Fail to Plan, Plan to Fail

Last night while discussing an annual off-site strategy meeting for my business, it occurred to me that individuals could benefit from doing something similar for their financial planning. Taking time out and outside of the box (i.e., moving to a different location to stimulate creativity) to brainstorm and formulate a strategic plan is a familiar tactic for successful businesses. So how does a LMF4HMW reader use an off-site strategy meeting to enhance her financial position? Below are some simple steps:

1. Take it seriously. Put an hour appointment on your calendar to plan the meeting. In this hour, you'll decide on topics for discussion (if it's a family plan -- i.e., you and a spouse or significant other) or further thought (if it's solo mission). These might include cash management/budgeting, debt service/payment plans, wealth building strategies, goal setting, evaluation of 2008's performance, etc. At this point you're merely deciding on the topics, not tackling them -- that's for the off-site.

2. Create an agenda. Decide where you'll go, perhaps to a night away or a more simple location such as a quiet restaurant. Plan your time given the topics above. How long will you tackle each topic? How will you record your thoughts? (I love using colored markers and big white sticky "Post it" style notes -- buy them at an office supply store.) I suggest that you divide the topics into separate sessions if possible to avoid burn-out. Gather any notes or files you'll need.

3. Mix in some fun. Maybe you're going to a spa hotel? If so, be sure to book an appointment -- businesses always blend some relaxation or fun into the equation which helps stimulate the creative thought process. If you're dining out for the day, perhaps drive to a different town and combine the trip with an invigorating hike.

4. During the meeting, employ the "Happy Tree". No fair using blaming or negativity. This off-site is a chance to brainstorm in the "happy tree" (think Will Ferrel and his new bride in the therapist's office during Old School). I'm not suggesting that you ignore any failed moves or mistakes from the past, only that you don't use blame or negative words during the discussion. If yours is a group, appoint a mediator and a note taker. If it's a solo mission, write out your "rules" beforehand and be sure to take notes.

5. Follow up! Don't let all of your hard work go to waste. One of the most important steps you can take post meeting is creating a plan for implementation. Again, pick an hour to write a formal plan for attack. During this time, check with your accountant to see if it's a deductible expense -- if you're discussing any side business you might have, it should be. So save those receipts!

6. Check in on your progress. Put a 30 minute quarterly review appointment on your calendar to assess your performance. Get yourself back on track if you fall of the wagon. Or reward yourself if you're progressing well.

This commitment to your financial strategy for 2009 means that you're much more likely to succeed. And if you achieve your goals beyond your expectations, the 2010 planning meeting can add a little more fun!

"He's Makin' a List... So Should You!"

Santa has been busy making his lists, and his better half is likely juggling quite the good wife act frantically planning dinner parties, cleaning the house, preparing the sleigh and (hopefully) keeping the "fun" in the dysfunctional Claus family Christmas.

As the season's cheeriest couple tackles the holidays, I urge LMF4HMW readers to start making a list of their own -- a 2009 goal commitment sheet.

I'm not calling your goals "resolutions" for a simple reason -- these financial commitments are not made to be broken. They are identified, written, agreed to and planned for. This list need not be long; it must only be specific. In fact, I urge you to keep it shorter and focused on a limited number of BHAGs (Big Hairy Audacious Goals or a corporate HR favorite). Below are four simple steps:

1. Identify your most pressing financial needs. Are you in debt? Saving adequately? Unaware of or avoiding your complete financial picture?

2. Write down your specific goal(s). For example, "pay down $8,000 in credit card debt", or "refinance car" or "revisit my investing strategy and lock on a better long-term plan".

3. Commit to the goal(s) with specific, measurable tactics and a timeline for achievement. This might be "pay $500 monthly to credit card to decrease debt by $6,000 and use $2,000 of bonus to cover final payment by December", or "research refinance options in January, contact preferred providers in February and lock on deal by end Q1".

4. Put the above appointments on your calendar to create accountability. Stick to them! For extra good measure, I recommend your keeping a signed copy near your home work area or as a file in the calendar reminder.

Following these four steps will ensure that you're on Santa's "nice" list come 2009 gifting season. And more importantly, doing so will provide a true and lasting gift to yourself.

Pausing to Give Many Thanks

There's a lot of less than cheery news out there. People are "worried", "fearful", having to "cut back", etc., etc. This isn't surprising since all it takes is the push of an "on" button to hear or watch news about the next development in our "global economic crisis". It's even more depressing for those pain and drama seekers hell bent on checking on their investments day after day.

So what does a LMF4HMW reader have to be thankful for on this day before a national ode to Thanks? A lot.

Clean Water. Many in this world do not have this basic source of life that we take for granted every day. Ditto food, shelter, and a warm bed. How rough must it be for those going to "bed" hungry on the cold streets? Freedom. The U.S. is an incredible country. It seems that many focus on tearing it apart and sadly, it can be easy to forget the sacrifices made by our service men and women. Education. It's an investment with a sky-high, linear return. Family, friends and loved ones. Without them, life would be so much less rich. Health. If you found out you had a terrible, life-threatening illness today, would a portfolio return, work project or anything that's currently frustrating you really matter? Time. Every minute of every day is precious. And we get to choose how to spend it given our gifts of freedom, education, health and those with whom we have meaningful relationships.

Spend some time during the next day thinking about how truly lucky you are to have the aforementioned gifts. Ponder how you might best give something of yourself. And how you can develop gratitude and peace given these benefits. Most of all, pledge to think more this way in your life throughout the year -- not just on this very special day of Thanks.

The Santa-Grinch Spectrum

SANTA

Pros- everyone loves ya; lots of cheer awarded to loved ones
Cons- habitual over spender; paying a lot more for cheer given financing costs

VS. GRINCH

Pros- never over spends; no credit card debt

Cons- black sheep of gathering; nothing in return

So which one are you during the holidays? Big bubbly Santa with tons of gifts and a big Visa hangover come January? Or Grinch with a dour predictions and a feeling of loss as the New Year rings in?

Most cheery Americans and HMW tend to be Santa-like. We grow up bombarded by holiday "spend, spend, spend" messages. The music starts playing in the stores in October and is downright ear numbing by December." This predisposition is actually great for our consumption- and service- based economy. But it's not so great for our wallet. Nor the waist as it turns out -- it's no coincidence that over-spend and over-eat/drink are partners in crime.

As a LMF4HMW, I'm certainly not advising that you become a Grinch. How would we put the "fun" in dysfunctional during all those holiday gatherings without some good cheer? I'm merely suggesting that you create a plan before the merriment officially begins and stick with it no matter how many eggnogtinis you down before embarrassing yourself in front of your mother-in-law. The following are a few ideas -- I'm sure you can come up with more:

1. Make a good old fashioned budget. Decide for whom you're buying and how much. Be sure to total it so that you can see how much you're actually spending -- $50 times 20 gifts seems a lot less brutal than $1000 line item on a bill. That way, when you're a couple of drinks in at the shopping mall (or online -- who has patience for those lines?!!) you're not side-tracked by the latest-greatest-three-times-what-you've-planned-to-spend-she-deserves-it(buy me!)-what-the-hell-it's-holiday-season gift.

2. Consider a gift exchange. Draw "secret" names between your key groups - maybe one or two circles of friends, the office pool and your family. Set a mutually agreed upon budget per person and enjoy the suspense. Most people will instinctively choose $50 or $100+, which is fine as you're shopping for one not ten. But consider the $15 and under limit because your compadres' creativity might surprise you. One of the best holiday gifts I ever received was a delicious book -- I gobbled it up within a day and could still fit into my skinny jeans!

3. Send holiday postcards - like to send holiday letters and photo cards? I do -- in fact, I'm so into it that I've already received mine for 2008! Save yourself some time and money by sending postcards. VistaPrint has some mighty fine deals and even customizable options.

4. Host potlucks partays - fan of the festive gatherings? Who isn't, really?!! Why not ask each invitee to bring a favorite hometown holiday dish and a bottle of cheer? You'll create quite the assortment and cut way down on your expenses. And you don't have to feel guilty because you're still the one doing all the clean up the next day!

5. Ignore #1-4 above and get seriously real. I recently heard an announcement on the radio about ReThink Christmas. I thought it was about creating donation or charitable type wish lists specifically and more generally promoting the idea of a return to a less consumerism-focused holiday. Turns out that it's that plus more: ReThink is a message started by a church, Advent Conspiracy, which seeks to have people "worship fully, spend less, give more and love all". While I don't tend to be a religious type, the message is quite valuable. Even if you're not Christian or religious. And the bottom line for them is promoting clean water through Living Water.

Even if you don't want to forgo gifting and spending, do spend some time giving the most valuable resources -- serve food, donate water, or build shelter. These are the gifts that truly do keep on giving. And the ROI is beyond calculation!

One of the Lucky Ones...

So consider yourself a very lucky LMF4HMW reader if you meet the following criteria: 1) you're contributing the maximum amount to your 401(k); and 2) you're contributing the maximum amount to your IRA or Roth IRA. You're well on your way to a bright financial future given that you're annually saving $20,500 if you're under 50 and $25,500 if you're older! In addition to the impressive annual savings rate, the powers of market returns and compounding will both boost your investment earnings significantly over time.

So what's a girl who's already a golden LMF4HMW member to do? Splurge on another pair of $200 jeans? Spring for that Fendi bag? Book a trip to Bali? Buy a new luxury car? You're owed some sort of reward, right?!!

The best answer and the commensurate size of your reward depends on your overall financial house. You've earned yourself a significant reward if you meet the following criteria: 1) all of your bills are paid on time, all the time; 2)you have six months of living expenses saved as a SDH* cushion; 3) and you're debt free (i.e., neither Visa nor Mastercard has you in a financial headlock). Trip, car, you name it! If you're quite not there or a ways from this point, the relative size of your treat should be smaller (spa day, anyone?).

For those winning the jackpot given a sparkling financial house, after you've rewarded yourself, it's time to open a taxable account and yes, contribute more. Perhaps it's your bonus or a percentage therefor, the money you save after (finally) finishing paying Social Security taxes each year (that period seems to come later and later), or the raise you get. In any event, you're going to deposit a sum of after tax money and purchase more financial assets.

Any financial planner worth her salt will advise that you look at your entire portfolio (retirement accounts, savings, etc.) to determine the best investments. If your 401(k) doesn't offer a fund with a certain class of stocks (i.e., small cap or mid-cap), or international or emerging market investments, a taxable account is the place to round our your overall portfolio. The easiest thing to do is invest in low cost index or exchange traded funds and plan to hold them for the long term.

Happy splurging and saving!

*SDH - a.k.a.,"sh*t does happen"; job loss, car trouble, family issues, pet surgery, unforeseen problems, etc.

IRA Breakdown

A lot of you probably have an IRA. You might even have two -- for example, a traditional and a Roth. You probably know that in general, IRAs, or individual retirement accounts, are investment vehicles geared for your golden years. But do you know the different types? And are you sure the one you have is best suited for your needs?

There are actually four different types of IRAS: traditional, Roth, SEP and SIMPLE. The traditional IRA allows the investor to contribute pre-tax income (this is good -- it lowers your taxable income) to an account that will grow over time. For example, Mary, who makes $80k, will first contribute $5k to her IRA, and then pay her taxes based on an income of $75k.

The current contribution limit is $5000 for those 49 years of age and younger, and $6000 for those 50 and over. In addition to the tax benefit, the contributions and their earnings grow tax-deferred over time. (This means you won't pay any capital gains nor dividend income tax.) When you do reach retirement and decide to start withdrawing, the money will be treated as income and you'll be taxed. The hope/plan is that you'll be in a lower tax bracket and therefore pay less taxes in those golden years than you would have while working. The other benefit is that of compounding -- there's more to grow over time since taxes aren't being removed from the pool of money.

A Roth IRA is similar in that if offers a haven for retirement earnings, but different in that
it may not be funded with pre-tax income. So if the same Mary from the previous example makes $55k after taxes, her ROTH contribution will come from the $55k. The benefit is that she'll receive the distributions free of tax since she already paid taxes on her earned income before contributing. However, there are income limits for a Roth. If Mary takes a better job and her adjusted gross income rises to $111k, the amount she can contribute is reduced. If her AGI rises to $116k, she is no longer eligible. (Don't get me started on this one -- there is of course no adjustment by the good ole USG for cost of living -- the "rich" woman in New York making $116k is not eligible, but her friend with a $90k salary in Topeka, KS, can contribute.)

SEPS and SIMPLE IRAs are established by employers, usually small businesses. A SEP is a simplified employee pension where the even a sole proprietor can contribute 25% of her net earnings (or $45,000 -- whichever is less). They feature low administrative costs and flexibility -- if a new business has uneven cash flow and doesn't contribute one year, that's okay (although not advised). The earnings grow tax deferred until you start making withdrawals, similar to the traditional IRA.

SIMPLE stands for savings incentive match plan for employees. The employer gets a tax deduction for contributions made and can either elect a flat rate or match a percentage of the employee's contribution. Like with SEPs, the earnings grow tax deferred.

A few final nuggets:
1. The IRS is always changing the contribution limits -- they like to keep everyone on her toes!

2. If you have a 401(k) plan, this doesn't mean you can't contribute to an IRA! In a perfect world, you'd max out both.

3. Malbec is a fabulous wine with which to learn about IRAs. I just tried (and bought a case of) Dona Paula, a delicious chocolaty, raspberry and full flavored wine perfect for crisp fall nights.

Want to loose money? Sell now and go to cash!

There could be no truer, simpler investment strategy than "Buy high; sell low". Yes, I did say that: "Buy high; sell low". If you're investing to get tax write-offs and lose money, that is!

Here's a great example: you read about some fabulous, gang-buster company and decide to buy some stock because hey, "everyone knows it's only gonna go up". A few weeks/months/years later, the performance isn't there, so you sell at a loss and either go to cash or buy some of the next hot item as "it couldn't happen again". You figure you'll make it up next time.

Sound stupid? Yeah, because it is! No one in her right mind would plan to operate in this fashion, but it's amazing how many folks out there do. They're the ones right now who are listening to negative media, walking around morose, "feeling the pain" of those people out there who've lost their etc., etc., etc. and taking on a sympathy depression to cope. These folks are fueling the negative sentiment. (I actually had someone Monday ask me if I'd heard about "the stock market crash"! She wanted to know if I "had had any stocks" and "if so, what was I going to do?" Let's just say that my response of "nothing" received a puzzled look.

I have a healthy emotional balance -- some highs, some lows with mostly positive, even keel, pretty bubbly days. (Health outlook, eating and physical activity deserve the credit.) I don't mind the variety -- especially when I'm downright hyper and loving the energy! But when it comes to investing and matters money, I become the steely-eyed, emotionless accountant type. I am content and rendered stronger by this chosen position. In fact, the worse the news gets, the more content I become. Because I know that the answer is, in fact, to stay the course. Meditate on the peace of doing nothing. Or just do nothing.

Why? Because I developed an investment strategy a few years back. And part of that strategy was sticking to the strategy. We don't know when the market will "recover" (I don't view it as a "recovery" because cycles are normal.), but we do have this set of foundational facts upon which to build a strong strategy:

1. For every rolling 20 year period since the Civil War, stocks have beaten bonds and cash. (Except for one time.) A diversified basket of stocks is still the best investment given a 20 year horizon.

2. Cycles are normal in markets. As the total number gets bigger, the perceived volatility grows. (Ever notice how the media doesn't like to talk about relative percentages, preferring instead to use bigger numbers of points? And how they whiz past the NASDAQ and S&P to report the Dow?) No one ever promised a smooth ride! The smoothest ride of hiding in cash is a downhill grade.

3. No one can really accurately predict the market volatility or cycles. If it were possible, there would be a lot more rich folks walking around. The problem with getting out is that you won't know when to get back in. When is the bottom, the bottom? When is the top the top? These questions are largely irrelevant because the measures are backward looking -- we'll only really know after the fact. (I didn't like philosophy.)

4. Reactive selling is stupid. Really stupid. And not to mention, it's expensive. No one likes to talk about transaction costs, but they'll eat right into a trading portfolio. Every time you buy or sell, there's a fee attached (not so with a 401k unless you're talking about your precious time). So buy and hold. Sell when you plan to sell, not when "the market!!!" tells you to.

5. It's amazing how much sentiment drives the market. Think about that. There are fundamental assets -- the expected growth in dividends backed by actual companies. And their values fluctuate constantly. Let the market and the media be schizophrenic.

6. Investing sooner is better than later. Compounding over time is the best asset you can "buy".

For the roller coaster ride ahead, I recommend a smooth, comforting Willamette Valley Pinot Noir. A to Z Wineworks makes a delicious one for about $20. No corkscrew necessary since it's bottled with a screw cap!