By Emerson Hartzler
For 44 years I worked in the corporate world dealing with complex financial issues. Corporate finance is complex, but many decisions are easy, once the financial information is available. During the past 7 years I have found personal finance to be very different from corporate finance. It’s pretty simple (unless you are really intent on creating your own confusion!), but decisions are not easy!
First of all, personal finance is, well, personal. Corporate executives typically make decisions based on the “cold, hard facts” and while I would not suggest that all executives have ice water running through their veins, sometimes it helps when gut-wrenching decisions have to be made! By contrast, every decision in personal finance involves some degree of emotion. Add a spouse, children and grandchildren to the equation, and you’ve got real challenges!
So how do you introduce some objectivity into personal finance? I would suggest, as a first step, understanding the basics of personal finance – the “True North” on the financial compass. I promised it was simple, and so it is:
- Spend less than you earn
- Avoid the use of debt
- Save for emergencies and major purchases
- Plan & Invest long term
- Give generously and systematically
Oh, and by the way, you need to do this every day for the rest of your life. I said simple, not easy. So let’s unpack these five basic tenets.
Spend less than you earn:
Well, duh, you say? The problem is you and I are subject to a literal barrage of messages daily (hourly!) trying to convince us that today (just today; tomorrow will be different) we can spend more than we earn. I know people who have done this for a decade or more, and while it inevitably ends badly, they have a great time while it lasts! The simple (there’s that word again!) fact remains, you can’t possibly comply with rules 3 through 5 if you don’t obey rule 1. Sadly, most people I meet don’t.
Avoid the use of debt:
Wow! Is this ever countercultural! Everyone knows you can’t live without your credit cards. And what would life be without “points”? The simple (that word again!) truth is credit cards were invented because merchants and banks knew people would spend more if they weren’t limited to the cash on hand, but could borrow against the future. The second most dangerous threat to rule #1 is credit cards. (The first is the student loan, but that’s a story for another chapter.)
Most of my friends carry multiple credit cards and use them daily, solemnly swearing that:
- They never fail to pay them off each month, avoiding all interest and penalties.
- They really don’t spend any more money than they would if they had to produce cash (or a debit card, actually having money in the bank) for each transaction.
Yet, according to Dun & Bradstreet , consumers spend 12% to 18% more with plastic versus cash, and the average household credit card debt balance for households that use credit cards is north of $15,000. So one of two things is in play here. Either I have a very select group of friends, or my friends may be inclined to lie about other things too.
Save for emergencies and major purchases:
In 2005 in the aggregate, American households saved a paltry 1.5% of their disposable income, and while that number is currently up over 4%, it is trending lower again. In 2010 only 52% of households saved anything for emergencies or major purchases. So if you can’t “afford” to save anything before “life happens”, when it does, out comes the plastic (or the Home Equity Loan), and now you have debt payments further burdening your already inadequate monthly cash flow. What a nightmare scenario!
When one of my clients has a budget suffocating in debt payments, I often recast it without any debt payments. Now I can’t magically make those payments go away, but having a vision of a better future can be a powerful motivator. Typically the clients would see an amazing amount of free cash flow, were they not burdened with their past violations of rules #1 and #2.
A question I often get from clients is: “Can I afford to buy (fill in the blank)?” The (universally unpopular) answer is always: “Can you write the check?” If not, you’ve answered your own question. Pretty simple, and when your monthly budget contains a healthy savings component, the answer is much more likely to be yes, because I’ve saved the money in advance of the purchase.
Plan & Invest Long Term:
In the race between the tortoise and the hare, the tortoise wins every time you read the book. To paraphrase Warren Buffet, “The stock market is very effective at taking money from the impatient and giving it to the patient.” The term “long term investor” is redundant. Many people get so excited about investing they skip rule #3 (saving) and go directly to investing. Big mistake, and here I speak from personal experience.
If you have a reasonable expectation that you will need some serious money for an emergency, a major purchase, or anything else in the next three years or so, there is no way those funds should be in the stock market, or any investment carrying similar risk. Murphy’s Law rules the planet, and inevitably, when you need the money the most, the stock market will be in retreat. Historically the market has tended to recover within five years, but in the interim, you need to be able to ride out the storm.
The good news is that once you have savings to cover your shorter term needs, you can take a bit more risk (and expect higher returns), with your investment dollars.
Give generously & systematically:
While this is not really counter-cultural (people in our country are the most generous people on earth), it may at first seem counter-intuitive. If I am trying to build wealth, isn’t giving it away the financial equivalent of “shooting myself in the foot?” The answer lies in two human emotions that, if left unchecked, will destroy any financial plan: Fear and greed.
Fear can be mitigated by education. For example, if I know the history of how the capital markets work, the next market downturn will be no surprise, and I will be less likely to sell out, fearing my investments will run to zero.
Greed is a bit more insidious. However, many have found that giving is the best antidote to greed. If you are personally involved with helping people less financially fortunate than you, a re-examination of your budget “needs” may transform some of those to “wants”, and the margin in your budget may suddenly expand. Personally, I have experienced the greatest joys in life when I am able to give to others. The gift may be time, attention, labor or money. But compared to other line items in my budget, giving has the highest rate of return, hands down!
So that’s it: Five simple steps to financial success. Today it’s the “road less traveled”, but the trip is a whole lot more joy-filled!
Emerson Hartzler, MBA, is a Lakeview Village resident, and, though he lives in a retirement community, he continues working as a financial advisor for Triune Financial Partners, LLC, at Lighton Plaza, 7300 College Blvd., in Overland Park, Kan. Reach Triune at 913-825-6100.