow you to keep your vehicles for longer and then direct more savings into your investment portfolios. (Selfishly, I will make more if my clients have larger investment portfolios, but hopefully that’s a goal we can both agree on!)

There is a company called BG Products which makes fluids for cars and trucks. They make motor oil (including synthetic), transmission fluid, brake fluid, anti-freeze/coolant, steering fluid, etc. BG offers a Lifetime Protection Plan that when you use their product regularly, if that component breaks down, they will reimburse you for the cost of the repair, up to a specific limit.

Best of all, they will cover your car, even if you don’t start using their fluids until 50,000 or 100,000 miles. That means that if you have a car with 80,000 miles, past the manufacturer’s warranty, you can actually add protection to your vehicle today. They offer double the protection if you start before 50,000 miles, so you might want to start sooner if you can. 

There is no limit on miles. As long as you continue to change the fluids within the specified number of miles, your car will be covered. You could keep your car for 300,000 miles and it would still be protected.

Here are the service intervals required for the Lifetime Protection Plan. If your manufacturer suggests more frequent changes, I would follow those instructions. To stay under this protection plan, you need to replace fluids before reaching these limits.

Engine Oil: 10,000 miles

Coolant: 30,000 miles

Transmission Fluid: 30,000 miles

Power Steering: 30,000 miles

Brake Fluid: 30,000 miles

The BG plan will reimburse repairs if these components break, but not for normal wear and tear. You would have to get the repairs done and then submit your receipts for reimbursement, which are subject to the following limits:

Plan 1, started before 50,000 miles: $4,000 coverage

Plan 2: started between 50,001 and 100,000 miles: $2,000 coverage

Full details of covered components HERE.

BG Products are not available in stores, you have to find a shop which uses them. Here in Dallas, I have used M2 Auto Repair, near Love Field. I’ve had a great experience there and can recommend them. If you talk to Eddie, the owner, please tell him I sent you.

If you’re not in the Dallas area, you can find a BG Dealer here. I have not filed a claim with BG, so I cannot vouch for that process, but obviously it is going to be very important to be able to document that you did have the services performed within the mileage limits and that the repairs required were on the specific parts covered by the protection plan. 

It doesn’t cover electronics, which is an increasingly large component in modern cars, but can give you some peace of mind over mechanical failures. If you’ve used BG and had a claim, please send me an email and tell me about your experience. 

I am aware that other fluid makers offer warranties, including Mobil 1Castrol, and Valvoline. In reviewing their warranty pages, they may offer similar benefits, but I think it may be more difficult to document proof of eligibility, and they don’t cover all of the systems that BG Products covers.

I’d also love to hear from you if you have ever filed a claim with another oil company and what result you received.  Regular maintenance is an important part of keeping your car healthy, and it’s great to see a company stand behind its products. I’m no expert on cars, but I have spent a lot of time looking at spending behavior. Any techniques which can help us spend less over the life of our vehicles will help you achieve your other financial goals. So, even if you don’t end up using the Lifetime Protection Plan, just knowing you were covered may provide you with the extra confidence to keep you car for 150,000 or 200,000 miles.

How Much Income Do You Need In Retirement?

Many people significantly underestimate how much income they will need to maintain their lifestyle in retirement. We’re going to point out how people underestimate their needs, explain why a common “rule of thumb” is a poor substitute, and then share our preferred process.

If we begin with the wrong budget, then our withdrawal rates, target nest egg, and portfolio sustainability are all going to be inaccurate, which is very difficult to correct after you’ve retired.

In general, when I ask someone to estimate their monthly financial needs, they use a process of addition. They think of their housing expenses, utilities, taxes, food costs, etc., and try to add those up. Unfortunately, the number many arrive at can be significantly too low, and here’s how I know.

They tell me that they spent $5,000 a month, or $60,000 last year. But I ask how much they made and they tell me $150,000. How much did they save last year? $30,000. To me, that suggests they spent $120,000, not $60,000. If they only spent $60,000, they would have saved more than $30,000. You either spend or save money; if it wasn’t saved it was spent, even if that spending wasn’t discretionary.

Here’s why most people fail with the “addition method” of trying to create a retirement income budget:

  • They don’t include taxes. Taxes don’t go away in retirement; pensions, Social Security (up to 85%), and IRA withdrawals are all taxable as ordinary income.
  • Unplanned expenses such as home repairs, emergencies, or car maintenance can be substantial and fairly regular, if not consistent or predictable.
  • Your health care costs may be much higher in retirement than you anticipate, especially in the later years of retirement.
  • You may finally have time to pursue activities which you did not have time for while working, such as travel, golf, or spoiling your grandchildren. With an additional 40 hours a week available, you will likely be spending money in new ways.

Some financial calculators use a rule of thumb that most retirees will need 75% (or 70-80 percent) of their pre-retirement income. This is called the “replacement rate”. And while there have been a number studies that confirm this 75% estimate as an average, its applicability on an individual basis is poor.

We know for example, that lower income people will need a higher replacement rate than higher income people. That’s because the lower income levels may have had a lower savings rate, a smaller proportion of discretionary spending, and little tax savings in retirement. Higher income workers may have been saving more and find significant tax savings in retirement, and therefore have a lower replacement rate.

Instead of trying to use an addition method or a one-size-fits-all rule of thumb, I’d suggest using subtraction:

  1. Begin with your current income.
  2. Subtract any immediate savings you will experience in retirement, including: the amount you were actually saving and investing each year, payroll taxes (7.65% if a W-2 employee), and work expenses, if significant.
  3. Examine your sources of retirement income and if you calculate any income tax reduction, subtract those savings.
  4. Consider any increases in retirement spending, starting with health care costs and discretionary spending (travel, hobbies, etc.). Add these back to your spending needs.

Unless you are planning to have paid off your mortgage, substantially downsize your house, get rid of a car, or stop eating out, I think most people will initially continue their spending habits in retirement very much the same as they did while they were working. Like everyone else, retirees spend a significant portion of their income on things which they did not want (property tax, income tax, insurance) and on things which were not planned (replacing a roof, medical expenses, etc.).

Underestimating your retirement income needs could lead to some very painful outcomes, such as depleting your nest egg, being forced to downsize, or impoverishing your spouse after you pass away. You have to still plan for occasional expenses, such as replacing a car, home repairs, and emergencies, in a retirement budget.

If you’ve calculated your retirement income needs and your planned budget is significantly less than your pre-retirement income, please be careful. When the number you reached through addition isn’t the same number I reach through subtraction, it’s possible you are not budgeting for some costs which you currently have and are likely to still have in retirement.

23 Ways to Save Money

A penny saved is a penny earned. I write often about how much you might need to invest for retirement, college, and other financial goals. While I can help with the financial planning strategies and investment advice, it’s up to each client to save the cash required to meet these goals. And this crucial first step is often easier said than done!

There is some amount that each family is comfortable saving. Unfortunately, for many of us, the amount we need to save is often much larger than the amount we’d like to save. Here are 23 ways to save money, hopefully with little or no sacrifice on your behalf.

1. If you pay off your credit card monthly, use a cash back rewards card rather than a debit card, cash, or check. I put everything I can on the credit card – and have gotten back $907 so far this year.

2. Drop your landline and use your cell phone as your one and only phone. You still have a landline?

3. Drop cable or satellite for Netflix or another streaming service. We probably watch too much TV as a society, myself included. Read a book instead.

4. Buy used items online, from Craigslist, or at local sales.

5. Sell your unneeded items on Craigslist. Cash is better than a tax deduction of the same amount.

6. Wait to buy items on sale. Never pay full price. There are a number of apps that scan barcodes and will show you reviews and prices of that item.

7. Get a programmable thermostat. For every degree you adjust the thermostat, you may see a 3% change in your utility bill.

8. Replace light bulbs with LEDs. Prices have come down quite a bit in the last three years. They use a fraction of the electricity and will last for years. I’m a fan of the Cree floodlights.

9. DIY Home Energy Audit. US Department of Energy instructions here.

10. Compare your Texas electric rates at PowertoChoose.org. These tend to creep up after your initial guarantee period is over.

11. Shop your home and auto insurance every three years.

12. Save money on pets: 5 Ways to Save Money When Adopting a Pet.

13. Volunteer. Looking for something fun and interesting where you can make the world a better place? Find an organization doing great work and volunteer! You don’t have to spend a lot of money to have an interesting and satisfying weekend.

14. Prepare meals at home or eat at home. If you are going to eat at a restaurant, lunch is usually much less expensive than dinner.

15. Shop at Target? Get the Red Card for 5% off and free shipping. Sign up for the Cartwheel app for additional discounts.

16. Shop at Walmart? Download the Savings Catcher app. You scan your Walmart receipt and if they find a lower price elsewhere, they refund the difference to you.

17. The car advice I always give, the short version: Keep your current car for as long as you can. When you must buy your next vehicle, buy used and pay cash.

18. You don’t save much by doing your own oil changes. But if you are mechanically inclined, you can save a lot of money by doing your own brake jobs and other routine maintenance and repairs. Check YouTube for video instructions.

19. If your car is out of warranty, find a reputable independent mechanic rather than having all work done at the dealership. Develop a relationship with one mechanic.

20. Cheapest local gas prices: gasbuddy,com.

21. Do you need two cars? How often? Could you get by with one car plus using a Taxi or Uber a few days a month?

22. Don’t want to spend hours tracking a monthly budget? Read my tips about Reverse Budgeting and putting your savings on autopilot.

23. For inspiration, I subscribe to a number of frugality blogs which share ideas, frugal fails, and a chance to read about others’ journey. Media bombards us with a message of consumption, but not everyone buys into the materialism they’re selling. We all need a reminder from time to time that “more stuff” or the “latest and greatest” is neither the source of happiness nor financial independence! Make your goals the top priority for your cash flow.

How to Succeed at Financial Resolutions

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I know that New Year’s Resolutions are often lampooned as pointless and misguided, but I, for one, love the idea that people can change and take steps to improve their life. To me, a resolution is the wonderful intersection of optimism to motivate you and realism to recognize that it takes hard work to accomplish worthwhile goals.

Fidelity Investments has undertaken a New Year Financial Resolutions Study for seven years and found that individuals who started 2015 with a financial resolution feel more optimistic, are more debt-free, and feel more financially secure than individuals who did not make a resolution. The key to succeeding with a resolution, in my experience, is having the ability to translate a desire into a clear objective, determining how to accomplish that goal, and then having the discipline to stick to your plan.

In other words, a New Year’s Resolution is just a small scale financial plan. Here are three categories of financial resolutions and how to best achieve those objectives:

1) That one thing you’ve been putting off. A lot of times, people have something they know they should be doing, but haven’t started. Maybe they don’t know where to begin, are overwhelmed by the number of decisions they will have to make, or maybe there just never is enough time.

Here are some classic examples of financial needs that many organized, otherwise responsible people have not “gotten around to”:

  • Starting a college fund for children or grandchildren.
  • Securing a term life insurance policy to protect your spouse or loved ones.
  • Establishing your will and estate planning documents.

If these are on your “keeps me up at night” list, give me a call and we will accomplish these in no time. You haven’t done this before, but we do this all the time. Start now and you could have these New Year’s Resolutions wrapped up before the end of January!

2) Save more. Many families worry they are not saving as much as they should. For some, it may be setting up an emergency fund; for others it may be saving for retirement, college, or other long-term goals.

Whatever your investment need, you are more likely to be successful when you put your saving on auto-pilot with electronic monthly contributions. When you pay yourself first every month, most people find they don’t even miss the money. Spending often takes up whatever amount we don’t save; if we recognize this, then we can also understand that it is usually very easy to adjust our discretionary expenses when our saving is automatic.

While the 401(k) is the classic example of automatic investing, we can just as easily use the same approach for an IRA, taxable joint account, 529 college savings plan, or any other type of investment vehicle. Saving more doesn’t happen by accident. You can’t wait until next December to do something if you expect to be a good saver in 2016.

3) Reduce Debt. If you are looking to reduce your spending to get out of debt, you can follow the same advice of making automatic monthly payments. Focus on paying down your highest interest rates loans first.

If you’re not sure where your money goes every month, your first step is to get better organized. Technology can be a big help; consider an app like Mint or Quicken to track your spending. Increasing your self-awareness is an essential step towards changing behavior.

A financial planner can help you with all of your financial questions and goals. Besides bringing expertise, training, and real world experience, a planner can also offer two of the most important elements of success: a concrete plan and accountability to stay on course.

If you are thinking about including financial goals in your New Year’s Resolutions, don’t go it alone, give me a call! I’m here to help.

The Benefits of an Older Car

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The average car on the road today is 11.5 years old today, according to USA Today. Today’s cars are more dependable and long-lasting than ever and yet for many consumers, transportation remains their second largest expense after their home.

Last November, I purchased a used car, and not the typical 2-3 year old gently used vehicle, but a 2002 Toyota 4Runner with 179,097 miles. I wanted a larger vehicle to transport my three big dogs and wanted something I wouldn’t worry about getting muddy or scratched.

Admittedly, I have been leery of older cars. What if they break down? The last thing anyone wants is to have unexpected large expenses trying to keep a dying vehicle on the road. And I especially do not want to have an unreliable or unsafe vehicle when it is 102 degrees in July or 20 degrees in January.

Well, I’ve lived with my old car for a year now and will give you a full report, including a breakdown of all my costs. I drove the car almost every day and put just over 11,000 miles on this year (the photo is my current odometer reading: 190,182 miles). During that time, it has been 100% reliable (knock on wood…). The car has always started and worked perfectly. I have had zero breakdowns and no unplanned maintenance.

As a student of behavioral finance, I think people’s car buying choices are interesting to study. Most of us buy what we want, but then create a rationalization that sounds good for why we “need” a new car. Oftentimes, it’s really about projecting an image of success or trying to fit in with others in the office, neighborhood, or group of friends.

Many people prefer a new car, under warranty, to avoid the unpleasantness of having to pay for car repairs. This is known as “loss aversion”, which means that the pain of a $500 loss is much more intense and memorable than the satisfaction of a $500 gain.

Getting a new car every three years may cost $400 or $500 a month regardless of whether you lease, finance, or pay cash. With an older car, your depreciation can be very small, and instead your main expense is typically maintenance. You may end up spending $800 twice a year in repairs and upkeep. That sounds terrible, but which costs more: $400 a month, or $800 twice a year?

Having a used car may leave you on the hook for unplanned repairs, but the chances are good that those repairs will be a small fraction of the ongoing cost of getting a new car every three years. It’s loss aversion that makes $1,600 a year in unplanned repairs feel much worse than the fact that you might save $400 a month ($4,800 a year) by not having a car payment.

I paid $4,500 for my Toyota, and had to pay $316.75 in sales tax and registration fees. My biggest expense for the year was for a set of four new tires, $744.84. I did all the work on the car myself, including three oil changes, replacing the rusty radiator, hoses, and thermostat. I changed the fluids, including brake, transmission, power steering, and differential oil. I installed a new air filter, PCV Valve, and wipers, and cleaned the intake twice. In total, I spent $521.23 on maintenance, which was quite low since I did the work myself.

According to Kelly Blue Book, the current value of my vehicle is $4,044, so my estimated depreciation for the year was $456. Including depreciation, my cost for the year was $2038, which works out to 18.4 cents per mile (not including fuel). My insurance cost was much lower with this car; I kept the same high level of liability coverage as my other vehicles, but dropped collision. The annual insurance premium was $510.40, less than half the cost of our other vehicles.

What are the takeaways from this experience? A couple of thoughts:

  • A well-maintained vehicle can certainly last 150,000 miles or more. Your best choice is always to keep your current vehicle for as long as possible and remember that even if you spend a couple of thousand on repairs per year, that is a small amount compared to the costs of depreciation associated with the first 5 years of a new cars’ life.
  • Buying a used car is always going to be a bit of a gamble. Do your homework and choose a vehicle known for its dependability and ease of repair. Keep up with routine maintenance, using the manufacturer’s recommended schedule. Get to know a trustworthy independent mechanic.
  • I know that keeping a car for 10 years is a great idea, but for me, I just get bored with a vehicle after a couple of years and want something different. Knowing this preference, I can buy a used car every couple of years and not have the staggering depreciation costs of new vehicles.
  • It’s okay to spend money on cars, but if you think that retirement, paying down debt, saving for college, or growing your net worth are more important, than you need to make sure to prioritize those goals ahead of new cars. Every financial planner has met lots of people who have a new Mercedes but who “can’t afford” to contribute $5,000 a year into an IRA. Make sure your spending reflects your values and goals, and is not based on what you want others to think.

Don’t Budget; Focus on Saving

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I used to feel a bit sheepish when clients asked about my personal household budget, because I don’t have one and never have. I always worried that I was being lazy and a poor role model for my clients. I’d see articles, books, or CFP materials touting the benefits of having a budget to be able to track your spending. Some said that without a budget, you would not be able to plan how to achieve your financial goals.

Eventually, I came to recognize that you don’t need to have a budget to accomplish financial goals and that creating a budget would be a waste of time. It’s true, I don’t know how much I spend on dog food, and I don’t have a set amount that I plan to spend on clothing, eating out at restaurants, or for car maintenance. Over the years, I’ve found that many successful investors skip making a budget and that it is not the prerequisite that many people would have you believe.

If you follow these three steps, you won’t need a budget, either:

  1. Put your saving on autopilot. Figure out how much you need to save to accomplish your goals. Set up your contributions to your 401(k), IRAs, and other accounts. If you are saving your target amount (or more), don’t worry about spending the rest of your income. I think of this as reverse budgeting. Save first, and then whatever is leftover is yours to spend.
  2. Don’t ever deplete your cash. While I don’t have a set monthly budget, I am aware of our spending and follow our credit card transactions weekly. We pay our credit cards every month and never carry a balance. In months when there are large expenses, we can always reduce discretionary spending or postpone other purchases. We keep an emergency fund, but after 17 years of marriage, we’ve never touched it. We won’t make a purchase if it requires dipping into the investment portfolio; we will have to build up cash in checking before making a large purchase, such as a vehicle.
  3. Live frugally. Luckily, I don’t enjoy shopping, so I am not often tempted to buy new things. When I do want to make a purchase, it is never an impulse buy. I’ll do my homework, research online, and make sure we are getting a good deal. For me, the knowledge of how $50,000 could grow over the rest of my life is much more attractive than a $50,000 boat. So, I’m not sure I’ll ever be willing to sink huge amounts of money into depreciating assets.

I know that for some people, spending is like a gas that will expand to fill whatever space you allow it to have. For these folks, creating a budget is helpful so they actually know where their money is going. Many people have benefited from having a budget, and if it has benefited you, that’s wonderful. I am all about empowering people to take control of their finances and make informed changes for a better life. My point is not that no one should have a budget, just that not everyone needs to have a budget if you are meeting your savings goals without one.

Not sure how much you need to save to reach your financial goals? Check out the Savings Goal Calculator on Bankrate.com. Enter your current portfolio value as the “first deposit” and your ending goal under “How much do you want to save?”. Want a more sophisticated analysis to consider market fluctuations? Contact me for a consultation; we have terrific goal-based financial planning tools!

Can Being Frugal Make You Happy?

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Gen Y is bringing frugality back in style. As a financial planner, I’m delighted to find frugality is cool now. I’ve read their blogs (where else would they write?) with fascination and appreciation for their candor. I’m calling this the New Frugality, and you’ve probably heard or read about some of these ideas, including the Tiny House, where people live in a home often smaller than 200 square feet. Others are embracing Minimalist Wardrobes, creating a personal, seasonal clothing uniform (think Steve Jobs with his jeans and black mock turtleneck). This past week, there was an article in Forbes about the Frugalwoods, an anonymous Boston couple who is saving 71% of their income so that they can retire at age 33 and move to a Vermont homestead with their rescue Greyhound.

In these blogs, the authors are never afraid to share their personal stories, from big-picture motivations and life philosophies, to the smallest minutiae of their daily decisions. Along the way, we invariably learn of their challenges, missteps, and triumphs. The blogs are part diary, part instruction manual, and part entertainment for their friends and fans. Even with different goals and approaches, there are common beliefs.

  • The New Frugality believes that less is more, and does not buy into the modern American idea that “buying more stuff” can make you happy. They have a maturity (which takes some people 70 years to develop) that recognizes that happiness comes from rewarding experiences, positive relationships, and a work/life balance that includes a higher purpose.
  • They want off the financial treadmill. Some had large student loans or crippling credit card debt before having an epiphany about becoming debt-free. Others found their corporate careers unsatisfying and were brave enough to recognize that spending the next 40 years in a job they hate isn’t worth it just to be able to afford a big house and a fancy car.
  • While others may view their frugality as a sacrifice, they often find that simplifying their lives and eliminating clutter brings a clarity to their sense of what is truly important to them.

The New Frugality is about seeking the quality of life you want today, rather than believing you should wait until some future date, i.e. retirement, before you can really do what you want. It’s an implicit rejection of the old notion of working 50 hours a week until age 65, then never working again.

[In case you are wondering, I contrast the New Frugality with previous beliefs about frugality which were created by those who lived through The Great Depression and who raised their children in a different, frugal manner. While both the old and new approaches want to stretch each dollar, the old frugality was characterized by self-reliance, never throwing away anything you might need in the future, risk avoidance, and mistrust of financial systems. Some of those traits were largely fear-based, which does not resonate with the abundance mentality I embrace and believe is required to be a patient and successful investor.]

Does frugality make you happy? I think the most literal answer is no. By that, I mean that if you are unhappy, spending less won’t make you happy. If you really enjoy going to Starbucks every morning, cutting out that $5/day habit isn’t automatically going to improve your satisfaction, even if it enables you to save $1,825 a year. Frugality works for these bloggers because they were willing to embrace changes to their habits even though society was telling them to spend more money instead. There’s no doubt that frugality is financially beneficial, but the sources of happiness include a lot more than just your financial situation.

Reading their blogs can help you appreciate your own spending more as well as to feel good, and not alone, when you do choose a frugal approach. We are continually bombarded with advertising that suggests we’d be happier, cooler, and more attractive if we had the right car, clothes, or beauty products. We’re told that our current life would be better if we had a bigger home, nicer furniture, or luxury vacations. Of course that’s not true. We know that spending to increase our satisfaction is at best a fleeting pleasure which can leave consumers addicted to living beyond their means. Unfortunately, there are so few voices pushing back on the advertisers’ message to consume.

Even if you don’t want to live in a tiny house, reduce your wardrobe to a few pieces, or bike to work, you can still take frugal steps to ensure you are working towards true financial independence, which we define as working because you want to and not because you have to. Here are six lessons to take away from the New Frugality:

  1. Beware of lifestyle creep. Many of us were very happy in college, even though we may have had a rickety car, tiny apartment, and slept on a futon. It doesn’t take long after graduation to discover the urge to “keep up the Joneses”, as friends buy big houses and fancy cars. How can they afford it? Oftentimes, they can’t and they’re up to their eyeballs in debt. They’re more concerned about their image than their net worth, and that’s not something to emulate! If you increase your living expenses every time your income goes up, you aren’t ever going to become wealthy.
  2. Save at least 15% of your income. Set financial goals, including a “finish line”. If you are highly motivated (or just impatient, like me), you will realize that the more you save, the sooner you will reach your finish line. Saving then is not a sacrifice, but the fastest, most direct way to achieve financial independence. When your goals are more important to you than a new (fill in the blank), your spending decisions become much easier.
  3. Avoid impulse buys and emotional shopping, that is shopping to distract you from sadness, frustration, or boredom. Never buy on credit; if you don’t have cash to pay for something, it’s not worth going into debt. Be conscious and intentional about your spending behavior. Do your choices reflect your goals and beliefs?
  4. Buy used. There is a growing market for used items, often selling at a small fraction of the cost of new items. This is the Craigslist economy, which is growing around the country. You can often buy what you need without paying full retail prices.
  5. Savor success. There is a great deal of intrinsic satisfaction in becoming financially independent. Even taking the initial steps towards creating a positive cash flow are great confidence boosters because people feel empowered when they take control of their financial life. As every financial planner will tell you, the more you need to spend, the larger the nest egg required to be able to fund your future needs. Therefore, when you reduce your spending, you not only can save more, but you also reduce the size of the nest egg you will need to replace your income.
  6. Reduce stress. While money is not the source of true happiness, there is no doubt that being broke, in debt, or just knowing you are not setting enough aside for the future, can be a significant source of personal anxiety and marital friction.

As a bonus, you will find great common sense financial planning tips on these blogs. What are the Frugalwoods doing with the 71% of their income the save? They maximize their 401(k) contributions and invest the rest in the market. They write: We’ve done well because we invest in boring index funds and we don’t sell when the market is down. That’s a great recipe for success!

Reading about the New Frugality is entertaining because many authors are willing to take their frugal habits to quite an extreme. Even if we don’t adopt their spartan lifestyle, they can remind us that we don’t have to spend money to be happy.  

Are Your Retirement Expectations Realistic?

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While many individuals have very realistic ideas about retirement, I find that some people may be significantly overestimating their preparedness for funding their financial needs.  Here are three specific mistakes which can hurt your chance of success in retirement, and a realistic solution for each issue.

Mistake #1: Thinking you can live on a small fraction of your pre-retirement income.
Occasionally, I’ll meet someone who is currently making $100,000, but who thinks that they will need to spend only $40,000 a year in retirement to maintain their current lifestyle.  On a closer look, they’re saving about $15,000 today so they are really living on about $85,000 a year.  This is a key problem with creating a retirement budget: when we add up projected expenditures, it is very easy to underestimate how much we need because we often forget about unplanned bills like home and auto repairs, or medical expenses.  And don’t forget about taxes!  Taxes do not go away in retirement, either.

Realistic Solution: Even though some expenses will be lower in retirement, most retirees find that they need 75-90% of their pre-retirement income to maintain the same lifestyle.

Mistake #2: Taking too high of a withdrawal rate.
20 years ago, William Bengen published a paper that concluded that 4%, adjusted for inflation, was a safe withdrawal rate for a retiree.  While this topic has been one of the most discussed and researched areas in retirement planning, most financial planners today remain in agreement that 4%, or very close to 4%, is the safe withdrawal rate.  However, many individuals who have a million dollar portfolio think that they might be able to take out $60,000, $70,000, or more a year, especially when the market is performing well.

There are two important reasons why it’s prudent to use a more conservative 4% rate.  The first is market volatility.  The market is unpredictable, so we have to create a withdrawal strategy which will not excessively deplete the portfolio in the event that we have large drop, or worse, a several year bear market at the beginning of a 30-year retirement.  The second reason is inflation.  We need to have growth in the portfolio to allow for the increased cost of living, including the likelihood of increased medical costs.  At just 3% inflation, $40,000 in expenses will double to $80,000 in 24 years.  And with today’s increased longevity, many couples who retire in their early 60’s will need to plan for 30 years or more of inflation in retirement.

Realistic Solution: At a 4% withdrawal rate, your retirement finish line requires having a portfolio of 25 times the amount you will need to withdraw in the first year.

Mistake #3: Assuming that you will keep working.
Some people plan to keep working into their 70’s or don’t want to retire at all.  They love their work and can’t imagine that there would ever be a day when they are not going to be working.  They plan to “die with their boots on”, which in their eyes, makes retirement planning irrelevant.

Unfortunately, there are a number of problems with this line of thinking.  The Employee Benefits Research Institute 2014 Retirement Confidence Survey found a significant gap between when people planned to retire and when they actually did retire.  Only 9% of workers surveyed plan to retire before age 60, but 35% actually retired before this age.  18% planned to retire between 60 and 64, versus 32% who actually retired in that age range.  The study cites three primary reasons why so many people retire earlier than planned: health or disability, layoff or company closure, and having to care for a spouse or other family member.  The study also notes that one in 10 workers plan to never retire.  Even if you’re willing to keep working, the statistics are clear: most people end up retiring earlier than planned.

For a healthy 65-year old couple, there is a good chance that at least one of you will live into your 90’s.  If you still think you don’t need a retirement plan because you will keep working, do it for your spouse, who might have 25-plus years in retirement if something were to happen to you.  Don’t make your plan’s success dependent on your being able to keep working in your 70’s and 80’s.

Realistic Solution: Make it a goal to be financially independent by your early 60’s; then you can work because you want to and not because you have to.

A comprehensive financial plan addresses these concerns and establishes a realistic framework for funding your retirement.  And whether you’re 30 or 60, it is never too early, or too late, to make sure you are on track for financial independence.

5 Ways to Save Money When Adopting a Pet

Black Lab Puppy

Americans love their pets, and although they repay every penny with their love and devotion, the amount we spend on our pets can be astronomical.  I’ve been a volunteer in animal rescue since 1997 and here are my top five suggestions for ways to save money if you’re looking to add a four-legged companion to your family.

1) Adopt Don’t Shop.  Puppies in a pet store or from a breeder can cost hundreds or thousands of dollars.  Adopting from a shelter may cost a fraction of this amount, and often, a shelter pet has already been vaccinated, wormed, and neutered, saving you $300 to $500 in initial vet bills.  Additionally, adopting a shelter pet saves a life, as currently, approximately 4 million unwanted pets are euthanized each year in the US. Take your time and make sure the dog or cat will be a good fit for your household – many pets are returned or wind up in shelters when people underestimate how much time and effort it will take to train a puppy to become a well-behaved adult dog.

2) Crate Train.  Although cute, puppies love to chew and can be quite destructive when left unsupervised.  They are naturally attracted to shoes, furniture, and other expensive items in your home.  Besides being costly to replace these items, it can also be dangerous for dogs to ingest these items.  There have been many expensive vet visits from dogs who got sick from eating something in their home that should have been off-limits.  Save yourself this headache and expense by buying a crate to keep your dog from causing trouble when you’re not home.  This has the additional benefit of helping with house training, which will save your carpets!  Over time, dogs really do start to like their crates.  My dog goes into his crate immediately when we get ready to leave the house – it’s his safe place.  Read up on crate training.  The $50-100 you spend on a crate may save you hundreds or thousands in preventable destructive behavior.

3) Ask Friends for a Veterinarian Recommendation.  The price of vaccines, neutering, or heartworm treatment can vary significantly from vet to vet.  Ask friends for a recommendation for a low-cost vet.  Some clinics offer one or two days a month that they provide discounts on vaccines.  Ask your shelter if they know of any free or low-cost vaccination or neutering clinics in your city.  Still, make sure to develop a relationship with one veterinarian who knows your dog or cat, to monitor changes in your pet’s health over time and make sure you stay up to date with any needed care.

4) Consider a Mixed Breed Dog.  A lot of people want a specific kind of dog, but unfortunately, many breeds have a higher likelihood of developing certain health issues.  For example, some breeds are prone to hip dysplasia, cancer, or ear infections.  These can be expensive to treat and often result in a shorter life expectancy for the animal.  Mixed breed dogs tend to be healthier, live longer, and have fewer of these genetic predispositions for certain ailments.  If you do want a specific breed, you can still probably find one through a local shelter or rescue group.

5) Buy Smart.  A 15 pound bag of my dog food costs $35, but a 30 pound bag only costs $45.  Buy the larger bags and use an airtight storage container.  Buy a high quality food and skip the expensive treats, such as rawhides, that have limited nutritional value and can upset a sensitive stomach.  Keep up with heartworm preventative and flea/tick medicine.  Although it is one of the largest ongoing costs, these preventative medicines are much less expensive than treatment, should your pet become sick.  And here in Texas, even indoor dogs have a very high likelihood of developing heartworms without prevention.

If you are looking for a pet, let me know and I will look for a good fit for you at Operation Kindness.  We also have fosters in our home several times a year, if you are interested in a puppy.

Retirement Cash Flow: 3 Mistakes to Avoid

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Living off your portfolio is unfamiliar territory for new retirees, and although it’s sounds simple, there are a number of common pitfalls which many people encounter in their first few years of retirement.  Here are three mistakes you should avoid to help keep your retirement cash flow safe.

1) Not including everything in your budget

A retirement income plan establishes a safe withdrawal rate designed to last for 30 or more years of retirement.  For example, we may determine that a couple can safely withdraw $4,500 a month from their accounts, in addition to their Social Security and pension.  They set up a $4,500/month transfer and this works well until they encounter a large, unanticipated bill.  Then, they require additional withdrawals to cover their expenses and suddenly their plan to withdraw only 4% that year balloons to 6% or 7%.

When we create a budget, it should include everything, and not just your ordinary monthly bills.  The following are some “unexpected” expenses that have caused retirees to request additional withdrawals in recent years:

  • Home repairs, such as a new roof or AC
  • Needing $35,000 for a new car
  • Medical expenses not covered by insurance
  • Property taxes
  • Vacations
  • Buying a Vacation Home
  • Boats, or RVs

It’s easy to consider a 401(k) account or Pension Lump Sum payout as being all available, but it’s better to view the account as a 30-year stream of income.  Rather than looking at the account as a $1 million slush fund, consider it a $40,000 salary with a 3% raise each year.  A retiree needs to have an emergency fund just like everyone else and to budget and save for large expenses.  The principal of your retirement account cannot be both your permanent source of income and your emergency fund.

2) Reinvesting Dividends in a taxable account.

If you are taking withdrawals, or will need to take withdrawals, from your taxable account, I’d suggest turning off dividend reinvestment on all your positions.  Have your funds pay dividends and capital gains in cash and hold the resulting cash for your withdrawals.  This will save you from having to sell positions and creating taxes on capital gains in order to access your money.

You probably have substantial gains in mutual funds if you’ve owned them for a long time.  Mutual funds typically use the average cost basis method, so if you have a 75% gain in the position, any withdrawal will be considered to have a 75% gain.  ETFs and individual stocks use the specific lot method, and sales are generally considered to be First In, First Out (FIFO), unless you specify lots at the time of the trade or change your default cost basis disposal method to another option.  While that does give an investor more flexibility in managing the tax implications of ETF sales than with mutual funds, I find that most don’t bother and simply go with the default of FIFO.

The easiest way for retirees to avoid this headache is have distributions paid in cash.  If you end up with more cash than you need at the end of the year, you can always use the money to rebalance your portfolio.  (Which is preferable to having to make sales in order to rebalance the portfolio, anyways.)

3) Ignoring the Low Interest Rate environment.  

Today’s low interest rates present a challenge for retirees and many of the conservative ideals of the past are simply not providing the same level of financial security today.  This applies to both assets and liabilities.  On the asset side, keeping the majority of your money in a bank account or CD may be safe in the short-term, but with today’s historically low interest rates running below inflation, you’ll lose purchasing power each year.  We call this a negative real return.  A balanced and properly diversified portfolio has short-term risk, but is likely to increase your wealth over time.  If you’re investing for the long-term, make sure all your investments aren’t designed as short-term holdings, or they may be setting you up for eventual disappointment.

Many near-retirees have a goal of being debt-free, which is a laudable ambition, but with today’s low rates, you could lock in a mortgage in the 3% range.  Selling investments or cashing out a 401(k) and paying taxes on the withdrawal to pay off a 3% mortgage could hurt your long-term financial strength, provided you are willing to hold investments that can potentially return more than 3%.  By paying off their mortgages, some home owners inadvertently wind up house rich and cash poor, which does not give you much flexibility in paying your living expenses.  From a cash flow perspective, you may be better off keeping a mortgage versus tying up a majority of your net worth in home equity.

One additional note on mortgages: eligibility for a mortgage is based largely on your income.  If you are going to refinance a mortgage, do so while you are still working and before you retire.  Once you are retired, it will be more difficult to underwrite a mortgage with no income, even if you have sufficient assets to buy the property outright.

These types of issues come up frequently with new retirees, and we give a lot of thought to the pros and cons of each choice.  Individual situations can vary and there are sometimes reasons why no rule of thumb can apply 100% of the time.  If you have questions about retirement cash flow and your personal portfolio, please send me a message and we can discuss your options.