The Seventh Sin - Operating Sans Budget

Groan. Sigh. Boo. I know, how much more boring could a HMW be -- talking about budgeting on New Year's Eve?!! The good news is, 2008 is a chance to renew and have your greatest financial year ever! Plus, you can read this now and ignore it until tomorrow :)

Instead of making a resolution you know you won't keep, why not choose to embrace a spot on the mindful spending continuum? I'm not suggesting you fret over every penny, nor that you stop treating yourself -- (I'm still going to buy wine and go to restaurants), just that you think about what you're buying and why. And commit to tracking your spending. Different HMW will have different plans. The point is to have a plan, a budget, or at minimum know how your cash leaves your pocket. More good news: this should only take about 15 minutes!

Management books say "you can't manage what you don't measure", so start with you unique situation by plugging your numbers into the outline below:

Net take home pay = salary - 401k - (possible) flex spending account deduction
Net spendable = net take home - savings - rent - bills (cell, utilities, gym, insurance, car, etc.)

So "net spendable" is what I allow myself for travel (got to see the world), running shoes, wine, etc. All the things I technically don't "need" but wouldn't care to live without.

One of the best practices I found for embracing mindful spending was ditching my credit cards. Sure, I still use a credit card for major planned purchases from time to time, but not without thinking about it and ordering a side serving of guilt. It's just too easy to put it on the card, get into the mindset of paying it off "later" and then end up in debt. My debit card and me are now bff.

Separating yourself from plastic is easier than you think -- you're probably already practicing mindful consumption other life arenas quite well. Have you ever had a few too many calorie-laden fruity beach drinks while on vaca, and then come home to soup and salad for a week to balance it out? Or ramped up your workouts after a week of long work hours that meant skipping the gym?

You can do the same thing with your spending! After a big fancy dinner out, perhaps you join your girlfriends for coffee or a hike instead of more expensive dinners. Or organize a rotating potluck instead of routinely being the hostess. Perhaps you buy the shoes next month. You get the picture -- the point is to think before you spend.

Now go open something sparkling -- I'm a huge fan of Prosecco since it's festive, light and tends to be a bargin when compared to its Champagne sister :)

Sin #6 - Owing More Than Your Car's Value

Today's post-holiday post likely only applies to a sub-set of you, but it's an important topic for all HMW to understand. But before I get started, since it's a relatively mundane topic, I'm bringing back the wine pairing -- today's is Merlot.

"But isn't Merlot out of favor?" you ask. This is precisely why I'm recommending it! While everyone else is pawing at the shelves to pay a Pinot premium, you'll enjoy Merlot's sexy, silky, blackberry-infused flavors and perhaps even more wine quality for your money. (Besides, Miles is one of the worst type of wine geeks -- he didn't even know his prized Cheval Blanc was predominantly a Merlot blend.) So uncork, pour and dive into stop gap coverage!

Most of you own a car. Some bought outright (good for you!), some lease, and others are paying down a loan. For HMW in the latter two cases, you may need additional auto insurance coverage. Auto gap coverage is what covers the difference between your car's value and the amount you owe on the lease or loan.

Have another sip -- it's math and worst-case-scenario-thinking time. Let's say you owe $30,000 on your car. But it's only valued at $23,000. If you have the misfortune to be in a car accident that totals your vehicle (or some ne'er-do-well steals it), your insurance company will cut a check for the value of your car less the deductible -- not the value of your loan. So guess who would be liable for the $7,000 difference? Not exactly how you'd like to spend your money nor your SDH fund, especially when you've just had an accident!

Gap coverage pays the $7,000 difference -- a lot of peace of mind for a relatively small monthly payment or a one time fee. Most dealerships offer high prices on this coverage -- shocker, so I don't recommend that route. The best bet is to call your auto insurer (if you have a good relationship -- otherwise, this blog should cue you to shop around for that, too), and discuss the possibility with them. They'll give you an estimate of the value of your car, which you can double check on Bluebook, and a quote. If you like, you can comparison shop to make sure they're giving you a good deal by Googling "gap coverage" as there are several companies dedicated to this type of insurance only.

Do your future a favor in the event of a wreck -- unfortunately they're so common with all the idiots on cell phones sans hands-free (so '90's): make sure all of your car's payments are covered.

Sin #5: Copy Cat Investing & Linear Expectations

Some purchases are best made with the help of others. You dine at a new restaurant because you've heard great things. You check out a new boutique because your best friend got a fab pair of black pants there. Or you go to your friends for advice when you've gotten sick of your hair guy who continually keeps you waiting 30 minutes, then barks at you for being 6 minutes late one time. These are all perfectly sound methods for finding restaurants, stores and services. Just not for choosing your investments.

Picking individual stocks based on what other people are doing -- because of a "hot tip" or your buddy's "feelings" about the market will likely trap you in a cycle of irrational copycat investing. Even if your friend works for the company or in the finance industry! Why?

Turns out that even the fat cats aren't superbly skilled at predicting the market: a study of 47 gurus and their 3800 plus predictions yielded an average forecasting grade of 48%! Sure, some "passed" (none got over 70%), but less than 20 of them predicted the market better than I could by simply flipping a coin!

The HMW shouldn't be dejected by this information, nor should she necessarily rid herself of her financial advisor (more on how to choose one later). The important take-away here is that most people, even the majority of the experts, can't predict the market, much less a stock's direction with any real accuracy. And that's okay! Picking individual stocks is much less important than how your assets are allocated -- the percentage divvied up between stocks, bonds and other classes. And most crucial is having your money in the market for a long time.

So don't try to outsmart or beat the market with a copycat tip. Join it! And better yet, appreciate and embrace its volatility -- a non-linear ride is totally normal. This means you needn't worry about day-to-day ups and downs in the Dow or any other index. And definitely shouldn't sell or go to cash just because an investment is down! Remember Siegel's great words if you start feeling shaky: "It's time in the market, not timing the market" that matters most. A HMW invests as much as she can, allocates correctly, rebalances once a year, and let's her money do the compounding while she's out getting her nails done :)

Pecado Cuatro: Being Bar Santa

I'm not talking about putting on a fat suit and white beard and hitting the town, nor am I advocating those sexy/slutty costumes you see out during the holidays (although the chicas with the right bods do look pretty fab in the latter).

Sin #4 is acting like Santa while out with your friends -- i.e., being "that gal" buying the round(s). While it's all fine and dandy to treat, continually buying drinks for a group -- or the bar if you've had too much, is a real budget killer.

Thankfully, it's a pretty easy behavior to remedy. First, there are some questions to ask yourself to determine whether you're round-buying is a genuinely friendly and occasional offering or a budget-slashing bad HMW habit:

1. Did you plan to treat before you left the house?
2. Do you tend to hate to ask your friends for money, even if you were the one who spent the 15 minutes batting your eyelashes at the bartender to get served? Prefer saying "just buy the next round" and subsequently being disappointed because they aren't as generous as you? (You might actually need new friends if you answered yes to the latter. :(
3. When you look at your receipt the next morning, do you promise to stop being so "generous"?

If you've gotten this far and you're patting yourself on the back thinking, "Of course not!", then either wait for tomorrow's post or continue reading so that you may help a friend in need or prevent this behavior should the mood ever strike.

If on the other hand, you sheepishly nodded "yes" to your computer screen while posing the above questions, the second step to solving your "fat suit" -- i.e., over-speding problem, is a quick action plan. It's much easier to fall into Bar Santa mode when you start a tab. So the best place to nix this habit is quite ironically, at the ATM: withdraw what you're planning to spend plus your cab fare home beforehand. You'll be a lot less likely to buy a round if it means you only get one drink! Then, leave the plastic chez vous so you're not tempted after the wine starts thinking :)

Sin #3: "I'll Do it Tomorrow" Thinking in Your 401(k)

How many times have you lost weight on a diet that starts "tomorrow"? Gotten a raise by going to work "tomorrow"? THEN WHY IN THE WORLD WOULD YOU FUND YOUR 401(k) TOMORROW??!

Tomorrow doesn't work, my fair ladies. The day to start contributing to your 401(k) if you didn't yesterday is TODAY. Here's a quick list of reasons to call your benefits office, pronto:

1. You benefit from the incredible power of compounded returns over time. Your investments work just like you do! (This is akin to burning calories while you sleep, but much better :)

2. You lower your tax burden. 401(k) contributions are taken from your gross earnings so if you earn $100,000 and contribute the max ($15,500), you are taxed as though you earned $84,500.

3. There's often an employer match. Sometimes it's a 5% of your salary add-on, at other times another figure, and often you have to be with the employer for a period of time, but the point is, not contributing means walking away from free money! Would you pass up a several thousand dollar gift certificate? Then don't do it with the employer match at work -- we're talking thousands of dollars!

4. You're farther from trying to subsist on social security payments. Have you ever checked how much money you can expect? (A HMW likely has neither the time nor the care to do this, so I did it for you.) I went onto the SSA website, entered in a 30 year-old who makes $100k and plans to stop working in 2048 (ugh!), requested the payment in today's dollars (not inflation adjusted) and found out she'd receive a whopping $2900. Can you live on that each month? I think not -- that's my rent plus a few extras!

5. You'll likely barely miss the money. Twenty more lattes or another few pairs of Choos versus the sound sleep you'll get seeing that statement growing every quarter.

So do this: a lot of you will be getting raises in the coming weeks. Challenge yourself to at least putting that much more in your 401(k) next year. I promise it will be the gift that keeps on givin'! AND keep you one step farther from ended up like cousin Eddie :)

Sin Numero Deux: Picking Socially Responsible Funds Just Because They Sound "Good"

Have you ever bought something just because it looked or sounded good, only to be later disappointed by the purchase? Perhaps it was a fabulous bra that squeezed you in all the wrong places? A wine in a fancy bottle that tasted a little too much like cat pee (while "feline urine" is a common and sometimes desirable descriptor for New Zealand Sauv Blancs, there is definitely such thing as too much of a "good thing")? Or a book with a delicious looking cover that once opened on the plane made you turn to reading the emergency exit procedure card?

We all eventually become better and more efficient shoppers by taking the time to try on the bra on, ask the sommelier, and flip through the book before purchasing. But how many of you selected XYZ "Socially Responsible Investment Fund" in your 401(k) because it sounded like the "good" or "right thing to do"?!! I've seen a lot of these in my HMW friends' portfolios and am sorry to say that a number have downright irresponsible returns!

Let's take a look at the Investopedia definition of Socially Responsible Investing:
"An investment that is considered socially responsible because of the nature of the business the company conducts. Common themes for socially responsible investments include avoiding investment in companies that produce or sell addictive substances (like alcohol, gambling and tobacco) and seeking out companies engaged in environmental sustainability and alternative energy/clean technology efforts. "

Sounds pretty lukewarm, perhaps even positive to some of you (except for the part about avoiding alcohol companies -- wine has been around since Man learned to walk bipedally, and to me is therefore perfectly responsible and enjoyable for most people).

Here's the problem: a number of these SRI funds lag the indexes they're using as a benchmark and charge pretty steep fees for all the research necessary to weed out all of supposedly sketchy companies.

Investopedia cautions: "Just because an investment touts itself as socially responsible doesn't mean that it will provide investors with a good return." Over time, these high fees and lagging returns will ultimately compromise your ability to save and be a philanthropist. (The ultimate giver of late, Warren Buffet, waited until he had accumulated an extraordinary net worth before unveiling a gradual plan to donate over $35 billion so his contribution could first benefit from growth.)

LMF 4 HMW bottom line: Unless your 401(k)'s SRI fund choice is beating its benchmark net of fees, do something socially responsible outside of your portfolio. Give to charity, volunteer at a homeless shelter or the Boys & Girls Club. Or heck, buy a renewable energy gift card credit at Whole Foods -- I didn't say it actually had to be useful :)

************ EXTRA CREDIT
This is a super idea, courtesy of my fabulous fiance, who happens to be in the industry: "Why not track the performance difference between the SRI fund and what you actually invest in. Then contribute this amount of money to charity. You still come out ahead in the long run thanks to compounding, and you sleep more soundly at night knowing the world is a better place?" Not very LMF, but another way to contribute without sacrificing your ROI.

#1 of 7 HMW Sins: Operating Sans Renter's Insurance?!!

In honor of the famed "days before Christmas" count down, I'm offering a less festive, but arguably much more important ticker during my next seven posts: The Seven Deadly Sins of HMW. These will be shorter, as we're all quite busy donning little black dresses for holiday parties, but definitely worth your precious minutes.

Toady's sin, #1, is operating sans renter's insurance. Think you don't need it because you haven't accumulated a ton of belongings? Think again. Remember the last time you moved? How many boxes did you pack? Were you not tired after lugging them around all day? That weight right there proves my point!

Still not convinced? Try this simple exercise: Pick one room in your house and go through it, clockwise, listing every single item in it with a cost estimate. Add those figures up and multiply by the number of rooms in your house. Or better yet, do this exercise for your closet!!! Even one filled with Issac Mizrahi is bound to cross into the multiple thousands.

Still thinking it's not worth the bother because your a HMW and a few paychecks could cover you? Put it this way, for the price of a couple of venti soy lattes each month, you'll be protected. If you remain resistant because you feel you'd never do anything stupid, think again! When was the last time your roommate did something dumb? In college, I left a tea kettle on the stove until it had melted into it -- thank goodness my fabulous roomie came home and interrupted my hair drying to tell me about my close call before it ruined our party evening.

Or, later in life, when my "candle accident" turned into a $3500 renter's insurance claim?!! Had I not had renter's insurance, I would have been in a serious bind. Instead, I went right back to Bed, Bath and Beyond and in a matter of hours, had replaced my belongings. (My nerves took significantly longer, especially since I had to explain to the adjuster exactly what happened while on my "date".)

If you haven't already called your provider of choice or looked online for rates, do so now! I just might be the new neighbor next door.