PepTalkHer Founder & CEO Meggie Palmer spoke to Kristin O’Keeffe Merrick on how to be the CFO Your Life. She taught us how to set yourself up for financial freedom, to calculate our net worth, budgeting for an emergency fund, and what to do in the current climate.
Meggie: Kristin, there's a lot going on right now. A lot of us have got a little bit more time on our hands as we had otherwise anticipated. We want to maximize this time and get our financial life together once and for all. What can we do in getting the ball rolling?
If you want to be the CFO of your life, what are the top steps that we can do literally today?
Kristin: These are my favorite kinds of conversations because I love to-do lists and I love action and I love using the opportunity of whether you're experiencing frustration or boredom for some people. What you can do at this time to kind of better your life?
Let's do a few disclaimers. First, I am a financial advisor. I am not a CPA, or an accountant or a tax filer. I have a lot of understanding and knowledge of taxes but I am not an expert in that. So, I can't answer all your tax questions. Secondly, I don't like to make recommendations on investing, but I am going to do my best to give you a lay of the land of maybe some things you should be thinking about. Um, so get your notebook ready and get your notes ready to Yeah, okay, let's do this.
Make an inventory
The first thing I want to talk about is inventory. Okay, so here we are, we're home. Some of us are trying to do our jobs at home and homeschool kids. PS there's like a 96% chance that someone walks through the door at any given moment, so just bear with me if that happens. They're super cute. But anyway, we're all kind of trying to do our things at home.
Some of us have had, unfortunately, a situation where maybe you have been furloughed or laid off some stuff. People have had to make cuts in their pay. Some people who are just freelancers or business owners and their businesses have gone down and I know how difficult this is for all of you. I have so many clients who have been affected by this. My sister got furloughed yesterday. Like there's a lot of people out there who are struggling. And so I just want to make this as friendly to those people and to those of us at home who maybe haven't been touched financially, but I think the first thing we'd have to do is we do an inventory.
It sounds very, like dry and like when I used to work at the cosmetic store, but you have to figure out what everything looks like. And the thing that I would say here is let's see if you can figure out what your net worth is right. So, net worth equals assets minus liabilities, which is what you own, minus what you owe equals your net worth. It's a pretty straightforward concept.
Figure out your net worth
But sometimes figuring out your net worth can be a little tricky. What you have to do is go through this, take it side by side, like if you ever took an accounting class, you're going to figure out your assets first. And your assets are your cash. Obviously, assets are any kind of investments that you have, those could be investments that you have in just a regular investment account, it could be investments that you have, in an IRA a 401k. An asset is your home. If you own it, an asset could be your car, if you own it, it could be your weird boat. I know everyone owns a boat these days, right? It could be art. It could be jewelry, it could be whatever.
There's a difference obviously, between liquid assets and illiquid assets. The most liquid asset that you own is cash, right? That's a barometer of liquidity and there's from varying different degrees from cash is how liquid or illiquid your assets are. So starting there. Figuring out what it is you have. This is a good time for you to be going through your accounts. Looking at your checking account, your savings account going back and looking at old retirement accounts, maybe you haven't checked in a while. This is also a really good time to be checking in on what's happened to your money in the last few months, which I'm going to give you a spoiler. It hasn't been great.
Good debt vs. Bad debt
So good debt and bad debt. The good debt in your life is generally your mortgage. Sometimes it can be a Student Loan depending on how crazy the student loans are. You have to kind of dig through and look at what your debt is, credit card debt, personal debt, and any kind of loans you have against securities, that kind of thing and you need to add all that up.
Now remember that when you're doing this and if you own a house, for instance, the value of your home is your asset, minus the value of your mortgage is your liability that equals the net equity that you have on your house. If you paid half a million dollars for your home and you have a $300,000 mortgage, you essentially have a $200,000 equity stake in your home. That is your asset.
So now that you've kind of established your left-hand side as assets, your right-hand side is liabilities, you can kind of figure out now what your net worth is. Some people have a positive net worth. Some people have a negative net worth. If you have more liabilities you owe more than you own, you have a negative net worth. So this is kind of part one is creating this little map for yourself and understanding where everything lives.
Budgeting
Part two is the B-word. So the next thing we're going to focus on is budget. And everybody hates budgeting. I hate budgeting, you hate budgeting, we all hate budgeting. But this is a really interesting time for us to take stock in the big question that we all have, which is where the hell does my money go? Right, which is a pretty fair question. And in non-quarantine life, our money was generally going to a lot of things that we couldn't really track.
There are things in your life that you can't change no matter what happens. There's your rent or your mortgage. There's your utilities, your phone bill, your overhead, okay? And we all can pretty much get a pretty decent sense of what our overhead is. The problem with budgeting is not your fixed costs that you know that you have to pay no matter what happens. The biggest problem with budgeting is the mistake of budgeting. The “I've had it” like, what? Where did I just spend $200 this week? I think I bought like a lip gloss and maybe I took an Uber and I ordered from I ordered out and now I have no idea where my money is. And quarantine life is an interesting time to be focusing on this because you can kind of start to say, “Well, hey, I'm not spending any of that money on these things other than maybe like takeout.” You are not able to kind of just spend mindlessly and this is a really interesting opportunity to kind of go back.
Cut unnecessary subscriptions
Take a three-month look back on what you have spent, where you have spent it, and focusing on things like subscriptions. I had a call with somebody the other day, who, after doing this product, this project, she had $496 a month in subscriptions, which was for every kind of streaming service, every new service. It was truly outrageous.
So subscriptions, things that can be eliminated. There's a lot of memberships right now that we're not using. There's just a lot of life that we're not living but being honest in your budget and actually accounting for things like hair massages, trips to like the nail salon. I know this sounds like I'm stereotyping you all. But I'm really not. These are all things that we spend money on that we don't necessarily account in our budgets. And it's things that we are not spending money on right now. So if you can be thoughtful about those kinds of the money that you're saving right now, and be more thoughtful about going forward, like you can cancel three subscriptions that you don't need.
Meggie: Maybe you don't need to go through your credit card or your debit card, and literally just go through because I've been doing that for the easiest way to see if there are any ways we can save money.
Do you recommend that people go through line by line and just cut?
Kristin: Yeah. Because what you're doing is like you can start to develop trends. When you go back, there has to be like three months look back at least because right now gauging your spending is worthless, you're not doing anything. You're not spending like you normally are. So you can't do a good job of your budget, right? So you need to go back, go back to do December, January, February, go back and figure out. You can take a good old fashioned highlighter and just go through and start highlighting different colors, different categories, and all of a sudden you realizing like, “oh, I don't really need to spend, $800 a month on my personal care.”
This is where you can get a sense of what you need in your life and what you don't and what you can cut out this second. Think about what you are not spending money on and where that money should be going.
Create emergency saving or emergency funds
There's no better time than now than to create emergency savings or an emergency fund. We're all living in a world where having an emergency fund is crucial, right? People getting laid off left and right. And so if you don't have money saved, this could be a really scary situation for you. So create this emergency fund.
If you have an emergency fund, then allocate that money towards other things. Start potentially thinking about investments, you could put that money towards retirement accounts, you can put that money in investments. If you have debt, use that money towards really getting attacking your debt. And you should always be thinking about attacking your debt, the highest interest rate first. So credit cards are going to usually be on the top, then you're going to have some kind of middle of the road. If you have any personal loans or things like that, then it's generally student debt. And then it's generally your mortgage debt.
Meggie: If someone, for the first time, attacks their finances, how much money are we talking?
How much should one save for an emergency fund?
Kristin: Everybody has a kind of a different view on this and my particular view is anything less than zero. I mean, anything more than zero should be your emergency fund. So don't stress yourself out about saying like, “Oh, I need six months of overhead, otherwise I haven't achieved a goal.” It's a nice goal to have. Six months of overhead is lovely, but don't whip yourself on the daily if you don't have that saved, what you should really be thinking about is getting yourself any kind of emergency fund.
Figure out how you can start doing that even if you are paying off debt, how you can divert whether it's 100 bucks or 200 bucks, a week, a month, whatever it is into some kind of account. And here's the trick with emergency funds. Put it somewhere that is not easily accessible to you and I don't mean like your mattress. Figure out a place, a financial institution that is not connected to your checking account because this is what happens. You create a little emergency savings account and it sits next to your checking account and then you’re like, “Oh, cute! I need you” and you just move it over and then suddenly your savings account is gone.
What you need to do is you need savings, and you need to move it out and you need to put it somewhere else. So that you're kind of creating almost work for yourself to get that money.
Meggie: We talked about trying to cut out any unnecessary expenses. We want to create an emergency fund, we want to pay off debt? What about like other things peripheral that people should be thinking about? Is there anything specific in finances that now is actually a great time to dive in and just sort out once and for all?
Should we be thinking about life insurance or income protection insurance?
Kristin: Let me kind of do a speed round of things. That should be on your list right now. First and foremost, if you haven't already filed your taxes you should be filing your taxes, especially if the government owes you money. If the government owes you money, you should have already filed, get your money. Get it, get it. So that's part one.
Part two is if you get a refund, figure out what you're going to do with that refund, this is an interesting time to consider investing. You've had an extremely, extremely scary move from basically the end of February till, a few weeks ago. We have made some moves back a little bit and things are starting to look a little bit more stable.
There are still opportunities. If you haven't made IRA contributions for 2019. You can still do that. If you haven't filed if you want to make IRA contributions for 2020 you can do that. That means money going into the market and that's money that you're not going to be using until you're an old lady or man. And that means that you can potentially take advantage of a kind of a pullback in the market. Buy some things cheap and take advantage of the inevitable appreciation of those things.
If you have or for somebody who has a little bit of cash on the sidelines and can't quite figure out what that next step is, then consider using that money and starting an investment account or consider increasing your contributions to your 401k, things like that.
Life Insurance is one of these things that if you have any liabilities, any large liabilities, whether that's debt, whether that's student debt, mortgage, even personal debt, you should have some kind of life insurance on yourself in the event that something were to happen to you that your beneficiaries are not left high and dry. If you have children, if you have a business, if you have a spouse, you should have some kind of life insurance. Life Insurance is not as scary as everyone makes it seem it's relatively affordable especially if you are a person kind of have decent health and a decent age, a younger age, it should not be a scary thing for you. If you are married, if you are getting married, if you have joint liabilities, you should definitely be considering life insurance. If you need any help with that you should get in touch with me. It is something that we do.
Meggie: You help people invest specifically, but are there any like automated tools?
Are there any user-friendly platforms for people who want to start investing?
Kristin: I would recommend that if you've never invested before, you should be going down the road of using a platform that has some kind of ready-made investment vehicle for you, for instance, like a Betterment or an Ellevest, they will have you fill out like a little risk survey and then they kind of tell you which bucket you should be investing your money in. And each trade a Schwab, a TD Ameritrade, all of those things are great platforms, but those are generally designed for people who are going to be creating our own portfolios. So unless you decided you want to become like a stock picker, you should probably go for your first time you should probably be going down the road that will give you some guidance and give you some healthy investment choices.
Meggie: If anyone hasn't invested with all of us before. And if you want to send me a DM @PepTalkHer. They've actually given us a code to share with you as well, which is super helpful. I think you get 50 bucks. Yeah, they're great like that. I'll send them specifics. But Kristin, I know that you specifically work with women like that is your niche as a financial advisor.
What is one of the top mistakes that you see women making that's really easy for us to overcome?
Kristin: A great question. The biggest problem that I see with women in investing is that generally, women don't take appropriate amounts of risk. And what that usually means is that they don't take enough risk. This has a lot to do with how we've been taught about risk in our entire lives or have we been kind of taught as girls so to speak. I could go on a three-month rabbit hole on this if you really want me to, but one of my goals as an advisor is to constantly make sure that you aren't making that mistake and you are kind of allocating properly.
For instance, there's like crazy statistics that women end up with significantly less money in their retirement accounts than men. Some of those reasons are because women get pulled out of the workforce. But one of the main reasons is because they're not taking enough risk in their retirement accounts. And so you should always be pretty thoughtful about what your time horizon is when you're investing and if your time horizon is 20, or 30, or 40 years, you should be making sure that you are taking more risk as opposed to less risk so that you take advantage of the compound interest of over that period. And compound interest is also one of my favorite things to talk about.
“Women end up with significantly less money in their retirement accounts than men. Some of those reasons are because women get pulled out of the workforce. But one of the main reasons is because they’re not taking enough risk in their retirement accounts. ”
Meggie: I'm a massive nerd and I love talking about compound interest as well. It is your best friend if you don't know about it. So the best time to start investing, as they say, is yesterday, and the second-best time is yet today or tomorrow. Thank you so much, Kristin, we're so grateful that you join us today. Check her out. She's @thegirlwhosavesmoney on Instagram, Kristin Merrick.