Big Success Starts with Small Habits

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by Allyson Hauss

In the past few months, both of my daughters have come to me with financial questions. You guessed it – they have an end goal in mind (more money) and are eager to find out the smartest and easiest way to attain it.

The youngest is 19 and a sophomore in college. Her goal is to have more money left over at the end of her sophomore year than she had at the end of her freshman year. Our agreement is that the money she earns in her part-time job during the school year goes toward her tuition, and income from her summer job can be used for extra expenses at college and savings. She found out during her freshman year how fast that money can be spent! Therefore, she wanted a plan for this year.

My first-born is 28 and a new mommy. She and myson-in-law are already planning for the education of their11-month-old boy. Her goal is to accumulate a college fund without sacrificing living now while giving to others in need.

For each of these goals and for so many more, my mantra is the same: whatever amount you can, big or small, start sooner rather than later and invest regularly.

Every person makes decisions every day that affect every part of their future. What are your needs? Whom do you want to bless? What can you do today that will bring about the tomorrow you envision? Through the power of time, discipline, and compounding interest, you can do it! No, you will not be able to do it overnight or without forgoing some wants; however, patience is not only a virtue – it pays big dividends!

So, you may ask where do I start? The best place to start is right where you are. What is your need/goal? What is your income, what are your expenses, and what is your surplus/deficit? Begin with your current budget and work toward spending less than you make. How much do you need? Maybe you can only start with $25 a month. Then save $25 a month! There are diversified investments that will allow you to begin with a small amount. No matter what amount you start with, be consistent and when you get a raise or pay off a debt, contribute more.

At $25 per month, starting at age 25 and earning an interest rate of 8% compounded monthly, in 20 years you will have $14,725; at $100 per month, $58,902; and at $750 per month, $441,765. Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

 

The choice is up to you. You can pay someone else the interest through high interest credit cards and consumer loans; OR you can choose to pay off credit cards, build an emergency fund, save for purchases, and pay yourself the interest while investing toward your goals.

 

Your goal may be paying off student loans, going back to college to pursue a new profession, building an emergency fund, starting your own business, taking that dream vacation, or saving for retirement. If you are saving for retirement or a health plan, you may be able to have it deducted from your paycheck and - BAM - enjoy tax-deferred savings in addition to compound interest! If your employer matches a portion of contributions, then time and compounding works even more in your favor with the bonus of free money! And anytime you can have the money automatically withdrawn, whether it is from a paycheck or just from your checking account, it is easier to save when you never have the chance to spend it.

If you are new to investing, a good place to start might be with a mutual fund.  I recommend dollar cost averaging which is just a fancy way of saying make regular monthly contributions directly to a fund. Making it consistent builds a great habit and takes the work out of saving and investing. When you enroll in automatic investing, you avoid per transaction trade commissions. By purchasing in monthly increments, you take advantage of ups and downs in the market, buying more shares at lower prices which can give you a better return in the long run. Mutual funds can be purchased within retirement accounts, 529 plans, and many other investment vehicles. If you were to increase your monthly contributions with every pay raise you receive, this can be a painless way to accumulate more over time while achieving diversification. A qualified financial advisor can help you choose mutual funds that meet your objectives, risk tolerance and fit with your comprehensive financial life needs.

My husband and I have been surprised over the years at what small monthly investments have enabled us to do. No, we are not without financial struggles, but we have been able to take a few special family vacations, help our children with college tuition and weddings, and put some money toward retirement. So whether you are just starting out like my college student with dreams of traveling and seeing the world or a young couple starting your family developing a financial strategy for the future, you can achieve your goals by harnessing the power of regular monthly investing.

 

Holiday Hangovers and Cash Management

 
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FreeDigitalPhotos.net

All of us know that Christmas falls on December 25th. Every. Single. Year.

I’m going to take a wild guess and say that many readers felt a cash crunch in January from holiday spending. Now that the holiday hangover has subsided, it may be a good time to re-evaluate the importance and value of good cash flow management (aka Budgeting). It also happens to be a good next step after the post from last month about setting priorities and intentions.

Most of us can remember special celebration dates like anniversaries and birthdays, and plan for vacations. But we rarely set aside funds for them. Let’s build a plan to bring back more joy and have less stress surrounding these important milestones, and to make progress toward longer term goals.

And, if you’re thinking cash flow management is just for people with lower incomes, take a look at this recent article: Why the poor do better on these simple tests of financial common sense. My experience working with some High Net Worth families has shown me that this is a behavior issue, and not always an income issue. In fact, having higher levels of income often hides spending mistakes.

With no disrespect to Richard Carlson, maybe you should sweat the small stuff.

Do you know how much you spent last month on purchases less than $20? If so, you’ve probably already got a great tracking system in place. If not, now is a great time to start tracking how those smaller expenses add up for you.

Would you know it if you had a $150 bill due each month? Most people would, but I’m sometimes guilty of not noticing the $5 that I spend here and there on ‘small stuff’.  It’s easy to forget that $5 a day is $150 a month.

If you deposit $150/month into an account that could earn even a 5% annual return, in 20 years you would have deposited $36,000 and it would have grown to $73,986 during that time.

But it’s hard to think about behaviors over a long period of time, isn’t it? Let’s break it down to be more manageable:

 

1.  Plan. 

What would your ideal budget look like based on your current income? Feel free to think radically about changes you may want (or need) to make.

Be sure to include items that don't occur regularly (like Christmas, birthdays, vacation, etc.).

Don’t overcomplicate it. It’s simply all sources of income, minus expenses.

Important Note:

Most cash flow management/budgeting advice focuses on cutting expenses.  But when it comes to cash flow, there are two sides of the equation, and spending is only one. The other side is income! Clipping coupons and other spending reductions are great and necessary sometimes, but may only have a limited impact on most people’s overall financial position.

The ability to earn more through an additional skill, certification, or educational attainment will have a much bigger impact for a much longer time, but we often forget about the opportunities to increase our income that are available.

If you could increase this year’s income by 10%, the value of that one change over the course of your career starts compounding and can become really significant.

 

2.   Evaluate.

Last year’s income and expenses:

We live in a time when we have more information that we know what to do with! Put some of that information to good use. Look up your credit card statements and bank statements to get a feel for what your past trends tell you. Some accounts even offer an annual summary with graphs and charts showing spending categories.

This part is a judgement free zone. Just gather the facts. We’ll evaluate later.

Current spending:

If you’re looking for a way to get started on your own, you can look to services like Mint.com to provide tracking of accounts (but without the planning help of an advisor). Just start tracking it somehow. Paper and pencil still work too, btw!

Clients of Bridge Financial Planning have a personalized client dashboard where all assets, liabilities, income and expenses can be tracked in one spot and is integrated with their financial plan.

Now that you’ve got the data, are you surprised by anything?

Are there a few things you wish you had not bought, or expenses that really didn’t add value to your life? Probably. No one gets it right all the time.

What are the expenses that represent good memories, and progress toward your goals? This year, we want to have more in this category, and fewer in the non-value category.

 

3. Implement.

Some changes will be easy to make and obvious once you take a look. Other decisions will be really tough.

When you get to those tougher decisions, think through what purpose or goal will be accomplished with each spending, saving, or giving choice. If you’ve worked through the questions from last month’s post, your list of priorities and intentions should still be handy and top of mind and will help your motivation and will-power.

 

4. Adjust.

I wish I could tell you that when you come to the end of this process all your budgeting/cash management issues disappear. But like most other things, it requires ongoing dedication. The most important thing is to start.

It starts today. Best wishes!

 

P.S. We’ve all heard the saying that “money can’t buy happiness,” and it’s true. But there’s a great book, Happy Money, by Elizabeth Dunn & Michael Norton that shows us the science behind happier spending decisions. There are some great lessons in there! Hope you are able to check it out.

As seen on Stretch A Dime.