The Social Marginal

Last month I wrote about the basics of getting started with planning for your future sans Social Security if you’re getting started at a young age.  Now I’m going to touch on a couple additional issues that are applicable if you’re getting into the game a bit later in life, primarily targeted at individuals who are between thirty and fifty years old and are just “waking up” to their financial future and their need to plan for it.

Depending on what end of that thirty to fifty year old age range you’re at, this can be a very stressful revelation, and as such, if you are experiencing a great deal of financial stress without an appropriate plan for your future, I highly suggest seeing a professional financial advisor and getting their help to lay out a plan appropriate for where you are in life and what your plans are for the future.  With that said, all of the initial steps I wrote about in my first post on this topic still apply, some just need further elaboration if you’re getting started later in life.

Debt becomes a more important factor.

Yes, the older you are, the closer to retirement you get, and as such, debt becomes a more important factor in your financial plan.  Often when people don’t save until they are over thirty, then they also have bad habits with debt.  If you don’t, more power to you and you can breathe easy as you likely won’t have any issue accruing enough wealth to be able to retire at a reasonable age if you buckle down and start saving now.  However, if you are carrying a load of debt, you need to evaluate the difference between your smart debt and not-so-smart debt and work out a repayment plan to follow closely (there are millions of resources covering how to do this, so I won’t bother regurgitating the topic here).

When you retire, you ideally want no debt going into it as the more debt you have, the more you have to have saved to be able to cover the payments; sort of counterproductive towards saving for your retirement in the first place.  Younger individuals have the luxury of time to repay their debt and then start on their retirement savings, you don’t.  To fully maximize long term growth and benefits of your available retirement programs (Whether than be an IRA, 401k, etc), you’re going to need to be putting something into them consistently if you’re in this age range, you can’t afford not to.  Of course more should be going towards paying off your debt still than towards your retirement, but you at least need to be putting in enough to cover any employer matches on a 401k/IRA program and/or to maximize your personal IRA contribution for the year (which is currently $5,000/year for individuals 49 and below for a Roth IRA).

Basically, be very aware of your debt, get it under control and once you have it under control, start diverting that money you were putting towards your debts towards your retirement instead.

Invest with long term taxability and stability in mind

By this point in your life, you should have a good idea what your tax bracket currently is and what it should be when you are planning on retiring.  That means that you need to start making decisions based on that data.  This is where issues such as a traditional vs. Roth IRA/401k are important (whether you’re going to pay taxes on your principle at your current tax rate or on your dividends when you decide to withdraw them at your tax rate at that point).  A larger percentage of your overall investment portfolio should also start to focus on stable, guaranteed yields rather than higher risk growth oriented stocks/funds; basically you need to start looking more towards bonds, etc at this point.  Attempting to play ‘catch up’ by making high risk investments with what money you do have is not a good idea.

Family matters

If you are over thirty years old, have any relatives or loved ones you care about and don’t have an up-to-date will or testament, you need to get off your ass and create one or have one created for you by an attorney.  Make sure to entrust a copy of it with a trusted friend/family member, or, ever better, your lawyer.  It will relieve a great deal of stress and confusion that could otherwise occur during an already very stressful time for your family.

Don’t give up

As I said earlier, just getting started with your “financial life” when you’re already over thirty, and even more so when you’re getting towards fifty, can be an extremely stressful situation.  If you’re determined, educate yourself, and stick to your guns it is most likely that you will be capable of putting together a plan that will still have you retiring by the time you’re fifty five to sixty years old.  Depending on your debt load, you may have to work until you’re a bit older or take on a second job in the meantime, but in the end it’ll pay off in financial freedom during your retirement years, allowing you to truly enjoy them.  Don’t let yourself be discouraged by the path in front of you, just take one step at a time and do what needs to be done and you’ll find that things will start falling into place more and more often as you proceed towards your goal.

The third, and final part of this series of posts will be discussing financial planning for individuals who are only getting started when they are fifty years or older.  It’s going to be a bit more involved and in my opinion the hardest challenge to tackle, but where there’s a will there’s a way, and one can realistically save enough for their retirement in under ten years if they are dedicated to doing so and are over fifty (some fun new options come into play).  Until then, I wish everyone the best of luck on their financial path.

Common sense, I know; but after a couple discussions today, I was again reminded that many individuals don’t think of it that way.

Regardless, the most important financial asset you have is your Job (or retirement/pension/disability income).  That means you need to treat it like a financial asset, or more specifically, an investment.   It means that appropriate time, attention and care needs to be put into it to fully realize the potential of it, and just as importantly, like an investment, if it’s going down hill, you need to know when to throw in your cards, cash out, and move onto another.  Holding onto a bad job can be extremely detrimental to your growth and overall long term financial success; sure, you’ll forfeit short term dividends, but they’ll generally pay off in the increased long term gains from a change of jobs.

And like an investment, proper diversification is key to long term success and weathering down times; for example, diversification of your client portfolio by industry if you run or manage a business.  By applying appropriate financial management/investment logic to your career, you can often ‘depersonalize’ the evaluation process a bit and help yourself decide what the best move is for you with a minimal amount of stress affecting your decision.

So I encourage everyone to step back and look at their current job as it was an investment.  If it looks like a bad investment, maybe it’s time to start making plans to move on to a better one.

It’s one of my four favorite days of the year, that magical day when money seems to mysteriously hop out of my piggy bank and dance over to the piggy bank of the IRS and state taxing agencies, it’s April 15th and your Q1 Estimated Taxes are due today if you are on a standard year fiscal calendar.

Whether or not you have 1099′d or other self employment income to document, remember that paying estimated taxes is often the best way to bring your tax liability as well as your return next April as close to Zero as possible (what everyone should strive for).  If you don’t pay enough, you’ll pay penalties next April, and if you pay too much, you’ve lost the dividends that would have been earned on that money if it were in your own control.  So talk to your tax professional or consult online resources to figure out your tax rate and what your employer will be pulling out at this time, revise your W4 if necessary so that you’ll come up short on the taxable amount for the year (but as close as possible), and then file your 1040ES and whatever your state form is for estimated taxes each quarter along with your payment to make up the difference.

Remember, not paying and not getting anything back on your annual filings should be your goal.  A refund is just a zero interest savings account for the irresponsible, especially if you rely on it every year as many Americans seem to these days.  If you’re intelligent enough to be browsing blogs on the Internet, you’re intelligent enough to manage your money now rather than letting the government hold onto it for a year for you.

I think this is going to be my only post on this topic, and though I wanted to avoid it in the first place, I figure it might give some a bit more perspective.  I could go on about this for pages, but I’ll do my best to keep it brief and summarized as possible, hopefully it isn’t too condensed to express the viewpoint.

For the past five years I’ve worked in positions with Residential Development companies that required me to be knowledgeable and exposed to information for pretty much every facet of the industry for said companies as they owned their own Mortgage, Resale, and even Lending fronts.  I’ve been fortunate enough to work for privately owned companies that were owned and ran by responsible individuals that actually cared about quality and customer service, even as they grew larger.  Still, since 2003 I’ve seen so many things that has made me wince that I’ve become a bit desensitized to the whole situation.

In 2003, it was a seller’s market where I was located, big time.  Prices were skyrocketing, projects were pre-sold before they were even finished (A bank’s dream), and buyers weren’t picky.  Of course, with this came the advent of the widespread usage of interest only loans, irresponsible ARMs, and people buying and just assuming that their house would increase in value and that they could use it as an equity piggy bank consequence free.  I often met with homeowners prior to them purchasing the homes, knowing what loan package they were going into (and them often bragging about it), and always asked them (in a caring way, not sarcastically) if they understood what would happen if the market took a dip; this was usually greeted with a laugh of disbelief that it would ever happened and shrugging off the notion that it even could.  The 115% LTV tricks and such, well, they were frequent and it just made me shake my head in disbelief.

Knowing our mortgage brokers and seeing the loans, meeting with the individuals buying the homes since 2003, I can confidently say that in over 1,000 homes sold, a single home buyer was never ‘pushed’ into a irresponsible mortgage package by them, though I have seen many, many insist on them.  I know there are some deadbeat brokers out there, but it is certainly not the ‘norm’, however, overconfident buyers at many times in the market trend certainly were.  And that’s the nature of the beast when you take a gamble like that, you take a chance at getting bitten, and many did.  I recently drove through a development in an area that ‘we’ sold in late 2003 as a developer and saw nearly 30% of the homes in foreclosure.  The thing is, these homes are still worth more than they were bought for, which leaves three likely options: The first, that the buyer was irresponsible in what they could really afford in the first place and insisted on a stated income loan to squeeze into the development; the second, the home has been resold since, likely at the peak of the market, and the again the new owners were irresponsible in what they could really afford; and the third, the most likely in this particular development given the doubling of price in a one year period after sale by developer, that the individuals used their newly found equity in their homes as credit cards and lived like millionaires until they realized that their piggy bank broke.

The biggest problem during the whole housing boom, in my opinion, were individuals using their rising equity as a piggy bank.  The constant refis, HELOCs, the initial 115% LTVs - they were just absurd.  While there were some people that were mildly ‘victimized’ in this whole debacle, individuals who were trying hard at the American dream and got hit by medical problems followed by a loan reset or individuals who truly were uneducated and really were lied to by their broker and such, the majority of home buyers were not, they were just bad investors trying to get rich quick without working for it or individuals spending way more than they could afford because they felt they ‘deserved’ it.  A lot of people seem to be ignoring this aspect these days and just focusing on the irresponsible mortgages, not that many of these mortgages were actually refis to cash out all that new equity for people that could have originally afforded their mortgage before they decided to do so.

And now the Fed wants to bail many of these individuals out.  Maybe I’m just too desensitized to it all, but I say let them lie in the bed they made and deal with the consequences.  This market, just as it has many times in the past when it took a steep dip, will again stabilize and uptick, and hopefully this time around people will have learned from past mistakes of themselves and others and be a bit more responsible with their home purchasing…

I doubt it, though.

It’s a principle that I’ve always held close in my personal and business relationships, though even the best laid plans can often come to ruin.

Uncertainty about your financial future can drive one’s sanity to the brink of destruction, whether that uncertainty is artificial or not.  That same uncertainty can cause you to work hundred hour weeks, start ventures which have always been looming in the back of your mind in an attempt to offset a potential loss of income, and cut back your spending to the bare essentials; basically it can turn you into a money obsessed Zombie, but at the same time it can also lead to new opportunities and financial freedom as a result.

What am I getting at?  I’m still trying to figure it out really, but I do know that I’ve been there before and I’m at that point again in my life.  Two of my larger personal contracts which account for the majority of my income are in an industry in a region of the country right now that is, for the lack of a better word, lacking.  Seeing employee numbers cut from fifty to under ten in any one company in an effort to ’stay afloat’ over less than a six month period can be a stressful experience for a contractor on the other side of the US to go through.

Last time I had this feeling was approximately seven years ago when I was getting out of the military after spending two years in various hospitals recovering from a parachuting accident that left me with some life altering injuries.  I knew that in a few months from that point, the paychecks would stop coming and be replaced with a pension check that could only be described as supplementary income that wouldn’t cover the bills.  I had to find a new profession.  After brooding and stressing for a couple weeks, I decided to do something about it and within a couple days, I had a nice corporate job lined up where I made plenty of money, my stress was relieved.  It isn’t as simple this time though, as the checks haven’t stopped coming (and I don’t know for sure if they will or not to be honest) but I do now have a mortgage to pay and a financial future to continue working towards.  I guess it was a lot easier with a relatively blank slate.

It’s not adversity in your financial situation that will cause you such anxiety, it’s the uncertainty of whether or not that adversity will be coming around the corner in the near future and the inability to fully plan for it.  So while I can continue to try and create contingency plans, work on new ventures and cut back my spending as much as possible, all I can really do in addition at this point is to let go of the anxiety for the time being and hope for the best.  History has taught me that it is the most important ingredient in getting through these situations.

If only it were as easy to actually do as it is to tell yourself to do.  Ok, enough brooding, back to work for me.

While I have a couple posts in the pipeline (regarding retirement without social security and a couple other topics), I’d like to hear, given what you’ve seen me write about thus far, what you’d like me to write about in the future.  While I’m no real ‘expert’, whether it’s a question concerning a situation that you’d like my advice on in a Q&A format or just a topic you’d like to see me research and write about, send it on in.  Anything I use will be properly credited to the source, and don’t be ashamed to share your own web site or blog and I’ll be happy to plug it for providing the ideas or questions to answer.

You can reach me at cinder@socialmarginal.com.  Thanks in advance.

So I’m busy forming a new company or two and transitioning some contracts at the moment, so don’t have a lot of spare time to write, but I’ve been keeping up my normal sporadic reading throughout the day though, so here are some posts I’ve found interesting in the financial blogging spectrum…

MasterYourCard writes about recession-proofing your savings - Good layman readable overview on what is and isn’t insured in case your bank fails.

Get Rich or Die Trying writes about donating your plasma for extra money - OK, I admit, I’d never do it (they won’t take my blood anyways, not that I had any nasty diseases or anything), but I guess if you’re really scraping by some honorable extra minimal income for yourself to pick up.

Saving Savvy by a Future Millionaire writes about his learning about Passive Income - Definite lesson that all should learn and something everyone should strive to achieve.  Financial freedom is a wonderful thing.

Pinching Copper writes about how there are no victims in the housing bust - I couldn’t agree more.  I get tired of hearing everyone whine about getting suckered into something based on their own ignorance and greed.

No Debt Plan talked about his toothpaste paying him seventeen cents - There are some very frugal people out there, not that it’s a bad thing…

That’s about all that piqued my interest for one reason or another in the past couple days.  Until I’m able to dedicate time to writing again, I’ll update everyone on what’s keeping my interest at least.  Listening to the Fed hearings this morning/afternoon was interesting as well.

Just got back from a nice little vacation in Showshoe, West Virginia for the last weekend of the season.  While up there, we found a nice studio condo right in the resort that we might be buying in the not too distant future as our first real ‘vacation home’, sort of exciting.  You can see an ever elusive photograph of yours truly below.  Catching up on my day job at the moment, but expect some new articles up in the near future.