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More on personal financial sustainability:
Wealth Building, Investing,
and Personal Financial Sustainability
We leave behind promises of double digit returns in stock market and real estate investments. Forecasts from investment advisors and politicians indicate a slow economic recovery. And, economic prosperity is in the process of being redefined.
In the economic times we are leaving there are people in high profile cities that have made more money owning one house than most Americans could possibly have saved during their entire work life. Does that mean the person with the high value real estate has a more secure future? Not necessarily. Although the numbers may be impressive; quality of life and personal financial sustainability are as valuable predictors of security as a high net worth.
The stock market (nationally and globally) will continue to make adjustments until some undefined equilibrium is reached. The world economy is heavily invested in the market and that is good news for individuals because we are all in it together. It’s far more devastating to individuals when an isolated pension fund evaporates or a large manufacturing company closes its doors. Continuing to invest our pension funds in the market may be the only viable option for most of us. The best we can do is invest carefully, have realistic expectations, and rely only on well established, trusted advisors/companies.
Real property has gone down in value but it is a tangible asset and, as long as investors can afford long term hold, there is high probability of future value; through sale and/or revenue stream.
Micro economic investments: entrepreneurial business development, good will, and pay down of debt are all opportunities for alternatives to other investments. This is a great economy for increasing personal financial sustainability by:
- Investing in your business
- Maintaining your home
- Strengthening relationships for community support
- Paying down mortgages or credit card debt (a guaranteed return of 7% to 20%)
- Adding to or starting a savings account for reserves
- Walking, riding a bike, using public transportation rather than a private vehicle
- Supporting local businesses, goods and services
Taxes
Federal and State Taxes: Resist getting reeled in by concerns about tax rate issues. Before accepting political rhetoric based on taxes, look at the last two years of tax returns and figure out how much was actually paid. Many people who are concerned about tax rates are actually in very low effective tax brackets. If you are paying more than your fair share of taxes schedule an appointment with a tax specialist and review your tax strategy.
Property Taxes: Because of mortgage delinquencies and foreclosure rates most new mortgage loans require impounds. By factoring property taxes into monthly payments the ‘real’ cost of ownership is more easily assessed. Property taxes fund local economies, including schools and infrastructure. State and local governments are struggling these days as a result of deflated property values. Property taxes vary significantly from county to county. When making housing decisions, exposure to property taxes and increases are an important factor. However, savings must be weighed against the quality of local services and cost of commuting.
Sales Taxes: Sales taxes are directly related to purchases and need to be considered when making purchases, particularly on large ticket items like cars and appliances. When considering a $10,000 purchase with a sales tax rate of 7.5%, the actual cost of the purchase is $10,750 which may be a deal breaker depending on available funds.
Gasoline and Other Energy Costs
Gasoline costs in America have been significantly lower than other Western economies. Prices will remain high and likely increase. We can not individually affect the cost per gallon of gasoline but we can individually (and collectively) reduce the amount we spend by lowing consumption.
An effective way to evaluate and adjust gasoline consumption is to (1) pre-designate how much you plan to spend on gasoline. (2) Calculate the cost per mile and budget use of cars based on the cost per trip. (3) Use alternative transportation and car pools at every opportunity even if you do have the budget for personal use of a private vehicle.
Housing
If you own a home and can continue to make the payments plan on staying long term and don’t bank on appreciation. Instead concentrate of increasing net worth by paying down the mortgage. Remember government subsidizes home ownership by providing tax incentives allowing us to write off mortgage interest and property taxes; one of the greatest tax benefits provided to working and middle class Americans.
If you can not afford your house payments deal with it efficiently and effectively. Talk to your mortgage lender about your options. Do not borrow to make payments if it is simply delaying an inevitable foreclosure or short sale.
If you are renting, negotiate the longest term for which you can commit. Write in an exception for the right to terminate the lease in the event of (1) death, (2) disability, and (3) loss of employment. Knowing where you will live will help stabilize your budget. And, longer term residents, owners or leasers stabilize and improve the quality of life in neighborhoods.
Spending
Spending, like eating, can be addictive and compulsive. The need to spend and eat in order to live makes it very difficult to control. Spending and eating have similar triggers, immediate gratification, seductive presentation, and ready availability. The rule of thumb for determining overspending is: going into debt and or under funding necessities in order to finance discretionary purchases. Consider the tracking system if you want to begin taking control of your spending behaviors.
Make a list of essential spending and keep it handy and visible for everyone in your household. Use the tool, Cash Flow Plan by Priorities and Categories , to begin developing a better understanding of how you prioritize cash flow.
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Celebrate purchases. If it’s not worth celebration, it may not be worth buying. Even grocery shopping can provide an opportunity for celebration.
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Clean out your spending closet. Focus on basics, limit spending to essentials for a month or two, and add discretionary items consciously.
Health Care
The cost of health care is the Achilles heel of Western society. Longevity, largely due to modern research and consumer education, means we are caring for our aging bodies much longer than was imagined when Medicare was first established.
It is essential to make conscience decisions about personal health care. If you are uninsured and a comprehensive health care policy is impossible to budget consider a major medical policy with a high deductible. Having insurance provides an added benefit; those services for which the insured pays are billed at the insurance companies negotiated rates.
Catastrophic health costs are the number 1 reason for personal bankruptcies in America.
Debt
Paying off debt increases net worth. The most effective system for paying off debt is to consistently round up the payment, no matter how minimal it may seem. If a payment is $98 make it $100. If a payment is $1,350 make it $1,400. The power of compounding!
Pay down of debt increases net worth and personal financial sustainability.
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