Financial Planning Stuff You Need to Know

I just read a statistic that most luxury cars are leased. I’m not surprised since many people who purchase cars especially luxury cars can’t really afford them. I guess this is part of the whole upgrade trend.

From $200 jeans, to $6 cups of coffee people have decided that it’s ok to upgrade to more expensive things whether they can really afford them or not. The easy availability of credit cards makes the upgrade lifestyle easy. That is until the crushing debt load kills any hope of achieving any long-term goals.

Of course the upgrade trend didn’t spring up from nowhere. It’s funded by marketers who spend BILLIONS of dollars per year to put ideas into your heads and make you think you came up with them. (I know I used to be one of them).

Now back to cars. I happen to love cars. I subscribe to a few car magazines, read the auto reviews in Consumer Reports and I’m a frequent visitor to the Edmunds.com website. I recently even bought a car and I will admit it was hard to pay cash when I know I could have leased or financed a much more expensive car that could have impressed my family and friends (well at least my parents).

Over time the difference between buying a modest car vs. upgrading and leasing a luxury car is substantial. Purchasing a $25,000 car every 10 years would cost you about $112,000 over 25 years, accounting for repairs and inflation. Leasing a $45,000 car would cost you about $320,000 or almost THREE TIMES AS MUCH! The difference is even more substantial if you were to invest your savings over time.

It drives me crazy when I read postings on Edmunds from people who are leasing their cars saying for $9,000 more over 2 years it was worth it to drive a nicer car. The problem with this thinking is that it is short term. That $9,000 could grow to $72,000 in 25 years. Plus what will the person do when their lease is over? If they do the same thing it will be another $9,000 or more in additional costs.

I now have a pretty reliable system for guessing a new prospect’s net worth before our first meeting. If they drive up in a really nice car, almost inevitably they are not on track to meet their long term goals. The nicer the car the more in trouble they usually are. An old car is usually a good sign that they are quite wealthy. One of the wealthier prospects arrived by city bus.

A fancy car is a sometimes a good predictor of income but not of wealth or ability to meet long-term goals.

Perhaps its time we upgraded the importance of our own life goals and used or money to achieve them vs. purchasing $6 coffee, $200 jeans, and luxury cars.

When asked, most people say they are not directly influenced by advertising and make their choices based on product quality, price, performance etc, etc.  What they fail to realize is how advertising really works.

The best advertising often doesn’t directly make you jump up and purchase the product but rather integrates the product or service into the cultures value system.  The most effective advertising creates a belief that you will have greater social status if you purchase the product or service, or have greater sex appeal (yes sex still sells!)  Even better is when these values are translated into cultural norms.

One American cultural norm is that everyone spending everything they earn, and therefore your spending is a good indication of your earnings and wealth.  Although this really doesn’t make sense on many levels it is deeply ingrained in our values system.

Here is a recent example I experienced:

A recent speaker at my CEO think tank group asked if anybody had recently purchased a car.  I raised my hand since I had just purchased a car a couple of weeks earlier.  He asked the make and model. When I told him he said that car runs about $30,000, right.  When I told him it was less, he said Work with me here I’m trying to make you look better.

Here are the unspoken values the speaker was expressing:

1. The more you spend on a car the “better” (wealthier) you are
2. Purchasing a less expensive car made me a lesser (less wealthy?) person.
3. I must have purchased the most expensive car I could afford (I want to look as “good” as possible, right?)

Here are a couple of others:

• My dad’s newly found respect for a cousin of mine who recently had purchased a Jaguar.
• My client who works at a large law firm who was looked at strangely for bringing his lunch to work to save money.

We are either rewarded or sanctioned based on our adherence to these cultural norms usually by those whose opinions we value the most:  Family, Friends, and Co-Workers.

This is an advertisers dream. Having the most influential people in your life punish and reward you for not purchasing their products and reward you for purchasing them.

Unfortunately, an advertiser’s dream is probably not yours.  In order for you to assert your own values you will need to do five things:

1.Recognize the powerful forces that are aligned to impose their value systems on you and how they work.

2. Make some tough decisions on what is really important to you (see the last blog on that topic)

3. Enroll those you care about to support you in living your own values. This means having a conversation about what you want is important to you in life and what changes you have decided to make.

4. Increase the time you spend with those who provide positive support for your life goals and decrease the time you spend with those who are not supportive.

5. Develop a long-term plan to achieve what is most important to you and revisit it periodically to make sure you are or track or make course corrections.

One question I often ask my clients is this:

If you knew today were the last day of your life what regrets would you have if any?

Typical answers include:

• Didn’t spend enough time with (mother, father, sister, brother, child, friends, etc.)
• Never worked at the career I really wanted
• Never made peace with (mother, father, sister, brother, child, etc.)
• Never tried (activity)

Almost no one answers with something material.  Yet when I first meet with clients they often have a list of material things that they want.  Why the disconnect?  Why aren’t people focusing on the things that they truly want in life vs. more material things?

Certainly some things like decent housing, heat, etc. are fundamental to happiness, but above a basic living standard there is very little correlation between happiness and material wealth.  But why many of us aspire to a Lexus vs. a Toyota, or a McMansion vs. a standard size house.

I call it the “Retail Industrial Complex.”  Companies spend BILLIONS of dollars to convince you and me that if we purchase their product or service it will truly make us happy.  Unfortunately, the things that really make us happy, spending time with those we care about, doing work we really value really don’t require the purchase of a lot of material goods.

Therefore the Retail Industrial Complex spends its billions to supplant our own internal value system with their own.  Their system revolves around the product and its role in achieving happiness for you.  You will be happier because you will be (richer, sexier, m loved more by family, more envied by neighbors), if you buy our product. Of course, the product may provide a temporary boost in happiness, but after a period of time it becomes part of the routine and no longer provides the boost that it once did, because it did not address one of the key drivers of happiness (see list of regrets above).

Think about this the next time you decide that you need to spend more time at a job you don’t like, to make more money, to buy a bigger (house, car, etc. etc.), to benefit your (kids, spouse, partner, etc.)  Will your kids be happier in a big house and see you less, or a smaller house, and see you more?  What regrets will you have?

Next:  How the Retail Industrial Complex uses your family and friends to change your value system.

Yes, there is a lot of excitement and breathless coverage of the possibility that someone could win $370,000,000 in the lottery, though I read if you take the lump sum amount its only $114,000,000.

So what would you do with that money, or more realistically what would you do with a smaller sum that you inherited or won?  Let’s say $500,000-$1,000,000.

Step 1: Do nothing!  Just relax for awhile, there is no rush to invest or spend the money, just let things settle down and sink in.

Step 2:  Figure out what’s really important to you.  Yes a luxury car is nice, but I bet very few people on their death beds say I shoulda bought the Mercedes.  Think more deeply about your values and life goals and how you could use that money to implement them.

Step 3:  Turn your thoughts into goals. To be real most every goal needs the following things:

• Money (how much, when is it needed)
• Timeframe (when will this be completed, milestones)

Step 4:  Discuss your goals with your spouse, partner, and family if you haven’t already and enroll them to support you.

Step 5:  Have a discussion with an outsider that can give you a reality check.  Your friendly Fee-Only NAPFA Registered Financial Advisor is a good place to start.

Your advisor can help you do a reality check on your goals and could point out things you may have missed.  (Pay off your credit cards first!, Make sure you won’t run out of money and that your retirement years are adequately funded.)

Step 6:  If there is any extra money after your basic needs and life-goals are fully funded, you then could spend some portion of the any extra amounts on short-term needs (cars, boats, toys, etc.)  You may also want to consider expanding your original vision and use this extra amount to fund it.  If you do decide to spend some of the extra strongly consider spreading the spending out over a few years.  You will have more enjoyment from the things you buy that way.

I have to run now; I need to buy that lottery ticket!

Some of my clients have come to me because they know they are not saving enough for the future but don’t seem to be able to change their behavior. These are smart, competent, well educated people who certainly understand their situation on an intellectually level, so why haven’t they been able to change their spending patterns.

The answer is they have deep seated money values that they may not be fully conscious of that are preventing them form changing. Until they acknowledge these values, and understand them it will be difficult for them to change.

What is a money value?
A money value is an association or meaning that money acquires which usually develops during childhood. For example, for many people who were children during the great depression when money was short, money may mean security. Money could also be the means to purchase status through a certain lifestyle (house, car, travel, boat, etc.). This is the money value that is subtly pushed in advertising. “You will have fantastic life if you purchase our product because it will make/give you, (higher status, a better parent, thinner, healthier, sexier, admired, envied, etc. etc.)”

How do money values affect us?
They motivate us at a very deep level and may engender feelings that we feel ashamed of if brought into the open. Example: a person buys a car she can’t afford to impress her neighbors (AND HERSELF!) that she is a successful happy person. In our society there is a particularly strong association between spending, perceived wealth, and high status. (I own a Mercedes therefore I am wealthy, I am wealthy and therefore I am high status). We adopt this value unknowingly and let it guide our spending decisions even if we would have made different decisions our status wasn’t at stake (e.g invest the money and drive an old car). The internalization of these values can often lead us astray holding on to a lifestyle we can’t afford and may not have ever really wanted.

How can we make decisions that really support what we want in life despite our money values?
The first step is to acknowledge them! You cannot change what you do not acknowledge. Once they are out in the open you have to ability to change them, keeping what you like and changing what doesn’t work for you. The next step is to decide what you really want out of life and write it down. I’m surprised that most people don’t do this. Once you have done that you can start prioritizing your big goals and quantifying them in terms of time commitment and financial resources required. Now you can evaluate your spending to see if it is really supporting the most important things you want out of life; to the extent that it is not, you have now given yourself the motivation to change your spending priorities.

How do we keep our goals front and center once the initial excitement wears off?
It is important to share your goals with those close to you and enroll them in supporting you.

Example: You start to bring your lunch to work everyday and your best friend at work starts to give you a hard time about it. Tell him that the reason you are bringing your lunch to work is that you are saving money to ( share your big goal and why it’s important to you), and that you hope that he can support you in achieving it.

Initially this will be disruptive to your relationships especially if it is a major change in your spending. It’s important to hold firm, and it may require you to reduce or eliminate contact with people that do not support your new direction. They may try to sabotage your change because it could be very threatening to them. However, this gives you the opportunity to spend more time with people who are supportive or seek out people who will support you in archiving what’s important to you.

I know this didn’t sound a lot like typically financial planning stuff but this is really at the heart of what I do. I see my role as helping clients identify what’s important to them, and making the unconscious decisions they are make conscious.