MONEY #financialfail

“I Made $6 Million at Age 26—and Lost It by 28″

Dave Asprey
Dave Asprey

Dave Asprey, bestselling author of The Bulletproof Diet, confesses his greatest #financialfail: Not walking away from a losing investment

Not only is Dave Asprey the author of the recent New York Times bestselling book The Bulletproof Diet, he’s also a Silicon Valley investor and tech entrepreneur. His biggest financial fail, he admits, was being too greedy in his 20s and failing to get professional help with investment decisions. “I made $6 million when I was 26,” he says, “And I lost it when I was 28.”

Here’s how it happened, as told to me on my new podcast, So Money:

My career accelerated quite a lot at that time. I was the youngest guy at Exodus Communications, a $36 billion company.

I was in charge of due diligence for our mergers and acquisitions department. So, when we wanted to buy a company, I was the guy who’d go in and say, ‘Is this technology going to work for us? Yes or no?’

I attended board meetings. And because of that, I knew all of the upcoming acquisitions. So, I was blacked out [of trading stock he had received as part of his compensation]; it was illegal.

When those stocks started to teeter, what I should have done was quit my job, sell all of my shares and retire. Instead, I said, ‘I can’t do that. I might lose an additional $4 million in uninvested equity or something.’

So I stayed at the company. And the stock dropped from $60 a share to $5 a share.

In retrospect, I should have thought, ‘I have enough money. I can do whatever I want. I should just walk away today.’ I could have done that. But for six months, I didn’t walk away.

Every day, I was worth less and less in the bank account. And that was a grinding down, horrible feeling.

And there’s another thing. I don’t think I’ve ever talked about this: I was with some online broker—going back 15 years. It was a very cutting edge broker that let me do options and all this stuff.

Based on the reports it seemed like I had a couple hundred thousand grand in the account, at least enough to take care of my basic expenses. But there was a margin on that account that I didn’t even know about because I wasn’t managing the stuff tightly. I was too stubborn and fearful to hire someone to help me manage it. The margin ended up consuming most of the account before I even noticed.

Today, the advice translates to: Hire a professional to pay attention to the stuff that you’re not paying attention to.”

Every day, MONEY contributing editor Farnoosh Torabi interviews entrepreneurs, authors and financial luminaries about their money philosophies, successes, failures and habits for her podcast, So Money—which is a “New and Noteworthy” podcast on iTunes.

More by Farnoosh Torabi:

MONEY Financial Planning

Why Won’t People Guard Their Wealth?

As you build wealth, you need to protect it using LLCs, trusts, and other entities. Here's what gets in the way.

Divorce, bankruptcy, lawsuits: These are the most common threats to a person’s assets. As we financial planners help clients build wealth, we also need to help them protect it. Unfortunately, sometimes they won’t let us.

A basic strategy for asset protection — an often-overlooked aspect of comprehensive financial planning — is to put property beyond the reach of legal judgments.

Yet when I suggest asset protection strategies to clients — for example, owning assets in limited liability companies — they often respond with ambivalence or reluctance. I now realize these reactions may be tied to the beliefs clients hold about money and wealth. It isn’t enough for us planners to understand asset protection; we also need the skills to help clients reframe the beliefs that may keep them from protecting themselves.

I’ve encountered several different common beliefs, or money scripts, that clients have pertaining to asset protection. Here are some of them, along with my responses:

  • “Liability insurance is all you need.” While liability insurance is a good start, it protects you only if (1) the claim doesn’t exceed your insurance coverage; (2) your policy is in force; (3) your insurer doesn’t deny the claim; and (4) your insurance company doesn’t go bankrupt in the middle of a lawsuit. Well, three of those four exceptions have happened to me.
  • “If you are ‘lucky’ enough to have a lot, it’s petty and selfish to want to protect it.” Asset protection isn’t just about the owner of the asset. It also safeguards others, such as employees, tenants, or family members.
  • “Asset protection is only for the very rich.” A client may have a small investment portfolio, some rental property, or a small business. That may not represent great wealth, but whatever they have is all they have. For that very reason, asset protection may be especially important for those without a lot of wealth.
  • “Asset protection is shady and unethical.” Many people associate asset protection with hiding assets illegally. This is not what any reputable professional will advise clients to do. Planners need to be prepared to discuss the ethics as well as the strategic value of the approaches they suggest.
  • “People in general can be trusted, so asset protection isn’t necessary.” Just ask anyone who’s ever been through a nasty dissolution of a partnership if they fully trusted their partner when they went into business — and how strong that trust was at the time of the breakup.
  • “You won’t be sued unless you do something wrong.” In an ideal world, this would be true. In the world we live in, it’s surprising how often people of perceived wealth are the targets of frivolous lawsuits. Most cases are without merit and are eventually dismissed or decided in favor of the defendant, but it takes a lot of time, energy, and money to defend against them. Plaintiffs hope to gain a settlement from a defendant unwilling to go to that trouble and expense.
  • “It’s wrong to prevent people from collecting damages if they have been hurt.” If you have genuinely injured someone, of course you have an obligation to make that right. Strong asset protection includes provisions, like adequate liability insurance, that allow clients to take care of legitimate obligations without bankrupting themselves.

It’s important to make clear to clients that ethical asset protection strategies are not a way of avoiding responsibility. Asset protection is not intended to protect clients from the consequences of their own wrongdoing. Its primary purpose is to protect clients from the wrongdoing of others.

And the first phase of implementing that protection may be to help clients get past their own money scripts about asset protection.

———-

Rick Kahler, ChFC, is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the former president of the Financial Therapy Association.

MONEY Ask the Expert

How to Secure Your Finances When Reality Doesn’t Bite

Investing illustration
Robert A. Di Ieso, Jr.

Q: I am a 22-year-old college grad with a six-figure income and minimal student debt. I have no car and live with my parents. Is there something I should do now to lead a secure and fiscally responsible life? My father gave me the name of his planner but he was of little help — Timothy

A: Given your age, healthy salary, low expenses, and minimal debt, you’re financial situation is pretty straight forward. “There is a time and a place to work with a financial planner, and now may not be one of them,” says Maggie Kirchhoff, a certified financial planner with Wisdom Wealth Strategies in Denver.

If you still want some guidance, you may have better luck getting referrals from friends or colleagues. “A planner who’s a good fit for your parents may not be a good match for you,” she adds.

In the meantime, there are plenty of things you can be doing to improve your financial security. The biggest one: “Save systematically,” says Kirchhoff. If you start saving $5,500 a year, even with a conservative 5% annual return, you’ll have nearly $600,000 when you turn 60. “That assumes you never increase contributions,” she says.

It sounds like you’re in a position to save several times that amount now that your expenses are still low. Make use of your current economic sweet spot by taking full advantage of tax-friendly retirement vehicles, such as an employer-sponsored 401(k) plan. You can sock away up to $18,000 a year in such a plan, and any contributions are exempt from federal and state taxes. If your employer offers matching benefits, contribute at least enough to get the most you can from that benefit.

Your 401(k) plan likely offers an allocation tool to help you figure out the best mix of stocks and bonds for your time horizon and risk tolerance. Based on that recommendation, you’ll want to choose a handful of low-cost mutual funds or index funds that invest in companies of different sizes, in the United States and abroad. “You can make it as complicated or simple as you like,” says Kirchhoff.

If you want to keep things simple, look at whether your plan offers any target-date funds, which allocate assets based on the year you expect to retire (a bit of a guess at this point) and automatically make changes to that mix as that date nears. Caveat: Don’t overpay to put your retirement plan on autopilot; ideally the expense ratio should be less than 1%.

Now, just as important as investing for retirement is making sure you protect that nest egg from its biggest threat: you. Build an emergency fund so you won’t be tempted to dip into your long-term savings — and owe taxes and penalties — if you lose your job or face unexpected expenses.

“A general rule is three to six months of expenses, but since his expense are already so low, he should aim to eventually save three to six months of his take-home pay,” says Kirchhoff, who recommends keeping your rainy-day fund in a money market account that isn’t tied directly to your checking account.

With the extreme ends of your financial situation covered, you’ll then want to think about what you have planned for the next five or 10 years.

Is graduate school in your future? What about buying or renting a place of your own? Once you get up to speed on your retirement savings and emergency fund, you can turn your attention to saving up for any near-term goals.

You might also consider eventually opening a Roth IRA. You’ll make after-tax contributions, but the money will grow sans tax, and you won’t owe taxes when you withdraw for retirement down the road. (Note: You can save up to $5,500 a year in a Roth, but contributions phase out once your modified gross adjusted income reaches $116,000 to $131,000.)

A Roth may not only save you more in taxes down the road, it also offers a little more flexibility that most retirement accounts. For example, you can withdraw up to $10,000 for a first-time home purchase, without tax or penalty, if you’ve had the account at least five years. Likewise, you can withdraw contributions at any point, for any purpose.

What about the student debt? Depending on the interest rate and whether you qualify for a tax deduction (in your case probably not), you could hang onto it and focus on other financial priorities.

That said, if you can make large contributions to your 401(k) plan, build your emergency fund and pay off your student debt at a quicker pace, says Kirchhoff, so much the better.

MONEY Financial Planning

4 Financial Habits of Highly Successful People

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Joos Mind—Getty Images

Farnoosh Torabi shares some of what she's learned in reporting for her new podcast.

Stephen Covey, author of the wildly successful book 7 Habits of Highly Effective People, wrote, “Depending on what they are, our habits will either make us or break us. We become what we repeatedly do.”

It’s true. Habits—the healthy and consistent ones, that is—can make all the difference in helping us go from good to great in any area of life, especially our finances. (Bad habits can be just as powerful…in the opposite direction.)

For my new podcast So Money, I’ve had the privilege of interviewing some fascinating entrepreneurs, authors and financial pros, each of whom has generously shared his or her personal financial habits with my listeners. Here are four of the best:

They Flex Their Idea Muscle

Entrepreneur James Altucher, bestselling author of Choose Yourself, says one habit he practices multiple times a day is generating ideas—exercising what he calls his ‘idea muscle.” He believes ideas are the “currency of life.”

And the key is to share your ideas freely with others.

“I’ve been amazed how many times I’ve given out free ideas, and abundance has come back to me not just in the form of money, but in the form of contacts, connections and future opportunities,” says Altucher.

For example, he recently was invited to speak at Amazon’s headquarters in Seattle after submitting several ideas to the head of business development on how the company can improve its publishing (a connection he made via “a friend of a friend of a friend”). “I got to meet, essentially, all the people running their self-publishing division and they all showed me what they’re working on,” he says. “I didn’t get paid for it, nor do I expect to get paid for it, but who knows what future opportunity I’ll have when I self-publish my next book.”

They Tuck Away More than 10%

Forget the standard savings rule of thumb that says to save 10% of your paycheck for a rainy day.

Melinda Emerson of @smallbizlady Twitter fame and author of Become Your Own Boss in 12 Months says she habitually—and automatically—saves 20% of every paycheck.

“I also have an emergency saving account for my business for rainy days when people don’t pay on time,” she adds. “I put safeguards in place so I’m never ‘broke.’ Ever.”

They Set It, But Don’t Forget It

Setting up a savings and payment system is one habit highly successful people practice to keep their financial house in order. They automate their bill payments and money transfers.

But they don’t turn a blind eye once they set up the system. They know it’s important to still maintain awareness of where their money’s going. “I check my bank accounts every week just to keep a good pulse on where things stand,” says Shama Hyder, bestselling author of The Zen of Social Media Marketing and an international keynote speaker who’s been invited to share the stage with President Obama and the Dalai Lama.

Financial planner and founder of Financially Wise Women Brittney Castro chimes in. “One of the biggest tips I can share with people is to do a weekly money date…a time where you check in with your money every week. You’re reviewing your spending and maybe your budget. It just brings this whole new level of awareness.”

They’re Not Just Go Getters. They’re Go Givers.

Over 20 years ago, New York Times bestselling financial author David Bach heard self-made billionaire John Templeton speak. He said that people in life are taught to be go-getters, but instead should be “go-givers.”

“That had a huge impact on me,” says Bach, who is now vice chairman at Edelman Financial Services. “Since then, the bulk of my life has been focused on, ‘How can I be of the most service?’ with the belief that if I’m of the most service good things will come back to me—that life is a giant circle of karma, and that the more you give out the more it comes back. And that’s really been true in my life. Even when I’m overworked or overstressed or things aren’t going the way I want, [I remember that] I signed up for this attitude that I was going to live my life in service.”

Jacki Zehner, the first female trader-turned-partner at Goldman Sachs and now the Chief Engagement Officer at Women Moving Millions, echoes Bach’s sentiments. “Give generously,” she says. “I’m spending a lot of my time now, and I continuously challenge myself to think about at any point in time, how generous can I be, not only with my money, but with my time.”

Want to learn more financial habits of highly successful people? Money contributing editor Farnoosh Torabi has a new podcast called So Money that features intimate interviews with leading entrepreneurs, authors and influencers. Visit SoMoneyPodcast.com to listen to the show’s inaugural interviews with Tony Robbins, James Altucher and Jean Chatzky.

MONEY financial advice

When Hugging It Out Was a Bad Idea

An awkward moment with a client teaches a financial planner not to jump to conclusions.

“We fight about money all the time,” said Zelda. “Ever since we inherited money from the family business, it’s been a source of tension.”

Stan shook his head. “What do you want from me?” he asked.

It was a good question to be asking as we sat in my office. What did Zelda want from Stan, and what did he want from her? The couple, who had come to see me for coaching, were constantly arguing about their wealth. Before, when they hadn’t had enough to pay the bills, they worked as a team. Ironically, now that they had become millionaires, they were no longer so supportive. They had lost sight of how to soothe each other about the family finances.

“Stan,” I asked, “what do you think might help Zelda when she gets upset?”

He pondered for a minute and then quietly said, “A hug?”

“Perfect,” I responded. “What do you think?” I asked, turning toward his wife.

When our eyes met, it was evident that “perfect” was not the word she would have used.

Quickly I backtracked. “Zelda,” I said, “I am sorry I spoke for you. I can see from your reaction that Stan’s idea is not a good fit. Instead of a hug, what do you need from him?”

“I don’t know,” she exclaimed, “but certainly not a hug!”

This client meeting happened a few years ago, but the memory of Zelda’s stare is etched clearly in my mind. It is a painful reminder that for advisers, curiosity is a key skill and jumping to conclusions is never prudent. While I recovered by apologizing and asking questions to gather more information, it remained a difficult meeting.

Making assumptions and losing curiosity are common mistakes made by all helping professionals, even skilled ones. You get busy or distracted.

It is vital that before each client appointment you remind yourself to focus on understanding your clients’ perspectives and metaphorically stepping into their shoes. When done well, clients feel understood and heard. When done poorly, you hit bumps in the road like I did with Stan and Zelda.

How can you maintain an open mind in client meetings and not let your own ideas get in the way? Here are three techniques to get started:

1. Identify your money mindset. A money mindset is a set of thoughts and beliefs about money and its purpose in the world. This mindset is made up of individual “scripts” or automatic thoughts that impact your saving, spending and investing habits. You money mindset is formed between the ages of 5 and 15 by watching your parents and other adults interact with money. Because most of the beliefs are formed in a child’s mind, these scripts tend to be overly simplistic when it comes to managing finances as an adult. Making matters more difficult, most of us don’t consciously know what our money mindset is. Until we identify the mindset, it impacts our financial habits without our consent. This lack of insight can be problematic in client meetings if we operate from our mindset without taking the time to discover our clients’ perspective.

By identifying your money mindset, you can notice potential blind spots and triggers for you based on your own history. In this situation, I unconsciously tried to protect Stan from Zelda’s harsh judgment. This tapped into an early childhood experience in my own family.

A bettter tactic is to teach couples about money mindsets and how curiosity about your partner can defuse financial tension. As an adviser, you can role-model this work for your clients and use it to help couples resolve differences — or at least increase mutual understanding. As with most couples, Stan and Zelda’s arguments often stemmed from having very different money histories and mindsets.

2. Uncover your conflict mindset. Talking about money is still seen as a taboo topic; therefore, most of us don’t have a rulebook on how to fight fair financially. As an adviser, it is vital for you to uncover your automatic thoughts and beliefs about conflict and learn how to help couples resolve financial disagreements in a healthy way. Whether you grew up in a home that resembled the Sopranos, where fights were loud and overt, or were reared by parents who rarely raised their voices, your upbringing influences your work with couples.

The first step is to become aware of your conflict mindset and identify its strengths and its challenges. In this example, it is clear that I prefer that conflicts be resolved quickly — hence my rush to provide the tidy solution of a hug. Had I not picked up on Zelda’s body language, I may have assumed that I helped the couple find an answer. But really, what I had tried to do was use a Band-Aid to make myself feel better, not guide Stan and Zelda toward a meaningful resolution. When I took a step back and asked them more questions about their experience, I was more effective. The discussion was not tied up in a pretty bow by the end of the meeting, but it didn’t have to be.

3. Practice curiosity. As an adviser, curiosity is your best friend. When you go into each client meeting with a healthy dose of wonder and use this to ask powerful, open-ended questions, you learn more about your clients’ motives, money mindsets, and values. This information helps you design financial plans and strategies that are more successful in the long run.

The best part is that the process fosters trust. While the meeting with Stan and Zelda was far from perfect, it was a turning point in our adviser-client relationship. For the first time, they saw that I was not just an expert but a human being who could apologize, and that I was truly curious about their experience of receiving this new-found wealth. Sometimes the most difficult clients appointments teach you and your clients the most.

———-

Kathleen Burns Kingsbury is a wealth psychology expert, founder of KBK Wealth Connection, and the author of several books, including How to Give Financial Advice to Women and How to Give Financial Advice to Couples.

MONEY Love and Money

The 3 Most Important Things to Do Before Announcing You Want a Divorce

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Jeffrey Hamilton/Getty Images

Ready to call it quits on your marriage? A little early planning can go far in helping you protect your finances

With “new year, new you” resolutions in full swing and the holidays finally over, January is one of the hottest months for divorce filings.

“Last year I saw a 10 to 15% increase in consultations in January, peaking at a more than 40% increase in March,” says Lisa Decker, a certified divorce financial analyst in Kennesaw, Ga. “I refer to January as the beginning of ‘Divorce Season.'”

If you’re among those who’ve decided that 2015 is the year you’ll go from married to single, make sure you’re ready for the financial toll that the divorce process can take by making these key move before announcing you want out.

Gather Key Docs

“Once a divorce has been initiated, financial information can disappear or become difficult to access,” says Carl Palatnik, a divorce financial analyst in Melville, NY.

With that in mind, begin gathering copies of any documents that verify assets, liabilities, income and expenses, including recent bank, brokerage and retirement statements, tax returns, and real estate deeds—and the prenup, if you have one. This step can take three to six months, depending on how accessible the documents are, adds Decker.

Having a paper trail saves stress, time and money. “You won’t be captive to your spouse, hoping he or she will provide things to you,” says Decker. Nor will you have to pay your lawyer to go after this information.

Stash Some Cash

Ideally you want to have a year’s worth of basic living expenses in a personal account prior to filing.

If all your money’s co-mingled and you have no way of opening your own account and making deposits without raising red flags, open a credit card with a low or introductory 0% interest rate, says Decker.

This step is important because divorce proceedings could take six months or more, during which time you may lose access to spousal support. Plus, you’ll need to lay out another $10,000 to $20,000 for an initial retainer if you plan to work with an attorney and/or financial advisor, says Decker. (If you earn significantly less than your partner or have no income a retainer could get a lawyer to petition to have your spouse pay ongoing legal fees.)

Sever Credit Ties

Finally, to prevent what my friend experienced, try to separate shared credit card accounts, says Palatnik.

If your spouse is an authorized user on one of your cards, ask the issuer to remove your spouse’s name. If you’re joint users, freezing the cards may be your best bet.

But wait to do this until right before making the big announcement. Otherwise, jig’s up as soon as your spouse swipes.

Farnoosh Torabi is a contributing editor at Money magazine and author of the book, When She Makes More: 10 Rules for Breadwinning Women.

More by Farnoosh Torabi:

MONEY Debt

7 Ways to Free Yourself From Debt—for Good!—in 2015

How to pay off debt
PM Images—Getty Images

These smart and easy strategies can get you back in the black before you know it.

If you’re in debt, getting out may seem impossible.

One in eight Americans don’t think they’ll ever pay off what they owe, according to a survey by CreditCards.com.

But it’s a new year and a new balance sheet. And the seven steps here can help you put hundreds more towards your bills every month—while still living the kind of life you want.

Can you taste the freedom?

1) Know What You Owe

It may sound easy, but this can be the hardest part, says Gail Cunningham, spokesperson for the National Foundation of Credit Counseling. “A disturbing number of people come to our offices with grocery bags filled with bills,” she adds.

After you’ve tallied up your total debt, make a “cash-flow calendar” to track how much money is going in and out of your accounts, and when, Cunningham says. When do you get your paycheck, and how much do you get net taxes and benefits? When is each bill due every month, and what is the typical cost? How much do you spend on each of your other expenses, and when?

The more you want to procrastinate on this step, the more you need to do it.

“People resist doing this,” Cunningham says. “I think that’s because they’re afraid of what they’ll find. There’s nothing like seeing your spending staring back at you. That could force a behavioral change.”

2) Follow the 10×10 Rule

If you want to create a debt-repayment plan you can follow, you need to set reasonable and sustainable goals. Curb rather than cut your spending, advises Kevin R. Weeks, president of the Association of Independent Consumer Credit Counseling Agencies.

“Just like a New Year’s resolution to get in shape, it’s very difficult to go cold turkey and say, ‘I’m going to do all this, this week, or today,'” Weeks says. “People bite off more than they can chew, with good intentions.”

Start slowly by following Cunningham’s 10×10 rule: “If you could shave $10 off 10 disposable spending accounts, you’d never miss it, never feel it, never feel deprived—and you’d have another $100 in your pocket,” she says. “Little money adds up to big money.”

3) Spend Cash

Researchers have found that when people shop with credit cards and gift certificates, they are more likely to make impulse purchases on luxury items because they feel like they’re using “play” money. If that sounds like you, cut up the plastic.

And force yourself to feel the pain associated with spending real money by going on a cash-only diet.

“People who live on a cash basis typically save 20% over their previous spending, without feeling deprived,” Cunningham says. “It’s because using cash creates a heightened sense of awareness. You are more contemplative, and you realize you’re going to have to pay for things with hard-earned cash. Something clicks in that allows you to feel better about not buying the item.”

4) Tackle Christmas First

There are two possible ways you can go when it comes to prioritizing your debts: You can pay off your highest interest-rate balance first to cut your financing charges the most or you can pay off a small debt first to build confidence and momentum.

To decide which path is best, you need to know what drives you, Weeks says.

Whichever way you choose to go, Cunningham recommends beginning with a goal of paying off all your holiday spending debt by the end of the first quarter of 2015.

“That will keep you from dragging that debt along with you all the way through 2015,” Cunningham says. “You’ll be back to where you were debt-wise before the holidays.”

No matter what, expect a series of small steps. “It’s going to take time,” Weeks says. “If you’re looking to lose 50 pounds, you should focus on losing the first five and then you move yourself forward. It’s the same thing on the financial side.”

5) Reduce Your Rates

Don’t do all the work yourself. Get your lender to cut your interest rates.

One way to do that is a balance transfer. Many credit cards offer promotions of 0% interest for a year or more if you transfer your debt from an old card and pay a small fee.

You can save $265.48 on a $5,000 debt with a typical balance transfer, according to a new report from Creditcards.com. That’s assuming a 3% balance transfer fee, a 12-month 0% intro APR, and the debt being paid off within the year.

You could do even better than that if you used Money’s pick for a balance transfer card, the Chase Slate, which currently offers a 0% APR for 15 months, no balance transfer fee in the first 60 days, and standard APR of 12.99% to 22.99% after the promotional period.

If you won’t be able to pay off your debt in the promotional period, however, this might not be the best option. You don’t want to move your debt only to possibly get stuck with a higher APR than the one you already have. A better choice: Move your debt to the Lake Michigan Credit Union Prime Platinum Visa, which has no balance transfer fee and an ongoing APR starting at an ultra-low 6%.

Or, simply call your issuer and request that your APR be reduced. In another report, CreditCards.com found that two-thirds of people who asked for a lower rate got it.

6) Stop lending so much money to the IRS

The average household got a $3,034 tax refund last year. In other words, every month, an extra $253 was taken out of your paycheck and loaned to the IRS interest free!

Sure, you’ll get it back after you file your taxes, but don’t you need it now?

“I don’t want anybody to receive an income tax refund—that $250 a month can make a major, life-changing difference,” Cunningham says.

Rather than paying interest on your debt every month while the government gets your money, you should be funneling that cash toward your balance. On a $5,000 debt at 16%, adding $250 a month to a payment of $200 a month, you’d save $675 in interest and get your debt paid off in just over a year vs. two and a half.

You can put your money back in your pocket by adjusting your withholding on a W-4 tax form.

Of course, you don’t want to owe money at tax time, so use the government’s withholding calculator to figure out exactly how many allowances you should take. File your new W-4 with your human resources department and give yourself a raise.

7) Ask for help

If you can’t stop taking on debt or are really unable to make payments on what you owe, you may need professional help. Credit counseling can be especially useful if you’re struggling with student loan debt or medical debt, not just credit card debt.

Find a nonprofit credit counselor through the National Foundation of Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Financial counseling should be free, though agencies can charge an enrollment fee for a debt management plan, which will consolidate your debt into one payment with a more reasonable interest rate, Weeks says.

If you don’t need professional help, but you need someone to keep you honest, ask a friend to be your accountability partner, Cunningham suggests. Share your debt repayment plan and check in periodically about how you’re doing. Leverage the positive power of peer pressure.

“People don’t want to let somebody down,” Cunningham says. “They don’t want to have to admit that they weren’t as committed to their plan long-term.”

More on paying off debt:

More on resolutions:

MONEY Millennials

How to Set Financial Priorities When You’re Young and Squeezed

man counting coins
MichaelDeLeon—Getty Images

You have a lot of demands on your money—and not a lot of it. Here's what to do first.

The most financially challenging state of life is not retirement, it is early career.

That’s the time when your salary is still probably low, but you have the longest list of expenses: career clothes, cell phone bills, your first home furnishings, cars, weddings, rent—need I go on? You probably don’t have enough money to pay for all of that at once, unless your parents have set you up very well or you are a junior investment banker.

The rest of us have to make choices with our limited “discretionary” income. Here is a rough priorities list for newbies who have shopping lists that are bigger than their bank accounts.

First, feed the 401(k) to the match, not the max. If your employer matches your contributions, make sure that your paycheck withdrawals are high enough to capture the entire company match. That is free money. If you have enough money to contribute more to your 401(k), that is a good thing to do, but only if you’re able to cover other key expenses.

Invest in items that will improve your lifetime earning power. A good interview suit. An advanced degree. The right electronic devices and services for the serious job hunt.

Pay off credit card balances. Chasing those “balance due” notices every month will kill just about any other financial goal you have. If you’re carrying significant credit card balances, abandon all other extra savings and spending until you’ve paid them off, in chunks as large as possible.

Put money into a Roth individual retirement account. The younger you are and the lower your tax bracket, the better this works out for you. Money goes in on an after-tax basis and comes out tax-free in retirement. You can withdraw your own contributions tax-free whenever you want. Once the account has been in existence for five years, you can pull an additional $10,000 out, tax-free, to buy a home. It’s nice to have a Roth, and the younger you start it the better.

Save for a home down payment. Homeownership is still a smart way to build equity over a lifetime. New guidelines will once again make mortgages available to people who make downpayments as low as 3%. Even though interest rates are still at unrewarding lows, it’s good to amass these earmarked funds in a savings or money market account.

Pay down high-interest student loans. If you had private loans with interest rates over 8%, find out whether you can refinance them at a lower rate. If not, consider paying extra principal to burn that costly debt more quickly. Don’t race to pay off lower-interest student loans; the interest on them may be tax deductible, and there are better places to put extra cash.

Buy experiences, not things. Still have some money left? Fly across the country to attend your college roommate’s wedding. Take road trips with friends. Spend money to join a sports team, theater group, or fantasy football league. Focus your finances on making memories, not acquiring things—academic research holds that you get more happiness for the dollar by doing that, and you’ll probably be moving soon anyway.

Buy a couch. For now, make this the bottom of your list. Sure, everyone needs a place to sit, but there’s nothing wrong with living like a student just a little bit longer. If you defer expensive things for a few years while you put money towards all the higher priorities on this list, you’ll be sitting pretty in the future.

UPDATE: This story has been updated to clarify that Roth IRA holders can withdraw their own contributions at any time and do not have to wait until the account is five years old.

MONEY retirement income

The Single Biggest Retirement Mistake

faucet pouring money into bottomless bucket
C.J. Burton—Corbis

Don't think of your retirement savings as one big bucket of money. Instead, divide up your assets.

The single biggest retirement mistake I see is that retirees don’t set aside funds for income during the early years of their retirement. They go directly from accumulating retirement funds to withdrawing them. And that can be a big problem.

Let me explain. The usual approach to retirement savings is to treat the client’s funds as if they are all in one pile. Under this method, the account is divvied up between stocks, bonds, and cash. A systematic monthly withdrawal begins to provide income, typically starting out at 4% of the client’s portfolio value for the first year. Each year afterward, the withdrawal amount is adjusted upward to match inflation.

This rate is considered by many advisers to be safe in terms of generating sustainable income over a two- or three-decade retirement. Unfortunately, it leaves many clients concerned about outliving their money. Let’s use 2008 as an example. At the time, I saw recent retirees who had $1,000,000 in their 401(k)s and who thought, based on the 4% formula, that they were set with $40,000 of annual income. Within the first year or two of their actual retirement, however, the market crashed and they were then drawing on a balance of $600,000. Most could not decrease their expenses, so they continued to withdraw $40,000 through the downturn, which was an actual withdrawal rate of almost 7%.Worse yet, the market crash caused retirees to lose confidence in their original plans. They pulled most, if not all, of their retirement funds out of the market, thus missing the ensuing recovery.

The compounding errors of higher-than-anticipated withdrawal rates and bad market-timing decisions doomed many to outliving their funds. This syndrome actually has a name: “sequence risk.” Academics are well aware of this risk, but few planners properly address the issue with clients and almost no individual investors are aware of the concept.

The problem can be alleviated by setting aside up to ten years’ worth of income at the inception of retirement. I address this problem with an approach called the Bucket Plan, which segments a retiree’s investible assets into three categories, or buckets.

Here is the breakdown:

  • The “Now” bucket is where the client’s operating cash, emergency funds and first-year retirement income reside. It will typically be a safe and liquid account such as a bank savings account, money market fund, or CD. These are the funds on which the client is willing to forgo a rate of return, in order to keep them safe and liquid. The amount allocated to the Now bucket will vary based on the clients assets and sources of income, but typically you would want to see no less than 12 months of living expenses here.
  • The “Soon” bucket has enough assets to cover up to ten years’ worth of income for the retiree. The Soon bucket is invested conservatively with little or no market risk. That way, we know we have ten years covered going into the plan regardless of what the stock market does.
  • The “Later” bucket funds income, and hopefully an increase in income, when the Soon bucket is exhausted. By then, the Later bucket has been invested uninterruptedly for at least 10 years. We reload another round of income into the Soon bucket, and the process starts all over again. The Later bucket is the appropriate place for capital market participation.

Financial planners have long used the analogies of an emergency fund and an accumulation/distribution fund. The real innovations here are the addition of the Soon bucket for near-term income and the method for communicating the concept to clients.

A client who was recently referred to me had the 4% systematic withdrawal that most financial advisers recommend. This did not seem to make him happy, though, since he could not see how his finances would last in the long run. He was not confident about what might happen if he needed more than the 4% income because of an emergency. He wondered whether there would be anything left over for his children to inherit. He was losing sleep and not enjoying his retirement at all.

I explained our Bucket Plan method. The Later bucket funding the Soon bucket made perfect sense to him. He also loved the idea of the Now bucket for emergencies and unexpected expenses. The real beauty of this approach is it gives retirees great peace of mind. They are much less likely to make bad market-timing decisions because a market correction will have no effect on their current income.

The bucket concept is simple to explain, and clients always understand the role their money is playing and why. Most importantly, they have the confidence to ride out market volatility because they know where their income is coming from. Sometimes simplicity can be quite sophisticated.

———-

Jeff Warnkin, CPA and CFP, of the JL Smith Group, specializes in holistic financial planning for pre-retired and retired residents of Ohio. He incorporates investments, insurance, taxes, and estate planning when building financial plans for clients’ retirement years. Warnkin has more than 25 years of experience in the financial services industry, and is life- and health-insurance licensed.

Read next: Here’s a Smart Strategy for Reducing Social Security Taxes

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MONEY Financial Planning

5 Simple Questions that Pave the Way to Financial Security

Analyzing 20 years of data, the St. Louis Fed found that five healthy financial habits are the key to future wealth.

Want to know how your bank account stacks up against that of your neighbors? You’ll get an idea by asking yourself five simple questions, new research shows.

The St. Louis Fed examined data from the Federal Reserve’s Survey of Consumer Finances between 1992 and 2013 and found a high correlation between healthy financial habits and net worth. In the surveys, the Fed asked:

  • Did you save any money last year? Saving is good, of course. Just over half in the survey earned more than they spent (not counting investments and purchases of durable goods).
  • Did you miss any credit card or other payments last year? Missing a payment isn’t just a sign of financial stress; it may trigger late fees and additional interest. An encouraging 84% in the survey made timely payments.
  • After your last credit card payment, did you still owe anything? Carrying a balance costs money. In the survey, 44% said they carried a balance or recently had been denied credit.
  • Looking at all your assets, from real estate to jewelry, is more than 10% in bonds, cash or other easily sold, liquid assets? If you don’t have safe assets to sell in an emergency, you are financially vulnerable. Just over a quarter of those in the surveys have what amounts to an emergency fund.
  • Is your total debt service each month less than 40% of household income? This is a widely accepted threshold. A higher percentage likely means you are having trouble saving for retirement, emergencies, and large expenses.

The average score on the 5 questions was 3, meaning that the typical respondent—perhaps your neighbor—had healthy financial habits 60% of the time. That equated to a median net worth of $100,000. Those who scored higher had a higher net worth, and those who scored lower had a lower net worth.

In general, younger people and minorities scored lowest, while older people and whites scored highest. Education was far less relevant than age. “This may be due to learning better financial habits over time, getting beyond the financial challenges of early and middle adulthood and the benefit of time in building a nest egg,” the authors wrote.

It should come as no surprise that healthy financial habits lead to greater net worth over time. But the survey suggests a staggering advantage for those who ace all five questions. One of the lowest scoring groups averaged 2.63 out of 5, which equated to median net worth of $25,199. One of the highest scoring groups averaged 3.79 out of 5, which equated to a median net worth of $824,348. So these five questions not only give you an idea where your neighbors may stand—they pretty much show you a five-step plan to financial security.

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