Financial Choices: I Want an iPhone 5

Financial Choices: I Want an iPhone 5

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Financial Choices I Want an iPhone5

The new Apple iPhone 5 was about to come out.

At the start of our weekly call, a new client said she was really tempted to get one right away.  And she wanted my input on what she should do.

I asked what she used now.

“iPhone 4.”

“Locked or unlocked?” I asked.

“Unlocked.”  (She’s not on one of the contracted carriers, so we’re talking a minimum of $649.  Plus new accessories because they changed the shape of the phone and its connections.  Plus-plus-plus.)

I had just started working with this budding entrepreneur and we hadn’t put together her “money snapshot” yet.  (That’s where we identify what she brings home, what she spends and what she owes.)  That meant I didn’t know the details behind whether a new phone made sense or not.

I have to admit, I wasn’t leaning towards saying “yes.”  Instead, it sounded like someone who has to have whatever Apple launches.  An Apple fanatic.  If she was swimming in money and already secure for the long term, she could buy whatever she wanted.  But I knew she wasn’t.

I just didn’t know how bad things were.

So I asked one more question.

“You’re 47 years old.  How much do you have in savings … IRAs, 401k’s or whatever … set aside towards retirement?”

“Nothing,” she answered.

I gave her what is probably one of the most powerful decision-making tools I know.  I gave her a vision of what her later years will look like … a vision she can either live with … or change.  Here’s how I did it.

Social Security

Without savings, she’s going to be living on Social Security.

According to the Social Security website, in 2012 the maximum monthly retirement benefit for a worker retiring at age 66 is $2,513.  (This assumes the person earned the top amount listed on the “taxable income table” for every single year after age 21.)  And for a retired worker in 2012, the average monthly Social Security benefit is about $1,230.

So let’s be generous and assume she falls right in the middle of those two numbers.  In that case, the 2012 value of her future Social Security payment would be about $1,870.  (It should more or less keep up with inflation from now until then.)

I asked her how she envisioned her lifestyle if she had to cover absolutely every living expense on $1,870 per month.  Oh, and that includes the Medicare supplemental of a couple hundred dollars …

She didn’t sound too happy.

Savings

Then I explained that she could add to that monthly amount with savings.

Knowing what investments will be paying in 19 years, when she’s age 66, is like licking your finger and putting it in the air.  We used to use 10 percent in these rough calculations.  But with the volatility in the world economy and the potential for inflation, let’s say she’ll be making 7 percent per year.

If that’s the case, she’ll add $100 per month to her available money for every $17,150 she has in her investment portfolio by the time she’s age 66.

How Does That Compare With Others?

The forties are the peak earning years for most people, so it’s a time when they should be well on their way towards their long-range savings goals.  But they’re not.

When Leslie Haggin Geary wrote about retirement in Bankrate.com, 35 percent of workers between the ages of 45 to 54 had less than $25,000 in retirement savings. And only around 40 percent had more than $100,000.

But there’s hope.  And it’s called compound interest.

The Beauty of Compounding

Very few people understand the power of compound interest.  (Or compound earnings.)  Regardless how many years are left before retirement, it’s a very strong reason to save as fast as you can, starting as soon as you can.

As an example, if my client already had $40,000 saved and invested—and never added another cent—by simply reinvesting all the interest being earned year after year, at 7-percent interest she’d have $144,661.10 in the account at age 66.  That alone would add about $850 per month to her available money.

What’s the Verdict?

So, what do you think?  With that scenario, should my client buy herself a new iPhone 5?

Let me know in the Comments section below what you think she should do.

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Bio: Sharon O’Day lost everything at age 53: her home, her business, everything. But how could that be? She’s an expert in global finance and marketing with an MBA from the Wharton School. She has worked with governments, corporations, and individuals … yes, she was the secret “weapon,” if you will, behind many individuals in high places. Yet she did! Since then, with her finances completely turned around, Sharon has gone on to interview countless women. She’s done extensive research to understand how that could have happened, especially with her strong knowledge of numbers and finance.

The surprising answers are shared in her posts, articles and an upcoming book. Today her mission is to show as many women as possible how to become financially free for the long term, through her coaching programs. She has developed a step-by-step plan to get past all the obstacles that keep women broke and scared … and from reaching the financial peace of mind they so deserve … if they’re willing to do what it takes!

  • This is such a great reminder not to impulse buy. Even if we think we can afford something it doesn’t mean to say that we should have it, especially if you look at your long term plans. Love your posts Sharon – full of good, sound advice!

    • Thanks for your constant support, Carolyn! You so obviously have learned these lessons along the way … doesn’t it feel wonderful to be in control? 😉

  • This article is a great reminder of the need to think and rethink before buying big ticket items…especially upgrades. Too often we are taken by the promise of bigger and better but we must weigh the real value of these upgrades vs. having the new toy! My suggestion…unless it will increase her opportunity to earn money be happy with what she has!

    • Toys are probably the toughest thing to control, Denny, especially upgrades, as you say. (And especially the latest Apple release … they’re such brilliant marketers!) And you’re right: she needed to look at the ROI on the new phone (investment = total cost of new phone less what she could get by selling the iPhone 4). Her question was “how much new business would come as a result of that purchase versus having the prior version?”

  • It really comes down to the difference between a Want and a Need. Everything I buy now goes through that filter – even some food items. I recently downgraded by phone from a Galaxy Sll to an older smart phone model that works better for me. Unfortunately, my carrier, Sprint, is not so on board with my decision and continues to overcharge for their service. Oops – an aside. Your post is eye-opening, Sharon, and one that everybody should read. I know plenty of people who have nothing saved for retirement, unfortunately, I’m one of them. Time to get busy.

    • Hope you were willing to share the post, Lis. True! The sooner we can get people focused on their future needs, the easier it will be for them. And congratulations on all the progress YOU’VE made this past year!

  • Love the way you break down the “real” numbers. So many operate on “fantasy” numbers! As usual, your post will help many. Sharing!

    • Fantasy can be great in certain parts of our lives, Martha, but not when it comes to our finances! Yet that’s where all too many people go. So I just keep doing wake-up calls … 😉

  • Umm… Idk about your client but you’ve made me rethink my “want” of the new iPhone!!! lol I would think that she needs to get busy building wealth… and fast. iPhones can wait.

    • You’re right about what her priorities should be, Angela … and that’s where she actually went! It’s just too easy to think we need the latest toy to build our new business. Actually, we need good ideas, good strategies and good follow-through … and none of that comes in the new iPhone 5! 😉

  • This is a really helpful reminder…Looking at the numbers can be so scary, but is so important!

    • Paige, what’s interesting is that the more we look at the numbers, the less scary they become. So it’s counter-intuitive! Especially once we realize that it’s up to us to change them, if need be … and that we can!

  • Alexandra McAllister

    Great, informative post Sharon! Like the way you explain the real numbers! As for your client, I think she should listen to you and ‘rethink’ about purchasing the new iPhone.

    • Alexandra, by knowing the “real numbers” we can get a better idea of where we stand … not over-inflated or under-inflated. Then we know how to make better decisions. (BTW, she still has the iPhone 4 … 😉

  • Thanks for the great insight.. that helps me see it more clearly! I hope That I can work and live off my savings but we really have to have another site down with our planner. our income and life changed drastically in the last 2 years. The job my husband had for 20 years end with the company going bankrupt and we had to live off our savings that we had planned for retirement to survive til we could replace his job. not fun. We are making it back to where we were but now have to make up for loss time and savings. Yikes we are 50 and 46.. not much time left..;) !

    • Elizabeth, I started back up again at 53 so, yes, it’s doable. It’s all a matter of how much sacrifice you have to make and, obviously, the earlier you start, the easier it is! But don’t put off meeting with your planner. Nothing’s worse than living in a space of uncertainty where you’re guessing whether or not you’re on the right path!

  • Wow, that is a powerful picture that you have painted, Sharon…with that financial snapshot, I would put off buying the iPhone…perhaps it could be something that is budgeted for after everything else is put into place for retirement savings!

    • Even as we are contributing to our retirement savings, Sherie, we do have to have some “fun/play” money. But it’s budgeted into our spending plans, not spent on a whim. So, as you say, unless the phone is going to build the business faster and can be justified on that basis, it would normally come out of the “fun/play” allocation.

  • There are other lesser options that make more sense financially, especially when technological changes are so rapid, if she doesn’t have the money for that iPhone and decides to buy it on credit, it will be time for the next upgrade before she pays it off.

    • Susan, you’re right about how fast technology changes. I often wonder if Apple has studied exactly when its customers think it’s okay to replace a phone and when it’s too soon. (As successful as they are, I know it’s not left to chance!) And, yes, buying it on credit would be insane!

  • Patsy Stewart

    What a great analysis Sharon! I am approaching retirement and I’m very thankful my husband and I have saved through our 401K plans. The thoughts of having to decide between my “wants” and my “needs” is not something I want to do. You must be prepared and trust me… it’s here before you know it!! I hope your client will hold off on her decision to and heed your advice on saving for the future! 🙂

    • Congratulations, Patsy! You’re right about how fast the years pass … although I’m always quick to point out that whenever you start, it’s never too late because every little bit helps in the long term.

  • Great post as usual, I imagine the answer for a NO for the Iphone LOL…

    • Yup. It was no. 😉 By her own choosing, once she saw how that same money would jump start her savings. Besides, when you do start saving, you somehow have a new motivation to add more … and watch the balance grow.

  • Awesome article Sharon, thanks for sharing all your wisdom and spelling things out!

    • You’re very welcome, MarVeena. Happy to share what I’ve gathered over the years … especially if it can help move women forward on the path to taking care of themselves financially …

  • WOW! What a powerful article and example. I would have to say it would be a no. Those darn Apple people tempting us all the time!!!

    • You have to admit, Stacey, their products are pretty darn irresistible … 😉 But, yes, she said no.

  • Amy Marin Carlson

    You always to such a good job of putting things into perspective, Sharon. It’s a no for her – and for me!

    • We all just have to pick our toys, Amy, as we get (and keep) ourselves on track for the long term. Not that we can’t fit some in … or life would be pretty dull … but we do have to make some judgement calls along the way!

  • i love the way you put it straight forward ! Not hard to see what we need to do or what we should have don’t!

    • “Straight forward” is simpler, Barbara. 😉 I find most people over-complicate things … which leads to paralysis. And the whole purpose is action!

  • You’re so right Shanon! Sharing it to many friends that have to read it!

    • Thanks for sharing it, Tereza. The earlier people understand why we have to factor our futures into financial decisions, the easier it is!

  • Karen Presecan

    You and my husband would get along famously! You are very wise.. and your article reminds me of conversations I’ve had with my hubby:-) He is great with our finances (I’m so thankful that he takes care of that for us!)

    • You’re lucky, Karen, to have someone proactive on the financial front. One little suggestion, though: don’t relinquish all involvement. Be sure you’re in the dialog and know what’s going on. Even if we have someone taking care of things for us, we have to be certain we’re knowledgeable and that we’ll be okay … no matter what … whether now or 30 years from now.

  • Sharon – this is FANTASTIC!! Talk about a reality check. If only young people could get this message, too, and believe it and act on it early – wow, they could change their later years. Sadly, for most people, it’s on the to-do-list and keeps getting bumped to the next re-do of the list. Thanks for a great article.

    • Lisa, I think we ALL wish we had gotten the message earlier … and actually paid attention to it! But you’ve probably figured out by now that my goal is for people to move it from the To Do list to the Done list, regardless of age!

  • Susan Preston

    Thank you, Sharon for a very Powerful post! I will definitely be sharing this!

    • Thanks for sharing it, Susan. I figure the more people I can reach with this message, and the more often, some people will actually DO it! It’s so critical …

  • Wow, Sharon. Great for you to share this and hit home with everyone!

    • Thanks, Sally, glad you saw the value in it. These are topics that we really need to be willing to investigate … and to share with loved ones!