Does This Make My Assets Look Fat?: A Woman's Guide to Finding Financial Empowerment and Success - Hardcover

Susan L. Hirshman was a managing director at a top global financial institution for most of her career. She holds an M.B.A. from Baruch College and is a Certified Public Accountant, a Certified Financial Planner, a Chartered Life Underwriter, and a Chartered Financial Analyst. She lives in Manhattan.

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THE CHOICE IS YOURS
Dieting.
The word conjures up different emotions. One is dread. We know dieting isn’t fun. A piece of chocolate is so comforting, the smell of a steak on the grill so enticing, a scoop of ice cream so satisfying. There’s no way around it, it’s difficult to give up the short-term gratifications of eating.
But the other emotion the word can bring to mind is satisfaction. That’s how we feel when we see the results of a diet. Drop a couple of dress sizes and you feel better about everything—the way you look, the way you feel, the way others look at you. Life is better.
I know what you’re thinking: If this is a book about investing, why am I reading about dieting?
You may not realize it yet, but there are many dieting principles that are applicable to investing. Both require discipline, both take time, and, if we’re successful, both provide us with substantial rewards. The parallels are uncanny. I promise that you will find the concepts of investing and personal finance a lot more familiar than you think.
As you read this book, try to approach it with the same level of interest and focus you would use exploring an exciting new diet. Here’s the truth: You don’t need an MBA in finance to understand and take control of your financial life any more than you need a Ph.D. in nutrition to work toward your health and fitness goals. Understanding the basic concepts and tools of investing is attainable—anyone can do it.
The world is changing and a big part of that change is financial. In the past, a financially secure retirement was based on personal savings supplemented by Social Security and your employer’s pension. As an individual, you had little risk and even less responsibility for planning your financial future; we didn’t need to do much or make many decisions. But those days are gone forever. Today companies are reducing or eliminating guaranteed pension plans and politicians are talking about reductions in future Social Security benefits. Increasingly, we are being forced, whether we like it or not, to assume the burdens of planning and acting to ensure our future self-sufficiency. The risk and the responsibility are becoming ours. No longer is it enough to work hard; today we have to make conscious decisions to save, invest, and manage our assets.
Why have these changes occurred? In short, over the past twenty years or so corporate America has come face-to-face with new economic, demographic, and regulatory challenges. Business has become much more competitive. Severe cost pressures have forced companies to operate more efficiently by cutting costs and reducing overhead. At the same time the average American is living longer and using more resources in his or her retirement years. When traditional retirement plans that put the risk and responsibility on a company began, the average person spent somewhere between two and five years drawing retirement benefits before passing away. Today the time spent in retirement can be more than thirty years. Do you think companies want to keep paying you money for more than thirty years after you worked for them for maybe twenty years?
Of course not.
Some of you may think I’m being a little overoptimistic when I talk about retirement lasting more than thirty years. Our perceptions and expectations play a big part in financial planning and the sad fact is, we’re usually wrong! Here’s a fact: According to the U.S. Census Bureau, centenarians, people one hundred years old or older, are the fastest-growing segment of our population. The second fastest is the age group eighty-five or older. Currently, there are about 40,000 people at least one hundred years old in the United States. That’s more than one centenarian for every 10,000 Americans. Of those, 85 percent are women. More important, it’s estimated that 40 percent of women who reach the age of fifty this year will live to be one hundred years old. (If you want to get an idea of your own life expectancy, go to www.livingto100.com.) Now, remember the results of these kinds of exercises are based on averages and are not an exact science. So if the Web site tells you that based on your lifestyle you will live only to sixty-five, don’t bet on it! You still need to save as if you had a longer life expectancy. I know too many people who maintained an unhealthy lifestyle—smoking, drinking, and carousing—until they drew their last breath in their nineties. Hey, Alfred Hofmann, the father of LSD, lived to be 102.
No matter how long you think you may live, you’re going to have to apply the same three principles to your own finances that you apply to your diet: self-awareness, discipline, and commitment. What it all boils down to is who you are, what you want, and what you’re willing to do to get there. Both dieting and financial success come down to one word: choice. Both disciplines require you to make the same kinds of decisions about instant gratification or delayed gratification on a regular basis. When you’re dieting, you’re constantly making a basic choice between indulging now or looking and feeling better later. That choice is forced on us by unchanging physical laws: The only way to lose weight is to reduce our calorie intake below our calorie expenditure over a reasonably long period of time. The calories that we take in go one of two places: Either they’re burned as you go about the daily tasks of living, including exercise, or they’re stored as fat. A pound of body fat is equivalent to about 3,500 calories. All else being equal, if we cut back our calorie intake by a thousand calories a day, we can expect to lose about two pounds each week. With that in mind, we can choose to have a bowl of ice cream now, but only at the expense of having to shed that extra five hundred or so calories sometime in the future if we want to lose twenty pounds. In the end, successful dieting boils down to that ancient maxim “You can’t have it all.” That’s true of financial planning, too. There are only two things you can do with money: spend it or save it. If you want to build a solid financial future, you’re going to have to make the constant choice between spending and saving. If you spend now, you won’t have that money later. Worse, if you spend more than you make, you not only won’t have that money later, you’ll owe others more money. But if you save instead of spend, you’ll discover the great secret of compounding (making interest on interest): Over time, the money you save will go to work for you making more money. It takes time for compounding to work its magic, but it can provide you with more money than you ever thought possible.
The following chart should give you a sense of the power of compounding. It shows the value of $10,000 compounded annually in five years and ten years at various interest rates.
We all know how easy and tempting it is to put off the start of a diet. I’ll start Monday. I’ll start next month. And, of course, every day that you delay adds more pounds that you’re going to have to get rid of later. That same kind of procrastination in getting your finances in order is costing you money every day. Worse, just like dieting, the longer you wait, the harder it’s going to be to start. Think about metabolism: It’s always easier to lose weight when you’re younger and your metabolism is nice and fast. Maybe you thought you could always stay thin without having to exercise. Then, as you get older, your metabolism starts to slow down, parts start to sag (and sag some more), and suddenly you’re faced with the unpleasant reality of having to diet and go to the gym. The same is true in wealth planning, except the longer you wait to take control,...