Financial Changes To Make Now

Thursday, January 22, 2009

Hope, accountability and a call to action is what President Obama called for in his inaugural address.  Just as Obama took an oath, I want you to take an oath today that you will start to take control of your financial life!!  I want you to make a commitment to yourself and your family that 2009 will be the year that you will work to build a solid financial foundation, protect what you have and work hard to have secure financial future.  I urge you to take action – now.  

Working hard for financial security is something that most of us have probably not done in awhile or maybe ever. We felt we had it made and had no need to focus on financial security given that housing prices were going up approximately 10% per year and the stock market was posting nice yearly gains.  It became very easy for all of us to feel richer, to be lulled into a sense of false prosperity.  Credit was not only cheap but readily available to just about anyone who asked for it – no income, no job, no assets, no problem you could still get a loan – a NINJA loan!  We were living in a world of false prosperity.  Most of us were living well beyond our means because we thought we could count on the price of our house appreciating every year and the major indexes posting yearly gains!!  That all changed in 2008.  The days of easy money are gone. 

In 2008 we saw and will continue to see in 2009 a decline in housing prices, continued home foreclosures, job layoffs and plunging retirement accounts…the recession is affecting us all.  Home values have slid approximately 23% - back to 2004 levels and could have more downside before stabilizing.  The major stock market indexes have fallen approximately 35-40%.  Americans have lost approximately $7 trillion in the stock market and $2 trillion in home equity for a total of approximately $9 trillion in lost wealth!!  One could argue that this wealth destruction is a perceived loss because we never really had it in the first place and we were just living beyond our means.  We kept spending like crazy – taking out home equity lines of credit to pay for vacations or furniture because we felt we could count on the steep appreciation in our house to eventually pay off the debt we incurred.  The easy access to credit fueled the lifestyle we wanted.  Maybe we didn’t save 10% of our yearly income or invest in our company’s 401(k) because we thought we had it made and could count on the value of our house increasing.  Things changed in 2008 – and the rules going forward are different.  We all have to face the harsh reality.  We have to live within our means not our dreams!!  We need to take control of our financial life. 

So what is that we need to do?  We have, as Obama said, “a new era of responsibility—a recognition, on the part of every American, that we have duties to ourselves, our nation, and the world, duties that we do not grudgingly accept but rather seize gladly, firm in the knowledge that there is nothing so satisfying to the spirit, so defining of our character, than giving our all to a difficult task.”  I believe we must give our all to this difficult task of ensuring our financial security.

First, I believe we must be held accountable and responsible for our financial life.  In 2009 we must strive to hold ourselves accountable for our financial decisions and understand how the choices we make today will affect our future financial security and quality of life.  We must become responsible for our own financial education.  We need to understand that knowledge is power. Today, more than ever, financial acumen is more than “nice to know” –it is “need to know”!!  Understanding and taking control of your finances contributes to your well being as well as your community and society.  The more informed you are the better choices you will make.

Second, get honest about what you have—and what you don’t.  Create a cash flow statement.  It is impossible to live within your means, eliminate debt and accumulate wealth if you don’t know where your money goes. That is why it is critical to create a spending plan or budget.  I want you to control the spending rather than have it control you.  You should know exactly how much income is coming in and what expenses you have.  If you add up all your fixed costs (mortgage, rent, etc.) and subtract it from your monthly take home pay, what you have left is your discretionary income.  This discretionary sum is the amount you have to pay for your wants – if you exceed that amount then you are living beyond your means.  Remember, times have changed.  We cannot have a plan that is built on a foundation of lies or dreams – we cannot expect easy gains from the stock market or housing. 

Third, spend less.  Evaluate your spending habits and make changes.  Keep a spending journal so you know exactly what you are spending.  After a month, take a look at the outflows and determine if what you are spending fits with your values.  How many times a week do you eat out?  Is your gym membership a necessity?  Can you cut your utility bills by 10%?  Can you lower your insurance deductibles?  Do you need those new shoes or can you wait a season? 

Four, save more. I am a big advocate of paying yourself first at least 15% of your take home pay – so that this becomes part of your fixed costs.  I know 15% sounds like a lot and it is.  I know it’s hard to save now for the future when you could just be enjoying life today.  However, ignoring the future while living it up today can lead to financial disaster later in life.  So just do it.  Give yourself the gift of financial security by starting to save as much as and as early as you can. 

Five, use credit wisely.  Charge only those purchases that you know you can pay off in full each month.  Know that if you only pay the minimum on your credit card, you might wind up paying twice as much for your purchase.  If you have credit card debt, pay it off this year.  Always pay your balance in full.  Do not take out any more credit.  Do not use credit for everyday purchases. 

So, the time is now for each of us.  Things have changed and reality is different.  We must give our all to the task before us – taking control of our finances.  I know this task may be difficult and daunting but will be rewarding and have the potential to change the course of your life.