Windfalls and Excess Income

It seems like we get news on a fairly regular basis that some professional athlete, movie or rock star is going bankrupt or owes the government taxes.  I’m flabbergasted by how anyone could make that kind of money and blow it. I always say, “Give me a person who earns over a million dollars for even 2 years of their life, and I can show them how to set themselves up financially for the rest of their life!”

Last week I watched a documentary on ESPN’s 30 for 30 Series called Broke. They highlighted why such a large percentage of NFL and NBA athletes end up broke instead of set for life. The Documentary cited the following statistics:

The average length of an NFL opportunity is only 3.5 years. 65% of players leave the game with permanent injuries. By only 2 years into retirement, 78% of NFL players have gone bankrupt or are under financial stress. Similarly, within 5 years of retirement, an estimated 60% of former NBA players are broke. (Sports Illustrated 03/23/2009)

This really is not new information for me. Over the 25 years of my professional life as a financial planner, I’ve read many studies of what the documentary called The Sudden Wealth Effect. In the past I’ve seen a similar study of why a large percentage of lottery winners eventually go bankrupt, and I’m sure many of the same explanations apply to professional athletes.

In this ESPN special, they cited many reasons why players are ill equipped to handle the sudden wealth that occurs upon entry into professional athletics. Generally speaking, most come from the lower middle class on down to poverty level and don’t have the money skills to plan for their investments. They are naturally drawn to investments that are sexy versus safe. Many put their money in the hands of agents who are not financially savvy either. The best explanation I heard in the show was that the NFL or NBA (or for that matter a movie career, hit TV series, or bestselling album or book) is an opportunity, not a career. In each of those examples, people are given a limited amount of time to earn big bucks, but it’s unlikely that it will be forever.

People that experience sudden windfalls, can also succumb to similar downfalls. The chapter titled Windfalls and Excess Income in my book, It’s Just Money, So Why Does It Cause So Many Problems?; details stories about salespeople who had a banner year of earnings and people who came into an inheritance or business windfall that could have made a serious impact on their future financial success, but instead, frittered the money away.

There is a tendency for anyone who experiences a significant increase in earnings to believe that this is going to continue indefinitely. That is in essence, the big mistake. Perhaps you will be one of the lucky ones to experience a long-term run of significant financial success. But if you are more like a professional athlete, where it’s a short period of time, you might miss the opportunity to capitalize on those earnings for your future. The even bigger mistake is leveraging a future on the necessity of those increased earnings to maintain that lifestyle. This is where people tend to go broke.

In so many instances it comes down to the fact that as Americans, we simply like to spend. We feel entitled to nicer things, we feel compelled to “Keep up with the Joneses”, and quite frankly, spending is more fun than saving. This generation, unlike those of the past, is more about living in the moment, versus worrying about the future.

But as a Financial Planner, totally invested in helping my clients get to a point of financial independence, it’s been a bitter pill to swallow. One of my most challenging situations is watching people I know struggling financially, that could have made better financial decisions along the way to prevent the situation they are currently in.

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Plan for the Future Without Looking to the Past: The Importance of Retirement Planning

The financial metaphor of a three-legged stool, representing Social Security, pension and personal savings, which was the theory when I went into Financial planning, is far outdated.

First you have the debate about whether the Social Security bank will be depleted. But that argument isn’t worth having as it was never intended to be a person’s full source of retirement income. I meet an occasional person, who grew up in the Depression, who is able to live on this very small amount.  But today’s Boomers and their children are used to a much higher standard of living. As for pensions, they are a thing of the past, especially for people in their 20s. More than half of people now in their 40s will not get any pension benefits. With that in mind, I suggest the following:

Save as if your personal savings are 100 percent of what you will retire on. My mantra is: Save ten percent of every paycheck, you ever earn, for the rest of your life, no matter what and make no excuses! There will be lean times where you will think you can’t do it, but if you can stick to that credo and never waver, you will never have to worry about retirement. You will have enough money.

Never sacrifice saving to pay debts. Saving is like a bell curve. Even when the initial 10 percent amounts to very little, over time, your money will double and quadruple. Make sure to  save another 10 percent for emergency funds of at least six to 12 months of living expenses.

Take advantage of 401(k) benefits at work. Remember that any matched amounts are free money. Due to the recent downturn in the economy, many workers actually have stopped putting money into a 401(k). This is the time to be unwavering in your long-term savings commitment.

Combined wealth in stocks, bonds and other investments also falls under the personal-savings category. Although “investment” sounds intimidating, I don’t believe it takes a genius to work with stocks and bonds. It is not rocket science. You can learn what you need to through a financial adviser, college classes, books or on the Internet by reading various mutual-fund families’ information.

If you have 10 years until retirement, you can still make money. I’ve learned that it’s not about how much you make, it’s about how much you save. That’s how I came to be a millionaire by the age of 37. The key is constantly investing an appropriate amount throughout a long period of time so it can grow exponentially.

Married couples often struggle  with retirement plans if they don’t agree with the importance of saving money. Many parents want to give their children non-essential, expensive things, better than they had during their childhood. Often one partner becomes the money manager and has the burden of dealing with the finances: frustrations and resentments can be a consequence of that arrangement.

This stress can lead to a marriage’s demise. Communication is essential. Everybody has been brought up differently when it comes to dealing with money. People’s view of what to spend their money on and how much to save can vary greatly. Have a sit-down as early as possible in a marriage or joint-fund relationship. Even if it’s uncomfortable, a middle ground must be reached in respect to budgeting, and saving.

My book “It’s Just Money, So Why Does It Cause So Many Problems?” covers these topics and more using examples, stories and practical planning guidelines. It is available at Amazon.com

The Formative Years

Until you can understand WHY you do what you do with money, know how you feel about money and see what void money or stuff fills in your life, you will have a difficult time moving forward and realizing financial success.

Throughout this blog, and in my book, I will share with you my own “Money Story” in the hopes that reading about my personal thoughts, challenges and ultimate success will inspire you.

To start with you have to meet my parents and understand their money story. Dad was born in Cuba to parents of eastern European descent. From what I’ve been told, they lived in near poverty, subsisting on a ten-pound bag of rice as the basis of most meals for the week.

My mother was born in Brooklyn, New York, in 1932, the height of the Great Depression. Her father was a shoe salesman who died in his early 30s when she was only seven years old. This left her mother, my Grandma Rose, to support her only child by herself, as Grandma did not remarry until after my mother was married.

After my father bought my mother her engagement ring, he was left with only $1.54 to his name! But they were both working and of course scrimping and saving as people who’ve grown up relatively poor know how to do. They made a decision that they would save and invest my mother’s paltry teacher’s income.

We never lacked for food or clothing, and we always knew we’d go to college one way or another, but we still felt growing up that we didn’t have much money. This was mostly due to the way my parents made decisions around money and spending. Their attitudes towards money were always based on fear of not having enough.

Our home was adequate, but not the nicest in the neighborhood. It always seemed that my friends had more “stuff” than I had. We bought our clothes at Kmart, and this embarrassed me. Our cars were always used and my parents would drive them for years and years before replacing them. When chickens were on sale at the grocery store, but limited to two per person, my mom would take all us kids and line us up with two chickens each so she could come home with eight chickens at the sale price. I’d stand there with my two chickens and my $2.00 hoping to become invisible. We never had the newest electronic gizmos. When we went on vacation and pulled up in front of the motel, the three kids were told to duck down in the back seat so we wouldn’t have to pay an extra occupancy surcharge.

I didn’t realize until years later that they did have money—their savings and investments—but they were committed to living on my dad’s income. They always conducted themselves as if things were really tight. And since they never had the newest of things, I perceived our family as “poorer” than the neighbors or my friends.

Obviously this upbringing would directly impact me and my relationship to money and spending, as it would my siblings. One day, after I’d become a financial planner, my father dropped the comment that they had a multi-million dollar net worth.

Confronting the Mystery of People and their Money Lives

I went into Financial Planning over 24 years ago following an overwhelming calling to help people.

Yet by 15 years into my career, I had become disenchanted with my industry.

For one thing, it often seemed that I cared more about my clients’ financial life than they did. On too many occasions, clients didn’t do what they said they were going to do, or followed some of my advice but not all of it. In addition, it felt to me that although I had certainly helped people, and I’m sure I’d made some difference in their lives, I couldn’t really count many financial success stories.

More and more, I found myself intrigued by some of the bizarre decisions people made over money and purchases. In fact, I found myself downright frustrated. As I grew more mature, I realized that people’s relationships with money were varied and in many cases, pretty messed up.

I started asking questions of my new clients about how it was growing up in their family in relationship to money, to try to understand what made them tick. We started having really good conversations. I found myself—and my clients—more engaged and energized, simply by talking about what they did with their money and why.

This insight helped me see that all the “how to” books written about money and investing would never truly be able to impact people, until they were able to uncover the roots of what money meant to them. People carry emotional baggage about money from their childhood and, without a doubt, it impacts their adult lives and how they deal with money.

Somewhere along the line, I decided that the best way for me to help the most people would be to share the experiences I’d had with innumerable people—and the insights that helped me understand why most people would ultimately succeed or fail financially. These insights would become the basis of my book.