Are You Photoshopping Your Finances?


Ah, Photoshop. Everyone knows its joys – the muffin top's erased! -- and its absurdities, such as Grazia magazine's royal wedding edition, which makes the reedy Kate Middleton look like she's had several ribs removed.

When it works, Photoshop can make something appear better than it really is. Which inspires me to ask: Are you photoshopping your finances? Do you have a clear picture of your income, expenses and progress toward your financial goals -- or are you fudging? If you aren't seeing the truth, and only the truth, it's time to banish your self-deceiving beliefs and get real with your money. Here are some common self-deceptions:

"I'm doing great with retirement because I max out my 401(k) contributions."

That's admirable, but do you know how your investments are performing? "People rarely track their total investment performance," says Charles Farrell, principal with Northstar Financial Advisors in Denver. "What they tend to do is look at the few holdings that did well and then discount the ones that did poorly. In an era of low or even negative returns, it's going to be very important to understand exactly how you're doing."

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The key is to look at the one-, three- and five-year total return on all your 401(k) holdings, and then compare that to your goals. Large plan administrators, such as Fidelity, now offer a "personal rate of return" feature that shows investment performance over those time periods. Even better, it does this without including your contributions, offering a true sense of how your portfolio is faring. (If your 401(k) lacks this feature, ask the plan administrator if it has a different tool to provide similar metrics.)

Meanwhile, be realistic about your return expectations. "This is still an issue even after (the downturn) of 2000 to 2002 and 2008 to 2009," says Chris Cordaro, CEO of RegentAtlantic, a wealth-management firm in New Jersey. "Some folks think stocks are going to return 10% to 12% long-term; 8% is a much more realistic number."

"I only have a little credit-card debt."

This is kind of like being a "little pregnant." Long-term, both credit-card debt and babies are guaranteed to have a major effect on your finances and anxieties, but debt offers zero moments of intense joy. You won't make much financial progress paying 16.5% interest -- the average rate in July, according to -- over the long haul.

Let's assume you owe the national average of $4,700 on a card with 16.5% interest and a minimum payment of $140. Paying only the minimum, it will take 13.5 years to eliminate that debt and you'll fork over nearly $3,500 in interest – and that's if you stop charging new purchases.

Moreover, everyone has a subjective view of what defines a "little debt," says Gary Ambrose, director at Personal Capital Management in New York. "Somebody once asked me to review their debt because they were thinking if they could borrow from one credit card and pay the other that would really save the day," he says. "When I showed them the numbers, bottom line, it was nonsense. It was making them look pretty on paper for a little bit, but when all is said and done, they were still in debt far over their heads."

If you can't afford to pay off the card all at once, tighten your belt and triple your minimum payment. In the case of the $4,700 debt, a monthly payment of $420 would leave you debt-free in just 13 months, with only $363 in interest charges. Plan your own paydown using this WalletPop debt calculator.

"I am taking out student loans to earn a college degree, but it's okay because it's 'good' debt."

No debt is good if you overdo it. Two-thirds of graduates had student loans in 2008, with an average of $23,200, according to the Project on Student Debt. But 10% of students who attended private four-year nonprofit institutions had loans totaling $40,000 or more.

Many students either have no overall borrowing plan or don't know how much they already owe. One rule of thumb: Don't borrow more -- for all four years of your education -- than your expected starting salary, suggests Mark Kantrowitz, founder of, a college-information website. If you expect to earn $60,000 a year when you graduate, for instance, you should borrow a maximum of $15,000 in loans for each year of school. The reason is this: If you borrow less than your starting salary, you'll have a good chance of paying off the loans in 10 years, Kantrowitz says.

"I never overdraw my bank account, so I don't need a budget."

No doubt you know what your mortgage or rent payment is and may have a handle on utilities, but can you ballpark what you spent on entertainment, vacations and clothing last month?

"I suspect if people aren't using a detailed budgeting program to track expenses, they easily underestimate things by 20% or more," Farrell says. "That's why they can't figure out how to save." Whether you use a pen or paper or online software, tracking spending is crucial to success.

As for saving, your budget should earmark money to build an emergency fund equal to at least three months' of basic living expenses (shelter, utilities, food and transportation) in the event of job loss. Nearly two-thirds of consumers surveyed in July said they'd have to tap a source other than their savings to cover an unplanned expense of $1,000, according to the National Foundation for Credit Counseling.

Budgets are especially crucial for people nearing retirement, Cordaro says. "In planning spending needs in retirement many folks discount the recurring one-time expense -- 'oh, we just built a new patio or went on a big trip or needed a new air conditioning unit. We won't have that expense going forward.' The onetime expenses always repeat to [an] extent, they are just different things," Cordaro says.

"My home is worth much more than I paid for it."

I'm guilty of photoshopping on this one. I had been fairly confident about the value of my four-bedroom colonial until we refinanced from a 30-year loan to a 15-year loan this past spring. While it is indeed worth more than we paid in 2002, let's just say the appraiser enlightened me on the specifics. It's not an major issue now, but it would be if we were close to retirement and counting on home equity from a sale to boost our nest egg.

"Individuals say, 'this is my home and I put a lot of blood, sweat and tears into it and it should be worth X when the market may dictate Y," says Maria Bruno, senior analyst in Vanguard's investment counseling and research group. "Having unrealistic expectations of what the house is worth" could postpone retirement plans.

To get a more accurate assessment of home prices, ask a real-estate broker for six months of comparable sales data for your neighborhood, or check out a real-estate-assessment site, such as

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