Rich Is So Relative

I laughed the other day when I read how golfer Phil Mickelson handed out two $100 bills to a fan whose watch band Phil broke with an errant tee shot. People in the sports media made a big deal about it, probably because most athletes wouldn't make the effort to reimburse someone for an accident like that. One writer thought it incredible that Phil would even have a couple of C Notes in his pocket while playing.

C'mon! At last count, Mickelson makes more than $20 million per year in prize money, endorsements and appearance fees. What's a couple of hundred bucks? I thought about it, and here's exactly what it means to him: Two Dollars.

It's actually less than that if you compare him to the average American. But two dollars is a nice round number, and it fits my formula, so that's what I'm going with.

If a person pulls in $200,000 per year, he or she is making some pretty good dough. Actually that person fits into about the top 1% of earners in America. Mickelson makes 100 times that amount. So, flipping a couple of Franklins out of his pocket on the golf course is the equivalent to a high-earning person flipping two Washingtons from his or her pocket.

Money is crazy when you stop to think about it. It's all relative, and someone's always going to have more than you.

Does It Really Make Sense to Simplify?

Experts are always telling us to "keep it simple", especially with our money. They say that if you make things too complex, if there are too many accounts to mind, and if you invest in too many different things, you'll never be able to keep track of it -- and you'll die a lonely death in a studio apartment on the wrong side of town, crushed by the weight of your voluminous financial statements.

Not so, sayeth Dollar Bill. Keeping your money matters simple can lead you down an even worse path!

The biggest money challenge most of us have is saving. We try to save, but it sometimes doesn't happen. We even set up budgets to keep our spending in check, but they never work. When all else fails, we try to simplify everything by consolidating all of our accounts and debts. What effect does this have? It makes things confusing. Since our goal is to eliminate confusion, maybe we should stop all of this simplification.

My wife and I used to have one checking account and one savings account. We paid the bills from the checking account (online if possible), and we paid ourselves first by depositing money into the savings account. Sounds good, right? Well, no. What happened was that it became impossible for us to plan our savings. If you lump all of your money into one account, how can you figure out how to parcel out what you're saving for? In other words, if you're trying to save for a car, a television, landscaping, and Christmas gifts, you'll inevitably rob Peter to pay Paul when all of the cash is in one place. It becomes confusing very fast, and you end up fighting with your spouse when you want to withdraw money to pay for one of your pet projects.

Solution: Set up savings accounts for each of the things you're saving for.

At first blush, this might sound like I'm advocating further confusion by adding to the paperwork. Instead, what happens is that you're able to better organize your money, and subsequently your goals are achieved with less grief. I would then take it one step further and do the same thing with your investments. Have an account for speculative investment (no more than 5% of you total investment capital), have one for long-term growth, and have one that acts as a savings vehicle for mid-term purchases like saving for renovations or a new home (if you only try to save for big purchases using savings accounts, it'll take forever).

So the lesson is to segment your money into accounts that have specific, achievable goals in mind. This will avoid confusion for you and allow your money to grow unimpaired. Otherwise, you'll die a slow, painful "death by simplification".

Get the Whole Picture Before Making Major Money Moves

We make decisions every day of our lives without having all the information. This works fine for small decisions, but it can get you into trouble if you don't get the whole picture before making decisions with important things like your money.

I know a couple who recently discovered the value of getting the whole picture. They are in their sixties, but they had never sat down and took stock of what they have, what they owe, what kinds of returns they're getting on their savings/investments, etc. Basically, they had no clue where they stood financially.

They were probing me for advice, so I gave them an easy exercise that anyone can do to get a handle on what's what. I told them to take a blank sheet of paper, draw a line down the middle, and list their assets on one side, and their liabilities on the other. Then, they were to put a number next to each, add them up, and then see where they stood. After they figured this out, I told them to do the same thing, but with their income on one side (they were within weeks of retirement) and their expenses on the other.

They did most of each of the exercises before meeting with a financial planner. They said their meeting would have been horrible if they hadn't begun to see the big picture first. Instead, it was a very productive meeting in which they felt literate about their finances.

Something as basic as this can easily be avoided (especially if you're afraid of what you might discover), but it's invaluable. One must have a handle of where one is before one can know where to go. Get the big picture first before doing anything you might regret later.

You Need to Start Today!

In my last post about paying yourself first, I mentioned that a key to success is to begin now. Now means today; not tomorrow or next month. It sounds easier than it is because we can always come up with numerous excuses to procrastinate.

My wife and I are pretty good about contributing as much as possible to her 401K and my SEP IRA. She maxes hers out, and I contribute about $10,000 per year. But I know that these retirement accounts will not be enough to retire on. So, I pay myself first every month in order to build up savings in taxable accounts. Just yesterday, I had to work hard to put the "start today" adage into effect.

I run my own business, so my cash flow is different from month to month. February was okay, but it wasn't a windfall. My pay myself first plan is to deposit $230 each month split among two DRIPs (which is withdrawn from one of our bank accounts automatically), deposit $250 into a fee-based, managed investment account, deposit $200 into our "vacation" account (so we don't have to put our vacations on credit cards), and deposit $200 into our "house renovation" account. My wife wasn't sure if we could afford making each of these payments in February. It got a little dicey there for a minute, but I reminded her of the plan and how it will pay off in the long-run, and she made the deposits.

Slowly but surely, these accounts are building. But if we neglect our plan even once, it can get us off track and make it harder the next month to work the plan. I've been a believer in this type of system for years, but even true believers can let doubt creep in if one is not vigilant. So start now, and stick with it!

Pay Yourself First

The easiest way to keep what you make is to pay yourself first. Paying yourself first means that every month before you pay the rent, the car loan, the credit card bill, or the Banana Republic charge card, deposit a set amount of money into a savings account that you absolutely won't touch.

Again, I suggest looking at your personal finances as your own business. Saving (that set amount of money you pay yourself each month) should be viewed just like all of your other bills. The only difference is that it should always be the first one you pay.

If you are a historically bad saver, don't resolve to pay yourself more than is reasonable. Otherwise, you won't stick to the program. Try paying yourself $50/month until it becomes a habit. Then, evaluate your progress and bump up the amount to $100 or $150. Doesn't sound like much? Don't think it would ever make you wealthy? Well, $150 saved per month, returning 10% per year for 25 years (including 25% federal taxes and 4.5% state taxes) equals a windfall of $149,084. Not too bad for some pain-free, disciplined savings...

So the keys to paying yourself first are to: a) start now, b) save a reasonable amount; don't do more than you can handle, and c) be consistent.

What are you waiting for?

It's How Much You Keep, Not What You Make

I am fond of platitudes. They are obvious, sometimes trivial statements that lack originality. But usually, they make sense. I'm fairly sure this blog will be rife with platitudes about money, as some simple, easy-to-remember rules about money can come in handy. Money doesn't have to be complicated, nor should you fear it.

Thus, my first money platitude for you to think about is, "It's how much you keep, not what you make." Before you stop laughing and then stop reading, consider for a second one of the first questions you ask yourself when you're comparing your money situation to someone else. Does "I wonder how much he/she makes?" ring a bell? Of course! We all go right after the top line and cling to it like it's the most important thing in the world. Guess what? It's not. The bottom line is all that matters.

The bottom line is how much you keep. Think of it as your personal profit. You are a business, and what you have left over is your profit, your bottom line. What are you going to do to increase this number? Cut costs? Increase your income? Invest smarter?

This blog sets out to help you do a whole lot of all three of these things. 1) Cut costs (or save), 2) Boost your income, and 3) Make your money work for you. Keep an eye on upcoming posts, as I have strategies galore for making you wealthier than you ever thought possible by keeping more of what you make.