By: Conrad L Slate, Sr, CLU, ChFC, MSFS
Investment Advisor Representative

Did you ever wonder how the man in Ohio who never went to college, always worked a line job in a factory, and never inherited any money was capable of leaving several million dollars to a college at his death? He mastered the principle that during our lives that, unless there is a rich uncle as benefactor, it is us at work, our money at work, or some combination of the two. This man never owned a car, and he walked to and from work only two blocks from his apartment. He went home every day to eat lunch which was a can of soup that he had opened in the morning and placed over the pilot light on his stove so it would be hot when he got home at lunch time! His lifestyle was so frugal that he only bought clothes at a second hand store, never married, and had no hobbies that required spending money. He represents the extreme to be sure.

This man was not well educated, did not have a sophisticated investment strategy or a genie in a bottle. He never took a lot of risk. He accumulated most of what he had in simple savings.

Since most of us don't have a rich uncle, let's deal with us and/or our money at work. It is not just a matter of how much one makes that determines how much one might have. In fact it is not what we make but what we keep that determines our accumulation success. We regularly read about the entertainment stars who owe the IRS millions of dollars, or the professional athlete who has to declare bankruptcy. How could that happen when they earn such huge sums of money?

Granted that in some cases an unscrupulous manager, scam artist, or unseemly domestic issues contribute to the loss of assets, but more often it is poor money habits that are the culprit. Amazingly, that is usually the problem most of us face but on a smaller scale. For most of us the lure of having it now versus waiting is too great. Remember "Wimpy" who would "glady repay two hamburgers tomorrow for just one today"? He always ran behind financially because he couldn't control his habits. After all, for just a "little bit" of interest we can go ahead and enjoy the car now, we can finance the timeshare and enjoy it now, or we can get that big house we don't need and can't furnish because it is such a bargain.

So how can people of modest means live on far less than we do and not seem to "suffer"? There are numerous "tricks" that we all read about or observe in the media. How much money can one save by being a "super coupon queen or king"? If we can just be as proficient as the wizards on TV we can get $1,000 worth of products for under $50. One thing I have noticed is that they often get 150 tubes of toothpaste, 60 cans of shaving cream, 200 bars of soap. That's not my idea of wise shopping, but, hey, it is "free" isn't it?

Among the rising strategy "stars" is to use a credit card with "cash back" or bonuses of various kinds. Users spend the bonuses or cash to purchase other things rather than pay cash initially. Of course this ploy demands that the purchaser pay the credit card faithfully and fully each month for the system to work. Statistically, that does not happen to most who try. The second flaw with that strategy is that the points are often used to purchase items not needed or to buy things that would not be purchased otherwise. How often do we hear of the person who used points to go on an exotic vacation for "nothing", only to find out that they charged food, gifts, entertainment, rental car, etc. while on the free trip?

Really, now, would the credit card companies have those promotions if they actually lost money or reduced their profits by doing so? I know, there is always the exception, but responsibility dictates that one can't plan by exception. Going against the odds almost always loses in the long run.

With that cheery forecast, let's focus on the basics of how to make the most of our money through concrete, attainable, and realistic actions. No one said they would be easy, but "success" and "easy" are rarely used in the same sentence. Here we go:

• Develop a budget and live by it;
• Eliminate most frivolous or discretionary spending—but give yourself a small discretionary monthly budget;
• Eliminate "away" vacations until you get your emergency savings completed—enjoy vacationing near home and take in the local attractions;
• Save something every time you get paid;
• Build an emergency fund first;
• Pay off debt second;
• Save at least enough in your 401k to get the employer match, if available;
• If you have a possible short term savings goal for a particular need, then do not save by using aggressive investments that could be lower in value in any short time period; and
• Use tax-favored savings when appropriate (tax-free or tax reduced savings vehicles)

Now for the details. First, establish a budget with the regular fixed expenses entered first (mortgage or rent payment, groceries, utilities, insurance, prescriptions, etc.). Next list your discretionary expenses (entertainment, eating out, cable TV, cell phones, etc.) and get the total. Then list all sources of income. This is where you must consider whether those discretionary expenses are really necessary. Remember, they are "discretionary"! A sacrifice might be necessary to get on the right track. The difference between income and outgo, if positive, is what you have left over to save in some way. For most of us we immediately think of going for the 401k where an employer's matching contribution may be included. However, until a family unit has an adequate emergency fund the 401k can wait. If you have an emergency fund of four to six months' expenses at a minimum, then you may comfortably plan to begin paying consumer debt if you have any or saving elsewhere. High interest consumer debt is first.

So here we go to the 401k again, right? Maybe. What is the timeline until you need the money you are saving? If you are 25 and won't need money until you are 65, then the 401k is probably a good choice for at least part of your money (at least enough to get the match). Saving for a down payment on a home, a college fund, paying student loans, etc. means you must stay outside the 401k with at least part of your money. If you are nearing retirement and have an emergency fund, have paid down debt and have no immediate financial needs, then the 401k and its catch-up provision provide a great way to save large sums of your income.

Depending on your timeline and purpose for saving, you have several choices. If your income is under a certain threshold, and depending on whether you are single or married, you may qualify for and choose to save in a Roth IRA. Otherwise, a regular taxable account may be the best place to start. This portion of savings is not the emergency fund mentioned above. This is the next layer of assets that you do not anticipate needing for an emergency; it is dedicated to a particular savings goal or purpose.

This account will not be an IRA because it may be needed before you can withdraw from an IRA without penalty. Therefore, the amount of taxes you pay on the savings will reduce the actual amount of the growth or interest earned. At a hypothetical 1% rate on a savings vehicle, if you are in a 25% income tax bracket, you will pay 25% of the interest earnings in taxes. If inflation is 3%, then you are losing over 2% in real buying power to taxes and inflation. You are losing money in what is called the real rate of return (what's really there after taxes and inflation).

So how can you mitigate that? When your savings reaches a suitable level, one possibility is to invest in a reduced risk tax efficient account, like some municipal bond funds or tax free money market accounts. No choices are without at least some risk, and there are other ways to do it. The recent municipal bankruptcies in the United States and sovereign debt issues in Europe demonstrate that governmental entities can have problems and do go bankrupt. However, the difference can be significant if you assume some additional risk and improve the net return by just 1-2% over the course of a lifetime.

These thoughts address only the beginning steps in making the most of your money, but it is not wise to begin a house with the roof! The foundation is critical to the long-term stability and integrity of the home. And so it is with making the most of your money. Build a strong foundation and the rest will work better.

Feel free to call us about 865-357-7370 or check us out on the web at www.sdp-planning.com.

Conrad Slate, ChFC
Chartered Financial Counselor
Slate, Disharoon, Parrish and Associates
9724 Kingston Pike
Suite 701
Knoxville, TN 37923
865-357-7370
Conrad@sdp-planning.com