How to do a financial reset
ARI SHAPIRO, HOST:
Have you ever found yourself toiling away at work, feeling completely burned out and thinking, you know, what if I just quit? Could I do that? Or maybe your work situation isn't dire, but you're ready for something new. You want to try another kind of job or start your own business or move to your dream city that happens to be more expensive. Making a big move like that can often feel impractical and out of reach. And you might feel like...
JILL SCHLESINGER: How could I leave something I've invested so much into? This is called the sunk-cost effect. It's actually, like, behavioral economics. And it's actually pretty dangerous because just because you've sunk some time, energy and money into something doesn't mean that's the best thing for you to continue doing.
SHAPIRO: That's Jill Schlesinger, a business analyst at CBS news and author of the book "The Great Money Reset." She says if you're considering a reset, it helps to crunch the numbers, see what your finances look like, what might be possible for you and when. It's the sort of advice that could also help anyone pondering a financially ambitious New Year's resolution. Schlesinger spoke with NPR's Marielle Segarra of our Life Kit podcast and shared a framework - five steps you can follow to help make these decisions.
SCHLESINGER: I call it the Fabulous Five. So No. 1 is you calculate the resources that you have, and that means, like, what you own. Those are your assets and your income and really everything. You know, like, when I say what you own, a lot of people will say to me, well, I don't own anything. And I say, but don't you have a 401(k)? Oh, yeah, I have that. So it really is a real calculation of kind of what you have and also what you might be giving up. Imagine what it would be if you had to do it all on your own.
MARIELLE SEGARRA, BYLINE: Yeah. And then in terms of assets, you mentioned one which is like, OK, so you have a lump sum of money in the bank, or you have money in a retirement plan. What other kinds of assets might people consider in this step?
SCHLESINGER: Anything that you would want to actually sell and that would make a difference. I'm much more concerned or much more focused on what you could convert to something easily to cash. So I think it's more of your savings account. If you're in - you're like, sort of middle-aged, you have some investment property. And I think that a lot of people look at their home, and they don't actually think of it as an asset, but it is usually people's largest asset.
SEGARRA: Yeah. And it's interesting. That sort of leads us to step two because your house can be an asset, and it can also be a liability because you owe maybe a mortgage every month, right?
SCHLESINGER: Right, right. Exactly. And step two is calculate your debt and your other liabilities - yes, of course, a mortgage. Maybe it's a credit card. Maybe you didn't quite pay everything off. It could be a car loan, education loans, either for yourself or for your kids. All of those things come under this category of liabilities.
And, you know, what happens when you're looking at these things - it - don't throw in the towel in that moment, OK? That's all I want to say. Like, I think that some people say, oh, I can't do it. I have all this debt. OK, calm down. We may be able to still do something. We're just in the phase - the earliest stage of taking a good, hard look at what you have and the position you're in today.
SEGARRA: So let's move on to step three. We've been talking about housing, and that's what this step is about, right? What do you tell people to consider here?
SCHLESINGER: I think first of it - of all is if I were to sell this house right now, what would that mean? What would I - how would I feel? Would I feel unburdened? Would I feel untethered? Right? Those are two opposite poles of something, right? Would I feel like I could have more freedom to consider something else in the future? For a lot of people, selling their homes makes absolutely no sense. I think the biggest question to ask is that, you know, what is it that I'm looking to reset, and how does my housing play into that?
SEGARRA: Does this step only come into play if you own a home or it's also - what are the questions if you rent?
SCHLESINGER: The renting is, you know, have I really looked at what it means to, like, tally up the cost of where I am right now? And, you know, when rents were going crazy and a lot of people said - I hate renting; I hate that my landlord has all the power - I would really encourage you to understand that owning is also really hard and that you might have a better deal than you think. Most of the people who are renting and are considering a reset have way more freedom to reset than those who own.
SEGARRA: I feel like we've been talking about expenses here when we talk about rent, and that is step four - right? - to consider your spending habits and what you have to spend.
SCHLESINGER: Yeah. This is one of those strange steps that you have to take regardless of how much money you have. I'm really, really stressing that this is not about living like a monk. This is just accounting for what your needs are and then what you actually are spending your money on. So if you're on this, like, track where you've been spending a lot of money and you say - well, you know what, I'm going to leave corporate America and be a teacher - and you think your whole family is going to reset to a lower spending, you have to be sober about that analysis. Maybe they will, but it is a lot of hard work to get there.
SEGARRA: Yeah. So what's step five?
SCHLESINGER: So this is a little bit more of the emotional part. Step five is consider the obligations that you might have to others. And so it's very hard to have these conversations. So have you made an obligation to your siblings that, you know, well, I make a bunch of money and you know, I'll take on the care of Mom? Do you have a sibling who's likely to need help down the line? Yeah, you just want to know about that. And so when you consider those obligations, as you're looking at your own reset, you know, that could actually have a real impact for you.
SEGARRA: Coming out of the five steps, you have all these numbers written down and all these factors. What do you do with them? Like, what questions do you need to be asking yourself once you know these things?
SCHLESINGER: So the first five steps are to figure out where you are today. And then the scenarios that you build out are, for maybe the first, say, one, two, three years, to say, what happens to these five things in a year from now if this is the best case, if it's a middle case and if it's the worst case? I mean, look, you don't know if this money reset is within your grasp unless you actually do the math. You just don't know. And so one of the reasons that - I mean, I love the idea of thinking about the big picture and thinking about what you want, but I also like the idea that it's only by going through this very clear process and using a framework that you give yourself the permission to do it in the way that feels most comfortable to you.
SHAPIRO: That's Jill Schlesinger, author of "The Great Money Reset," speaking with NPR's Marielle Segarra. Life Kit wants to help you make and keep your New Year's resolution. Check out Life Kit's resolution planner. You can choose areas of your life you'd like to focus on, and the tool will guide you to some of Life Kit's best tips on the topic. You can find it at npr.org/newyear.
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