Rick Kahler's Financial Awakenings

In a column in August, I reported that almost every large news magazine and major newspaper was predicting the real estate bubble was about to pop. I concluded that, when the major financial press all agree an event is eminent, that is the best guarantee it probably isn’t.

As I pointed out at that time, I don’t remember reading screaming headlines in 1999 or 2000 about the coming dot.com bubble. My experience is that the financial press does not have a great record of calling market tops.

I suggested that, rather than a crash, a soft landing might be a more likely fate for the real estate markets. This would be similar to what has happened in Australia, where prices have gone flat or fallen slightly.

I have recently come across some additional information that seems to support those conclusions. It possibly even calls into question whether there is a real estate bubble at all. This is from the November issue of Wired magazine, supported by statistics from the National Association of Home Builders, the National Bureau of Economic Research, the US Bureau of Labor Statistics, and the US Census Bureau.

If we compare housing statistics in 1950 with those of today, we find that housing is not overpriced at all. Adjusted for inflation, housing cost $60.61 per square foot in 1950. Today, the cost is $59.49 per square foot. In 1950, the average home cost 229% of a family’s annual income. Today the cost is 251% of a family’s annual income.

Certainly, the average cost of a house has increased. In 1950 (adjusted for inflation) the average house cost $59,575, and today the average home costs $138,601. However, the average home in 1950 had two bedrooms, one bath, a one-car garage, and 983 square feet. Today, the average home has three bedrooms, two baths, a fireplace, central air, a two-car garage and 2,330 square feet. In 1950 , the average person lived in 289 square feet of space. Today, with the decrease in family size and the increase in the size of houses, it is 896 square feet per person.

Over the past 55 years, while housing prices have increased 133%, the average square footage of a home has increased almost proportionately by 137%. The average income has increased 113%, indicating that housing costs have increased slightly. Still, they have not gone out of sight, as many of us might be led to believe.

Another interesting—and to me, quite startling—fact in light of the current soaring energy costs is that we are paying less today for heating costs than we did in 1950. Again adjusted for inflation, the annual heating cost in 1950 was $3,419. Today (as of September 2005) the cost is $2,644. The percent of annual income that heating costs represent was 13% in 1950 versus 5% today.

If there really isn’t a real-estate bubble, is that good news or bad news? Obviously, the answer depends on your individual circumstances. It may be good news if you will be selling a house in the near future. If you are trying to decide whether to buy a house, this may be either good or bad news. If prices aren’t likely to come down, there is less chance that housing will become more affordable. At the same time, if you do buy a house you can be more confident that it is likely to maintain its value.

The bottom line is that, bubble or not, it’s probably wisest to base housing decisions more on what fits your particular situation and less on predictions or worries about the real-estate market.

Living within a budget would seem to be a perfectly straightforward proposition. The first part of the task is creating the budget. You list all of your income, then list all your expenses, add them up and compare the two. The second part is following the budget. You know how much you can afford to spend in any given category, so you don’t spend more than that. Again, perfectly simple. How hard can this be?

The answer is, “Very hard, indeed.” Setting up a budget is something most of us know at least basically how to do. Yet actually creating one—let alone following it—is something many people can’t seem to do successfully.

One reason for that may be the word “budget” itself. For many people, it implies restrictions, limits, spending less, and a sense of “I can’t afford it.” This is similar to the way we associate the word “diet” with “restricted diet” or “eat less.” Yet the word “diet” simply means a description of what you eat.

In the same way, a budget is simply a summary of how much you spend and what you spend it on. Because the word has such a negative connotation, though, it may work better for you to use the term “spending plan.” This isn’t a nitpicking or trivial distinction. I have seen workshop participants change their thinking about budgeting simply by changing the way they describe it. “Spending plan” implies something that is purposeful and under your control. It gives you permission to spend money in ways you choose instead of implying blame or a sense that you need to cut back.

Another creative twist that helps some people follow a spending plan more successfully is to rename the categories. Generally we simply list expenses as housing, food, insurance, car expenses, and so on. Instead, it might work better to describe each category by what it represents or provides for you. Think of what you really want or need in your life—from basic shelter and nutrition to good health, fun, satisfying work, spiritual growth, and connections with the people you care about. Make your own specific list, then use it to create the categories in your spending plan.

Using this method, your mortgage or rent payment might be listed as “nurturing environment” or “dream house” or “warmth and safety.” A health club membership or a trip to the dentist would come under “health investment.” Savings might be described as “security for the future” or might be put under “fun” or “family relationships” as “next year’s vacation.” Car expenses might represent “freedom to come and go as I please.” Clothing could be “self-expression,” “looking my best,” “comfort,” or “professional work appearance.” Insurance might fit under “security” or “being a responsible parent.” Paying off debt might come under “being a responsible adult,” “working toward financial freedom,” “respecting myself,” or even “learning from past mistakes.”

Again, like using “spending plan” rather than “budget,” this is more than just a semantical gimmick. When you think of what you spend your money on, and you emphasize what you get for each item rather than simply listing it, you are changing the way you think about your spending.

Using this method, you may find some items that give you more value than you had realized. You may find others that don’t seem to provide anything worthwhile for you, and you might choose to reduce or eliminate those. In either case, this renaming approach may help you make some positive changes in your spending patterns. It also may make it easier for you to create and then follow that “simple” spending plan.

Take a break from ghosts and goblins on Halloween afternoon to listen to Rick on the radio. He will be the guest that day on the show “Money Speak,” hosted by Dick Wagner, CFP®, a financial futurist from Denver, Colorado. The show, part of the VoiceAmerica™ Business Networks, airs on Monday, October 31, at 2:00 p.m. MST.

The topic of the discussion is financial consciousness. Rick will discuss the two books he has co-authored: Conscious Finance: Uncover Your Hidden Money Beliefs and Transform the Role of Money in Your Life (FoxCraft, Inc., 2005) and The Financial Wisdom of Ebenezer Scrooge: Transforming Your Relationship With Money – 5 Principles to Financial Freedom & Prosperity (Health Communications, 2005).

This show will focus on an integral approach to financial consciousness. Rick will address issues such as money scripts, barriers to financial balance, money psychology, and his ground-breaking work with psychotherapist Ted Klontz. He will explore A Christmas Carol, by Charles Dickens, as a metaphor for achieving a new financial perspective and moving toward a healthy and happy life. The show will guide listeners toward ways they can examine and strengthen their relationships with money.

To find out more, or to listen to the broadcast online, go to http://www.business.voiceamerica.com/cms.php?CMSLink=ez/index.php/plain/business/list_broadcasts/(show)/7119

Due to a scheduling conflict, we have eliminated the May Financial Integration Residency Program for CFPs and therapists.  The September program will now be the only interior residency workshop offered by Ted and Rick in 2006.  This program will be held September 3rd-7th, 2006.

The Financial Integration Residency program is one of the premier workshops available to financial and mental health professionals wanting to facilitate permanent behavioral change around destructive money issues. The program trains financial professionals and therapists how to integrate into their practices exterior and interior money skills that will transform the lives of their clients.  Participants learn how to uncover their clients’ hidden money beliefs and how to use technologies that will actually change their clients’ behaviors around money.  The heart of the workshop experience is the exposure to and use of experiential tools that will help practitioners communicate financial information in a way never before experienced.  These are tools that participants can take back to their practices and implement immediately.

Tuition is $4,900.  For more information, call 605-343-1400 or email Rick Kahler at rick@kahlerfinancial.com.

What are you saving for?

For financial planners and other financial advisors, it’s easy to become immersed in the details of investment portfolios and retirement plans. Those of us who get excited dealing with the mechanics of investing—the “how”—sometimes forget that it’s at least as important for clients to focus on the reasons behind investing—the “why.”

When many people start thinking about saving and investing, they want to know, “What’s the right amount to invest? How much should we be saving?”

As a thrift-minded financial planner, of course, my first inclination is to answer this question with, “As much as you can.” That’s a bit too facile, though. Nor does it do anything to answer the real underlying question, which is, “How much is enough to help me reach my goals?”

Certainly, financial advisors can look at such factors as your age, income, and assets, then tell you how much you need to invest in order to provide for retirement. More generally, most advisors will recommend saving from ten to fifteen percent of your income. This amount, put away consistently over time, will be enough for almost anyone to have a comfortable retirement. Within that range, though, there are no particular “rules” for how much of your savings should be designated for emergencies, for short-term goals, for kids’ educations, for retirement, or for other unique needs. Different advisors will have different suggestions.

Financial advisor Dave Ramsey, who specializes in helping people get out from under burdensome debt, says that every dollar you have in savings should be earmarked for a particular purpose. His first step for those just starting out, with nothing at all in savings, is to build up an emergency fund. This is money you keep in a bank savings account—readily available funds to cover an unexpected car repair, emergency dental work, or even a job loss.

Almost all financial advisors would agree that an emergency fund should be your first level of savings. I would recommend in most cases that the next step should be to max out either an IRA or a 401(k) plan if your employer offers one. The possible tax benefits and employer matching of these plans make them good choices even for younger employees who are only able to save small amounts.

Another level of saving, which could be combined with your emergency fund or could be held in such investments as certificates of deposit, would be putting money away to fund short-term goals. These might be vacations, cars, home remodeling, and the like.

Then there is saving for long-term goals. These funds, most likely held in an investment portfolio, might be intended to provide for education for yourself or your kids, a career change, or retirement.

Before you can decide how much is the right amount to save for any of these purposes, though, you need to know the answer to a simple but profound question. This question, which isn’t asked often enough, is: “What am I saving for?”

Saving is not an end in itself, but a means to help you meet your goals. Don’t simply tell yourself you should be saving ten or fifteen percent. Instead, sit down and think about what you want to do and to have. What are your short-term and long-term goals?

Once you are at least somewhat clear about your goals, then you can set your savings priorities. Then your savings are in support of specific purposes. It can be much easier to put money away when you know what you’re saving it for.

Every year at the beginning of tax season, when tax statements are sent to investors, I know that I will be getting a few phone calls from new clients who are not pleased.  They have the following question:  “This form shows that I had a taxable capital gain from the Such-And-Such Fund.  But I didn’t sell my shares in that fund.  Why do I have to pay taxes on this?”

It’s particularly galling for investors to get a year-end statement that shows a taxable capital gain, even though their investment in a fund has declined in value.  It’s possible to lose money on an investment, yet still have to pay capital gains taxes on it.  I just love it when I get to explain that one.

The reason this is possible is that a mutual fund’s overall gains do not necessarily parallel the gains and losses of an individual investor’s shares in that fund.  The fund itself may (in fact, it had better!) earn money over the course of a year.  Its earnings, however, are subject to fluctuations during the year.  Depending on when a particular investor bought shares, that person’s holdings might be worth less at the end of the year than they were when they were purchased.  The mutual fund’s gains for the year, though, are "passed through" to the shareholders on the basis of the proportion of shares they own, without consideration of when the shares were purchased.  The taxable gain shown for each investor isn’t necessarily the same as the actual gain or loss on that person’s shares.

There is a bill pending in Congress that would provide some tax relief for mutual fund investors.  Senate Bill 1740 was introduced this fall by Senators Tim Johnson (D-South Dakota), Mike Crapo (R-Idaho), and Jim Bunning (R-Kentucky).

This measure, along with its companion House Bill 2121, would defer capital gains for investors in mutual funds until the shareholders actually sell their holdings.  This would apply to those who automatically reinvest their earnings, not to those who receive their distributions as income.

The bill, called the Generating Retirement Ownership Through Long-Term Holding (GROWTH) Act, would change the tax code to treat those who invest in mutual funds the same as those who invest in individual stocks.  Its intent is to encourage Americans, particularly small investors, to save more toward retirement.

In a press release about the GROWTH bill, Senator Johnson was quoted as saying, “Private savings are crucial to economic independence at retirement, and mutual funds represent a huge portion of the savings held by American workers.  In South Dakota, there are nearly 267,000 mutual fund shareholders with more than $20 billion in assets.  This bill will encourage workers to automatically reinvest and get workers to think about the long haul by contributing to national savings and building up their own retirement nest egg.”

The bill is currently making its way through both the Senate and the House, having been referred to the Finance Committee in the Senate and the Ways and Means Committee in the House.  For more information on it, you can check out a website maintained by the Library of Congress at www.thomas.loc.gov. Just put in the Senate or House bill number to see the text of the bill and its status.

As a proponent of investing through mutual funds, I am certainly in favor of the GROWTH act.  It will provide some tax relief for mutual fund investors and treat those investors more fairly as compared to individual stock investors.  Of course, my support has nothing to do with the fact that passage of the bill will give me some relief from having to explain those confusing year-end statements.

We’re having a party on November 11 to celebrate the release of my new book, The Financial Wisdom of Ebenezer Scrooge, co-authored with Ted Klontz, Ph.D., and his son Brad Klontz, Ph.D.  The festivities begin at 4 pm and run until 6 pm.  Make plans now to attend, and stay tuned for all the details.  I hear it rumored that Scrooge himself may make an appearence. 

The book is published by HCI, the publishers of the well-known Chicken Soup series.  It is available for pre-order at http://www.amazon.com/gp/product/0757303544/104-3682794-2446336?v=glance&n=283155&s=books&v=glance.

Recently, a baby made his appearance at our house.  His name is Jasper, a male, 4.5-pound, three-month-old kitten.  In cat years, he is about eight.  Jasper was born in Jasper, GA. (Okay, so no originality in the naming department.)  My wife suggests that we will catch a lot of heat for not obtaining a cat from our local animal shelter.  But given our past history with dysfunctional cats and newborn babies, we went for genetics. 

Let me explain.  One of the redeeming features of this cat is: 1) he is not colicky.  Let me repeat, HE IS NOT COLICKY!  Anyone who is remotely familiar with me will know that the word "newborn" puts me instantly into post-traumatic stress, as both of our newborn human babies had colic.

Another impressive feature of this kitten is that he understands how to properly use a litter box.  Again, long-time readers and clients understand that among Kahler kittens, this is not a given. One of our former cats ended up going on a one-way trip to Texas, while I stayed behind overseeing the replacement of carpets.

I was not particularly a cat lover before that experience, and I was even less of one afterward.  So when Davin and London coaxed us to get a pet, I was ready to insist on a dog.  Unfortunately, Davin is allergic to dogs.  This breed of cat, we are told, is the most dog-like feline one can get.  So far that seems to be true.

Other benefits of this new baby are no diapers, no allergies, no crying, no night feedings, and no bickering with siblings.  We are indeed happy parents, especially because Davin and London are so content with their new kitty.

This week I am off to Knoxville to speak to the local FPA chapter and the clients of Kathy Parks, CFP.  The next day I will drive to Nashville, TN, where I will co-facilitate the Healing Money Issues program at Onsite Workshops with Ted Klontz and Warren Brent.  We are expecting about 16 participants.

Just today I received a summary of a clinical study recently completed on the Healing Money Issues program.  The conclusions?  "Participants showed significant and lasting reductions in: 1) psychological distress, 2) anxiety and worry about money and money situations, and 3) tendency to view money as a symbol of success and way to impress or influence others.  They also showed measurable increases in overall financial health."

You’ll be hearing a lot more about this study in the coming months.  I am told it is the first clinical study ever done on the treatment of anxiety and depression around money.  Stay tuned.

Is the way your parents spend their money any of your business?  It might be—at least if those parents live in South Dakota.  If you have parents who are residents of the state, you are financially responsible for them.

South Dakota law (SDCL 25-7-27) states, “Any adult child, having the financial ability to do so, shall provide necessary food, clothing, shelter, or medical attendance for a parent who is unable to provide for oneself.  However, no claim may be made against such adult child until the adult child is given written notice that the child’s parent is unable to provide for oneself, and such adult child has refused to provide for the child’s parent.”  A second statute requires adult siblings to share the responsibility of providing for needy parents.

Being willing to give our elderly parents the help they need, financially as well as physically, would be a no-brainer for most of us.  Several of my clients have as one of their financial goals the need to have resources to help support their parents in old age.  For many of us, supporting our parents if they need it is every bit as much our responsibility as is supporting our minor children.

From that perspective, a law requiring adult children to support needy parents isn’t much different from a law requiring divorced parents to provide financial support for their children.

The real kicker in this law, however, is the final item in the list of necessities an adult child is required to provide—medical attendance.  If someone’s medical expenses are covered by certain public assistance programs, that person’s children could be required to reimburse the program for those costs.  The law (which was originally passed in 1939) is not specific about which programs or forms of assistance might be reimbursable.  At least in theory, though, adult children could be required to pay for an elderly parent’s expensive long-term stay in a hospital or nursing home.  Such a financial burden could jeopardize the children’s own financial future.

Our attorney tells us that the state of South Dakota has successfully collected from adult children, even those who live outside of the state, for monies due the Title IXX program.  We are also told that the Department of Social Services is not consistent in its enforcement of this law. 

By the way, although spouses are required to support one another, I didn’t find a similar law requiring parents to support needy adult children.  Apparently, once the kids are grown, Mom and Dad are off the hook.

I have often reminded clients that taking care of themselves financially means their children won’t have to take care of them.  I tell my clients that they are not being selfish when they make saving for retirement their top financial priority.  Only after there is sufficient provision for their own retirement should parents divert savings toward paying for children’s education, helping them buy homes, or bailing them out of financial difficulties.  Knowing about this law puts some weight behind that position. 

As you’re planning for your own financial future, then, one aspect you might consider is to support your parents in planning for their own.  If you’re ever tempted to ask them for significant sums of money, you might want to think again.  You might be far better off if they keep those funds for their own retirement.  Knowing they are provided for can take a financial as well as an emotional burden off your shoulders.