The Emotional Roller Coaster - Financial Version

There was a comment on my last post that got me thinking...

"When it comes to money one has to be a lot like the old Star Trek's Dr. Spock. Completely unemotional and totally analytical."

Now that is a tall order! I understand where the commenter was coming from - he wanted to warn about avoiding groupthink and herd mentality. But I think it's an interesting topic anyway. How much do you need to keep your emotions out of your finances?

Well, it depends which emotions and what context they arise in. Some could be highly beneficial. For example, the emotion of fear is well known to be one of the most powerful motivators. Personally, one of my greatest fears is being poor or dependent on others, especially in my older years. So this emotion actually helps me because it is so deeply imbedded in my psyche that even when I make conscious decisions to spend money there is a part of me that is saying "okay, now where can we cut back to make up for this?"

Another emotion that could be financially beneficial is greed. Yes, it can lead to unwise choices too, but many people who chase money above all else actually end up getting it (and often nothing else, but we don't need to get into that!). And especially if greed is matched by a good work ethic, then I think financial success is virtually assured.

However, if you talk about the stock markets, then both greed and fear can sink you pretty fast. They make you sell at the bottom and buy at the top, and make many other stupid moves along the way.

So here's my theory: the context really matters. Emotions are just motivators - they basically cause you to take an action. If you have emotions plus luck or intelligence you get actions with positive outcomes. And if you have emotions plus bad luck or stupidity then you get negative outcomes. In other words, the emotions are neutral but because they motivate action they will expose your strengths and weaknesses much sooner and more decisively.

If I'm right about this theory, then you don't need to control your emotions, you just need to become really smart financially so that every decision you make is a good one. Then when an emotion comes along and causes you to take action, you show off your genius!

What do you think? Are emotions dangerous to finances or is ignorance the real danger??

Sticking to Your Strategies

Don't join the flavour of the month club when it comes to your finances! While you may get away with it in the short term, I believe that shifting strategies too often will punish you financially in the long term.

One reason for that is basic human psychology: you will want to chase the strategy that has already worked (and whose time may be past) and exit the strategy that is creating pain right now (which means leaving at a low point). Most reasonable financial strategies are designed for the longer term, so if you only implement them in the short term they won't always work.

A good example of this is owning real estate. If you hold a property for less than five years, and the market stays flat, you won't have enough to pay off your mortgage after commissions and other expenses. Even a modestly rising market won't compensate you if you sell too quickly. A 5% increase in a year will translate to just paying off your mortgage with no profit on most properties after commissions. But as we all know, owning your own home can be a great cornerstone of financial independence. If you stay in the same home for 15 years and accelerate your mortgage payments modestly, you could end up dropping your cost of living by a bundle when that last payment is made.

It's worthwhile to remember this fact when stock markets are falling, interest rates are rising and housing bubbles are collapsing in many areas. Your future does not depend on big gains tomorrow. It does depend on holding steady and keeping your eye on the goal - not the noise of today's market gyrations.

One challenge for me right now is that my house is turning into a bit of a headache, with tenants and renovations to deal with. It's so tempting to just say "sell it!" and have a bit of cash in hand and a headache relieved without drugs. But I have a vision of one day owning both a rental property and a primary residence so that I have some cash flow that is unrelated to a job or the stock markets. So now I have to push myself to do some hard or unpleasant tasks that are going to be investments in keeping my future plans on track. If I change my strategy now, then I will be back to shopping for a first property instead of having one in place and being ready for the second when the time is right.

One final word of warning though - I don't mean to imply that your plans should never ever change. They need to grow and adapt with your life circumstances so that you don't end up succeeding in 20 years at something you don't want any more. So set your goals carefully, review them annually, and in between put it on autopilot and let the plan proceed. If your strategy is sound then the little wiggles of the markets will either be buying opportunities or have no effect on you. And the best part is all the nights of sound sleeping that you will get!

Try to cancel... get a deal?!?

I spent 45 minutes on the phone last night with my internet service provider, who happens to also be my phone company. The issue? I wanted to move my phone and cancel my internet. Sounds simple doesn't it?

Well, to cut a long story short it took 45 minutes of talking, on hold time and other garbage, but in the end I was convinced to keep my internet with them due to an offer of $10 off my internet every month for the next year. That's a $120 rentention bonus!

So first of all, this makes me realize just how much money they are making off me, but also it goes to show that a "good" customer does not get the best deals. If I just stay for years with the same provider, they will keep charging me the same rate (or raising it), while at the same time they are extending lower rates to people who try to cancel or change service providers. How unfair!

I suppose that I knew about this practice on some level, but having it happen to me really brought it home that it pays to shop around on everything, all the time. Now, obviously it would be too much work to do this every month, but perhaps a yearly schedule of calling around for better deals would more than compensate for the time you spend on it.

I'm sure that you will have some great examples of this to share. Where are the best (or worst) hidden deals to be found?

Why a Full Time MBA?

A few people commented about my plans, saying that I should be considering a part-time or executive MBA, and keeping my business going. There are two reasons two do this:

1. Money - to keep my income flowing, even if it is slower
2. Contacts/Clients - to stay in touch with my network

The second reason is weaker than the first because everyone agrees that an MBA builds your network like nothing else can. However, the financial side of this decision is very interesting. I can afford to go back to school without going into debt. That is a tremendous luxury that many people don't have. But it will reverse the positive trend in my net worth for a couple of years, quite significantly.

As readers of this blog, you all know the gory details of my financial situation. Why do you think that I need to keep working during my MBA? Are you worried that I might not have a secure retirement if I spend $150,000 on an MBA and don't keep saving? If my net worth at age 35 is only $500,000 am I out of the game?? What if it's as low as $400,000?

The reasons that I want to do a full time MBA are a little bit less obvious:

• I'd like to live in another city. I've never done so as an adult.
• I'd like to be able to have time to learn and enjoy. I have friends who have done EMBA's and you literally have to take 20-30 hours out of your week, plus a day and a half of classes every other weekend. There's not much room for anything beyond work and MBA at that point.
• I want to do a complete career shift. I don't plan to go back to my old career in any way. So keeping my business going would be counterproductive relative to my career goals.
• I believe that I will get more out of the whole experience this way. More knowledge, more exploration, more networking, more unanticipated benefits.

These are mostly lifestyle and personal preference points. But isn't the point of money so that you have the freedom to do what you want, how you want? In a way, going back to school is like an indulgence for me. I love being in school. I am anticipating having a fabulous time there. And when I'm done, I will possess a qualification that will allow me to start earning money again. In fact, statistically, I should be able to more than catch up, but that is not something I am counting on.

So, in a roundabout way, this decision is about setting my own personal level of enough. I don't need to be the richest person around, and I have already succeeded financially beyond what I would have ever anticipated. I am now choosing to have my money do something for me, instead of me always doing things for money.

I hope that this post helps you to understand some of my reasons for making this decision. As always, I welcome your feedback and discussion!

More about my new plans...

Million Dollar Journey asked yesterday what I plan to do after my MBA, and I realized that I haven't really put very much context around this decision so it must seem a little bit random. So here's a bit more background....

I have been working in a computer related field for the past 8 years, and frankly I am feeling very burnt out by the low-level detail-oriented nature of this work. It is also very stressful because clients don't notice all the good things that are working as quickly as they notice even one thing that is not, so the ringing of my phone is not a happy sound. Putting these things together, I decided that I wanted to shift my career to a higher level, escape the evil world of details, and leave computers behind.

After much thought, I concluded that I am quite good at working with management types to explore options and determine strategies, and this is something that will clearly satisfy my objectives. So I am heading to MBA school to become a management consultant in the area of strategy. Believe it or not, this is actually a genuine career. I hope to continue as an independent consultant, although I may work for a couple years for a large consulting firm after graduation if needed to get some good experience and pay off my MBA.

The good news is that my financial position allows me some flexibility to go back to school full time. The bad news is that MBA's are very, very expensive so it kind of feels like I am cannibalizing my finances. But I have realized that a full retirement would leave me floundering a bit, so if I'm going to keep working then I need something new to do.

And that's the story in a nutshell. I don't know where I'm going to school yet - I'm actually going to visit a couple of MBA fairs in September to try to narrow down where I might apply. And there are many other details to address over the next year. But I have set my general course, and now I feel much more invigorated and enthusiastic in knowing that I am moving forward in a positive new direction!

Making New Plans

You know what they say about the best laid plans of mice and men....?

Well, after much thought, I have decided to back to school in September 2008 to do an MBA. This is going to be a huge undertaking in many ways, and financially is not the least of those. So now I am starting to look at my finances and make some preparations and adjustments to get ready for this step. Since there are so many variables, I am planning with the expectation of having to change or toss some of these ideas. But it is always easier to revise than to start from scratch, so I am going ahead even though there are still many unknowns.

Today I am going to discuss housing and related issues. I don't want these posts to become ridiculously long, so I will break it down into a few pieces.

The first part of my plan is that I am going to keep my house and rent the whole thing out. I have an opportunity to house sit for the next 5 months (paying only the operating expenses of about $300-$400 per month), and I am going to use this chance to move out and get my place fixed up and ready to rent. My goal is to have it fully occupied no later than October.

I am hoping for monthly rental income of $3000, and my monthly principal, interest and taxes are $1825. I am budgeting 10% or $300 per month for property management and forecasting 1 month vacancy each year. I will also need to keep my house insured, and cover any repairs or maintenance. I am budgeting $200 per month for these categories. Using these numbers, I am expecting a net cash flow of $5400 which is the equivalent of $450 per month. This may be my only income while I am in school.

Related to housing is my moving costs. It is going to cost me around $500 to move to the house sit because I have a few pieces that must be professionally moved, and I have to clean the carpets in the new house at a cost of about $200.

I also have a 3 year contract on my internet that I will have to break either this year or next year when I go to school. That will probably cost me $300+ since they will make me return my incentives plus penalties. I may also need to break a 3-year cell phone contract, but I don't know what that will cost.

The renovations on my old house are a bit of a question mark. I haven't been able to get a contractor lined up yet, and the last couple who looked at it were reluctant to give a price. I'm going to say that it will cost me $5,000-$10,000 to get everything done. I'm not doing any major items, but there are a lot of fix ups to do.

I may end up having to store items or pay to move some things to my new city. At this point I don't have dollar numbers for these, but I want to capture them.

Any finally, there is the cost of renting, or covering my house sitting expenses. I am going to plan on $400 per month for the house sit and $1000 per month after that. Again, these numbers could change when I get more information about where I will be going.

So as I went through this list, I have been creating a little spreadsheet for all these numbers. For me, the words are great but the numbers make it all come together. Perhaps I'll post it once I'm a bit further along in this process. Tomorrow we will take a look at education costs....

Planning Works

I must apologize for the infrequent posting schedule. I've been very busy this summer with all the changes going on in my world....

Today I had lunch with an old friend and we talked about some of these changes and all the decisions that need to be made. I told him that once I made up my mind about the new direction my career was headed, it seemed to get easier to make the decisions along the way because I could tell which ones would further my objective.

I was thinking about that conversation again and realizing how many areas of life this can be applied to. There are so many cases in which we are asked to make decisions - sometimes large, life-altering decisions - and we don't have time to think about it for weeks and gather advice and weigh our options. Some opportunities come very suddenly, and we can either grab them or let them pass.

I believe that the key to making good choices under pressure lies in planning. Planning works on many levels and provides benefits that range from immediate to long term. And I think that your personal finances are perhaps one of the best places to apply this, for it will surely pay off. In addition to helping you make decisions, here are just three other ways that planning pays off for personal finance:

1. Vision
   The road to financial freedom is very long when you are standing at the beginning. It can be tempting to fulfill all of today's wants and let tomorrow take care of itself. But with planning you can see a vision of the future that is more appealing than the seductions of the present. You can keep your eye on the goal and know that you are moving toward it.
   
2. Updates
   Good plans are never static. They are revisited on a regular basis, as well as whenever things change significantly. This may include things like updating your will and insurance when you first have kids, or adjusting your savings level to build in room for a sabbatical. You don't need to get it right once and for all, you just need to make a plan that makes sense right now and keep it up to date as you move through your life stages.
   
3. Backups and contingencies
   Planners are ready for emergencies. With planning, unexpected expenses may be inconvenient but they are rarely catastrophic. A good financial plan considers an emergency fund very early on. It may be an actual pot of money in the bank, or perhaps a line of credit waiting to be used only in special cases. But either way, a job loss or sudden large expense can be taken care of.

I know that I need to update my financial plans and get ready for the next few years. I will post more on how I plan to do this in the coming days.