Tag: Saving

Your Most Common Questions, Answered: We Have a Lot of Cash in the Bank, Now What?

Written by support@seostats.com on February 3, 2020. Posted in Budgeting & Money.

As part of my initial meeting process with new clients, I always ask, “Why did you reach out to me today?”

Understanding people’s motivations and primary concerns helps me know what’s most important to them, and it helps guide our planning process. But it also allows me to see how universal some of our questions and concerns around money are.

In asking that question, what I’ve found is some of the same topics come up time and time again. Throughout this year’s blog posts, I’ll address some of these most common pressing questions to share the framework we use to solve these challenges and take advantage of opportunities.

Up first: let’s look at how to deal with having too much cash in the bank.

“We Have a Lot of Cash in the Bank. Now What?”

At first glance, this might not seem like a challenge or issue at all. Who’s complaining about having too much money?

While it’s a good problem to have, it does create a lot of questions that are hard to answer. Once you establish yourself, take care of obvious problems (like repaying credit card debt), and start earning more money, the question becomes, “now what?”

What’s the best thing to do with your money now that you actually have enough of it to make complex decisions around?

Not knowing what to do often leads to people amassing large amounts of cash with zero plans for utilizing it wisely. If you find yourself in this situation, here are some things to keep in mind to help you determine a strategy for the best ways to leverage this money in the bank.

Paying Off All Your Debt Might Not Be the Smartest Move

Commonly, people who have managed to save up a lot of money will start wondering if they should use that cash to repay all their debt — including their mortgage.

It’s natural for people to want to be debt-free and some pundits (see Dave Ramsey) feel getting out of any and all debt, regardless of what it is, is the only way to go.

But we advise people against rushing out to pay off loans like mortgages with low interest rates. While getting rid of high-interest credit card debt is probably in your best interest, hanging on to your mortgage and using your cash to build wealth in other areas could make more sense.

If you have a mortgage that is around a 3.75 percent interest rate, that is historically “cheap” money. Rushing to pay that off requires you to throw your cash into an illiquid asset — and takes away the opportunity to use those dollars on goals like building up your retirement accounts.

Not only that, but avoiding contributing to investments now means losing out on the compounding opportunity that comes with investing for the long-term. If you could be earning 7 percent in a 401(k) or IRA versus having a forced savings rate of 3.75 percent paying down debt, which would you pick?

If you want to build wealth, you may need to focus on building up your assets first rather than funneling all your cash into your house.

Building Up the Right Amount of Emergency Savings

You may have heard that you need to build up a rainy day fund, and that’s good advice. How much should you keep in that emergency fund, though?

The rule of thumb says to build up 3 to 6 months’ worth of expenses and keep that amount in cash in a liquid savings account. But I feel this guideline is much more of an emotional decision than a financial one.

You do need emergency savings. But how much depends on factors specific to your situation. Before determining the precise amount you should keep in reserves, consider things like:

How risky is your income stream? Is your work vulnerable to seasonality, layoffs, or economic downturns?
How reliable is the pay you receive: do you get a steady paycheck or does money ebb and flow depending on external factors?
Do you own any risky or expensive assets, like an older home that needs frequent maintenance and repairs?
How many people financially rely on you?

I find that, for most people, the “right” answer comes down to a number that provides them with a sense of comfort and security.

For example, does it feel okay to only keep $30,000 in the bank after you’re used to keeping a stash of $100,000? If the answer is, “no,” then don’t feel pressured to reduce your emergency fund to what the rules of thumb suggest is all you need.

If you are going to be up all night worrying, it’s just not worth it. Prudent financial management is not always about getting the highest return. It’s also about being confident in your plan and being comfortable with who you are.

Achieving What Matters Most to You, Now That You Can

Once you establish how much cash you truly need on hand to protect against emergencies and establish an investment plan that puts some of that extra money to work, consider turning to your goals and priorities.

Many of us get so focused on saving that we don’t even realize when we’ve hit the point at which we actually have enough cash available to use on things we’ve always wanted.

If you’re funding your retirement and investment accounts appropriately and managing your ongoing expenses well, actually using some of that cash to achieve your goals is not a bad thing. It might be time to consider taking the trip you’ve been dreaming of, or enrolling in cooking classes, or finally upgrading your 15-year-old car.

Spending money isn’t always the answer — but using your money wisely on things that matter to you or to achieve long-held goals may be a good way to go.

The Psychology of Saving Money: Why some do it successfully and others struggle

Written by support@seostats.com on December 11, 2017. Posted in Behavioral Finance.

The Importance of Saving Money

A sound financial plan has a variety of elements. These elements include everything from retirement planning to an understanding of investments and financial choices. However, I can’t emphasize enough how important your ability to save money is to your financial future.

The ability to save money is one of the foundational principles for reaching financial independence. Good money behaviors, including spending habits and a commitment to saving, are a recipe for success.

While some people seem to save money intuitively and without a great deal of effort, others find it difficult or almost impossible to do so. This leads me to two important questions:

1. What are the differences between people who can save without a struggle and those who can’t?

2. How do people who struggle to save overcome these difficulties?

Why Some People Can Save and Others Can’t

It’s never a good idea to blame our problems on others, but your upbringing exerts a great deal of influence on your spending habits. Typically, children raised in frugal households tend to save money more easily during their adult lives. The opposite holds true as well– children of parents who spend impulsively or don’t have a good hold on their personal finances tend to have difficulty saving money as adults. Although this is not always the case, it’s certainly worthwhile to look at family money scrips.

Another reason some people struggle saving is related to a phenomenon called learned helplessness. This is state of mind that causes people to believe that there’s nothing they can do to escape a negative situation when the opposite is actually true. As it relates to saving money, learned helplessness often arises in people who have had consistently negative experiences with money.

Although learned helplessness can begin during childhood, it can come about from adult experiences as well. The more often someone experiences a failed attempt to save money, the more likely they are to believe that they’re simply not capable of doing so. In other words, they begin to think that the inability to save money is just a part of who they are.

You’ll notice that both of these difficulties are learned behaviors. While it’s not always easy to reverse the trends established early in life, the good news is these patterns can be unlearned as well. The best way to begin unlearning these patterns is through practice. Here are a few ways to get started on the path to saving money:

· Start by saving a small amount each week.

· Track the progress you make, however small it is.

· Set savings goals and acknowledge reaching them with a small reward.

· Find a ‘financial buddy’ and establish a dynamic with them where you’re mutually accountable and can encourage one another.

While these can help, the most impactful practice I have seen is removing choice from the equation as much as possible.

Automate Your Savings For a Better Financial Future

Hopefully, you’ve gained some insights into the psychology of saving money from what you’ve read here. But it’s equally important to understand that these insights are not enough to elicit the necessary changes. Self-awareness is necessary for making positive changes, but it’s far from sufficient. Any real change results from constructive action.

The best way to develop a savings habit it to automate. With an automated savings plan, you’ll be able to change your habits without even thinking about it. Follow these steps to get started on an automated savings plan that could eventually become life-altering:

· If you don’t have a savings account, open one immediately and connect to your checking account.

· If you haven’t already, sign up for direct deposit and arrange for a percentage of your paycheck to be deposited into your savings account automatically.

· Set up an emergency fund and contribute a reasonable amount to it consistently. This will help you cover unexpected expenses and facilitate the next rule of automated savings.

· Don’t touch the money in your savings account. Let it grow through good budgeting and proper use of your emergency fund.

· Ensure you are receiving your 401K match. This means contributing at least the maximum percentage that your employer will match, usually around 2-3%.

Conclusion

Removing the need to choose to save by automating your savings is an easy way to establish the habit. For people who struggle saving money on their own, making the process automatic may be a necessity.

Don’t be discouraged if you happen to be someone who struggles to save money. Simply acknowledge the problem and remain focused on the solution. A big part of this solution is automated savings. Start executing your automated savings plan today and you’ll begin to see a rosier financial future.

Want to learn more about the Psychology of Money? Check out our other recent articles:

Can Money Buy Happiness?

The Psychology of Money, Part II: Make it a Treat & Buy Time

Want to Raise Financially Savvy Kids? Try These 5 Steps

Written by support@seostats.com on April 17, 2017. Posted in Kids.

In my previous post, Educating Your Kids About Finances, I talk about the basics of preparing your child with financial knowledge. However, teaching your kids basic money concepts on how to be responsible with money from an early age and actually helping them apply important money habits are two entirely different things.

There are plenty of “teachable moments” when it comes to finance. From holidays to diffusing a melt-down at the store when they can’t get something they want, there is opportunity everywhere you turn to raise a financially savvy kid.

Here are 5 actionable tips to start your child’s financial education early and strong:

1. Open up a Bank account

Helping your child open their first bank account is an exciting event for a child. It affords you as the parent an opportunity to initiate money conversations and help them learn how the banking system works, and perhaps more importantly – the power of saving.

As an example, my local credit union, Corning Credit Union, does a great job with the super savers program. Kids get stamps each time they make a deposit and after collecting five stamps they earn a prize. This simple exercise has incentivized them to save while also teaching them about delaying gratification (not every visit ends in a prize).

2. Give Them the Opportunity to Earn Money

Show your child the value of hard work and a dollar by rewarding them with an allowance when they complete the tasks you assign to them. Your kid’s financial education is certain to become much more personal once they earn their own money. Like with most good habits, you need to start somewhere, even if it’s just a dollar a week.

3. Hold Them Accountable

Hold your young child accountable to good money habits. You can do this by showing them how their behaviors impact their ability to earn and save money. For instance, if they do not complete their chores that earn them an allowance, then they do not receive their allowance. This teaches them that follow-through and work earns money. Another way you can hold them accountable is by helping them set money goals like saving so many dollars for that toy they really want. If they don’t save the money, then they don’t get the toy.

4. Make Them Prioritize Their Money

After your child earns his or her own money, it’s critical that you step in and show them how to make smart money decisions. You can create envelopes or folders labeled, “Tithe/Giving,” “Savings,” and “Spending.” Your money categories can be whatever you want them to be, but the point is to get your kids to establish smart money habits as early as possible. These are the types of habits that will benefit them their entire life.

As an example, I personally make my children put half of any birthday or holiday money into their savings account and allow them to spend the other half. A friend I know has his children save 1/3, donate 1/3, and spend 1/3. It is completely up to you how you want to teach them to prioritize.

5. Let Them Make Purchasing Decisions

Once they have put money towards the categories you determine to help them prioritize their cash, let them spend the rest as they want with some gentle guidance. As they spend their money, help them understand their purchasing power, but don’t tell them what they can and can’t do with it (this has personally been difficult as my kids continue to pour money into buying Shopkins). Ultimately, they need to make a few mistakes so they can learn the valuable lesson that if they waited a few more weeks they could have afforded to buy what they really wanted.

Continue engaging your children about money and they will slowly and surely have a much better grasp at how much things cost and how they want to spend their money.

What are some other money lessons you’ve taught your children over the years? What are some mistakes you have made? I would love to hear so please don’t hesitate to share.

4 Ways to Build Wealth Right Now

Written by support@seostats.com on January 9, 2017. Posted in Financial Planning.

For many of us, building wealth may seem like an allusive concept that can feel far off and unattainable. With the mounting costs of day to day life, building wealth can sometimes feel more like a dream rather than an attainable goal.

What if I told you that no matter your financial circumstances, you can take steps to build wealth? That you don’t need to win the lottery, come into a large inheritance, or make a seven figure income in order to build wealth and secure a better financial future.

I believe a truly wealthy person is someone who has enough money that they work because they want to, not because they have to. A wealthy person can walk away from a job at any moment and still lead the life they want.

With everyday intention, planning, and discipline, you can build wealth. Here are four ways you can start building wealth:

1. Establish Good Saving Habits

Good habits lead to good outcomes. I recently finished reading “The Compound Effect” by Darren Hardy. In it he provides the formula “Small, Smart Choices + Consistency + Time = RADICAL DIFFERENCE”. Creating wealth isn’t about hitting home runs. It’s about getting into the consistent habit of saving. When you’re younger and just starting out, you may not be able to save a lot, but save anyway. Set a percentage of your income to save, say 10%, not a dollar amount. Saving just $1 out of every $10 you make will put you at almost double the US Personal Savings Rate. This way, when you earn more in the future you will save more, in dollar terms, and you can even increase that percentage of saving slowly over time. This one decision has the power to set you up for financial success or failure.

2. Invest

The act of saving is amplified when you invest those savings. Investing does not mean keeping your cash in a savings account earning nothing. Investing is putting your money into a well-diversified portfolio of stocks, bonds, mutual funds, and ETF’s and allowing the growth to compound over the long-term. Compounding it arguably the most effective way to build wealth. The reason why this is such a powerful wealth building tool is because the interest you earn on your money also earns interest.

I see way too many people who have an inordinate amount of cash as part of their net worth. While having enough cash is important for emergencies, cash will not make you wealthy. In fact, when inflation is factored in at say 3%, by holding onto cash that is making .05% in your savings, you are actually losing money in real and purchasing power terms.

The younger you start saving and investing, the more time your money has to compound year over year. Let your money go to work for you and give it the chance to multiply over your lifetime.

3. Delay Gratification

In addition to establishing good saving habits, it’s just as important to exercise smart spending habits as well. It may take some time to adjust and form smarter spending behaviors if you are used to buying what you want when you want it. Credit has made it much easier to spend money, even if you don’t have the actual cash to cover the expense, which can quickly lead you into high-interest debt.

Therefore, be mindful about your purchases and delay gratification until you know you have the means to cover the cost. When you already have smart saving habits established, it makes delaying gratification a little more palatable because you will actively be saving for that car, those concert tickets, or the vacation you really want. It’s not that you won’t attain what you want, but with smarter spending behaviors, you won’t compromise your financial security just to get something immediately.

4. Set Goals and Be Intentional

You’ll be able to achieve your financial goals faster if 1.) you have financial goals and 2.) you make intentional financial decisions. Not unlike attaining a certain physical fitness level, setting goals, being intentional, and taking action all play a crucial role in determining your success. Before you make that next purchase, think to yourself: “Is this purchase in line with my goals? Will I be closer to my goal if I don’t make this purchase?” It’s a simple yes or no answer that should make your decision easier.

When it comes to your finances, building wealth is possible when you take action to secure your financial future and take advantage of wealth building tools that passively grow your money over time. Your long-term financial success isn’t decided in an afternoon; it’s determined by the financial choices you make today and every day.

Start making financial decisions that help you build lasting financial independence. The earlier you start, the more time is on your side to build long-term wealth.

Educating Your Kids About Finances

Written by support@seostats.com on September 19, 2016. Posted in Kids.

Did you know that when it comes to teaching our kids about money, we may be doing it all wrong? Here’s what you should be teaching them instead.

In an effort prepare the next generation for making better personal finance decisions, schools are starting to address financial education in their curriculum. In general though, schools have been slow to adopt personal finance as a top priority with only 2 additional states since 2014 adopting personal finance standards in their K-12 programs. While more states are implementing standards in personal finance, the number of states that require high school students to take a course in personal finance remains unchanged since 2014 – just 17 states (source).

Despite efforts being made on the part of educators, children are still growing up and making the same financial blunders their parents made. Just look at all the young people in debt. According to a Rent.com study reported in Time Magazine, more than 75 percent of late teens and early 20-somethings who rent spend more than they earn each month! The study reports that, to keep up with their expenses, young people are financing everything with credit cards- the worst kind of debt you can have because of high interest rates.

More needs to be done beyond financial literacy to help prepare our youth to make good financial decisions in real life. It starts at home and it involves real-like application of financial concepts and healthy money behaviors.

What Can You Do?

As a parent, you can help your child avoid this scenario later in life by teaching a few core principles… and teaching them the right way. Here are the basics of “finance for kids” that you can work on at home.

1. It’s never too early to start. In a study done in the UK, it was found that our money habits may be formed as early as age seven! Not only that, but some researchers say that even toddlers can comprehend the very basic concepts of saving. Why not go with your child to open his first savings account when he is young. This way you can teach your son or daughter how to save first and spend what is left. This is a great and simple exercise that helps your child start a lifelong healthy financial habit.

2. Teach Gratification Delay. This is a general life concept that holds wonderfully true in financial scenarios, too. “If you want something, sometimes you have to wait!” Delaying gratification is a useful skill in almost any role in life, and has even been linked to success in adulthood… that’s overall success, not just success in making financial decisions.

3. Teach goal-setting. This, like the tip above, can be taught to a preschooler. Having goals works in any area of life, not just finances, but in money matters it’s particularly useful and effective. An idea for a child’s goal might be a new toy. You’ll probably have to set up an allowance for your child so he or she has a way to reach the goal. Have them add money to the pot and monitor their progress towards the goal. It’s fun for everyone.

4. Teach timeliness. There’s not really a metaphor for this one except health care. The sooner you start taking care of your health, the larger the reward you’ll reap later on. As for finances, it’s all about compound interest (we’ll let you figure out the healthcare parallel!). Kids can start comprehending this concept around age 12, which is when they start to really be able to wrap their heads around long-term goals.

5. Show examples of real-life informed financial decisions. The supermarket is ripe for teaching opportunities. Explaining your reasoning for choosing one type of cereal over another can lead to a conversation about sugar… or it can lead to a conversation about generics vs brand names and value. You decide! Just don’t combine both lessons in one day or your son or daughter will never want to go grocery shopping again.

Conclusion

Whatever it is, teach it at the appropriate time. One of the reasons researchers think school finance classes aren’t working is because they’re teaching lessons whose practical applications are years in the future. Teach your lessons at home shortly before or after your child is about to encounter the issue in real life. The lessons will sink in much deeper that way!