Being grateful around money and finances

Being that this is a financial planning blog and being that I happen to lean toward the overly practical (in case you hadn’t noticed), here are some ideas about being grateful around finances this season. 

The nature of money and wealth is that most people, no matter their net worth, think they are “middle class.”   I kid you not.  Those with $2 million in the bank and those with $50 in the bank all think they are middle class.  Our human nature somehow always finds someone “above” us with a greater net worth and someone “below” us.    You probably have more to be grateful for than you realize.

A fair number of people are in a “negative space” around money these days—they’ve made less than they wanted this year, they have more debt than they care to carry, they have less in reserves than what makes them comfortable, they’re worried about job security, and the list goes on.  Whatever space you’re living in—positive or negative—find gratitude.  The trick is, no matter how “well” you’re doing or how “poorly,” the trick is to be present—a simple task, but not easy.

The best ideas I’ve gotten are these:

1. Every time you write a check or pay a bill online, think, “I’m grateful I have the money to pay this bill.”  What happened in the moment before or the moment after is unimportant. In that moment, you had plenty of money to pay the bill.
    
2. Remember times in the past when money was tight and think, “I made it through that, I will make it through this.  I’m grateful for that experience to help inform this one.”
    
3. Every time you spend “frivolously,” be grateful for whatever you got and be grateful you could pay for it.  In other words, don’t beat yourself up for the frivolous purchase.
    
4. Every time you make a decision not to buy something because you “don’t have the money,” instead reframe your thinking to how you are supporting your financial well-being and be grateful for that decision.
    
5. Every time money comes your way—a paycheck, a gift, a reimbursement, a coupon you use—say a prayer of gratitude.
    
6. Every time you see money in your accounts, be grateful. 
    

When all else fails, start making lists of things you are grateful for that money truly can’t buy:  family, friends, their health and yours, joy, love, compassion, hope, this moment.  When that fails, there’s always oxygen.

But interest rates are so low!

Yes, I know.  But interest rates don’t matter. Stop chasing sexy interest rates while forsaking good financial decision-making.

I’ll also wager that the same familial financial advice-givers that told you to get the 30-year fixed-rate mortgage also told you not to spend money on depreciating assets, like a fancy car.  They say that it’s not financially prudent to throw a lot of money at something that you don’t have for very long and is ultimately disposable. (This particular piece of advice I agree with, by the way, but I will also concede that fancy cars are fun to drive and are a nice luxury item to purchase with disposable income.)

Please, please, please see the inconsistencies in these two positions. 

My clients who are in adjustable rate mortgages are saving a truckload of money right now, both in their mortgage balances, payments, and lack of refinancing fees.  Their interest rates are in the 3’s or lower.  For all of you who just read that sentence and are secretly and smugly thinking about how smart you are for getting a fixed-rate mortgage at 4.5% because interest rates are going up, I ask you these questions:  How do you know and when will it happen?  Those questions are important.

Look at this math:  The longer a rate is fixed, the higher the interest rate.  The longer the term of the mortgage, the more the bank makes.  A 30-year fixed-rate mortgage at 4.5% has an interest charge that is 82% of the original loan amount.  In the first five years, you pay 25% of the total interest charge.  In most cases, the loan balance isn’t cut in half until after year 20.  No kidding.  Here’s another fun math factoid of mine: A $500K loan, fixed at 3% has a payment of $2108.  In five years, the loan balance is $445K.  The same $500K loan, fixed at 6% has a payment of $2998.  In five years, the balance is $465K (yes, $20K higher after making $53K more in payments).

What does this mean?  If you’re going to take out a home loan for 10 years or less, the adjustable rate mortgage mostly likely puts you money ahead.  You’ll pay less overall and chip away at the principal faster such that in higher interest-rate years, you’ll be paying a higher interest rate but on a lower loan amount.  It still makes sense to take the adjustable, even in a low interest-rate environment. In fact, I would argue, especially so in a low interest-rate environment.

The 30-year fixed-rate loan is the Cadillac of mortgages—big, expensive, and probably disposed of in 10 years or less through sale or refinance.  If you won’t buy a fancy car, why are you buying a fancy mortgage?  I know, it is humbling to think about.  Your familial financial advice-givers mean well.  They do.  Sometimes they just don’t know what they don’t know.  Now you do.

The Law of Unintended Consequences in action?!  Sort of….

I have to admit that I didn’t see these kinds of opportunities coming.  Please understand that I have for many years been advising clients not to pay down their mortgages aggressively, to save their money, to keep multiple assets growing in different markets. I have been defining “financially secure” not as a home paid-off, but as having enough money in the bank to weather any financial storm or take advantage of any financial opportunity.

I would not have guessed that perhaps one of the greatest opportunities for that cash would have been to settle mortgage debt for pennies on the dollar, retain the asset, get a fixed rate loan, and continue on the original plan for keeping the property.  Or, for those who took great risk at the peak of the last economic boom and borrowed a truck load of money on credit cards to start a business, to have them be able to start again.

I’m not saying that any of these decisions to negotiate credit are what these investors planned or would have preferred or had an easy time making. Each of them got into their investments with the idea that it would pay off in the traditional way over many years of hard work and/or appreciation.  I’m not saying that their credit won’t be impaired.  What I’m saying is that because they kept cash on-hand, they now can take advantage of the financial “opportunity” that is sitting before them.  I won’t go so far as to call it the catbird seat, but it’s not such a horrible place to be.

Identify your opportunities

I’ve talked to many entrepreneurs and self-employed types who are quite optimistic again about their ability to pay down debt they’ve created or invest in delayed business plans.  Many of us are starting to get the breathing room of an economy that might be back on the upswing.  Entrepreneurs tend to share this trait:  We’re optimists.  That’s a gift that gets us going in the morning, that spurs our creativity and our willingness to take risk and do new things, that keeps us going in hard times.  Its shadow side, though, is that sometimes we see things rosier than they are.

If you have put plans into place to pay off debt or “right the ship” in your financial life, stay the course, even if it looks like you’ll be out of the woods financially in just six months, or a year, or whatever you’re telling yourself.  Stick to your plan.  If you do happen to make tons of money, that’s great. But if you don’t, you’re back where you started or worse.  Great lessons are coming out of this Great Recession—financial prudence being one of them.  Take care of your financial well-being first.  If you have a chance to renegotiate a payment plan, do it.  If you have a chance to reduce your mortgage balance through negotiation, do it.  There are great opportunities here to put yourself on a better financial path for many years to come.  Entrepreneurs know how to find opportunity.  Make sure you’re finding yours, and put your long-term financial well-being on the top of that list.

Suggestions for managing bills and cash-flow

I’m a big believer in keeping as much cash at your disposal as possible and paying government entities on-time, but not early.  No sense in giving someone free use of my money, especially if I might not owe as much as I’m predicting.  How to do this is always the challenge.

First of all, there’s nothing worse than surprises, so eliminate them.  Be in conversation with your accountant at least three times a year (March, June, and December, if not also September) and talk about your income, how much you’re paying in taxes (whether that’s per paycheck or quarterly payments), what your projections are for the year, and what big expenses you may have this year.  That way, if you can adjust your quarterly payments so that they’re more in line with where you will end up at year’s end, the last check is smaller to write.

Second of all, create an account that is devoted to saving up for those “big checks” that happen annually or semi-annually or actually fund them.   Set aside money for property taxes, go ahead and fund your Health Savings Accounts, and your retirement accounts.  Get that money working for you.

Finally, if you’re behind on payments, create a debt repayment schedule and stick to it.  Throw as much money at those debts as you can so you can get in “real time” on your payments.  Sometimes just having a plan will make you feel more in control and capable.

Thanks!