CFP Hilary Hendershott’s tools for successful budgeting
Episode 1 tanscript:
Welcome to “Charged Up!” I’m your host, Jenny Hoff. This is our first episode and one of many that I hope will be interesting and inspirational discussions about money and credit and how you can take control of your financial life.
Coming out of the holidays, I wanted to focus this first discussion on our financial resolutions, since a lot of us make them after the binge spending that happens from Thanksgiving to New Year’s Day.
I’m very excited about this interview will Hilary Hendershott. She’s a certified financial planner, and she owns the company Hilary Hendershott Financial. She’s been featured in numerous publications and on news shows with her fantastic strategies on how to master your money. She’s given a TEDx talk and has her own podcast “Profit Boss Radio.”
But despite all of her expertise and her down-to-earth approach to taking charge of your finances, Hendershott also has experienced her own financial problems. As a result, her solutions are not just theoretical, they actually work. Let’s find out how:
Hilary, thanks so much for joining us today. It’s a pleasure to have you here.
Thanks, Jenny, I’m happy to be here.
One of the first things I like to do is talk to my guests about their own personal journeys with their personal finances, because I think it’s important that people understand everyone at some point has been confused, anxious and scared about their financial situation. Maybe you are making tons of money and you just don’t know how to take care of it and how to budget it. Maybe you are not making very much money at all and you just keep getting into debt, and you don’t know how to dig yourself out of that hole.
I think it’s someplace that a lot of us have been, but nobody ever likes to talk about that. I mean, we don’t even talk about our salaries. So nobody really likes to talk about our finances. Maybe that comes from something we experienced growing up in our families, or maybe it’s just so confusing that it makes us insecure.
I want to talk to you first because you’ve been open about the fact that you went through your own financial issues – you struggled to figure out what was right for you to stay on track and not be in debt. So can you talk a little bit about that journey and how you got there?
I like to start in the middle because it gives you a good sense of how bad things had gotten. At one point, I was driving this silver convertible BMW. This was several years ago, and I was working in financial planning at the time. I pulled into a Chevron station to get a tank of gas and I put my credit card in the machine, and my card was declined. I tried another credit card, and it was declined. At that point, I had no other cards in my wallet with any room left on them – either balance in the account or credit left on the limit.
I had to leave my car at the Chevron station, and as I’m walking home I realized I had drained my 401(k), drained my retirement accounts, and I wasn’t sure how I was going to make my next house payment. I was mortified. I’m able to tell you this now at a place of clarity, but I was so ashamed I felt like a drag on society, like I’m the worst kind of person out there: irresponsible: How did it get this bad?
At that point, I made a decision about how my life was going to go. I didn’t know why I had good intentions and bad results. At that point, I was a certified financial planner, meaning I have a very thorough understanding of the financial stock market and investing. I was advising multimillionaires during the day, and I’d come home to a stack of bills that I wouldn’t open because I couldn’t pay them. I was a chronic overspender.
So I said to myself, looking around at my professional colleagues, they are at the same place in their life and they’re building wealth, and I’m not. What’s the difference? I know that difference was my behavior and I know that behavior comes from psychology, so let me figure out what I can do differently. That led me to read everything I could get my hands on about behavioral finance and money psychology. I really became an expert on psychology at one point.
Several years ago, I gave a TEDx talk about the surprising power of language to make you rich because it turns out our money lives are dictated by our beliefs about money, which give rise to our conversations about money. So beliefs and language are very closely intertwined.
See, we have all kinds of superstitions – people are basically crazy about money – and what I discovered at some very early point in my life was that my mom was a good budgeter. Things didn’t feel they were luxurious in the home – don’t get me wrong, I didn’t go without – except there are things that I did want that I didn’t get.
Also, I decided that there is never enough money, and I had persisted in my life to perpetuate that superstition. It seems really counterintuitive, but when – and I was earning income at the time, I mean I had a condo, a BMW and a good job – you have money come in but have the belief that there is never enough money, the only thing you can do is spend it. You have to get it out of your system because that doesn’t jibe with your belief about money, and you know the brain is a really powerful thing.
So when I was able to turn that pattern on its ear, I got really clear with myself that I needed to build wealth and not debt, and did everything that I needed to do it. Now, I have built a thriving business, I’ve paid off debt, and I’ve refunded the retirement account. I say this to just let people know that anything is possible, and given the value of that saleable business I’m definitely at a seven-figure net worth at this point.
I said to myself as I’m on this upward track, “I bet I could give this away.” I started talking about it publicly, I’ve done public speaking on the topic. It’s something that really inspires me, and not only was I able to turn around what was a very destructive situation in my own life, but I was able to give it away.
So let’s talk a little about debt because that has been the subject of this month’s podcasts. I think a lot of people coming out of the holidays are experiencing a lot of debt that they didn’t intend to have. Why is that debt so central to the mindset and limiting to our freedom?
I think that debt is like a psychic leech. It’s an unfunded promise. Debt is a responsibility that you know you have, and when you have more debt than you can pay off in a month you never really know how you’re going to pay it off.
People think that being rich is about how much you get to spend, but it’s not. Being rich is about how much you get to keep. And that was a major fallacy in my own thinking. I wanted people to think I was rich so that they would think I was successful. That came from an inadequacy in myself, not thinking I was successful, being insecure. And so I was using money to kind of stomp that hole up.
But there is so much messaging out there directed to American consumers about how you need to spend money to make things all right, and the vast majority live in far better conditions than even the royalty of the Holy Roman Empire. We have it pretty darn good.
You have your smartphones, a flat-screen TV, a laptop, a microwave, central heat and a car. So why are you spending so much? Debt is a weakness in the system. A lot of people think they have an income problem, but it’s almost always a spending problem.
Debt weakens your financial positions so that all of that spending you’re doing on entertainment, self-care, clothes, hairstyles – it’s not making you happier. And that’s the ruse really. Every time you plop down a credit card to buy something you think you want, you’re weakening you position in life, and it’s a big deal.
Let’s talk about financial resolutions, because I know that is something that’s on a lot of people’s minds.
You probably make health resolutions and financial resolutions. Those are some of the most common ways to start off the new year. And we also know those well-intentioned plans like the diet and financial resolutions can often lay by the wayside if we don’t have a good plan.
What do you say, first, is the biggest reason people don’t keep their financial resolutions? And what are your ways for them to keep their financial resolutions?
I would guess 80 percent of people don’t keep their financial resolutions. Why? It’s very difficult for human beings to apply discipline in an area of life that is already filled up with ways of being. It’s like physics: If the space is full and unless you clear some space and take out other habits, any ways of being you force or forcefully try to apply, it’s going to feel really difficult.
It’s going to feel like work. And in the case of spending less, it’s going to feel like scarcity and it’s going to eventually get pushed out. You’re going to rebel from yourself.
That’s why you’ve got to work on you money script or money superstition, which I call the money operating system, and immerse yourself in new habits. That’s why on my financial walk of shame, I had been doing things to hide what was going on in my financial life. So I decided I wasn’t going to do them anymore, so I forced myself to call five friends and tell them “Look, I’m broke.”
Often with bad financial habits – and just like bad food habits – we are compensating for something else.
For example, I worked with a woman once who was spending a lot of money on clothes and personal travel and eating out by herself, and what we realized was that she was compensating for not engaging in social relationships by spending money on herself to make herself feel better.
She wasn’t just going to stop spending money, and stay home alone and be lonely. She had to go out and get more balance in her life. When she did make the effort to be social with people, her excess spending kind of cleared up naturally.
You do have great tips on how to reduce spending and even how to resist the temptation to spend more.
What actions did you take, besides telling yourself or calling your friends, specifically, to make yourself stick to a budget? How did you even compose a budget, and how can we do that?
The first thing is that money lives in the real world. You can think about money all you want, but you have to actually manage it. You have to actually understand and have your arms wrapped around your cash flow. When I say cash flow, I mean how much money goes in and how much goes out, and you have to measure it in small enough time periods that you can actually wrap your brain around the numbers. When money becomes real to you, there is clarity.
So first, sit down. You’re going to probably resist this step, but I need to know how much money is coming in: For example, do you have 26 pay periods a year or 24? What is your exact net income in a one-month period?
Now look at your debt. To get out of debt, you’ll need a measure of your income and assets. For most people, if they are in debt, they’re going to have a negative net worth.
But we need to know how much credit card debt there is, how much tuition debt, and what are your debt payments and your required payments every month. Your assets minus your debts gives you your net worth.
Once we know the income number, we can decide how to distribute those dollars so every dollar that comes in your ecosystem has a job. It should be assigned a role.
People hate to do a budget, I get that. There’s like 3 perfect of people on the planet who like budgets – and most of them are engineers – but for most people, a budget becomes another thing to feel guilty about not doing.
So don’t do it.
I teach a financial automation system – I used it for myself, I’ve taught it to people paying off six figures of credit card debt, and most of my wealthy investment clients use it so is scales infinitely. Essentially, instead of dividing your spending into categories like utilities, clothes, trips, gas … I invite you to divide your spending into categories based on when you made your decision to spend it. This is very important, and it won’t be intuitive to you. You’re probably going to actually have to try it to really get a sense of how powerful it is, but people who do it love it.
First, you have Yesterday’s Promises, which is your overhead. When you wake up on the first of the month, you know there are expenses you have to pay this month – your rent, gym membership, life insurance, car insurance, utilities. I want a list of that month’s obligations. That is your Yesterday’s Promises number.
The rest of your spending is based on decisions you make in the moment. That’s Today’s Funds. And then Tomorrow’s Dreams are the things you are saving for, whether they are short-term of long-term goals.
Most people make their saving decisions after they make their spending decisions. I invite you to turn that around if you are paying off debt. Instead of putting it in savings, you’re going to be paying off that credit card, and whenever you are done paying of that credit card, you’re just going to keep that money going. It’s not going to go to your Visa anymore; it’s going to go to your Bank of America account.
I have one single spending account. It’s called Today’s Funds. It literally says that when I log into my bank, and it says that on a label on a card in my wallet. I use credit cards now for the points, and I don’t carry any balance on my card. But there was a very long period of time when I had no credit cards.
I carry only one debit card, and that is the Today’s Funds spending. That’s like my allowance, and now every time I make a decision to spend the money, it goes on that card. Gas, clothing, gifts transportation, my hairstyles, lunch today – whether I brown bag it doesn’t matter since it’s coming from Today’s Funds.
In this way, when you get to the end of that bank account balance at the end of the pay period, you can spend that account to zero, but your financial system is still working – it’s still a well-oiled machine. Your expenses are funded, and your debt payments or savings is funded.
So if you want spend on a Gucci bag, then sure, you take it out of your Today’s Funds, and you better be prepared to eat beans the rest of the two weeks.
There was a time when I had $1,000, or it may have been $600 – I don’t know – in my Today’s Funds account. That is a small enough amount that when you and I go to dinner and you ask Hilary, “Do you want to have wine?” and I look at my bank account balance, and if it’s $500, I might say yes, but if it’s $22, you better bet I’m saying no.
That’s what I mean by you have to right-size your spending, and all you have to do is not overspend.
I love that, and I want to get into that a little bit more. Do you have a spend-down card, or do you have a card with a certain limit?
I actually use a points credit card. I get about a 3 percent cash rebate. And I have a account aggregator. I use a tool called “emoney,” and I watch the balance go up, so right now it’s at $232. I know I have $1,000 total, so when the balance gets up to $990, I just stop spending and write a check from my Today’s Fund account to the Visa or transfer the money. I pay off my Visa gets every two weeks without fail now.
What is your future spending account, and how does that work?
Tomorrow’s Dreams are my savings account. I have a Tomorrow’s Dream for my next car – I always pay cash for cars. I have one for holiday spending, so I have a drama-free Christmas season every year. But I consider all of the savings account to be in the Tomorrow’s Dreams category, because I’m funding short-term and long-terms dreams. So, if I was saving for a kid’s college, that would be there, or saving for a house for college, that would be there.
I love that idea! It’s very simple. Split it into these three categories. I’ve tried the apps like Mint and stuff, and I try to say, “OK, how much am I going to spend on groceries?”
Ugh. How are you going to predict that?
Yeah, it’s so exhausting by the time you’ve set up an account that I don’t even want to look at it again. So I like that idea of just saying, “It’s very simple: Is this a debt that I have to pay every month? Is this something I want to buy right now? Or is this something that I’m funding for the future?” I think that’s a great tip to use, and I really recommend people try it out. I’d love to hear from people who have tried it out and if they are successful, just write me at firstname.lastname@example.org.
Oh my God! That’s a great email address!
And also go to Hilary’s website, hilaryhendershott.com. You have a lot of information on there about your services and your programs. I really recommend it. I love this approach to budgeting your money without making it so exhausting that you just don’t want to do it.
Let’s also now talk about what people need to do psychologically to get started with this. I love the approach, I think that it’s probably very useful and a lot of people, if they do it, will be successful. How do we get to that place psychologically where we actually sit down and do it?
There’s a man name George Kinder who wrote a book called “The Seven Stages of Money Maturity,” and this book became really seminal in my industry.
To answer your questions about how you get ready to turn your financial life around, I want to talk about just the first three stages of money maturity.
Stage One – Innocence.
It’s comprised of superstitions about money, no planning, no budgeting, no dialogue about money that’s analytical in any way. We all know people in that stage. When you try to talk to them about money when they have bad habits, they just don’t hear you. They don’t listen because they aren’t there yet. They haven’t awakened to the fact that money is a thing to be managed and that can improve your life.
Stage Two – Pain.
We talked about my pain. Everyone suffers a different kind of money pain that propels them to the next stage. Some people have more financial pain than I did, and some have less. My husband’s was so minimal he can’t even remember ever having been in pain.
Stage Three – Awareness.
Now some people can actually use pain to ping them back into Stage One: Innocence. I’ll give you an example:
There’s a couple in their 60s who realize they only have $20,000 saved up for retirement. So they take that $20,000 and buy lottery tickets. The realization that they are not ready for retirement is pain, and they choose to let that ping them back into innocence by buying the lottery tickets. We all know how that story will likely go.
But at that point you’re in pain. You are ready to move through the portal to the next stage which is awareness.
Awareness is characterized by the ability to be in productive dialogue and plan. This planning is all about the things that you and I have talked about today, Jenny, the sitting down and valuing your net worth, adding up the numbers that allow you to manage your cash flow. You have to be in the stage of awareness to actually do that, so you know if it’s time for you.
If you’ve been sitting in pain for weeks or months and it’s time to take action, there is no time like the present. And really every day that you put it off is another day of pain. I had to be pretty scarce for a while, and I was in a pretty bad situation. It did feel like I was doing without for a while. I wasn’t destitute, but I definitely didn’t have a lot of the things I want in my life. But things change pretty quickly. They start to kind of compound and become exponential. It was a character building experience.
I guess my core message is that there’s a light at the end of the tunnel. If you start to do the right things, you’ll be surprised how quick that can snowball for you.
Do you think people should limit how many credit cards they have?
I think if you’re in debt, you should cut up your credit cards. I think you should positively disallow yourself to use credit cards unless you can absolutely say that you can pay them off every two weeks.
I know some people say to put them on ice, which I think is a really cute idea. Put your cards in a glass and fill the glass with water and then put the glass in the freezer. This way, if you want to use the credit cards, you have to wait hours for the ice to melt.
But honestly, why do you need credit cards? People say you will need cards for emergencies, but you should be at a point in your life where you have cash on hand for unexpected events. There just aren’t that many unexpected events. Your car breaking down is not an emergency, your house needing a new roof is not an emergency. These things happen, you just don’t know when.
In my opinion, credit cards are for the rewards programs, so I don’t think you need them at all. And if you can’t be trusted with them, then you have to take them away from yourself. Sorry to say that, but it’s true.
Finally, our show is called “Charged Up!” So what gets you charged up about being financially independent?
I wouldn’t actually say I’m financially independent. That said, at my current standard of living, I’m confident I could live for the rest of my life, which is likely to be 60 years or more – I mean I just turned 40. But I’m very close to being financially independent, and I will get there and it just feels good.
Let me tell you, I’ve been broke and been in a situation now where you could say I’m wealthy or rich, and it’s just better this way. There is a whole set of concerns that you don’t have anymore. There is a whole set of concerns that you can handle with money. You can really start to specialize at what you’re good at and you can buy the one resource that you can never get back, which is time.
And being someone who just had her first baby this year, my time with her is precious. I’m glad that at 6 o’clock I have support around me to stop working and go spend the evening with her.
Congratulations. That’s great to hear.
Thank you so much, Hilary. This has been a very enlightnening coversation. I really recommend people try out these tools. It’s not super difficult and doesn’t require any fancy apps. It just requires sitting down one day to do the calculations and then start spending what you can afford – and not spending what you can’t afford. Thank you so much for joining us.
Thanks, Jenny, for having me.
And thank you for joing me for our first episode of “Charged Up!” We are going to be interviewing financial experts from CreditCards.com, authors and inspirationsal individuals so that you can take charge of your finances and learn about good money stewardship.
This isn’t just about money, it’s about life. Credit, finiances, debt – these affect every area of our lives, our happiness, our peace of mind. And when you can control this you can start controlling those other parts of your life and start enjoying life a little bit more without having to constantnly swipe a credit card to do so.
If you have questions that you want me to answer or address on the show, email me at email@example.com. I’ll do my best to get your questions answered. Meanwhile, get charged up about your financial future. We’ve got this.
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