Financial Literacy

When someone’s income goes to zero, only then do they fully realize how critical it was to have emergency savings beforehand. When your income goes to zero, this is the moment a fuse has been lit on an unsustainable spending bomb. While you’re searching for new employment, it is important to determine exactly how long you have before your spending bomb goes off. Below is a template to help you determine how long you have before your bank and savings account hits zero.

My first assignment out of college was determining how many people, per department, needed to be laid off to restructure a business for a lower-level of sales. Unexpected layoffs like this is why it is important to have enough money saved to pay for your expenses – for the length of time it takes to find a new job, in your profession, in your geographic area. This could be 3 months to 12 months, depending upon your local economy and personal skills.

The first step is to determine your current monthly fixed expenses:

1. Housing: rent or mortgage, association dues, and insurance
2. Utilities: electric, gas, water, trash, cellphones, internet
3. Health Insurance: a new plan (or Cobra) for your family
4. Food, (not dining out in restaurants)
5. Transportation: vehicle payment, insurance, gasoline

Add up these necessary expenses, cut back on them where you can, and you have your monthly minimum budget that you’ll have to fund from your savings until you gain new employment. How much savings do you have? Divide that amount by your monthly minimum and this calculated number reveals how many months that you can financially survive without new income. You may qualify for state unemployment benefits or severance pay – so this is a credit to add back to your monthly expenses. This helps extend your savings, but this normally doesn’t add more than some weeks or months to your available money.

As you’re getting closer to your financial cliff of unsustainability, then it is time for very uncomfortable decisions. Now is the time to severely downsize your living situation while you still have the funds to do so. Delaying this painful decision is not an option. Many people delay taking action by putting their head in the sand and hoping for a miracle. The result is that they’re forced to rack up credit card balances and 401(k) loans. Then their cars are repossessed and their home is foreclosed upon – and they lose all the equity they had built up in all of them. Even if you get a new job after a few more months, you may be buried in unsustainable debts and still have to declare bankruptcy anyway.

Everyone’s situation is different, but your savings determines how long you can support your monthly expenses, and what you may have to do when you’re close to running out of money. Give yourself a long runway to find a new job by setting building up a savings account that is at least 6 months of your expenses.

As we enter the 4^th quarter of the year, it is important to minimize or eliminate income tax refunds from the IRS, state, and city. You’ve likely heard that receiving a tax refund means that you gave an interest-free loan to these government entities. In addition, all of these government entities are becoming worse about paying income tax refunds back to you.

Each of these entities has tactics to deny, delay, and apply endless red tape to hold onto your money; and you have little recourse. The most common excuse, and they’ve all used this with me, is to claim, “We lost your return, could you send another one?” A few years ago, the state treasury kept claiming that they had lost my return, so I twice physically drove my income tax return to the state capital.

I had an unexpected credit just before the end of the last year, derailing all of my zero income-tax refund plans. I filed my taxes with my state electronically. After a month, I called them about the missing refund and their reply was (you’ll never guess), “Your return was lost somehow, could you re-send it?” Losing an electronic filing is not even a believable excuse. Anyhow, a month later, I call again to hear, “We’re having trouble with our system; just be patient.” A month later, I call again, “Ok, it just has to be approved, be patient.” Another 18 days later and the state income tax refund appeared. This was nearly 4 months after I filed electronically and made no mistakes. Note: the tax event that precipitated the refund was a mistake by the state to begin with – they withheld money they were obligated NOT to withhold.

There are many cities in my state that also have their own an additional city income tax. City income tax departments still process returns with paper for the most part, and are not known for efficiency or accuracy (the average city income tax refund takes 5 months to process). A nearby accountant made the news because: she was owed a city income-tax refund of $500 from the city where she worked. Instead, she received a bill for $5,296 in back taxes, interest, and penalties going back 12 years. Luckily, she had documents going back those 12 years to prove her innocence. Eventually, the accountant discovered that the city clerk doing her return was using the wrong social security number and the wrong marital status. But it took months, effort, and meeting several times with the clerk in person to resolve it. This experience prompted her to change jobs and move 30 minutes north of the city to avoid this problem in the future.

Through adjusting your income tax withholding with your employer, or adjusting your estimated tax payments, you can more accurately target — not over or under paying – all of your income taxes. Talk to your employer or accountant if you need it get it correct. It is a poor financial decision to hand a free loan to government entities, and now that income tax refunds of all kinds are routinely delayed and denied, there is even more reason to stop this bad money habit.

An 18-year-old receiving extra money is normally a bad combination. They could be receiving money from a lawsuit settlement in their childhood, inheritance from the passing of a relative, or some other money held in trust until this birthday. I have never heard of an 18-year-old holding onto a modest one-time payment of $8,000-$35,000 for longer than 10 days. Instead of investing the money for growth and income that could last a lifetime, they immediately blow the money. Below are just few of the examples I’m acquainted with:

• A young man spends all of it on a new pickup truck, loaded with all the extra options, although he doesn’t have a job to pay for insurance or gas.
• A young woman spends the majority of it on body-sculpting plastic surgery. A few years later, all of the weight is back.
• A young woman is scammed by “loaning” almost all of it to a close relative, based upon his word alone that he will pay her back. Two years later, when she asks for re-payment of the loan, he proudly and indignantly replies, “Prove to the court that you have a signed loan agreement!”
• A young man vaporizes all of it on electronics: gaming consoles along with a spectacular tv and speaker set; and some furnishings.
• A young woman, who had already racked up a lot of credit card debt from living on her own since 17, spent every penny of an inheritance on jewelry.

It is my experience that few 18-year-olds have any financial education, maturity, or self-discipline to handle any money, let alone a large lump sum like the examples above. A chunk of money given to someone ill-equipped to manage it appropriately (at any age) is exactly like handing a sharp knife to a toddler and hoping for the best. Money is a double-edged sword, it can benefit and support, but it can also be poorly leveraged and literally destroy everything that you have. In the examples above, the money was frittered away or lost, creating a large opportunity cost for their financial future.

The way to avoid mismanagement by an 18-year-old is to start providing them a financial education starting between age 5-7, which includes requiring them to save 50% of any money that they receive – too build a habit and expectation of saving money. Once they are age 10-12, give them some minor budgeting responsibilities, such as: school supplies for a semester or a clothing budget for the season. In this way, the kids will have a chance to build favorable money habits, expectations, and better understand the value of money. If some extra money comes their way at any point in their future, there will be a chance that they may place a portion of the money into savings and investments – instead of blowing it all.

There is a very good reason to be low-key about revealing your finances and valuables publically; it invites all kinds of risks into your life. This includes theft, home invasion, hackers, professional plaintiffs with frivolous lawsuits, kidnapping for ransom, con artists, blackmailers, slick salespeople, fraudsters, and worse.

When someone that is financially desperate overhears that you have something of value, then you may become a potential target for treachery. I’ll start with the worst case scenario. A couple years ago, someone I know well has a close friend that was successful in building up franchise restaurants. This man’s grandson, in his 20s had a buddy that is addicted to drugs. The drug addict learned of his friend’s grandfather’s wealth and hatched a plan, on his own, to murder the rich grandparents and hopefully some inheritance spillage would come his way. He actually murdered the friend’s grandparents in a gruesome manner, but thankfully, the police investigation prevented any financial benefit from reaching the murderer.

The other reason to keep valuables a secret is because no rumor travels faster than one involving money. Just a few experiences I’ve had,

• A co-worker won $12,000 on at a casino, and within hours I was hearing about it from company offices in far-away states.
• A friend’s sister told me and a few other people that she keeps $25,000 in cash at her house. Within days, half the small town knew about her “secret stash of cash.”
• I know a doctor that lives on an affluent street. A few doors down, a luxury home was being renovated with a few dozen workers. Within a couple months, everyone within 3 blocks knew that the giant home had a secret “room safe” in the basement for valuables. When the home owner heard the rumor as well, he was shocked and angry – the only one he told was his architect and his workers; and he had been instructed to keep it a very confidential secret.

Conspicuous consumption can be an advertisement to people with evil intentions that you are an excellent target. It is not a coincidence that lottery winners are hit with many frivolous lawsuits right after they win. It is in your best interest to be very low key and private about valuables, collectibles, resources, or wealth.

Every year there is at least one wealthy celebrity who passes away leaving a dysfunctional estate. You’d expect that someone with significant assets would have at least a minimal (or possibly a sophisticated) estate plan in place. However, this is rare. This past month legendary singer Aretha Franklin, the Queen of Soul, passed away at age 75. Although she has an estimated net worth of $60-80 million (plus all kinds of income from music catalogs and royalties), she didn’t even have a basic Will. This is the worst possible situation for heirs:

1. Fake creditors, fake relatives, and fake friends can now come out of the woodwork to contest and potentially grab a payout.
2. Her entire financial situation will become public information.
3. The Probate Judge must follow the state guidelines and percentages to make any distributions, no matter what her wishes may have been.
4. Full taxes will be applied at the city, state, and federal levels, plus transfer taxes.
5. The lawyers and liquidators will raid the estate leaving crumbs for the heirs.
6. Probate battles over significant amounts of money can last several years; all the while the estate dwindles, depreciates, and is likely to be mismanaged.

Whenever there is a significant event in your life (marital status, children, deaths, change in personal values), then it is best to immediately reflect that into your estate plan. Some of the goals of an estate plan:

• A thorough audit to locate all of the assets
• Confirm that financial account beneficiaries are current
• Avoid probate for privacy, speed, and needless expenses
• Holding assets in trust for a simpler distribution
• Protect and manage assets
• Guardian selection for minor children
• Ensure financial security for spouse and children
• Minimize or eliminate all the different types of taxes for the estate
• A flexible plan to adapt to changing life circumstances
• Avoid opportunistic parties attempting to steal some of the estate

Although each state handles probate differently, many people are unaware that if they fail to avoid probate, 3-10% of the estate will be consumed by a long list of fees right off-the-top. The cost to handle an estate held in a Living Trust averages around 1-2% of the estate value. The longer Probate takes, the more charges are incurred. For example, the average Probate in California takes a ridiculous 8 months. If there is a probate dispute (in any state), it can last years and sometimes destroy 100% of the estate – leaving nothing for any heirs.

To create a customized estate plan, it may cost $1,500 to $3,000 for one that is free to update, but prices and quality vary greatly. However, this is a small amount compared to the cost, effort, and drama for passing away without an estate plan in place.

Every few years, some country enters a financial crisis from government mismanagement (over spending) or a catastrophic natural disaster (hurricane, earthquake, flooding, etc.) Since these events occur periodically, we can examine what repeatedly takes place in order to adequately prepare for the future. In the last 10 years, there have been 5 financial crises that we can learn from: Greece, Argentina, Puerto Rico, Venezuela, and Brazil.

Capital Controls

1. The government closes the banks and stops or limits ATM withdrawal amounts per day. Preparation = hold a couple months’ worth of expenses in cash outside of a bank. If you don’t have cash and are forced to barter, be aware that you’ll only get around 10% of the item’s fair value. (Gold and silver coins hold the best value for bartered exchanges).
2. Government confiscates a percentage of bank deposits or financial accounts. Preparation = hold as little money in a bank as possible; have some kind of bank account in another country (that is stable and has rule of law).

Crime

1. Crime explodes when people have no money or food. Preparation = being able to defend your family and home with firearms (or at least batons, mace, or tactical knife), motion-sensor spotlights on your home, and a neighborhood security group.
2. Rioting, civil unrest, and increasing homelessness becomes normal. Preparation = stay very far away from marches or conflicts with authorities.

Emigration

There will be a flood of people leaving the country. The government will be overwhelmed with applications and will move very slow in issuing or renewing passports. Government corruption also increases at all levels. Preparation = always have a current passport to exit the country and a plan to get to a few of your top choices for your next destination.

Healthcare

Medical care plummets; operations and surgeries are cancelled. This gets worse over time. Preparation = don’t put off medical procedures; look into getting treatment overseas – some health insurance companies offer assistance for overseas procedures.

Shortages, Restrictions, or Limitations

Capital controls will stop and limit all economic activity, including imports. The result is all kinds of unexpected shortages and critical supplies are rationed. Preparation = since you cannot hoard everything, use rising prices as a signal that this is an item you may want to hoard. When the power went out in Puerto Rico, these items became very valuable overnight: backup generators, candles, water, and canned food. Meanwhile, inflation ravaged countries commonly have shortages in: milk, sugar, flour, rice, and cooking oil. This is after there are shortages in: toilet paper, meat, toys, and eggs.

Right after a crisis, what normal supplies can you no longer find on store shelves?

• Food (so you may want to acquire enough freeze-dried meals for a couple weeks’ worth of food, or just some extra canned goods)
• Hygiene (from the dollar store, get some soap, laundry detergent, hand sanitizer, toothpaste, q-tips, etc.)
• First aid (acquire first-aid kits, bandages, aspirin, and disinfectants)

Some people don’t think that could ever occur in the U.S. or first-world nations, but this has already occurred several times: The Great Depression of 1929; in 1971 (it was side-stepped by going off the gold standard); and in the fall of 2008 (the U.S. was hours away from closing down all the banks. But then the U.S. Federal Reserve decided to bail out the bankrupt banking system from real estate defaults by printing several trillion dollars). Some financial crises slowly arise over time, while natural disasters can strike without warning. Either way, you need to think about your family’s long-term future as things unfold, and it doesn’t hurt to think through some scenarios and do some advance preparation.

Current Issues:

1. This month, Turkey has begun a financial implosion from over spending. Their currency, the Lira, has lost 40% of its value in the last several weeks. It slightly rebounded when Qatar pledged to invest $15 billion in their economy (but that won’t be nearly enough for the various and continuing mis-management decisions from the government).
2. Since December 2017, Pakistan has devalued their currency, the Rupee, 3 times. And today they are in talks with the International Monetary Fund to keep them afloat.
3. The Turkey and Pakistan currency contagion is spreading as the Indian Rupee just touched an all-time low against the U.S. dollar.
4. These financial problems and currency devaluations don’t happen in a vacuum – foreign banks may hold debts in these currencies, foreign investors hold assets in these countries, many countries trade with these countries, and it adds financial instability to the world as the issues unfold.