Why We Approach Financial Planning and Budgeting Differently

Picture of Jesse Mecham, founder and CEO of YNAB.
Jesse Mecham, founder of online budgeting tool “You Need a Budget.”

Disclaimer: Neither the author, nor Providers & Families Wealth Management, LLC or its employees, are affiliated with, compensated, or endorsed by You Need A Budget (“YNAB.”) This is not an endorsement of YNAB and should not be read as such.

On his company’s website, Jesse Mecham (founder and CEO of online budgeting tool “You Need a Budget,” or YNAB for short) explains in his like-titled book how budgeting and financial planning are different:

If it is impossible to perfectly predict your expenses, a budget needs to be nimble and adaptable, right? Except most budgeting systems are decidedly “set it and forget it.” You make a budget at the beginning of the month, set it in stone, valiantly try to bend the fates and laws of the universe to make the month turn out exactly like the numbers you guessed, er, projected. Oh, and then beat yourself up and feel guilty when it doesn’t.

In retirement planning, “forecasting” is very useful. We forecast what we will spend, how much things will cost, and how much more expensive they’ll get over time. We even forecast how are investments will perform, even though there’s no guarantees.

Related: Yes, You Can Keep a Budget

When it comes to budgeting, forecasting is much different. If we forecast what we’ll have, we’ll forecast how we can spend it, and often make the mistake of spending it now. This is why YNAB’s approach to budgeting is so unique: you only focus on what’s in your bank account today, and you split it up into bitesize pieces designed to accomplish its own tasks.

Budgeting is a fluid, active process that requires dilligence and awareness.

Most budgets are backward. You start by projecting or guessing what your income will be, then plan how to spend that money. The farther out you go with this exercise, though, the less accurate your guesses–about your income or your expenses–are going to be. (Go ahead, I dare you to try and perfectly predict your expenses even for a week). The result? You are always in the dark, guessing, and waiting for the other shoe to drop.

With YNAB, you only budget money you have right now. It’s an allocation system, rather than a forecasting system. Therefore, you are on solid ground, fully aware of what you have and where you are going.

What about that big bill next month? Slow down, we aren’t there yet. With YNAB’S approach, we focus on what are current money is doing. And if it our current money isn’t helping us achieve our objectives, then we need to rework it.

Check out YNAB for yourself here.

About the Author

Scot Whiskeyman is Founder and Partner of Providers & Families Wealth Management, LLC., and is a CERTIFIED FINANCIAL PLANNERTM . His primary focus is on retirement planning for established professionals and estate planning for seniors. He can be reached by e-mail at scot@providersandfamilies.com.

Looking for a Simple Way to Reward Employees?

Getting from point A to point B should be simple
Putting a retirement plan into place for your employees should be Simple. [image credit: eglobalis.com]
Ever wonder how some of your peers offer expensive benefits packages to their employees and manage to stay afloat? Have you thought about putting a retirement plan into place to reward your employees, but gotten stuck navigating complicated filing requirements and trying to make sense of confusing language like ERISA, Third Party Administrator, and Form 5500?

The IRS recognizes that it can be both costly and time consuming to set up a 401(k) plan if you’re a small business. Complicated rules such as avoiding being “top-heavy,” choosing between profit-sharing options versus matching options, and high startup costs can be seemingly insurmountable hurdles to putting a retirement plan into place.

For those businesses looking to avoid the complicated, the IRS has a solution – the (appropriately named) Simple IRA. Simple stands for Savings Incentive Match Plan for Employees. It is intended to be an easy, cost-effective way for employers with fewer than 100 employees to reward them and provide access to a retirement plan for their future security.

Unlike the traditional 401(k), a Simple IRA has no annual filing requirements. This might not sound like a big deal, until you see what the form 5500 looks like. Not a lot of fun to have to think about every year. And potentially even less fun to pay someone (a third party administrator) to do.

In addition, most Simple IRAs can be set up with no start up fees to the employer. It’s not uncommon for a mutual fund company to to charge a flat fee in addition to what the third party administrator charges for its services for a 401(k). If an employer intended to offer a match, that’s two gatekeepers she has to pay just to offer her employees free money. Not so with a Simple IRA.

Drawbacks

For all their simplicity, there are some trade-offs employers should consider carefully before establishing a Simple IRA.

When establishing Simple IRA plans, employers have the choice to either offer every employee 2% of his pay, or a 3% match if he puts in 3%. For example, if Joe employee makes $50,000 per year, the employer has the option to a) put in $1,000 (2% of Joe’s pay) on top of Joe’s salary, or b) match up to $1500 if Joe puts in $1500 of his own money. Either way, the employer is on the hook to make contributions, and can only reduce the match twice in a 5 year period.

Additionally,  all employees are always 100% vested. That means that the match the employer makes is the employee’s to keep forever, even if they leave the next day. This is quite a contrast to vesting schedules in 401(k) plans, which are designed to give employees incentive to stay – or risk losing some of their 401(k) matching. The even bigger pitfall here is if an employee leaves mid-year and the employer is offering a flat 2% non-elective contribution, because the employer is required to make good on that contribution.

While higher than IRAs, Simple IRA contribution limits are lower than those of 401(k) plans – $13,000 for 2019, compared to $19,000 for 401(k) plans. If there are quite a few employees over the age 50, then you’ll want to consider whether the lower catch-up contribution limit would be detrimental to those getting started saving late.

It’s important to weigh the costs and benefits to any type of retirement plan you’re considering – Simple IRA, 401(k) or otherwise.

The Bottom Line

We’ve only scratched the surface of the ins and outs and of Simple IRAs, their pros and cons, and how they compare to 401(k) plans. If you’re an employer, it’s important to weigh your options carefully before implementing a retirement plan. Not sure where to get started? Check out “Help with choosing a retirement plan” on the IRS’s website, or contact us today to get answers so you can decide what type of plan is best for you.

Free Employee Benefit Available for 2019: Naps

Pictured: how napping can make you feel.

Here’s a riddle: you can’t put a price on it, but it’s tremendously valuable. Without it, you wouldn’t be alive. What is it?

Did you guess “the mind?”

Few things peeve me more about our culture than the value we put on a single key ingredient to a healthy mind: sleep. Isn’t it insane that we still give people 15 minute smoke breaks (one of my first jobs offered two fifteen minute smoke breaks each day) – and yet napping is stigmatized?

I don’t have time to point cite any studies, but you can them up, and you’ve likely heard about what research shows about sleep. Well rested individuals get more done, are more effective and getting things done, and are at a lower risk for a myriad of diseases. In short, if you get plenty of sleep, you’ll be healthier and richer.

When it comes to employee benefits, we offer insurance, gym memberships, onsite cafeterias, retirement plans, company cars, and more. I even read an article recently about businesses building sound-proof phone booths for personal phone calls. Employers offer these things because they know that healthier, happier employees = more productive (read: profitable) employees.

Wait, you want to sleep? Stop being lazy!

Think about how absurd that is. As an employee benefit, it wouldn’t cost more than a mattress pad like these ones available on Amazon and semi-private designated sleeping quarters (i.e., an office.)

But to do all that, we need to stop stigmatizing sleep. Being well rested is not about just “going to bed earlier” (although that certainly helps.) We now know that sleep cycles, when interrupted, results in us feeling more tired and groggy…regardless of how many actual hours of sleep we got.

Don’t get me wrong: this is not me saying “forget the rules! Stay up until 4am! Take a 6 hour snooze after lunch!” Try to go bed at a normal time, and try to get up at a normal time. But if you can’t make that happen, don’t punish yourself. A 20 minute snooze can give your mind that extra push to get you through the rest of your day.

Last week I wrote about us living in an abundant universe. One of those things that is abundant in our universe is time. Therefore, don’t feel bad for giving yourself time to rest. You don’t owe anyone an explanation. If anyone asks why you were sleeping, there’s a simple answer: “I was tired.” If you get pushback, such as, “you need to go to bed earlier,” you can respond, “I did, but I couldn’t sleep.” If you then run into “you have things to get done,” simply respond “no one knows better than me what I need to get done, which is why I wanted to get some rest so I could concentrate.”

I’ll say it. I’m not ashamed. I take naps. I take them during the day. I take them in my office. I take them in my car. I know this totally spoils your image of me (lol) but I promise you that I am a hardworking individual. Sometimes I work so hard that I get tired. And sometimes that getting tired happens at 2:15pm instead of 10:00pm.

 

We Live in an Abundant Universe

When I began my career in financial services in 2011, the vast majority of the investing public was still recovering from aftershock of the great recession that had only ended a few years prior. Rampant were fears of a double dip recession – the idea that the market correction of 2008 could rear its ugly head again – or that perhaps, something much bigger was on the horizon.

Out of these fears comes the desire for safety. And despite the peace of mind they provided, with interest rates continuing to plummet, FDIC insured bank accounts and certificates weren’t providing the yield many retirees needed to maintain their lifestyles. Where else was there to look for safety and yield?

Enter gold, one of the rarest metals on the planet. While the stock markets were moving sideways and doing nothing, the price of gold per ounce was soring. By the end of August 2011, gold was trading at more than $1,800 per ounce – an all-time high.

As you can see from the chart above, reality eventually reared its head. No markets move in one direction, and gold is no exception. Still, the idea that gold is a safe investment got me thinking: just why is it perceived as a safe investment in the first place? To answer that, let’s look to its origins as a source of wealth. From Investopedia:

For 5,000 years, gold’s combination of luster, malleability, density and scarcity has captivated humankind like no other metal. According to Peter Bernstein’s book The Power of Gold: The History of Obsession, gold is so dense that one ton of it can be packed into a cubic foot.

So there you have it – gold is dense, malleable, shiny, and scarce. People like shiny things; they like metal they can use, and they like stuff that packs a big punch without taking up a lot of space. But it turns out it’s really the scarcity aspect that gives the gold any value at all.

From 1871 to 1914, the gold standard was at its pinnacle. During this period near-ideal political conditions existed in the world. Governments worked very well together to make the system work, but this all changed forever with the outbreak of the Great War in 1914.

With World War I, political alliances changed, international indebtedness increased and government finances deteriorated. While the gold standard was not suspended, it was in limbo during the war, demonstrating its inability to hold through both good and bad times. This created a lack of confidence in the gold standard that only exacerbated economic difficulties. It became increasingly apparent that the world needed something more flexible on which to base its global economy.

That something flexible: paper currency. What’s more is that gold, historically speaking, hasn’t always been the standard for determing monetary value. From Investopedia:

While gold has fascinated humankind for 5,000 years, it hasn’t always been the basis of the monetary system. A true international gold standard existed for less than 50 years (1871 to 1914) in a time of world peace and prosperity that coincided with a dramatic increase in the supply of gold. The gold standard was the symptom and not the cause of this peace and prosperity. Though a lesser form of the gold standard continued until 1971, its death had started centuries before with the introduction of paper money – a more flexible instrument for our complex financial world.

Gold is scarce. But just how scarce?

(A) figurative cube of gold would measure to be the length and width of two volleyball courts side by side and 20 yards thick. Image source: visualcapitalist.com

The reason that gold is so rare on earth is because it’s rare in the universe. In fact, relative to human life, the event that creates gold is rare occurrence: the collision of two neutron stars, which happens about once every 100,000 years. When those collisions do happen, the amount of gold produced – not to mention silver and platinum – might make you feel small. Take the first ever direct observance of such a collision in October of 2017.

Observations revealed the event forged roughly 50 Earth masses’ worth of silver, 100 Earth masses of gold, and 500 Earth masses of platinum.

How much gold is that?

The gold forged alone is worth about 100 octillion dollars at (October 2017’s) market price, according to Metzger, or $100,000,000,000,000,000,000,000,000,000 written out (1 followed by 29 zeroes).

Summary

Is it abundant or is it in short supply? Whether we’re talking gold, time, love, happiness, wealth, or anything else, it’s a matter of perspective. If your perspective on gold has changed by this point, imagine how your perspective on the wealth you’re trying to build can change with the right mindset.

Sources:

https://www.investopedia.com/ask/answers/09/gold-standard.asp

https://www.businessinsider.com/how-much-gold-created-in-neutron-star-collision-2017-10