Category: Personal Finance

Have you ever noticed that each year the cost of most goods and services increases? I have also noticed, especially with food and other household consumables, that portions seem to go down, packaging gets flimsier, and services are reduced as prices increase. This is the consumer outcome of annual inflation. Company expenses increase and shareholders expect more value from their investment. This drives up the need to corporations to grow their profit margins. In the United States, annual inflation averages around 1.5%. Between 2000-2020 inflation has been as low as -.4% and as high as 3.8% per year.

If you are fortunate enough to work for a company that provides annual pay increases, you may have noticed that these increases generally fall in-line with the respective years’ inflation rate. Some organizations refer to this as a Cost of Living Adjustment or (COLA). Companies that do not offer this benefit may experience more employee turnover, as employees seek opportunities elsewhere, for higher paying jobs to offset inflation.

While earning compound interest will help to rapidly increase your savings and investments, the same holds true for the reverse effect of compound inflation, requiring more money for the same goods and services each year. As you are planning your expense budget during your working years, and through your retirement years, it is important that you factor in for inflation. As a conservative estimate, most planners will factor in a 2% inflation rate. Since we can’t tell the future, this is a safe estimate but probably on the aggressive side. I recommend using between 1-1.5%. Keeping in mind that some of your future expenses may need to be adjusted through reduced spending to offset inflation factors.

Below I have included a table which shows the effect of inflation on annual expenses over a thirty year period. As you can see, the compounding nature of inflation can produce drastic changes in your annual spending needs over time.

If you start out expecting to spend $60,000 per year in your budget, with inflation compounding over thirty years, you can expect to need $92,398.83 to maintain the same lifestyle based on 1.5% inflation. Most of us will not have the same spending patterns during our retirement years, as our needs will change over time, so keep that in mind when you are planning for your future. Again, this table is merely to show the impact of compounding inflation on spending, and the importance of factoring for inflation.

Disclaimer: I am not a licensed financial planner or tax expert. Any views expressed are my own and based on what I have learned on my financial journey. Please do your own research before making important financial decisions.

You will never get out of debt by paying the minimum on your credit cards. If you have loans or debt with a higher than 7% APR, I recommend you focus on paying this down as quickly as possible. So, you might ask, where do I start?

1. Analyze your spending. I recommend Personal Capital, but any expense software will work.

2. Create three budgets; current spending (your current fixed and variable expenses), planned spending (adjusted spending targets), retirement spending (how much you need for retirement if this is your objective).

3. Reduce your expenses and focus on paying down debt. I used a snowball method to pay off some smaller balances and then use those dollars to attack higher interest balances. When you have reduced your debt, then apply this money to increase your savings and investments.

After analyzing your spending for a few months, you may be surprised at where your hard earned dollars are going. Here is the breakdown of my spending (from net income) for comparison, not including savings/investments. These are not exact figures, but will give you a general idea.

As you can see, the mortgage is our biggest expense, followed by groceries, and general expenses. The high cost of automobiles coupled with full coverage insurance and regular maintenance/repairs, is also a major drag on the budget.

From a mortgage perspective, we recently refinanced to take advantage of the lower rates. We didn’t reduce our payment, but we were able to get a shorter term mortgage for basically the same monthly cost. We plan to have the mortgage paid of by the time we retire, or very nearly after early retirement.

We have had several automobiles over the years, but have always bought used, and generally keep for 6-10 years. If you have a good driving record, it is a good idea to get new insurance quotes every few years. There are several online sites which will help you find the best rates for your situation. Due to COVID, our stops at the gas pump have been far between, so we have seen some savings there.

I made the decision a few years ago to “cut the cord”. Right after this became a popular way to save money, we shutoff our DirecTv service, which we had for years, and made the switch to Hulu Live. This cut our monthly television expenses in half. We have since added on a few premium channels, since we aren’t leaving the house much for other entertainment, such as going to the movie theatre.

Recently, I reviewed my current cell phone usage, and since we aren’t leaving the house much do to COVID, we made the decision to switch to a T-Mobile prepaid plan. We were able to keep our numbers and reduced our monthly cell phone costs by 7x. We just completed our first month with the new service, but no issues so far. We will continue to monitor our usage and adjust as needed.

Utilities can also be a drag on the budget. You can reduce your monthly utility bills by switching to low cost lighting. We use Hue smart bulbs, which have a higher upfront cost, but long life span and added benefit of integrating with our smart home. A few years ago, I also switched out the old HVAC thermostat for a modern version with scheduling capability. During the summer months, keep your outside HVAC unit clean and clear of weeds/debris. Make sure all windows and doors remain closed as much as possible during extreme temps and have a good seal. If you are able to adjust your hot water heater temperature, this will also help to reduce your energy bill.

While these small adjustments may not have a huge impact month to month, you will see significant savings over time. For reducing debt and increasing your savings/investments, every dollar counts!

Disclaimer: I am not a licensed financial planner or tax expert. Any views expressed are my own and based on what I have learned on my financial journey. Please do your own research before making important financial decisions.

If you leave your company, what do you do with your 401k?

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You have a few options for your 401k if you are separated from your company. There are advantages and disadvantages for each option. We will discuss the pro’s and con’s below.

1. You can leave the account in place to grow.

2. You can rollover your old 401k to a new 401k.

3. You can rollover your old 401k to an IRA.

I have had a few instances of leaving the old 401k in place as I was happy with the tools, investment options and rate of return I was experiencing. I was also a little lazy about transferring the money. Some 401k providers make it difficult to move the money as you get bogged down with paperwork. Some also require your spouses signature and Notary stamp before you can start the transfer. If you do leave your old 401k in place, keep an eye on the fees. Fees can increase over time and can often be much higher to begin with. In most cases you will also no longer be able to contribute to your old 401k.

A rollover of your old 401k to new 401k can have a few benefits. You are able to manage your money easier using a single platform, and you get the added psychological benefit of looking at a bigger number each month. Again, beware of fee’s as your new provider may have higher fees than the old 401k provider. Also, make sure you are happy with your investment choices. Some 401k providers only provide a limited number of investment options to choose from. Choose wisely.

The most popular option is to rollover your 401k to an IRA. Since your 401k is made up of pre-tax dollars, you will want to open a traditional IRA to transfer your money into. These dollars will continue to grow in a tax deferred manner, just as your 401k has grown. As long as your funds are deposited within 60 days to the IRA, you will not pay any taxes or penalties at the time of transfer. Most all brokerage firms offer a traditional IRA. These accounts also offer the most flexibility in terms of investment options and can provide very low fees. In some cases, no fees at all.

For rollovers, there are two types to be aware of, the direct and indirect rollover. If your account providers have a direct rollover option, this is usually the quickest and safest path. The current provider will take care of transferring the funds to the new provider either through a money transfer or check. An indirect transfer requires that the current provider sends the dollars to you, usually via a mailed check made out to the new provider. You are then required to send the check to your new provider. There is inherent risk with this method and generally takes longer to get your dollars reinvested. Not to mention the double transfer of your funds which can get lost in transit. This has happened to me and is a nerve wrecking experience to say the least. You are only allowed to do 1 indirect rollovers per 12 month period. You can do as many direct rollovers as you want in a year.

I am not a certified financial planner or tax adviser. I am happy to share my learnings and experiences. Please do your own research before making financial decisions.

At the time of this writing, we are still dealing with a global Covid pandemic. Each day new information comes out about record breaking jobless claims and extraordinary unemployment numbers. People in the millions are claiming unemployment, and some for the first time, as companies of all sizes struggle through this downturn in the economy. I have been fortunate enough to maintain my job, so far, but we never know what tomorrow might hold.

My youngest daughter owns her own photography business, which has been hit hard by this economy and the social distancing edicts set forth by our government, in an attempt to flatten the curve and save countless lives. She does not pay into the unemployment coffers and is therefore not eligible to receive this benefit, like many other Americans.

During this time it is more important than ever to have a budget. Actually, you may want to create three budgets.

1. What’s my actual spending?

2. What’s my target spending?

3. What’s my absolute necessity spending?

I recommend using a spending tracking application such as Personal Capital to help you evaluate your monthly spending patterns. This will be important in creating your budget. Each dollar should fit into a spending category. As you track your spending on a monthly basis, you can begin to get control of your finances. It is important to know where your dollars are going, in order to understand which areas of spending give you the greatest opportunity to tighten your belt.

This reduced spending should be used to pay down high interest debt, increase your savings, or grow your investments. Another important aspect of the budget is to understand your spending patterns not only now, but also in retirement. This is especially important for early retirees. In order to calculate your financial Independence goals and spending needs in your retirement years, you will need to track your spending.

I have provided a link to a budget template spreadsheet in the tools section of this blog. Please feel free to use it to help categorize your spending. It is not an all encompassing budget, but should be easy enough to help you get started, in the event that you have never created a budget before.

We are living in truly remarkable times the likes that none of us have ever seen. The year 2020 will definitely be one for the history books. Towns and cities around the world are experiencing mandatory stay at home orders, businesses have been forced to close and everyone is practicing social distancing to avoid spreading Covid-19. The US Stock Market has experienced some of it’s sharpest drops in modern history. The US government has released trillions of dollars in stimulus and financial aid for families and businesses. Millions of people have lost their jobs and have been forced to file for unemployment benefits.

In light of all this darkness there have been glimmers of positive. On a daily basis you can find stories of people helping people, appreciation for our medical practitioners and first responders, some of the lowest levels of smog ever reported in our major cities, and a resurgence of wildlife.

While our world may never be exactly the same, there is a definite sense that this too shall pass. I think we all realize the strength of the human spirit and how time and again, we have been knocked down only to get back up stronger. There is no doubt that our economy will do the same. Throughout history we have seen it drop and recover stronger.

It is during these times of hardship, the true importance of having a diversified financial plan is important. Always have a safety net to rely on. Keep six months of bills in a high-interest easily-accessible savings account. Make sure you are credit worthy. While I do not condone running up your credit cards, during these times, you may need some credit to get to your next paycheck. If you have fallen on hard times, contact your creditors and mortgage company. Many organizations understand that these are trying times and will work with you. The most important financial advise I can give is to stay the course. If you are financially savvy, and willing to take the risk, you can pull out of the market during a downturn, but you will be trying to time the market to get back in. The easiest path is to ride out the storm, not stress, and realize that it has always recovered.

Above all, take care of yourself mentally and physically, so you can be there for your friends and family. It’s easy to drown in all the bad news. If you are feeling overwhelmed, find a healthy distraction. Play games, read, watch a comedy, call a friend. If you are in the fortunate position to be able to work from home, realize how lucky you are, and make each day count. If you are able to give back, there is no greater time, and plenty of need.