Where did the time go? And with a global “melt-up” in the markets in 2017, you may be feeling pretty good about things, financially speaking.
But no matter how you feel about how your 2017 saving and spending plans are ending up, I guarantee you can take some further actions to get your 2018 kicked off right.
They won’t be painful, and their impact could last for years. (And notice I’m not calling them “Resolutions”, just because I never liked that term for some reason!)
I’m Sort of a Mind Reader
First, let me get this out of the way quickly. There are millions of things I don’t do well, including fixing things, writing code, making small talk at parties, watching hockey… The list is practically endless.
But there are two things I do really well. Thank goodness the first one has paid the bills for the past 30 years or so. And while the second one has no real commercial value, it may very well help steer you to greater financial security in 2018.
First things first, I’m really good with numbers. And while I love the novelty of poring over a good baseball box score or adding up the grocery bill in my head faster than the clerk can scan it, I have gotten paid for creating corporate budgets, analyzing proposals, and thinking on my feet in meetings when someone is looking for a number, any number. So check that box.
But it’s the second skill that might get your attention.
I can predict your future.
At least your relatively near-term future, like the coming year or so.
So let me know if I got this right:
• You will not write that novel (but 2019 is looking pretty good, haha)
• You will wrestle with the constant influx of bills and wonder why things need to be so complicated
• You may or may not play the lottery, but either way you won’t win
• You will wonder whether your income will rise so that you can finally do those things, or buy that stuff
• You will save some, but it never seems there’s as much left at the end of the month as you’d like
• You will strive to discover lots of great new music but always come back to that one Green Day or Oasis album (maybe that’s just me)
• Mainly you will alternately love and hate, save and spend, floss or not, all the while missing out on some key financial opportunities to make this year better than the last.
So if you’re ok with the next year being pretty much like the last year, you can probably stop reading.
But there’s a chance for each of us to make some adjustments that will move the needle forward in the coming year. Here are my Top 10.
1. Review ALL recurring expenses and ask yourself which ones aren’t really needed
Make a list of all those things that either show up on your credit card every month as recurring charges, or that you get a bill for in the same amount every month. Start with everything, including those things you are sure you want to keep paying forever. Now look at the list both in aggregate and the individual items and ask yourself (a) do I really use this product or service to justify the cost, and (b) are any of these costs redundant to the point where ditching one or both in favor of a lower cost alternative makes most sense.
You know what these are, and they may seem minor until you realize how much they stack up. I’m talking about Netflix, Hulu, Spotify, Apple Music, premium media services like New York Times or Wall Street Journal, food delivery services like Hello Fresh or Blue Apron, those “surprise box” services that promise you lots of product samples, and of course the mother of all underused recurring services, the health club. (You may scoff at the last one because you go to the gym five times a week and take full advantage of pilates classes and the killer juice bar, but surveys show that 85% of you, and 100% of me, barely go at all).
2. Do a gut check on your level of investment risk tolerance
If you’re basking in some pretty good gains in the market in 2017, or the past six or seven years for that matter, so am I. But there’s a big difference between basking and taking a cold, rational assessment of where you stand and what you would do when the inevitable corrections come. It is downright healthy, and historically normal, for markets to dip 5%, 10%, even 20% on a fairly regular basis. Not to say the economy isn’t showing broad signs of health (it is), or that markets don’t have room to potentially keep rising (they could), but nobody knows what may trigger the next drop.
The fact that the major stock markets have not had a significant pullback in a couple of years (and no severe downturns since the Big One in 2008-2009) should not make you complacent. Quite the opposite, you should ask yourself right now how you would feel about a 20% plunge over, say, a three- to six-month period.
I’m not saying this is going to happen, but as an exercise in your personal risk profile, would you (a) stay the course because you still have a long (10+ years) investment horizon, (b) get kind of panicky and want to sell when things seem to be at their worst, or (c) feel that pit in your stomach seeing your investments accounts lose value, but have some cash held back to take advantage of price opportunities as they arise?
As you might imagine, scenario (a) will serve you well over your investing life, which can last 40 or 50 years, (b) can result in knee-jerk reactions that tend to get you out of good investments at their low point, and where (c) can represent a balanced approach to being somewhat tactical in taking advantage of stocks or ETFs that you may have had your eye on that can be had at 10% or 20% discounts from their highs. The main point is to always have some liquidity in reserve, take a long-term approach when the worry about short-term fluctuations seems to take hold, and pick your spots to opportunistically add to your positions as your stock allocation falls.
3. Look into all the ways people are practically handing you money that you aren’t taking advantage of
If your employer offers you a match to your 401(k) contributions, at least contribute up to the maximum match (for many a contribution of 6% of your salary gets you a 3% match, or some variation). Preferably you are contributing more than this minimum, but not even being at the minimum to receive the match is like throwing away money in Vegas on the Browns to win the Super Bowl (or a single game, for that matter).
If you have a Flexible Spending Account option (FSA), don’t make the mistake of thinking that you won’t have much use for it, or that it’s a hassle to access. Being able to spend money you would have spent anyway from money that is deducted from your taxes is REAL savings.
I know some people fear the aggravating “use it or lost it feature”, but get over it. You probably spend hundreds, or even thousands, on out of pocket expenses like doctor visit co-pays, medical deductibles, prescription co-pays, eye exams and glasses/ contacts, and certain over-the-counter medications. If you are in the 28% tax bracket and spend $1,000 on these things without blinking, that’s $280 back in your pocket.
Like the FSA, but potentially even more powerful long-term, is the Health Savings Account (HSA). If you choose a healthcare plan that is considered High Deductible and has an HSA feature, the amount you contribute is both tax-deductible and portable. This means you can either use the plan to pay for current expenses (again similar to the FSA) with pre-tax dollars, OR contribute more than you might actually need (the limits in 2018 are $3,450 for individuals and $6,900 for family plans, including any employer contribution) and let the account grow tax-free to fund future needs. This is YOUR money, not your employers, so the account goes with you even if you change jobs.
I’m introducing to Guided by Coffee for the first time Sophie The Dog. This is in response to the potentially huge backlash to my prior puppy picture from the “People Against Exploitation of Puppy Models” crowd (I know you’re out there somewhere). “Portraying only perfectly airbrushed, and downright snuggable, puppies in your posts destroys the self esteem of real puppies everywhere”, they say. So here you have it. Doesn’t get more real. Actually kind of sad. And no, she doesn’t exactly make up for it in the brains department. But we love her anyway.
4. Consider whether you are protected from catastrophe, and take immediate action if not
Think of all the things that you absolutely value the most in life. Your family, your house, your ability to earn an income, your ability to access credit. Before embarking on some complex investment plan, or day trading, or flipping houses, first you must make sure that the potential loss of these foundational things doesn’t wreck your future (sorry to sound so dire). Ensuring your pillars of protection includes:
If you have anyone who depends on you for your income, you must have adequate life insurance. Shop around. Low-cost term insurance is best. Lock in long-term rates (ideally for as much as 20 years) , especially if you benefit from being young and can avoid large increases in the future.
Never go a day without health insurance. I know our tax laws and healthcare options are changing as we speak, but do not even consider going for a period without insurance and paying the opt-out penalty. You may be the healthiest person in the world, but just one day with a broken leg, or serious infection, or car accident can put you in medical debt for years.
Choose home and car insurance that protects both the asset itself and your liability. Most policies include some portion of personal liability in addition to the cost of repairing or replacing what was damaged. But if you own additional property, or run a side business that involves customers in your home, consider an additional umbrella liability of up to $1 million or so. That sounds like a lot, but this coverage costs surprisingly little. People are strange (at least according to the Doors), and being exposed to this legal risk can be a huge setback.
5. Take a portion of your extra savings and earn something on it
I know, I know. If you want to keep a portion of your cash savings ultra-safe (as you certainly should), today’s paltry interest rates make if barely worth the effort to look for alternatives. But if you are making basically nothing in your standard checking account or local bank savings account, at least think of whether a portion can be allocated to something eking out a bit more. For example, some online bank accounts (which are still fully FDIC insured) might pay 1.5% on savings vs 0.1% you are currently getting. On $10,000 this is around $150 per year. Still doesn’t sound like much, but if the money is going to sit there anyway, this amount might fully pay for one of those recurring costs above that you were debating whether to keep.
If you are ok taking slightly more risk, there are short-term investments such as short-term bond and floating rate funds. These are not guaranteed funds in that your principle is in an actual investment, not a savings account, but the big well-known investment houses like Fidelity and Vanguard will pool your money in specific assets that could earn 2.5%-3% in today’s environment that carry very little risk that your principle will be eroded.
I have used Fidelity Floating Rate High Income Fund to supplement my savings for several years, and while I do notice fluctuations in value (yes, sometimes down), overall I have secured an average return of around 3% or more, which is way better than zero.
6. Do some things yourself that you might have normally paid someone else to do
I made a vow many years ago to never pay someone to mow my yard when I am perfectly capable of doing it myself (unlike my inability to actually fix things around the house, I do have the ability to push a motorized blade in a reasonably straight line).
Maybe you have been paying someone $25, $35, even $50 to mow yours, and that can be fine if it fits your overall budget and you don’t like taking up that extra time and sweating a lot. But you might stop and think of the $500 to $1,000 it costs you each summer and consider putting that savings somewhere else. The same goes for house cleaning, power washing your deck, or any other service where you spend for someone else’s efforts. You might get the side benefit of exercise and learning a new skill.
7. Plug into the sharing economy
One of the great innovations of technology, and society in general, over the past decade or so is the ability and willingness to share resources for fun and profit. The two most obvious are our houses and cars, with the transformative services AirBnb, HomeAway, Uber, and Lyft (and many others). Whether you are a provider or consumer, these can offer either lower-cost or revenue-generating options to optimize the use of properties and vehicles.
I assume most people by now have used a car-sharing app like Uber, and may have saved over the cost of a hotel (and had a great local experience) with AirBnb. I personally have rented out a vacation home for a small amount of time each summer that I know we won’t be using it, and this alone pays most of the operating costs for the whole season (however, be careful to also plan for a tax obligation if you rent for more than 14 days).
On the provider side, maybe becoming an Uber driver or renting out a room of your house isn’t in your immediate future, but it pays to keep an open mind to the possibilities.
8. Use any extra income as an opportunity to save more
Maybe you’re fortunate to get a holiday bonus this year. Or a performance bonus early in the new year, plus maybe even a raise (increases are set to average just over 3% again this year). What a perfect way to add to your savings plan rather than spending it away! In the case of a one-time bonus, first consider paying down (or paying off) any high-interest credit card balances. With a raise, absolutely think of increasing your 401(k) or other retirement contributions. Not only will you get the tax benefit, but it will be using money you never had before, so you won’t even have time to miss if you divert it into a retirement account.
9. Bundle your insurance, and consider higher deductibles
If you and your family have a house, a car, and maybe multiple cars, the start of a new year is a good chance to make a couple of calls regarding your insurance. Most major insurers give discounts for placing multiple policies with the same carrier. Even if you already do this, it often makes financial sense to make at least two other comparisons annually as a routine exercise. Rates change, and offerings may become more competitive, so you may be missing out on extra money by sitting on your current policies and just rolling over the prior years’ rates.
As for your deductible, I tend to view insurance as protection against major loss, not smaller damages. The savings on premiums can be substantial if, for example, you raise your house or car deductible from $500 to $1,000.
10. Give back, breathe, and don’t be too hard on yourself
While securing your savings goals and budgeting for all your necessary expenses, I feel you should also give a portion of your income back to someone or something that helps fill a need beyond your own. And I confess, I go through periods when other expenses seem to all be hitting at once to the point where I don’t do this. But if you have the means and someone dear to you or some local organization that does good work for the less fortunate reaches out, consider the satisfaction of helping out.
Plus, actual data shows that people generally feel BETTER donating money than spending it on themselves. Everything is a balance of course. I would not feel great giving away all my future security, just as I would not want to eat the WHOLE carton of ice cream when put in front of me (ok, bad example). But take a moment and find a mix that’s right for you.
Also, take time out to not beat yourself up about mistakes you may have made with your finances, or things you put off that could have helped you be further ahead. Regret is never a good thing, and all you really have is NOW anyway.
Give yourself a break, and simply get on with making improvements. Even one small action at a time counts.
I’d love to know how many of these ten you are looking to tackle in the coming year, or if there are others that will help you manage your money better.
Here’s to 2018.
(And don’t forget @guidedbycoffee on Instagram!)