Monthly Archive for April, 2009

More About Sleeping at Night…a Personal Financial Stress Test

Published by JS Wolff on April 27, 2009 in Financial Education and Financial Wellness. 0 Comments Tags: , .

All of us have a distinct financial personality or what we call our “Money Pulse”, that is probably different than anyone else’s.  What you do or don’t do with your money in tough times says a lot about your core financial beliefs.  Often we get caught up in a herd mentality and we gravitate toward what others are doing. Consider Bernie Madoff and the famous people who invested millions without asking fundamental questions.  An economic crisis is not a time to follow the crowd…it’s a time to know yourself extremely well.

Very few of us have ever trained for or thought through a financial emergency…or any emergency for that matter.  My wife is a chaplain for the local county Sheriff’s department and through her experience, I have gotten a taste of what it means to be mentally and physically equipped for tough situations.   Last year, after 4 months of preparation, she was a part of the response team at a simulated school shooting.  Everything was planned to look like a real event.  Yes, it’s tragic that this kind of training is necessary and all involved hope they never have to use what they learned that day, but she is convinced that lives will be saved if…

Similarly, commercial pilots spend about 80% of their training time on emergency procedures. A recent example is the remarkable “Miracle On the Hudson”, where 155 airline passengers were saved in January due to Captain “Sulley” Sullenberger’s superior preparation and crisis management skills.  Sullenberger drew upon four key attributes during that eight minute flight which we can borrow to help us manage our money in tough times.  More about those in upcoming posts.

Sleeping Financially Well

Published by JS Wolff on April 21, 2009 in Economy and Financial Wellness. 0 Comments Tags: , , .

According to the 2008 American Psychological Association’s Stress in America survey, money is often on the minds of most Americans. In fact, the results revealed that money and the state of the economy are two of the top sources of stress for 80 percent of Americans. And symptomatically, one third of Americans reported losing sleep over the economy and personal finance concerns, according to a recent poll by the National Sleep Foundation.

Know that we have a problem and understanding what to do about it are miles apart… and even further removed can be actually changing our behavior.

Some believe that we should start making better financial citizens before they enter the workforce. Sharon Lechter, a member of the President’s Advisory Council on Financial Literacy is on a mission to see that every student receives some form of financial education. Her goal seems closer with the recent introduction of a Congressional bill that would require every college and university receiving federal funds to provide a four-hour course on financial literacy.

This strategy and may provide much needed money sanity for the next generation and prevent future financial meltdowns, but what about those of us who don’t have time to go back to college? Let’s get real simple…

In last week’s entry we talked about four buckets of money

- Essential, Now (less that 5 years)
- Non Essential, Now
- Essential Future (more than 5 years)
- Non-Essential Future

This week’s post addresses why did I selected five years as the tipping point between now and later. It has to do with the trust level I have for where I park the money and how much chance is there to lose it versus the opportunity for growth.

For example, there is historical evidence that I can’t trust the stock market to park my money for less than a 5 year period. To illustrate, let’s take a quick look at the best and worst stock market periods over 1, 5, 10 and 20 year periods.

Best Worst
1 Year +61% -39%
5 Years +30% -4%
10 Years +18.5% -1%
20 Years +18% +5.5%

Although this data is historical and not necessarily a predictor of future market activity, there is a huge difference between the 1 and 5 year swings. While I’m not willing to take the possibility of a 39% loss for money I need in the near term, the risk of a 4% loss over a 5 year period seems more palatable.

So how does this help me? Concluding that exposure to the stock market will only be for money uses outside of the next five years, I can concentrate on more conservative vehicles for near term needs and wants… and be one of the poll respondents who actually can get a good night’s sleep.

Beyond Financial Literacy

Published by JS Wolff on April 13, 2009 in Economy, Financial Tools and Financial Wellness. 0 Comments Tags: , , .

Turns out April is “Financial Literacy Month” and the National Foundation for Credit Counseling is weighing in by releasing the initial results of their third annual Financial Literacy survey. As this is currently a hot topic nationally, Congress will be briefed with the full report later this month.  They will hear, among other alarming statistics, that fully 41% of respondents gave themselves a grade of either “C, D or F” when it comes to understanding money and/or making good money decisions.  We are definitely not making the Dean’s List here.

So what’s the problem? Evidence suggests that economic and financial stress is damaging health across gender lines but apparently affecting women to an even greater degree. According to 2008 American Psychological Association’s Stress in America survey more women than men (84 percent to 75 percent) expressed fear about the economy, and many reported new physical and emotional symptoms, such as headaches, irritability, insomnia, fatigue, overeating and chest pain.

With this kind of evidence, why aren’t we more proactive in preventing this stress from taking such a toll on our health and wellbeing? We know that the medical side of the health/wellness movement took a dramatic turn as they discovered it was both healthier and less expensive to prevent disease than to treat it after onset. Similarly, ask anyone who has ever tried to dig themselves out of a financial hole, it is always more stressful and expensive to dig out of a money pit that stay out of one in the first place.

I’m convinced that much of the problem can be attributed to a couple of reasons…first, there’s too much financial information for us to process and secondly, the communication of money concepts are often overly complicated.  In the past few weeks, I have been discussing pros and cons having tons of data within clicking distance.  Information, and even education, is only valuable only if we have a simple way to determine its relevance to our personal situation and forge a confident, clear path toward decisive action.

So taking off from last week’s example where we looked breaking down a complex topic like Estate Planning by forming a few simple, high level questions, let’s consider something similar for managing money in tough times.

The big picture money questions in tough times are:

  • Do we need money for an essential expenditure or a non-essential expenditure?
  • Am I going to spend within the next 5 years or beyond the next 5 years?

I will explain the five year timeframe in the next blog, but with these simple questions we can create four buckets of money and form very straightforward action plans for each. The four buckets are…

  • Esssential, Now (less that 5 years)
  • Non Essential, Now
  • Essential Future(more than 5 years)
  • Non-Essential Future

Next week… walking through simple money management strategies for each of these buckets.

Financial Decision Support Frameworks – an Estate Planning Example

Published by JS Wolff on April 8, 2009 in Financial Education, Financial Tools and Financial Wellness. 0 Comments Tags: , .

Last week, I mentioned that two of the clear differences between our current economic crisis and the Great Depression are the interactive ways we now communicate and the staggering amount of data that is literally at our fingertips via the Web. Collectively these phenomena contribute to what I termed the, “data invasion”, meaning that, unless we have a way to filter, simplify, and personalize financial information we will probably not be much better off than they were in the 30’s… sort of dazed and confused.

In discussing the topic of Financial Wellness with the HR Director of a prominent Silicon Valley tech firm, she commented her employees had an almost universal reaction to the economic fallout of 2008… they were more or less frozen. That is, they didn’t know what to do, therefore did nothing and were financially stuck. In fact, she noted that they still are. This is precisely what happens when we don’t have a plan or framework to help us process the inevitable unpredictability of our financial life.

As a specific example, I’ll use what most of us would agree is a complex financial topic… Estate Planning. Responding to employee questions from corporate Estate Planning workshops over many years, common misconceptions about Estate Planning include that it only is a pertinent topic for wealthy people or that it is something that only needs to be addressed by the elderly. Both of these assumptions are just flat out incorrect and, of course, create barriers to take needed action.

So how can we build a simple Estate Planning framework that will help create the momentum we need to move forward? Start with the broadest questions. There are the three basic components that need addressing.

  1. Living Care – I’m still alive but I need care and management of my financial affairs
  2. Dependent Care – Whether alive or dead, I can’t care for those who depend upon me, who will and how?
  3. Assets – Who gets what and when?

These high level broad questions are the essence of Estate Planning and for that matter, building helpful frameworks. For example, if you don’t have documented, written answers to these Estate Planning questions, it is hopefully somewhat disturbing and should spur you to want to know the next steps. I recommend going one step further to own and internalize the required actions. How about, “whether alive or dead, I can’t care for my daughter, Tess… who will and how?”

Next week, a framework to help us with money management in tough times.