What’s in the newly passed budget bill? Part 2

This is blog post #3 of my brief summary of the recent budget bill. Previous posts were on taxation of Social Security and then the first part of my description of what’s in the bill. For an 870-page bill, this summary is neither short nor comprehensive. However, with this post I’ll complete my effort to describe the impacts that I believe will be most important to my clients. Today I’ll write about changes to the Child Tax Credit, the new deductions for taxpayers with tip income or overtime pay, car loan interest, and charitable contributions, the extension of the Qualified Business Income deduction (“QBI”), changes to the itemized deduction of charitable contributions, the estate tax exemption and 529 accounts, and the new “Trump” accounts. There’s a lot of ground to cover, even in just summary form, so let’s jump right in.

Mystery! Suspense! The Complete Sherlock Holmes—about the same length as OBBBA but so much more fun!

Child Tax Credit increases are now permanent[1]

The Child Tax Credit increased from $1,000 to $2,000 per qualifying child with the Tax Cuts and Jobs Act (“TCJA”) in 2018. This temporary increase was made permanent by the One Big Beautiful Budget Act (“OBBBA”) and even increased to $2,200 for the current year. Starting in 2026, it will be indexed to inflation.

While the entire credit may be used to offset taxes owed, only $1,700 is refundable if there isn’t a tax liability. This credit is available to households with modified adjusted gross income of up to $200,000 (single “S” and head-of-household “HOH”) or $400,000 (married filing jointly “MFJ”).

Some New Deductions

In the past, most deductions were taken as part of a group of itemized deductions. You either took the standard deduction or, if the sum of all of your itemized deductions was larger, you took the itemized deductions. In 2018, the TCJA created a new kind of deduction that could be taken independent of whether you itemized deductions or took the standard deduction. This was the QBI deduction (more on this one below). OBBBA has added a few more of these deductions. I described the additional deduction for seniors in a previous post. Today we’ll look at deductions for tip income, overtime pay, auto loan interest and charitable contributions.

As we saw in my recent blog post on the taxability of Social Security, concepts that sound simple and straightforward as campaign sound bites tend not to be either simple or straightforward to apply.  The next three deductions illustrate this nicely:

 Deduction for tip income:  Up to $25,000 in qualified tip income will be deductible annually between 2025 and 2028. The amount is the same regardless of filing status S or MFJ. To “qualify”, the work must have “traditionally and customarily” received tips prior to 2025, tips must be voluntary and can not be earned through a “Specified Service Trade or Business”[2] Clearly doctors, lawyers and financial planners can’t deduct tips (thanks for asking!), but neither can entertainers, musicians or artists. The deduction phases out at $100 for each $1,000 of income over $150,000 and $300,000 for S or HOH and MFJ, respectively.

Deduction for Overtime Pay: There’s also a new deduction for overtime compensation—up to $25,000 for MFJ and $12,500 for other filers, from 2025 through 2028. This deduction phases down to zero between $150,000 and $275,000 for S or HOH and between $300,000 and $550,000 for MFJ.

Only the income that is paid in addition to the normal wage is eligible for this deduction. For example, if regular pay is $15/hour and overtime is $22.50/hour, only the additional $7.50/hour qualifies for the deduction, not the base pay of $15/hour. Also note that employment taxes (FICA) will still be due on the overtime portion of the pay.

Deduction for Car Loan Interest: Interest of up to $10,000 per year on “qualified passenger vehicle loans” will be deductible from 2025 through 2028. New vehicles (cars, pickup trucks, vans, SUVs, and on-road motorcycles with GVW < 14,000 lb.) that are assembled in the US are eligible. Interest on loans taken out or refinanced (without increasing the balance) after December 31, 2024 will be deductible. The deduction phases down to zero between income of $100,000 and $149,000 for S and $200,000 and $249,000 for MFJ.

Deduction for charitable contributions: Generally, charitable contributions have only been deductible for taxpayers who itemize deductions. During the pandemic, a temporary deduction of charitable contributions of $300 for S and $600 for MFJ was added for those who take the standard deduction. However, it was only in effect in 2020 and 2021. OBBBA makes permanent a charitable deduction for non-itemizers starting in 2026--$1,000 for S and $2,000 for MFJ. Only cash contributions qualify and they may not be used to fund a donor-advised fund.

A few more things that have changed

As mentioned earlier, the QBI deduction for owners of pass-through business entities (sole proprietors, partnerships, S corporations) was created by the TCJA in 2018 and scheduled to end this year. OBBBA essentially made this deduction permanent with a couple of changes added:

1.     The income levels at which the deduction phases out were raised a bit; and

2.     A new minimum deduction of $400 for taxpayers with at least $1,000 of qualifying business income.

 While those taxpayers who do not itemize deductions will have a pretty straightforward charitable contribution deduction starting next year, the opposite will be true for the itemized deduction of charitable contributions. This is a deduction category that was already complicated with different limitations on deductibility based on what is donated (cash or property of different types) and by the type of organization receiving the donation. Starting next year, there will be a 0.5% of adjusted gross income floor on the deductibility of charitable contributions. For example, a taxpayer with AGI of $100,000 would have to subtract $500 from the amount of charitable contributions and then apply the limitations based on property type and charity type to arrive at the deductible amount. The bottom line is that charitable contributions will result in smaller deductions in 2026 and beyond.

When 529 accounts were created in the 1990s, they were intended as a vehicle for saving to fund higher education. The TCJA added an allowance for K-12 tuition as a qualified expense for 529s. Now OBBBA expands qualified expenses to include K-12 expenses beyond tuition and certain post-secondary credentialing expenses.

One final change—if you were concerned about the federal estate tax exemption reverting from close to $15 million this year to $5 million next year, rest easy. The exemption will be $15 million in 2026 and will be indexed for inflation going forward.

And one final new addition—the creation of “Trump” accounts. Think of these as retirement savings accounts for children without the earned income requirements of individual retirement accounts (IRAs). US citizens born in 2025, 2026 and 2027 are eligible for a $1,000 US government credit to a Trump account. However, no contributions can be made before July 2026. There are lots of details of these accounts that will need to be clarified between now and then.

This has been a long and winding post, but that’s all I have to say in summarizing the OBBBA. Even with three blog posts, I’ve barely scratched the surface of what’s in this bill. And, of course, the actual application of most of these provisions entails plenty of small print. If you want help figuring out how these changes may affect you, contact your tax professional or send me a message!

[1] See previous blog post for an explanation of what “permanent” means in this context.

[2] This category was created to differentiate service providers like doctors and lawyers from manufacturers when the QBI deduction was introduced.

Investment advisor representative of and investment advisory services offered through CGN Advisors, LLC, a fee-only SEC registered investment advisor.  Tel: (910) FEE-ONLY. Fair Winds Financial Advice may offer investment advisory services in the State(s) of North Carolina, Texas and in other jurisdictions where exempted. Click here for additional disclosures.

What’s in the newly passed budget bill?

It has come to my attention that not everyone is as enthralled by income taxes as I am. There were those couple…or few…client meetings when one, or maybe both, clients nodded off and fell out of their chairs, completely disappearing from view in our virtual meeting. But we financial planners get excited about this stuff, particularly when a big budget bill like the “One Big Beautiful Budget Act” or “OBBBA” passes. A fair amount of complexity has been added to the tax code for individuals, families, and small businesses. Might anything in there be useful to you? Let’s sort it out.

I’m not going to try to summarize the potential impact of OBBBA on individual taxpayers in a single blog post—you wouldn’t want to read it (unless you’re another financial planner or a tax person) and I wouldn’t want to write it. Instead, I’m going to provide a pretty high-level review focusing on areas where you may want to take action now and particularly changes that will go in to effect for the current tax year.

Tax enthusiast in training, circa 1966…

Current income tax brackets are now “permanent”

OBBBA effectively ended eight years of uncertainty over the scheduled sundown in 2025 of most of the changes made in 2017 by the Tax Cuts and Jobs Act (“TCJA”). Many of the TCJA provisions—lower tax brackets, higher standard deduction and Child Tax Credit, were made “permanent”. “Permanent” means that there is no scheduled end date for these provisions—they will remain in effect until a future Congress passes a bill that changes them.

For years I have pointed out to clients that our income tax brackets: 10%, 12%, 22%, 24%, 32% 35% and 37%, are historically low income tax rates. If you have gotten into the habit of doing Roth conversions in anticipation of being in a higher income tax bracket later, you’ll want to recheck your strategy to see if it still works now that these lower tax brackets are permanent.

Standard Deduction increases in 2025

These new “permanent” amounts will be adjusted for inflation annually.

 Enhanced Deduction for Seniors

Also new in 2025 is an additional $6,000 deduction for each person aged 65 or older. This deduction, which can be taken along with either itemized deductions or the standard deduction, phases out as income increases. It will be available from 2025 through 2028. You’ll find more details about this enhanced deduction in my last blog post.

 Limit on the deduction of State and Local Taxes Increases to $40,000

 Very few Americans have benefited from itemizing deductions since the TCJA took effect in 2018. By simultaneously raising the standard deduction and limiting the deduction of state and local taxes (“SALT”) to $10,000, less than 10% of taxpayers had enough itemized deductions to exceed the standard deduction. In 2025, the SALT deduction limit increases from $10,000 to $40,000. The limit will then increase by 1% each year from 2026 to 2029 and will revert to $10,000 in 2030. All filing statuses will have this same limit except for married filing separately (“MFS”) for which it is 50% or $20,000 in 2025.

 This higher SALT deduction is available for households with modified adjusted gross income (“MAGI”) of $500,000 or less.  As MAGI exceeds $500,000, it is reduced by 30% of the amount over $500,000 until it reaches $10,000 at MAGI of $600,000. This is the case for all filing statuses except MFS where the threshold is $250,000 and the deduction drops to $5,000 by $300,000 of MAGI. From 2026 to 2029, both the amount of the SALT deduction limit and the phase down limits will increase by 1% annually.

 The following example shows that for a single person in a high tax state who would be able to take advantage of the full $40,000 SALT deduction, there’s a high cost to earning more than $500,000. An additional $50,000 of income will only yield $27,250 after federal taxes; $100,000 results in only $56,512 after federal taxes. If you’re in this situation, you may want to reduce or defer income to keep the benefit of your SALT deduction.

Clean Energy Tax Credits End Soon

Several clean energy tax credits that were introduced in 2022 and originally scheduled to end in 2032 or later will now end this year:

·       Clean Vehicle: A new or used electric vehicle must be purchased before September 30, 2025 for a credit of $7,500 or $4,000, respectively.

·       Energy Efficient Home Improvement: A credit of up to $1,200 for improvements (heating and cooling equipment, windows, doors, insulation and home energy audits) in place before December 31, 2025.

·       Residential Clean Energy—a credit of up to 30% of the cost of purchasing and installing wind power, fuel cell equipment, geothermal heat pumps or solar panels for expenditures made before December 31, 2025.

If any of these are on your radar, consider whether it makes sense to move forward in this newly compressed time frame in order to receive the credit.

Bonus Math Tidbit—the Value of Deductions vs. Credits

While both deductions and credits can save tax dollars, they work in different ways. For example, let’s look at a single taxpayer with taxable income of $75,000. This person is in the 22% income tax bracket—the last dollar she earned will be taxed at 22%. If she gets an additional $1,000 deduction, her taxable income drops to $74,000 and she saves $220 (22% of that $1,000). Nice! However, if she receives a $1,000 credit, her tax bill will be reduced by the entire $1,000. Even nicer! Credits are worth more than deductions! Here are the actual calculations:

Still with me? I know, probably more than you wanted to know about income taxes! But this is the fun stuff we get to figure out when the folks in Washington make changes to the tax code. Next blog I’ll describe some changes to how we can deduct charitable contributions and car loan interest, new deductions for tip and overtime income, changes to estate taxes, 529 accounts, the Child Tax credit and Qualified Business Income deductions, and the new Trump accounts. If you want help figuring out how this may impact you, contact your tax professional or send me a message!

Investment advisor representative of and investment advisory services offered through CGN Advisors, LLC, a fee-only SEC registered investment advisor.  Tel: (910) FEE-ONLY. Fair Winds Financial Advice may offer investment advisory services in the State(s) of North Carolina, Texas and in other jurisdictions where exempted. Click here for additional disclosures.

Are Social Security Benefits Taxable?

The short answer is maybe. Though there are 870 pages of the recently passed federal budget act (One Big Beautiful[1] Budget Act or “OBBBA”), nothing in it changed the formula for taxing Social Security benefits. I’ll describe how this works later in this post, if you’re interested in the math. And please note, I’m only talking about federal taxation here—there are still a handful of states that tax Social Security benefits.

The New “Enhanced” Deduction for Taxpayers 65 and older

While nothing has changed on how Social Security, specifically, is taxed, for a few years there will be a tax break for older people.  Everyone who is 65 or older and has annual income[2] of less than $75,000 (single, “S”) or $150,000 (married filing jointly, “MFJ”) will receive an “enhanced” deduction of $6,000, starting in 2025 and ending in 2028. During these four years, those who meet the income requirements, will receive this additional deduction. It will be used to offset any kind of taxable income (wages, business income, pension benefits, investment income, taxable Social Security benefits). You don’t have to be taking Social Security benefits to get the extra deduction and you can take it along with the standard deduction, which more than 90% of Americans take, or along with your itemized deductions.

What happens if you are over 65 and have more than $150,000 (MFJ) or $75,000 (S) of income? The enhanced deduction is reduced by 6% of the amount that income exceeds the threshold. The entire $6,000 per person deduction will be reduced to zero at income of $250,000 (MFJ) and $175,000 (S).

Examples:

A single person with income of $100,000 will have the enhanced deduction reduced from $6,000 to $4,500 (6% of the $25,000 over the threshold is $1,500).

For married couples, the 6% reduction is applied to each person’s enhanced deduction. A couple with income of $175,000, $25,000 over the threshold, will have this extra deduction reduced from $12,000 to $9,000. Six percent of $25,000 is $1,500 and this reduction is applied to each person’s $6,000 enhanced deduction.

How Social Security Benefits Continue to be Taxed

If I haven’t lost you yet, you must love math or income tax calculations or both, like I do! And you’re wondering if and how Social Security benefits continue to be taxed, as they have since this formula was first put in place in the 1984 and then expanded in 1993. The taxpayer’s “provisional income” is used to determine if and how much of Social Security benefits are taxable. “Provisional income” is basically all forms of income included in adjusted gross income with the addition of tax-exempt interest and one half of Social Security benefits. Then provisional income (“PI”) is used to determine if any or some part of the taxpayer’s Social Security benefits will be taxed as shown in this table:

These threshold numbers were put in place in 1984 (for 50% of Social Security to be taxable) and 1993 (for 85% of Social Security to be taxable) and are not indexed for inflation. In 1984, $25,000 was more than five times the national poverty level for an individual. In 2024, it was only 1.7 times. And in 1993, $34,000 was 4.9 times the individual national poverty level; in 2024 it was 2.3 times. Because these numbers haven’t risen with inflation, Social Security benefits are now taxable for many more middle and lower income families than they were at the outset. Today, only those whose Social Security benefits aren’t large and who have no other income will have their Social Security benefits exempt from Federal income tax.

Making decisions on when to take Social Security benefits and planning for the income tax consequences of choices is all part of the work I do with clients. If you need help, send me a message!

Investment advisor representative of and investment advisory services offered through CGN Advisors, LLC, a fee-only SEC registered investment advisor.  Tel: (910) FEE-ONLY. Fair Winds Financial Advice may offer investment advisory services in the State(s) of North Carolina, Texas and in other jurisdictions where exempted. Click here for additional disclosures.

[1] Beauty is in the eye of the beholder--Margaret Wolff Hungerford, Molly Bawn

[2] For purposes of this limitation, income is Adjusted Gross Income plus any income earned while residing in U.S. territories or possessions like Puerto Rico, the Virgin Island, Guam, American Samoa and the Northern Mariana Islands.

Oblivious or engaged?

Recently I did a Zoom interview with financial coach Lisa Duke. Her Money Club community members submitted questions for a financial planner in advance. I love this one:

“Being an ostrich about financial planning is always worse than even facing errors/mistakes you’ve made, even if it feels easier?”

Substitute your own troublesome topic for the words “financial planning” in this question…and think about how often we ask ourselves this question. Like the person who submitted this specific question, we’re pretty sure we know what the answer is—look at the way the question is framed as a statement, seeking confirmation. But we’re asking “do I really have to force myself to do this”?

It could be a bad relationship, deferred maintenance on the house, unhealthy eating habits, your overdue income taxes or deciphering medical bills. We know we should face up to it, but it is more comfortable in the moment to ignore it. So we put it off. Our financial lives fall into this category, at least some of the time, for all of us. Even financial planners occasionally defer a money task or decision cause we just aren’t up to it at the moment.

Unburying your head

Many of my clients feel shame around their finances. I can relate—I have felt this shame, too. Wherever we are on the spectrum of financial sophistication, from very savvy to completely naïve, we feel that we haven’t done enough, soon enough or well enough. Money is right up there with sex on the list of things we don’t talk about, but anytime you’re going to take on an area that feels scary or confusing or just plain punches your buttons, you shouldn’t do it alone. You want a supportive, non-judgmental advisor or friend by your side while you sort it out. A financial planner or coach can help you determine, in a judgment-free zone, what to take on first for a maximum benefit for the stress. If you’re a DIYer, enlist a trusted friend or a support group. Even during the pandemic, there are plenty of social media groups where members share information and support each other. But, yes, as with our other problem areas, it usually is better to pull off the band aid and take a look than ignore the problem and risk a serious infection.

Always?

That word, always, trips me up, though. Is anything always true? Other than the certainty of death and taxes, most of life falls in that yawning grey in-between. And there is an instance, when it comes to financial planning, when we’re better off being an ostrich. That would be when it comes to managing our investments. Don’t stop reading now and ignore your investments, there are criteria:

1. You do need to have an investment strategy. That means that you know what your goals are and you have a plan in place to achieve them that takes into account your timeframe, risk tolerance and risk capacity. Whether you work with a financial planner to develop your investment strategy or do it yourself, you need to have one.

2. Implement your investment strategy.

Those are the criteria. Now you can bury your head in the sand. Do yourself a favor and don’t continually monitor your investments or search for ways to change up your strategy. Stay the course. The data shows that the fewer changes and adjustments you make, the better your investments are likely to perform over time.

The much cited Fidelity study

Numerous studies have shown that individual investors tend to underperform their investments. For example, if an S&P 500 index fund returned 10% over five years, an individual investor in the fund might instead only earn 6% during the same period. And it isn’t due to fraud or even fees, but instead that the investor moved money in and out of the fund, due to his changing outlook, or possibly due to unforeseen needs for the money. They didn’t stay the course.

One of my favorite behavioral finance data tidbits is an often referenced (though I can’t find an actual citation) Fidelity study on this topic. Fidelity did an analysis of all of their accounts to see how if the account owners achieved the same performance as their underlying investments, or if their performance lagged. Sadly, most accounts did worse. There were two types of account holders, however, who were much more likely to do as well as their underlying investments—those who had died and those who had forgotten that they had a Fidelity account. These account holders were able to stay the course.

I have never recommended dying as an investment strategy (though my dad did tell me that was his strategy to make sure he didn’t outlive his money. Thankfully, he still had some of his nest egg left when he died in February at 98!). I don’t even recommend forgetting where you hold your investments. But burying your head in the sand and “forgetting” about investment performance, once you’ve got your strategy in place, works really well. Don’t monitor the volatility and it won’t make you crazy. Then you, too, will be able to stay the course and achieve market rates of return.

One final caveat

This ostrich strategy only makes sense when you’re a long-term investor pursuing a long-term strategy, preferably using passively managed index funds. These are the type of investments that I recommend my clients use. If, instead, you have chosen to go the active management route by investing in actively managed funds or relying on hot tips from your cousin Charlie, by all means keep an eye on them. And if the monitoring gives you heartburn or keeps you up at night, maybe you should consider joining those of us following passive long-term strategies that allow us the luxury of burying our heads!

Looking for a supportive, non-judgmental planner to help you sort out your finances? Give me a call (336-701-2612) or send me a message.

Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Fair Winds Financial Advice may offer investment advisory services in the States of North Carolina and Texas and in other jurisdictions where exempted.

Working for the SBA—Part 1: What I learned about the SBA

Rest in peace, Dad!

This spring, when the pandemic started, my financial planning business slowed down. I get a lot of satisfaction from working with my financial planning clients. Being a catalyst that helps folks get to a place where they feel good about their financial decisions and where they’re headed with their lives is powerful stuff. The sting of that loss was compounded by the death of my dad in February. Dad’s passing meant not only losing the father I loved but also, as his long-time primary care-giver, losing the sense of purpose care-giving provided. There are no two ways about it, care-giving is hard work, but I never had to wonder whether it made a difference if I showed up. I knew that my actions, and those of my partner Ron, made a big difference in Dad’s quality of life every single day. And that gave meaning to my life.

What now?

So Dad bows out and COVID-19 arrives. In this new environment, what could I do to contribute for the greater good and continue to feel that I’m living with purpose? I stayed home, social distanced, wore a mask, donated plasma, kept paying service providers (like the guy who cuts my hair and the woman who cleans my house) while they stayed home to stay healthy. And wondered, living my privileged life that allows me to stay home and not risk exposure to COVID-19, is this all there is?

While looking for information on Small Business Administration (SBA) loans for a client, I noticed on the SBA website that they were hiring loan officers. Twenty five years ago, when I lived on a sailboat in St. Thomas, I worked for the SBA as a disaster loan officer after Hurricane Marilyn blew through. I liked the work then. Seemed like this might be a way that I could make a contribution during COVID-19. So I applied.

And then the fun began!

After a month or so, the SBA got back to me with an offer. And things started to move very fast—they shipped me a laptop, scheduled me for swearing in and orientation, and gave me a few hours of virtual training. Then they said, “go to it, approve disaster loans, at least 40 loans a day”. At the outset, the mandatory schedule was 12 hours a day (with a 30 minute break), seven days a week. My team leader had already been working that schedule, as had everyone in the SBA disaster loan division, for more than a month. Later, the mandatory hours would be reduced to 10 hours a day, six days a week.

My team was made up of 15 of us who had done orientation together. We had a virtual meeting the day we started, then shared a team chat. Initially, our team leader would chat back answers to the questions we posted. But within a few days, we were told to use the resources we had and only IM the team leader when we had exhausted those. There was a short reference guide, email updates, and the things that other team members had learned and could share. On the one hand, it seemed kinda crazy, on the other, it made sense. The SBA disaster division, where I worked, had never before handled a disaster of this magnitude. In a “normal” disaster, they would process 700,000 loan applications, using a combination of permanent staff and temporary hires (like I had been in St. Thomas in 1995). When I started in June, the SBA had already received more than 7 million Economic Injury Disaster Loan (EIDL) applications. The application portal was temporarily closed but would reopen and turn back on the fire-hose of new applications. And the charge from Congress and the expectation of the public was to get money to small businesses that desperately needed it ASAP.

As a financial planner, I knew more about the CARES disaster relief legislation that spawned these EIDL applications than the rest of my team members. Like most planners, I had been reading articles and attending webinars to learn the ins and outs of the various parts of the legislation in order to help my clients get the help they needed. And I had seen the EIDL application first hand, having applied for an EIDL loan for my own business. But it was only after I went to work for the SBA that I realized what an enormous challenge it was to administer the program that Congress had envisioned.

When the CARES act passed in March, there were no systems in place, beyond the existence of the SBA, to carry it out. Congress funded two different loan programs to help small businesses, to be administered by two different branches of the SBA.

• The Payroll Protection Loan program was offered through participating banks by the branch of the SBA that oversees traditional small business lending. This loan program was designed to provide funds to help businesses keep their employees. If the proceeds were used for payroll and a few other specific purposes, they could be forgiven.

• EIDL loans and advances are administered by a separate part of the SBA, the disaster loan division. This is the division that makes loans to get people and businesses back on their feet after disasters—floods, hurricanes, tornadoes, wildfires, or, in this case, a pandemic. Knowing that businesses needed money right away and that processing loan applications takes time, Congress authorized an advance program. Every business that applied was to receive an advance of up to $10,000 which did not have to be repaid, whether a loan was approved or not. Great idea!

When the legislation passed, the SBA was charged with carrying out a program unlike anything it had done before, and doing it during an on-going pandemic. There were no existing applications for loans that looked like these. In the case of the disaster division, the existing application processing system wasn’t workable. The concept of quickly providing an advance to each applicant was just that—a concept, had never been done before. And there was no precedent for bringing in and training the number of people who would be needed to carry out this work…or for doing the on-boarding and training virtually.

I’m awed and amazed by the way the SBA has managed to staff up and quickly create systems and processes to meet this unprecedented demand for assistance. No, it isn’t pretty. Applicants in desperate financial straits may have to wait hours before speaking to a customer service representative on the phone. It took months for some of the loan applications to make their way to loan officers. Advances did NOT go out immediately on applying; for some borrowers, the advances were funded after loan had been disbursed. The loan processing system, named “RAPID” was anything but as more and more loan officers and customer service reps tried to access it simultaneously. And, it turns out, you can’t just add hundreds of new users to your phone system and have it function. Everything was overloaded, working all out, and subject to slow downs or crashes.

Who gets a loan?

In order to move money out quickly, a greatly pared down process had to be created to assess applicants. The goal of the system and the loan officers using it is to determine if a legitimate business exists and then to roughly estimate if and how much this business was damaged by COVID-19. The resulting application was short. So short that, when I filled it out, I thought it must just be some kind of “pre-application” and that the “real” questions would follow. Not so. For a for-profit business, information on revenues and cost of goods sold (COGS) in the 12 months prior to the pandemic is required. For rental property management businesses, the amount of rents lost has to be quantified. And for non-profits or agricultural businesses, 12 months of expenses are requested. That’s it. All applicants are asked how many employees the business has. This question serves two purposes:

1. To insure that businesses meet the criteria of being “small”—with less than 500 employees; and

2. To determine advance eligibility at $1,000/employee up to a maximum of $10,000 (Note: all of the funds appropriated for advances had been allocated by mid-July.)

Even this striped down, mainly non-technical application stumped a lot of people. Not necessarily the ones we as taxpayers would hope it would stump, either. Small time scammers went after the $10,000 advances, just providing enough information that it might look like they had legitimate businesses with 10 or more employees for long enough to get that $10,000 into their bank accounts. Some folks with more nerve went for loans as well, sometimes supplying information for real businesses…just ones they didn’t own. Sadly, though, many business owners who really needed the help made mistakes on their applications that either disqualified them for loans or caused them to receive smaller loan offers than they might have.

The most common culprit I saw for a business receiving no loan or a very small loan offer was a misunderstanding of COGS, one of the very few financial questions on the application. While COGS—the cost of the product you produce—can be a relatively high percentage of revenues for a manufacturer or a retailer, it is zero for most service businesses. But many lawyers, photographers, barbers, taxi drivers and physical therapists don’t know what COGS is…and they entered COGS numbers that were as large as or larger than their revenues. EIDLs are intended to compensate for an economic injury brought about by a disaster. If a business was already losing money on a gross margin basis (revenues less COGS) during the 12 months prior to the pandemic, there’s really nothing there to injure. A business that was making nothing to cover its operating expenses was probably insolvent or on its way to being insolvent before the disaster ever started. And this is the story that many applications told, not because it was true, but because people didn’t understand what the application was asking. When I was able to connect with applicants and explain what COGS was and suggest that they speak with their accountants or bookkeepers, the vast majority came back to say that their initial applications had grossly overstated their COGS.

Unfortunately, a second common reason that applicants didn’t get the help they requested was a failure to respond to SBA requests for more information in a timely manner. We loan officers were trained to allow an applicant seven days to respond before declining the loan for lack of responsiveness. There were applicants, probably at both ends of the age spectrum, who don’t really use email regularly. These people could easily miss an email, or two or three, from an SBA loan officer. Others were put off by fears that they were being scammed. And why not when you get an email asking you to email back sensitive information, like a photo of your driver’s license or a copy of your tax return? Because the SBA application database would occasionally reshuffle the applications, applications would move from one loan officer’s queue to another’s. You might get an email from me requesting information on Monday and be contacted by a different loan officer on Friday. Applicants got suspicious.

Finally, it should come as no surprise—those most able to successfully navigate the process were the more sophisticated applicants, not necessarily those with the greatest needs. While the SBA disaster division tried to make the process as straightforward as possible, the result still isn’t intuitive for the average applicant.

I learned a lot about the SBA in my 38 days working there this summer. And there’s a lot to appreciate in the SBA’s rapid response. I also learned a few things about myself in this process—I’ll share that in my next blog installment.

Ready to learn more and take charge of your own financial life? Give me a call (336-701-2612) or send me a message.

Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Fair Winds Financial Advice may offer investment advisory services in the States of North Carolina and Texas and in other jurisdictions where exempted.

Enough is enough!

I haven’t written a blog post in over six weeks. I was busy moonlighting, working for the Small Business Administration, helping to process the millions of Economic Injury Disaster Loan requests they’ve received from small businesses. It was a good thing to do, work that makes a difference. Still, after five plus weeks, the long hours and lack of any kind of life outside of work convinced me to give it up. I imagine you’ll be hearing more about what I learned from those weeks once I’ve had a chance to process. For now, I’ll just say—I’m baacckkk.

Is there a lesson in this, somewhere?

When I was able to tear myself away from my computer screen, I noticed that COVID-19 is still with us, on the increase in the southeast where I live. There has to be something positive that will come out of all of the destruction this pandemic is causing! My crystal ball continues to be broken. However, an area where I believe we’ll see change is in people’s willingness to save for both the expected and the unexpected. During our 12 year bull market, it was often difficult to convince clients, sometimes even myself, to keep a good store of cash savings. No one wanted to miss out on the returns in the stock market to keep cash that wouldn’t even earn enough to keep up with inflation. A market that just goes up and up starts to feel like the safest place to stash any extra funds. But the pandemic and resulting market uncertainty reminded us of the fault in this logic. The market is the place to be until the day it isn’t anymore…and then it’s too late to run for safety in cash. Who is the person among us who can accurately predict what day the bull market will turn to a bear? I don’t know that person, either, but I know it isn’t me.

A market correction is just the reminder we need to keep cash for near term requirements and then some more just in case—a curveball fund. Those of us fortunate enough to still have an income are going to have an easier time saving some of it, too, thanks to the pandemic. In January, you might have felt that eating out and travel were non-discretionary expenses. What kind of life would it be if you were deprived of these conveniences and pleasures? That question has been answered! We may not love our new pandemic lifestyle, but we have been forced to learn that we can get along spending a lot less in some of our favorite spending categories. This, combined with an awakened sense of the need to have cash savings, can lead to a reordering of our priorities for our income. I think it’s a great opportunity to bulk up our savings and experience the peace of mind that comes from knowing that, at least financially, we’re prepared for whatever life throws at us.

Money magazine article

Recently I spoke with Money magazine staff writer Noel Davila while he was putting together this article on savings. Check it out here: Money.com Best Savings Accounts

Need help choosing your own strategy for financial resilience? Give me a call (336-701-2612) or send me a message.

Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Fair Winds Financial Advice may offer investment advisory services in the States of North Carolina and Texas and in other jurisdictions where exempted.

Your 30 goals

Image by Gerd Altmann

While attending a virtual conference this week, I heard Bob Veres (an author, editor and influencer in financial planning for decades) talk about goal listing as a technique to use in working with financial planning clients. The idea was to write down 30 goals, recognizing that coming up with the last 10 would likely be difficult. Even so, don’t cheat. Cheating would be turning a single goal like “eat more vegetables” into multiple goals “eat more carrots”, “eat more lettuce”, “eat more asparagus”. Bob claimed that, when clients came up with their lists, then went about their lives for three months, they would return having achieved a bunch of the things on their lists, without any intervention on his part. Neat trick, isn’t it?

But 30 of them?

Normally, I would resist the very idea of creating a laundry list of goals—too many choices are overwhelming. I’ve suffered from a lack of bandwidth for years. One of my hacks for battling it has been paring down my priorities. And this strategy has worked for me.

Still, there is something inspiring about listing those goals. Well, with 30 of them, we’re moving from Goals with a capital “G” into mini-goals. Forgive me Bob, you may not have intended your technique to be interpreted this way! While streamlining my priorities to make life today more manageable, I’ve pushed out, probably to be forgotten, some of my mini-goals. Not a bad thing—I have plenty of ideas about things I could or should or want to do, some of which are just as well forgotten, set free to float in the ether. Many of these mini-goals should be put aside to best use my time today or this week. But maybe, with a nice long list, I’d find some goals that I can pursue right now, during COVID-19. And wouldn’t that improve my quality of life? By merely bringing these goals back into our conscious minds and writing them down, we may achieve some of them. A 2015 research study by psychologist Gail Matthews showed that, when people wrote down their goals, they were 33% more likely to achieve them than people who thought about goals but didn’t write them down.

The paradox

There’s a paradox between what I typically do as a financial planner and having clients write a list of 30 goals. Much of financial planning is helping clients prioritize what they most value in life. In many cases, this leads to a conversation on the necessity of choosing between the things we value. For example, the client may have to choose between a higher paying, more stressful job and a lower paid position which allows more time for the rest of life. Often it is having to reconsider the trade-offs between what seems secure and what will allow us to achieve a dream. But it’s all about picking and choosing and ranking various priorities…or goals. So what’s up with asking people to write down 30 of them? That would be a nightmare to prioritize!

I’m going to make the case that this list of goals and mini-goals is different than our shorter list of life goals. For financial planning and life satisfaction purposes, your values and beliefs will be the guiding principles that determine how you want your life to look. This, in turn, will lead to your overarching goals for the creation of a lifestyle that is consistent with those values and beliefs. Metaphorically, this is the house you want to build. And to build it, you’ll make decisions about what to prioritize first, second, or not at all. In contrast, much of this list of 30 goals is mini-goals, the bricks you’ll use in building your house. Yes, they’re contributing factors in creating the life you want, and need to be in keeping with your values and beliefs. But they are the individual building blocks that will together be used to build the house.

The Magic is in the Writing

We’re not going to be too systematic or structured about our approach here—it’s for fun and to enhance quality of life. (If you want to go deep, Jack Canfield has written and spoken extensive on goals). Merely spending 20 minutes imagining all of the things you would like to do, have or achieve is pretty entertaining. Trust me, stop rolling your eyes, it will be fun! Get out your pen and paper or tablet or laptop and start writing. Don’t stop until you reach 30 goals.  That’s it—the magic is in the writing. If you feel inspired to take the list out and look at it on a regular basis, you can. One of my clients posted hers on her refrigerator! But there is no particular follow-up required. Write the list and, in three months, we’ll see if anything has come of it.

I’m trying this experiment on myself and with my clients. Want to join us? Get busy writing that list and mark your calendar 90 days from now. We’ll check back in then to see where we are.

Need some help preparing for the future you envision? Give me a call (336-701-2612) or send me a message.

Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Fair Winds Financial Advice may offer investment advisory services in the States of North Carolina and Texas and in other jurisdictions where exempted.

Looking farther ahead

Spec Miatas racing at Road Atlanta

Like so much of life, driving fast on the racetrack is mostly in your head: focusing your senses to pick up maximum information while shutting up the unhelpful inner voices so you can respond to the ever changing environment. Yes, lots of people get caught up in the physical/technical aspects of going fast. Without a doubt, your 650 horsepower Corvette Z-06 can outrun my tired old 100 hp on a good day Miata. But that’s not the part of high performance driving that fascinates me and keeps me wanting more. No, it’s the inner game—what makes one driver faster than another in an identically equipped car? And the differences are dramatic!  At a race last November at Carolina Motorsports Park (CMP), the range of best lap times for the Spec Miata class was 1:52:063 to 2:04:336. That’s more than 12 seconds—an 11% difference! “Spec” stands for specified. The modifications allowed to these cars are very limited in order to make the cars as close to identical as possible. Variations in lap time are almost entirely due to the driver, not the car.

I always counsel my high performance driver education students—before you start tweaking your car, do all you can with the driver. And, when you think you’ve improved as much as you can, have the best driver you know take your car out for a few laps on the racetrack. How do that driver’s lap times compare to yours? So what needs a push—the driver or the car? It’s about skills we can learn and experience we can acquire.

I miss the track. I miss driving and teaching. And I won’t be headed back to the track any time soon. I’m able to continue to limit my social contact without economic or emotional fallout and I intend to. But I do daydream about it and am reminded—the inner game is much the same, whether we’re driving fast on a race track or navigating our lives through corona virus chaos.

Where are your eyes?

The most important thing I’ve learned from driving on the race track is to always keep your eyes looking farther forward. In driving and life, it’s tempting to focus on what is going on right around us. You know, that financial pornography (a very fitting description coined by Carl Richards, the Sketch Guy) that crosses your screen 24/7. Or, when driving, whatever is immediately in front of your hood. We get caught up. But all we’re doing is reacting to stuff that has already happened—what’s around us now. In so doing, we miss the opportunity to focus our attention on the future where our current actions can make a difference in determining our path.

Sometimes, in life and on the track, if we lift our eyes, what’s coming seems very clear. I might be headed down a straight with a clear view of the next turn and any traffic or debris between here and there. This is reminiscent of how life felt before COVID-19—kinda predictable. It wasn’t true, but it had that feel to it. And, of course, it turned out that it wasn’t predictable at all.

But We Can’t See What’s Coming…

Spec Miatas at Carolina Motorsports Park

One of the most difficult and important corners at CMP is turn 14. It’s at the end of a short straight. It’s a 75 degree turn leading on to the nice, long, front straight. If you don’t do it well, you’re likely to hit the tooth-jarring rough rumble strips on the outside of the turn. And, if you really blow it, you’ll go right over those rumble strips into a sand trap, hopefully still shiny side up. Turn 14 and the front straight are prime spectator country. The straight borders the paddock where all of your track buddies are congregating, waiting for their next track session. Screw ups in turn 14 are a great source of entertainment for spectators and fellow drivers alike.

Turn 14 is technically challenging—to do it well, you need to maintain top speed as long as possible in the short straight leading up to it, brake very hard and late, going deep into the corner while staying on the outside edge of the track, then smoothly turn and rotate the car around the corner, keeping her nice and settled, so she’s headed down the front straight and you can get right back onto the accelerator. Failure to do so, by degrees, can mean anything from losing a lot of momentum and having to wait until you can finally get the car pointed down the straight to get back on the throttle to having your teeth loosened on the rumble strips to over-shooting the rumble strips and having to wait to be towed out of the sand trap. But even the loss of momentum, having to stay off of the throttle longer than is ideal, translates into slow speed for the front straight. When you’re in a low-powered Miata, it’s hard to recover that speed. Slow entry onto a long straight will cost you 10 to 15 mph in top speed on the straight, and a second or two slower lap time.

The key to nailing a corner is to look farther through it, towards where you want to go, even if you can’t actually see it yet. Which is why I chose CMP turn 14 for my example. In this case, there’s a corner worker station that blocks your view of the front straight during your final approach to the corner. I remind my students and myself to already be turning our heads to the right and looking over our shoulders, down the front straight, well before we get to turn 14, and to keep doing it, even when the corner station blocks the view. First—you’ll be prepared to process the visual information the instant your route does come in to sight. Second, you won’t be focused on your immediate surroundings. These are the result of past decisions. Focusing on them can tempt you to react to them when your actions will be too late to be appropriate; and finally, of extreme importance, you won’t be staring at the rumble strips and the sand trap on the far side of the track, exactly where you don’t want to go but where your attention is drawn. In the physical world, we are drawn where we look. You may have experienced this in skiing, riding a bike or a horse, or driving a car or boat. Look at it and you’ll head towards it. No doubt you’ve had the experience of walking towards a person and, as you get close, moving to one side only to have the other person move to the same side. Why is that? Because you’re looking at each other!

We can’t envision the future right now—COVID-19 has placed an enormous corner station to block our metaphorical field of vision. But we still need to lift our eyes from the chaos around us and focus on that unknown future to navigate our lives in the best possible way. Only by consciously preparing for this yet to be revealed future can we be taking appropriate action now. Look towards it, build for it, prepare. COVID-19 too shall pass.

Envisioning your future

Are you wondering what looking farther ahead has to do with your life? Metaphorically speaking, looking further ahead in life, certainly during this pandemic, will positively impact our actions. Just imagine your own life and substitute “further” for “farther” in the following quote:

“Looking farther ahead allows you to act, rather than react. It is more of a planned action than a panicked reaction.”

— Bob Bondurant from "Bob Bondurant on Race Kart Driving"

Bondurant goes on to explain that a short-range focus leads to lots of quick steering adjustments. These can cause a bumpy, unsettling ride, either in a car or life. When your focus is well ahead, your inputs can be smooth, subtle and positive and they are more likely to take you where you want to go.

So enough of the racing analogies, already! I don’t have a specific hack or three step process to implement this one. Our lives are different and each of us has her own challenges, values, and aspirations. I can share how this works in my own life, though. Maybe an example will be useful as you find your own path. I’ve mentioned before how fortunate I am that my work was virtual prior to the pandemic. I haven’t had to alter my working habits or found myself without a job. My personal life was already in upheaval when COVID-19 arrived due to the loss of my father in February. Having devoted close to a decade to caring for my dad after my mom’s death, his passing brought an intensely challenging and rewarding stage of my life to a close. What will replace caring for Dad? Close, loving relationships with family and friends are important to me. Being of service to others gives my life meaning—where will I channel this energy?

You might think that COVID-19 was a crisis made to help me answer that question! In another time, I might have taken a long trip to rest, grieve Dad, and think about what my life should look like. Scratch that idea! Without a sabbatical option, I had to imagine how, during this crisis and the future I can envision, I can make a difference. Looking further forward, right? For me, that means donating plasma each month, continuing to pay my housecleaner and the guy who cuts my hair even though those services are on pause, donating canceled tickets or a little cash to the theatre and symphony when we can no longer attend, thanking the FedEx delivery person, mail carrier, and store clerks for the important and risky work they do. And, of course, paying attention to social distance and wearing a cloth mask in public—for the health of the community as a whole.

In imagining and looking towards our future, my hopes for a more peaceful, harmonious, supportive world guide my actions. What can I do to be better able to support and care for the people in my life, whether family, friends, clients, or the community, now and later? I’m learning about new tools that may be useful to my clients, practicing my listening skills so everyone in my life will feel supported, saying yes to interviews and requests for assistance that would be more comfortable to turn down because they are opportunities that may help others in tough times. I don’t know what our future will look like. Still, by looking further ahead, I can envision a time that will be a little better because I’m doing what I can today to help myself and others. And I’m preparing to make a contribution to the lives of those I touch in that future, however unclear it seems today. How about you?

Need some help preparing for the future you envision? Give me a call (336-701-2612) or send me a message.

Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Fair Winds Financial Advice may offer investment advisory services in the States of North Carolina and Texas and in other jurisdictions where exempted.

Risk perception and chasing the market

One of my bittersweet favorite behavioral science books is Daniel Kahneman’s Thinking, Fast and Slow. I consider it the book that pulled off my blinders and ruined my life. Kahneman, who won the Nobel Prize in Economics, and his colleague, the late Amos Tversky, researched contradictions in human behavior. This book lays out our methods for decision making and the short-cuts our brains take—heuristics (essentially, rules for problem solving) and biases. Methods that work really well a lot of the time and cause us to make mistakes, repeatedly, in often predictable circumstances. After a lifetime of considering myself a good, rational, analytical decision maker (spoken like a true control freak), Kahneman revealed that to be just a front, not even a very good one. It’s hard to accept being human, making decisions for all kinds of reasons that have little to do with sound analysis. And Thinking, Fast and Slow isn’t a self-help book—Kahneman doesn’t believe that by recognizing our biases and tendencies to take short-cuts when making decisions we can eradicate them. They’re the way we’re put together. Nevertheless, in today’s blog post, we’re going to take on a few of our mental traps. I operate under (or suffer from) these and maybe you do, too.

Weighing risk

As a financial planner, I help my clients choose their own personal risk/reward balance on the path to achieving their goals. Often part of financial planning is setting up an investment portfolio to provide resources for future goals—sending a child to college, taking a dream vacation or funding retirement. To do this well, we need to consider both the client’s risk attitude—the willingness to stay invested through inevitable market declines, and risk capacity—the level of risk required in order to have a high likelihood of meeting the client’s goals.

While there’s no guarantee that history will repeat itself, historical investment performance is the best tool we have for estimating a reasonable range for the future and then to determine risk capacity. For example, if I have a $500,000 investment portfolio and I want to be able to draw $25,000 per year through a 30 year retirement, risk capacity won’t allow me to invest solely in U.S. treasury bonds. With a current yield of less than 1.5%, I’ll run out of money before I hit the 30 year mark. So risk capacity says that I have to move up the risk scale, investing part of my portfolio in higher yielding stock, in hopes of earning a return adequate to fund my goal.

Now if I have a very conservative risk attitude, I may decide that I’ll be happier sticking with those long term treasuries and reducing my annual draw to $20,000. That’ll work. Or I can decide that $25,000 is truly my number and I’m going to learn to live with a bit more risk in order to get it. Either my goal or the level of investment risk I’m willing to take on will have to change. But, in a perfect world, I would then pick an appropriate investment mix of stock and bonds to achieve my goals and leave it there.

Meanwhile, back on planet Earth

In the real world, we have humans calling the shots. Humans are prone to shifting perceptions based on the world we observe. So, for example, our perception of the risk of investing in stocks changes with the stock market’s performance. Some of those very biases and heuristics that Danny Kahneman used to ruin my life come in to play (I don’t think he did it maliciously—he doesn’t even know I exist!). When the market goes up and up for years and years, as we saw in our recent long-running bull market, we are affected by an availability heuristic—the likelihood to overestimate events based on what is available in our memory. Availability is influenced by how recently a memory occurred or how emotionally charged or unusual it is. Our recent experience is that stocks rise and rise. The availability heuristic leads us to extrapolate this growth trend far in to the future. This expectation, however flawed, makes stocks feel less risky. During a bull market, an investment portfolio starts to feel too conservative—we think we have too large a portion invested in bonds and cash, we’re afraid we’re missing out on too much of the upside. Our circumstances haven’t changed, our goals haven’t changed, only our perception of risk is altered. If we act on this perception, we buy stocks on the upswing.

When the inevitable correction arrives, like the one we experienced in March, our risk perception changes again. Now the availability heuristic has us assuming that the down market we’ve seen is going to persist on in to the future. We can easily fall prey to two additional biases:

Confirmation bias: We are more likely to notice information that confirms what we already believe. If the availability heuristic says the market will decline, confirmation bias adds fuel, in the form of corroboration, to the fire.

Overconfidence: With availability and the confirmation bias hard at work, we believe that we actually do know what is coming.

All of this adds up to a new perception that our portfolio is too aggressive. Now is the time to dial back on stocks so we don’t get further hammered as the market continues to decline. Again, neither our circumstances nor our goals have changed, but our risk perception has. And it is telling us to sell stocks. If we act, we’re selling on the downswing.

Buying on the upswing, selling on the downswing—isn’t this the exact opposite of that golden rule—buy low, sell high? Acting on our changing perception of risk has us forever chasing a volatile market, losing ground all of the way. I know this from personal experience, not only from reading the research or stories about other people. Shortly before the tech bubble burst in 2000, I decided that my cash wasn’t earning a decent return and that I was missing out on tech stocks. Heck, people I knew who didn’t know anything about stock analysis were making money on tech stocks…and it just kept going up and up. Does this sound like a mix of availability, confirmation and fear of missing out? I knew better than to invest money I might need in the next couple of years, but I did it anyway. Bought at the top. And we did end up needing the money in the next two years and selling those tech stocks at the bottom of a bear market. Ouch! Welcome to the human race!

Resisting the temptation

How do we break this cycle? It isn’t easy, but in order to meet our goals, we need to try. Here are my recommendations:

• Make sure that your investment strategy takes into account both your risk attitude and your risk capacity. You want to be able to sleep at night while having a good likelihood of reaching your goals.

• Be aware of the short-cuts we’re likely to take in decision making: availability, confirmation bias and overconfidence.

• Put in place an accountability system that is triggered before you change your investments. This could be a mandatory conversation with a friend who has agreed to question your reasoning. Or work with a financial planner who can both help you define the investment strategy that’ll let you reach your goals and stay on track.

Want a professional to help you decide how much risk you need to take and then stay the course? Give me a call (336-701-2612) or send me a message.

Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Fair Winds Financial Advice may offer investment advisory services in the States of North Carolina and Texas and in other jurisdictions where exempted.

The Scarcity Experience

Much as we prefer abundance—in time, wealth, love, friendship, we have a lot of experience with scarcity. Two of the most common flavors of scarcity for Americans are the financial and time varieties (I’m purposely not addressing loneliness which is beyond the scope of this blog post). Have you succumbed to busyness? That feeling of never quite getting to the things you meant to do? Are you one of the majority of Americans who is financially worse off due to the pandemic? Maybe you’ve lost your job, or your business is way down, or your investment portfolio is shrinking? Then you’re familiar with the experience of scarcity.

The Consequences of Scarcity

Scarcity brings along its own consequences, consequences that perpetuate more scarcity. In Scarcity: Why Having Too Little Means So Much, Sendhil Mullainathan and Eldar Shafir don’t claim to have found the cure to scarcity, but they have some profound insight into the consequences and how we can act to avert those and disrupt the downward spiral. I highly recommend the book—it’s an eye-opener! But for now let me quickly summarize the research cited. There are two main consequences of scarcity:

Tunneling: Ever been on a diet and found yourself unable to think about anything but food? You’ve experienced tunneling. When we are in scarcity, the current lack draws all of our attention. As a result, we neglect things that fall outside of the tunnel. While I’m scrambling to find the money to pay the rent, saving for the car insurance next month, much less retirement a decade or more away, is outside of the tunnel and not likely to get any of my attention.

Reduced bandwidth: This second consequence, a loss of cognitive function, may be a little harder to recognize by examining your own experience, unless you’re really looking for it. But research shows it is no less real than tunneling. Studies measure IQ drops of as much as 13 points when we move from a condition of abundance to one of scarcity. And 13 points is enough to move an individual from superior to average or average to borderline deficient, to dramatically alter our performance when playing a game or processing information or making a decision. We can’t dismiss this as poor people making bad financial decisions—the data shows that any given person will make markedly worse decisions, financial or otherwise, when suffering from scarcity. And all of that busyness, feeling time pressure? It creates time scarcity which has the same impact on bandwidth and cognitive function as money scarcity, friend scarcity or cookie scarcity. Wow—this revelation hit me like a ton of bricks!

There’s a silver lining in this dark gray cloud. The silver lining is that understanding the impact of scarcity allows us to take action to alleviate the impact and measures to avoid future scarcity. The dark gray cloud is that neither alleviation nor preparation is easy or particularly effective.

Easing the impact

We can’t add hours to our days to battle time scarcity. And the typical solutions to financial scarcity, increasing income and decreasing expenses, come with their own bandwidth tax. Figuring out how to increase income is both a cognitive challenge and a stressor. Downsizing our lifestyle can work those same two levers. What strategies can we employ to minimize the impact of tunneling and reduced bandwidth?

Delay decisions: The first thing to do is notice when you’re in scarcity and suffering from a cognitive deficit. Delay important, consequential decisions until your bandwidth improves!

Optimize your prime time: Personal bandwidth changes, not only due to scarcity, but also with the time of day. You probably know when your prime time is, the time of day you are best able to focus and think clearly. When operating with reduced bandwidth, it is critical to reserve prime time for any tough decisions.

Reduce stress: Our physical condition and stress level also impacts bandwidth. Are there steps you can take to reduce stress and free up some bandwidth? As you’re reading this, you may be sheltering in place with your family, those people you love who are inadvertently contributing to your stress level. Might you choose to let go of your efforts to train your husband to put his dirty clothes in the hamper? Can the kids wear mismatched socks? Maybe the closet doesn’t have to be reorganized this week. And, if you’re thinking about losing a few pounds, this probably isn’t the best time.

Schedule thoughtfully: Checking email before tackling work that requires your undivided attention is not effective. Once you’ve gotten up-to-speed on all of the requests and demands in your e-mail box, it’s hard to turn your attention fully to the project at hand. Schedule your important work first so you can really concentrate. The e-mail will be there!

Use reminders: If you tend to run over in meetings or scheduled time blocks, use reminders 5 or 10 minutes before the scheduled end and again at the appointed end time. Reminders can ward off the daily domino effect—run late on your first meeting, then run behind and furiously try to catch up for the rest of the day. If you have an assistant, fantastic—ask that he call, text or message your reminders. Or just use the timer or alarm function on your closest digital device.                  

Breaking the Cycle

Most of Mullainathan and Shafir’s suggestions for avoiding the consequences of scarcity involve planning in advance—anticipating times of scarcity while we’re still in abundance. Sounds like retirement planning, doesn’t it? Can we harness the memory of scarcity to take action to prevent a reoccurrence? Everyone experiencing financial scarcity today is promising to start contributing to a rainy day savings account as soon as this is over! The data says, despite our best intentions, it won’t be easy.

The seeds of scarcity are sown during abundance. It isn’t only college students who squander abundant time during the semester and cram to write the final term paper the night before it’s due. No, speaking from experience, I didn’t prioritize writing this blog post earlier last week when time was abundant, and now I’ve missed my deadline and get to scramble! While tunneling keeps us completely focused on our present life during scarcity, even during abundance we tend to be present focused. We procrastinate, waste time and money, and are overly optimistic about the future’s ability to take care of itself. My failure to meet my blog post deadline is living proof that it isn’t easy to beat they abundance/scarcity cycle, even after many decades of practice!

Sadly, throwing money at financial scarcity doesn’t stop the cycle, it just introduces a delay. Most of us have experienced this as our income has increased over time. Immediately after an income increase, you feel like you have plenty. But the feeling doesn’t last too long. Before you know it, some unexpected expense arises, or even the anticipated insurance or property taxes are due, and you feel scarcity kicking back in. Failure to have a large enough buffer built-in to the system means that a single shock, like a big expense, can restart the cycle.

It isn’t easy to overcome our optimism and present focus during abundance, but that is what we need to do to prepare for future scarcity. Only during times when we aren’t feeling the pressure of scarcity do we have the capacity to put in place the means to avoid it in the future. Consider the following:

Create a buffer—whether in your schedule or in your savings account—that will absorb future shocks without sending you into scarcity.

Make it automatic--Automate saving for retirement, education, and a rainy day fund to build your buffer. Block

Use deadlines—trick yourself out of squandering abundance by breaking projects into phases and giving each its own deadline. This is a great way to tackle personal finance tasks, too, like updating beneficiaries, getting estate planning documents in place or consolidating all of your accounts in one place.

Be accountable--Find a like-minded accountability partner and check in regularly.

Engage a personal trainer—that might be a business or life coach to help you avoid time scarcity or a financial planner on the money front. Just like you aren’t likely to miss sessions that you’ve paid for with your personal trainer, paying a coach or financial planner is a strong incentive to stay on track.

Need a personal finance trainer? Give me a call (336-701-2612) or send me a message.

Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Fair Winds Financial Advice may offer investment advisory services in the States of North Carolina and Texas and in other jurisdictions where exempted.