Your Money or Your Life: A Practical Guide to Managing and Improving Your Financial Life

YOUR MONEY

OR

YOUR LIFE

ALSO BY ALVIN HALL

Winning with Shares:

Investing Wisely and Profitably in the Stock Market

You and Your Money:

Mastering the Emotions Behind the Numbers

YOUR MONEY

OR

YOUR LIFE

A Practical Guide to Managing and Improving

Your Financial Life

ALVIN HALL

WITH KARL WEBER

ATRIAPAPERBACK

A Division of Simon & Schuster, Inc.

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New York, NY 10020

Copyright © 2002, 2009 by Alvin Hall

Originally published in Great Britain in 2002 by Hodder & Stoughton

All rights reserved, including the right to reproduce this book or portions thereof in any form whatsoever. For information address Atria Books Subsidiary Rights Department, 1230 Avenue of the Americas, New York, NY 10020

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Library of Congress Cataloging-in-Publication Data

Hall, Alvin D.

Your money or your life: a practical guide to managing and improving your financial life /Alvin Hall with Karl Weber.

        p. cm.

Includes index.

1. Finance, Personal. I. Weber, Karl. II. Title.

HG179.H2337 2009

332.024—dc22        2009015509

ISBN 978-1-4165-9662-2

ISBN 978-1-4165-9674-5 (ebook)

To

Vicki Mclvor,

ten years and counting

Acknowledgments

Judith Curr, publisher of Atria Books, and Malaika Adero, my editor, have always been encouraging to me as a writer and supportive of my goals. Judith, in particular, was the first American publisher to take notice of my established work in the United Kingdom and envision a market for it in the United States.

Karl Weber—friend, adviser, gifted writer and editor—has provided invaluable assistance in helping me complete this book—especially given my hectic travel schedule—and has kept the information and tone on the money for the people who will buy this book. Robert Allen provided useful insights in shaping the promotion for this book.

Jennifer Longmire, a producer at NPR’s Tell Me More, hosted by Michel Martin, and the team of producers and researchers at The Takeaway on WNYC in New York deserve special thanks for getting me involved with these interesting and informative radio programs in the United States. The topics covered and the questions asked, especially by Michel Martin, let me examine the diverse financial concerns that affect all of us every day, and help me refine how I talk and write about these topics.

I must also thank Rowena Webb, Emily Heyworth-Dunn, and the team at Hodder & Stoughton who published the original version of this book and several others. By keeping many of them in print, the Hodder team shows how much they believe in and support the continuing message of my work in personal finance.

And, finally, I wish to express my gratitude to the people in the United Kingdom who have watched me on television, listened to my radio shows, and shared their financial secrets with me. I deeply appreciate the insights and wisdom their experiences have given me. In the States, my friends, colleagues, and students, listeners to my radio programs, people who have bought my books, and especially my lawyers, Kenneth Swezey and Lisa Digernes at Cowan, DeBaets, Abrahams, and Sheppard, have believed in me, my work, and my message. Thanks to all of you for keeping me inspired with your unfailing support and encouragement.

Alvin Hall

June 2009

New York City

Contents

Introduction

1. Money and Your Mind: Understanding and Taking Charge of the Ways You Spend

2. Consumer Debt: How You (Probably) Got into It, and How to Get Out

3. The Joy of Saving: Creating Your Financial Safety Net

4. Real Estate Choices: How to Make Smart Choices About Buying a Home

5. Financial Partnership: Love, Marriage, Family, and the Money Choices They Bring

6. Investment Basics: First Steps in Building Your Personal Wealth

7. Investing for Life: Developing a Personal Strategy to Make Your Money Grow

8. Yes, You Can Retire: Planning for a Prosperous Old Age

9. Who to Believe? Choosing and Using Financial Advisers

10. One Hour a Week: Creating and Maintaining Your Personal Money Plan

Epilogue: Living Your New Financial Life Each and Every Day

Index

YOUR MONEY

OR

YOUR LIFE

Introduction

The present economic situation makes it clear that the time has come for each of us to have a better understanding of the basics of how money and investments work and how we can use our assets prudently and effectively—today and in the future, through inevitable cycles of economic upswings, as well as downturns. We must learn how to make appropriate decisions (not idealized ones) about what we do with the money we earn. And we must maintain a realistic and honest view of the risks associated with our choices. Our goal ultimately is to enable our money to sustain us over the long term.

When your personal finances (and the rest of your life) are under stress—because money is tight, your job is uncertain (or worse, gone), debt is becoming overwhelming, and the value of your long-accumulated investments and assets is falling, as it is for so many of us right now—every money-related decision is crucial. What you do with what you have can make a huge difference in the quality of your life next month, next year, and a few years from now.

Give Yourself Choices

Perhaps the most tragic thing about bad money management is this: It takes away your choices in life.

Here is a sad—and all-too-typical—example. I interviewed a young couple who had just given birth to a beautiful baby daughter. Understandably, the wife wanted to stay home with her child. But before the baby was born, straight through the pregnancy, she and her husband had continued to manage their finances as if they were two single people with no responsibilities. They enjoyed deluxe vacations, lived very nicely (although not quite as nicely as they wished), racked up a growing pile of credit card debt, and saved very little.

Even after the baby was born, this young mother did not want to reduce her spending. I don’t think it’s right for me to have to do that, she defiantly told me. After all, I want my child to have a better life than I do. The result? Mother had no choice but to keep working. By spending to the maximum of the family income (and beyond), she had destroyed the possibility that she could stay at home and raise her own daughter. She was miserable—but of course it was all her own doing.

Yes, You Can—with Some Sound and Practical Advice

This book is a do-it-yourself guide for handling your personal finances—a step-by-step, user-friendly, and practical primer designed to help you control your money and other assets and make them work best for you, through easy and difficult economic times. The goal is to give yourself an essential gift that will serve you for a lifetime—the gift of strength.

Many of the ideas I’ll present grow out of what I’ve experienced—seen, heard, talked about, read about, and lived through. They come from the questions people ask me frequently on my radio and TV programs, from columns I’ve written for magazines and newspapers, from interesting Q&A periods following speeches, as well as from the experiences of family, friends, and colleagues of many different social and economic backgrounds. Regardless of the source, my goal is to make all of the information clear and accessible in order to help you become smarter about helping yourself. You don’t have to understand advanced mathematics or economics to take control of your personal finances. You need only some basic data, a few key facts, some uncomplicated procedures that anyone can master, and some reasonably clear selfawareness. You also need the desire to set a course that is appropriate for your money and your life.

The health of our financial lives is influenced by the actions we take, but it is also increasingly influenced by others— financial institutions, corporate titans, and political leaders. The same is true of the economies in our neighborhoods, towns, cities, and states. Recent events have shown that economic problems that seem far from us can suddenly become up close and personal, undermining our sense of financial security in ways we could not have imagined a few years ago or even just a few months ago.

While it increasingly feels as if other people and events are in control of our money and our lives, and there is no safe harbor against the current economic downturns, in reality there is one: yourself. The take-away is this: Each of us must manage our money more prudently. We must learn about and use those strategies—new and time-tested—that will help us get through the current crisis and, when it’s over, incorporate the wisdom of this experience into the new ways we use money.

Think of the previous generation. Unlike many of us today, they always kept an eye toward the unexpected. In plain language, they saved for a rainy day and prepared for those whatifs. Prolonged and relatively consistent economic growth seduced many of us into thinking financial uncertainty had been largely removed from our future. Things would always be better; they would always work out. Today, quite suddenly, those what-if scenarios that some people may have thought were too negative or pessimistic—such as What if I lost my job tomorrow … how long could I survive? or What if I had to suddenly reduce my spending … where could I cut the quickest to save the most?—may now become the kind of planning that enables us to weather the difficult times and make better choices for our short- and long-term financial security.

Master the Basics

Acquiring money and resources does not mean we will know how to use them wisely. History shows that people who don’t know how money works don’t manage to hold on to it for very long. We’ve all heard about sports, film, or music stars who made fortunes that were then quickly squandered. The same is true for entrepreneurs who treat their businesses as cash cows that will always generate increasing profits. It takes knowledge, self-control, and thoughtful planning to manage money intelligently.

You may want to protest, But the rich have professionals to advise them. True—but anyone who turns his money over to an adviser without fully understanding what is being done with it is likely to find it depleted in a shockingly short time. Consider the case of Bernie Madoff and all of the other Ponzi scheme operators who are being uncovered.

This book will show you a series of hands-on activities. Put pencil to paper or fingers to a keyboard and develop your own financial plan following the guidance I provide in these pages. You will emerge a wiser person—and be on a more financially secure path as well.

Magical Thinking About Money

In many people’s minds, money is a force unto itself, imbued with magical powers. Some want to believe they are destined to have it, while others believe they are destined to struggle. Both mind-sets can lead people to behave as if there is little need to apply common sense and thoughtful planning. Why should I have to worry about money? is a statement I hear from both rich and not-so-rich people. One should simply be able to get anything and everything one wants—as if by waving a magic wand at a checkout counter. They believe those difficult financial problems that pop up will somehow take care of themselves.

Easy credit has worsened the problem. For nearly all of us, money is limited. But the availability of credit has made it seem unlimited. The habit of immediate gratification many of us practiced with our plastic currency has been highly risky and is costing us dearly. The hard choices about how to prudently use real money day to day while preserving some of it for the longer term must be faced now. Reward has always required sacrifice, but we can do it, and at the same time create an enjoyable, comfortable, satisfying, and economically sound life ahead. The choices we make are the key.

Experience, Not Genetics

Many people want to believe that we are all fundamentally unchangeable, that it’s basically impossible to improve. That’s why people make comments like I’ve never had a head for finances, or I take after my parents—they were bad with money and so I am, or We never learned about savings or investing in school. All these statements may be true, but the underlying mind-set is wrong. There’s no need to remain trapped in our limitations, endlessly repeating the mistakes and frustrations of the past. Life is about maturing, growing, and learning, and this applies as much to your personal finances as to any other area of life.

Everything I’ve said here applies to me—in spades. I have lived through four recessions, having been laid off during two of them. I’ve been unable to get a job for as long as nearly six months—and the new job paid less than the old one. As I began to earn a very good salary, I got too many credit cards and spent thoughtlessly, buying too many clothes and dishes, pictures and books, theater tickets and dinners out. I sank deeper and deeper into debt, missing payments and paying late. I remember vividly what it was like to lie awake at night wondering how I was going to pay my rent or fretting over which bill I could put off paying without the consequences being too dire.

Eventually, I vowed that I would never get myself into this situation again. I then analyzed, with brutal frankness, what I’d done wrong. I had to begin by recognizing that the problem was me, not the proverbial they on whom it’s so easy and tempting to blame our problems.

The key was gaining control of myself and my financial demons. Easy? No way. But I’ve embraced sound practices. Let me tell you, it will always be a struggle. I still have to check myself when I see the word sale posted in the window of a shop I love, calling to me as the Sirens called to Odysseus. And like the Greek hero, I have to use all my strength to resist temptation and pass by. The difference in me then as compared to today is that resistance is much, much easier now.

The first exercise in this book—keeping a financial diary—is designed to help you understand your own financial practices, shortcomings, and demons. Let’s say that overspending is your problem. Well, once you recognize the situations and the emotions that cause you to overspend, you can avoid them or prepare to handle them when you know they are coming on.

Recently at a brunch I had a conversation with a young man who told me that he decided in late 2007 and early 2008 to sell all of his investments and move all his money to high-interest CDs (at different banks) and U.S. Treasury securities. He said not only had he grown nervous in his gut about the news he was hearing about companies and the volatility of the stock market, but he felt his friends and the people he worked with had let their personal spending outstrip the reality of their incomes and career growth. What this young man described as his gut was actually the intuitive wisdom of experience kicking in. And he knew himself well enough to listen to his inner voice and take action.

There is also an important second component: learning from other people’s experiences. My grandmother used to advise me: Watch what happens to other people, because it just might happen to you. You don’t have to get into debt over your head, lose your house, and declare bankruptcy to know how horrible it can be. These days, we have only to watch the news to realize what this kind of predicament can look like. If you see that there is trouble in the overall economy and people are getting laid off, shouldn’t you begin making changes in your life so you can survive in case the same thing happens to you?

By getting to know yourself and your financial strengths and weaknesses, as well as by learning from others, you can use the practical strategies and insights in this book to help you handle money prudently and build financial security in ways that are appropriate to you—through the diverse economic conditions that are an inevitable and unpredictable part of our lives and careers.

CHAPTER 1

Money and Your Mind

Understanding and Taking Charge of the Ways You Spend

The Secret Meanings of Money

The key to making better short-term and long-term choices about your money begins with understanding your own approach to earning, spending, saving, and investing. To do this, you need to uncover the secret meanings that money, risk, and reward have for you. Once you’ve done this, you can begin developing a more positive and enriching style of financial management that you can really live with through easy and difficult financial periods.

A crucial step to understanding your own attitudes toward money is to recognize how you really handle money. The bad news is that many people are subject to self-delusions about their spending habits. The good news is that there’s a simple process you can use to do away with your distorted views no matter what they are. All that’s required is effort—and the will to humble yourself and face reality.

Your Daily Spending Diary

Begin by keeping a daily diary of your income and expenses for one month. No one—and I mean no one—is really capable of accurately remembering everything he or she spends money on from one day to the next, let alone from one week to the next. So keeping the daily diary or journal of your spending is important. As the poet Robert Frost, who had serious money quarrels with his in-laws, once put it:

   Nobody was ever meant

To remember or invent

         What he did with every cent.

So if you try to write down your money habits long after the fact from memory, I promise you that the picture you paint will be inaccurate. And it will probably be flattering— deceptively so.

And why an entire month? Because anything shorter doesn’t represent a serious commitment to change and is unlikely to capture a typical cycle of a person’s earning and spending. A spending diary for a week or two isn’t long enough to provide a real picture of how you spend.

Use a