Budgeting through the game of life
Published by Florida Times-Union on June 27, 2004.
Ever wonder where your money goes?
The paycheck comes in; the bills go out. A few cups of coffee, restaurant meals, nights out with friends, shopping sprees, and suddenly you're hoping that next paycheck shows up pretty soon.
Or maybe you're a little more careful about not just frittering your funds away but still have nagging suspicions that you're not really planning for the future, not really letting your money work for you as well as it should. Maybe we can help.
"The reason everyone works is to create financial independence," financial adviser Lisa Puttick said, and we talked to Puttick and two other advisers to find out how to get on the right path.
Each adviser agreed to sit down with people looking to get a handle on their money -- one single woman, one couple who both have erratic income and one couple with a more steady cash flow -- and from them, we gleaned some tips that might help you with your finances.
Name: Heather Henslee
Job: Pharmaceutical Sales Representative
Situation: Heather makes a good living, but doesn't really have a handle on where the money is going. "I don't balance my checkbook," she said. "I just look online and see what I have."
As well as having to get rid of debt, particularly credit card and student loan payments, Heather is particularly aiming to save up enough to buy a condo: After several years in school -- Heather has a master's degree in speech therapy -- she's making a good living and wants to establish herself more securely.
In a way, Heather wanted to meet with a financial planner because she didn't want to have to spend too much time thinking about her money. Rather than wondering if she'd have enough for a purchase, Heather said she wanted "guidelines," letting her know how much she could spend when she goes out for lunch.
"I have discipline in other areas of my life," she said. "I don't want to ignore [my finances] anymore. I need to develop a different kind of mindset."
Solution: Financial Planner Bert Costa sat down with Heather to work out a plan that would accomplish two major things: Tracking where her money was going in an effort to spend it more wisely and figuring out how to apply the saved money to clearing out the credit cards.
"The biggest part of managing your finances is organization," he said, having her bring in several months of bills and tracking her daily spending.
Heather wasn't in bad financial shape, Costa said; she just needed to take control of her money if she wanted to fulfill her goals. In going over her expenses, the financial planner found ways she could save several hundred dollars -- including adjusting her tax withholding and researching new cell phone plans -- that could go directly to paying off bills.
What you can take away
1. Keep track of your spending.
2. Sit down once a month and go over your finances. What can you cut? What line item needs to be beefed up?
3. Pay off "bad debt" first. While mortgages and student loans have certain tax advantages, credit card debt, in particular, can quickly drain your coffers.
4. See where you can make (relatively) painless cuts. You don't have to get rid of the cell phone or turn off the cable television, but you might be able to scale back plans and save a few bucks.
Names: Shana and Stephen Gangluff
Job: He's a professional golfer. She's a freelance lifestyle coach.
Situation: The couple is in decent financial shape, but have to deal with wildly fluctuating income. Stephen's job, as a professional golfer, means that the couple might see a large windfall one month and be scraping a bit the next. To compound matters, Shana recently left her job to work as a self-employed health coach so she'd have the flexibility to travel with her husband to at least some of his tournaments. (She caddied for him at a recent Canadian Tour competition in Virginia, which he won.)
While the travelling together is nice, it can make the money situation a little harder to deal with. "It can get stressful," Shana said. "I think we can make better choices."
Solution: Working with financial planner Lisa Puttick helped the Gangluffs realize that they were actually doing pretty well. Although the couple doesn't have a written budget, Shana said they keep mental notes of where the money is going.
The things they need to focus on, Puttick said, was evening out the peaks and valleys of their income. One way of doing this: Rather than treat all the money coming in as money that can be spent, pay themselves a salary. "If they have a great month, they pay themselves a normal salary," the financial adviser said. "Then if they have a less than successful month, they still have a reserve."
Puttick's other advice: Examine their investments to make sure they work together. When Shana and Stephen got married, they each had a variety of investment funds already set up. While they might not have to change any of them, it would be beneficial to make sure they don't overlap too much, and that they complement each other in terms of risk and time frame.
The couple's desire to stay with their more-precarious-than-most career choices also provides the motivation they need to work within the budget.
What you can take away
1. See if you're using all the financial tools at your disposal. Would it make sense to take out a home equity loan and pay off high-interest rate credit cards, for example?
2. Remember that a budget doesn't have to be a straitjacket. By taking control of your finances, you can make more informed decisions, rather than flying by the seat of your pants until you crash.
3. Focus on building up an emergency fund. Getting out of debt is important, but if you don't have any money in the bank, it's too easy to slip back into credit card usage when the washing machine breaks.
4. If you own your own business, be especially careful how you handle your money. Just because you're doing well one month doesn't mean it's time to live it up.
Names: Porfirio and Avegaile Escandor
Job: Both computer programmers
Situation: The Escandors have been married for about five years and have two children. Their big goal: Planning for the future, particularly retirement.
The couple is hoping to retire their 15-year mortgage in about six years. With college funds already set up and some money in a 401(k) and various Individual Retirement Accounts, "the retirement planning is the big thing," Porfirio said. "It's time to make it a priority."
The couple plans on retiring when they're between 60 and 67 years old -- "but 50 or 55 would be nice," Porfirio said.
Although they have been socking away some money for the future, the couple would like to get a better handle on what plans they should focus their investments in and make sure they're contributing the proper amounts.
Solution: The couple is doing some good work in getting ready for the future, financial adviser Denzel Smith said, and now has to focus on making sure they're contributing to the right plans and have those plans investing in the proper funds. That's something Smith said he's used to seeing
"People who come to Merrill Lynch have assets," he said. "They just want positive reinforcement."
Smith said he also cautioned the couple to take two different approaches to their investments, depending on what they plan on using the earnings for. While income generating investments can be a bit riskier and losses can be dealt with come tax time, retirement funds have to be able to stand the long haul, since you can't capitalize on the losses.
"Your retirement accounts are the ones you make good sound investments in," he said. "The main thing in any retirement planning is you go through a full market cycle."
Another change the couple plans on making: Setting up more regular contributions to their funds. "We've been doing it on the fly," Porfirio said. "Right now, I want to go to the next level and do an actual budget."
What you can take away
1. Max out your 401(k), especially if your employee is providing matching funds. Passing up on this benefit is leaving free money on the table.
2. Make investing a priority. Rather than just taking whatever "leftover" money you have and putting it in retirement accounts, make such contributions one of the first things you do with your paycheck.
3. Talk to an expert about the various sorts of retirement accounts and what their benefits are. While you can always contribute to, say, a 401(k) and an IRA, you want to make sure that you understand the tax benefits -- both for now and for when you retire -- of the various instruments.
BUDGETING: 7 Sucessful steps
1. Track your expenses. Start with the fixed stuff -- rent, car payments, that sort of thing -- and then track the other money you spend each month.
2. Break these into categories like entertainment, automobile and food.
3. Decide how much of each of these expense you need or if you're spending money on things that aren't important to you.
4. Give each category a monthly spending limit. If you decided to go over the spending limit in one category, figure out what other category you can slash to get the money.
5. Focus on paying down debt, starting with consumer debt like credit cards.
6. Make setting up an emergency reserve a priority.
7. Prepare for the future. The earlier you start getting ready to retire, the better off you'll be.