Monthly Archives: November 2006

Myth – Profit By Forgoing Joint & Survivor Option for Life Annuity Option

I have been hearing this more and more about how a retiree should not sign up for the joint & survivor benefit option (if married) and go with the life annuity option. The premise is that the life annuity will give them a bigger benefit that they can invest the difference in the two benefits and have more money to pay to their spouse when they die. Unfortunately, this is an old myth created by life insurance agents to sell more life insurance policies that has continued because people do not understand the math behind the issue. They just see a bigger benefit and focus on that.

To understand this better, when a person selects a monthly annuity from a company, the factors used to adjust the life annuity to a different benefit form (e.g., joint and survivor annuity) are based on what is called actuarial equivalence factors. The factors convert a benefit in a way that the “normal” person would receive an equivalent benefit no matter what option he/she choices. For example, if a retiree has the options of choosing between a $1,000 per month life annuity versus $850 100% Joint and Survivor option (where $850 is paid to the retiree and spouse when either one is alive), the joint and survivor benefit is smaller because it is expected to be paid out over a longer period instead of a shorter life annuity paid only when the retiree is alive. Based on actuarial tables, both options would pay out the same amount benefits on a present value basis.

Second thing to understand is to get a similar benefit from the life annuity option as a from the Joint & Survivor option, the retiree will need to buy a term life insurance benefit to pay for an annuity for the spouse when retiree dies. By doing this the retiree is paying two commissions (one commission on the life insurance and another on the annuity). Thus, instead of making money, the retiree is usually paying it out any profit to pay for commissions instead, thus actually losing money. Sure, people can show examples of where a person can win by selecting a life annuity option, yet they tend not to show where people (actually their spouse) can lose if the retiree dies to soon.

For example, let us assume retire and spouse are both age 65

– Life Annuity – $1,000 per month

– 100% J&S Annuity – $850 per month

– Difference is $150 per month

If the retiree dies immediately, the spouse would need approximately $135,000 (based on calculation done at Vanguard to get an equivalent $850 annuity per month. Now, the retiree can buy term life insurance for slightly less than $150 per yet it is for a 10-15 year term policy being assuming the retiree is in superior health. If the retiree is not in the best of health at 65, he would be paying a lot more money for the policy than $150. In addition, he is opening his spouse up to risks if he lives past the age 75 because he still needs to buy additional term life insurance. At age 75, he would have only accumulated $12,000 in savings ($75 per month at a 6% return) which will pay his spouse for only 90 to 100 months which is not enough if she lives into her mid-80s. However, buying life insurance at age 75 to have the additional benefit needed to guarantee annuity benefit to the spouse for her life will cost more than any savings (e.g. cost will be over $200 for a 10-year term policy in the best of health) that is if the retiree can qualify for life insurance at all.

Yes, the extra $150 per month does sound enticing. However, it does open up the retiree’s spouse do large risks:

• Cost of term insurance goes up significantly with age, so any perceived savings is reduced and eliminated in future years with additional costs

• Spouse may significantly outlive the retiree and any additional savings they may have accumulated

• Any short-term savings assume the retiree is in the best of health to qualify for term life insurance

• In future years, the retiree may not even qualify for term life insurance based on his future health condition (e.g., having a heart attack, cancer, etc.)

Thus, before selecting a life annuity instead of a joint and survivor annuity, understand the risks involved to the spouse if everything does not go as perfect as in the example from the insurance agent or financial planner. There may be times when the math does work due to age, sex and health of the retiree and spouse. However, with commissions paid to the agents, any profit can quickly erode any of the profit and there may still be risks involved.

Note, an insurance agent will say that there is a benefit because life insurance is paid out tax-free. This tax-free benefit will not change my example significantly. For example at a 33% tax bracket, the $150 extra a month for a life only benefit will be reduced to $100 after taxes are paid ($1,000 life only benefit is $667 after-taxes and $850 joint & survivor annuity is $567 after-taxes). Because the retiree only need $567 annuity for his spouse after his death, he will only need 2/3rd of the $135,000 life insurance benefit. Thus, instead of paying $75 for $135,000 of life insurance, he is paying $50 or so. As you are starting to see, the initial example without taxes is similar to an example with taxes factoring in the tax-free distribution of a life insurance benefit (just all results are reduced by 1/3 for taxes). Thus, because life insurance is paid for with after-tax money, reflecting the tax-free benefit of a life insurance payout does not materially affect the initial example.

Ideas for Holiday Season

As the holiday spending spree is upon us, December can be a joyous month with the holidays and visiting family and friends. However, it can lead to a stressful New Year as the bills start coming in. Thus, before you head to the mall, there are a few items to think about:

  • Do a Budget

There are many extra expenses that occur this month and next month that should be planned for (e.g., increase in home heating costs, holiday presents, travel costs, special holiday tithe, property taxes due in January, etc.). Thus, before you go spending on presents, calculate how much these bills will become due in January (e.g., heating cost). The credit card bill in January should not come as a surprise that you are not ready for. Even if you do small gifts for your family, these gifts can add up ($20 here and $10 there). The key is to list out all the people you want to buy for and have a good estimate of how much their gifts will be. Don’t say $300 for gifts of the top of your head without allocating it to each person and move on because it is easy for the $300 to morph into $400 as you enter the mall and get enticed by bigger presents. It is o.k. to spend $400 if your budget allows for it. Yet, many people overlook the consequence that even $100 can have, until the bill comes in January.

  • Don’t Give Up

Even before sitting down to do a budget, some people think “what is the use to planning” because there is not enough money. They revert to the mentality of being doomed to put the expenses on a credit card and pay it off through out the year. Yet, by giving up, you may find yourself in an even worse situation than before. If you think that you will go $500 in debt due to higher airfares and heating costs this year, that $500 can easily become $1,000 unless you map your budget out ahead of time and work towards it.

  • Think about the Meaning of the Holiday’s

As we are inundated by commercials, it is easy to overlook the true meaning of the holidays. The holidays have gone from a religious holiday to a commercialized shopping frenzy. Even though we talk about it each year, how many people step back and revisit the true meaning of Hanukah, Christmas or Kwanza? We may spend a few hours at our place of worship, yet this time is usually dwarfed by the time looking for that perfect gift.

So what do the holidays mean to you? Is it time to remember your spiritual/religious beliefs? Is it time to connect with family? Is it time to go overboard with giving in order to win the approval of others? Once you put the holidays into perspective it is easier to take step back when you are at the mall and ask if you really need to buy the extra gift.

  • Giving is about the thought

It is easy to remember the oohs and ahs as that special gift brings when it is unwrapped. Yet, it is harder to remember that in a month time the gift is collecting dust in the basement. Thus, the old saying that it is the thought that matters is usually meet with a rolling of the eyes and thoughts of “here we go again with the Scrooge mentality of do not over spend” because we remember the special thank you when the gift is given.

Yet, for many, giving inexpensive gifts is a necessity of life. My sister-in-law’s finances are tight and she makes her gifts or just gives small gifts. It doesn’t matter to me because I know my 18 month old son will not remember what he got from his aunt. He will just remember spending time with her as we pull out the photo album. For example, the other day got a small wooden train set from my parents when they visited for Thanksgiving. He ended up having a lot of fun with the brown paper bag that they brought the train in. Yet, what he will remember are the good times he had with his cousins from all the photos my wife took.

Thus, remember that gifts are usually forgotten in about a month usually before the bill is paid for.

  • Negotiate the Obligatory Gifts

If you feel uncomfortable giving a small gift while receiving a larger gift, then discuss limits to the gift giving with your friends and family. With my family, we rotate which sibling we buy for each year. Thus instead of 3 small gifts for each, we buy 1 nice gift for the one we have that year. For us, it is more of a time constraint of finding several gifts instead of one nice gift.

Many people are putting limits on gift exchanges (e.g., $10 or $20 limit). At my old firm, we had a gag gift exchange with a $5 limit with the twist of being able to swap gifts that others had. So at your family get together, think about making it fun (e.g., Secret Santa) instead of thinking what to get everyone.

Many parents in our son’s playgroup are starting to ask their relatives for a donation to their child’s college tuition instead of getting another toy that our children do not need. It is better to ask for what you want (e.g., future tuition) rather than getting upset for what you (or your child) got.

  • Don’t Be Swayed By a Sale

In watching the news today, it seems that a trend for Black Friday (day after Thanksgiving) was men spending more than women for electronics. Part of it can be the lure of a sale makes it sound like the best time to buy that plasma television that they want. Even if you find that great sale, it can cost you plenty in credit card interest (maybe more than the discount itself) if you can not pay the credit card bill when it comes due in January.

Thus, know what you want and the price you are willing to pay for it before being swayed by the 50% off sign.

The holiday season should be the time of celebration and giving. I discuss that giving freely is a path towards prosperity. Yet, giving is about giving of the whole of who you are, not just your money.

Simplicity of Gratitude

On Monday, I wrote about being grateful for the bigger picture instead of resentful for the details of life. There is a gift to seeing the bigger picture. When we isolate on the day to day events, we can get stuck in the quagmire of details and issues. Yet, when we step back, we can see the beauty of life. Sometimes we can not see the impact of an event when we are stuck in the details. As time passes, we can see the lessons that we learned and how a single event can unfold to a beautiful master piece of life.

For me, two boys kicked a rock into my right eye when I was 5 years old where I am now blind in that eye. I could look back at the event as a travesty and be resentful. Yet, over the years, I have learned many lessons from the event. One of the most important lessons is that my feelings are not governed by the event but from my interpretation of the event. My anger about being blind was not due to the two boys but because of judgment of who I believed I was by being blind. Another lesson was forgiveness in seeing that it was not being blind in one eye that limited me (I know it seems small compared to others who have lost limbs), yet it was my beliefs that I created that limited me. When I was a child, New York State did not allow me to participate in high school sports due to being blind in one eye. Yet, when I did not allow being blind to stop me from playing intramural hockey later in life, no one could guess that I had only ½ my sight. So, in time, a single event in isolation can seem like a travesty. However, in the bigger picture, it has made me who I am and how can I complain about that.

In looking at our financial life, we can be upset over the rising prices of gas, college education, food, health care, etc. (the individual details) or be grateful for the beauty of life (having the freedom of choice to eat, work and worship where we want, having the experience of love and happiness, etc.). When we take events out of context of the large picture, we can be blinded by the illusion that events are either good or bad. We can learn that it is not the event that affects our state of mind, yet our judgments about the event. We can look at rising gas prices as bad or see it as a motivator to find new alternative fuels that will be cheaper in the future. We can see rising health care prices as bad or see that the higher prices are funding research for new procedures and drugs that are extending life. Or, we can see rising health care prices as a motivator to pursue preventative care (e.g., stop smoking programs, exercise programs, etc.) instead of using health care as a crutch for poor habits.

At the same time, being grateful for the individual things can lead to distress later as well. If we are grateful for our growing savings account or our children’s good grades, how would we feel if the financial markets change or our children start to slack off? Thus, if gratitude is based on what you have or do, it will lead to seeing events as either black or white (good or bad). If we are upset about our children’s behavior (e.g., slacking off or spending too much), we may miss the fact that having your children slacking off for a year and experiencing the consequences of their actions now is better than having them perform well only when someone is on their case (their parents for now and then their bosses). Sometimes learning experiences are done from making mistakes (what we consider bad). Thus, events are neither good nor bad; they just are (see Do You Judge Your Financial Situation?). This does not mean that we overlook negative situations either. If we are angry or upset about rising gas prices or our debt burden, we need to release the anger and practice forgiveness. Yet, we do not need to keep on going back to it either and wallow in the judgment.

In my article on Monday, I compared how life is easier today than it was for the Pilgrims to show that life is not as bad as some picture it is. In this analysis, I was isolating how specific instances are either good or bad rather than being grateful for the beauty of life which is still judging things (life is better today than 300 years ago). Thus, on this Thanksgiving, be grateful for the overall beauty of life instead of specific possessions because even if we judge a situation as good (something to be grateful for), we then judge other situations as bad.

Grateful for Bigger Picture Instead of Resentful for Individual Issues

Being the week of Thanksgiving, I started thinking about gratitude again. There are many things that we can be grateful. I am grateful for being able to spend so much time with my son while he is growing up and also grateful for The Ohio State Buckeyes winning on Saturday against Michigan. Sorry, but being from Cleveland there has not been too many other football moments to celebrate. At the same time, I also see how our society focuses on the negative instead of the positive. Part of this is the media knowing that we want stop to look over at a car wreck even though we also despise slowing down for rubberneckers who are looking at a wreck on the other side of the road. We may say that we want to be happy, yet when things are good we keep on looking over our shoulder waiting for the other shoe to drop. We say one thing (we want to be happy) yet find reasons that we are not.

I have discussed several times about what we think about expands. It goes to how we see our life. If we separate out what we see going wrong, we will not feel good about life when we are always trying to find something wrong. If you look at the news coverage, it picks out the special events that will get them the rankings while making people feel like they are unsafe, victimized and poor. We can see events about crime that gives us the impression that violence is rising, yet in reality crime rate can be falling. We can see how the middle class is having a harder time getting ahead with the increase cost of college and medical care. Yet, at the same time, more students are going to college and life expectancies have been rising.

What will finding things wrong and having resentments get us? I wonder how many people look at some stories of how hard life is (e.g., the unmanageable debt due to going to college) and then give up on their dreams because there is no use to get ahead. Yet, playing the victim role does not serve us in achieving our drams. So, why do we do we give up? Part of it is that we really do not believe how powerful we really are. I remember a time where a friend was driving down a road in an area deemed unsafe in Cleveland and stopped at an intersection. A man got into the passenger seat. Most people would freeze, think about recent car jacking stories and feel like a victim (“please do not hurt me”). Instead, she looked over and screamed “Get Out!” (she probably threw in another choice word or two as well). The man apologized and got out. The morale is that we can look at life at what is wrong and give up or know that we are more powerful than we believe we are and take action. Yet, if we keep on looking at what is wrong, we diminish our power. If we believed we could fix a problem, we would be fixing it instead of wasting energy of being resentful and blaming others for it.

Those that want to find problems and excuses will. The question is what do we focus on, individual details or the bigger picture. When we look at individual details, we may see more problems than there really are because they are easy to find if that is what we are looking for. I hear stories on how this generation may be the first ones not to have a better life than their parents. These stories make it sound like the sky is falling. Yet, as we have seen over the years, we have had times of expansion followed by things settling down and even taking a step backwards. After some time, things move forward yet again. The question on this week of Thanksgiving, do we want to see what we are grateful for or see how we may not be as better off than 6 years ago. We can see ourselves in debt and focus on that or find what we are truly grateful for.

I see how much we have to be grateful for especially looking at life compared to the first Pilgrims. We have religious freedom, equality and democracy that many people still do not have today all due to their actions. We have a life where living in poverty today is probably a lot easier than surviving their first winter here or living in some other countries today. Even with all the problems with medical care today, the uninsured receive better care than our grandparent’s generation. I am not saying that we can not do better. Yet, change comes from when we see how our action can affect the world versus how society is creating problems where we are resentful and feel trapped, just struggling to get by.

Do You Judge Your Financial Situation?

As a society, we believe in right and wrong and in black and white. So, when we see something, we want to judge it as good or bad. Today, many would judge being in debt as bad and having $1 million as being good. It is what it is. When we place a label on financial health, we are actually robbing ourselves of peace and happiness in the moment. If we label $1 million as good and $5 million as great, then if we get $1 million then we will be happy for a moment and then wonder why we do not have $5 million, yet. If we never reach $1 million, then what do we feel? Are we not good enough to be wealthy? Money is what it is neither good, nor bad, nor right, nor wrong.

There is a fable about judgments that I always liked:

A farmer had a son who went for a journey and came back with a wild horse. Others exclaimed what a find to the farmer. The farmer said it is what it is, neither good nor bad. His son one day went riding and got bucked from the horse and broke his leg. Others exclaimed how disappointing to lose his son’s help in the fields. The farmer said it is what it is. A few weeks later, the military came around and enlisted many of the young men, yet left the farmer’s son due to his broken leg. Others exclaimed how fortunate. The farmer said it is what it is.

Life is about trusting (not judging) that if an event does not go your way is that it can be worked out which is easier said than done. A financial disaster will not ruin you forever yet it may seem like it. If you do not get one job, then another job is probably on its way. We learn in life that we can not always change the events (especially those in the past unless you have a time machine), yet we can change how we feel about them. The key is to take the judgments off of what we believe about the event. Even if we label something as good, there must be a bad, as well. For example, if we are a saver, what will happen if a disaster comes and wipes out our life’s savings (e.g., stock market crash or medical illness)? If we see ourselves as good because we saved, then how do we feel if we lose it all? The key for me is that money is money. If I had it once and lose it, then I can have it again. Yet, neither saving money nor spending money is good or bad, just is.

For example, we can get so worked up about having a car wreck or having an unexpected bill that it will deter us from achieving our goals because we judged the event as bad. Yet, in reality, events like these things happen. It is how we interpret them that are the key. One may ask wouldn’t the absent of judging something as good leave us feeling bland? No. As an exercise one morning (or even now), close your eyes for a few minutes and take a few deep breaths. Just concentrate on your breath and let go of all thoughts that may come up (e.g., meditate). If you can, do this outside while sitting, standing or lying down on the grass outside. What do you feel when you are not concentrating on your thoughts, your “to do list” and judgments? Peaceful? Calm or at ease? What I am learning is that our natural state is one of peace, joy and love. Yet, when we start to judge things, we bring in all the negative emotions as well.

To remove the effects of judgments, we need to learn instantaneous forgiveness. We may get upset for people who we perceive as taking advantage of us or hurting us in some way (e.g., a boss not giving us a promotion). The perception is that not getting a promotion will hurt us when in reality a better job may be on its way or the promotion may have lead us to working long hours and ruining our family life. In reality, we do not know what is around the corner. Yet, if we stay angry and resentful, we are just pushing away our future prosperity and peace.

For example, as a manager looking for new employees or as a coach helping people with their resumes and interview skills, I can tell who is angry at their current jobs. As a manager, this sent a red flag to me that they wanted to work for me not necessarily for the right reasons but more for getting away from their current situation. This red flag was if they are angry at their current job will they be angry in this job? Or, do they have the skills to stay even keel when things did not go their way?

For prosperity to work, we need move towards what we want (happiness, peace, joy, etc.) instead of running away from what we do not want (what we deem as bad). If we are running away from something, the situation is going to follow us.

Instantaneous forgiveness is about learning to let go of the judgment as quickly as possible. As a friend says, we are human thus we will judge, yet do not let the judgment affect how you treat others. This is about accepting credit card companies and your company (and boss) for who they are. A credit card company may charge you a high interest rate, yet do not let this affect how you deal with them (e.g., as the evil empire). They are just a company doing business. You will probably have more luck working out a payment plan if you recognize this instead of getting angry at them over the phone where they just want to hang up on you. You may initially dislike you boss when he does not give you the promotion you wanted, yet get back in there and see what you can do to change his mind the next time the promotion comes up.

At the end of your life, will not getting promoted or being in debt really define who you are? It is really our judgments on the events that affected our happiness and peace, more than the event itself.

6 Months Old and Counting

I can not believe that I have been blogging for over 6 months (first post May 11th). I wanted to take this opportunity to thank all the readers and those that comment on this board. I enjoy hearing feedback, so keep it coming. I am also interested in hearing of any of your questions or topics that you want to learn more about.

I started this site because I see a link between our thoughts, beliefs and emotions and how it affects our finances. If we continue to focus only on money (the end results), then we only change the outcome and not the source of the issue. So, I hope that I am enlightening your spirit as well as showing you a few tips on how to better handle money.

A part of my philosophy is if we just focus on money, what kind of life are we living? If we only focus on saving every penny, we may lose sight of happiness. If we only focus on how to retire at 55, we may lose sight of what is important (friends, family and love). Yet, there is a way to have love, happiness, kindness and spirituality along with prosperity. To learn more, keep on visiting.

Peace, love and joy to you all


Do You Have Courage to Face Your Financial Situation?

In David Hawkin’s book, Power vs. Force, he defines courage as the energy level where a person moves from weakness to strength. In his book, he uses kinesiology testing to show that many other emotions (like fear, shame, guilt, etc.) weaken the body while courage is the first emotion to strengthen the body. This is one of the first energy levels where a person takes responsibility for what shows up in his life instead of being a victim of life around him. He starts to use his life events to see how he can grow and learn. Courage is the ability to look at the situation and accept it for what it is. People use courage when facing a line of fire (e.g., soldier or police). Courage isn’t about taking unnecessary risks in the situation, yet courage is about taking the steps needed to control the situation and not stepping back in fear. With courage, fear and worry do not control a person’s life, but gives him a willingness to face the situation and grow from it.

David also talks about courage being the first energy level that a person gives to the world more energy than he receives. This is important for prosperity because prosperity increases as energy grows. Energy and prosperity is limitless if we give back to the world what we get. When people are just taking without giving back, their prosperity will diminish because energy gets depleted. At these lower energy levels, we tend to drain the energy around us with anger, blame, fear, etc. For example, if you have an angry employee at work, how does he influence the rest of the company? Does his anger tend to affect others and possibly make them angry as well and thus become less productive?

To summarize the lower energy levels in Power vs. Force (from lowest to higher energy levels) taking a situation of someone who is in debt:

No hope for changing the outcome:

Shame– humiliating disgrace of his situation (e.g., around amount of debt)

Guilt – beating himself up for the past (e.g., for getting into debt)

• Apathy – giving up on a situation (e.g., no hope of getting out of debt)

With these emotions, people tend to take no action for getting out of debt because they do not see any other possible outcome to their situation.

Seeing different outcomes are possible:

• Grief – sense of loss of what he could have had (e.g., morn loss of a peaceful dinner without being called by a debt collector)

Fear – anxiety of what may happen (e.g., going further in debt if he loses his job)

Even though people know what they can have, their energy is focused on the loss or potential loss of what they want (inaction) and not focused on action.

Taking action against what we do not want:

Desire – need to escape where he is at (e.g., wanting to be rich to stop feeling less than others by being in debt)

• Anger – hating where he is at and taking action against others (e.g., yelling at the debt collectors and credit card companies)

Pride – trying to justify him self-worth by being better than others (e.g., thinking that it is noble to be poor)

Even though these emotions are about taking action it is the wrong action (e.g., cutting others down with anger or pride to feel better or desire to escape the current situation instead of action towards what you really want).

As you can see, these lower energy levels do little or nothing to change the situation. Even desire where it is about escaping the current situation (e.g., of debt), is over looking what the person may really want (e.g., self-worth, peace, happiness) and focus instead on money believing that will change the situation. Courage is realizing that the definition of insanity is doing the same thing over and over again and expecting different results. Thus, if you want your situation to change, you need to change your reaction to the situation. From a financial situation, courage is looking at your situation and learning from it:

• Do I need to find a better job by getting the training that I need instead of thinking no one want to hire me for more than minimum wage (shame) or getting angry at the economy and government

• Do I need to cut my expenses until I can get back on my feet again instead of waiting it out and see what happens (apathy)

• Do I need to see that those who have wealthy are just like me (not greedy or evil) instead of believing that being poor is noble (pride)

There are always going to be reasons why things are not going your way. You can use this as an excuse not to take action (live with is no hope) or have courage to be honest with yourself. You may not be able to change the situation (e.g., incurring medical bills due to illness) yet can change the outcome by managing your spending and debt. Courage is the point where we see that life is not just happening to you (on a roller coaster with no steering or brakes) but where you can take charge of your lives (elect to get off the roller coaster and choose your next step). This is a scary step because it means that everything in your life, you have some degree of control over. Thus, instead of blaming others, you need to look at yourself and the impact you have on the situation.
So take the first step in chaning your financial situation is to see what situation you are in:

• Are you in debt?

• Are you underemployed (should have a better job)?

• Are you saving for retirement?

• Do you have health insurance?

• How else would you describe your financial situation?

Then take a moment as see your feelings about these situations. Are your emotions in the list above (e.g., seeing the situation with anger, fear, apathy, guilt, etc.)? Have you started to stand up and address these situations? If not, take a few more moments and brain storm ideas on how you can start taking action to change the outcome of your current situation. Brain storming can show that there are other possibilities to solve the situation instead of being a victim and giving up.

Courage is the tipping point to a different life. It is easily to revert back to believing that we are a victim to others. Thus, you need to look at your thoughts. One of the biggest traps is thinking, “yes … but …”

• Yes, I can pay down my credit card debt, but not at their outrageous interest rates they charge

• Yes, I got myself into debt, but the credit cards are making it impossible to get out of it

• Yes, I should get a better job, but the economy stinks and government is not fixing the situation

It is easy to say that you can control your life, yet it is harder to stay focused in believing it. Thus, when you have emotions that tell you that you are not in control (e.g., all the emotions listed above, shame, fear, guilt, apathy, etc.) then your emotions are telling you that you have an opportunity to choose courage by taking action to change your situation. For example,

  • Instead of fearing debt collectors, be proactive and call them with a proposed payment plan
  • Instead of ignoring your investment summary during down months in the market, open them up and understand where you stand
  • Instead of ignoring your retirement plan, sit down and map out your retirement strategy even if you currently do not have the money to save for it

Ask for a Pay Raise Discussion Instead of Demanding a Raise

I have been seeing articles about how to ask for a raise and how a raise can make you wealthy. Then over the weekend, I heard someone suggest that you should go in and demand a raise. For me, I believe that suggesting that everyone should go in and ask or demand a raise is not prudent because it may actually backfire. Yes, there have been success stories that encourage others to follow. Yet there are others who have tried to ask for a raise and it turned out to be the straw that broke the boss’s back (especially if the employee wasn’t a stellar employee). So before you jump and ask for a raise, understand the risks of asking for a pay raise and know there are many different ways to ask for one.

For myself, I never asked for a raise because I feel that I have been treated fairly where ever I have gone. Even now, in my coaching business, I tell my clients that they can pay me what they believe the session was worth. I even tell them that they can wait until they apply my suggestions to see the results first before determining the value of what they received. Some clients have given me $20 while others have given me $100 or more. I do this because I trust the universe will bring my prosperity based on what I give instead of worry that some people will take advantage of me. When we drop our expectations, the universe will open up to give us real prosperity. By having expectations, you may get disappointed for receiving less than what you expect and get discouraged and frustrated. This can lead to a downward spiral because your performance will start to be affected. In the end, I probably have received more with my flexible payment schedule without any expectations than what I would have by setting up a fixed payment for all my clients.  Yet, there are times where I would be underpaid if I had set up expectations and other times where I reap the benefits of being flexible (getting a higher than expected payment).  The same goes for working at a company.  Sometimes you may feel underpaid yet being in that position may lead to future opportunities where you will feel like you hit the jackpot.
In my previous job, I had some responsibility for suggesting pay raises. From my limited experience, I can tell you that there is a lot of thought and review that happens on who should be rewarded for their performance and how to fix any pay inequities. Even though at times there may be a few inequities in pay, for the most part, the pay process does treat people fairly.

So what is the best way to go about a pay raise? There are many different styles that will work differently depending on your boss. Thus, one way will not work for everyone. Yet, for me, if the pay process is relatively fair for the company, then the best suggestion is use the pay process as a dialog to know how you can become more valuable to the company to justify a higher pay. So, first

1. Know when the pay process begins

Usually this is 2 months before the pay raises are given. You will want to have a conversation with you manager before he sends his recommendations up the line. For the best opportunity, you should start 4 to 6 months before this time. Thus, if you boss has suggestions on what you can do to justify a raise, you will have time to act before he makes his recommendations.

If you want to demand a raise, you can go in at any time. Sometimes there are opportunities to get a pay raise mid-year if you demand one. Yet, it is easier to get a raise when it is a part of the normal pay process. A raise mid-year will demand a significant reason to justify taking the special request up the chain for approval.

2. Know what others are getting paid

You are more likely to get a raise if you can verify that you are being underpaid. If you are already at the top end of the pay scale for the company your chances for a raise are lower and you may be viewed as greedy for asking (not good for long-term job growth).

3. Understand what performance your company rewards

Even during a regular performance review, the actual pay performance process may not be discussed. For example, a consulting firm may pay more for someone with marketing skills while you are known as a great technical person. During a regular performance review, they may give you high praise on your technical abilities yet not grade you on marketing skills because they do not see you in that role. When it comes to pay increases, your high grade on technical skills may translate to a low pay increase compared to someone who has better marketing skills. They may figure that they can hire another technician but a marketer is harder to find and thus gets rewarded.

4. Understand how you can modify your skills to create value

As mentioned above, your skills may be fantastic in one area, yet does not add value to the company. To find out if this is the case, I would find it refreshing as, a manager, if an employee would come to me and say:

“I have been disappointed in my pay raises lately. I believe that I have the skills to be more valuable to this company, yet it seems that my efforts are not being as valued as much as I would have thought. Thus, I wonder if there is a disconnection of what I should be doing to be of value to this company and what I am doing. Can we discuss what I can do to make myself more valuable to you?”

By taking this approach, the employee is asking what he can do to receive a larger pay instead of asking of a raise which may backfire in the long-term. As a manager, I rather work with someone than feel that they backed me into a corner with only a “yes” or “no” answer to give.

Note, at the end of the meeting about your pay performance, your boss may tell you that he is not giving you a raise at this time and may give you several areas to improve on. You have every right to set up another meeting to review your performance. You can ask that the request for a raise be reviewed at this time based on the measures you just agreed on.

5. Know your value

The same person who this past weekend said you should demand a raise also said that you should know your value. This value is an inner knowing of who you are (self-worth). This is important because if you have a low sense of self-worth, your boss will not see your worth either and not give you a raise.

A few suggestions on what not to do when asking for a raise:

1. Demanding a raise

There is a difference in a request and a demand. For me, a demand is you either do it or else with little discussion (just a one-way discussion on why he should do it). With a demand, the other person is put on the defensive and may raise a wall of defense (e.g., “I do not have the money to give you a raise”) instead of inviting an honest discussion.

Second, in demanding a raise, the underlying issue may not be solved. If there was a perceived issue of how your performance has not measured up, this issue may not be addressed, even if you get a raise (e.g., he may have caved in for now due to the economy). Yet, when the next round of layoffs occurs, you may have put yourself on the top of consideration list.

This does not mean that you can not have a pay discussion and make a strong request to receive a raise. In this discussion, if your boss does not want to give you a raise, you have every right to say:

“Sorry that we do not see eye to eye. Yet, it may be time for me to move on” (to another company that you have an offer from).

Be aware that you may end up seeing your boss again down the road, possibly at another firm where his hands are not tied in giving raises. Would you rather end on a good note (having a respectful discussion and making a request), then leaving the company where things got nasty because your boss could not give you a raise?

2. Not being ready for a no

Probably the worst thing to do is to be stunned by a “no”. In actuality, being ready to discuss why your manager said “no” is the most productive step in the whole process because a majority of times you will hear “no” as the response.

As mentioned above, you need to understand your value to your company and what needs to be changed in your performance to get a raise. Maybe you are working hard on Project A while you boss would prefer you to spend more time on Project B for your long-term growth. Unless you ask for the reason behind the “no”, you do not know how to change your boss’s mind for a future raise. Maybe you are doing what he wants, yet he has not seen it. Thus, making sure your productivity is more visible is an easy switch to make.

3. Staying angry if you are denied a raise

If you get a “no”, you are probably going to be upset and resentful. You need to work out respectfully your disappointment with your boss by asking for the reasons for his “no”. The worst thing to do is to go back to your desk fuming and give less effort towards work. If you think that he does not respect you, thus you will not respect him, this would be the worst possible outcome. This resentment can be the start of a downward spiral that ends with losing your job. By asking for all the reasons for his decision, you can start to see how you can change his mind overtime. Thus, instead of the answer being a “no”, you may start seeing it as an opportunity for a raise down the road.

4. Not changing your performance if you get the raise

If you received a raise, it may have resulting in being paid more than your counterparts. By being paid more than others, your productivity to the company should also be higher. If there is a layoff, your paycheck may make you stand out compared to others unless your performance justifies the pay. If your performance does not justify the higher pay, you may have just put yourself on a pedestal that is easier to tip over.

The raise may have also come with increased expectations. If you had a discussion about the raise with your boss, you may be aware of these expectations. If you demanded a raise, the expectation may have been implied but not talked about. Even if there are no mass layoffs, your manager’s expectations of future performance due to giving a raise may hurt you unless your performance meets up to their expectations.

5. Expecting future raises if the raise put your salary above others

Jim at Blueprint for Finacial Prosperity asked would you take a 20% raise from a new job or stay with your current job with a 20% raise via a counter offer? In the analysis it was pointed out that you may not get future raise in your current position if you are making more than your counterparts. In reality, you may not get a significant raise from a new job either unless your performance changes to substantiate it. One of the reasons why there are pay inequities at companies is due to people being hired in at higher salaries or getting a raise before it was due. Over time, these raises are evened out. The new hire that negotiated a higher salary (or just got one as the incentive to make a jump) may get a 2% raise while everyone else gets a 4% raise. The same is true with someone who requests a raise. The manager may give it to make you happy, yet long term they need to preserve pay equity through out the company. So, unless you get a job in a company with a higher pay scale, a raise may be a temporary shift in pay that gets evened out over time.

When I read how a raise can easily get people out of their financial trouble I shake my head because unless your job performance changes (e.g., take on new responsibility, land a new client, etc.), the pay raise will ultimately be evened out over time to what they would have gotten. Thus, it may not be the ultimate solution as some suggest yet more of a quick one-time fix.

If your pay is below average of what is paid in your company or in the city you work in and your performance is “above average”, then you may want to ask for a raise or look for a new job. Yet, if asked, 40% of employees would consider themselves a top 20% performer and 75% of employees would say that they are underpaid in comparison to others. It is sometimes difficult to see ourselves objectively like a manager tries to do. The point is, an employer would consider giving raises to a top 20% performer to keep them or to employees who are truly underpaid due to an anomaly in the pay system. Yet, when someone who is not a stellar employee or is already getting paid more than others asks for a raise, they are probably not going to get a raise because it will create problems with other employees who will then be knocking at their manager’s door next.

We all would enjoy make a few extra dollars in our paycheck. Yet, be careful on how you approach your boss. If your boss is going to be offended that you are demanding a raise (which he may interpret as questioning his fairness in how he treats you and other employees), you may be doing more harm than good. Yet, asking for a dialog about how your performance is valued when it comes to pay, may lead to a higher likelihood of being paid better over the long term instead of just the short term.

Wisdom from Tao – “Chase After Money and Security and Your Heart Will Never Unclench”

When reading the Tao Te Ching the other day, I was stuck by how the 9th passage summed up what I was thinking about money especially because it was written over 2,500 years ago.

Fill your bowl to the brim and it will spill.

Keep sharpening your knife and it will blunt.

Chase after money and security and your heart will never unclench.

Care about people’s approval and you will be their prisoner.

Do you work, then step back.

The only path to serenity.

Before reading this, I was contemplating writing an article about “What kind of life do we want to live?” In the article, I was going to discuss on some people in their quest to financial independence have actually been caught in a trap where money has taken over their lives instead of giving them independence. I may step on some toes, yet if we spend all our time tracking our finances, what kind of life are we living? With all the books, shows and blogs on personal finance, we could keep us so busy learning that we have no time for life. We could also keep ourselves busy by:

• Tracking our net worth to the penny by counting our change jar each month

• Recording all our expenses to the penny over the year to see if our budget is accurate

• Tracking our investments every day at work wondering if we are still on track for retirement

• Fighting with our spouse over $50 not accounted for in the budget reconciliation

• Attending the countless lectures on how to become rich

• Fretting over every fender bender and its impact on our budget

I think that it is great that the area of personal finance has drawn so much attention lately where people are learning how to take control over their financial lives. Many people have started tracking their spending and debt which has helped them get out of debt and the stress that debt can bring. Yet, I wonder if we are going too far in how much we let money control our lives.

From the wisdom of the Tao, in the rush to become the next millionaire, are we then not letting our hearts unclench. We let the love of money drive many of our decisions instead of the love of life. Money has become the excuse to get divorced instead of love driving the decision. We as parents feel like failures if our children do not understand the value of a dollar and accumulate large debt in college. Fathers in New York City brag about their high tech baby strollers with extra wide wheels and then dread working overtime to support their lifestyle. What does that say about our society where financial decisions have such an impact on how we live and love?

The passage in the Tao does not imply that we should ignore personal finance or work either. As it says do your work and personal finance is something that we need to work at. However, we should set up our plan, then step back and enjoy life. This means:

• We do a quick reconciliation of the budget instead of tracking it to the penny.

• We define ourselves by who we are on the inside instead of by our net worth or size of our home (else we become other people’s prisoner or a prisoner to money).

• We figure out what really brings us the most peace, love and joy when doing our budget (even if it is the latte) instead of scrutinizing every penny that we can cut where the knife will become blunt (in other words, we will feel deprived and tired).

• We practice gratitude of what our financial work has given us in peace, love and joy instead of beating ourselves or spouse up for not following the budget.

• Instead of figuring out the 15% gratuity, give the value of what you received even if it is 50% of the bill. Or better yet, give the servers the best night they have had that week by thanking them personally for their service, by being friendly and cordial, by asking how their night is going, etc. (e.g., change the tables, figuratively, and serve them kindness and compassion).

Financial planning should be about setting up our plan and then taking a step back and observing it instead of being consumed by it. If financial planning is taking more than a few hours a week (or even a month), see if it is just a fun hobby or an infatuation with becoming rich that interferes with having fun with your family and friends. Financial freedom does not come from having money, yet the ability to feel secure by knowing who you are. Our grandparents survived the Great Depression not because of their money (because many lost all they had), yet from their hard work, perseverance, determination and knowing that a new day was around the corner. As the saying goes, you can’t take your toys with you when you die. So, enjoy this moment in time with an unclenched heart rather than striving for the goal to become a millionaire or to retire at 55. Set up your financial plan, yet do not become consumed by it.  And know what you really want in life.  Is it having money or is it really security, peace, joy, happiness?  For me, it is having an unclenched heart instead of a tightly controlled wallet.

Abracadabra – Impact of Inflation, Interest & Investment Returns

In reading a few blogs this week (some at Consumer Commentary, Free Money Finance and others), there has been a lot of discussion about the power of compound interest and about paying off college loans and mortgages early due to paying too much interest to the bank. It got me to think that a lot of articles are written covering one of three parts (i) interest paid to banks, (ii) compounded returns on investments and (iii) inflation; yet, only occasionally are all discussed together to see the interactions of each. Unless the numbers that are presented together; the results are incorrectly skewed in my mind. It can be a marketing magic trick that shows us only ½ the picture to influence us to use their services with inflated numbers. Other times it is done in pieces because it is difficult to show everything together (as you will see based on my attempt).

Let’s start easy. If you have $20,000 and invest it at different investment returns, it would grow over 20 years to approximately:

• At 3.5% – $40,000

• At 5.0% – $53,000

• At 8.0% – $93,000

• At 10.0% – $135,000

One would look at $135,000 and say “Wow, this is why I should be invested in the stock market.” Yet, before this goes too far, the first magic trick is showing numbers that have not been adjusted for inflation. For example, if you could buy something that is $20,000 today, it will cost $40,000 in 20 years assuming 3.5% inflation. In reality, the $40,000 return using 3.5% investment return is only worth $20,000 in today’s buying power. In addition, the $135,000 is only worth $68,000 in today’s dollars, still a significant increase but not as much of a “wow” as before.

In today’s buying power, the $20,000 investment would grow over 20 years to

• At 3.5% – $20,000

• At 5.0% – $27,000

• At 8.0% – $47,000

• At 10.0% – $68,000

That is some illusion of showing the power of compound interest and leaving out the point that a loaf of bread is going to cost $4 in 20 years instead of $2 today.

Now, let’s look the decision whether or not to prepay a mortgage (or other loan). First, the idea of prepaying a loan should be broken down into 2 parts:

• A decision to save the extra payment

• A decision where to invest (paying off mortgage or invest in CDs, bonds or stock)

If I have a $100,000 mortgage at 5% interest rate, I would have payments of $535. If I prepay the mortgage by paying $579.58 a month (44.58 more a month or $535 a year), I would payoff the loan in 25 years and 3 months. Yes, prepaying the mortgage would save $17,000 of interest. Yet, the $17,000 is only showing ½ the picture (which I will explain below) and the $17,000 in lost interest is equivalent to $9,000 in today’s dollars.

The other ½ of the picture is if you considered saving the extra payment and invested it in stocks, you may actually lose more money by deciding to pay off the mortgage instead of investing. If you had invested $44.58 a month (instead of paying off the mortgage), you would have after 25 years and 3 months the following (shown at various assumed post-tax returns and not adjusted yet for inflation):

3.5% – $22,000

5.0% – $27,000

8.5% – $47,000

10.0% – $61,000

If you saved at 5% rate, you would have earned enough to pay off the remaining mortgage of $27,000 at the same time that the prepayment plan would have paid it off. Thus, in my mind, prepaying a mortgage is like investing in bonds at your mortgage interest rate (ignoring taxes for now). So, the decision is in two parts:

• Whether to save an extra $44.58 a month – which would result in $22,000 using at 3.5% investment return rate (which is $9,000 in today’s dollars)

• Where to invest the money: either in money market at 3.5%, bonds at 5.0%, stocks at an estimated 8.5% to 10% return or by prepaying the mortgage

o Prepaying the mortgage will save an additional $5,000 which is the difference in 5% return and 3.5% return. In today’s dollars this is only worth $2,000 which is not very much compared to the $17,000 in interest saved

If you are a young investor (risk taker) and would invest a majority of your money in stocks (at an assumed 8.5% return), you could lose out on possibly $20,000 by prepaying the mortgage instead of investing ($20,000 = $47,000 assumed investment return – $27,000 remaining mortgage) and your mortgage would still have been paid off at the same time the prepayment plan would have been. So, by prepaying you may not being saving $17,000 of interest but losing potentially $20,000 or more depending on your actual investment return. Note, the $20,000 of potential return is equivalent to $8,000 is today’s buying power to compare apples and apples (because I do not want to appear like I am magically inflating numbers).

Now, there are a lot of reasons to prepay or not to prepay a mortgage. You can read more at:

Should I Have a Mortgage

Sometimes when people just look at interest that they are paying, they decide to prepay the mortgage after only seeing ½ of the total picture that does not even show results adjusted for inflation. So objects may appear larger than what they should and the illusion of seeing 1/2 the picture is an example of focusing our attention to one side of the room (savings) while the elephant (other investment options) is hiding on the other side. Thus before prepaying your mortgage sit down with a financial advisor to see the whole picture and get the numbers converted into today’s dollars so you are comparing apples and apples.

Some would say that prepaying a mortgage is a guaranteed return, which it is. For an older investor who wants to invest more conservatively due to his approaching retirement (e.g., invest more in bonds and less in stock), prepaying a mortgage may be a good option to look into with his financial advisor. Yet, for a young investor who is taking calculated risks due to a longer term investment horizon, it seems a little contradictory in my mind to say he would invest a majority of your money in stocks (which have a higher upside but no guaranteed return), yet prepay his mortgage for the guaranteed return. Of course, his overall risk analysis needs to be reviewed with his financial advisor because prepaying the mortgage is just one part of his investment plan. Yet, I am always a little cautions when someone tells me in one breath that a guaranteed return is always better (e.g., prepaying a mortgage) and then says that if I am younger investor with a long-term investment horizon that a large share of my investment should be in the stock market due to its potential higher returns.

For me, I am prepaying just little on my mortgage now for three reasons:

• I am getting a little older and have a large stock investment already, so I am looking to lower my overall investment risk (e.g., with bonds and prepaying my mortgage).

• I wanted my mortgage to be paid off by the time my son goes to college, so our income currently allocated to our mortgage can then be allocated to pay part of his college expense (with him paying the rest)

• My prepayment now less than the typical prepayment plan yet is going to increase over time so our home payments (including maintance and taxes) is consistently around 25% to 30% of our income

Note, the interest paid is not one of the reasons why I am prepaying my mortgage. My real decision is based on how much I want (need) to save and where to save it (e.g., equities, bonds, CDs or prepaying the mortgage).

Now, for the last point, I will attempt to discuss the effect of inflation on the interest charged on a loan. The premise is that for a low interest rate loan, a lot of the interest paid is due to inflation. For myself, I do not see this interest paid as lost money if it is due to inflation. It is just time value of money and does not constitute a loss of buying power. This may sound confusing because no one talks about it.

Let’s look at a scenario where a person has an outstanding loan of $10,000 due in 10 more years at 3.5% interest rate (3.5% being the assumed inflation rate):

• If he gets a windfall and invests it in CDs or mutual funds (safe investment) that provide a post-tax return equal to 3.5% (inflation) there is no loss of money if he pays if off now or later

Loan outstanding now – $10,000

Pay loan back – $14,000 in 10 years

Invest – $10,000

Investment grew to $14,000 after 10 years

Thus, his investment grew enough to pay back the loan and the decision to prepay the loan did not cost him anything. Now, many (if not all) will say that he is losing $4,000 in interest by not prepaying the loan back immediately. Yet, by saving the money in a secured investment, most if not all the costs of the low interest rate loan is eliminated. Plus, he has the money for an emergency if needed.  So the money lost by not prepaying the loan is $0 even though he is paying $4,000 of interest . Sounds confusing I know. After years of hearing interest is always bad, it is hard to see the distinction between interest due to inflation and interest costs due to risk and investment horizon.

Well, what happens if he spent the windfall instead of investing the money? From a buying power perspective, the buying power is still not affected.

If the person’s salary is $50,000, the $10,000 loan is 20% of his salary.

If he waits 10 years to pay it off, his salary would normally increase to $70,000 (assuming 3.5% salary growth) and thus he would need to repay the loan $14,000 which is 20% of his salary ($14,000 / $70,000).

Thus, he did not lose any buying power at all due to his decision not to pay the loan of earlier. He could also pay the loan back 2% of his salary for 10 years as well. Thus, the money paid back on the loan is just from time value of money (inflation).

As you can see below, inflation affects everything over time (interest rates, investment returns and salary increases), thus to find the real costs (on an inflation adjusted basis) the inflation component should be removed from each to compare apples to apples:

Loan interest rate = Inflation + Risk + Investment Horizon (higher rate for longer loans)

Investment return = Inflation + Risk + Investment Horizon

Salary increase (in theory) = Inflation + Merit/Promotion + Productivity

Note, there should be a drive to pay back credit card loans, payday loans and other high interest rate loans as quickly as possible because they will rob you of overall buying power because they are charging an interest rate that dwarfs the long-term assumed inflation rate. Yet, low fixed interest rate loans do not rob you of as much buying power as interest charges suggest because most of the interest changed is for inflation which has minimum if an effect on your buying power. This is because your salary and investments are also increasing at a similar pace (over the long term).

One last example, let’s look at a student loan of $20,000 with 3.5% interest with his salary at $50,000. The person can pay the loan back now using 40% of his salary or pay it back over 10 years at 4% of his salary. From a buying power perspective, he is not losing anything (even though the interest paid is approximately $4,000). Yet, by amortizing the loan over 10 years, he makes it easier to payback the loan without killing himself in the first year.

To try to tie this all back together. If you have a loan that is repaid by at $115 per month for 20 years ($27,600 in total payments), the interest paid is at various loan interest rates is

• At 3.5% – $7,600

• At 5.0% – $10,100

• At 8.0% – $13,800

• At 10.0% – $15,600

From a buying power perspective, the loan at 3.5% has no effect on your buying power because it is the assumed long-term rate of inflation. Thus, lot of the interest paid on most standard loans low interest rate loans is due to time value of money (effect of inflation being $7,600). So if you have a mortgage at 5% or 6%, the marketing material for a biweekly mortgage plan can lead you to think that you are paying a lot of interest to scare you into their plan (for one-time fee of $300 with a small fee for each payment there after). Yet, the actual cost from a buying power perspective is less once inflation is accounted for.

So, my point is paying some interest is not that bad from a buying power perspective. Yet, this does not mean to load up with credit card and PayDay loans (at higher interest rates) or to have too much debt (as many are getting into trouble due to having to high of a debt burden).

In addition, when you look at numbers, see if the number can be converted to today’s buying power so you are comparing apples and apples. This way, you are not thinking that a $1 million today is equivalent to $1 million in 40 years when the average car will cost $100,000 (when the real value of $1 million is only $250,000).

And as always you should consult with a financial advisor to analysis your specific debt and risk situation.