The Building Blocks of Financial Security

Ali Habashi: I think that we can agree that most, if not all, of us in the U.S. are worried to some degree over our finances. This is especially true for caregivers who often must invest a significant sum into raising children or supporting aging loved ones. In fact, according to the AARP, “family caregivers spend an average of over $7,200 annually on caregiving expenses alone.” So, Lori, for all of our listeners, what are the basics of being financially secure? Lori Atwood: People sometimes think that being financially secure means driving a certain car or wearing certain things or being able to go on certain trips, and that's not what it is. So, I like to break it down to five things; foundational building blocks of your financial well-being. The first is the most important by far, and it sounds simple, but it's very critical, and that is spending less than you earn each month, consistently. Making sure that you are always spending less than you earn. And when you're caregiving and unforeseen expenses come up, you can't always be in that situation. It's very difficult, but if you know how much you're bringing in after taxes and benefits and retirement contributions and how much is going out, that number at the bottom is positive. Then hopefully along with a rainy-day fund and an emergency savings account, you can weather any sort of expenses that pop up. So that's the first thing. The second thing is that you have $3,000 to $5,000 of cash for rainy-day expenses; $3000 if you're a single person, $5,000 if there are kids or minor children in the home What is a rainy-day expense? A rainy-day expense is a car repair, a home repair. Dental work that's not covered because most dental work is not covered and things pop up. All the things when you say, “Oh, I didn't spend that much this month, this thing happened.” It's those items. Then the third thing is having emergency savings and your emergency savings is different. Your emergency savings is for a total loss of income. It's usually due to one of three things: divorce, some sort of health or disability (something that keeps you from working), and obviously job loss. So we want you to have three to six months of your expenses in cash in an account somewhere that you can draw on if, heaven forbid, your income just gets cut somehow. And so you need to know how much you're spending in your expenses, which you would've figured out in ticking the first box, and that'll help you figure out what you need in your emergency savings. So, number four is that you are saving appropriately for retirement. People in the caregiving world know this better than anyone else, that no matter what we say or do, or how often we repeat that we're going to die at our desks, there's 10+ years where you are unable to work, god willing, and we need to be properly saved. And my recommendation typically, and this is just a guidepost, a rule of thumb, is that you're saving 15% of your pre-tax salary or whatever it is you're making. If you're working on your own or as a consultant or whatever it is, you may get a 4% match from your employer, which means that you should be saving 11%. That’s the total. And then the fifth thing is that you're managing any consumer debt. I don't mean a solid mortgage, I don't mean a good interest rate, or car loan. I mean revolving credit card debt, personal loans, and that the myriad pay-as-you-go stuff that people seem to have now. Ali: Student loans as well? Lori: Student loans, that's an interesting question. Student loans, if you have parent plus loans, they can be at a very high interest rate. But if you have subsidized student loans, no, I would not include those in that category. And so, for listeners who don't know the difference, let me just hit that quickly. The U.S. government subsidizes student loans for the student by paying money to reduce the actual risk-adjusted interest rate. So, if the risk-adjusted interest rate is, say for example seven, the U.S. government pays the lending institution, and you get a loan for say, three, three and a half, four, whatever it is. And those are subsidized student loans, and you don't have to start paying them back until you graduate. They just are much nicer loans. But if you have parent plus loans, which are typically the ones you hear people complain about on online or on TV or whatever it is, those are at the risk-adjusted rate, typically you have to start paying them back right away. They're basically unpleasant loans. So we want to get on top of those, and some people have hundreds of thousands of dollars to get an undergraduate degree. It's crazy. But if you have those five things checked off, you are prosperous. No matter what car you're driving, no matter what shoes you're wearing, no matter where you go on vacation, you are prosperous, you are making it. You are in great shape financially. And I want people to really hear that because there's so much comparison out there now. It's really hard to get that message across. And in terms of the caregiving community, having that emergency savings, having that rainy-day savings, is critical. Making sure you don't spend more than you earn each month. These are critical things because if someday you just need a break and you need to get someone to help you, we need to have some cash around for that kind of thing. Ali: I am not taking care of any children right now. I'm not living with an elderly relative right now, but even just random expenses on the condo that I live in…it's constant. And even when you think you can fix something, something else happens and it costs the same amount of money, and now you need that money for something else. Lori: Yeah, it's crazy. Even people who have pets, and especially if you have an elderly pet or a pet that has some sort of ailment, it's crazy how expensive that kind of caregiving is. Ali: Oh my God. Vet bills, my God. Lori: Yeah. So you definitely want to have that money stashed away because again, just like dental insurance, pet insurance can be spotty. Ali: Yeah. And I know it's something that people are looking for now as another benefit, just pet insurance or pet care. Lori: Pet care is fabulous if people offer that as a benefit. Pet insurance, you must read the fine print of what they cover and what they do not cover. Ali: That's good to know. I will say Homethrive does offer pet care. Lori: Okay, good. That's really fabulous. That is a great benefit. Ali: Yes, I can, speaking of myself and a good chunk of the millennial population, we care so much for our pets and that pet care really comes in clutch for us. So, in that same sort of vein, let's talk about short-term satisfaction and long-term goals. I don't know about you, but my personality is pretty fiscally cautious, to the point where sometimes I really need to remind myself that I should definitely invest in a decently made piece of furniture, or better shoes, or a jacket that keeps me warm. I also have a bunch of lovely friends who are much better at rewarding themselves or upgrading the things that they need to upgrade. The problem there is that sometimes that type of spending has them crying over their bank statements. There has to be a happy medium. So what is your advice there? Lori: Here's what I tell people and this is how we do it in my own household. Remember step one from what I just said, which is figuring out everything that you earn after taxes and benefits in retirement and everything you spend on a recurring basis. The internet bill, the cell phone bill, insurances, groceries, all of that, and get yourself or your household a pool of some amount of full discretionary funding. So what do I mean by that? Let me give you a simple example. If you make a thousand dollars a month net of taxes and everything else–and I'm obviously using that number because it's simple and people can follow it easily–and you spend 400 on rent, right? And you spend 100 on utilities and you spend 200 on groceries, you're left with 300. I don't want you to spend all of that, but you could have 200 for full discretionary spending each month within that pool of 200. Do whatever you want. If you need new shoes, if you need a new coat, if you just want to go out to dinner with a friend because you just want to blow off some steam, go for it. Don't go over that number. Because I'm taking that last hundred, if you remember my example, and I'm putting it toward longer term goals, car replacement, renovation, down payment or whatever the longer-term goals are. Maybe it's retiring early, I don't know. I'm putting it toward longer-term goals now. I just gave dummy numbers there in that example. Those are obviously not real, but that's the calculus. Ali: Alright, you heard it here first, folks. We're going to have to do some math. Lori: Math is your friend. Because it's really, it's math that anybody who's gone through fourth grade can do. It's really adding and subtracting and multiplying and dividing. Ali: We've all got that. Or at least most of us. Lori: Yes, I am absolutely confident. Ali: You know what? We've all got that little calculator on our computers now. Lori: Exactly. Which, by the way, I take out all the time and use. Ali: Me too. Yeah, all the time. All the time. So what affects a person's finances the most then do you find? I assume you have tons of experience in listening to where people are spending or seeing where they're spending. Lori: Tons of experience is the correct way to say that. I've been doing this now for nine years, almost 10. We have thousands of clients at the firm. I can't say we've heard it all, but we've heard a lot of it. And my experience time and time again is that the most important thing for your finances is your happiness. If you are not content with your body, your relationship, your housing, your job, whatever it is, it will show up in your finances in a negative way. And I know this is something that's relevant to a lot of the caregiving community because sometimes caregiving is extremely hard. Hard on you, emotionally hard on you, physically hard on you. Psychologically, it's unrelenting. Sometimes you just don't get a break. And so it's very easy to say something to the effect of, I deserve this. I'm doing this because I deserve it. I'm just doing this. And it's not that I don't empathize with that position. But what I'm saying is that if you, overall–and this may not be the case for everyone, I get that–if you can arrange your life so that you can get the breaks you need or get whatever it is you need to increase your contentedness, even if you're not a hundred percent happy with everything going on in your life, your finances will be much better off. People expect me to say something about some Roth account somewhere, but that's just way further down the road than any of the other stuff. Ali: I think every week I can look at myself or a friend who's had like a rough day. And then it's, “I've had a rough day, it's time to order DoorDash.” Lori: That's right, that's right. Oh, that is so right about the takeout. Ali: It costs so much now. It’s so much money. Lori: And the $10 fee just to have it delivered, and my experience is that it always comes cold, and it's those sorts of things. If you, not you personally, but if a person were calmer, were more contented, we're less frustrated with whatever the situation is, and it could be a million different things, your finances will benefit. Ali: So with that time saving element, I know that's part of what we do at Homethrive. We try to take some of that time off a caregiver's plate so that they can have just a little bit back to themselves. I know everybody's sick of hearing self-care, the word self-care, but we really do need time for ourselves in order to be better caregivers, in order to be, apparently, better spenders. Lori: Better at your finances. Yes. Yeah, absolutely. That's right. Ali: While we're on wellness, here at Homethrive, we are well aware of just how much something like caregiving impacts a person's mental health. One of the many services that our Care Guides, or social workers, provide is simply being a listening ear for our members who are often going through extremely stressful situations in their lives. Here's another stat from AARP: 60% of caregivers report clinical levels of stress and 40% experience depression. So how does financial security help with that emotional lift of being a caregiver? Lori: Well, there are two ways, in my opinion. The first way is by taking one of the main stressors of life away. You know, I'm not saying it's going take everything away, but it will take one of the top three stressors of life away if you know that you've hit those five things. And the second thing is similar to something we talked about earlier, which is there's a little cash around if you need a break. And going back to that well-used term of self-care, it's a lot of times we just don't have an escape hatch. We just don't have a valve to let steam out. And having extra cash around is that valve. Extra cash is not a cure all, but it helps so many things. Ali: So when we do definitely need that DoorDash, we can spend that money. Lori: Yeah, because what you don't want to do is, I mean, how many people have some article of clothing in their closet that still has the tags on it? Raise your hand. So, I don't, because I do this for a living, and I'm very weird about that kind of thing, but lots of people do. And part of the reason that they stare at that thing, which is I'm sure a beautiful thing that still has the tags on, meaning it's unworn, is because the guilt and the shame, they overpaid. They didn't have the money for that. Something else went undone in order to do this. It's a whole swirl of psychological stuff that goes on. But if you knew you had a certain amount each month that you could spend on full discretionary items, and if there was a pair of shoes you were just yearning for and you knew if you didn't do DoorDash that whole month, you could buy those shoes and happily and proudly wear them. Wouldn't that feel empowering and wouldn't that reduce stress? Ali: I need that guilt-free spending. I have a trick that I use. I don't know if you do this, but if I go to a store and I see something I like and it's expensive, and I don't need it necessarily, then I will put it back and I will go home. And if I'm still thinking about that thing few days later, a week later, then I will go back and buy it because it's in my brain in that sense. Something I want. Lori: I definitely do that. In fact, you can't see them, but these earrings, I had my eye on them for three years. Three years waiting for a sale, waiting for this or that, and somehow I just mentioned it to my husband. He's like, that's ridiculous that you've been waiting for three Christmases, and he got them for me for Christmas this year and I love them. I wear them almost every day. And, you know, I had my eye on these things. It didn't go away. So I think that's a great system. Ali: Yeah. I think the bug in the brain is a good system. And I too, if I'm feeling a little guilty about overspending, maybe I didn't do the bug in the brain thing. Maybe I just bought the thing. If I wear it a lot, I like to imagine however much I spent on that thing dividing and dividing. Lori: Amortize. It's called amortizing. That is the technical name. Ali: Is that what it's called? Is that where I'm like, “If I were rent this each time, it would only cost this much”? Lori: That's high finance. That's finance. Amortizing. Women more so than men if you have to buy something for some fancy event. A lot of times women don't get a second use out of it. And if you're not sort of a Rent the Run Runway gal, which I'm not, I will buy something like that and I will wear it like five times because chances are whatever, wedding and event, they're not the same people. I just wait for the next wedding. And so I do absolutely get more uses out of it, but there are all kinds of hacks like that to keep yourself in check. I think one of the places where people don't have enough hacks to keep themselves in check is one you mentioned earlier, which is takeout. It's takeout and a lot of times people will say things like, “Hey, I hate cooking.” Okay. That's fair. Yeah. Not everybody likes to cook. It's a hobby for some; it's not for everyone else. Then figure out some things that you can prepare easily that don't require cooking. Something as simple as tacos, something as simple as pasta. Something where it's just really preparing. It's not a 10 ingredient recipe or whatever. Ali: Everybody has their rotation, their weekly rotation. Lori: That's right. That's right. I want my teenage daughter to have heard you say that because she's like, “Why do we always eat the same thing on Tuesday night?” I'm like, “Because I have a rotation.” Ali: Yes. Because it takes so long to plan. But okay, so I've got one last question for you here, and it's just, have you seen growth in your clients from when they first come to you versus when they finally are financially organized? I would love to hear some success stories. Lori: It's not even just growth; it’s life changing for some people. I have a client who, she was single all her life and she was, I don't know, maybe 54 or 55 years old and she said I know I'm going have to work until I'm 70. I'm like, really? Let's see. And she didn't, and she retired based on our analysis. And not only has she sent me like every one of her coworkers as a client, but she often sends me postcards from wherever she is. She's like, this is because of you that I'm here. And it is life changing. I mean, we work with a lot of people who are in life transitions, getting married, getting divorced, having a child, having a second child, changing jobs, changing careers. It's extremely empowering. I have another woman, she was an attorney at a big company, and they were just grinding her down to a nub. I mean, she worked constantly. She's like, I have a skincare product idea. I want to have a business doing that. I'm like, do you, let's take a look at that. And she did resign and she does do that. And she's making enough now to have that as her business. And she doesn't have to go back to the practice of law. And there are a bunch of stories like that because again, the overarching goal is for you to get contentment. Because her being ground to a nub at that company and spending more and being miserable and couples therapy and this and that and the other because everything was just so tense was not helping her finances. And so if you can tighten up and live on something less for a while as you build whatever the other thing is, the contentment goes way up, even if you have a little less to spend on DoorDash. Sorry, I'm picking on DoorDash. Ali: I know we are. We have been picking on DoorDash. Lori: Yeah. I don't mean to Ali: You know what? They deserve it. Eighty dollars for one burger? Lori: It's very expensive. Yeah. but you get what I mean is that it's a rippling effect in your life. Ali: Yes. Yes, absolutely. And I think too, it's so easy to overspend, at least for me personally, I think it's very easy to overspend on ordering takeout on going out to eat. Little daily things, that are just like that little treat that I deserve. Because I worked a full day. It takes a tiny bit more planning and a tiny bit more money. At this point, not even that much more money, to find an event that you can look forward to in the next few months, and you pay for a ticket and just schedule that out and now you've got this cool thing. And for me, having an event or a vacation or something like that on the calendar is wonderful. To look forward to something. Lori: That's absolutely right. I mean, you and in the caregiving community, this is definitely a thing, every day can be extremely stressful. I have a 90-year-old mother with dementia, and so this is not lost on me by any stretch. It's something I understand. And the thing about it is if there's a way to configure any aspect of that caregiving, to lighten your load slightly, it's well worth it compared to the DoorDash or the shoes or whatever it is. Because you're just so freaked out all the time and stressed out. Ali: I want to say thank you, Lori. I think this has been a very good, very compact sort of lesson on finances. I know I definitely have some takeaways. I need to adjust how I'm putting into retirement. But, is there anything else you want to leave the listeners with before we sign off? Lori: Here's what I'm going say. With very few exceptions, most financial issues are fixable if you're willing to do what needs to be done to fix them, and we're not always willing to do it, and that's where you have to look into yourself and see. But they're mostly fixable. There have only been a handful of situations where I'm like, I don't know what to do here. But 99% of the time I know exactly what to do and you have to implement it. I'll tell you what it is, and you have to implement it. And so get the help you need. Get fiduciary help. My firm works hourly. Find someone who works on a fee-for-service basis. We're around the country. If anyone wants our help, please come in and just put “caregiver” in the promo code and I'll give you $50 off the first meeting. Absolutely get the help you need to try and reduce the stress around finances.