Debt, according to Lynnette Khalfani, is the single worst four-letter word in the english language. She describes it in her latest book, Zero Debt: The Ultimate Guide to Financial Freedom (Advantage World Press; $14.95) as “the longest-lasting economic curse, the most heinous financial plague, and the least recognized form of modern slavery afflicting Americans this millennium.”
“Debt keeps you up late at night,” she writes in the introduction. It drives people to drink, to fight with their spouse, and to have anxieties. The problem with debt is that the way we manage it has a huge impact on our daily lives. People who handle their debt better than others are the people who have better financial opportunities and benefits.
Khalfani is a former Wall Street Journal reporter for CNBC, whose work has also appeared in The New York Times and USA Today. Khalfani’s second book offers a 30-day plan to help consumers take control of their finances and manage their credit properly. And while she divides her book into week-by-week steps, this particular book excerpt is from the three chapters that help consumers understand the basic steps of debt management as well as ways to overcome debt. As always, BLACK ENTERPRISE routinely revisits little-known ways to help consumers take control of their finances. Sometimes it’s as complicated as knowing which stocks to buy at a given time; other times, it’s something as simple as being organized. We assume that our readers are fairly advanced in their understanding of consumer issues and management, but every now and then we revert to retelling the basics. Here, we look at three basic key components to gaining financial freedom.
—The Editors
BASIC STEP [NO. 1] SET UP A GOOD FILING SYSTEM
One of the best things you can do to get financially fit this year is to get yourself financially organized. So many of us want to whip our finances into shape, yet the task seems especially daunting because most households are overwhelmed by mounds of paperwork. But wouldn’t it be great to have an easy, workable system for organizing all your financial documents—like those numerous credit card receipts, old bills, tax records, and quarterly investment statements? Well, here are some tips from a few experts [who] will help you get a handle on all your paperwork, streamline your home or office, better balance your time, and enhance your record and document management skills. As of today, you’re going to create an easy-to-use filing and financial record-keeping system.
WHAT TO KEEP—AND WHAT TO THROW AWAY
Once you’ve gotten your files labeled, you may wonder how long you should keep certain financial documents. “As a rule, you should keep old tax records for at least seven years because that’s how far back the law allows the IRS to go when it wants to audit you,” says David Bach, a New York financial adviser and the author of Smart Women Finish Rich.
You should also hang on indefinitely to your stock, bond, and mutual fund statements—mainly because if you sell any of those investments later, you may need to demonstrate the cost basis of your investment to the IRS. Bach notes, however, that you don’t need to keep those prospectuses that mutual fund companies mail you each quarter, so you can safely toss those.
Additionally, Harriet Schechter, author of Let Go of Clutter, says, “When in doubt, throw it out,” when it comes to things like magazine articles, seminar handouts, and other “resource” materials you may have collected over the years.
BEING ORGANIZED HELPS YOUR FINANCES
In case you need any motivation, first consider all the benefits of getting rid of piles upon piles of paperwork and creating, for example, a decent filing system for your financial records. Schechter says that well-organized people can eliminate clutter and the stress related to it. They can also prevent piles of mail from accumulating, shed sentimental stuff without regret, and manage “mental clutter,” she says.
CREATING AN EFFECTIVE FILING SYSTEM
To make an effective filing system, experts recommend alphabetizing your relevant documents by subject or category. But don’t make the mistake of having too many or too few categories. A dozen broad categories should be the maximum in any filing system, Schechter says. Therefore, a sample file index might include categories for:
- Banking records (including checking and savings accounts)
- Bills paid (where you file regular monthly expenses)
- Budget (for itemized listings of all your expenses, income, and assets)
- Mortgage
- Receipts
- Credit cards (useful for storing receipts, statements, and contracts)
- Insurance (auto, property insurance records)
- Investments (such as 401(k) and mutual fund reports)
- Taxes
MAINTAINING YOUR FILING SYSTEM
Once you’ve got a working system, of course the final step is to stay on top of your paperwork, so that it doesn’t spiral out of control again. Experts say you should resist the urge to have general mail files—like the dreaded, all-purpose “in” and “out” baskets that seem to occupy almost every home office and work desk space. Instead, create a paper-flow system that instantly tells you what you’re supposed to do with the mail that’s held there. For example, to quickly sort through mail—and it’s best to do that the same day that it arrives—you can put it into categories labeled:
- “To Pay” (for bills, charitable solicitations, etc.)
- “To Read”
- “To File”
- “Correspondence”
- “Pending/Follow-ups”
- “Events/Invitations” or
- “To Share/Forward”
Once you weed through your files, purging unnecessary paperwork and reducing the amount of piles you have stacked up, chances are you’ll be a lot clearer about your finances—and certainly better organized. What’s more, if you take a few minutes each day to tackle your paperwork, you’ll save yourself many hours—if not days—of having to wade through a morass of papers later in the year when you’re trying to find some important document. This is particularly true when tax time rolls around. Imagine how great it would feel if you didn’t have to go sifting through old piles of paper trying to justify all your tax deductions. Instead, you could simply turn over to your accountant or to a paid tax professional a nice, neat file of well-organized receipts and records. I can’t guarantee that you’ll be paying zero taxes … but I can promise you that having organized paperwork and a well-kept filing system is a strategy that will make tax time a lot less taxing.
BASIC STEP [NO. 2] CREATE SMART FINANCIAL GOALS
THE IMPORTANCE OF WRITTEN GOALS
You must have precise, written goals—not ideas in your head. If you can’t come up with your own written goals and the plan that will get you there, find a local financial planner for help. You can contact one in your area through the Financial Planning Association at 800-647-6340 or www.fpanet.net. Another place to find a fee-only financial adviser is the National Association of Personal Financial Advisors at www.napfa.org or 800-366-2732. Finally, many accountants also offer financial planning services. To find one, contact the American Institute of Certified Public Accountants: www.aicpa.org or 212-596-6200.
In my first book, Investing Success: How to Conquer 30 Costly Mistakes &
Multiply Your Wealth! (Advantage World Press; $24.95), I told readers about the importance of having SMART goals. I also explained that people who set written goals overwhelmingly fare better than those who do not.SMART is an abbreviation for goals that are Specific, Measurable, Action-oriented, Realistic, and Time-bound. The idea is to avoid general, vague, or hazy goals such [as] “I want to be rich.” Exactly what does “rich” mean to you? Is it having $100,000, or $1 million in t
he bank? And what’s your timetable and/or deadline?
CONSIDER YOUR SHORT-, MEDIUM-,AND LONG-RANGEGOALS
I’d like to guide your thinking now toward short-term, medium-range, and long-term goals that you may want to pursue. Short-term goals are those you can accomplish in one or two years at most. Medium-range goals will take two to 10 years to achieve. And long-term goals require you to save or invest for a decade or longer.
Here are some goals to which you might aspire:
- Paying off student loans
- Eliminating credit card debt
- Building up an emergency cash cushion
- Buying a new car or a second automobile
- Starting a business
- Saving for a downpayment on a house
- Investing in the stock market or in real estate
- Retiring comfortably
YOUR RETIREMENT ASPIRATIONS
Financial advisers say one of the most frequently asked questions from their clients is: Am I financially prepared for retirement? Yet far fewer people take time to ponder another, equally pressing query: Am I emotionally ready to retire?
Certainly, leaving the full-time workforce has serious financial implications. But too often, experts say, economic issues overshadow important emotional considerations.
So if you’re planning for your golden years, do take time to enhance your retirement IQ—ensuring, among other things, that you’ll have a healthy-sized nest egg.
But before you retire, don’t forget to boost your retirement EQ (Emotional Quotient) as well. To ease into retirement with a lot more peace of mind, consider these three questions now—before you bid corporate America farewell.
Where do you plan to live? If you still have a mortgage, or if you plan to purchase another home, this is clearly a financial issue—especially since housing prices vary wildly nationwide. But where you will live during retirement is also an emotionally-laden topic, particularly for couples. Oftentimes, one partner may envision selling the house, moving out of state, or relocating to a warm climate. Meanwhile, the other partner may be sentimentally attached to the family home, may be wary of leaving the current neighborhood, or—far from desiring tropical weather—may want to move closer to the grandchildren in Minneapolis or Buffalo. Thus, talking beforehand with your spouse about these potential areas of disagreement can go a long way toward avoiding future conflicts.
How will you spend your time? Figuring out what to do with the rest of your life will require some serious soul-searching. It’s also important to debunk some myths about what retirement represents.
“A lot of people are afraid of what their lives will be like,” says Jerry Kleiman, a clinical psychologist in Long Island, New York. “They associate retirement with diminished capacity, diminished usefulness in society, dependency, or being a step closer to death.”
Kleiman, who is also co-founder of Optimal Resolutions Inc., a consultancy that aids individuals and families with the emotional issues surrounding retirement, suggests that pre-retirees take a “life inventory.” This requires you to identify unfulfilled dreams or goals, examine the hobbies and activities that excite you most, and determine what you are passionate about, in terms of intellectual, physical, social, or spiritual pursuits.
Similarly, it’s also crucial to realize what you don’t want to do.
“I know some people who want to retire on a beach, and sit around and play cards all day. If I did that, I’d be dead within a year from boredom,” says Mark Wachs, a publicist in New York. Wachs, 60, has been meeting with his financial planner recently to prepare for his retirement—a period he views as “the next phase” in his life.
If your finances fall short of your expectations, can you cope with that reality? Many of us have grown up with grandiose images of what retirement will be like: freedom from the stresses of work, time to travel, carefree days spent playing golf, or even doing absolutely nothing at all. Unfortunately, these images are more fiction that fact. The average American is woefully unprepared for the financial challenges of life without a steady paycheck—and thus unprepared to deal with the emotional letdown that inevitably occurs when retirement dreams and goals aren’t realized.
One big shock for many people is that they probably won’t be retiring at all—at least not as soon as, or in the manner, they’d hoped. Ivan Geffen, an investment specialist at Vfinace Investments in Boca Raton, Florida, predicts a lot more retirees will continue to work part time. Others, he says, will be forced to adopt a less expensive lifestyle.
“With the stock market getting annihilated” between 2000 and 2002, “people’s original retirement plans may have to be postponed,” Geffen says.
By getting your debts under control now, you can avoid that postponed or “delayed” retirement scenario—and ease into your golden years with zero debt and maximum financial freedom.
BASIC STEP [NO. 3] FIND A WAY TO GENERATE ADDITIONAL INCOME
Anything you can do to generate other income can go a long way toward reducing your debt—especially if you’d like to wipe out your bills fast. One option is to get a second job, even if only temporarily.
IS A SECOND JOB, OR PART-TIME WORK IN YOUR FUTURE?
I realize that most people already work really hard, and often put in more than 40 hours a week on the job. But if you can even fathom the idea, consider getting a second job or part-time work—just for a set period of time, perhaps three months. This may seem like a big sacrifice and a burden. But trust me: it’s nothing compared to the burden of carrying around debt year after year. Take every dollar earned from your second job and use it to reduce debt or build an emergency savings fund.
Your emergency fund, or emergency cash cushion, should be at least three times your monthly expenses. In other words, if your bills are $3,000 a month, you should have a $9,000 emergency fund. I know this is hard to amass, but you can build it over time. Having a cash cushion is crucial in case one of the five dreaded Ds (downsizing, death, divorce, disability, or disease) ever happens to you.
TURN A HOBBY INTO CASH
Maybe right now you’re saying: “Lynnette, you have absolutely lost your mind if you think I’m going to go slaving away on a job for even more hours than I do now!”
Well, if the idea of more work is so unbearable, how about playing for money? And I don’t mean hitting the slots or the crap tables in Vegas or Atlantic City. I mean do you have any hobbies—or things you do for fun or entertainment—that you can actually turn into cold, hard dollars?
Like to knit or sew things? There’s a market for that—just go after people who might want handmade (read: customized or tailored) clothing. Charge your customers enough to cover all your expenses for fabric, supplies, etc. Then add a hefty labor charge to make it worth your while.
Perhaps you’re good at styling or cutting people’s hair and you actually like to be creative in that way as well. OK, so put the word out in your neighborhood, or among your family and friends, that you’ll do hair—for a fee—from the comfort of your home.
Whatever [pastime] you take pleasure in, chances are there’s someone out there willing to pay you for it—regardless of whether or not you’re providing goods or service.
THE IDEAL PART-TIMEENTERPRISE
A word to you dreamers out there: Don’t look at this advice and go off half-cocked talking to your spouse about how you’re going to start raising ostriches and make $100,000 a year at it—and I don’t care if you happen to live on a farm! In all cases, you want to hone in on no-cost or low-cost ventures; businesses that you can do by yourself, and if possible, startups that can be operated exclusively or mainly from the privacy of your o
wn home.
Why these characteristics? For starters, you don’t have the money to buy tons of products. You also don’t want to have to hire anybody. Hey, you need to keep all the money you’ll earn, don’t you? And by taking the home-based approach, you won’t have to pay extra money to lease space or rent a place from which you’ll run your home-based business (you’re already paying something to live where you are, right?). Running the business from home also means no commuting costs or commuting time (unless you call the 30-second walk from your bedroom to your basement a serious commute).
LEVERAGE THE INTERNET
Finally, if you’re a person who is Web savvy, I’d encourage you by all means to harness the power of the Internet to make money in any way possible—any way that’s legal and moral, of course. For instance, maybe you’re a good writer. Scores of corporations and organizations out there need writers to, well, write—all kinds of stuff: pamphlets, brochures, company newsletters, employment manuals, etc.
You can offer to do desktop publishing services if you have a penchant for that. Perhaps you speak another language: think about selling online language instruction. With the World Wide Web as your gateway, your customer base is almost unlimited. Clients can be in any part of the world—as long as they’re willing to hire you and pay up in a timely manner.
If you follow these guidelines and are willing to think creatively about how you can pad your current income—without killing yourself in the process—you can slash your debts by leaps and bounds and become financially fit much, much faster.
THE SMALL-OFFICE HOME-OFFICE SOLUTION
Speaking of goods and services, now may be the time to consider doing something that so many Americans are angling to do: start their own business. And if millions of entrepreneurs across the country are correct, one of the best ways to launch a business is right out of your own home (or apartment … or garage).
From Zero Debt: The Ultimate Guide to Financial Freedom by Lynnette Khalfani (Advantage World Press). © 2004 Lynnette Khalfani. Reprinted by permission of the publisher. For more information, contact www.themoneycoach.net.