Are You Prepared For the Unexpected?

November 17, 2016

If you’re like me, you may have been quite surprised (whether in a good or bad way) by the election results last week. The fact is that things don’t always go as we expect and sometimes life throws us curve balls. For example, I recently had a trip in which my first flight was delayed, then the Wi-Fi that I had been planning to use to get some work done on my second flight wasn’t working (here’s a different perspective on this), and then I found out my luggage hadn’t made it to my final destination.

Fortunately, I had everything I needed to finish my work (including writing this blog post) on me and the rest was delivered to my hotel by the next morning. The key is to be able to roll with the punches and that’s a lot easier when we’re prepared. The same is true in our financial lives. Here are some preparations for life’s financial curve balls:

Insurance

Knowing how my travel day had gone, I opted for the more complete supplemental liability insurance for my rental car. I knew the odds of an at-fault accident were low, but it could happen and being carless, I have no other insurance. That means I could be personally liable for thousands or even hundreds of thousands of dollars in damages in the event of an accident.

Insurance is for those unlikely but disastrous events that could leave us financially debilitated. (If the event is likely, the insurance wouldn’t make financial sense for the insurance company and if the event wouldn’t be disastrous, the insurance wouldn’t make financial sense for you.) Make sure you have enough property and casualty insurance to replace your valuables and to cover your assets in case you’re held liable for damages. That may mean having an umbrella liability policy if the limits on your auto and homeowners insurance are too low. Don’t forget health, disability, life, and perhaps long term care insurance too.

Emergency Fund

If insurance covers the unlikely events, the emergency fund is also for all the things we know will happen but can’t predict when. Your home and car will need repairs. You’ll have out-of-pocket medical expenses. You’ll probably be in between jobs at some point. If you don’t have adequate emergency savings (ideally enough savings and other supplies to get you through at least 3-6 months), you may end up having to borrow the money at astronomical interest rates or even worse, losing your home or car if you can’t make the payments.

Advance Health Care Directive and Durable Power of Attorney

These documents specify your wishes or delegate someone to make those decisions for you in case you’re unable to. You can get advance health care directives drafted and stored for free at My Directives. A durable power of attorney is relatively inexpensive or you may be able to get it for free as an employee benefit.

Investment Diversification

Just like things don’t always go as we expect in our personal lives, the same is true for the overall economy as well. That’s why we diversify our investments. Have at least 30 different stocks in various sectors (if you have a mutual fund, you probably already have this) with no more than 10-15% of your portfolio in any one stock (especially your employer’s). You may want to include bonds, cash, and even alternative asset classes in your portfolio like real estate and commodities as well. Even the most diversified portfolio can lose value but by holding for the long term (at least 3-5 years), you also diversify by time and so the good years can make up for the bad ones.

Just because most of the political or financial experts predict an outcome doesn’t mean they’ll always be right. Life has a way of making fools of us all. When it does, you’ll want to be prepared.

What I Learned From an Early Retirement Package

November 11, 2016

Over the last few weeks, I have been having a whole lot of conversations about retirement with employees of one of our client companies. They are offering an early retirement package (ERP) to a fairly large number of employees, and they have a fairly short window of time in which to make a decision about accepting it or declining the offer. When retirement is no longer something that has a long term time horizon and is suddenly presented as an immediate opportunity, what is important suddenly becomes crystal clear, and that is slightly different for each person.

I have been able to make some observations on the factors that have driven the decision for most of the candidates for the ERP. It isn’t hugely surprising, but these factors are helping people make one of the most important decisions of their lives. So let’s learn from them so that we can be in a great position to make our retirement decisions with a clear head and on our own time lines. Here’s what I’ve found over the last several weeks:

People with very low levels of debt are much more likely to be able to accept the ERP. The people I met who have paid their mortgage off are, with an almost unanimous vote, accepting the offer and moving on to the next phase of life.

What I learned: I want to pay my mortgage off ASAP! Any debt should be eliminated quickly and you’ll be in a better position over the long haul. When all debt is gone, your embedded cost of living is lower for the rest of your life. That can do nothing but extend the life of your asset base.

The cost of health insurance in the future was a factor in everyone’s decision. Some had a spouse who could cover them or had the ability to roll into Medicare. Others are going to price policies on the exchanges or with affinity groups or simply price policies on a few insurer websites. Those with a clear plan for how to handle the cost of insurance had a very good likelihood of accepting the ERP.

What I learned: In order to prepare for medical costs in the future, I’m planning to max out my HSA annually and invest the account for long term growth, while paying most medical costs out-of-pocket. I plan to keep abreast of the ever-changing landscape of health insurance as well. Recently, we saw significant increases in premiums for health insurance in the exchanges so being aware of the landscape is always a best practice.

The folks who were confident in their ability to land another job before the severance package ran out were also much more likely to accept the offer. With a relatively generous severance package, those who could get jobs relatively quickly could “double dip” for a while. With income from two jobs, they can work on paying debt off or invest a sizable portion of their income.

What I learned: Having an updated resume and refreshing your LinkedIn profile periodically is always a best practice. One never knows when the employment market will turn into the next batch of good (or bad) news, so being prepared at all times is a very worthy endeavor. Keep your contacts organized. Stay in touch with former coworkers, as well as current ones. Use your internal network to help find opportunities.

The lessons I learned over the last few weeks will provide more benefits to me than the benefits I provided to the individual employees. I will consider all of these factors and work to make sure that when the time comes for me to consider retiring, I have all of my I’s dotted and T’s crossed. You should too.

How to Financially Survive the Holiday Season

November 08, 2016

I love the fall – the changing colors of the leaves and the beginning of the holiday season. For many, this gives us time to spend with family, but for a lot of us, the holidays create a black hole in our wallets. I am sure that it comes as no surprise that Thanksgiving and Christmas are two of the most expensive holidays of the year, but with some planning, these holidays do not have to wipe out your accounts:

1. Review your spending to determine a realistic budget. Before you get caught up in the non-stop “Black Friday” sales that seems to start right after Halloween season, take some time and realistically assess your budget to come up with a total dollar amount you can spend on family gifts. Consider using your bank’s software or websites like, Mint to help you create a budget.

2. Come up with a game plan for who will and who will not get gifts. I have a HUGE family: 5 brothers and sisters and close to 20 aunts and uncles between both my parents. (Don’t get me started on first cousins, much less second and even third cousins.)

I limit gifts to immediate family members, and I give either a family photo or a photo of the kids in an inexpensive frame for family gifts. Decide who will get gifts and come up with a game plan for other family members. Remember, gifts can be more than something you purchase- yummy desserts or an offer to babysit or do another needed service for a family member are great gifts.

3. Start shopping now for great gifts in inexpensive stores. The best time to hunt for gifts in inexpensive stores is now. Also, start searching consignment shops, particularly for kid’s gifts. A few years ago, we got an expensive all wooden dollhouse filled with wooden furniture and dolls for under $25 at a local consignment shop. Start slowly going to local stores to find some great deals.

The holidays can be financially stressful. However, they do not have to be if you take the time to plan ahead. Start planning now so you can save later.

Are You Ready to Buy A Home?

November 03, 2016

With all the speculation about interest rates possibly moving up soon, I’ve been hearing a lot of talk from people about buying a home. You may want to buy, but are you ready? The answer involves a lot more than what interest rates are expected to do. Here are some questions to ask yourself:

How’s your credit? If you’re planning to get a mortgage, one of the first things the mortgage company will do is run a credit check. To get the best rates, you typically need a score of 740 or above. If yours is lower, you’ll pay higher rates or you may not even qualify for a mortgage at all.

One of the quickest ways to improve your credit is to order a copy of each of your 3 credit reports from annualcreditreport.com (free every 12 months) and dispute any errors you may find that could be hurting your score. Another is to pay down credit card or other consumer debt, which also improves your debt/income ratio. If neither of these can improve your score in time, you may just have to build a positive record of on-time payments and wait for your score to rise over time.

Do you have enough savings for a down payment and closing costs? Ideally, you would have enough savings to put down 20% to avoid paying PMI, although mortgages with lower down payment requirements are available. You’ll also likely need another 2-5% of the purchase price for closing costs plus whatever you plan to spend on furniture, renovations, etc. This should be in addition to your emergency fund, which will be even more important with your home on the line.

Can you afford the higher payments? Contact a mortgage broker or loan officer to get a quote and see what your monthly payments would be with different purchase prices. Don’t forget to include estimated costs for insurance, taxes, utilities, and maintenance/repairs. Then see how this would fit into your current spending. It’s important to do this analysis before you even start looking at homes so you don’t fall in love with one and then talk yourself into being able to afford it.

Would buying be cheaper than renting? The rule of thumb is that you need to keep a home at least 3-5 years to make it worth the transaction costs and the risks of the home falling in value. You can do a more precision calculation with this Rent v Buy calculator from the New York Times that factors in everything from how long you plan to keep the home to the tax benefits of home ownership to the opportunity cost of not being able to invest the money you spend on the down payment. If you have a really good deal on rent, or home prices are particularly expensive, or you just don’t plan to stay put for long enough, renting may actually be more financially beneficial.

Are you ready emotionally? The numbers may make sense but they won’t matter if you don’t actually feel comfortable buying. Being a homeowner means freedom from a landlord but it also means being tied down to a home that you’re responsible for. No financial calculation can tell you if you’re ready for that.

Want more info on this or other financial topics? If you have a question you’d like answered on this blog, feel free to email me. You can also receive my future posts by following me on Twitter and/or subscribing to my posts on the blog home page.

How to Evaluate and Review Automobiles

November 01, 2016

My husband is a car lover and enjoys the process of looking for cars, whereas I would rather go to the dentist for a root canal. As we were sharing our differences with a friend of ours, she said that the biggest question she has is just how to get started. Below is how my husband answered her question:

No matter which category you fall into, one things become very apparent. It takes time and energy. To make the best decision, first consider how you will use the car to narrow down your options. For instance:

How much driving will you do? The longer your drives, the more gas mileage and wear and tear becomes important. So you may start evaluating cars for gas mileage and the overall cost for wear and tear. Consider using websites like Long-Term Quality Index and Consumer Reports to evaluate the reliability of the vehicle. These reviews can also help you avoid the most troubling models to increase your likelihood of having a reliable vehicle.

What are your capacity needs? Is it just yourself driving or a bunch of kids? Will you be hauling major items or just groceries? Consider reviewing websites like Edmunds and Car and Driver to get a road test evaluation as to how the vehicle fits into your lifestyle needs

Once you have determined this, evaluate your budget to figure out how much you can either afford to pay with cash or how much of a monthly payment you can make. The general rule of thumb for car payments is the 20/4/10 rule, which is to put 20% down, to have repayments terms of 4 years or less and for the cost of the vehicle (payments, maintenance, insurance, and gas) to be 10% of your monthly gross income or less. Websites like Kelley Blue Book give you an estimate of what cars you can afford in your budget and they can even estimate car payments.

If you are me, the thought of doing is like nails scratching a chalkboard. Trust me though. In the end, you will thank yourself for doing the upfront work now to get a reliable vehicle that you can use for years to come.

Are You Disheartened By This Election Season?

October 28, 2016

After watching all of the political debates, I am both disheartened and encouraged. As much as I am disheartened at this point, I’ve always been a big fan of finding reasons for hope and optimism. Don’t let obstacles outside of your control impact your life. Here’s why:

Stock markets rise. Stock markets fall. We know this (or we should).

Yet every time the stock market has a rough week, I field calls from nervous investors. People who see their 401(k) balance go down every day for a week or two tend to want answers. We talk with them about their long term goals and their current asset allocation. At times, they are invested in a way that is either way too aggressive for their stage of life and their goals and at other times (and fewer in frequency), they are invested more conservatively than their stage of life and goals would indicate is appropriate.

Most of the time, though, they are invested in a way that is perfectly suitable. In those cases, we talk about patience and allowing the market to do the rising and falling that it always does without getting too emotionally invested. They can’t control the markets, but they can control how they react to changes in the markets.

Similarly, whether the economy is great (remember when that used to happen?) or lousy or just muddling along like it has for the last 7-8 years, no one individual (not even Janet Yellen) can control the overall US economy. Even less control can be exerted over the global economy. The one thing that we can control to a large extent is our “personal economy.”

How much are you contributing to your 401(k)? How much are you saving in other accounts on a regular, automatic basis? What’s your level of spending in relation to your income? These are things we can totally control.

Those who examine their financial habits and lifestyle will find that their personal choices control a great deal of their financial life. The great thing about choices is that they aren’t permanent (kinda like elections) so if we’ve chosen to spend 102% of our income over the last few years, we can decide to spend less, move to lower cost housing, drive a lower cost car, cut the cable cord, etc. If we haven’t saved enough in our 401(k), we can increase our contribution every year. If we don’t have a solid emergency fund, we can direct deposit $5, $10, $20 or more to our savings account with each paycheck. The amount isn’t as important as the momentum.

So let’s use this season of disheartening political shenanigans to focus on our own personal economies and make progress on our goals. My challenge to you is to pick one area in your financial life, one where you DO have control, and before election day, make one change to your current habits. We can’t change the national economy, but we can change our own.

When Should You Go the DIY Route?

October 24, 2016

Have you ever wondered, “when does it pay to have a professional do it versus doing it myself?” My fellow planner, Cyrus Purnell, CFP® and I were chatting about our funny home improvement adventures. Then the conversation turned to other areas where sometimes it’s better to go it alone and sometimes to get help. Here’s what he told me:

A couple of weeks ago, I saw an Instagram post of a buddy of mine with his face buried in his hands and a pair of car keys with the hashtag #failmomentoftheday. Apparently, he tried to program a new key for his wife’s car and managed to deprogram both keys. The result was hiring a tow truck to haul the car to the dealership – what he was trying to avoid in the first place.

I spoke with him afterwards and he mentioned he was convinced to go the DIY route after watching YouTube videos. If alcohol is liquid courage, YouTube is definitely digital courage. My own failures after a little digital courage include: various attempts to fix my car and lawnmower, burnt pieces of meat offered up to the grill gods and a Craigslist’s furniture fixer upper which now resides in my attic.

I can now laugh at these DIY disasters. However, sometimes doing it yourself may not be a laughing matter. At what point does the cost of making a rookie mistake outweigh the price of having someone else do it?

When does it make sense to hire a financial advisor to help guide you in decisions related to your nest egg? Should you try to write your own will? Can you find the best insurance and mortgage rates on your own? Here are some thoughts on the value of hiring a professional:

When should you hire a financial advisor?

The value of a financial advisor is found in their ability to work with you to build a portfolio you can tolerate during the inevitable ups and downs of the market. Time in the market generally beats timing the market and a good advisor can help you stay on track in this area. Additionally, once your nest egg is in place, a good financial advisor helps you design a strategy which allows you to take income.

If you want to invest outside of your employer’s retirement plan and retirement is more than 10 years away, DIY investing can make sense. There are a lot of low cost investment options to consider or robo adviser options which can function as an “advisor lite.” If you are simply not comfortable going alone or you are nearing your investment goal, it may be time to interview an investment advisor.

Financial advisor is a generic term so you may want to look for someone reputable and with training specific to your needs. My colleague Erik Carter wrote a blog post that explains exactly what to look for in a trusted adviser: https://www.financialfinesse.com/2012/10/04/can-you-really-trust-your-financial-adviser/. Doing your due diligence is so important my CEO wrote a book about it: What Your Financial Advisor Isn’t Telling You: The Ten Essential Truths You Need to Know About Your Money. That’s a good place to start to see if you really need one.

When do you need a professional to assist with estate planning?

An estate plan can direct where your assets such as a car, home, business, savings, etc., will go in the event of your death. Our own mortality is not the most pleasant topic, but it is one we all deal with it. A well thought out estate plan can make it much easier for those we leave behind.

If you have a blended family or assets across multiple states, professional assistance is especially helpful. If you think a trust might be necessary, you will certainly need to have an attorney to establish one. If you are looking for an attorney that practices estate planning law in your area, a great resource is your local estate planning council: http://www.naepc.org/. Also consider looking into whether your employer offers a legal assistance benefit.

Do you feel your situation does not merit hiring an attorney? Then it can make sense to find a tool to help you put a will in place. Websites like nolo.com offer wills which conform to the laws of your state.

When do you need to hire a tax professional?

If you are filing a 1040EZ or you are not claiming deductions beyond your home and your kids then using tax software will typically do a good job of filing your taxes at a minimal cost. There are cases when a software program may not be the right fit though. If you own a small business, collect income from rental property or if you are settling an estate, hiring a certified public accountant or an enrolled agent can be a very prudent investment.

If you are going to pay someone to help you, hiring a CPA, EA or an attorney would be preferable because they can speak to the IRS on your behalf if you are ever audited. Not only can these professionals help you file your taxes, but they can also give you advice regarding how to run your business to take maximum advantage of the tax rules. The IRS actually offers a site to find qualified professionals in your area: https://www.irs.gov/tax-professionals/choosing-a-tax-professional

When should you work with a mortgages or insurance broker?

From personal experience, I can suggest the more “plain vanilla” your circumstance is the more likely you can save some time and money online, but the more complex your circumstances are, the better off you may be with a seasoned professional. What is not “plain vanilla?” In the case of life, disability, and long term care insurance, if you have a health condition that could be viewed as negative or uncommon, it may pay to talk to an insurance broker. They can point you to the right companies that will insure you in spite of that condition. In the case of a mortgage, if you have some instances which merit explaining on your credit report, it may pay to have a mortgage broker shop and find the bank or mortgage company that would look more favorably on your situation.

Knowing whether to hire someone or DIY can be tricky. Hopefully this gives you an idea of when to call someone. Otherwise, you may experience your own #failmomentoftheday.

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

Are You Having Trouble Sticking to Your Budget?

October 18, 2016

I love what I do for a living, but there are definitely some drawbacks. My friends and family will come to me with financial questions but will run from me like I have the plague if they are not following my advice. In fact, a family’s or friend’s communication with me after I give advice is my best indication if they are actually following my guidance. I find the more voice mails I leave, the more likely they are not following my guidance. Such was the case with one of my young cousins.

Samantha is a recent college graduate in her early twenties that recently landed her first job. Immediately, the “I wanna have” disease took over and she quickly found herself barely able to make it from paycheck to paycheck. We sat down and worked on a spending plan based on her lifestyle. As a Starbucks fanatic, I am the last person to deny someone a pumpkin spice latte, but I encourage people to create a budget so you are not “latteing” yourself out of paying off debt, building an emergency fund or saving for retirement. She took my advice…or so I thought.

After not hearing from her for months, which is unusual, I finally got her on the phone and she admitted that she had been avoiding me because she was not following the budget. Once I told her that it was okay, that a failed budget only means re-strategizing, we looked at ways to help her stick to her spending plan. If you are having trouble sticking to a budget, consider doing the following:

1. Consider increasing some of the areas where you continuously overspend. Samantha struggled with eating out. She is young, single and in a new city. Her income allowed for some eating out so she decided to eat out 5 days a week, bring her lunch into work and eat at home twice a week.

She reduced her grocery budget and increased her eating out budget. Since part of the reason for her eating out was loneliness, I suggested having a potluck or pizza/home movie night with friends on one of the days when she eats at home to share the cost and for her to have company. Consider increasing your budget in areas where you constantly overspend. Remember, you have to make up for the overspending by decreasing spending in another area though.

2. Consider using cash for areas where you overspend. If you have areas where the problem is simply a lack of discipline as opposed to a need to increase spending, consider using cash. Some of the popular areas where people overspend are: groceries, clothing (this includes kids), eating out, entertainment, and gifts. If you overspend in any of these areas, consider using cash.

3. Find the method of tracking spending that works best for you. Samantha was tracking her spending with a great budgeting tool that she thought was too much work. She switched to her online banking budgeting tools, which streamlined the budgeting process for her. Her bank offered a robust app so she can stay connected to her budget online.

Consider how you want to access your info. If it is through your smartphone, consider online apps. If you want to not only budget but review investments and tackle debt, review online tools that can help you. If you are not sure where to start, consider doing what Samantha did and start with your bank’s online programs.

Remember to be patient when you start a new budget. There is almost always a need to make adjustments during the first three months. Hang in there and you will be a budgeting guru in no time!

What’s Your Lifetime Medical Expense Plan?

October 14, 2016

I got a phone call from my daughter (senior in college) not too long ago, relatively late at night, asking me if I could text her a photo of my HSA card. I figured she was heading to the pharmacy to pick up some antibiotics for a sinus infection. But when I heard Nick & Danny (two of her roomies) screaming in the background to get towels and try to stop the bleeding, I learned that her calm exterior was masking something bigger. It turns out that she eventually needed a whole bunch of staples and some glue to close up the large gash in her leg acquired when opening a box with a large knife when she couldn’t find her small scissors. She’s back to walking normally now so the crisis is over and she’s back to her normal daily activities.

It’s amazing to me how many different bills can come in from one injury. There were bills from the hospital (supplies, etc.), the ER department, the physicians group who treated her and a few others that I’m sure I’ve forgotten. The incoming mail probably hasn’t come to a complete halt just yet.

While I have an emergency fund set aside for emergencies (what else would it be for?), in the heat of the moment, I wasn’t thinking “let me pull money from my emergency fund so that she can get treated at the hospital.” I was thinking “Holy ****! My daughter’s roomies are screaming and she’s got the calm “something’s wrong” demeanor. I need to get the hospital paid right now so that they see her.” So I used my health savings account card to pay for the trip to the hospital.

I deviated from the logic and reason that I use in my normal budgeting process. In the heat of the moment, I “messed up.” But the good news is that I had my health savings account there as a backup. That wasn’t consistent with my long term plan, but I’m not going to look back with any regret.

My long term plan with my HSA is to build a pool of $100,000 or more before I retire. I plan to make the maximum contribution every year, pay for medical expenses from either my checking account or my emergency fund (if it’s a big one) and invest the balance for growth. Once I retire, the HSA will be there to pay for medical expenses for the rest of my life…or at least a good portion of the rest of my life.

What’s your plan to pay for medical expenses for the next 20, 30, 40 years or more? I have an outline of what I plan to do. I encourage you to come up with your own personal “lifetime medical expenses” plan. Here are some ways that people have told me that they plan to pay for medical care:

Health savings account – that’s the one that I’m planning to use.
Emergency savings – building up a large emergency savings fund, well beyond the 3-6-9 months of expenses, is what several people have told me that they plan to do to pay for their healthcare in retirement.
Large income streams from Social Security, pension and investment accounts while minimizing expenses – that’s the game plan for a few folks I’ve talked to recently.
Moving to Costa Rica, Panama, or some other foreign country where healthcare quality is good but costs are significantly lower.

These are just a few of the many ways people have told me that they are planning to cover medical expenses over the rest of their lives. I’m sure there are others. What’s your plan?

What To Do Before You Say “I Do” Again

October 11, 2016

As I anticipate all of the upcoming marriages, I think about two of my friends who are getting married for the second time. Second marriages make up 1/3 of weddings. One of my recently engaged friends getting married for the second time told me the first time she went into her marriage blinded by love. This time, the blinders are off and she wants to walk into her second marriage with her eyes wide open. I told her that this means having a tough, but loving financial conversation with her fiancée.

One caveat my husband asked me to include is this: I live in the south where the men eat and sleep college football so please respect the football or whatever your fiancé’s favorite sport season is and have the meeting at a time when he or she will not get distracted by scores. When you find the best time for a meeting consider reviewing the following:

1. Consider pulling up each other’s credit reports using websites like Annual Credit Report.com so you know what you are financially marrying. Ask about his or her plan to repay debt and their thoughts about the debt. Do they consider the debt to be a shared responsibility or just yours to take care of separately once you marry?

2. Review each other’s spending plan or at least your ideas on how you will spend money once you get married. If you are coming into the marriage with children, what financial obligations or promises do they have towards your child that will affect the household income now and in the future? Will you keep everything separate, together or have one joint account and two separate spending accounts? Discuss current and future financial obligations and a plan for how these obligations will be met.

3. If you have assets you are bringing into the marriage, consider a prenuptial agreement that can state how the assets will be divided in case of a divorce. As optimists, we want to believe our second marriages will last forever, but the fact remains that the divorce rate for second marriages is higher. Your EAP or prepaid legal plan may provide legal benefits to help you create your documents.

As you think of remarriage, remember that you are bringing a lot into the second marriage. Assets, kids, a credit history and money management habits can make or break your future marriage if they’re not discussed. Taking a few hours to talk about your finances with your future spouse can go a long way to building a strong foundation for your marriage.

Don’t Ignore Your Symptoms

October 10, 2016

“…the upside of painful knowledge is so much greater than the downside of blissful ignorance.”― Sheryl Sandberg

Do you ever get that nagging feeling that something isn’t right with your finances? Should you brush it off or dive deeper? On the blog today, my fellow planner Cyrus Purnell, CFP writes an intriguing guest post about the importance of not ignoring your financial symptoms:

Are you getting that nudge that things are not working the way they should in your finances? Don’t wait until a problem shows in your credit report or as a shortage in your checking account. Take the time now to diagnose where that nagging feeling is coming from.

I came into 2016 not feeling my best. I was tired all of the time. I was always cranky. My kids were walking on eggshells. I was sick more often.

I went in for my annual physical and there was no sign of anything wrong in all of my tests. But the way I felt told me something was wrong. When I would talk to my doctor and peers about it, their answer was pretty simple, “Oh Cyrus, you are just getting older.”

Thankfully, that answer was not good enough for me. I took steps to investigate why I was not feeling well. I began looking into everything from what I was eating to what time of day I was eating it. I started tracking my sleep. I plunged into reading blogs and listening to podcasts about health.

I finally figured out the culprits and gradually felt several years younger. I am convinced that if I stayed on the road I was on, the way I felt would eventually show up in the form of a bad diagnosis. While I did not enjoy feeling the way I was feeling, the discomfort probably saved me a lifetime of issues.

On paper, you may not be financially sick. Your income may be more than your bills, your credit score may qualify you for anything you want to purchase and when you compare your financial situation with your friends and family, your circumstances may look fine. In spite of all of this, you may still have anxiety about where you are financially. You may be experiencing financial stress.

In our own 2016 Financial Stress Research, we uncovered that 85% of us are experiencing some financial stress. Our research also showed that unmanaged financial stress can result in problems like depression, hours of lost sleep, and overeating. It is at the onset of financial stress, before it becomes unmanageable, that you want to take steps to do something about it. You can start to alleviate financial stress by taking a C.A.L.M.™ approach to cash management:

Create a plan. Create a new plan to manage your cash, calculating necessary expenses and establishing a way to track them. A financial coach, such as a CERTIFIED FINANCIAL PLANNER™ professional, a financial or credit counselor, or an employee assistance program counselor, can provide assistance as needed.

Automate bill payment and savings. Put everything you can on autopilot, setting up automatic bill payments for monthly expenses and transfers to emergency and other savings.

Lower nonessential spending and debt. Track expenses for several months, looking for opportunities to reduce spending on nonessential items and to make extra payments on debt.

Make progress. Make progress by focusing on small, achievable goals, accomplishing one before moving on to the next.

Don’t ignore your symptoms. Look at the early stages of financial stress as a gift. By paying attention to the early discomfort of financial stress and following the C.A.L.M. approach, you can meet the source of your financial stress head on and save yourself from a more difficult recovery down the line.

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter at @cynthiameyer_FF.

What Are You Willing to Spend Money On?

October 07, 2016

As I write this, I’m surfing the web looking for my next “gym” to join. I use quotation marks because I most likely won’t join a traditional gym. I have a pretty functional gym in my basement where I can do all the strength training and cardio I care to do.

I’m looking at gyms that are a bit more specialized. One is a Brazilian Jiu-Jitsu gym, one is a MMA gym, one is an indoor rock climbing gym and one is an American Ninja Warrior obstacle course gym. I like to switch up my fitness routine periodically and take on new challenges. Worst case scenario, I try something new and either don’t like it as much as I think I will (that rarely happens) or I end up taking on a pretty tough physical challenge and end up with a battered body that requires either rest or surgery. (That happens more than I care to admit.)

I’ve noticed that with gyms, pricing is all over the place and it doesn’t make sense to me. Some of the places with longer hours and more diverse offerings are lower priced than some of the ones with more specialized offerings and fewer hours. That befuddles me. Lately though, I’ve been befuddled by more and more things as I go out and look around at ways to better spend money. Here are a few examples:

A new car: My son is driving now and not that long ago, he, my ex-wife and I all chipped in some cash for him to be able to buy his first car. Within our budget, he and I did a pretty thorough search of a few car search engines and narrowed the field down. We saw a huge disparity in the years and mileage of vehicles.

The beautiful part about shopping for cars online is that you can sort in various ways. We sorted by newest, we sorted by lowest mileage and we sorted by lowest price. Eventually, we found the right combination in a car that he absolutely loves.

Cell phone plans: Do I need to say any more than that? With several iPhones on my plan, pricing with various carriers is a complete hodgepodge of choices. Minutes, data, texts, price of new devices, contract length (or not) — there are a lot of variables that make picking the right plan a bit complex.

“Cutting the cord” television plans: I’ve been contemplating being a “cord cutter,” but as a self-avowed sports and news junkie, I’m having trouble finding a combination that gives me what I want at a price that makes giving up what I currently have feel worth it.

What’s my point in talking about these different products/services? A lot of financial blogs and articles and “experts” will talk about how to cut costs and save a few bucks on various products and services. I’m not a big believer that the lowest price is always the best thing though.

When looking for ways to save money, make sure that you aren’t doing yourself a disservice. Do you REALLY want to drive a car on a bridge built by the lowest bidder? Do you want the lowest cost heart surgeon to operate on your loved ones?

Figure out which of the many variables in the pricing decision is the most important to you. I rank the features from most important to least important and focus my search on the top two or three variables. With the TV, it’s having an ample supply of news and sports channels. It’s not just about cost. That’s how I stay current with what’s going on in the world and with my favorite teams.

For cell phones, it’s about having enough data for my kids and I to do our work, school and fun stuff without needing to worry if we are exceeding our limits. With us often being in different cities (me on the road for work, my daughter away at college, and my sons at home), our data usage is how we all connect at various times. With cars, here is my thought process.

Take a look at your monthly expenses. See which ones you want to take a look at replacing with a lower priced option. Then determine the top two or three variables and go out to make a decision that best fits your lifestyle and your budget.

Where to Buy a Car

October 04, 2016

If you have been following any of my posts, you probably know that my husband and I found ourselves unexpectedly on the market for two cars, following two car accidents. (I will confess I was not exactly heartbroken that my husband’s 1997 Honda Accord with 312,000 miles was totaled.) As we started researching cars, we explored the possibility of using either a dealer or a private seller for the car sales. We went with an online dealer for my vehicle because that is where we found the vehicle I wanted and went with a private seller for my husband because the seller had the best asking price. Ultimately, we had good experiences with both, so if you are in the market for a new car, consider the pros and cons of both options so you can make the most well informed decision:

Dealer Pros:

Some dealers offer warranties on the vehicles, which may protect you if something unexpectedly goes wrong. If you are a worrier, this extra protection may be enough for you to choose a dealer.
Generally, you may have more legal protection working with a dealer. If you have a problem, you have the business as opposed to an individual to formally complain to. In some instances, dealers have more stringent lemon law requirements than a private seller.
In many cases, the vehicles have already been inspected and repaired, if needed. With a private sale, you are typically on the hook for repairs.

Dealer Cons:

On average, the cost of a vehicle is higher at a dealer. There is also less room for negotiations.
On top of the higher cost of the vehicle, there are typically extra fees you would need to pay. I about fell over when one dealer wanted to charge a $700 fee for processing a few pieces of paper that took me 20 minutes to do.
Some find car salesmen overbearing. I don’t think I have to explain this one. It’s pretty much a cliche.

Private Sale Pros:

If it is a one owner only vehicle, you may be able to find out the entire history and maintenance of the vehicle beyond what Carfax or Autocheck may have documented. We were pleasantly surprised by how many people kept all of their maintenance records. If you like personally knowing the history of your vehicle, private sellers can make the sales process easier.
Oftentimes the vehicle costs less since many sellers use websites like Kelly Blue Book to price the vehicle. In most cases, there are also no additional dealer fees. If you have a limited budget, this may be an ideal situation. Keep in mind, you still may have other fees to pay like taxes, registering the vehicle, title change and tags. Check with your local government office for more information.
There are usually no pushy sales people. I found that in many cases, a private seller wants to get rid of their vehicle and hopes to make some money whereas a dealer’s sole focus is a profit. Personally, I found many of them hated the sales process as much as I did.

Private Sales Cons:

If you get a lemon, it is a lot harder to fight when you bought from a private seller than a dealership. Private sellers generally aren’t bound by the same lemon laws as dealerships. You are on the hook for repairs.
In many cases, you won’t be able to leverage your trade-in. Most private sellers want cash not a car. If you have a trade-in, then your best bet may be a dealer.
You have to do the legwork – transfer the title, register the vehicle, pay the taxes and get the emissions. This paperwork is not hard, but if you don’t want the hassle, a dealer can do most if not all of it for you .

I will be honest. Doing a private sale was a lot of work between searching for vehicles, checking to see if it was still for sale, getting the Carfax reports, and coordinating not only our time but the seller’s time. But if you can handle the work, you can find amazing deals online. If you like the comfort of knowing that if sometime goes wrong, you have a company to turn to or if you have a trade-in, then a dealership may be a consideration. Ultimately, you have to take the time to explore both options to help you make the best car buying choice for you.

Sometimes It Does Take a Rocket Scientist

October 03, 2016

Portia Jackson believes that people should be able to design their finances around their lives and not their lives around their finances. A business strategy coach and former rocket scientist who is studying financial planning, Portia joined our team this year for a long term financial planning internship. I recently had a fascinating conversation with her about her world view and why she is pursuing her CFP® designation. The future for this mother and financial wellness evangelist looks bright!

Why did you become a personal coach? What influenced your decision to pursue the CFP® designation? How do you see combining those two paths?

I became a business strategy coach after many of my original podcast listeners (I used to host a podcast for working moms, Working Motherhood) kept emailing me and asking me how I was able to run a business, work full-time and manage my family, including a daughter with special needs. I loved my podcast and it gave me fulfillment, but as I started working with the members of the Working Motherhood, I realized I LOVED coaching so much more! I get to help people see an immediate difference in their lives? Yes, please!

I decided to pursue the CFP® designation after teaching a workshop course on tackling debt for many years. I loved the impact I was making on people’s lives and seeing the weight lifted off their shoulders after they realized they wouldn’t be in debt forever made my heart sing. I wanted that feeling all day every day so I decided to change careers and become a financial planner. I also wanted to do it right so I knew I had to be a CFP® professional. The two paths easily combine because I believe the combination of a solid financial plan (i.e. 6 months emergency fund, zero debt, fully-funded retirement and college plans, home ownership, estate plan, tax minimization and proper insurance coverage) with working at something you love to do is a complete path to financial wellness.

How does your background as an engineer influence your financial planning and personal coaching style?

My engineering background helps me as a financial planner and coach because I’m very data-driven. I work off of action, not just “what could happen.” If something isn’t working, I can course-correct. Planning a launch of a billion-dollar rocket and launching someone’s business or retirement plan are both very important so I use my strategic background to reduce some of the uncertainty that can surround those areas.

What’s your personal mission? Who do you most want to help?

My personal mission is to free people from financial stress and bondage so they can then pursue their personal mission in life. I feel that many times the amount of energy people put into worrying about money (even if they are doing everything “right”) can be put toward their personal calling in life. I believe everyone has a specific purpose in life and that purpose often goes unfulfilled because they are stuck in a job they dislike just to pay the bills and then they are too exhausted to do anything else or sometimes people are doing everything right and still can’t afford a decent lifestyle.

They aren’t trying to keep up with the Joneses. They just want to be able to own a home, have insurance, travel maybe 1-2 times a year and send their kids to college. In an expensive place like Los Angeles, that can easily add up to a lot.

What is the biggest mistake you ever made with your money, and what did you learn from it?

The biggest mistake I’ve ever made with money was buying a rental property at the age of 23 in a bad neighborhood with no money down in 2005 in Chicago right before I moved to Los Angeles for grad school. I really don’t know what I was thinking when that happened. Actually, I do. I was focused only on the POTENTIAL cash flow. Those late night real estate ads were apparently very convincing to me.

The property was a big pain the butt. It sucked up all of the money I won from a game show I was on and commercials I booked while I worked in Los Angeles. It also caused a LOT of stress for me during what should have been one of the most exciting times in my life.

What have you learned about money and marriage that you can teach the rest of us?

I’ve learned that communication is key and that understanding each other’s personality types is really important when it comes to family finances. My husband and I have monthly financial meetings, where we review our budget, our net worth statement, our financial goals and the financial mission statement we’ve written for our family. I’m the CFO of our family and while I can typically recite the budget down to the penny, he is the bigger visionary and wants to see where we are going.

When you got married and had children, did you feel prepared to deal with the financial aspects of partnership and parenthood? What do you wish you had known in advance?

We felt pretty prepared going into marriage because financial planning was part of the two pre-marital classes we took. (We like to be thorough, haha.) When our kids came (very soon actually, we had a honeymoon baby) it wasn’t too much of a disruption to our budget, although the budget for sending kids to daycare could feed a small country for a while.

How do you teach your kids about money?

Our kids are just 4 and 2 right now so we haven’t really had the money discussion yet, but we plan to use the envelope method that I used growing up — one envelope for giving, one for saving and one for spending. They will earn money through chores as they will not receive an allowance. As parents, we believe that we are to be mentors to our kids and train them for the real world and in the real world, there are very few handouts.

Is there anything that really surprised you about coming to intern at Financial Finesse? Why?

Yes, I was surprised that workplace financial wellness as a type of business actually existed. When I was searching for a place to complete my required experience hours for the CFP® designation, I came across many opportunities to sell products or gather assets, but I never heard anyone lead with the benefit of changing lives and offering unbiased financial guidance with no ulterior motive or sales pitch, which is what we do at Financial Finesse. The passion that everyone has here for helping people and for extending this vision to more people is truly amazing and a rare jewel in the financial services industry. Unlike in my brief wire house days of seeing people get excited to close a sale, people at Financial Finesse are excited about a great Financial Helpline call or one-on-one planning session.

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can also follow me on the blog by signing up here, and on Twitter at @cynthiameyer_FF.

Do You Really Need to Spend That Much on Entertainment?

September 30, 2016

As the baseball season winds down, and my beloved Baltimore Orioles are in a downward spiral and may fall out of playoff contention, the big story on local sports radio is about the lack of attendance at Orioles games in the midst of a playoff race. When Oriole Park at Camden Yards (the best ballpark in the country in my opinion) opened 20+ years ago, it was sold out every night. 14 years of losing baseball, as well as some questionable business practices, drove attendance down over the years.

Several seasons ago, the O’s made it to the playoffs for the first time since the late 90’s, and the town went nuts. It was tough to get a ticket at the end of the year, and playoff tickets were being sold on the secondary market for outrageous sums of money. This year, I’m almost embarrassed to say that I haven’t made it to a game yet, and tickets are available on the secondary market for next to nothing. My kids haven’t expressed interest this season. Friends that I normally go with haven’t been all that enthusiastic.

It’s weird. If I don’t go in the next week or two, I will go a whole season without going to a game. That may not have happened since I was 2 or 3 years old, and I’m questioning why I haven’t. It hasn’t bugged me until today. That’s an answer that I’ll wrestle with on my own, and as I write this, I’m checking the O’s home schedule and sending a message to friends to make sure we at least get to one game.

While I wrestle with this question, it also raises the larger issue of how I spend my entertainment dollars. Along with the cost of housing, cars and food, entertainment is one of the big line items in most family budgets. Vacations, cable TV, movies, sports tickets, concerts, shopping, going out for dinner – there are a lot of dollars being spent on entertaining ourselves. When we are having a tough time making ends meet, the entertainment budget is usually the first to go. When it doesn’t, credit card bills can mount.

Most of the people I’ve talked to who are in deep credit card debt will tell me that they spent the money on “stupid stuff” (their words, not mine). A lot of times, it was because times were tough, and they felt that all they did was work, so they wanted to “reward themselves” with a little bit of fun. That fun usually ended up on a credit card, and a $100 expense turned into a $300 payoff amount after many months of minimum payments and high interest rates.

Here’s my challenge to you: Take a look at how much money you’ve spent on entertainment over the last 3-6 months. Are there ways you could have just as much fun while spending less? Hikes, bike rides on local trails, and a kayak rental at a local lake are all very low cost ways I’ve replaced my fairly expensive baseball habit. Rather than eating stadium nachos (now I’m hungry!) and drinking expensive yet lousy beer, I’ve been sweating and spending way less money while drinking water and eating protein bars.

If I can do it, you can too. Find one habit/entertainment source where you think you might spend more than you’d like. Pick a fun and free (or close to free) activity to replace the more expensive one. Spend the next 30, 60 or 90 days re-configuring your entertainment habits. I have a hunch you’ll find the change of pace enjoyable, and you might even be able to REALLY reward yourself in the long run.

How to Decide if You Can Afford a Large Purchase

September 28, 2016

I’ve often read that September and October are the best months to buy large appliances. Since our washer and dryer are showing signs of calling it quits, I’ve been thinking about whether or not we should go ahead and buy new ones while they’re on sale. When trying to figure out whether or not it’s the right time to make a big purchase like this, including cars, furniture or even booking a long-awaited vacation, there are a few ways to look at whether you can afford it.

Cash is King

Ideally, you’d pay cash. As long as you don’t need to dip into your emergency fund, paying cash for the purchase of depreciating assets (or stuff that you won’t be able to sell for as much or more than you paid for it) is the best way to go – yes, even for cars. (For help saving up, try the no-tracking budget.)

Same as Cash or 0% Promo Rates

If you don’t have the cash saved yet, then look at same-as-cash financing deals, but only if you can actually pay the balance off BEFORE the interest kicks in. To figure out if you can afford to do that, divide the purchase price by the number of months you’d get interest-free. For example, if it’s a $1,500 purchase on a 90 days same-as-cash deal, you’d have to pay $500 per month.

Can you afford that payment? If not, don’t use the same-as-cash deal. It’s not worth it.

If you’re using a credit card with a zero percent promo rate, the same rules apply. It’s only a deal if you can pay the balance in full by the end of the promo rate. Otherwise, the high interest rate that will kick in will inflate the price of the purchase beyond reason.

Financing with a Loan or Credit Card

If same-as-cash or zero percent financing isn’t available (or you wouldn’t be able to pay the balance by the time the zero percent period ends), then there are a few things to consider before you take out a loan or use a credit card. First, make sure you’re considering the total purchase price including interest. To figure out how much interest you would pay, use the cost of credit calculator. When you add the interest to the amount you’d be paying for the purchase, is it still a good price?

Debt Rule of Thumb

Finally, anytime you’re considering adding a new monthly payment to your budget, make sure that your total debt payments won’t exceed 36% of your gross income. For example, if you make $50,000 per year, then you would want to keep your debt payments to $18,000 per year or $1,500 per month, including your mortgage. So if you have a mortgage payment of $1,000 and a student loan payment of $250, and you’re looking to finance a car, you could reasonably afford a $250 per month payment.

In a perfect world, you would never finance something that you couldn’t sell for its purchase price or higher. This is why it’s a financial folly to charge clothes or food on a high interest rate credit card if you’re not paying the balance off every month. But in times when debt can’t be avoided, having a plan to pay it off is the best way to avoid getting yourself in financial hot water.

If you have other pressing questions that we can answer on the blog, send me an email, and I’ll do my best to help. Did you know you can sign up to receive my blog posts every week, delivered straight to your inbox? Just head over to our blog main page, enter your email address and select which topics or bloggers’ posts you’d like to receive. Obviously, I suggest at least “Posts from Kelley.” Thanks for reading!

How Not to Eat Your Retirement

September 27, 2016

“I am eating my retirement.” This was my friend’s reaction finding out that she was spending about $1,000 a month eating out by organizing transactions in her online account. She told me that she wants to eat at home but struggles to grocery shop and meal plan. I told her that with a few online tools and kitchen gadgets, we can come up with a plan to get her to eat at home more.

If your cooking skills involve menus as opposed to recipes, use online tools to create recipes. If you are fine buying the food but need help with organizing recipes online, tools like Big Oven can help. If you need help coming up with recipes, tools like Emeals will deliver recipes for all types of cooking and food preferences. If you struggle with recipes and food shopping, websites like Blue Apron not only provide the food and recipes. You can also make enough so part of your dinner can be the next day’s lunch.

Slow cookers are awesome for making easy healthy, meals. Crockpot.com has a ton of recipes on their website. You can prep, freeze and dump the ingredients in the night before, turn on the Crockpot and come home to a great meal.

Indoor grills are a lifesaver. I can cook delicious grilled chicken, turkey burgers and fish in a few minutes. It is also almost fool proof. You simply turn on the grill, spray oil, sprinkle a few spices, slap the chicken on the grill and in about 10 minutes, you have restaurant quality chicken breasts. Many are no stick so the cleanup is a breeze.

Spices can make or break a meal. If you are not sure what spices to use, websites like Cooksmart offer great guides to picking spices. Check out your local spice store (mine is Penzey) for blended spices and even guidance on what to choose.

Are you eating your retirement? Thankfully, saving money on food doesn’t have to cost a lot of time anymore. In this day and age, technology, a few kitchen tools and spices can make planning and cooking meals at home easy.

Where Would You Keep Something Very Valuable?

September 23, 2016

I saw the play Wait Until Dark last night, and it was very entertaining. I have not seen the old movie with Audrey Hepburn, so I wasn’t sure how it ended. As a result, my son and I jumped and were shocked by what was happening on the stage during a pivotal scene at the end of the play. While decompressing over a beverage in the theater afterwards, we were laughing at ourselves (and being laughed at by our dates) for not seeing the “jump scare” coming. But we are much bigger fans of comedies and dramas than we are of thrillers.

In the play, a key part of the plot was a frantic search for a doll. The doll’s contents were worth killing a few people over. The whole play was about the lengths various people would go to in order to retrieve the contents of the doll. That raised the question after the play – “if you had a physical object that was incredibly valuable, where would you keep it and why?” I’ve raised that issue with some friends, and here are some of the responses I’ve gotten:

A safe deposit box at the bank

Why? It’s safe and only I would have the key.

Drawback: One downside is that if the valuable thing were something thing that I’d want to see (like jewelry or art), that would be a lousy place for it.

A safe bolted to my basement floor

Why? It’s here at home, and I don’t have to operate on bank hours if I need it. I can also buy it one time and not have to pay a bank an annual fee. If the safe is big enough, I can put way more stuff in it than I could ever put in a safe deposit box at the bank.

Drawback: The price of safes is high, and there’s some serious labor involved to properly bolt it into a concrete floor. It’s also not ideal if you are renting, living in a tiny house or a boat or have very limited storage space.

Keep it at home and simply insure it.

Why? The real risk of theft is statistically very small. I’ll keep the valuables around so that I know where they are and they add to my quality of life. For art, I want to see it. For jewelry, I want to wear it.

Drawback: There is a risk of theft or vandalism or natural disasters (floods, hurricanes, tornadoes, etc) as well as the cost of the insurance to cover the loss.

All of my valuables are on paper, so I scan them and store them in my external drive with a password protected backup in “the cloud.”

Why? Why not?

Drawback: My kids and I have become fans of the show Mr. Robot, which has NOTHING to do with a robot but everything to do with the world of hacking. Anything that is online is at risk of being compromised. If you doubt that, ask Debbie Wasserman Schultz or Hillary Clinton or Colin Powell about their online security!

For the things in your life that you consider valuable or irreplaceable, do you have a plan or, like me, do you have a scattershot approach to this and have a few things secured and a few things unsecured and other things that you put somewhere and just have to remember where so that you can figure out what your game plan is for them? My personal goal, spurred on by the play, is to have a coherent plan for my valuables and have that plan implemented by this Halloween. If I don’t put a date on it, it won’t happen.

So, what’s your plan? What’s your deadline? If you don’t have answers to those questions, spend the next 5 minutes writing down what’s valuable/irreplaceable in your life and develop your plan, complete with a deadline. Then get busy implementing it!

What is APR and Why Should You Care?

September 21, 2016

Ever wondered what promotional ads for loans mean when they talk about APR and more importantly, why you should care? Well, you should care and the answer comes from Teig Stanley, one of my brilliant CFP® colleagues who has perhaps the most diverse career experience on our team. He started his career as a child actor, has lived all over the world, and most relevant to this post, he was involved in the mortgage industry before we were lucky enough to hire him to the Financial Finesse Planner Team. Here’s what he has to say:

First of all, APR stands for “annual percentage rate.” It is the actual annual cost of any loan, including mortgages, car loans and even credit cards, expressed as a percentage of the total loan amount, including interest AND fees. It must be disclosed in nearly all consumer credit transactions according to Consumer Finance Protection Bureau regulations.

For example: If you took out a five-year $1,000 loan with no interest or fees, you’d simply divide the total loan amount by five years to arrive at a payment of $200 a year. Since there is no interest or fees, the APR is 0%. Let’s imagine that the loan has a simple interest rate of 5% but no fees. Each year, you would pay $200 (principle) plus 5% of the loan balance ($50 the first year, $40 the second year, $30 the third, etc.) That 5% is a cost for you, so in this case, the APR would be 5%.

Now let’s say there was a one-time $100 fee for the loan (sometimes called an origination fee). That would make the APR 7% – higher than the interest rate because it is taking the total cost into account. Finally, imagine that the interest is compounded. In the first year, you not only owe $200 in principle, $100 in fees, and $50 in interest, but you also owe 5% on the $50 in interest that has accrued during the year (an additional $2.50). While this amount is small, it does add to the APR, making it 7.0024%.

Confused? Don’t worry. Any bank that is offering a loan must disclose the APR so they already do this math for you.

But it’s important to pay attention to the APR because if you are expecting a simple interest loan (no fees or compound interest), you can actually confirm that by checking the APR. It should match the interest rate. If it doesn’t, that’s a red flag that something is wrong. In most cases, the APR for a loan is going to be higher than the interest rate because of fees and compound interest.

So one way to compare two loans with the same interest rate would be to compare the APR on those loans. A higher APR for one indicates that the fees or compounding would cost you more over time. It’s quite common for lenders to advertise super-low interest rates to get you hooked, only to have you discover that that they will make up for the lower interest rate with fees. Checking the APR allows you to spot these tactics and avoid paying more than you would with a higher rate but no fees.

Why You Should Roll Your 401(k) to Your New Employer

September 19, 2016

When changing jobs, what should you do with your employer-sponsored retirement account balance? Our blog editor, Erik Carter, JD, CFP®, recently wrote a post titled What Should You Do With That Old Retirement Plan, in which he stated that if he left an employer, he would be very likely to roll over his retirement account balance to an IRA in order to have access to more investment choices. Erik outlined a job-changing employee’s four options: 1) leave the money in the former employer’s plan, 2) cash out your account, 3) roll over your balance to a new employer or to an individual IRA or 4) purchase an immediate income annuity (if it’s a feature of your former plan.)

Option 3, rolling over your balance, is by far the preferable choice for the large majority of retirement savers. For most people, it may make more sense to roll their retirement plan balance to their new employer’s plan rather than an IRA. Here’s why:

Lower Fees

Many 401(k) plans offer participants access to institutional share class mutual funds and very low cost index funds, especially those sponsored by large employers. Conversely, investing in your IRA can get expensive if you aren’t careful to monitor the mutual fund fees, trading costs and account fees. Before you make your distribution decision, compare and contrast the fees for all your options, including leaving your account with your previous employer, rolling your balance to an IRA and rolling it to your new employer. Not sure which option offers you the lowest cost of investing, given the type of investments your want to choose? Use FINRA’s free mutual fund fee analyzer tool.

Keep it Simple

While it’s true that there is a broader universe of investment options in a self-directed IRA account at a brokerage firm or mutual fund company than in your workplace retirement plan, many investors don’t need or want that kind of customization in their investment strategy. Keeping your retirement plan balances in one place allows you to see at a glance the investment mix of your retirement savings and how much you’ve saved simply by logging on to one site. If you’re a more “hands-off” investor, a target date fund in your plan with a date near your target retirement can offer you an easy, diversified, one-stop-shopping investment strategy.

Protection Against Lawsuits

Balances in retirement plans, such as 401(ks), are protected against civil judgments and bankruptcy. (But if you owe taxes, your 401(k) assets can be seized to settle the tax debt – and you’ll have to pay more taxes and a 10% penalty if you take an early withdrawal to settle the bill.) The higher your income and/or net worth, the more important it is to consider this factor. However, depending on where you live, your state may not extend that protection to IRAs.

Borrowing Power

Many 401(k) plans permit participants to borrow from their plan assets at a very low rate of interest. If you roll your old plan into your new plan, you’ll have a bigger base of assets against which to borrow. (A common borrowing limit is 50% of your vested balance up to $50,000, but check with your plan administrator for the specifics of your plan.)

While the disadvantages usually outweigh the advantages in borrowing against your retirement plan, there are times when it may make sense, such as preventing eviction, foreclosure or auto repossession, paying off very high interest debt or putting 20% down on a home purchase to avoid PMI. Keep in mind that you’ll repay the loan with after-tax dollars so you’ll end up being double-taxed on the interest when you eventually withdraw it, and those funds won’t have access to market performance during the loan repayment period. Also, if you leave your company for any reason before the loan is repaid, your unpaid balance becomes a taxable retirement plan distribution, subject to a 10% penalty.

Workplace Financial Guidance

More and more companies are offering workplace financial wellness programs, where financial education and guidance are offered to employees as an employer-paid benefit. Can you attend a workshop or webcast, use an online learning resource or work one-on-one with a financial coach? More 401(k) plan sponsors also offer access to robo advice, where an online investment adviser service sets your investment mix based on your risk tolerance and time horizon and regularly re-balances your portfolio.

How about you? What do you think is a better idea: rolling an old retirement plan into an IRA or into your next employer’s plan? Email me at [email protected] or let me know on Twitter @cynthiameyer_FF.