“The Talk”: Kids, Religion, Money

Real Life Example: “What do we want from our marriage?”

In full transparency, this example is from my own life. Someone suggested I use it this week.

My wife and I have four natural parents. Those parents logged four divorces among them (my parents were both divorced twice). This makes for children who are wary of marriage. In my case, I wanted to convert this wariness into intention in my own marriage. At the time – around age 30 – I’d often seen marriages break up over one of three things: religion, children, or money. I wanted our marriage to last, so I knew we should talk about these things before we married. But in the case of money, what are some ways to approach that subject?

My wife and I didn’t know how to go about it, we didn’t have any guides or advisors, but we had one advantage: awareness. We both knew deep down that we needed to talk about it, and our awareness of that need led us to an open conversation about money in our lives growing up, our values at the time, and what sorts of values we wanted to carry (or not) into our marriage.

All of us have unconscious beliefs about money, much of which was probably formed in our childhood years. Money might have been an open topic in your home, or perhaps a taboo subject. Your family might have been careless with money, or vigilant and scrupulous. You might have felt you had all you needed, or at least the basics, or you might have felt it was never enough.

I didn’t understand this at the time, but I did know I had some values about money, and the conversation revealed that my wife did also. We both wanted to get out of debt (forever). We had both had struggles with money, albeit different struggles and lessons learned. We both saw cars as primarily functional rather than status symbols or sources of fun. I remember quite vividly talking about whether we wanted to pay for our potential children to go through college – both of us had very strong opinions on this topic based on our families and our own experiences. We decided that day to establish a principle to always live on just one of our incomes. I don’t remember all of the conversation, but I know we’re lucky – we agreed on a lot of things and we set a great foundation for the years ahead.

You don’t need to be on the cusp of marriage to have this conversation, you only need awareness that the conversation is important and a desire to align your money to your shared values. You can start the conversation by asking your partner this simple question: “What was money like in your family growing up?” How did that shape how you think about money today, and is that what you want in your partnership or would you change something?

Let me know if you want follow-on questions for the conversation.

And drop me a line if you have a Real Life Example financial topic you’d like to hear about.

Why You Need a Cash Flow Projection for the Year

Real Life Example: “My company’s laying people off. We have some big expenses coming up. Will we make it?”

One of the most powerful things you can do to reduce the anxiety of an uncertain world and the risks it poses to your personal finances is build a simple cash flow projection. Do you have an Emergency Fund? Check. Are you doing some budgeting and expense tracking? Check. Cash flow projection? Um, what?

Given what you know and some of what you don’t know, will you still have money in the bank at the end of the summer, at the end of the year, next spring? Keeping this question answered is both easy and powerful.

Step 1: Known and Steady

First you need to capture your known and steady income and expenses. These are the amounts that you probably know the best. You know how much income is deposited into your checking account each month, and you probably know how much you spend in a normal month.

Those amounts are both known and steady, meaning you know about them and they happen every month.

Write down those two numbers: steady monthly income, steady monthly expenses.

Step 2: Known and Lumpy

Now make a list of items that are known but unsteady, or lumpy. These might be income items (like a bonus), but the list of expense items is probably longer: a vacation, an insurance payment, property tax payments, or a planned home improvement. 

Write out your list of known, lumpy expenses and what month you expect them to happen.

Step 3: Unknown, Steady or Lumpy

This is the group that can be scary, the “what-ifs”. What if I lose my job? What if one of us gets sick? When we talk about emergency funds, we’re talking about coverage for these types of unknowns. Instead of trying to predict the future and guess what these might be, just think for a moment about the ones that bother you, the ones you already think about.

Write down 1-3 What-If situations you actually want to examine. Don’t worry about numbers yet, just the situations for now. While doing so might feel unpleasant or scary, the process of writing it down and later examining the possible impact will reduce uncertainty and either 1) build confidence that you can weather a storm or 2) inspire you to change your course accordingly.

Step 4: Make a Happy Path Projection

Now make a simple projection across 6-18 months. Use a spreadsheet if you can. For each month, here’s your equation:  Starting bank balance + steady income – steady expense – known, lumpy expense (if there is one for that month) = Expected ending balance. You don’t know what your bank balance will be at the end of the month, but now you have a projection.

Now setup the same equation for next month, using this month’s projected ending balance for your next month starting balance. Repeat for 12-18 months. Revisit the known, lumpy expenses – are they all there? 

You should now have a projection of your bank balance at the end of that 12-18 months. How’s it look? Do you need to adjust anything? Any surprises? Everything OK?

Here’s the last bit: at the end of each month, record your actual ending bank balance on top of what you projected. This should replace the starting balance for next month and adjust your entire projection. This is how you keep the projection fresh.

If you’d like a simple, pre-built spreadsheet for the above, just email me at james.hindes@moresignalplanning.com and I’ll send it your way to get you started.

Step 5: Adjust Your Projection for “What-if” Scenarios

Lastly, if you want to stress-test your forecast for something unexpected and undesired, like a layoff, you can do that. Using the layoff example, the known, steady income number will drop with your loss of income, and that drop might be partially offset by unemployment benefits or other temporary benefit. Adjust your model to work that in, and see how it looks. How many months before you run out of cash? Do you need (or simply want) more in your emergency fund? What expenses will you cut if that event happens?

I hope you’ve found this helpful. Please drop me a line and give me your real life example questions.

What’s My Number? Go For Choices, Not Rules

Real Life Example: “I was talking with my buddy and he said his number was $X and asked me if I knew what my number was. What’s my number?” (For clarity, the expression ‘My Number’ means, ‘how much do I need to have saved or invested in order to retire?’)

I have no idea.

Your number is a function of you. Your life, your family, your values, what you care about, what you want to do, maybe what you don’t want to do.

But I really want a rule of thumb.

A Couple Rules of Thumb

Income Ratios

No kidding, I received an email just today that said if I had 10x my income saved by age 67, I’d be good. It was that simple.

You can find a more robust version of this concept – your capital to income ratio – in Charles Farrell’s Your Money Ratios. It’s the ratio of your retirement stash (excluding property) divided by your current income, or the last four years of your income. He suggests that a ratio of 12 at age 65 will allow you to retire on 60% of your income (plus social security). You ratio should be about 2.4 by age 40 to get there.

Living Expense Ratios (e.g., the 4% rule)

These ratios look at it from the expense – not income – point of view. For example, the 4% rule suggests that you can spend 4% of your portfolio each year through to the end of your life. So if you spend $75,000 per year, you need to start with a nest egg of $1.875M.

Why Rules Don’t Work

The catch with rules of thumb is that they’re ratios based on who you are, not necessarily who you want to be. Maybe you…..

Your choices and goals may drive a different lifestyle – a different level of spending – from your current life.

So if you’re 40, I’m sure you’ve got all those goals completely locked in, right? You know exactly what you want over the next ten to thirty years, right? Sure you do (well maybe you do, I myself do not and I’m past 40).

Instead of Rules, Go For Choices

Try this: think about a simple relationship instead of ratios and rules. The relationship between your unearned income (from savings, investments, assets like rental property or a business) and your living expenses. See the green line and the red line below, respectively.

When the green line rises past the red line, you’re entering a world of choices and options. If the income from your savings, investments, etc is covering your expenses, then you can put your creative and competitive energy into a different job, toys or hobbies, or a life goal to do something different, somewhere different.

Everyone’s chart lines are different, and everyone’s lines are a product of what’s important to them.

So what’s important to you and how do your lines look?