As I sat down to write this article, the stock markets around the world were plunging then rising then plunging again. Analysts in North America were not sure if the market was just reacting to a slowing of the American economy or "doing a natural correction." And it seems like the Autumn season is a prime time for market drops ever since that Black Friday in October 1929. The result of all this activity is a sense of uneasiness, even panic, among many of the population, particularly those who look toward the markets for their retirement incomes, both current and long-term.
As I have often said, "When times are tough, go back to the basics." For me, the basics of financial peace of mind are best summarized in David Chilton's book, The Wealthy Barber and Joe Dominguez and Vicki Robin's book Your Money or Your Life.
Chilton bases much of his message on the magic of compound interest; however I think that his philosophy can be best summed up by the phrase "Think long-term, save now." Chilton believes that sound financial planning is relatively simple, based not on high-priced financial advisors or rigid budgets, but on common sense and regular savings. If you are in a plan for the long term, he advises: "Don't sweat the ups and downs of the market...."
A few of Chilton's maxims on financial planning tell us:
"Pay yourself first."
"Pay off debt as quickly as possible."
Invest 10% of all you make for long-term growth."
The ramifications of following these three can be easily calculated using the math we were taught in high school. For example, saving $200 per month at an interest rate of 8% after thirty years gives a total of nearly $300,000. With the financial calculators and software readily available, even those who have forgotten the math can sit down one evening and play the what-if game. If you would like to spend an interesting evening, run through some scenarios of what your assets could be if you were paying yourself first and investing for the long-term.
Paying off debt quickly and remaining as debt-free as possible frees your money for your own use. If you buy on credit, the true price of an item rises. So, before you borrow, calculate a reasonable total interest cost and then add that to the product price. Is it still worth it?
If you have a small savings at hand (not your long-term investments), I suggest borrowing from it for any purchases you must make on credit. Then pay yourself back and include an interest payment equal to that the credit cards charge. And remember Chilton's Number 1 maxim: "Pay yourself first" each month.
While Chilton gives sound information on what your money can do for you, I would combine his wisdom with that of Dominguez and Robin as expressed in Your Money or Your Life. Although the two books have many areas of overlap, particularly on budgets (like diets, they don't work) and preparing personal, or household, financial statements, each offers a unique view on controlling your financial present and future.
In Your Money or Your Life, Dominguez and Robin ask the reader to take a close look at their personal relationship with money. They take a wide perspective, asking us to consider how we feel about: earning it, spending it, investing it, owing it, protecting it and worrying about it. They ask us to increase our financial intelligence by stepping back from our assumptions and emotions about money and observing them objectively. "Until you think independently, you can't be independent." In addition they advise us to develop our financial integrity, which is achieved by learning the true impact -- on ourselves, on our family, and on our planet-- of our earning and spending.
As you are determining your emotional relationship with money, Dominguez and Robin show you how to determine your true financial status. I refer you to the book for details, but in summary, the program goes something like this. (I hope Vicki and Joe's spirit forgive my simplified treatment of their marvelous program. If my words grab your attention, get the book and read the words of the true masters. They have much more wisdom to convey than I have extracted here.)
1) Determine what you have earned to date in you lifetime.
2) Next determine what you have to show for it. This includes all your tangible assets -- house, cars, furniture, clothes, bank accounts, retirement and mutual funds, etc.
3) List your current liabilities, all debts from loans to outstanding bills.
4) Now determine your present net worth by subtracting your liabilities from your assets. These calculations give you an idea on where you currently stand financially. If you are seriously in debt, you may have a negative net financial worth.
5) The next step is to determine your real hourly wage. This is done by adding all those costs over a year associated with holding your job: commuting, cost of work "uniform", outside meals and snacks, day-care, expenses incurred by activities or products used to de-stress yourself after work, job-related illness expenses, etc. Subtract this total from your annual income, after taxes, from all work-related sources (full-time or part-time jobs including moonlighting, but not money earned from investments.) Now divide the remainder by the number of hours worked per year (e.g., number of hours per week times number of weeks worked). This gives your real hourly wage. Not so impressive now is it?
With this figure in mind, you may want to rethink your current work situation. Could you work closer to home and eliminate commuting costs (and time)? Is the second family income really worth someone else raising your children in daycare? Is your job satisfaction level reasonable for your pay?
This calculation also gives you a means of determining how much money you are trading your life energy for. Dominguez and Robin see this as an important tool in determining your relationship with your earnings and spending because your life energy is your life. For a quick example, if my calculated real wage is $10 per hour, and I buy a new widget that cost $40, by dividing the cost by my real wage indicates I gave 4 hours of my life in exchange for it. Was the purchase worth four hours of my life? Maybe, maybe not, this is a personal judgement, but I now have a personal yardstick by which to judge the the cost of my expenditures. (Others to use would relate to the social and environmental costs of spending.)
6) The next step asks you to keep detailed records of all expenditures -- every cent. The purpose is two-fold. First, it gives you a factual handle on where your earnings went. Many find previously unknown information about their spending habits. For example, spending $4 per workday on coffee and donuts becomes $1000 per year! Second, the record gives you the ability to see how much life energy you give to each expenditure or expenditure category (e.g., the sum of all our clothing purchases).
7) Dominguez and Robin recommend that you plot on a graph your monthly income total and monthly expense total. This not only gives you a dramatic record of your current financial state — hopefully income is greater than expenses, if not you have work to do — but also show the trend of your financial status. If initially expenses exceed income and you work at reducing expenses, the gap should decrease and eventually the two curves should cross — a time for celebration!
Financial stability can be achieved by having a stash of interest-earning money saved for that proverbial rainy day. And with proper attention, that stash can be accumulating interest monthly to a level that exceeds your regular expenses. At that point, you are financially independent of your job's income (which leaves you the opportunity to re-consider your life situation). By reducing expenses, increasing real income, or a combination of both, you can increase the amount of money you save for the long-term. And if you concentrate on reducing expenses, you will move much more quickly toward the state of financial independence.
The bottom line, and we are talking finances here, is that regaining control over our financial picture does not require high-price assistance and fancy-named, costly programs. We live in, and will always live in, difficult economic times; it is only the degree of difficulty that changes. But with a little thought and forward planning, we can achieve financial stability.