Friday, November 16, 2012

In Which I'm Asked for Financial Advice

Sometimes we never really know the honest shape of someone's financial situation.

One of my BFF's called me up the other day in tears because she felt frustrated over not having enough money in her bank account to buy herself a $3 pumpkin spiced latte (or something or other - I don't drink coffee). I was shocked.

From all outside appearances, you would never know she and her husband are having financial problems: they drive a BMW, live in a $800k-ish house in a very nice section of a major city, and take an annual family Caribbean vacation. (But see The Millionaire Next Door for a description of the consumer preferences of truly rich folks: tastes running pretty much the exact opposite of my friend's.)

She perceives me as someone to go to for financial advice. Why ask me? Because she knows I'm financially independent now despite my parents never having made more than 6 figures, plus she knows I had some student loans, and I hardly ever buy new, etc. Admittedly, it comes somewhat naturally to me.

I should add that she's blessed with two very caring, very wealthy parents who have given her a lot of cash over the years - they technically own her house and instead of a mortgage, she's paying them back... they also paid for her college, grad school, her lavish 500-person wedding, two new cars for her, and are also funding her two kids' college educations. Now if only I had chosen my parents that well - actually that's my best financial advice right there: choose rich parents!

What can she do to have more money now?

My first piece of advice for my friend: Stop accepting money from your parents. Start managing your own income more effectively.

Yes, the parents are happy to give it, but when you boil it down, it is actually having the effect of making her unhappy. See, I have this little theory about certain ex-rich kids, and I channel a bit of the Warren Buffet in my thinking on this topic. Rich people, please stop giving large sums of money to your kids. It may gratify them in the near term, but their inability to manage that money effectively seems to hurt them in the long term. Pay for their college, then go see your estate lawyer about how to stop being their ATM.

I went to college with a handful of rich kids whose parents constantly gave, gave, gave material things to them. In one case, the guy got $150k cash from his folks at age 22. It was gone in less than a year, thanks in part to his poor marital choices, namely, his ex-wife who spent $18k of it on wedding photos (it literally pains me to type that). Since he's been living in the same city all this time, he could have used that $150k to purchase a 2 bed/2 bath condo in the 1990s, then maybe traded up once or twice pre-2007, and he could be living mortgage-free today in a very nice home. But no.

My second piece of advice for my friend: Fill out new W4's to adjust your tax withholding, so you can stop giving Uncle Sam an interest-free loan.

She and her husband are both employed by corporations. They receive W2's and a large tax refund every year. You never want to get a refund (the concept of the time value of money, anyone?). I told her to gather her most recent tax returns and check out the withholding calculator at Kiplinger's. Then they should each fill out a new IRS Form W4, and submit the forms to their employers. Voila! More money in each paycheck. (But will they have enough to pay their taxes next Spring? hmmm...)

My third piece of advice: Do a quarterly balance sheet. Get to know your own net worth. Understand your cash flow. Then you can set some specific goals.

One goal might be to have at least $1000 in the bank 6 months from now - or whatever amount would make her feel comfortable enough to be able to indulge in her favorite latte once a month.

My fourth piece of advice: Read up on money and investing.

There are a lot of great personal finance books out there, and your local library is the place to get them. Many years ago, I had the good fortune to read The Only Investment Guide You'll Ever Need by Andrew Tobias, and I learned all the basics from it - it made me open a Roth IRA as a teenager (awesome). Other people I respect have loved Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence by Vicki Robin and Joe Dominguez. Oh yes, and I understand there are some fantastic and free blogs out there, too.

Got anything else for my friend?


Haley said...

Set up auto-transfers to an account that's NOT linked to your everyday checking account at the same bank. That means is no one-click moving of money, and the balance of the savings account won't be in your face tempting you every time you review your purchases. Since the money never feels like it's in your hands, you live off of the rest of the paycheck and occasionally check to see how much you've put away for emergencies.

I second the W-4 advice - tax refunds are not a sign that you're doing it right!!

Anonymous said...

The Millionaire next door also talks about that generational transfer thing and how it causes problems.

Here's our consolidated debt advice: It doesn't have to be about debt-- it could be about personal finance in general.

In it we list a bunch of books that have different methods that work for different people to get at financial solvency. Higher income people tend to do with with David Bach or Elizabeth Warren. People with emotional spending problems do well with Dave Ramsey. And so on.

Jac. said...

My personal demon is my credit card, which is what would always throw my budget. My solution is an Iphone app called Mint which links to most major financial service providers. My app is linked into my credit card so it categorizes my spending (eg. groceries, health and dental, entertainment) and gives me little alerts if I am approaching my monthly budget in a particular area. My monthly credit card spending has cut in half and I am actually coming in way under budget now.

NoTrustFund said...

I find it's always helpful to track our expenses for a month or two (or longer) when I get the sense I don't know where all our money is going. It's really helpful to see all the numbers at the end of the month and you need all this info to start making any kind of meaningful changes.

Like Nicoleandmaggie, I really like the Elizabeth Warren. In one of her books she talks about the balanced money formula. 50% on must haves, 20% savings, and 30% on wants. This formula helped me get my finances in order a few years back.

hush said...

@Haley - I agree about setting up auto-transfers to separate accounts. We do that for IRA and 529 plan contributions.

@Jac - Great suggestion to use the Mint app!

@nicoleandmaggie - Thanks for the link to your excellent post. Super helpful!

@NoTrustFund - Welcome! I'll definitely have to check out Elizabeth Warren's book.