Monthly Archives: August 2016

Instill a value of saving

images-11We don’t make our kids eat their vegetables before having dessert. Shocking, isn’t it? I’m probably going to get in trouble with a lot of parents and nutritionists for saying this, but yes, we do not make our kids eat their vegetables before having dessert. Wait, you say, isn’t this is a blog about personal financial planning? What does saving have to do with kids eating vegetables?

I’ll get to that in a minute, but first let me tell you how dinnertime goes at our house.

Dinner at Our House

Almost every night (no one is perfect), our kids get a plate of healthy food in front of them.

We talk about how we value eating foods that make us strong inside and out. We even have a vegetable garden so they can see where healthy food comes from and have the pleasure of helping to grow it.

Beyond what goes on their plates, though, we stay out of their eating decisions. They are pretty good about trying things, but they don’t always like what we serve, and they don’t always eat it. That’s okay. If we happen to be having dessert that night, they still get some.

There’s research out there that says kids have innate mechanisms for knowing what their bodies need and when to stop eating. Limiting sweets can actually lead to kids eating a lot more of them later in life. Our goal is simply not to mess up their internal regulation by telling our kids what to eat.

And guess what? They like vegetables and are really proud of eating them!

Kids and Eating / Kids and Money

So what does all this vegetable talk have to do with money? We wonder if a similar approach might work for money lessons. Right now, the kids are six and four years old. The most important thing we want them to internalize at this age is “spend less than you make,” “live beneath your means,” or in other words, “Save!”

So, what is our job as parents?

  • Put healthy choices in front of the kids. First, we limit the amount of advertising and shopping that makes it on to their “plates.” And we do things such as hitting neighborhood garage sales to stock up on gently used toys. They are comfortable leaving some of their money in their piggy banks when we go, because they know they are going to have a little fun spending too, and it’s easy for them to see that their money goes further than it would at the store.
  • Give them a window into how we make grown-up decisions with money, using lessons they can understand. “Yes, I can just pay for that library book you can’t find, but that is money we won’t be able to spend going to the water park.”
  • Talk to them about our value of saving. We value having reserves that give us choices and flexibility. Saving is setting aside money to spend later on something more important than whatever is in front of us right now. Like the vegetables, it makes us strong and healthy, even though it might not give us the same immediate pleasure as dessert.
  • Use Money Savvy Pigs so they can see and touch what it means to make goals, set aside money for different goals, and have the pleasure of reaching goals. This is their money vegetable garden!
  • Stay out of their spending decisions and let them have dessert (i.e. spend money on something frivolous), even if they don’t always save exactly the way we want them to save.

Planning and Uncertainty About Finance

download-36Benjamin Franklin once wrote, “Tis impossible to be sure of any thing but Death and Taxes.” But even death and taxes are uncertain enough to present significant financial planning challenges.

Unfortunately, it is quite easy to conclude that financial planning is a waste of time because no one can know the future. But we do know that we’ll need to set something aside for the future, we won’t earn wages out entire life, and prices will probably continue to inflate. The only other crucial assumption we need to make in financial planning is that every other assumption we make is wrong.

Let’s face it, managing our finances and making important money decisions involve making a lot assumptions:

  • How much will I save? Spend?
  • How much money will I be making? For how long?
  • How much will I need for emergencies?
  • Should I buy or rent?
  • What if I need to move for work?
  • How much should I invest? Keep in cash?
  • How much money will I need to retire?
  • Inflation?
  • When will I retire? Will that be in a bull or bear market?
  • How much risk should I take?
  • What will the markets return?
  • How much insurance do I need?
  • How much will healthcare cost?
  • What will my future tax liability be?
  • How long will I live?

Just about everything about financial planning is uncertain, but some of these uncertainties become less uncertain overtime. As we get closer to future events, often the very same events that we’re planning for, the range of possibilities becomes narrower because we will have more information available. And at some point, we will have our certain answer, but by that point, is is usually too late to have done anything different before we knowing better.

Assumptions are temporary placeholders

Perhaps instead of thinking about the role of assumptions in financial planning as what we think will happen, we should think of them as a way to better answer the question of what to do now. Often, long-term assumptions are used to answer questions like, “how much should I be saving now,” “how much can I spend now,” and “how much risk should I take now.” An assumptions is really nothing more than a temporary placeholder for a piece of information we do not yet have, so we can dosomething, not just anything right now.

Trial and error is a skill

So what if we are wrong now? we can repeat this process and adjust what we do in the present as more information becomes available. We may still be wrong, but with each adjustment, the margin of error in our placeholders becomes progressively smaller until we arrive at the certain information.

This process is known and trial and error, and we rely on it almost everyday, from figuring out what time to leave the house to get someplace on-time to how much food to plan for dinner. It starts with a trial, and even if most of our assumptions are wrong, we have a starting point from which we may continuously improve.

The more we use trial and error to solve a problem, the better we get at it. Just like planning meals, travel, and projects, financial planning has a skill set that is ultimately refined through trial and error. Even medicine uses trial and error. How does a doctor know what dose of a medication will get a patient’s high cholesterol under control? Uncertainty is found everywhere, yet we still get things done.

How to increase a interest rates

download-37As neared a finish, I thought that interest rates, which had been dramatically suppressed by the Federal Reserve, would start to rise sometime in 2011. Boy, was I wrong. Being in the majority of professional opinion at that time didn’t matter either.

Now it is the summer of 2015 and we’re still waiting for our Federal Reserve to raise short term interest rates which will have an influence on longer term rates. Who knows when that will happen and I’ve stopped predicting and making recommendations based upon my personal view.

I thought it was important to remind readers of the effects of rising interest rates, so here goes:

  1. When interest rates go up, the market re-prices the value of bonds and bond funds down to reflect a better return in newer fixed income securities. Fixed means the rate promised remains the same.
  2. The bonds and bond funds (remember there are many different types of bonds) currently owned still produce the same amount of interest income unless there is a default or non-payment. If you hold the individual bond to maturity it pays you back your initial investment. Bond funds just replace maturing bonds with newer, hopefully, increased return bonds, and the fund slowly rises in value (market price) to reflect these transactions.
  3. Now I’ve set the scene, what are the strategies we’ve previously recommended or are now considering recommending in the near future:
  4. Floating rate bank loan portfolio funds. These funds feature variable rate loans usually credit rated B or better. You pay a professional mutual fund manager to select the holdings.
  5. TIPS. Treasury Inflation Protected Securities. These are US government bonds (and many providers have TIPS bond funds) that provide a return of stated coupon rate plus a variable cost of living adjustment (COLA). If interest rates, and then inflation increases, these will become a more popular security or fund.
  6. Bond ladders. Individual bonds that sequentially mature in a pattern like $10,000 at the end of one year, $10,000 at the end of two years and $10,000 at the end of the third year. The bonds will be re-priced down if rates rise, but since the maturity is short we know with a high degree of certainty we will get our money back plus interest along the way.
  7. Other alternatives? Of course. Just wait and the financial services industry will be hard at work to sell you on the “fear” emotion of loss of principal by offering you lots of products and funds that will make them lots of money and maybe you too. Bonds and bond funds will be like stocks for awhile rising and falling in value based on actions in the interest rate sensitive markets.