First Steps to Financial Independence

Last 4th of July, I wrote an article on comparison of financial independence with the American Revolutionary War. In particular, I looked at how important it is to:

• Know what you are fighting for

• Declare your independence

• Do not let initial defeats stop you

• Understand your enemy may come back, so be ready

• Realize your enemy can become your biggest ally

As a follow-up to the article, I thought I would look at some of the other similarities in the initial course of action that should be taken.

• Look beyond the initial reason to fight and consider what you really want

Last year, I discussed how the initial rebellion was for what we did not want (no taxation without representation). However, to be truly successful, we needed to look for what we really wanted (independence and freedom). People may get frustrated and angry for a short time with what they do not want (taxes). However, lasting change only happens when we move towards what we want (freedom).

Financially, we may rise up in arms against debt, higher health care insurance costs, taxes and stress of paying bills. These things tend to be something to get people riled up for a time. Yet, in time, people wander off in different directions aimlessly because there was no ultimate goal to move towards.

The first step in financial independence is to really understand what we want. Do we want financial peace, happiness, or something else? There is little we can do about taxes or higher health care costs other than vote and wait several years hoping our politicians can agree on a compromised bill that is acceptable. Yet, when we have a direction of what we really want, we can take individual steps towards that goal as we wait for other changes to follow.

We want better consumer debt protection laws because we get upset and angry when we are charged 18% or more for interest. However, our real goal is not lowering the interest rates rather what we believe that the high interest rates are doing to us, for example robbing us of our happiness due to working longer to pay the bills. We may become happier when we know we have better consumer debt protection laws, yet why wait that long for Congress to do something only to get discouraged until it gets here? Take steps now to monitor and manage your debt. Take steps to be happy despite what credit card companies are doing out there. If we don’t, we may end up waiting to be happy, hoping something out there will change to get us to where we want to be.

• Create a plan of action

Usually creating a financial plan seems daunting. What should we tackle first? Thus, we avoid make a daunting plan and take one step at a time. Doing one-step at a time is a good approach. However, a great pool player or baseball pitcher and catcher have a plan of action on how their current step will lead them to their next step. If George Washington only worried about the current day, he would have never thought a few steps ahead and planned a course of action to keep a rag-tag army from deserting which they almost did if it was not for the Battle of Trenton and Princeton which changed the momentum of the war.

Thus, come up with a plan of action. You do not need to do all the steps at once (better to focus on one step at a time). Yet, prioritize your plan in an order that makes sense and then tackle it one step/day at a time while seeing there is a path to reach your goals. You may find that your plan changes as new options and alternatives arise because a great plan is laid out first so that we can see the end in sight (believe that it can happen) and is flexible enough to handle changing circumstances.

For example, to get out of debt, you may start out with the following steps:

1) Set your intention with your spouse on getting out of debt

2) Call credit card companies to lower rates

3) Create a budget to figure out how much money can be paid towards debt

4) Follow up on budget – to see any problem areas that need to be corrected before the problems become overwhelming

By mapping out a plan ahead of time, we may be able to see issues come up ahead of time. Some people have tried to do a budget and reduce their debt without the buy-in of their spouse. When they do a budget, they feel great about it. However, when they get to the step of monitoring the budget, they realize it is not only their spending that they need to track yet also their spouse (sorry if I simplified this example to much). By setting up an action plan ahead of time, we are able to see the bigger picture and how the steps are dependent on the other. Thus, in this example, the person doing the budget may see the need to have a budget that the spouse buys into when it comes to the monitoring step. Thus, they see it easier to get the spouse’s buy-in before doing a budget, thus save aggravation by getting their spouse on board the debt reduction plan before the budget is created.

Or in another case, someone may call the credit cards companies first to lower their rates and get denied because they were late with their payments in the last 6 to 12 months. They may give up thinking that it is hopeless because they can not get past this step. Alternatively, if they have their plan in mind and think through the plan, they may discover that having a budget in place before calling the credit card companies back may give them more support on what they are able to pay to convince the credit card companies that things have changed and they are more financially responsible now than in the past. As I written about before, I believe that we are more determined and convincing when we call credit card companies to lower rates if we have a budget plan in place ahead of time (see Getting Out of Debt – New Approach to Calling Credit Card Companies. The order of the steps in your plan does not matter as much as seeing the bigger picture and thinking a few steps ahead of how to adjust your plan to handle issues as they arise. The worst thing is to get stuck and not seeing the bigger picture to determine a way out.

• Rally support

When we go into battle alone, we can find no one is watching our backs. When battle financial debt or other financial problems, it is always better to have a friend to talk to that will support you when you need a little extra push to get back on track. Plus, they may be able to give you suggestions on what to do next. Friends are our biggest ally. America would not have won the war if it was not for the support from France (first logistically and training, long before they jumped into the actual battles at the end).

Thus, find a friend who you feel can be a good coach and that you can trust. Sit down with them to lay down your expectations. There is a difference between being a friend to talk to for support and being a coach that gets in your face when needed. Thus, make sure your friend knows what you are expecting from them.

If you can find someone going through the same issues, it may be a good mutual support system. You will be able to share your ideas and examples with each other to make each other’s plan even better as you go through it together. Yet, still have someone else ready in case you are both stuck at the same point without any ideas of how to move forward.

For more examples on how to achieve financial independence, see How To Regain Power in Your Financial Life

And, have a joyous 4th of July where ever you are.

Reasons Not to Set Your Goal to Become a Millionaire

I have been reading some forums on why people want to be a millionaire.
There are four main camps that many of the answers fall into:

• Get whatever I want

• Never have to worry about paying a bill

• Symbol of status or success

• Ability to help others

In these discussions, it seems like the line in becoming a millionaire is a defining moment where dreams can come true. Unfortunately, for many people, they are a long way off from reaching this milestone. And, by the time that some reach it, the millionaire milestone will have lost its meaning and buying power. $1 million in 40 years will be equivalent to about $250,000 today, assuming 3.5% inflation, still a lot of money yet not enough to retire early.

Financial Perspective

One of the things that I have been noticing is that when people have reached certain milestones in life (like becoming a millionaire) the bar of what they and others want to achieve is raised as well. Every day there is something new and different that we can spend our money on. Five years ago, people would have thought it would be crazy to spend $500+ on a phone that could be used to play music and connect to the internet. People just a few years ago would have been satisfied with a cell phone that did not drop their calls. Ten years ago, people would have thought is mad to buy a 3,000+ square foot home especially if they only had one child. Twenty years ago, people would have thought it as crazy to spend $150 on a dinner for two for anything but a golden anniversary celebration. Yet, now these events are common place. Thus, as we become more prosperous as a society, the bar of what we want continues to rise.

A part of our wants is driven by wanting to improve our self-worth. We see what others have and are driven by envy to stay on even footing with others. Even becoming a millionaire is a status symbol. Yet, it does stop at being equal to others. We also look for things because of how it makes us feel. Just 15 years ago, it would have been crazy to think that someone needed a SUV/minivan to haul a family. Growing up in a family with 4 children, the biggest vehicle we had growing up was a station wagon. Now, once a family has one child, it is off to the car dealership for a minivan or SUV with the added costs associate with going to the pump. We say that it is a need and convenience to have a larger vehicle due to having a family. Yet, what part of it is due to the power we feel sitting up high off the ground? What part is it the status symbol like having a BMW or Lexus name plate on the car? So it is not just about keeping up with the Joneses but also about how we try to feel better by what we have.

I know that many people have controlled the need to keep up with the Joneses. They may have learned that they can become a millionaire by limiting their wants now. We sacrifice today for a better tomorrow. However, this just creates a vacuum of wants just waiting to be filled. This is because stopping buying things by cutting up credit cards or following a strict budget, does nothing with the underlying drive we have to acquire the things we wanted in the first place, only delays the drive. Until we figure out what drives us to consume what we do, we will never satisfy our wants. This is why many people seem to get ahead (put some money into savings) and then splurge. Look at what happens to people who win a large lottery or receive an inheritance. Many lottery winners end up bankrupt in 5 years (seen statistics indicating this is anywhere from 30% to 80% of all lottery winners).

Thus, thinking that we will have no worries or have all our wants fulfilled by becoming a millionaire is backwards and leaves many people left wondering where all their money went. Instead, we need to determine what our worries and real wants are first, to free ourselves to become millionaires down the road. If we want to feel more powerful, that can only come from within ourselves. The power we feel from being behind a car will not last. It only leaves us wanting more. For example, next time we would be looking for a bigger truck or SUV (like a Hummer).

Successful Philanthropist

One comment which kept on coming up was that we can help more people by being a millionaire. As a society, we have deemed our success based on a quantifiable measure. Did we tithe 10%? When did we become a millionaire, multi-millionaire or billionaire? It is like the motto of snowboards goes, “go big or go home”. We have a tendency to think that the biggest impact comes from having the most money (reason why we incorrectly equate money to power). We are only successful if we are a millionaire and only then can we really change things and help others.

Yet, we lose track of the impact we have in society, in the present (in the here and now). One of my beliefs is that giving comes in many forms, other than money. For example, giving is in how we use money. We do not understand how a small innocent action can impact the society as a whole. A success stories that I enjoy reading is about how Thomas Edison dropped out of school after the age of 8 because a teacher said he was un-teachable. Where would we have been if our country’s greatest inventor was kept in school languishing instead of home schooled by his mother? We consider Edison as our greatest inventor. What about recognizing his mother as one of our greatest teachers?

Yet, we do not think in terms of what our actions today do to inspire tomorrow’s generation. Rather, we want to play big or stay at home. We think that only when we see our name in lights does it qualify as a “wow” moment. A friend of mine who had financial issues came to see me as a client. When we talked about a course he taught, he did not seem like he really understood the impact that he had. He had a way of minimizing the impact he had and never sat back to observe what he has done. We may not see it in the moment, yet he had more of an impact in the lives of 1,000s of people than he could probably ever realize. A few years ago, I ran a self-improvement course for teens. Every once and a while, I run into a parent of one of the children that came through the course. I could not imagine how a weekend course could affect someone, especially as we were struggling to keep the course going. Yet, the biggest change sometimes comes in the smallest actions or words that are magnified over the years. And, by recognizing this, we can then capitalize our small actions into great things.

Thus, if we are waiting to be successful by leaving our impact on the world or hitting a milestone, we have missed the boat. Our impact is felt in what we do today where the biggest impact is propelling others to reach their goals and dreams. Being a millionaire is not a measure of success rather it is in how we became a millionaire that is more important. Did we have to trample over others to reach our goals? Or, did we help others reach their goals along the way?

Thus, we do not want to become a millionaire. Rather, the goal is in living today because it is how we live today that decides who we are and can become (whether it is a millionaire or not).

The goal is to notice the little things in life rather than the grand milestones.

Does What I Write About Really Work?

First off, sorry again for taking a few weeks off from blogging. I have been kept from typing and doing much of anything due to have severe pain up and down my arm (from fingers to elbow) probably from typing too much for a book that I am writing. It is not carpel tunnel rather something else that my doctor could not specifically identify. He believes that it is caused by how my arms were resting when typing that somehow pinched a nerve or muscle, so we will see how it goes as I start typing again.

Anyways, a while ago I received a series of comments from a reader questioning the impact of what I write about. I want to take this opportunity to explain why I write the way that I do. In particular, there are probably many people taking a quick glance at what I write about (financial behaviors) wondering how it can help people who is living paycheck to paycheck with little hope of getting ahead. This appears to be where the commenter was coming from when he wrote

Which reminds me, what good is “financial awareness” if you have no money?

It is hard to explain my whole point of view in a short blog which is why I am excited to being closer to submitting my first book to a publisher. My first draft is currently with an editor who has been helping me organize my ideas better. Yet, in a nutshell, my philosophy is based on when we are caught in a struggle (living day-to-day) it may not money that is holding us back rather our thoughts and beliefs about money. For example, I have offered my services free of charge to many people who have been struggling with money and for the most part have not been taken up on the offer. The key is that when we are in the struggle, we lose sight of opportunities and believe that there is no way out (or a single solution that we try over and over again with no substantial results) thus do not take opportunities when they present themselves. Thus, it should not surprise me that my offers have been ignored because people grown to believe that there is no hope. For example, one of the comments that I have seen over and over again, is similar to

I apparently have no marketable skills, no career-related experience, and no money to go back to school to acquire a marketable skill.

We have a tendency to get caught in the belief that college education as being the end all-be all way to get ahead. I am a strong proponent of education. However, there are other ways to get ahead if one path is blocked. For example, I have a friend who went into the military after high school. After his military service, he worked his way up to being a manager for a large grocery store. However, he end up being fired from that job along with a few others and each time settling for lower and lower managerial positions at smaller and smaller stores. And, even these positions dried up for him. He ended up starting a website design business by teaching himself about the web design industry and programs. As some people know, web design is a highly competitive field to crack into because many people are trying to do the same things. Along the way, he and his wife barely made ends especially with two daughters in college. Yet, he was not discouraged. His ability to learn web design ultimately lead him to being hired at a computer software company where he has worked his way up the ranks and has developed skills sets that are highly sought after, making him very valuable to the company. The key is where there is a will there is a way if we open ourselves to opportunities instead of limitations. Thus, sometimes it is not about the money rather our behaviors (for example, our “lack”/”poor me” thinking) that needs to be addressed to get ourselves out of our financial struggle.

I believe that one of the biggest hurdles we face that influences our behaviors is our belief that “doing what we love” needs to come in a specific form. Thus, we get discouraged when we do not see things go exactly as we would like things to be. In asking people what they would do if money and time was no object, I have head millions of ideas such as “opening up a center to help (fill in blank) ”, living on a beach front house or “starting my own business”. What we normally focus on is the form of what we want believing that it will bring us happiness. We then push ourselves to acquire or accomplish these tasks while we minimalize what we are doing now and may never find lasting happiness in our drive for success.

Instead, I ask people to focus on what they want to give or what they want to accomplish (in generality – not specific outcomes). When we focus on what is important the ultimate goal (not specific actions), we leave it up to the universe to provide us the form to do it in. For myself, I enjoy being a teacher and helping people. Yet, for years, I was caught in a consulting job where we helped large companies instead of individual people. I could have been miserable in this position because it was not the form of what I wanted because our focus was on helping corporations instead of where I wanted to focus on in helping people. However, I focused on helping people whether it was in volunteer activities that I did on weekends or it was being a mentor to younger employees at work all while helping corporations in my job. Thus, when I hear people say:

What if what you love requires money up front which you don’t have and cannot get?

I suggest looking at doing what we love to do where we are at. We may not be able to do it 100% in the job we currently have and see what behaviors and thoughts we have that get in the way. We can work in things that we love into our lives and our interactions with people without making major changes in our life. What about if we want to sing and we are caught being a janitor? The key is to understand singing is the form of what we want and focusing on the form (singing) as the source of our happiness will make us miserable. They key is what we get by singing? Do we get to be creative or do we get to bring joy to people through our voice? If it is joy, we can do this no matter what job we have. I have a mailman who always greets me with a smile every time that I see him. I do not know him all that well, yet that one minute interaction with him brightens my day. Thus if giving joy is his mission in life, he does it where he is at. And, being a janitor does not mean that a person can not sing while working or do karaoke after work or perform on weekends. If we see our ability to do what we love controlled by outside influences, we need to shift and to look at our behavior instead of how much money we may have. Just look at the recent winner of Britain’s Got Talent. A mobile phone salesman (Paul Potts) just received a two million dollar recording deal because he did not let his work situation get in the way of his passion for opera. He did not have to quit his job to get noticed, rather do what he loved where he was at. In reality, being a salesman probably helped him win the competition (type of rags to riches story).

Thus, next time you think that money is keeping you down; I encourage you to become aware of your behavior to see what may be holding you back. All I can say is that anytime someone has worked with me and stayed with becoming more aware of their thoughts and behaviors, they have seen the results. Others however have become discouraged and gave up when I have not given them a top 10 quick fix on how to become a millionaire that is one size fits all. They did not realize that how we think, act and behave has more impact on their finances than knowing just the tools. This is why many people on diets fail when they just focus on the diet and do not become more aware at what is causing them to eat (their behaviors).

If you need help to help identify what is holding you back, drop me an e-mail (pete at myfinancialawareness dot com) and we can chat. I have not let money get in the way of living my passion for helping people. My coaching services have been based on accepting only donations/gifts (and sometimes times nothing at all) solely based on my clients’ choice and/or ability to give back.

Do Not Cut Too Much Fat

In writing my last article (seems like so long ago due to taking a break due to illness and a bum wrist which still leave me typing with one hand), I discussed simplifying our finances by making wise choice about our large expenses. Much of our budget is about choices. Yet, what happens is that we commit ourselves into large expenses and restrict what we can and can not do in the future. If anything does not go our way, we are tied to cutting the little expenses to try to make ends meet (e.g. latte). Many people say that you can become a millionaire by doing this, however there is only so much that we can cut before it can come back to bit us.

There are three things that can happen:

• Cut out too much where we cut our enjoyment of life as well

• Set up a belief that struggle, living paycheck to paycheck and sacrificing, is our reality (no way out); by being caught in a struggle to get by, it is easy to stay trapped and continue that struggle (will discuss this more in a future blog)

• Avoid seeing the potential benefits of our smaller expenses.

I am not advocating that we can go out and spend what we want on little things. Yet, I want to emphasize that looking at our large purchases as a place to reduce costs can be very rewarding if it allows us to keep the little things in our expenses that are more valuable or enjoyable.

We can try to cut the cost of getting a hair cut or eating out at lunch because these are the easy areas to cut. However, this may have detrimental effects on our future income and enjoyment. For example, in my last job, I found spending $5 for lunch every so often was a good expense. Some people may be ready to hang me for saying this. However, sometimes important conversations happen over lunch. Spending ½ hour with my boss away from the office was valuable time that helped me understand how I could be more valuable to him. It also allowed me time with my staff to help me understand their concerns that helped me plan my projects better. Lastly, going out and walking helped my energy level in the afternoon instead of being stuck behind a desk all day. If spending $5 a week helps us get even a 1% raise by understanding the office dynamics better, in my mind, the $250 investment would pay off with a $400 raise for the average salary (which equates to $250 after taxes) and helps us keep our job.

You may think that this is one isolated incident, yet what about getting a hair cut. Why spend $25 for a hair cut at a salon instead of $10 for a cheap barber? I am one who does spend the extra money. For me, the extra $15 that I spend going to a friend who works at a salon is money well spent to get out of the house and relax (part of my morning away from taking care of my son during the week). I could find something else to do. However, in my case, a friend who is helping me with a long-term project goes to the same salon as I do. Thus, because of our busy schedules, it is an easy and convenient time for us to get together and discuss what we are each doing and how we can help each other out as we get our hair cut. Yes, we can schedule another time to meet (such as over lunch or a cup of coffee). Yet, sometimes business deals are done at the strangest places. Point is that we need to sometimes see the incidental expenses as a possible investment in our future (if used appropriately) instead of just an expense to cut.

Now, I know that many people spend money on lunches, hair cuts and other things that can not be in the faintest stretch of the imagination be consider an investment in their future. My point is that sometimes it is our larger expenses which we often ignore that should be the first to cut instead of the smaller expenses. I have written numerous times on Don’t Give Up Your Latte. In these articles, I talk about not cutting out the little pleasures we have in life. If we really enjoy the simple cup of coffee in the morning as we sit reading the paper before work, then we may want to keep it in our budget (if we can afford it) and look elsewhere to cut. Maybe the $3 cup of coffee is more enjoyable than driving an Acura instead of a Honda. Thus, we could cut $1,000 or more from our annual transportation costs and keep the simple pleasures in our life. We may find that we can brew coffee our own for a fraction of the cost or cut back to 2 cups a week at our favorite coffee place. Yet, if we go around cutting out all our small expenses just to get by, we may be doing more harm than good. It is important to understand that if we go to work grumpy because we did not have the morning cup of coffee (due to cutting back to the bone our expenses) can be detrimental. Rather we should look at the bigger picture of what we rather have (e.g., coffee) and look instead at what we think we need (a bigger house or fancier car) as a place to cut.

There is fat to be trimmed from small expenses. Yet, if we cut too much without forethought, it may have a harmful effect. It is sometimes better to look at our bigger expenses instead of the smaller expenses that look easier to cut.

Posting Delay

Sorry for the lack of posts the last few weeks. A list of things have popped up for me, including a trip to Florida, my son getting sick when we got back and now I injured my wrist where I can only type with one hand. It will be a few more days before I can get back to typing again instead of pecking with one finger.

Simplifying Our Finances – Expenses

Typically, when we think about expenses, we commonly look for the little expenses that add up over time, like a cup of coffee or the fees for cable/satellite television or even using coupons for food. This is because these are usually the expenses that we can easily cut. Most of our other expenses are tied up in our home, our car or other things that we need to get by. We find it difficult to cut back on expenses for our home and car because these are usually fixed amounts. Thus, we look for our variable expenses whether it is eating out for lunch or going to a cheaper barber. Yet, there is only so much that we can cut.

In looking at the expenses that we can control, we need to be aware about

1) Distinguishing between a need and want

A need is something that we need to sustain a productive life (food, water, shelter, clothing, etc.). A want is everything else. Yet, a need can be confusing because shelter can either be a 500 square foot apartment or a 3,000 square foot home with granite counters. Now, based on the criteria that a need is something that sustains life, only a small portion of the 3,000 square foot home is really a need. Most of it is a want.

2) Understanding where we can have the most impact

To understand this we need to look at where we spend our money on. The typical consumer spends (per Consumer Expenditure Survey 2005):

Insurance, Social Security & Pension
Health Care
All Other

We see that most of our expenses are on housing and transportation. Our belief is that there is little in these areas that we can cut because we need it. And, to an extent, we are right. However, it is not because we can not cut these areas, rather we do not believe that we can cut these areas. Thus our belief becomes a reality.

We look at our car and house as a type of status symbols of what we have achieved. Thus, it is hard to cut these expenses, not only because we have already signed the contracts, but also because we have put our worth into what we have. If we need to scale down from a 3,000 square foot home down to a 1,500 square foot home, it appears to be a blow to people’s pride unless they know their real worth is not in a home rather in who we are. Even if we can see our real worth is not in what we have, getting out of these contracts usually takes money as well (e.g., for a home we have agent commissions and moving expenses).

Thus, instead of making one decision to cut our expenses by looking at our largest expenses, we make hundreds of decisions on little expenses to try to make ends to meet. To simplify our expenses, we should look at our major purchases before we make them because this is where we can have the most impact. When we make these purchases, we are not only obligating ourselves to making the payments for that purchase but also obligating ourselves for many other future expenses as well where our decision can impact many other decisions as well.

For example, when purchasing a house:
• Insurance payment for the house
• Property taxes
• Utility costs for the home
• Repairs/upkeep of home
• Furnishing of home (unless you are willing to have a room with no furniture)
• Lawn maintenance
• Transportation costs to work

For purchasing an automobile:
• Insurance
• Future gas payments (depending on MPG)
• Maintenance (including money for premium tires for trucks and SUVs)
• Parking (you are not going to park an expensive car out in a $2 run down parking lot)

Thus, as you can see, one purchase can have a large impact on our future financial health. We can even say this when deciding to have children. One event ties us to future expenses that should be considered. Yes, we can control to a certain extent some of the cost factors for owning after we make the purchase. We can keep our houses heated only at 62 degrees instead of 70 degrees in the winter or cooled to 78 degrees instead of 72 degrees in the summer to save money, yet this is only an adjustment to the expense that we signed on for when we bought the house to heat/cool a larger home instead of a smaller apartment. Our finances become hard to adjust down the road when we do realize all the future purchases we commit ourselves to when we buy a car or automobile.

We complicate our finances when we limit our choices. We look at things like shelter, transportation and food as needs that can not be cut. However, we overlook this when we make the purchase believing we can afford to stretch our budget to have the car and house that we want. When we over-commit our budget on our larger purchases (transportation and shelter), we are left scrambling over little things to make ends meet. Instead of making one large adjustment to make ends meet, we are left making hundred of little decisions to trim as much fat as we can. In the scramble we become tired trying to keep our head above water, not realizing we tied the anchor to our ankle when making our larger purchases. To simplify our finances, we need to see that we have the key to the anchor that is weighing us down. Having a reasonable mortgage and car payment is one thing. Having a mortgage and car payment along with all the other expenses like gas and insurance and maintenance that drowns us is another.

Contemplating Risks when setting up Emergency Fund

One of the things that many people do not do when considering their emergency fund is how much risk they have. They may have thought of the chances of being laid off from their job in determining how much to save, yet typically nothing more. We have relied on the rule of thumb of having 3 to 9 months set aside for an emergency fund. However, we never really thought if 3 to 9 months is really enough for what an emergency fund should cover.

Some of the risks that we should consider for an emergency fund are:

Age – The chances of being disabled increases with age. Also, even though age discrimination is not permitted, it is sometimes more difficult for older workers to get hired for certain jobs if they find themselves unemployed. It may not be age discrimination necessarily; however, an employer may use potential to decide which of two equally qualified applicants to hire. If one applicant’s potential may not been fully realized where the other applicant with more experience may have shown his full potential already (given more chances to succeed yet has not done so), the one with more potential may be given the nod. If a company had too many employees with no potential for growth, they are stuck in the mud because it is hard to promote within. Contrary to what we think, companies want to promote within because they have seen their employees in action and it is risky to hire someone based on a resume and short interview process. Thus, the potential for future growth is sometimes given preferential treatment over experience in the hiring process especially in lower and middle level positions.

Education – The probability of being unemployed at a point in time being a college graduate is ½ the risk of a high school graduate (per College Board – 5.4% for high school graduates versus 2.3% for college graduates). Sometimes having a college education gets someone in the door even if their degree has nothing to do with the job criteria. Some employers may see the college degree as a sign of determination and ability to learn on the job and thus give college graduates preferential treatment in the hiring process.

Job Skills – The more flexible your skills are, the more opportunities you have to switch careers. If you are a pianist who is starting to develop arthritis, it is hard to transfer your skills other professions other than being a piano teacher. The skills I used as an actuary in a consulting field has allowed me to do many different things down the road because I did a little bit of everything as an actuary from accounting, economics, investing, legal, speaking, etc. as a part of my job. Thus, the more skills you have, the more opportunities you have open up if you need to change careers. In today’s world, many people will have more than one career thus flexibility is a key to reduce risks of being unemployed.

Job Market – If you are a nurse in today’s economy, it is easier to find another job than some other professions. For example, if you work in the car manufacturing field, the opportunities are more limited where changing jobs if you are laid off it much tougher and may take a longer time to find another job. Therefore, you may want to have a larger emergency fund.

Economy – Many people think when the economy is booming that there is little need to have a large emergency fund because they could always get another job easily. However, the economy tends to change with little warning. With companies being more careful about watching costs, they can turn their hiring forecasts around within the matter of months. Thus, even if the job outlook is great now, in 6 months it can easily change.

Living Expenses – If you have a lot of fixed expenses (mortgages, car loans, cell phone contracts) where it is hard to cut anything, you are at greater risk than someone who has mostly fixed expenses that can be cut instantly (like vacations, eating out, entertainment, etc.). The more we can and are willing to cut the less of an emergency fund we may need.

Insurance (Disability & Medical) – We know about the risks of becoming disabled and not being able to work as a reason we need an emergency fund. Just realize that even if you have a good long-term disability insurance polity, the policy will typically not cover 100% of your lost income (typically 60% to 80% of base income) because if they did there would be no incentive to go back to work. Also, needing an emergency fund to pay large medical expenses is also important. Thus, if you have a plan that has high deductibles and no cap on co-pays (e.g. 20% on all expenses even above $5,000), you may need to have a larger emergency fund in case of an accident or illness.

Also, everyone talks about 3 to 9 months of living expenses and thinks about their current expenses. However, what many people forget about is covering the cost of COBRA (health insurance) while unemployed. Many are unaware of the cost until their ex-employer offers to continue their medical insurance at 102% of the actual cost to the company (cost of insurance plus 2% for administration expenses). This is significant because many of us do not even consider the part of our health insurance that we already pay because it is taken automatically out of our paycheck. I have heard too many people say that they were not able to pay for health insurance, so they went without insurance and are now struggling with debt due to having a medical condition diagnosed in the meantime. If you are unsure how much health insurance will cost to cover your family, many employers are listing the full cost in their annual benefit election material or their annual summary of benefits. If it is not there, you can always ask your HR representative.

Family Situation (changes like having a baby) – Many people do not think ahead of some additional expenses that they may have when having a baby. We think about the cost of getting the car seat and baby furniture. However, many do not factor in if there are complications with the delivery. Not only could they have significant medical costs but also they could have a loss of income due to being confined to extended bed rest or needing to be in the hospital with their baby after a premature delivery or other complications. Many first time parents spend more time thinking about taking their last vacation BC (before children) than thinking about saving a little bit more just in case something happens. The unexpected costs are not only with children but also with elderly parents where adult children may need to take off for an extended period of time to take care of the parents or pay for a nursing home.

Single Income – Some feel that it is more risky being a dual income family than a single income family because if one spouse is laid off or become disabled in a single income home, the other spouse could go back to work. This may or may not be true depending on their spouse’s employment background. A spouse that stays at home to raise their children may be out of the workforce for a long period of time that it takes a while to get back into the workforce and when they do it is usually at an entry level especially after a prolong break (needing to prove their abilities all over again). Thus, it is true that there may be some reduction in risk because the other spouse can re-enter the workforce to replace the single earner’s salary. Yet, it is probably going to be at a fraction of pay and may take weeks and maybe months to happen. Thus, sometimes there is less of a risk being a dual income family because you may lose 50% of the total family income, yet it is better than 75% reduction of a single income family’s income, especially if the spouse working has a high paying job (such as a manager or physician) compared to the spouse who goes back to work to fill in the gap. In addition, dual income workers, tend to have higher flexible expenses such as eating out, dry cleaning, maid services, etc. that can be cut back on if one spouse now is temporarily at home and has more time to do these chores instead of hiring someone else to do it for them.

Medical History – If you are not as healthy as others or your family history shows some tendency for a medical condition (such as heart condition or cancer), you may want to be better prepared in case something happens.

Paid by Commission instead of Salary – If you are paid by commission, it is better to have a larger emergency fund in case there is a drop off in sales due to a cooling economy or a new product that enters the market place and takes away some of your business.

Self-employed – Some say that being self-employed is less risky than being employed by a company where you are at risk of being fired. However, in my mind being self-employed is riskier because you are still at risk of getting fired by your clients (instead of by a company). Yet, at a company, if you are fired, you can claim unemployment, something that is not the case if you are self-employed (can’t fire yourself). In addition, being self-employed, you ride the waves of clients coming and going (similar to being paid on a commission basis). In being employed by a company on a salary, the company insulates you to an extent by providing a fixed income. In addition, if you are better than the average employee, you are a somewhat insulated from being fired at the first signs of a business downturn (unlike being self-employed).

Thus, when you are considering how much to save in an emergency fund, look at all your risks, not just the chance of being unemployed. Those who are better prepared in an emergency have a better chance at getting out quicker because they can focus on the problem and not trying to scramble for cash to pay the bills.

Have a Happy Memorial Day

I just wanted to wish all my loyal readers a happy Memorial Day weekend. I will be spending mine with my in-laws celebrating my son’s second birthday.

And, as we are traveling, let’s pay attention to how many people are on the roads. The news here in Cleveland has been focused on how consumers are going to continue there driving habits even if gas prices go higher (even up to $4 and beyond). It has even been suggested that our thirst for gas will not be quenched until the regular non-SUV driver pays over $100 to fill his tank. Thus, the news is still expecting a booming holiday travel weekend.

I bring this up because we all hate how high the gas prices are going. Yet, we seem to be doing little to nothing about it this time around, other than demand Congress to investigate the oil companies. Congress battling the oil companies has been attempted several times in the past with no impact on the gas companies or the price of gas. Some will blame Bush and Cheney. Yet, to prove price fixing, it takes a lot of evidence which is not available (if price fixing is even going on). And, complaining about this issue has done nothing to lead Congress and oil companies to find a solution to the problem like agree on EPA regulations changes to get a few additional refineries built ASAP to make up for the lack of supply on the market or require an increase in the fuel efficiency standards for new cars.

The first time gas spiked over $3 a gallon at the time of Katrina was right before Labor Day weekend in 2005. At that time, I noticed how barren the drive from Cleveland to Chicago and back seemed to be for a holiday weekend. It appeared that because the price of gas increased so rapidly, many people choose to stay close to home to conserve gas and their money. Thus, the price of gas came down soon thereafter even with all the refinery issues. However, this time, it seems that because the price increased on a slower pace where consumers feel that nothing can be done (I have seen several drivers interviewed on the news saying what can they do, nothing but pay the prices). Thus, because demand is not changing, the price continues to increase. This is similar to a frog’s reaction to a boiling pot of water. If the frog is put into a pot of hot water, the frog will take immediate action to get out. If the frog is put into a pot of cool water which is then heated, the frog will stay in no matter how hot the water becomes (or high gas prices go).

Note, consumers have the most power to influence the price of gas. It is all in our choice on how much traveling we want to do and in what kind of cars we drive. We have tended to want bigger cars for the power and safety features that the car has. We made a push in early 2006 for smaller hybrid cars after the spike of gas prices from Katrina. Yet, as price of gas decreased from consumers rethinking their choices (and no hurricanes hitting the Gulf Coast last fall), we have became complacent and have gone back to our motto bigger is better. Well, it has caught up to us again. Until we choose to affect the long-term demand for gas we will continue to fight the high price of gas. So, as you travel this weekend, just notice how many people are on the roads. There is nothing wrong with wanting to travel; we just need to be aware how each of our choices is affecting the price of gas.

There are several things that we can each do to have an impact, including making sure our tires are properly inflated, driving the speed limit and buying more efficient cars. I find it interesting that people buy SUVs for their safety yet speed putting themselves and their precious passengers at higher risk of an accident.

Footnote – just as I am publishing this, ABC News came out with a survey that 3 out of 10 families are planning on not taking a summer driving vacation due to the price of gas. I do not know if these 3 families who changed their plans were the families who usually stay close to home anyways and thus were not really serious about a vacation anyways. Or, if these families were planning a trip like they have taken in the past and cancelled their plans, indicating a deviation from past practices. We will see how consumers respond. For my wife and I, we have not changed our driving habits as of yet. However, when we bought my wife’s car in Fall 2005, we choose a Subaru station wagon over a SUV due to the gas mileage.

Eating Right, Professional Athletes & Financial Prosperity

I was watching the end of a baseball game last week and after the game, they were interviewing a player about how he keeps in shape during the season. He was talking about how he needed to lay off the fried foods that he loved during the season because the foods adversely his energy level during the games. Professional athletes have been paying more attention to what they eat over the last 20 years because they know that if they are not in the peak physical shape, they will lose their paycheck. Gone are the days where “Refrigerator” Perry could eat anything he wanted and be a star football player for the Chicago Bears. Now, there is a lot more attention even during the off season on an athlete’s diet and exercise program because they see the relationship between their energy level and their pay check.

So what does this have to do with personal finance? We are not professional athletes, so is diet that important to our paycheck? Absolutely, we may not need to run 100 yards for a touchdown or 20 yards to make a diving catch for a baseball, yet how we perform during the day at work is as important to our paycheck as how an athlete performs on the field. However, many people do not think twice before eating a greasy hamburger with extra large fries that will hit the pit of their stomach during the afternoon making them want to take a nap.

We want to blame the long day at the office for not being able to concentrate after work on things that can improve our job outlook like reading the training materials our boss gave us 3 months ago instead of looking at what we eat. I know at my last job, my boss gave me a training binder for improving my consulting skills that he wanted me to read over and discuss with him. However, I never seemed to find the time or energy to read it because I was too tired at the end of the day to pick it up.

Over the last few months, I have also been noticing my energy levels. When I have ice cream or pie for dessert at lunch, I know that I will want to take a nap around 3 or 4 o’clock. And, because my son does not let me do that, I am dragging until 7 o’clock until the sugar fix has passed. When I do not exercise in the morning, I know that I am more irritable and lack energy to work on my writing projects than if I get in 2-3 workouts a week, even if it is just a walk around the block.

So it is important to look at when we are most productive during the day. For me it is in the morning after eating a health breakfast (cereal and juice). Yet, I tend to drag in the later afternoon especially after eating french fries. By seeing our patterns we can correlate to see how what we eats affects our productivity. Also, look we need to understand how if we increased your productivity either in the sluggish morning or afternoon, what it can give us. By being more productive, we may be able to avoid coming into work on the weekend (or stay late) and thus be away from our families less. Or by being more productive, we can get that next promotion. Or, we can work on an idea for a new business after we are done with work because we are more energized.

Thus, when we are looking at ways we can increase our financial abundance, we should look at what we eat and how we exercise. By watching what we eat not only can we cut back on our expenses that we spend on unhealthy snacks but also we can increase our performance at work which can have a direct link to the paycheck we receive (or do not receive if we were caught napping at our desk too many times).

Emergency Fund – Changing Your Behavior

We all know that we should have an emergency fund in place to help deal with unforeseen circumstances that happen in life. By being prepared ahead of time, we are better able to avoid taking on a large amount of unexpected debt. Yet, an emergency fund does more than prepare you for unforeseen circumstances; it also helps to change your behavior as well. When living paycheck-to-paycheck for an extended period of time, sometimes changing our behaviors/habits are just as important has having some money saved up in the bank. For example, when setting up an emergency fund, we tend to

Be Forward Thinking

In living paycheck to paycheck, we tend to be thinking just about how to make it through the end of each month. Our thinking is very short-term, specifically on what we can do to survive our financial struggle. It is a continual process of putting out fires where we have no energy to concentrate on the long-term that we need to get out of our situation.

With an emergency fund, our needs for the month are taken care of. Thus, we can start looking forward to the future. When our focus is on short-term survival, we stay stuck in the struggle because we can not see far enough out to avoid the financial pitfalls before they occur. When we look long-term, we can start avoiding issues before they become a fire that needs to be put out. We can see where the long-term issues are and start making adjustments accordingly. In management training, the discuss things we do each day that are graded on urgency and impact. We tend to spend a lot of our typical day on urgent things that are important (emergencies). However, to be effective, we need to plan ahead and spend more time in non-urgent activities that are important to avoid them becoming emergencies. Thus, the more we plan ahead the better off we are.

Be Understanding of Our Risks

One of the misconceptions of an emergency fund is that it should be a fixed number of months of living expenses (being 3 to 9 months depending on which financial advisor you are talking to). This general rule of thumb is meant to get people to put money away. Yet, to optimize your emergency fund, we need to better understand our risks. If we have higher risks (e.g., older, have medical plan with higher co-pays and deductibles, no disability insurance, etc.), we may want to have a significant emergency fund because we have a higher likelihood of needing it long-term. Thus, there is not a specific target that we should have because it is dependent on the risks we have.

By seeing what we need for an emergency based on our risks, we are better able to manage our behaviors day-to-day to reduce our overall risk. For example, if we work in a shrinking employment field (e.g., manufacturing), we may need to look out for other opportunities to keep our resume up to-date and find ways to expand our employment opportunities (through training and/or seeking out new job). Maybe we can to switch fields to become a car mechanic instead of building cars especially if we know the plant we work in may be shutting down in a few years.

There are risks with personal finance. However, when we are aware of our risks, we can better manage them by adapting our behaviors accordingly. Maybe we save more money when our job or our health is at risk. Maybe we increase our networking efforts, when we feel our job at risk. Whatever it is, the more we know about our risks and look forward to what may be a problem down the road, the better prepared we will be to deal with the situation.

Have Other Savings

I have seen situations where people have not been able to save money of any significance for most of the adult life (20 or more years). They have gotten into a pattern of spending everything that they have. For some, this may be tied to a belief in the phrase “easy come, easy go”. Their spending habits (anti-savings habits) may be due to anytime that they have had some money saved up, they have seen something happen (like a car breaking down, tax payment comes due, etc.) that has wiped out their savings. Thus, they subconsciously believe that they should spend the money before the next bill collector comes a calling. Their belief is that they should enjoy their money before someone else takes it first because someone else will take it if they do not spend it first.

A well funded emergency fund helps people get over the inertia of having savings. Just like an airplane spends more energy trying to take off the ground to overcome the initial inertia of gravity, so does it take some extra effort to save money at first when you are not use to saving. Yet, once you see that saving money is possible via an emergency fund, savings behavior can be carried forward to saving for retirement as well. If we only save up $500 to $2,500 (one to two months of living expenses), something is more likely to come up to wipe it out, proving our miss belief that we are unable to save. If we save up, an adequate emergency fund (6 to 9 months), then we can handle the little bumps in the road and retain our savings showing us that we can get ahead of the game with a little diligence and effort.

Be Empowered

Having an emergency fund is shifting from being a victim to being empowered. When there is no savings, it is hard to see all the choices that we have because we are just concentrating on paying the next bill. When something happens, we see very little that we can do about it because we are scrambling to find any way to pay the bills.

By having an emergency fund, we are in more control of what we can do when something unforeseen happens. We can see our choices because we have time to react to how we are going to pay the bill because we always have a fall back plan (using the emergency fund). The key thing is that when we feel that we have more control of a situation, we are able to see more opportunities. When we are able to see more opportunities, we can find alternative ways to pay for bills rather than being a victim to sales agents or payday loan firms.

For example, if our car all of a sudden breaks down and it can not be repaired, someone with no emergency fund will be more desperate and go out and take what ever offer is being provided. It is a recipe for being taken advantage of especially if the car dealership senses our desperation. Someone who had an adequate emergency may be in a similar position (a bit desperate for wheels). Yet, they have the option of renting a car for a week to look for a better deal especially if it means saving $1,000 or more off the price of the car by not being as desperate. Or, they are able to look around to find the perfect used car rather than taking the first car they see because they have no money to take off of work to look for a car that may save them $5,000 by shopping around.

We always think that money is the solution to all our financial problems. However, it is our behaviors that have more of a long-term impact on our financial situation. By moving forward to set up an emergency fund, we are not only putting aside money that we may need later but more importantly setting up better financial habits that will pay larger long-term dividends. Setting up an emergency fund is a step towards being empowered to save for retirement and a step towards being a better negotiator by having all our options at our disposal instead of making quick decisions because we are running around putting out fires.