The Secret to Financial Freedom is Living below Your Means

Jane Young, CFP, EA

Jane Young, CFP, EA

Over the years I have observed that a comfortable retirement and financial security can best be achieved with reasonable lifestyle choices.  One of the biggest detriments toward reaching financial independence is spending beyond your means and spending on things you don’t really need.  You don’t necessarily need millions of dollars to retire comfortably but you need to follow a lifestyle that minimizes your living expenses while allowing you to indulge on things or experiences that are really important to you.  Good financial planning requires a balance between current expenses and saving for the future. 

Many Americans have a habit of systematically increasing expenses in lock step with salary increases.  Along with a big raise or promotion comes the inclination to buy a bigger house or a new car.  As we progress through our careers, earning a higher income, we continually take on more financial obligations becoming hand-cuffed to our jobs and our bills.  By increasing your lifestyle every time your income increases you can get caught up on an endless treadmill, trapped with a lot of debt for a house and cars that may be more than you really need.  I’m all for enjoying some of the benefits that come from all your hard work but it’s prudent to spend below your income.   Avoid the temptation to live an extravagant lifestyle and compete with your neighbors, colleagues and friends.  Instead, take pride in following a solid financial plan by saving for the future to achieve greater financial freedom.

As a rule of thumb, save or invest at least 10 – 20% of your income and maintain a buffer of 4 to 6 months of expenses to cover emergencies or a change in your ability to earn a living.  Try to keep your housing expenses below 28% of your gross income; this includes your mortgage payment, insurance and taxes.  Avoid systematically increasing your expenses.  Give yourself some breathing room in case you want or need to make a career change.  Save for the future and keep your options open.  As your income rises automatically put a larger portion into savings and retirement.

To keep expenses under control, examine what is important to you and set some priorities.  You have worked hard and you deserve some of the nice things in life but spend your money on things or experiences that genuinely make you happy.   If you want a really nice house you may decide to spend less on vehicles, vacations and clothing.  If you love taking extravagant vacations consider buying a smaller home and less expensive used vehicles.  Never buy on impulse – always look for ways to save money on the purchase of things you decide are important to you.  

Prioritize your spending to live below your means, save for the future and focus on what truly brings you joy.

Gradual Retirement Can Ease Stress and Cash Flow

Jane Young, CFP, EA

Jane Young, CFP, EA

As the average life expectancy increases retirement is starting to look very different.   We may be less likely to completely stop working on a fixed, predetermined date.  As the traditional retirement age of 65 approaches many are considering a more gradual transition into retirement.

One advantage of easing into retirement includes the ability to supplement your cash flow and reduce the amount needed to be withdrawn from your retirement savings.  If you continue working after 65 you may be able to earn enough to delay taking Social Security until 70.  This will provide additional financial security because your Social Security benefit increases 8% per year from your normal retirement age to age 70.  The normal Social Security retirement age is between 66 and 67.

Abruptly going into retirement can be very traumatic because careers provide us with a sense of purpose, a feeling of accomplishment and self-esteem.   Your social structure can also be closely tied to work.  By working part time before completely retiring, you can gradually transition into the new phase of your life.   As you approach retirement age the grind of working 40 to 50 hours per week can become very trying.   Working part time allows you to stay engaged with your career while taking some time to relax and pursue other interests.

According to a 2012 study by the Bureau of Labor Statistics, more people are working beyond age 65.  In 2012 about 18.5% of Americans over 65 were still working vs. only 10.8% in 1985.  A study reported by the Journal of Occupational Health and Psychology stated there are health benefits from working part time during retirement.  This may be attributed to less stress and a more balanced life while experiencing the mental stimulation gained from continued engagement at work.

Gradually transitioning into retirement may be more practical for someone who is self-employed.  However, the concept of phased retirement is a hot topic among human relations firms and departments.  Phased retirement programs usually involve working about 20 hours a week with some element of mentoring less experienced workers.  Formal phased retirement programs are still rare but they are gaining popularity.  A 2010 study by AARP and the Society for Human Resources Management found that about 20% of the organizations polled had a phased retirement program or were planning to start a one.  In fact, the federal government just launched a phased retirement program.

Before signing up for a phased retirement plan, take steps to fully understand the impact it may have on your benefits.  If you are under 65 there may be restrictions on your health insurance.   Additionally, some pension calculations are based on your final years of salary, working fewer hours at this time could negatively impact your benefit.  Also avoid situations where you are only paid for 20 hours a week but still work 30 or 40 hours to get your job done.

Strategically Withdraw Money for Retirement

Jane Young, CFP, EA

Jane Young, CFP, EA

After years of contributing money to 401k plans and Roth IRAs you are finally ready for retirement and face the dilemma of how to best withdraw your retirement savings.  Many retirees have several sources of income such as pensions, social security and real estate investments to help cover their retirement needs. Review your annual expenses and determine how much you need to pull from your nest egg for expenses that aren’t covered by other income sources.

One way to manage your retirement income needs is to create three buckets of money.  The first bucket is for money that will be needed in the next twelve months.  This money should be fully liquid in a checking, savings or money market account.  The second bucket is money that will be needed over the next five years.  At a minimum, hold money needed in the next five years in fixed income investments such as CDs and short term bond funds.  By investing this money in fixed income investments it is shielded from the fluctuations in the stock market; avoiding the agonizing possibility of having to sell stock mutual funds when the market is down.

Consider buying a rolling CD ladder where a CD covering one year of expenses will mature every year for the next four to five years.  After you spend your cash during the current year a new CD will mature to provide liquidity for the coming year.

The third bucket of money is your long term investment portfolio.  This should be a diversified portfolio made up of a combination stock mutual funds and fixed income investments.  Every year you will need to re-position investments from this bucket to your CD ladder or short term bond funds to cover five years of expenses.  Rebalance your long term portfolio on an annual basis to keep it well diversified.

In conjunction with positioning your asset allocation for short term needs, you need to decide from which account you should withdraw money.  Conventional wisdom tells us to draw down taxable accounts first to allow our retirement accounts to grow and compound tax deferred, for as long as possible.  Gains on money withdrawn from a taxable account are taxed at capital gains rates where withdrawals from a traditional retirement account are taxed at regular income tax rates and withdrawals from Roth IRAs are generally tax free.

Withdrawing all your money from taxable accounts first isn’t always the best solution.  You need to analyze your income tax situation and strategically manage your withdrawals to avoid unnecessarily going into a higher tax bracket.  Additionally, the taxation of Social Security is graduated based on income.  After starting Social Security, you may be able to minimize taxation of your benefit by taking withdrawals from a combination of taxable, traditional retirement and Roth accounts.  Do some tax and financial planning to strategically minimize taxes and maximize your retirement portfolio.

Financial Pitfalls to Avoid

Jane Young, CFP, EA

Jane Young, CFP, EA

Below are some common pitfalls that I have observed over the last seventeen years as a financial planner.  You may have a smoother journey toward reaching your financial goals if you can avoid some of the hazards along the way.

Living Beyond Your Means – Take the time to review your monthly expenses and compare them to your income.   Establish a budget where you spend less than you earn.  A good way to deal with unforeseen financial issues is to always save at least 10% of your income and avoid unnecessary debt.

No Emergency Fund – Everyone should maintain an emergency fund of at least three months of expenses.  This should be higher if you don’t have a lot of job security or your income fluctuates.  Without an emergency fund, large unexpected expenses can quickly throw you into a negative debt spiral.

Too Much Debt – Avoiding debt is a mindset.  There is good debt and bad debt – it may be wise to secure a low interest, tax deductible mortgage when purchasing a home.  This enables you to start building equity and reap the benefit of appreciation as the value of your home increases.  However, it is generally not advisable to finance personal items such as furniture and appliances.  If you can’t pay cash, you should probably wait and save up for the purchase.   Avoid credit cards if you can’t pay off the entire balance at the end of the month.  

Overspending on Vehicles – Financing the purchase of a new vehicle can negatively impact your monthly budget.  I have seen clients and friends take on car payments in excess of their home mortgage.  Vehicles are depreciating assets and they are not a good investment.  When possible you should buy a used vehicle and save your money to purchase your car with cash.  Unless you have a lot of disposable income, minimize your vehicle expenses and buy with functionality in mind.

Putting Kids Through College at the Expense of Retirement – I know you love your kids and you want to give them a good start in life but don’t sacrifice your retirement.  There are many ways to minimize college expenses and finance a college education.  You can’t take out a loan to finance your retirement.

Get Rich Schemes – I’ve heard them all – every few months someone will ask me about some new product or investment scheme that promises low risk, double digit returns.  There is no free lunch, if it sounds too good to be true, it is! 

Emotional Reaction to Movements in Market – Stocks are long term investments, you need to be willing and able to ride out the fluctuations in the market.   Over long periods of time, the stock market has trended upward; however, there will be periods with negative returns.  Avoid the natural tendency to react emotionally to market downturns.  Stay the course and follow your long term plan.

Save Money by Focusing on Problem Areas

office pictures may 2012 002Probably the most important step toward saving money is making the decision to focus on your spending habits.  We frequently over spend when we are in a hurry and don’t have time to plan.  If you are serious about saving money slow down, get organized and devote some time to making a plan.   You can save a tremendous amount of money if you think about what you really need, make a list, compare prices and avoid impulse purchases. 

Start by reviewing your spending habits over the last year.  Calculate what you have been spending in relation to your income.  You may discover a gap in what you thought you were spending and the amount of money left at the end of the month.  It may be helpful to keep a spending diary for about a month to see where all that money is going.  Review your spending over the past year for obvious problem areas.  It is common for many people over spend on eating out, clothing, electronic toys and tools.

You may be very good at setting a budget and tracking your expenses. However, if this approach is too time consuming for your busy lifestyle, consider what we call creative budgeting.  Focus on one or two problem areas and develop creative ways to reduce spending in these areas.  For example, if you have a tendency to over spend on eating out, think of some creative ways to reduce spending in this area.   Some creative ideas may include preparing breakfast and lunch at home the night before and taking it to work with you.  When you are preparing a meal, make extra to freeze or eat for lunch the next day.  If you enjoy going out with friends, consider eating something before you leave and then eat something small like a side salad or cup of soup when you meet your friends.  Instead of going to expensive restaurants, organize a potluck dinner or start a gourmet club and rotate going to one another’s home.   Restaurants generally provide very large portions.  Consider taking half of your meal home, to be eaten later, or share a meal with a friend.  You can also save money by meeting at someone’s home for appetizers, desert or drinks before or after dinner.  There are many ways to reduce money on eating out that may result in more enjoyment, better food and less calories.

 Continue working on fun and creative ways to reduce spending in your initial target area.  The key is to substitute what you are giving up with something equally or more satisfying and less expensive.  Once you feel comfortable with your level of spending in this area, identify another place where your spending could be reduced.  After going through this process a few times you should become more focused on where you are spending money and your spending should be better aligned with your goal

Attend a Financial Fireside Chat with Jane and Linda on December 2nd to discuss “Year End Financial Planning Tips and Money Saving Ideas for the Holidays”

 

You and a guest are invited to a Financial Fireside Chat with Jane and Linda at our office, from 7:30 – 9:00 am on Thursday, December 2nd to discuss “Year End Financial Planning Tips and Money Saving Ideas for the Holidays.”

A Financial Fireside chat is an informal discussion over coffee and donuts, where our clients and guests can learn about various financial topics in a casual non-threatening environment. This is free of charge and purely educational. There will be absolutely no sales of products or services during this session. We will provide plenty of time for informal discussion.

The Fireside Chat will be held at the Pinnacle Financial Concepts, Inc. offices at 7025 Tall Oak Drive, Suite 210. Please RSVP with Judy at 260-9800.

We are looking forward to seeing you on Thursday, December 2nd to learn about and discuss some great year end financial planning ideas.

Take Control of Your Life with a Personal Strategic Plan

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Jane M. Young, CFP,EA

At least once a year we need to step back from our daily routine to look at our lives from a broader perspective. We get so bogged down with daily responsibilities we lose track of where we are, and where we want to go. Take the time to do some personal strategic planning. Start by looking at what you are actually spending and saving. How much do you spend in a typical month, how much is necessary spending and how much is discretionary? How do your expenses compare to your income? How do your expenses and your savings line up with your goals?

Maybe you haven’t thought about your long range goals for awhile. I challenge you to make a list of 30–50 goals that you would like to accomplish over the next five years. I know… that’s a lot! Think of this as a brainstorming exercise. Don’t evaluate the importance of a goal, just write down what comes to mind. If you are having difficulty thinking of 30–50 goals, try thinking of goals in the following categories: friends and family, health, career, social and entertainment, money and finance, spiritual, education, and community. Once you have created your list, prioritize your goals by importance and timeframe. Develop an action plan for your high priority goals.

Now go back and review your expenses. Are your spending and saving habits congruent with your long term goals? Use the information you have pulled together to develop a spending and savings plan that supports your personal strategic plan. Once you have a clear picture of where you are and where you want to go, you can take control of your life.

“The future belongs to those who believe in the beauty of their dreams.”
– Eleanor Roosevelt

How to Save Money on European Travel

Jane M. Young, CFP, EA

I have decided to focus on a topic that is near to my heart and for which I have a great deal of first hand experience. Although in some cases you should do as I say and not as I do. I have a terrible weakness for European cafés and therefore spend too much money on meals and wine. We must choose our battles.

1.) Take the time to research air fares; it helps to be flexible on dates, times and locations. On my last trip we were able to save about $500 by trying a wide variety of routes and destinations – all within southern France. It is generally much cheaper to travel in and out of the same city and to book round trip tickets. If you need to travel one way within Europe there are several low cost, regional, airlines. If you don’t have too much luggage, consider a high speed train. I found train travel to be easy, fun, inexpensive and reliable. However, it can be difficult with a lot of luggage. It’s great for a day trip!

2.) Avoid travel during peak season, June through August. I usually travel in May or September to avoid the huge summer crowds and get better prices. Most hotels charge higher rates during the peak summer months. The service is also much better when there are fewer people to deal with. I also found that several historical sites don’t charge admission until June 1st.

3.) Save money by eating fewer meals in restaurants. Buy some bread, wine and cheese at the local grocery store and have a picnic in the park or at the beach. Reserve a hotel with a refrigerator to keep food fresh for breakfast and snacks. Most hotels offer breakfast but it can be very expensive, pick-up a baguette or a sandwich on the go and eat it as you stroll through the city. If you are limited for time, eating all your meals in a restaurant can use up a lot of valuable time.

4.) Save money when eating in restaurants by ordering the special of the day, sharing a meal or eating the seasonal local specialties. You can also save money by ordering the fixed price menu. If you are traveling to several towns in a region eat in the smaller less touristy villages. In addition to being less expensive, the food is better and the proprietors are more open. Seek out restaurants that are off the beaten path or ask a local for a restaurant recommendation. The prices will be lower, the food will be better and the ambiance will be nicer. You can eat with the Americans at home.

Save on wine by ordering a half liter or small pitcher of house wine. Most restaurants in France and Italy serve a half liter of house wine for about 5 euros; it’s the best deal going. The house wine is usually produced locally, many restaurants serve only regional wines. As they say, when in Rome….

5.) Take the time to research your lodging. You can save on lodging by staying in lesser know towns and staying in small locally owned Inns or Hotels. If you have the time, book an apartment for a week or two and take days trips from your base location. Another great way to save money is booking a business hotel over the weekend or a holiday; this can be especially helpful for airport locations.

There are several internet sites that can help you select good quality, inexpensive hotels such as Tripadvisor.com and Hotels.com. You can read reviews written by the people who have recently stayed there. A good guidebook on the region you are visiting can also be very helpful in selecting a hotel. Check out your selection with several sources to make sure the reviews are consistent.

6.) Think about what site-seeing you plan to do and what is really important to you. Admission into museums and various historical sites can be very expensive. When you visit cities with several sites that you want to see ask the tourist office if there is a museum pass or some kind of package deal that you can purchase. Be selective on what you pay to see – the inside of one mid-evil castle looks about the same as the next. You have limited time and there is so much beautiful scenery and architecture available to see absolutely free.