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 nails into a coffin

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While, I don’t believe money alone can buy happiness, it can certainly enable you to spend time doing things that bring happiness. Money provides options and increased flexibility,  and it is also an important predictor of longevity and quality of life. Given money’s essential role in our lives, it is both necessary and wise to spend time evaluating things that can lead us to a bad monetary position. This article does not attempt to provide a comprehensive list, but rather highlight a few common pitfalls to avoid and concepts to contemplate when reviewing your own financial plan.

Let’s talk about three money pitfalls that could be the nail in the coffin of your perfect plan. I think you will come to enjoy spotting and avoiding these pitfalls, because doing so will provide confidence and direction as you prepare for the future.

Avoid Three Nails in the Coffin of Your Plan

  1. Lack of Margin & Liquidity
  2. Not Having The Tough Conversations
  3. Focusing on the Urgent Instead of the Important

Nail # 1: Lack of Margin & Liquidity

Okay, I’ll start with a moment of honesty here. Margin isn’t natural for me. Ever since entering adulthood, I’ve wanted to max myself out in every way shape and form. I’ve wanted to work the hardest, be the best friend, have the most friends, volunteer at every charity, be involved with my church, invest every penny for retirement, and I wanted to do all of this in a week. I have had to learn the concept of margin both with life and with money, but now that I have an appreciation for it, it has been a complete game changer. No matter what stage of financial independence you are in, liquidity and margin are important for protecting your progress.

As I have worked through hundreds of financial plans over the years, two key observations are:

  1. That the tortoise often beats the hare, and
  2. That margin is important.

The fact of life is, you need margin (room) for so many things, and it is certainly no different with money. People who build margin into their finances don’t have to be frantic when things don’t go perfectly, and if there is one rule about living on earth, it is that things will not go perfectly.

Imagine that you have worked extremely hard to pay off $50,000 of debt over the course of two years. You have a celebration by using what would have been your debt payment for the 25th month (once your debt is gone) to take a vacation. You have only one month of expenses in your checking account because you have been so focused on your debt payoff. On the way home from your vacation you begin talking with your husband about your increase in discretionary cash flow. You decide together it would be good to start investing in your IRAs. This sounds great right?

Well, the lack of margin may get you in trouble… What happens if your air conditioning unit goes out in July? You would then have three options, take your money out of the IRA with tax plus a 10% penalty reducing your buying power and future savings, use a credit card, or hope the AC Company offered low interest financing. What started as a fantastic situation, now has you frantic and going backwards.

Having 3 to 6 months of expenses saved could prevent a problem like this. Some call it an emergency fund, and it is becoming more and more popular, but so many people get ahead of themselves trying to do too much too soon, and end up shooting themselves in the foot. They create an urgency to invest that isn’t there because they want to “get ahead”. It is great to be intentional about investing, but get first things first, and REMEMBER THE TORTOISE!

Another common margin/liquidity mistake is over withholding for your taxes. With the tax deadline just a month away, I completely understand the concept of preferring a refund over a payment in April, but imagine for a minute that you received a $6,000 refund this year. That is $500 a month you could be using to live, give, save, or pay down debt, but instead you are giving a temporary loan to the government. Not only that, you have been working super hard to budget, and make ends meet on your current salary, plus save a little to your 401k, and it is stressing you out. In this situation, when you get your refund of $6,000 and the relief has finally come, you are much more likely to spend the entire refund on a vacation to the Bahamas, a shopping spree, or on 30 trips to the spa because you need a break.

The solution to the stress problem is liquidity, and the solution helps us to focus on what we can control more effectively throughout the year so we can take a long weekend in the mountains instead of needing a $6,000 vacation to the Bahamas. I am not saying a $6,000 vacation is wrong, or unnecessary, but what I am saying is that stress has an effect on your ability to make good decisions, and you can only deny yourself for so long without going crazy. It can easily become a tailspin to increasingly poor financial decisions and additional stress.

If you revise your W-4 (or if an employee, ask your HR department) to withhold a more appropriate amount you may be able to eliminate the stress of the month to month budget and still avoid the dreaded task of coming up with money in April to pay Uncle Sam. Not only that, if you plan to have 3-6 months of an emergency fund, you won’t have to worry about coming up with a small amount of money to pay a tax bill in April.

4 Ideas for Staying Liquid and Creating Margin

  • Make sure you have an emergency fund before you invest. Failing to create margin can quickly cause you to have to sell investments prematurely, or force you into debt against your will.
  • This year if you get a large refund, or owe money in April take a few minutes to figure out why. The knowledge of what is affecting your taxes will help you plan for future years, giving you power over your money instead of letting it control you.
  • Use your refund to get ahead now. If you did get a big refund, and you don’t have an emergency fund, you were just provided a great start! Save the money, and adjust your withholdings to improve your monthly cash flow margin.
  • Run a tax projection for yourself on TurboTax or H&R Block. When your income changes, you have another child, you change jobs, or you move, your taxes are likely to change. If you are worried, make a calendar reminder for yourself in September or October to review the changes to your income, deductions and withholdings. A little work in September or October may save you from an unexpected bill in April.

Nail # 2: Not Having the Tough Conversations

Recently I was talking to a friend who was shocked at how open my family is about money. Really my family is open about almost everything, which can be a blessing and a curse. At times I would prefer to have been instructed to apply my “earmuffs”, to steal a brilliant concept from the great Vince Vaughn in Old School. What is it about money that enables or cripples one’s pride? When there is trouble we always sweep it under the rug, and when it’s great we invite our friends to come on vacations we know they can’t afford so they will know how good things are (maybe you aren’t that mean, but you understand my point). One of the easiest ways to ruin your perfect financial plan is a failure to communicate.

I think the hardest conversations happen with the ones that are closest to you. Your spouse and your parents have the potential to be the most difficult. I can get really frustrated talking about money with my wife, and have realized the importance of being on the same page. I think even financial advisors often need financial advisors to help them navigate their own family money nuances. Much of this can be attributed to the fact that each family member may want something different from money, and the pool of resources is limited, so each individual’s money goals are perceived to be ranked, and the minute you put yours over your wife’s there is a fight even though you both may want what is best for the family.

Sometimes the conversations have to last a long time, and experiencing conflict is never very enjoyable until common ground is accomplished. Money can push couples apart, or bring them together, but it takes work to be on the same page. Failing to do this work, can lead to one of the most costly financial decisions of all time: divorce.

Another such communication barrier, is talking to a parent about money. There is a challenging dynamic to talking about money with the ones who raised you. They really may not look to you for advice on anything but how to use their phone or iPad, but what would happen if they weren’t prepared financially? Would that burden fall on you? You can do all the planning in the world, make all the right decisions, have good investment returns, create adequate liquidity, and immediately you could still be belly up if someone close to you needed help, and didn’t tell you until it was too late to make changes.

I find the best way to approach these issues is to ask good questions. People are less threatened by questions if they are asked properly. Often we just assume that things are great with our parents, but many times they’re not. A good question can allow you to relate without forcing embarrassment, and provides an opportunity to both challenge assumptions and promote progress. For more on good questions check out the SENEXX blog.

4 Ways to Ask A Better Question

1. Don’t Force an Embracing Answer. “Mom/Dad are you prepared for retirement?”  This question needs work. The only appropriate answers here are yes or no, which puts people on defense immediately, but there are several things you could do to adapt this question. What if you related the question to your own experience?

2. Relate to the One You Question. “Mom/Dad, Whitney and I have been thinking about how to plan for our future, and were wondering what you were doing to prepare for retirement?” We have made significant progress here. This doesn’t force your parent(s) into an awkward situation at all, it provides them with the opportunity to reply with several answers, without having to say “No son, I am certainly not prepared for retirement”, and if he is prepared, you have even opened the door for them to provide advice as a parent . We could probably still improve this question slightly.

3. Provoke Thought. “Mom/Dad, as Whitney and I were looking over our finances, we were a little overwhelmed by what it takes to plan for retirement. I know you have been thinking about when you might retire, and was wondering if you had met with someone to evaluate your retirement readiness, and make a plan to ensure things are in order as your desired retirement date gets closer?”

You are provoking the thought that maybe they shouldn’t do this on their own even if you haven’t come right out to say it. There are a million responses your parent(s) could have to this question, but they would all give you a good indication of how things were going. You could also ask a follow up question.

4. Provide Opportunity for Progress. “Mom/Dad, do you think it would be a good idea to communicate your plan to the family once it is finalized so that we know how to best help you facilitate your wishes? We know you don’t want to depend on us at all, but we are very thankful for you and would want to be there for you if you were to need anything down the road.”

Having the tough conversations is one of the best ways to prevent driving a nail into the coffin of your investment plan.

Nail # 3: Focusing on the Urgent Instead of the Important

For most, life is a whirlwind of decisions, and it is hard to slow the merry-go-round to create sanity in your life. Borrowing from Stephen Covey’s The 7 Habits of Highly Effective People, we have to find ways to slow life down and “Put First Things First”.  For some reason, money tends to fall to the bottom of the priority list. Why? My theory is that it’s because people spend time on what’s urgent first. After fixing the urgent, people spend time doing what they like, rather than what is most important. It takes a serious element of intentionality to focus on what is important over what is pleasurable, and the human brain can only take so much of this self-denial unless it is trained to enjoy the things that are important.

But how do we learn to like the important things?

Let’s think for a second about the iPad. What does the iPad actually allow you to do? Well, mostly just the things you can already do on your computer (assuming you still own one), but with a much more intuitive interface, pretty pictures, and a focus on connectivity and convenience. I never imagined myself enjoying checking email or conducting a video conference – but the iPad made those tasks seem more fun. The iPad has taken routine tasks and morphed them into something more enjoyable.

With the iPad as a model – let’s look for ways to make working with money more enjoyable, so that is no longer – or at least less – of an act of self-denial to focus on what is important.

2 Tips For Making Money More Enjoyable

  • Use Mint, Personal Capital or a similar budget tool to make your budget easier. (All your transactions are imported, you can categorize them into budgets to evaluate your spending in a matter of minutes instead of having to piece through 100 credit card statements and enter thousands of numbers in a spreadsheet, you can look at your budget twice a month for 30 minutes and know exactly where you stand).
  • Reward yourself for monetary successes. I know this sounds counter intuitive because you will be spending money to do it, but setting rewards for reaching your own financial goals can provide the incentive you need to reach them. For example, if your goal is to save $10,000 this year, and you are saving $833.33 a month, you could use the 13th month’s savings to take a short trip for a long weekend. By doing this you are celebrating your own success, and creating an incentive to keep your priorities in the right place for 12 months.

Avoiding The Nails

In this world of uncertainty, there are so many ways to proactively avoid the nails. Take a little time today to think about how you could take a step in the direction of more margin, intentional conversations, and finding tools to help you accomplish more with less pain.

Daniel Graff is a Director of Financial Planning at Weatherstone Capital Management, a money management firm that utilizes active money management strategies that are designed to generate strong returns while reducing the level of risk that is found in most stock and bond market investments.