The Hill is Home

Uploaded to flickr by Steve Wampler.

Throughout the month, this space will be dedicated to talking with local experts about ways to tackle some of the most common New Year’s resolutions (as determined by my highly unscientific Googling of the topic).  So far in this series we’ve looked at Going Green and Eating Healthier.  This week we are Getting Your Financial House in Order.

Like many other people after the tsunami in 2004, Erik and Heidi Floden wanted to help by giving money to charitable organizations, but they looked at their financial position and found that it was not really feasible for them.  In the previous three years the Floden’s had bought two new cars, paid wedding expenses, gone on a “rock star” honeymoon, and remodeled the kitchen in their Capitol Hill home, plus the other odds and ends on their credit cards.  Erik described what they discovered as “death by a thousand swipes of the credit card”.  That was when they decided to wash over their own debt like a tidal wave, and Operation Tsunami was born.

The Flodens calculated all their debt and figured out just how many hundreds of dollars a month they were paying just in interest rates.  “That money wasn’t going anywhere productive, “ said Erik,  “it wasn’t buying us anything.”  That realization set them in action:  they didn’t know how long it would take but their goal was zero consumer debt.  The next step, according to Heidi, was to go through all their expenses and “eliminate things: meals out, vacations, movies … we kept Netflix and did all of our entertainment at home.  We capped spending at the grocery store to $50 per week for about the first six months, no shopping for clothes, no more HBO.“  Once they had a new budget in place, they opened a joint checking account where they automatically deposited a percentage of their salaries and used the money for paying bills.

According to Bill Phillips, a Capitol Hill certified financial advisor and owner of William H. Phillips & Company, the Flodens took the right approach.  When getting rid of bad debt, he says to “take stock of where your debts are.  A mortgage and student loans are okay, even a car payment is to be expected, but look very closely at credit card debt.  That needs to be paid off and in order to do that you will have to live frugally.”

The money dedicated to their joint checking account gave the Flodens several hundred dollars a month additional to apply to their credit cards.  Heidi had some savings bonds they used to accelerate the payments on their more expensive car.  Once it was paid off, they took the payment amount and applied it to their less expensive car, effectively more than doubling that payment.  They did eventually increase their grocery budget.  “We still never said ‘we don’t want to cook so let’s order a pizza’.  We did a lot of dishes, but then we had that brand new kitchen.”

Making a commitment like the Flodens did is essential to a financially secure future. William Phillips (no relation to Bill Phillips), a financial professional in estate management and estate planning who lives on Capitol Hill and works with Axa Advisors, says the key steps to financial stability are managing cash flow and saving as much as you can.  “You have to know what your budget is month to month and actually stick to it so you can build up the proper reserves.”  Once a budget is in place its time to decide what to do with the extra money.  William suggests, “With the additional money you want to tax defer as much income as possible and save as much as you can.  For someone in their 30s or 40s, the chances of living to age 95 are high, and current savings limits on a 401k won’t get most of us to retirement in the lifestyle we envision.”  William shared this Excel budgeting spreadsheet he offers to his clients.

What are common things people overlook, according to the two financial professionals?  “Not shopping their credit card rates or consolidating their cards,” says William Phillips.  “If you consolidate you can often get special lower rates on transfer balances.  Credit unions in the area have some good interest rates, around 6-8% vs. 15% … if you take a loan from a credit union at 6% and pay off a 12% credit card, that’s good arbitrage.  You have to be disciplined with that credit card, though, and not use it anymore.” Bill Phillips suggests taking a comprehensive look at your retirement position, “Review your will and be sure it is what you want, make sure you have a durable power of attorney, make sure you have a health care directive and that you’ve appointed the right person or people for it – someone local who can make decisions right away. “

And the best advice Bill and William give to their clients?  For Bill, it’s to “save early and often. I don’t care what you save, if you create the habit, it is a whole lot easier to increase the amount than it is to establish the habit itself.  In the case of savings, you’re paying yourself and why wouldn’t you want to pay yourself?”  William says it’s important to get educated.  “There’s a lot of misinformation out there, and everybody has an uncle that gives advice.”  To help wade through it all, William suggests talking to a professional and using trusted sources.  “Don’t be afraid to talk to someone in the industry, but research who you’re working with at sites like finra.org/brokercheck.  There are also free online tools like Mint.com and PNC.”

Ultimately, Operation Tsunami took 18-24 months.  Now the Flodens don’t have a car payment or credit card debt, just their mortgage and student loans.  They started vacationing again and Erik did an Ironman, which he called the “anti-tsunami”.  During that time, they made a post-tsunami wish list that Heidi says is still on the bulletin board in their office.  “It was just a list of things we needed once Operation Tsunami was over: a dining room chandelier, new television, some home improvements we had to put off.”  The wish list was a motivator because, according to Heidi, “it was a way of life.  A tough way of life.”   “Especially when we went from being profligate spenders to spendthrifts,” says Erik.  Heidi still references it when they’re thinking about purchases, “I say, ‘we can’t go back to tsunami’”.

Bill Phillips
William H. Phillips & Company
Investment, Trust and Tax Consulting
148 F Street, SE
Washington DC 20003
202-543-1646 – Voice
202-543-4046 – Fax
email: william.phillips.44@att.net

William Phillips
Axa Advisors
(703) 207-0900
william.phillips@axa-advisors.com

Do you have any financial success stories to share?