A CFO is normally a corporation’s Chief Financial Officer. But as illustrated in Kim Snider’s new book, “How to Be the Family CFO“, a household certainly needs someone to step up and run the finances. Now don’t let this book confuse you. If you’re a fan of the site Chief Family Officer, it’s not the same author, although I wondered the same thing when I first heard of the book. Kim Snider certainly intends the more common meaning of the acronym CFO.
Rags to Riches, to Rags, then to Riches again
Kim reached top management at a her company, and thus received a good number of stock options. Some time after her company went public, her options were worth an incredible sum of money. So what did she do?
When Kim was 31 years old, she quit her job, cashed in her stock options, and went on a spending spree. Along with entrusting her money to an unwise broker, Kim’s decisions led her to being broke less than two years later.
After spending some time wallowing in her own misery, Kim got her act together and spent the next 12 years learning how to run her own finances properly. She now shares her knowledge on the radio, through workshops, and of course through her new book.
Purpose of the Book
Kim’s stated purpose is to “give you a simple, straight-forward guide to the basics of personal finance, based on my personal and professional experience, with the ultimate goal of your achieving financial success.”
Her definition of financial success is “being able to do what you want, when you want, without worrying about how to pay for it.” She starts explaining the path to financial success with basic fundamentals about spending: if you spend more than you make, you fail. If you spend less than you make, you succeed. Simple, right? Not for most people, maybe including you.
Four Fundamentals of the Family CFO
Kim separates her book into four sections based on the roles of the Family CFO:
- Plan Prudently
- Save Prodigiously
- Invest Wisely
- Manage Risk
Ok, for you grammar nerds out there, I agree that “Manage Risk” doesn’t fit with the others, but you try to find a verb/adverb combo that works well!
Just like a corporation needs to know its assets and liabilities, so does every single household and family. A good way to be surprised when an emergency (or tragedy) hits is to not know where your money is, or is going. Kim advises creating a balance sheet and income statement, and of course a budget.
Another important part of this first fundamental is estate planning which, I’ll admit, we’re lagging behind. Since we don’t have kids or businesses (other than this site), we feel that writing out a will or planning for distribution of our assets isn’t as important of a matter. However, after reading the section titled “Plan Now for the Inevitable”, I recognize the importance of getting that will made!
I had to look up the word “prodigious” to be sure I knew what it meant: “extraordinary in size, amount, extent, degree, force, etc”. Thus, this section deals with ensuring your financial stability through active saving.
The first act, although done in parallel with everything else, is to gather together 3-6 months in an emergency fund, stored in a bank such as ING Direct (get $25 when you open an account). This step builds on the balance sheet and income statement you created in the last one as you need to know how much you make and how much you’re spending before you know how much to store in a savings account.
Generally, the emergency fund is 3-6 months of expenses, not total income. While it would be nice to have a full 6 months of my paychecks sitting in the bank, that would take seemingly forever. Instead, I need to plan for my known expenses like any fixed bills (mortgage, car), variable bills (utilities, groceries) and even items currently subsidized by my employer like medical and dental insurance (the cost would jump up if I paid it all on my own). Add all those up for 3-6 months and you’ll know how big your emergency fund should be.
Next, Kim discusses “good debt and bad debt“. While I really think all debt is bad, I also agree that they differ in their “badness”. So, “good debt” is debt that helps you get or keep an asset with increasing value (a house) or potential (your education). “Bad debt” is debt on an asset that only depreciates in value, or costs more than it’s worth (auto loans, credit card debt).
Next up is saving for retirement through tax-deferred investment options like 401(k)s and Roth IRAs. Kim answers the burning questions like “should I take money out of my retirement account if I’m hurting for cash?” and how that will impact your retirement.
And then Kim has an excellent chapter whose topic I couldn’t agree with more: “Save for Retirmement First, Then Your Kids’ College“. YES YES YES! Take care of yourself first, or you’ll only be a burden for your kids as you, and they, age. If you instill the right values in your kids and help them get scholarships, grants and even loans (hey, I don’t begrudge my loans), then you’re only helping them to be prepared for life after college when they can’t (or shouldn’t) rely on mom and dad’s handouts.
With investing, Kim advises that you first figure out what the purpose is for your investments (a comfortable regular retirement, an early retirement, etc.), which helps you decide how much risk you can bear. For instance, if you’re 25 years old, looking to retire when you’re 35, then throwing your money into bonds probably won’t get you there. But you need to be willing to accept the risk of total loss to get the returns on investments that can get you to that early retirement.
For other people, taking it slow and steady is perfectly suitable so they can better assure a comfortable and stable retirement. Kim outlines a number of strategies for both types of people:
- Start early
- Invest YOUR OWN MONEY (i.e. You can do exactly what a broker does, but without the extra fees)
- Invest, don’t trade
- Create passive income
- Understand taxes and inflation
Kim describes each of these in their own chapters, plus a few others.
Being an IT system engineer, we’re taught to monitor project risk very closely or else risk getting burned by the occurence of that risk. First, though, you need to identify the risks that can affect your project (or household budget), determine the probability and the consequence of them happening, and then outline a “mitigation” strategy to reduce the chance of them happening. But if they do happen, you need to have a plan to fix it.
So what’s your biggest risk? According to Kim, and of which I certainly agree, it’s your human capital. It’s your ability to work, to produce, to learn. It’s the skills, knowledge and wisdom you possess from years of experience and education, and the capacity to continue learning or producing, and even teaching. You have two things than can impact your human capital:
Both are very scary to me, but you have ways around each. With disability, you have both health maintenance (excercise, good eating habits) and insurance. For obsolescence, you have continual education and training. Kim describes your options for each in more detail in their own chapters.
Lastly, Kim highlights another risk in our modern society: identity theft. She talks about the normal credit impact, but also highlights a bigger, but less known, concern: medical identity theft. Unfortunately, there’s not much you can do about the latter as of yet, but I’d hope some options to monitor your medical history updates and changes comes around in the near future.
Can I recommend “How to Be the Family CFO”?
Even if you think you know the basics, I’m sure there’s an area of finances (including insurance, identity theft, etc.) that you can always brush up on. In my case, I liked the extra emphasis Kim placed upon estate planning, considering they also do not have children. It made me realize it’s not just important for parents, but for anyone.
I enjoyed Kim’s conversational manner, as it seemed to be like she was standing there explaining the concepts to me in person. While I don’t understand her rant against variable annuities (you’ll see), she does explain all the other steps, methods and fundamentals fairly well and in detail.
Overall, I’d recommend this book to those looking to get a handle on their finances, and for those still pretty new to running their own household. It’s a good starter course in planning and preparedness, and was an easy read too. I was able to get through the book from cover-to-cover in about 4-5 hours (on the train) and still retained much of the information weeks later. The cover price is $19.95, but Amazon currently sells “How to Be the Family CFO” for under $14 (subject to change).