Newsletter by Mary Buffett
At the start of the New Year, I do a “deep dive” into my financial hygiene. Financial hygiene, like personal hygiene, looks at the relationship we have with money. We all know people who have good and poor personal hygiene. We all know people who have good and poor emotional hygiene. However, we don’t invest enough time into our own financial hygiene.
On New Year’s Day, we start out with the best of intentions. There are vision boards and resolutions. We promise to do better this year. However, by the time April rolls around, it is clear that our resolutions are hopeful suggestions. Our busy lives soon take center stage. That brand-new piece of exercise equipment becomes a rack piled high with clothes. By the end of summer, everything has been long forgotten. We took our eyes off of the ball and we have tumbled all the way down the mountain.
2020 was a rough year and millions lost their jobs. However, even with this terrible (and temporary) situation, we can prepare ourselves for a comeback.
If you are currently unemployed.
For those who have been economically impacted by COVID, there are a number of ways that you use financial hygiene to prepare for your comeback. Yes, it is very tough, but you have the inner strength to get back into the ballgame.
I promise you—things will get better.
When Congress passed the HEROES ACT in May 2020, it provided a number of guardrails for people who had lost their jobs as a result. While the initial $600 per week assistance ended in July 2020, other parts of the legislation can directly assist you and your family. The legislation passed at the end of 2020 can also assist your family.
If you own a home, you can forbear your monthly mortgage for up to a year without any damage to your credit rating. Once you get back on your feet, there are a variety of ways to pay back the missed payments, including extending the terms of the note. The same can also apply to your HELOC loan. Unlike the endless paperwork for home mortgage modifications during the Great Recession, getting forbearance can often be completed over the phone. Considering that housing can account for roughly 40% of your monthly expenses, this could be a lifesaver and will allow you to conserve funds where possible.
For those who rent, it can be a little dicier. Right now, there are a number of eviction moratoriums at the national, state and local level. The Biden administration has extended the national moratorium until the end of March and the State of California has extended it until the end of June.
The key in sustaining your financial hygiene if you are unemployed is to communicate as often as possible with your creditors. It tells them that once you get back on your feet, you will continue to honor your financial obligations.
The one big lesson learned from the Great Recession is that mortgage lenders want to keep people in their homes because a spike in foreclosures drives down the average overall valuation in residential real estate. Wells Fargo certainly does not want to go into the property management game. The people at Honda Financial Services do not want a bloated inventory of repossessed cars that they have to resell at a loss. They know that this period will pass.
2020 was tough but 2021 will be better.
People got sick; friends died. Maybe we can forgive ourselves for a little financial “self-care” when it comes to some gentle overspending. However, 2020 is now behind us. Even with the various strains of COVID-19 that are emerging, a variety of vaccines that are either available or in the planning stages will fully address this pandemic. So, forgive yourself if your self-discipline “took a walk” last year, but let’s talk about good financial hygiene for 2021.
The key words here for good financial hygiene are “Benchmarking” and “Baby Steps.” It might seem counterintuitive, but it’s the best way to hardwire long-term success.
Instead of announcing aggressive financial goals that are impossible to sustain, start off with a number of smaller goals that can be expanded throughout the year. This will allow you to adjust to these new changes so that they can be expanded as the years continue.
So, let’s start with some basic financial benchmarking.
Round up all of your bills and statements from December 2019 and December 2020. Collect everything, from your utility bills to your cable bill. Find your bank and credit card statements. Even if you have tossed out 2019 bills, you should be able to get copies online or have them emailed to you with a simple phone call.
Let’s take a good look at your credit cards. Did the balances go up or down? Did the interest rates go up or down? Are you paying the monthly minimum or more? If your rate is above 18%, it’s time to start looking for a better credit card. If your balances are increasing, what would it take to stop the bleeding?
Now let’s talk about the baby steps. Start by decreasing your monthly spend by 20%. While you’re at it, increase your monthly payment by 20%. However, you have to own the self-discipline for good financial hygiene. After three months, once your budget has been able to adjust, increase both figures to 25%. Three months after that, move it to 30%. The basic idea for financial hygiene is to build a beachhead and expand outward so that you can build a sustainable future.
Now let’s look at your investments.
What do your 401K and other investments look like between December 2019 and 2020? Let’s not forget that all of the market indices crashed but appeared to rebound as the year progressed. Those who didn’t panic were rewarded. Are you putting the max into your 401K?
Now let’s talk about the baby steps. Let’s say you’re at a 10% contribution and you would like to aim for 18% as an optimal figure. Start with your 10% figure and move it upwards by 1% monthly. When September rolls around, you have achieved your goal of 18%. By gradually adjusting your 401K contributions, your monthly budget can readjust around your goals. Also, look beyond your 401K to a number of micro-investing companies that are emerging on the scene today. You can recapture the small change that would have fallen between your fingers and begin to build a second or third portfolio. When you think about it, these micro-investing companies are a great environment to learn more about the benefits of value investing.
Now let’s take a paring knife to your monthly budget.
Let’s discover what we can live with—and live without. Often we live through “expense creep” as we sleepwalk throughout the year. As we navigate through the busy rapids of our lives, we can quickly collect a whole bunch of $9.99 monthly fees for products we rarely use.
Take some baby steps. Look at cable and online channels as an example because there‘s a tidal wave of entertainment content out there. Do we really need every premium channel under the sun? Most people seem to have Netflix, Hulu, Amazon Prime, HBO Now, Epix, a whole bunch of minor entertainment apps, plus 500 basic cable channels on their Roku big screen television. What if we canceled one or two of these entertainment apps/channels? Remember, there is a great deal of content overlap between all of these premium services. 90% of what you watch on Netflix is available on Amazon Prime or HBO Now, or Showtime on demand. Get rid of one entertainment channel now. Get rid of another channel in 6 months from now. Once you get rid of the second channel, you will generate a savings of roughly $350 per year. Again, these are little movements that when added together with everything else you are doing will move your ship into the right direction. It is good financial hygiene in action.
Let’s take a look at your “dining-out” spending.
The average person dines out 5.9 times per week at an average cost of roughly $20 per dining event. That means that the average person spends $118 per week or roughly $472 per month. Add to that most people—and I’m just as guilty here—will spend $5 per day at Starbucks. That Starbucks cost will add up over time.
Let’s take a baby step but don’t stop cold turkey. There is an emotional aspect to dining out that is just as important as the food on your plate. However, if you cut out the beverage and the dessert costs whenever you dine out, it will reduce the net check by roughly 25%. Moreover, if you were able to move the “dine-out” ration from 5.9 times per week to 4.0, it would mean a 33% reduction in your dining out costs. Once you have “trimmed the fat” from those costs, you can get to 50% reduction as easy as bypassing the dessert menu.
Here is something else to consider. If you annualize the 50% savings in dining out, it would pay for a nice vacation along the beach in Cabo San Lucas. You wouldn’t have to put anything on your credit card. You used your own self-discipline to identify the places for budget cuts through benchmarking and baby steps. Once you have adjusted to those new benchmarks, you have moved on to some new baby steps. Since most of the extra calories are found in beverages and desserts, you’ll look better as you stroll along the beach.
A series of little tweaks in the form of benchmarking and baby-steps—when added together over the period of a year—can really turn our financial ship in the right direction. That is how you build good financial hygiene.
And if you’re heading to Cabo, I know a great place.