Did you do your summer homework?

By Don Kuehn

What did you do on your summer vacation?

Regular readers may recall that was the question I promised to ask this fall, after you had a chance to do a bit of financial homework over the summer. In the May/June issue, I cautioned that “you can’t get rich by working” and discussed several small steps and strategies that would help you set the course for a sound financial future.

So, did you take time from your busy summer to make a budget? A simple budget is a way of tracking your income and expenses, and finding the places where you are “leaking money.”

We all do it. A trip to the ATM machine on Monday and by Thursday we wonder where all our cash has gone. Is it on designer coffee? A quick snack while out shopping? A lost wager on the golf course? Or handing a few bucks over to the kids for something they just have to own?

I’m not saying you can’t treat yourself to a snack or a coffee (as for the golf bets: practice your short game), but if you track what you spend, you can plan for it in your budget. It’s important to get into the habit of making a note of every dollar you spend, save receipts for at least a month or two, and see exactly where the money goes.

Your budget is just a prediction of how you think you will spend the money you earn. Income is pretty easy to account for. But the other side of the ledger, expenses, is a bit harder. If you find you are spending more than 10 percent of your income on “miscellaneous” things, it’s time to get a grip.

You should “pay yourself first” and then allocate the remainder to general categories such as housing, utilities, auto, insurance, debt payment, clothing and food. Develop your own system to track how you are doing. You could use a computer program, index cards, a small notebook—even envelopes filled with cash for each category. It doesn’t matter, as long as you can tell where you stand at any given time.

According to a survey conducted by the Impulse Research Corporation, 59 percent of Americans say they maintain a household budget. Considering the fact that the average household debt has grown to $18,700 (including credit cards and auto loans) you’ve got to wonder what the other 41 percent are doing to manage their income. Not much, I suppose.

Another part of your summer assignment was to develop a plan to get out of debt, so you can build an emergency fund equal to six month’s expenses. This may mean switching to a lower-fee credit card, paying off balances on your highest-interest credit cards or paying off your smallest balances first. It doesn’t matter which system you use (there are experts on each side of the discussion)—the key is to make a plan and work that plan.

After you pay off the first account, add that money to the minimum you were paying toward the next account on your list. Keep this up and, before you know it, you could be debt-free.

If you are married, you probably didn’t get into debt all by yourself, and you can’t get out of it alone either. Your spouse has to be as involved and as committed to fighting through your financial problems as you are.

Without accusing the other party of overspending or “wasting” money on trivial things, try to enlist his or her cooperation in developing a plan to corral spending and reduce debt. Discuss long-term goals and the issues related to sticking to a budget that you and your spouse both can agree on.

If you need help working through these problems, you can find it in your community—I’m talking marriage counseling here. Most marital problems start (and end) over money issues. It isn’t a sign of weakness, but of strength, to seek professional help before problems become insurmountable.

Besides the obvious strategy of consolidating and (perhaps) refinancing debt, the other way to get within your budget is to cut spending. This requires separating “needs” from “wants.” Your teenage daughter may tell you she needs that new cell phone, or your son may think he needs the latest brand-name sneakers, but, in fact, they want them. They may want them real bad, but it’s just a want. They need things like food, a reasonable amount of clothing and a place to live.

You can argue whether a college fund is a need or a want, but I can tell you that a retirement fund for you is a definite need. They give scholarships for college, but I have yet to find a scholarship for retirement.

Part of your summer homework was to investigate how to join the 403(b) plan or similar supplemental retirement arrangement at work. The simplest way to start is to dedicate at least the amount of your annual salary increase (step increment, COLA or longevity increase) to your retirement. Even if it is just a small amount to begin with, as you get comfortable, and as you see your balances grow, you can increase the amount you set aside each month. You never see the money, so it doesn’t hurt much.

If you haven’t done so by now, run—do not walk—to your employer’s payroll department and find out how to sign up for a 403(b) account. Your contribution goes into your account before taxes. And the money in your account grows free from annual taxation, so it grows faster than money in your personal investment portfolio.

Be careful to avoid falling into the trap of buying an annuity. I know there are still places around the country where 403(b) accounts are referred to as TSAs or TDAs (Tax Sheltered or Deferred Annuities). But annuities are a good deal only if you happen to be the salesman siphoning off commissions from unknowing investors.

And, finally, on your summer to-do list was to learn as much as you could about investing. If you’re sitting on a large balance in a money market fund, or some other savings account, it’s time to get risky. 

What did you learn about no-load mutual funds? Have you found out what the minimum investment levels are in the funds you have identified? Did you call the fund and ask for a new investor kit with a prospectus and application?

You may have heard that the stock markets, as reflected by the Dow Jones Industrial Average and the S&P 500 Index, are at or near record highs and assume this is no time to jump into stocks.

As I am writing this, the Dow is at 13,535 and the S&P is at 1,519. When I started investing in the early 1980s, they were at 850 and 150 respectively.

In spite of these two deep recessions (1987 and 2000) and several milder pull-backs to regain equilibrium, the returns in the stock markets have been pretty much on track with their historic patterns. Or as Peter Lynch, the former manager of the mega-fund Fidelity Magellan, once said:

“I don’t know what the market is going to do tomorrow, or next week. But I am pretty confident that a year from now, or five or ten years from now, the markets will be up, perhaps way up.”

Even at today’s fairly high levels, market fundamentals are good. Some sectors are suffering right now, particularly real estate, but the markets as a whole are healthy. There is no reason to think that Lynch’s optimism shouldn’t hold today.

Can you lose money if you get in the market today? Sure, in the short term there’s always a chance of losing money in the stock markets. But if you want to get rich, the only way to do it is to build on what you earn, and allow time and compounded interest to work for you.

What are you waiting for? If I was right that you can’t get rich by working for a living, it’s a cinch you’ll never get rich just thinking about investing. The question is: Do you want to work for your money or make your money work for you?

Go to the Internet. Read up on this stuff. When I googled “no-load mutual funds,” I got over 1 million hits. If that’s not enough to keep you busy for a few days, you need another hobby!

Okay now, a show of hands: How many of you completed your summer assignment? If you didn’t, it’s never too late to get started. Budget. Debt reduction. Savings. Investment. It’s your money and it’s time you took control of it.