Real Life Situations
I mentioned earlier that my personal experience has provided me with insight to recognize some of the things of what to do as well as situations to avoid. Here are a few of the stories I can share.
Story One, Turn "Emergencies" into "Inconveniences"
I knew a married woman who took a sum of money from her 401(l) when her husband lost his job in the later part of the year. She used it to pay her bills and then had a big surprise the following year at tax time. The surprise?? The money that she took from her 401(k) threw her in a higher tax bracket, so with all the taxes on the regular earnings, the penalties on the early distribution and taxes of the higher income bracket, she was short the money so once again she took money again from her 401(k) to pay the tax man. In a short time, she unknowingly spent years of savings?!?!
Moral: Have adequate cash reserves set aside to allow more options so you will be able to leave your retirement money for retirement and giving away unnecessary funds by avoiding penalties.
Story Two, 401(k)s and Banks
Many companies promote 401(k)s as a benefit. Some of these same companies also promote the ability to take loans as a way of "borrowing from yourself." Several things to be aware of with this strategy are 1) the money you take is no longer working for you, so it isn't growing. It's like putting your growth of retirement on hold. 2) Inflation continues, so you are not keeping up with inflation, 3) if you lose your job, you more than likely will have to pay the loan off in a very short amount of time to avoid penalties. How many people have the cash to pay off a loan if they are not working?
Moral Please remember that your 401(k) is not a bank.
Story Three, Write that last love letter! Now!
I had a 26-year-old client who had a girlfriend and two children. We talked about insurance that he could have gotten for less than $20 a month (the cost of a pizza and drinks) to provide $50,000 in the event something tragic happened. He said he was handling it.
A little over a year later, his girlfriend called me to inform me that he slipped at a poolside and broke his neck. He was flown here to Reno and 3 month later developed further health issues. He died on the operating table, leaving his 24-year-old girlfriend, and 2 years old and 4 year old without any way of making the transition to a life without him. Her father ended up moving in with her to help her get her feet on the ground. I often wonder if people could have a crystal ball to see their futures, what would they do differently?
Moral Remember to write the last love letter you will ever write. Make sure you are covered for the unexpected. Ease the pain of those you love.
Story Four, Second opinion and diversification
I once knew a gentleman who bought a stock that he did well with. In fact, he liked it so much he mortgaged his house to buy more. Later, the stock went belly up and with it basically everything he and his wife owned. In fact, they lost the home they lived in and were forced to move from state to state living with each of their children. He eventually passed away and now his widow continues on, moving from place to place with no home of her own.
Moral, Just like a Dr giving you a serious diagnosis, get a second opinion. Whenever making critical decisions, seek out a professional.
Story Five Have a plan
A gentleman and his wife came to my office stating he was going to start his own business. I asked him if he was going to work at his job during the day and work on his business in the evenings and weekends. He said, "No, I'm just going to quit and go full time to my business." I asked him if he had funds to live on while he was getting his business up and running, which he himself figured he would be able to replace his own income in less than a year. He said he had nothing saved. I suggested that he might be a little overoptimistic but if so, how he was going to replace his income for that year while he was building his business. He had a blank look, then a look of understanding came over him. I then asked him if he had funds to buy all the equipment he needed of which he had none. I asked him how he was going to pay for a building to have his business in. He said he would use the value in his life insurance which was $900. You get the picture. Imagine if he would have given his notice.
Moral, To avoid some costly mistakes, have a plan, for life, for business, for college, for retirement, for whatever you are trying to accomplish. Sit down and take the time to figure out where you want to be and where you are now so you can figure out what direction to go.
Story Six, I don't have any money
I had a client who made good money complaining to me about being broke already on a Monday and she just got paid on the preceding Friday. Upon her prompting, I started asking her questions to determine what was happening to her paycheck. Through an open discussion, we discovered the area that needed to be looked at. She decided that she didn't want to have to have her children support her, so she opted to make the changes to free up the funds so she could plan for herself.
Let me ask you a question, If you don't have money now to save, even just a small portion, are you going to have money later to buy food? Do you want to work when you are 65 or older because you have to or because you want to? Look honestly at what areas could be improved upon and make the change, sooner, not later.
Moral, There is no "Pot of Gold", no "Fairy Godmother" or "Genie in a Bottle". Sorry... but. There is "You"!
Story Seven, Don't get ahead of yourself
When I'm out and about, people will make comments about the latest current event and its impact. Unfortunately, people don't buy the newspaper or tune into a station to hear good news. Its a fact of human nature. "If it bleeds, it leads". So, I feel the news can be somewhat biased. It's like taking your blood pressure just after running a mile marathon or when you are in a comma. Of course, it's going to be skewed. When taking in the news, remember it changes from day to day. My job is to remind people, to look from a longer perspective and handle their finances the same, according to the time frame to which it applies.
Moral Don't follow trends. By the time its a trend, you have missed the opportunity. And don't make quick decisions.
I could go on and on, but I will save more for a later day so stay tuned.