4 Financial Reality Checks

Good money management is all about taking control. Of the way you spend, the way you save and even the way you think.

And to illustrate this concept, I decided that a few reality checks were in order. Luckily, I've already written 10 for my book, The Working Girl's Guide to Financial Freedom and I decided to share the first four with you.

So, without further adeiu, here's the four financial reality checks you simply can't do without.

Case in point:

Meet our fictional friend, Carol. Carol has been a legal assistant at a Fortune 500 company for several years now. She takes advantage of their Flexible Healthcare Spending program and contributes 2% of her salary to her 401(k) on a pre-tax basis. It's not much, but it's better than nothing she thinks and in reality, it's just all she can afford. Between school supplies for the kids, the rising cost of gas and the mortgage payment, things are pretty tight. She'd love to increase her savings but right now just isn't a good time.

Does this sound familiar?

Carol's right in the belief that her little "something" is better than nothing at all but that doesn't mean she can just stop there. She's found herself a comfort zone that allows her to take a tiny bit of financial action without committing to any really big changes. She doesn't need to understand all the investing details - she's got a 401(k). That's all she needs to know.

Of course, Carol doesn't plan to do this job forever. One day... some day... she'd like something more. But the problem is, Carol hasn't yet decided what that "something" is and she knows she certainly can't finance whatever it might be. This job on the other hand, is paying the bills and perhaps more importantly, it's stable and safe. Carol also knows that performance reviews are coming up soon and she's hoping to be rewarded with a bonus and a nice raise for the job she does. Things will surely get better then.

But creating financial freedom is an ongoing progress that requires time, persistence and quite a bit of self-education. If Carol continues to wait for some opportune investing moment, she may find herself running out of time.

We hear the term "compound interest" and while we may not understand its complexities, we know it's a good thing. Invest a few pennies into a retirement account and somehow, magically that compound interest will turn those pennies into everything you need. Or so we think. But unless we really understand how our money grows, we're likely to be tragically disappointed when those golden years do finally roll around. In our previous example, I introduced you to Carol. Currently, Carol makes about $38,000 a year. If she continues with her 2% contribution and we assume an average annual raise of 4% and an 8% rate of return, Carol can expect to have just over $140,000 when she retires in thirty years. That's only $140,000 to cover her 10, 15 or 20 plus years of retirement, minus of course, the inflation between now and then. And let's remember that women are living longer than ever. Still think that's enough?

Just because we commit something to a retirement fund doesn't guarantee us a comfy life when we need it. There's no agency out there that says "okay, you contributed so we'll cover whatever you need". What you put in is exactly what you'll get out, plus of course that compound interest we talked about but if you don't do the math now, you'll be faced with the less-than-adequate results later.

I know, I know... It's extremely easy to procrastinate when it comes to financial education. The concept itself is rather overwhelming and the whole process can be extremely intimidating. Do I buy this stock or that fund? What if I lose my money? What kind of taxes will I have to pay if my fund grows? Look up some of these questions and you'll find yourself surrounded by legalese sounding terms like REIT's, hedging and PEG Ratio.

Which brings me to another common problem when stepping into the investing world for the first time: how far did you make it through Carol's story before your eyes glazed over? The pre-tax contributions? Or was it the average rate of return? For me, the word "prospectus" does it every time, a boring little investing term that we'll cover later. Throw that or "mid-cap" my way and I'd skip down a good three or four paragraphs before realizing what I had done. Why do we zone so quickly on this all important subject? I have a theory or rather, three to be exact:

First of all, it's hard to stay focused on something we don't understand and if you haven't spent much time studying your finances, you're not likely to be familiar with all the terminology. But that's okay. We're going to cover that terminology plus a whole lot more.

Secondly, it's hard to feign interest in things you find boring. Yes, you might be genuinely interested in building your nest egg but that doesn't mean you're going to be captivated with every facet of investing. And that's okay too. You don't have to be an expert on all the investing avenues, nor do you need to find them all absolutely fascinating. You only need to know what they are and, more importantly understand how they work.

And finally, we zone because we can. Like Carol, we all have our own personal ideas about what we're capable of financially and we rarely venture beyond those limitations. We prefer instead to stay safely tucked inside our little box. And like Carol, we're often content in the belief that someone else will take care of the finances. Whether it's a husband bringing home the bacon or a boss that owes us a raise, we tend to hand over the reigns when it comes to our financial security. We know how to balance our checkbooks and we've mastered paying our bills. Maybe we even ventured into the 401(k) or opened a small savings account through the local credit union. At least that's something right? But this investing, diversifying and financial planning... what's the point?

Now, having said all that, there's a second piece to this reality check: selfishness and greed will get you nowhere. Be generous and giving, and the rewards will flow your way.

I know, I know... how can you be generous when you don't have anything to give? I'm not suggesting that you throw your money around freely or pretend it really does grow on trees and you have more than enough to share. What I am saying is that hoarding your money creates a very negative vibe that will not serve your purpose here. Yes, there are some very rich people out there that wouldn't part with a dime to save your life. But I'm willing to bet that your desire to have more money isn't simply to "have more money". It's to enjoy life and that includes your family, your friends and all the wonderful things around you. It's to send your kids to college or retire nicely without worrying about your next Social Security check. It's not the money itself that will bring you happiness - it's the security and comfort that the money can buy. Be frugal, yes. Financially prudent? Without a doubt. But don't let your money control the way you feel, think or behave. Remember, you're the one in control now, right?

While Carol is busy waiting for that bonus, opportunities are passing her by. While she puts her hopes in her boss and her company, her dreams of financial freedom are slowly slipping away.

Carol believes that she doesn't need to know about investing and money management because the people and things in her life will take care of it for her. That's not a conscious thought of course, but it's easier for her to believe that things will just "work themselves out" rather than take control of her own future.

In the self-help era of the nineties, I read a book (one of many) that gave instruction on how to be more assertive and "get what you want". For the most part, it said what my ten other self-help books had said but one part really stuck with me: the author suggested that people allow others to control their lives because they'll have someone to blame if things don't work out. And that got me to thinking: it's not something we'd admit to of course, but it is actually easier to pass on the responsibility to someone else. If they mismanage things, well then... it wasn't our fault, now was it? I mean, the whole thing was just out of our hands.

The same is true with our finances. It's easier to be a victim - "I work hard but my boss just doesn't appreciate me" - than it is to step outside our box and say "Enough of this! I'll take care of it myself!" Because after all, where would we start? What would we do? And worst of all, what if we were wrong?

That was Carol's philosophy, however unconscious it might have been. But what Carol doesn't know is that the bonus isn't coming. Her raise isn't going to be quite as much as she thought. Despite those extra hours and extra efforts, her company felt the need to tighten its belt. Carol's raise will barely cover inflation and the possibility of a bonus will have to wait until next year. So, instead of spending her time working toward a future that she controlled, she spent those extra hours trying to impress a management team that had no intentions of being impressed. Of course, they didn't tell her that. They weren't going to suggest that an employee do less work. There was no way Carol could have known. But now she's faced with another year of payday to payday and the realization that "next year" brings no guarantees. Even worse, Carol starts to suspect that she has no control over the outcome.

You've heard the term "putting all your eggs in one basket"? If you haven't, you have now. Carol put all her "eggs" in the company basket. She decided to rely on someone else's value of her worth instead of relying on her own ability to grow and build financial stability. No, Carol didn't know that things would turn out the way they would. But if you think about it, none of us do. We have no way of knowing what may lie ahead. Our defense then, is to control the things that we can and that means taking the helm of your own financial life. You can't really blame the company for not coming through on the raise. That's what companies do. Yes, it sucks. It can be downright insulting. But they do it nonetheless. And there's nothing you can do.

What you can control however, is how you respond. Okay, so that job pays the bills. Just barely perhaps but it's enough to get you by. Will you continue to put you're your eggs in that basket or will you look for new ways to expand your income, your well-being and your life? Maybe you can't control how the company will treat you but you can control your own investing plan. You can take steps to build something that doesn't require you to rely on your company's approval. You decide how you will manage your money. You decide if you're going to learn more about the way your money grows. What you learn can make that financial future you dream about. What you don't know can seriously hurt you.

This brings us to our next reality check. Carol relied on someone else to determine her value to the company and thus, her earning potential. That's no way to live and as Carol found out....

If you are waiting on someone else to determine the value of your work, you're going to be waiting a long damn time.

First of all, understand that your personal value has nothing to do with your net worth. While our society seems content with a world of social status and monetary classes, in truth they are transparent labels that mean absolutely nothing. We are people, you and I... just people, one and the same. Now that doesn't mean that you're not unique. Quite the contrary, you are. Each of us is graced with our own world of talents, skills, interests and challenges. For the most part, how we welcome that world depends greatly upon how we view it and that view is influenced by the environment around us.

And yet, there are some who were born with "nothing" but have moved on to enjoy rich, full lives while others seemingly born with "everything" have gone to great lengths to throw it all away. Why?

Could it be possible that money and status isn't everything after all?

Maybe our perception of "needing" money is all wrong. We don't need it, not the money itself anyway. What we need is the food, shelter and other things it can buy. Maybe just having money isn't enough. Maybe that impressive cash flow doesn't guarantee you success, self-esteem or a balanced sense of worth. Maybe, just maybe, those things come from somewhere else altogether.

And that's exactly why we can't rely solely on other people's assessment of what we're worth. Your boss will always balance the value of your performance with the value of the company's profit. That's his (or her) job. And more importantly, your boss' bonus and raises often relate directly to his or her ability to control costs. See where this is going? So, while they might honestly think they've served you well, you'll never get to where you want to be if you're waiting for someone else to take you there.

Also remember that those who don't live from paycheck to paycheck don't really understand the rest of us who do. Okay, a few maybe, but they're far and few between. People with six figure salaries have plenty to sock away in their retirement accounts without worrying about how to pay for this week's groceries, assuming of course that they manage at least a portion of their money responsibly. They don't worry about things like cutoff notices, payment extensions or eating peanut butter and jelly sandwiches because that's really all you have in your pantry. When both of my kids came down with strep throat, I told my boss I needed to stay home. What else could I do? They couldn't go to school. "We need you at work," he said. "Don't you have a backup plan?" I did of course, but with strep throat, the "back up plan" wouldn't take them either. And call me crazy, but isn't a Mom supposed to stay home when her kids have fevers of 102°? "You should think about getting a live in," came the reply. "Then sick kids would no longer be a problem."

A problem? Sorry, but I didn't see them as a problem. I saw them as sick children, my sick children no less and it was my job to make sure they got better. And while my boss seemed to see things differently, to me those kids are worth so much more than anything he might have needed me to do. The problem then, wasn't my sick kids, but my dependency on allowing someone else to assign value to my priorities.

Financial freedom isn't just about making the right investment or participating in the right plan. It's about creating a life that is independent of someone else's opinion. It doesn't rely on a raise or a performance review to work and it doesn't leave you high and dry when you really need it the most.