How can you improve your financial life? Getting it all together is the top resolution for the year 2000.
I'll give you a tip: You don't sit down with calculators, budget books and charts. You look into yourself.
"Financial planning isn't that complicated for the average person," says planner Bert Whitehead of Cambridge Connection in Franklin, Mich. "What's complicated is people's fears, and the things they think they know but that aren't correct."
Whitehead's firm specializes in financial planning for the middle class. "The vast majority are financially dysfunctional in some way," he says.
By "dysfunctional," he means that you may be making poor financial choices. You think what you're doing is smart, but it won't get you where you want to go.
In some cases, people simply don't know enough about personal money. For example, they may not be clear about the difference between stocks and bonds. After learning the facts, they start saving, spending and investing more productively.
Others hold opinions that hinder their progress. For example, they might say that carrying lots of credit cards is a sign of good credit and prosperity.
The third level of dysfunction is "deep and psychological," Whitehead says--such as being a miser or a compulsive shopper. That's beyond a financial adviser's reach. Some people try therapy. Others build a life around the way they prefer to behave.
Here are Whitehead's seven symptoms of financial dysfunction:
1. Mortgage aversion. You remember your parents burning their mortgage, and you want to do the same thing soon. So all your spare money goes into paying off your home. You're thinking only about saving on interest expense, by prepaying the loan.
But working people also need to build up their financial assets. If you have spare money, it's better to maximize your contribution to a retirement plan than to make mortgage prepayments.
Whitehead goes further. For people who have substantial home equity and few other assets, he suggests taking a larger mortgage and putting the extra cash into index mutual funds (index funds mirror various stock market indicators, such as the Standard & Poor's 500 index.).
Refinancing would cost around 8 percent today. He thinks you'll earn more than that from mutual funds over six years or more.
He would not, however, take a home-equity loan at around 10 percent and use that money to invest.
2. Inappropriate risk reaction. You may be unreasonably afraid of stocks. Conversely, you might take unreasonably high risks.
For the fearful, Whitehead suggests starting out with a small mutual-fund account, to see how it goes. Plungers, he says, could set aside 10 percent of their money for crazy bets and invest the rest soberly.
3. Compulsive spending and excessive debt. You say, "I just don't make enough money." In truth, you need to cut up your credit cards and develop a plan for getting out of debt.
4. A poverty mentality, more common to women then men. If you're in business, you're afraid to charge more for your services. If you're employed, you're afraid to ask for more than your company's standard 3 percent raise.
In today's strong economy, consider looking for a higher-paying job, Whitehead says. Even if you'd rather not leave your current job, an outside offer gives you credibility when you ask your boss for more money.
5. A miser mentality. Some people need "permission to spend," especially if they've saved all their lives. Retirees, in particular, may be afraid to use their savings, even if--on paper--they have all the money they could possibly need.
Projections of income and expenses might help them feel more secure.
6. Acute financial paranoia. Some people live in fear of being sued by creditors, or having their money stolen. They do bizarre and expensive things to hide their assets or transfer them to a third party.
"Sometimes they just don't understand how the system works," Whitehead says. They need to understand the legal system, incorporation, bankruptcy and insurance.
7. Windfall woes. Windfalls come in many forms: an inheritance, super stock options, even a winning lottery ticket.
With unearned money, any dysfunction you already have is likely to be magnified. You may feel overwhelmed. You'll also find people pestering you for loans or gifts, or trying to sell you stuff. Don't do anything with a windfall until you lay out a plan. You'll need lots of financial education, and lots of introspection about how you want to live. A pile of money--earned or unearned--isn't a life. Planning is always personal, with money bringing up the rear.