The DIY Financial Checkup

August 08, 2016

When is the last time you had a financial checkup? Just like physical exams, regular financial exams lead to better overall financial health. While you can’t give yourself a thorough doctor’s exam, you can give yourself a comprehensive financial checkup with today’s abundance of useful online financial planning tools.

The first step in your diagnosis is to get all your important information organized in a central place. Some of this may be in paper form and some of it online. Gather these resources in advance so you have them on hand:

-your employee benefits such as retirement accounts, health/dental/vision insurance, disability insurance, HSA account, flexible spending accounts, commuter accounts, etc.

-the last month’s bank and brokerage account statements, including taxable accounts, IRAs and annuities

-a recent paycheck and your W4 (YTD cash flow statement if you are self-employed)

-estate planning documents, e.g., will, trust, power of attorney, healthcare directive

-additional insurance policies, e.g., homeowner’s, auto, umbrella liability, life, disability

-mortgage statement

-credit card statements, student loans, car loans, etc.

-financial plan, if you have one

-your budget, if you have one

What’s your financial position?

Pull together a summary of everything you own and everything you owe. (Download an easy net worth and budget worksheet here.) Subtract what you owe from what you own. That’s called your “net worth.”

Is your net worth positive or negative? Has it increased or decreased since the last time you calculated it and by what percentage? As my fellow planner Kelley Long says, “Your net worth is the ultimate measure of your ability to weather financial storms and maintain financial choices in life. The higher your net worth, the more financial freedom you can afford.”

Next, calculate your debt to income ratio by dividing your monthly gross pay by your total monthly recurring debt payments (mortgage, credit cards, student loans, car loans, etc.) The lower your debt to income ratio is, the better your financial position. FYI, mortgage lenders often look for a total debt to income ratio of no more than 36% of gross income.

Do you have sufficient cash reserves?

According to our 2016 Financial Stress Research, good cash management is the biggest differentiator between those workers who have no financial stress and those who have overwhelming financial stress. The foundation of cash management is a solid emergency fund to deal with inevitable unexpected events that happen to all of us. While the common guidance is to have at least three to six months in living expenses in savings or money market funds, it’s also important to make sure you have enough additional cash on hand to handle health, auto and property insurance deductibles as well as home and auto repairs. Bankrate.com has a helpful emergency savings calculator to figure out exactly how much you should keep in liquid savings. If your emergency fund could use some work, use this daily savings calculator to figure out how small savings, like $5 or $10 per day, can add up to a big cash cushion over time.

Could you survive a financial earthquake?

The purpose of insurance is to protect you and your family against catastrophic loss. The big idea behind insurance is that people pool their risks of catastrophic events. If you do suffer a loss and are adequately insured against it, you can be restored to your financial position before the loss. Do you have the insurance you need? Here are some guidelines for determining if you are sufficiently covered:

Health insurance – Everyone needs it, no excuses. If you don’t have health insurance, get it right away.

Disability income insurance – How would you pay the bills if you couldn’t work due to injury or illness? Many employers offer short and long term disability insurance. Make sure you take advantage of them during your next open enrollment period. This is particularly important if you are single or if you are the sole breadwinner in the family. To determine how much coverage you need and whether a supplemental policy is in order, use this calculator.

Life insurance – If someone else depends on your income for their living expenses, you need life insurance. There are different methods for determining how much insurance is ideal. For most people, the less expensive term insurance meets their needs. Use this calculator or download this worksheet to see if your coverage fits your situation. Subtract the coverage provided by your employer to determine what you need to purchase on your own.

Homeowner’s insurance – Per the Wall Street Journal, your homeowner’s insurance should provide enough to rebuild and furnish your home if it were wiped off the map. Does your policy reflect the current value of your home, any improvements you have made to it plus the cost to replace its contents? Basic homeowner’s policies do not cover you for things like floods and earthquakes. If those are common in your region, you may need to add specific coverage.

Renter’s insurance – Not a homeowner? When I was a young professional in Washington, D.C., my apartment was burglarized twice. Only then did I purchase renter’s insurance. Renter’s insurance covers the value of the stuff in your apartment that belongs to you like furniture, clothing and electronics. If the value of all those items exceeds the insurance deductible, consider renter’s insurance to cover your valuables.

Umbrella liability insurance – According to fellow planner Scott Spann, most people facing a judgment from civil litigation probably assume that their homeowner’s or auto policy would cover them. Low cost umbrella liability coverage provides an additional layer of protection in the case of a civil lawsuit. Consider policy coverage that is at least twice your net worth – more if you are a high earner.

Are you on track to replace 80% of your income in retirement?

Running a retirement calculator is like stepping on a scale. It is best done regularly in order to compare your results to your goal. Download our easy to use retirement estimator here.

While you may have run retirement estimates before, results can change depending on economic conditions. Review and update your assumptions about your savings rate, inflation and rate of return. For example, a recent report from McKinsey and Company suggests that investors may need to lower their sights, projecting that U.S. stock market returns over the next two decades could be between 4 and 6.5% annually.

If you’re not on track, what can you do to increase your retirement savings? Can you increase your contributions to a 401(k) or other employer-sponsored plan? Sign up for the contribution rate escalator. Contribute to a Roth or traditional IRA. According to our CEO, Liz Davidson, you can set yourself up for success by automating a process that would otherwise require a lot of effort and sacrifice.

How are you handling your taxes?

Did you get a big refund or owe a large sum on your most recent tax return? It may be time to adjust your withholding. This IRS withholding calculator can help you figure out the right number of allowances to claim.  Additionally, are you taking full advantage of tax-deferred retirement accounts, your health savings account, and flexible spending accounts? Make a list of what you need to change during your next open enrollment period.

Do your investments fit your situation?

Do you have a written plan to guide your investing decisions? If not, consider putting together an investment policy statement using this easy guide. Start by updating your risk tolerance by downloading this worksheet.

Has anything changed with your willingness or ability to take investment risk, your time horizon or your required rate of return? What about your inflation expectations or the kind of investments you are willing to make? Evaluate your current portfolio to see if it meets your updated goals and make changes if it doesn’t.

How much do your investments cost you in fees? Calculate your fees both as a flat dollar amount and as a percentage of your portfolio. Do you think you are getting your money’s worth?

Hint: if they are higher than 1%, consider changing brokerage firms or moving to lower fee alternatives such as index funds. Thinking about doing it yourself? Check out this blog post from fellow planner Erik Carter on how to save and invest on your own without getting eaten alive.

What happens to all this when you die?

Has anything changed since you first put together your estate plan? Take a look at all your retirement accounts and insurance policies and make sure your beneficiary designations reflect your current situation. Second, review your will and other estate planning documents such as a living trust, durable power of attorney, healthcare directive and guardianship provisions. Are the documents current and reflective of your wishes? What needs to be brought up-to-date?

Don’t have an estate plan? Follow these simple seven steps. Even if you do have a current estate plan, you may still need to develop a digital estate plan to express your wishes about what happens to your digital life.

Did you give yourself a financial checkup? How did it work out? Let me know by emailing me at [email protected]

If It Sounds Too Good to Be True…

August 05, 2016

The Consumer Federation of America (CFA) and the North American Consumer Protection Investigators released a study based on complaints to local consumer organizations. This article discusses the top 10 categories of complaints. At number 10 is “Scams.” To quote the article, here are some of the top scams:

  • Tech support: A caller claiming to be with a well-known company such as Microsoft seeks access to your computer, warning you will lose files or suffer other harm if you don’t allow it.
  • The grandparent scam: A “grandchild” calls an older person, claiming to need quick cash for an emergency in another state or country.
  • CEO email: An email that appears to be from your company CEO asks employees to wire money to a foreign supplier for a deal that needs to close immediately — promising you’ll be reimbursed, of course.
  • IRS scam: A caller “from the IRS” wants money you owe, now, often in the form of a prepaid card (iTunes gift cards are also being used this way). The caller may warn that you’ll have to pay even more or that law enforcement officers will come to your home if you don’t comply.
  • Tax ID theft: In this case, the scammer poses as you and scoops up your tax refund. In many cases, taxpayers don’t find out about it until they can’t file their tax returns because someone beat them to it.

The common thread in these scams is that the scammer preys upon one of two emotions – fear or greed. By either promising something for free or using fear and pressure, the scammer hopes to use your emotions against you and in his favor. I’ve talked to quite a number of people who have fallen victim to a scam and have seen the financial distress that it caused.

For example, one of my friends has been out searching for a new job recently, and he was telling me about an offer he received from a company. They were offering a much higher salary than other companies he had interviewed with recently and definitely made him feel special throughout the interview process. It was almost as if they were telling him exactly what he wanted to hear. They offered him a role, and he was strongly considering accepting it, but there was a nagging little voice in his head that said something didn’t add up. He was contacted by a recruiter and hadn’t known much about this firm other than what they told him.

So we broke out the laptop and started doing some research. What we found was not spectacular. The leaders of the organization had a very checkered past, and while they treated their employees well, their customers were overcharged and charged for services never performed (at least in prior companies). He politely declined their offer, but he nearly accepted it because they used his emotions against him. It was the same modus operandi of the scams but with a different end goal.

If confronted with a situation like these scams, don’t ever give personal identifying information to anyone over the phone. Take a deep breath and a mental step backwards. Break out Google and do some research. Call your local consumer protection agency to see if others have reported scams.

As you go through your life and engage in potential transactions either as a consumer or a potential employee, remember to try to strip emotions from the deal (if it’s significant) and don’t allow anyone to manipulate your emotions against you. No one will be or should be as protective over your money as you. And remember the old phrase, “if it sounds too good to be true, it probably is.”

 

 

 

A Debate on 401(k) Loans

August 04, 2016

Asking questions and challenging assumptions are important components of financial self-defense. That’s why I was glad to see one reader take the time to raise some interesting points contesting some of what I wrote a couple of weeks ago in a blog post called “The Hidden Downsides of a 401(k) Loan.” Since other readers may have similar concerns, I thought it would be useful to address them. Besides, I love a good, friendly debate! Here are the 401(k) loan downsides from the original post, the reader’s critiques, and my responses:

Downside #1: You lose out on any earnings:

Critique: “You are wrong because the 401(k) loan continues to be a plan asset – bearing a fixed rate of interest. Instead, you should have encouraged her to reallocate so as to maintain her asset allocation (equity position) – treating the 401(k) loan principal as the fixed income investment it is.”    

My Response: Yes, it’s true that the 401(k) loan continues to earn a fixed interest rate, but that’s interest you’re paying yourself. If you take money out of your savings account and then pay it back with “interest,” I wouldn’t call that earnings. Reallocating the remainder of your 401(k) balance is an interesting idea though that could help make up for the lower earnings.

Downside #2: Your payments may be higher.

Critique: “Are you seriously suggesting that a cash advance using a credit card (with interest rates of 15% – 30% or more) is a better liquidity solution because the minimum monthly payment might be less if you stretch repayment out over 20 – 30 years instead of 5 years?  That is so obviously bad financial advice I don’t know what to say.”     

My Response: I certainly wouldn’t say that a credit card cash advance is generally better than a 401(k) loan. I’m simply pointing out that using a 401(k) loan to pay off high-interest credit card debt could actually increase your cash flow problems because the payments on the 401(k) loan may be higher than the credit card debt.

Downside #3: You also can’t eliminate a 401(k) loan through bankruptcy.

Critique: “Are you are suggesting that when entering into a debt obligation, one consideration should be that if the combination of mortgage, car and 401(k) debt become unsustainable, you should anticipate being able to stiff the creditors? Remember that a plan loan is secured debt, secured with your vested assets. So, you can default on a 401(k) loan anytime you want (just stop repayment) – you don’t even have to declare bankruptcy.  However, I am not sure why you would want to stiff yourself.”

My Response: I’m suggesting that if you’re considering filing for bankruptcy protection, you may not want to use a 401(k) loan to pay off debt that would otherwise be discharged in the bankruptcy. (As for “stiffing creditors,” keep in mind that creditors assume the risk that you may employ this legal protection and charge higher interest rates accordingly.) It’s also hard to default on a 401(k) loan when the payments are withheld from your paycheck.

Downside #4: You may not be able to take another loan.

Critique: “Really. If the plan only provides for a single loan, your recommendation is to borrow all you can and put the amount you did not need at this time into a passbook savings account or a money market fund? That is almost as bad as your recommendation concerning credit card debt. However, I will agree with you that this is one likely result where, based on “expert” advice, plan sponsors amend their plans to limit access to a single loan.”  

My Response: If you’re going to take your only allowable loan and have no other emergency funds, you might want to borrow more than you need and put the remainder in savings. This can help you avoid accruing high interest debt or even worse, missing car or rent/mortgage payments in the event of an emergency. At least with a 401(k) loan, you’re paying yourself the interest.

Downside #5: You may be subject to taxes and penalties if you leave your job.

Critique: “The better response is for the plan sponsor to amend the plan to permit repayment post-separation. In the 21st Century we call this electronic bill payment. Your response confirms that service providers/recordkeepers have failed to keep pace with 21st Century electronic banking functionality.  The other response is to prepare for any potential change in employment by obtaining a line of credit.”

My Response: I agree that plan providers should offer electronic bill payment after leaving employment, but if your employer doesn’t, you need to be aware of the risk of getting hit with taxes and early withdrawal penalties on the outstanding balance. Also, lines of credit can be cancelled. This is even more likely if you lose your job or if the economy is weak, which are two times when you’ll probably need it.

Downside #6: You’re double-taxed on the interest.

Critique: “When you receive a payout of interest earned on investments, it is taxed just like interest on any other fixed income investment. In terms of tax preferences, if you secure the plan loan with a mortgage, the interest you pay on your plan loan may be tax deductible. And, importantly, if the plan loan is secured with Roth 401(k) assets, the interest you pay may be tax free at distribution – just like it would be for the interest received on any other fixed income investment where Roth 401(k) assets were the principal.  So, no, interest is not “double taxed”.”

My Response: I agree with the point about interest from Roth 401(k) accounts not being double-taxed. However, most 401(k) accounts are pre-tax and so the interest will be taxed on the interest when it’s eventually withdrawn. Since that interest was paid by you with money you already paid taxes on, I would call that “double taxed.” That’s one reason why the loan isn’t completely free (the other being the lost earnings from point #1).

Conclusion: The employee I was talking with decided to dip into her savings rather than borrow from her 401(k) due to the double taxation of her interest.

Critique: “Since she could take out multiple loans, there was an “emergency option” even if she borrowed this time. And, assuming the tax status of interest paid to the condo was the same as the tax status of interest paid on a plan loan, the calculation you should have performed was whether, after the loan was repaid, her total net worth (inside and outside the plan) would have been higher. In this case, because the condo rate was 3.75%, she might have been better off using that liquidity option – but nothing in your response suggests you proved which alternative was superior.”

My Response: I do think her choice was the most likely to maximize her net worth the interest she gave up on her savings was less than the the 3.75% the non-401(k) loan would cost her and what her 401(k) could be expected to earn (plus the taxes on her interest payments). That’s why she made the decision she did.

Final point: Finally, don’t forget that the real purpose of your 401(k) is retirement.

Critique: “Your suggestion is that people should avoid using plan assets for any purpose other than post-employment income replacement.  However, if you (self-) limit liquidity, people will only save what they believe they can afford to earmark for retirement.  Those who limit their saving by earmarking money for retirement are more likely to fall short of their savings goals. Importantly, reasonable liquidity access has been shown to increase (not reduce) retirement savings.”

My Response: I’m simply saying that you should understand both the pros and cons before taking a 401(k) loan. In some cases, the 401(k) loan may indeed make the most sense. However, I do think that the 401(k) is not the best vehicle if you’re saving for liquidity. After all, putting your emergency money in your 401(k) could leave you short in an emergency since you can generally only borrow up to half of your vested balance (up to $50k) and the loan will have to be paid back at a time when money might be tight. Saving first for emergencies in something more accessible like a savings account is not going to make or break your retirement.

None of this is to say that 401(k) loans are always a good or bad idea. It all depends on the situation. Just make sure you’re making an educated decision even if it means having a little debate with yourself (or a qualified financial professional).

 

 

7 Signs You’re Living Beyond Your Means Even If You Can Pay All Your Bills

August 03, 2016

I’m pretty sure most people understand that the first step in achieving financial security is to spend less than you make. Sometimes easier said than done, but it’s the only way you can save any money and avoid high interest credit card debt. What a lot of people don’t get though is that just because you’re able to pay your bills each month, it doesn’t mean you’re not living beyond your means. If your bank account balance gets dangerously close to zero right before payday, you’re not “getting by,” even if you don’t overdraw and are technically making ends meet. Here are 7 other signs you’re living beyond your means, even if you are able to pay all your bills on time, and what you can do about it:

1. You’re not paying off your credit cards every month or you don’t have a plan in place to pay them off. Use the Debt Blaster to get a plan going and then stick to it.

2. You don’t have an emergency fund. This is your first line of defense against long-term financial issues. Get started on this ASAP.

3. You say you can’t afford to do that thing you really want to do. This was actually the wake-up call for me to realize that I was living beyond my means even though I was making ends meet. I really, really, really wanted an iPad and a new bike, which added up to about $1,000. I said I couldn’t afford it and yet I was spending that amount monthly on dining out and booze. If you tell yourself you can’t afford something you really want, and that thing would be reasonable for someone of your income, lifestyle and life stage to have, that’s a sign you need to examine your spending and start living within your real means.

4. Unplanned expenses like a traffic ticket or a family member’s destination wedding send you into a tailspin. If the first thing you think of when you hear a cousin is getting married at an all-inclusive resort in the Caribbean is, “How rude! I don’t have the money for that!” you are not “making it” financially. There needs to be wiggle room in your cash flow for things like this. Here’s a good way to plan for it.

5. You’re taking out 401(k) loans to pay off other bills. Even though you’re paying interest to yourself, this is still a form of debt. If you’re borrowing against your savings, you’re not living within your means.

6. You’re not on track to retire at 65. Ideally, you’d be financially able to retire before you are mentally ready, but 65 is a good age to shoot for if you’re still in the earlier parts of your career. Here’s how to find out if you’re on track. If you’re not, the earlier you start saving, the sooner (and easier) you’ll get on track.

7. A job loss or medical emergency would severely alter your future. If going without even just one paycheck would send you into late fees with all your bills, it’s time to get a system in place that helps you save for these unexpected events.

The best and easiest times to escape the paycheck-to-paycheck lifestyle is when you experience any type of windfall like a tax refund, an unexpected bonus or even just your annual single-percentage increase at work. Be strategic with that money and use it to find some space in your finances, rather than just adjusting your spending to match. You don’t have to wait for a windfall to do this though. Even just a small change each day that you mindfully use to put away a little extra adds up.

 

Building a Strong Financial Foundation

August 02, 2016

One of my favorite things to do is to talk to employees or honestly anyone about their finances. I find that some of the best guidance I give comes from other people. I also get a lot of insight as to why people find themselves constantly in a financial hole.

As I was doing a series of financial consulting appointments, I started to notice a trend in people wanting to make the right financial decision but not in the right order. My mantra to all is to look at building your finances like building a house. If you do not lay the right foundation, your house will crumble at the first sign of stress. For instance, if you start paying off debt with no savings, eventually life is going to happen and you will either have to stop paying on your debt to take care of the emergency or worse, get into even more debt because there was no cash to take care of the expense. Here are some steps to lay down a strong financial foundation:

1. Create and stick with a monthly spending plan. The greatest resource you have to help you achieve your financial goals is your income. If you do not have a written plan for how you are going to spend your income, you may overestimate how much you can spend and have nothing left over for emergencies.

Having a monthly spending plan is an important foundation to your finances because you need to know how much money you really have to use towards goals. It will also give you insight into how much you need in savings and how much you can actually save.Consider using websites like Mint to create a realistic spending plan to account for your spending.

2. Have an emergency savings account. An emergency fund is a foundation to a great financial plan because it makes sure you can take care of the unexpected like paying your mortgage if you suddenly lose your job or replacing your transmission without having to go into debt. I actually label my emergency savings account as “debt free insurance.” I found labeling the account is a constant reminder to my husband and myself that the purpose of it is to protect us from having to use debt to cover emergencies. This also prevents us from getting tempted to use this account for non-emergencies.

If your emergency account is at ground zero, break up your goals. First, shoot for a goal to get $1,000 into the account as soon as possible to cover minor emergencies and then set a goal of at least 3 months of expenses. Consider setting up automatic payroll deductions to reach your goal.

3. Pay off high interest credit card debt. For many that carry high interest credit card debt, they will save more money by paying off the 13-20% interest than they will make in an investment averaging 6-10%. No debt also means that your money can go towards your financial goals and not your creditors’ bottom line.

I had a meeting with a wonderful young woman who was contributing regularly to a Roth IRA but was carrying credit card balances with over 20% interest rates. I told her the best investment she can make is to pay off her credit card. We used the DebtBlaster Calculator to come up with a strategy to pay down her debts. She was surprised that she could pay off her debt in less than ½ the time by paying off her higher interest rate first, adding an extra $100 a month and committing ½ of her average tax refund amount to her debt.

As you look to getting your house in order, make sure you lay a foundation that can withstand the test of financial stress. It may not be fun. However, your foundation will help you withstand the financial crisis that will inevitably come and help make sure that whatever else you build does not buckle at the first sign of financial stress.

 

Financial Planning Tips for New Stepparents

August 01, 2016

Do you have stepchildren?  If so, you’re not alone. According to the Pew Research Trust, more than four in ten Americans have at least one step-relative in their family.

Recently several of my fellow planners and I who are stepparents were talking about financial planning and step-families. One thing was clear: we love our stepchildren and can’t imagine life without them! We also agreed that getting married to someone who has children from a previous marriage requires a certain money mind shift. What should stepparents expect? How can new partners set themselves up for a harmonious and prosperous financial relationship?

Full Financial Disclosure

A Money magazine poll found 80% of married couples with children under 18 argue about money. Take this very seriously. Frequent arguments about money are a top predictor of divorce.

This can get even more complicated when there are factors such as child support, alimony, or divorce-related credit issues that accompany one or both spouses into remarriage. Accept upfront that this will add a level of complexity to the financial side of your relationship. Set some parameters during your engagement for how you will communicate about money and make financial decisions.

One of the best ways to head off financial discord is for each partner to lay all their financial cards on the table before tying the knot. Have a “full financial disclosure policy” in your relationship, which includes sharing and discussing what you own, what you owe, your credit reports, any ongoing financial obligations and any pending legal or financial problems – before you get married. To minimize conflict, fellow planner Kelley Long suggests couples set up a money meeting to explore each other’s beliefs and attitudes about money and how you’ll communicate about them when you disagree.

Managing Combined Cash Flow

Discuss in advance how you’ll pay for ongoing living expenses. An easy way to handle this is the “yours, mine and ours” method of budgeting. Make a spending plan for all your anticipated joint expenses such as housing, transportation, insurance, food, vacations, etc.

Decide how much each spouse will contribute from their income, net of retirement savings, to a joint account to cover joint expenditures. You keep what’s leftover in your individual accounts to handle as desired. If there are big disparities in income, consider having each spouse contribute proportionate to their income.  .

They’re Your Kids Now Too

If only one spouse has obligations from a previous marriage, this can be a trouble spot, so work out in advance whether you agree that child support, tuition and other kid-related expenses are part of your couple budget or the biological parent’s individual budget. I favor the first approach. In my relationship, we’ve always agreed that all child-related expenses for all the children are part of our joint budget and we discuss them like any other financial decision.

Fellow planner and stepparent Tania Brown agrees. “When you marry, it’s not his or her child’s expenses. It’s both of your expenses. Although blended you are one family.”

“Consider each child in your household, regardless of who the actual parent is, as YOUR CHILD,” counsels fellow planner Paul Wannemacher. “Do all you can to treat each child equally as possible and love them as your own. Financial considerations should never, ever be the determining factor affecting that love and commitment.”

Create a New Financial Plan

Going through the financial planning process together will help you and your new spouse reach consensus on your goals and how you will work to achieve them. The financial planning process allows you to identify financial priorities such as saving for retirement, buying a new home, paying for college or helping an aging parent, as well as steps you can take to get there. Retirement and college goals often look very different after going through divorce and remarriage. A CERTIFIED FINANCIAL PLANNER™ professional can broach difficult topics, facilitate discussions and help you reach agreement on a unified vision for your financial health as a blended family.

Redo Your Estate Plan

Our director of planner operations, Linda Robertson, encourages new stepparents to update their estate plans. New spouses should update wills, beneficiaries and trusts as many concerns can be addressed through good estate planning. She proposed that couples in good health consider life insurance to even out estate planning needs between children. “A spouse who is the joint owner or primary beneficiary on most of the marital assets could set their partner up with a decent life insurance policy that is split between his/her children so they don’t feel as if the stepparent is taking everything if their parent passes away first” said Robertson. Stepparents could also consider adding stepchildren as the contingent beneficiaries on their retirement accounts.

Keep Separate Assets Separate

Whether or not you have a pre-nuptial agreement, consider keeping assets you each acquired before your marriage in separate accounts. This is particularly important where there is divorce-related conflict with an ex-spouse. For the stepparent, this helps safeguard your separate property from inadvertent loss in case of a legal dispute arising from your partner’s previous divorce

How about you? Do you have any other financial planning tips for stepparents? Please share them via email at [email protected] or tweet me @cynthiameyer_FF.

 

Are You Taking Good Things Too Far?

July 29, 2016

The latest craze that has swept my family is the Pokémon Go app. My kids run around trying to “catch” Pokémon at different locations. I’m happy they are outside and active, but I have to admit that I don’t have the foggiest idea why they consider this even remotely fun. They walk around and occasionally ask me to take them to a nearby neighborhood so that they can catch these things. (I use “catch” liberally because it’s all virtual, with no one really catching anything.)

They can catch their Pokémon thingies while I sit at an outdoor table at a local coffee shop. I find it a little strange, and in a horrible twist to this silly game, criminals are now setting up shop near Pokémon characters and robbing unsuspecting game players. What started as a fun thing has turned into a fun thing that needs to be used with caution because of some unanticipated consequences. A lot of things that start out as a purely positive have some unintended consequences that create some negativity.

I’ve seen that with a few people recently. I’ve had two meetings with people who are doing a wonderful job of saving for retirement. They ran retirement projections and learned that they needed to pick up the pace as it relates to saving for retirement. They cranked their contribution percentage WAY up so that they could catch up to where they think they should be. That is 100% admirable, and they are operating with the best of intentions.

Their unintended consequences? Both of them are saving so aggressively in their 401(k) that they are struggling with day-to-day cash flow. One is depleting his savings account on a monthly basis just to cover basic living expenses, and the other is using a credit card for groceries in the last few days before her paydays. A noble effort to save for retirement has taken a somewhat sinister turn in these examples, and I’ve had to have a few “I applaud your effort, but maybe it’s one step too far….” conversations.

The good news is that they realized that they may have gone a bit too far, and when we talked about bringing the 401(k) contributions down just a bit in order to make day-to-day cash flow a bit more manageable, they were completely receptive. In each conversation, we had a nice laugh at how some good things can be taken too far. (If you don’t believe that, see how many chocolate chip cookies you can eat before you start to feel like it’s been one too many.)

The lesson here for all of us is that after a few cookies, it makes sense to stop and catch your breath. The other lesson is that some great financial behaviors can be taken to an extreme. Are you saving so much for retirement that you aren’t able to enjoy the here and now? I’ve heard so many stories about people depriving themselves of life experiences in order to save for retirement, only to die just prior to retiring. Are you spending so much in the here and now and enjoying life experiences that you are woefully behind the curve for your retirement goals?

Neither is a good place to be. What’s the old phrase? ”In all things, moderation.”

Even good financial behaviors should be used in moderation! If you’re wondering if you’re taking something just a bit too far, chances are that you are. Whether you ask a financial professional or just hit our Facebook page and ask, get another perspective on your situation to make sure that you have all of the moving parts in your financial life working together.

 

What To Teach Your Kids Before College

July 26, 2016

This time of the year is brimming with the excitement of future college freshmen over their new adventure. Talking to them is fun – hearing about their hopes, dreams and expectations of their freshman year. The more I started listening, the more my excitement wore off and disbelief settled in. I started to realize that some parents have this expectation that they can teach their kids zero about finances, give them an account with a few thousand in it and expect their kids to become financially responsible and budget properly. Here are some tips to follow instead:

1. Summer jobs are great economic teachers. If your student has a summer job, use it to teach your child invaluable lessons such as what their future careers may be for life if they drop out of college with no plans, that the gross vs. net difference in a paycheck is big and guidance on how to budget their money. Use websites like Mint, YNAB, or even the budgeting tools where you and your family banks to help your child create a budget.

2. Show your child the economic realities of college. Most people think about tuition, books and room and board. To some degree, that is only the beginning.

Every organization, fraternity or sorority your child is thinking about joining may have a fee, some to the tune of over $600 a semester. There are also those pesky fees like student health center fees, student activity fees, orientation fees, new student fees, technology fees and whatever other fees the college thinks up to charge. Use checklists like this one as a guide to possible costs.

3. Come up with an “oops I screwed up plan.” Okay, let’s be honest. None of us were financial wizards when we went to college. A lot of us overspent in our attempt to fit in and alleviate home sickness. Talk to your child before they mess up about how you will handle it the first time and come up with what you will do if they make the same mistake twice.

One of my friend’s parents told her daughter that she would consider the first time she makes a financial mistake a lesson learned. The second financial mistake will result in the “Bank of Mom” shutting down. My friend figured that at worst, her daughter would still have food from the cafeteria to eat, a dorm room bed to sleep in and feet to walk to class.

Don’t wait.Working on a contingency plan now will save you from unnecessary and probably emotionally charged conversations in the future. Take the time to work with your kids on a financial plan for college to not only save your wallet but to save your sanity.

Meet Our Newest Planner: Cyrus Purnell

July 25, 2016

Cyrus Purnell, CFP® is driven to take the mystery out of why some people thrive financially and others don’t. Recently, I had the privilege of sitting down with our newest planner. We discussed his money story and how this Gen X father aligns his personal mission to help others get the information they need to make better financial decisions with his work at Financial Finesse and his role as a husband and father.

Why did you want to earn your CERTIFIED FINANCIAL PLANNER™ designation? What does it mean to you?

I earned my CFP® designation because my primary reason for joining this industry was to help families plan for their futures. When my mom would pick me up from school, she would have the radio on Larry Burkett’s radio show “How to Manage Your Money.” After listening to him help people work their way through financial situations day after day, I thought to myself, “I would like to do that.” Looking back on it today, I was struck by how effectively a short conversation can help relieve someone of stress and set them on a positive road.

What’s your money story – what your parents taught you about money, etc.? Did you hold any negative beliefs about money that you had to overcome?

In hindsight, my parents had a very well balanced view on money. They had very consistent positive money habits when it came to paying bills on time and maintaining low debt levels. They definitely lived within their means, but they would occasionally splurge on things like vacations for the family.

Growing up, I felt like they said “no” to everything, but as an adult, I realize they were very balanced in their yes’s and no’s, and that balance allowed me to walk away from undergrad with zero student loan debt. My perception of being deprived of certain luxuries growing up has always given me a slant toward spending on one event or item and then doing a 180 and spending nothing for a while to make up the difference. It took time for me to learn to plan for those special items and live in balance.

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

When I started out on my own after college, I picked up what I call “pet debt.” I seemed to carry around some credit card debt and never really took the initiative to completely pay it off. My wife had a similar level of debt when we married, and while were very aggressive on paying off student loans and car loans, we still kept our “pet debt.”

After the birth of our first child, we took a hard look at what the debt was costing us in interest. We got on the same page and attacked the debt and paid it off aggressively. This allowed me to get my MBA without picking up new debt, and my wife was able to start her own business.

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

You can accomplish a lot more working together than you ever could individually. Anytime my wife and I had individual agendas, it always produced tepid results. When we work together on something, we would have better-than-anticipated results.

I know how to run an amortization schedule and how quickly something can be paid down. When we work together, it was faster than any pay-down plan. We would have the wind at our backs.

How do you teach your kids about money?

While my kids are still young, we have felt it was important to begin conversations with them on the value of money and saving. We’ve wanted them to be very involved in the savings process, going to the bank and opening their own savings accounts. Now with any Christmas or birthday monetary gifts they receive, we have the conversation on what we will give, spend and save. My 8-year old is now earning money with doing extra chores around the house. I have been impressed that while he has enough in savings to get the toy he wants, he’s yet to ask for it but has a plan to continue saving $5/week.

If you could wave a magic wand and reform the financial services industry, what would you do?

I would shift cost from the products to the advice. I think there are many very intelligent and ethical people in the financial industry, but they are trapped by the fact that so much of the industry is product-focused and not solution-focused.

Tell me about your personal investment philosophy?

My study and experience with investments has shown that almost all investment return is based on asset allocation. The biggest obstacle to realizing the return from that allocation is fees. In my personal portfolios, I endeavor to build allocations well suited to my time horizon with an eye to keeping fees low.

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

I did a fair amount of research before joining the company so there haven’t been many surprises. I will say the company is exactly what it says it is. Most companies tend to over-hype the strength of their culture and their dedication to mission. It is not hype here. All of that is real.

Have a question you’d like answered on the blog? Please email me at cynthia.meyer@financialfinesse. You can also follow me on Twitter at @cynthiameyer_FF

The Hidden Downsides of a 401(k) Loan

July 21, 2016

I recently had a helpline call with a woman who was thinking about taking a loan from her 401(k) to pay a $32k condo assessment and avoid the 3.75% interest rate she would be charged if she made the payments over time. At first, the 401(k) loan looked like a great option. There’s no credit check, the fees and interest rate are minimal, and best of all, the interest would go back into her own account. However, there are also several hidden downsides of 401(k) loans to be aware of:

You lose out on any earnings. The stock market has averaged a 7-10% average annualized return over time. It’s easy to overlook this but it’s probably the biggest cost.

Your payments may be higher. Even if your interest rate is lower than the alternatives, your payments might actually be much higher than a credit card that will be paid off over 20-30 years. That’s because 401(k) loans generally have to be paid back within 5 years. The payments also generally come out of your paycheck so if you run into financial trouble, you don’t have the option to prioritize things like your mortgage and car payment. You also can’t eliminate a 401(k) loan through bankruptcy.

You may not be able to take another loan. This could be a problem if you don’t have an adequate emergency fund. In that case, you might want to borrow more than you need and put the extra money away someplace safe like a savings account or money market fund for a rainy day.

You may be subject to taxes and penalties if you leave your job. Any outstanding loan balance after about 60 days of leaving employment is typically considered a withdrawal. That means it’s subject to taxes and possibly a 10% penalty if you’re under age 59 ½.

You’re double-taxed on the interest. Even though the interest wasn’t paid pre-tax, it’s taxable when you eventually withdraw it. That means you’re essentially paying taxes twice on that money since you already paid taxes on it when you first earned it.

In this woman’s case, her employer’s policies provided a lot of advantages since she was able to take out up to 5 loans at a time and could continue making loan payments after leaving her job. However, we calculated that the taxes on the interest could easily add up to over $1,000 depending on the interest rate. As a result, she decided to use some of her emergency savings and reserve the 401(k) loan option for future emergencies.

If you’re considering a 401(k) loan, be aware of all the possible downsides. Make sure you also consider other options like peer-to-peer lending sites such as Lending Club and Prosper that allow you to borrow money from other people over the Internet, usually at lower rates than you can find at a bank. Finally, don’t forget that the real purpose of your 401(k) is retirement.

What to Do When You’re Expecting

July 19, 2016

When my husband and I got married, we wanted children, but we had to face the reality that it would be difficult to have children due to prior medical issues. Apparently, God had a different plan for us and I found myself surprisingly pregnant within two weeks of trying. We were happy with the news but after the joy wore off, I started putting on my planner hat to figure out how to plan financially for the new baby. I’ve always believed in learning from other people’s experience, so I started asking friends of mine who were parents what financial guidance they would give to a woman pregnant with her first baby, knowing what they know now.  The list started pouring out:

1. There are enough surprises to being a new mom without medical bills being one of them. Contact your healthcare provider to find out how you are covered for medical visits, including vaginal and c-section deliveries and well-baby care. Once you have the numbers, consider increasing your contributions into a health savings account (HSA)  or a flexible spending account (FSA) to cover the costs with pre-tax money.

2. You only get one time to be a first-time mom so take all of the leave offered to you. Contact your employer to clarify how much time you can take off and how much you will get paid during the time off. Many companies offer paternity leave so find out the rules for the baby’s father as well. If the leave is unpaid, figure out how much time you want – factoring in that you may want to take leave before the baby comes and/or your bundle of joy may be late (mine was almost two weeks pat due) into your numbers.

3. What is your ideal maternity leave? Do you have lots of friends and family to help out or do you need to outsource? If you are the primary cook of the family, do you need to budget an eating out, food delivery or frozen food budget? Do you want a nanny or baby nurse to help you out? Would you like a cleaning service to help you for the first few weeks?

Start thinking about what costs are involved in each of these options. Delivered prepared meals can run over $300 for two a day. A baby nurse could cost upwards of $200 a day. Average cost of maid services can run upwards of $157 for the service. If your budget is tight, consider asking for frozen meals or even for people to pitch in and pay for a cleaning service as part of your baby shower gift or reach out to your local place of worship for help.

4. Once you have your numbers, start to work on a budget for when you are on maternity leave as well as a budget for when you return to work.  Account for possible medical costs, any gaps between your pay before maternity leave, and the costs that come with a new baby – endless diapers, wipes and if needed, formula. After you go back to work, you’ll also have possibly new work clothes (it took me forever to fit back into my pre-baby clothes), daycare (for a year, I called my daughter my little mortgage payment) and additional doctor visits. Any parent with kids can tell you that with the first baby, as soon as they sneeze, you are crying and heading to the doctor. With baby number #2, as long as they aren’t spitting up blood, you don’t even bother.

5. If your budget shows a shortfall, take the total amount needed and divide it by the months you have left and that is your savings goal. Start thinking about what you can cut back on now to save the funds. Can you reduce your cable and cell phone bills and eat out less? Can you use vacation days to get additional paid time off?

What did I learn from all this? Overall, the best guidance centered around thinking through what your ideal maternity looks like, putting those ideas into tangible dollars and realistically assessing your finances to see if it is doable. Taking these few steps will make your first few months with your bundle of joy less financially stressful.

 

 

What Financial Security Really Means

July 13, 2016

When my colleague Matthew recently announced that his family had made the decision to move to Maui this summer, I was immediately intrigued. I’m a big believer in gathering wisdom from the experiences of others, so I asked Matthew to share the process that he and his family went through in making this life-altering decision. Here’s what he had to say, from an edited interview:

Q: You and your family have decided to move to Maui this summer. Was this something you always planned to do?

Matthew: This wasn’t something we always wanted to do. I was pretty content living in Southern California, due to our strong relationships here, up until recently. My wife’s family is from Maui, and she was born and raised there. Moving to Maui is something we only began to seriously consider end of December, last year.

Q: Was there a specific event that triggered you to start thinking about this?

Matthew: A number of happenings triggered us thinking about moving to Maui. For 14+ years, we had been part of a tight knit community through our church. Recently, some of the key leaders in that community passed away. Our families were really close so it was a big hit. It really hasn’t been the same since.

We started re-thinking why we were in Los Angeles. It’s a busy place, and in many ways, not our ideal place to live, although we have really enjoyed the work and relationship opportunities we’ve had. We began to consider other places to live, Hawaii being the chief place, due to my wife being from there.

Q: What was your timeline for making this decision and what things did you consider?

Matthew: It took about 6 months to determine if the move was viable, and after we determined it was viable, we went with it. We considered a number of different factors:

  • Cost of living: Hawaii is a pretty expensive place to live, but so is where we currently live (the South Bay of Los Angeles). We performed a cost of living analysis and determined that besides food and gas, it’s pretty much a wash.
  • Housing costs: Rental rates are about the same between Maui and LA. We were pleasantly surprised to learn that housing prices are a bit more affordable than the South Bay, especially if you stay away from the beach.
  • Potential job salary (if we were unable to keep our jobs): We weren’t sure if we’d be able to keep our jobs or have to find new ones, so this was a bit of a gamble. After doing research on IT jobs for me and biology jobs for my wife, we found that we could possibly take a 50% pay cut if we moved. So we did some soul searching and felt ok with this decision – a more restful, peaceful way of life was more important to us than making more money and having a more expanded lifestyle.
  • Our current savings: We have been aggressively lowering debt and saving money for the last few years, which was a huge factor in our decision to move. Having a financial cushion to fall back on helped ease concerns over the cost of moving, initial rent payments, and possibly being without a job for a few months.
  • Relationships: Friends we’d be leaving behind as well as the benefit of being closer to my in-laws were important considerations. My son has a lot of close friendships with kids his age through school, so that was a big one to work through.

Q: Anything that would have caused you NOT to make the move?

Matthew: A number of things had to line up for this to work, and if any one of them had not, we probably wouldn’t have considered moving. First, and most important, we needed the existing relationships in Maui (my wife’s family and friends), which leads to potential connections between us and the community. Second, we had to have a viable financial plan to move. Third, the hope of a better lifestyle is what pushed us over the edge.

Q: If you had one piece of advice for people thinking about making a life change like this, what would it be?

Matthew: There’s a lot that goes into a decision like this, and obviously it’s not something to take lightly. I think understanding yourself, as well as understanding your immediate family is super important. What type of environment will make you and your family most effective and happy should be your starting place.

Some of us are lucky, and we understand ourselves from the get-go pretty well. Others may need to spend some time soul searching and looking for answers as to who we are and where we should go in life before decisions like this. This process takes time, but if you want to be effective and happy as a person, you’ll want to undergo this process and continue to re-evaluate and develop over time.

After you do some soul searching within yourself and with your family, then you can start evaluating where you might want to move. Is the place you’re thinking of a place to visit or is it a place to live? Could you really be happy there long term?

Do I, as a person, make sense within that community or region? Will I fit in well there? Do I have something to offer that community? Do I have the potential to care about the people that live there or will all of my relationships likely be superficial?

Lastly, have an exit plan in case you miscalculated. If it doesn’t work out or if the place doesn’t line up, what’s the worst that can happen? Can you and your family leave relatively unscathed?

The CFP® viewpoint: I was very happy to see that the long and short-term effects on family finances played a central role in the decision but that this wasn’t the primary factor. I’ve seen so many instances where families are dragged around the country as one parent climbs the ladder in a corporate job only to find that the financial success wasn’t worth the strain on their marriage, kids and overall life. I also love the fact that before they had this idea, they had already begun laying the financial foundation, and to me, that’s actually the key takeaway for all of us.

Even if you’re not sure what your “Moving to Maui” event will be, being financially prepared will make the decision much simpler. It’s a real shame to say no to the things you really want to do because you’re too burdened by debt or don’t have any savings in the bank to allow for leaps of faith. To me, that’s the true definition of financial security – making choices for every reason besides money because you’ve already got that one taken care of.

 

How to Survive and Thrive in a Pricey City

July 12, 2016

I was born and raised in Brooklyn, NY – before it was trendy. When I was growing up Red Hook, the underpass of the Brooklyn and Manhattan Bridges were places you did not want to go to at night. It seemed like overnight the worse and somewhat cheaper parts of town became the most sought after and expensive places to live.

These changes are what attracted my cousin to move to Brooklyn later this year. As I was talking to her, I realized that she was excited about the idea of living in New York, but the reality of the financial change from her move had not quite sunken in yet. I told my cousin about financial changes she had not fully factored into her move such as:

Paycheck Sticker Shock: My cousin was moving from Florida to Brooklyn. She knew that she was going to experience a major shock in expenses, but she had not factored in the change in her take home income due to taxes. Unlike Florida, New York City and some other major cities have state and city income taxes. She was shocked to see about a $600 a month estimated decrease in her paycheck once she moved there. For anyone moving to a new state, using calculators like the one from Smart Asset to gauge what your new income will be can help you better manage your finances.

Caviar Tastes on a Tuna Fish Budget: My cousin grew up watching The Cosby Show and fell in love with the brownstones featured on it. She knew the rent would be high but she almost passed out when I told her that a one bedroom apartment in Brooklyn Heights could easily run over $2,500. I told her to first do a budget to see how much she can afford. Her budget did not support $2,000 in rent so we researched apartments on  websites like Apartments.com,  which helped her set realistic expectations of where she could afford to live.

We brainstormed ideas like renting a room, living in a basement apartment, taking in roommates or living on the outer edges of Brooklyn. We also searched apartments that were in rent controlled/stabilized buildings to protect her from crazy rent increases. I encouraged her as well as anyone moving to a new city to research the cost of housing and realize that it may be a choice between a longer commute or more expensive rent.

Ditch the Car: My cousin grew up in a place that required her to have a vehicle. It never occurred to her that she may not need a car. She was shocked when I told her that my mother, a typical New Yorker, does not have a driver’s license, and I was 24 before I got mine.

I encouraged her to get to know the mass transit system in her area and estimate the cost of maintaining her vehicle in Brooklyn. Between the extra cost of car insurance, gas, parking and the hassle of alternate side of the street parking, she decided it was not worth it and ditched her car. The extra savings helped her to afford an apartment closer to where she worked. Call your insurance company to find out the cost of insurance in your new location, look up the average gas price, the average cost of parking and the hassle of finding parking to see if it is worth keeping your car.

Finally, I encouraged my cousin to do a comprehensive budget, not only factoring in the cost of living but also vacations, since she will either have to rent a car or fly home. She created a budget that helped her get her apartment and even have a little fun. Because of all the preparation she did, she was able to enjoy her new location without going broke in the process.

Use These 5 Tricks to Keep Online Shopping in Check

July 06, 2016

When was the last time you indulged in a bit of retail therapy? Even the most financially savvy of us are prone to impulse buys at times. Considering the fact that we often end up regretting those splurges, it’s wise to explore this leak in our budgets and try to keep these guilty pleasures from turning very quickly into shameful regrets.

One way I avoid impulse buying is by shopping with a list and avoiding stores like Target when my emotions are high. I’ve noticed that even when I go into certain stores with a very specific buying mission, I find myself wanting to buy something else, even if I have zero needs. Marketing gurus have figured out how to trip our psychological need to consume and those stops are fully pulled out when you walk into any retail outlet. I’m mindful of this and it helps.

My Achilles heel of impulse buying, however, is the Internet. The “avoiding it” option doesn’t exist, so I’ve had to implement other techniques to quell the shopping. Here are a few tips I use to keep online shopping sprees in check:

1. Create a filter for emails. There’s a reason that stores are so generous with discounts offered via email. They work!

Just this morning, I found myself browsing skorts from Athleta because they sent me an email about their semi-annual sale, even though I didn’t wake up thinking, “Hey, I need a new skort.” I don’t want to give up on the opportunity to enjoy coupons and discounts when I DO need something, so I created a filter that directs all my shopping-related emails straight to a folder aptly titled, “Shopping.” Then when I actually do need to buy something, I just check that folder to see if there are any current coupons or discounts in effect (note to self to add a filter for Athleta).

2. Don’t save your card. Make it one step harder to complete a purchase by opting out of storing your credit card information on a retailer’s site. Not only does this hopefully make you think twice if you have to get up and get your card, it could potentially save your card number from hackers. Win-win.

3. Beware the lure of free shipping. If you find yourself going back to shop for one more thing to put you over the mark and qualify for free shipping, stop for a second and do the math. If the one extra thing you buy is less than shipping would cost, then it’s worth it. Otherwise, you’re just spending money on stuff you don’t need to avoid paying less total money. Pay the shipping or skip the purchase altogether.

4. Realize that Facebook isn’t all-knowing. It’s no coincidence that the pair of shoes you were contemplating on the Nordstrom website suddenly show up in your news feed on Facebook. That’s part of what you signed up for when you agreed to Facebook’s terms. They track everything you browse, not just on their site. For this reason, I try to remember to sign out of Facebook when I’m done so that I can both maintain my privacy and avoid temptations the next time I log in.

5. Only shop sober. Do I really need to explain why shopping online after a few glasses of wine is a great way to blow your budget? If you can’t resist the pull of shopping after happy hour, then at least make an agreement with yourself that you’ll leave everything in the shopping cart and complete the purchase in the morning. Deal?

I’m not suggesting that you cut out all online shopping, but if you spent more money last month on purchases that you don’t really need than you saved for retirement (assuming you’re not on track to have enough to retire by age 65), then a change in priorities is necessary. Consider increasing your savings and opening a separate shopping account where you direct deposit a set amount of money you can afford to spend on splurges each month. Just make sure you don’t go beyond that and find yourself in unnecessary credit card debt either.

 

 

Reality 101

July 05, 2016

I recently went to New York to visit my family. I always love my trips because I get to hang out with my loved ones and pretty much eat nonstop, but I do not actually have to cook anything. Before the kids came, I always had my favorite foods cooked when I went home. Now when I go home, it is the kids’ favorite foods.

While I was visiting, I had a chance to talk to my nieces and nephews. Most of them are in their twenties so our conversations have shifted from the latest Jonas Brothers song to college and their futures. As my niece started talking about moving out of her parents home and becoming a teacher, I started taking a good look at her. Her hair, clothing and handbag probably cost more than most of the outfits I owned combined.

I, like probably all of you, can see the financial train wreck as her spending and the reality of her income, unsupported by family and in Brooklyn, NY of all places, came together. I recognized that she, like many young adults, was in for a serious reality check the first month she attempts to pay for rent and a $1,000 handbag on the same paycheck. I attempted to stop the wreck I saw ahead by doing the following reality check with her.

Salary

We looked up what her potential starting salary as a New York City Public School Teacher, which would be about $54,411 a year. (Parents, go online to websites like the National Association of Colleges and Employers (NACE) to find out the average starting salary for your child’s major and share it with them.) She was initially disappointed. She thought it would be higher, but then she got excited.

Take Home Pay

I quickly stomped out the excitement by reminding her that this is gross and we needed to calculate net. We used a paycheck calculator like the one from Paycheck City to estimate that her take home pay was going to be approximately $3,000 month. Give your kids the gift of a reality check by helping them understand the difference between a gross and net check.

Living Expenses

Next, we started creating a budget. She already knew living in Brooklyn was expensive, but a studio apartment, not even a one bedroom, in the area she wanted to live in was about $2,000 a month – almost her entire paycheck. If she wanted to share an apartment, a two bedroom averaged $3,400 a month.

Up until this point, I felt I had about 50% of her attention. When we started working on the budget, it really opened her eyes as to exactly how little her money stretched. Consider creating a post-college budget with your children who are close to graduating to help manage their salary expectations and lifestyle once they graduate.

After my niece got over the shock that her lifestyle is going to look very different once she is on her own, she surprisingly started talking about ways to cut back on her lifestyle and save money. She said that her biggest motivation was the fact that if she did not control her spending, she will be living with her parents until 100. Take the time to give your kids a financial reality check so they can start off their adult lives on the right foot.

 

Don’t Believe Everything You Hear

July 01, 2016

I’m the kind of person who will always try to listen with an open mind to different points of view and find something to learn from the speaker. I hear a lot of theories that way, some which appear to be myths, superstitions or misinterpretations, and some of which offer a refreshing change in perspective. In many cases, what’s true for most people might not be true for everyone. When sifting through financial advice, make sure to ask yourself if that guidance makes sense for your situation. Here are three common examples of financial guidance where you might want to think about things differently:

Question: I’ve been told that I should always have a mortgage so that I can get the mortgage interest deduction. Is that always true?

My view on it: MYTH

For each $1 in interest they pay the mortgage company, the typical family gets ~$.20 in tax relief (using the tax rate as the real payback number). To me, you lose $.80 on the dollar by paying interest. Plus if you have no mortgage, your embedded cost of living is permanently lower, so your accumulated savings and investment dollars can last a whole lot longer. Financial advisors typically say disciplined, long term investors could do better in the stock market rather than using savings to pay off a mortgage, but I’ve observed that most people prefer to have the peace of mind that comes with low or no debt so I’m not a huge fan of carrying a mortgage just to get a tax deduction.

Question: I should never contribute more to my 401(k) than my company’s matching contribution. Once I reach that, I’m told I should open a Roth IRA. Is that the right choice?

My view on it:  MYTH

Most people I see who try to implement this, forget one critical part – funding the Roth IRA. The problem with this guidance is that many people never get around to funding the Roth IRA every time they get paid. Once their paycheck hits their checking account, it gets accounted for in so many other ways.  I’d prefer to see people shoot for the maximum 401(k) contribution ($18,000 this year, plus $6,000 in catch-up contributions for those over 50) and once they max out the 401(k), THEN contribute to an IRA.

Also, maxing out the 401(k) doesn’t have to be an instant thing. You can increase your contribution level by 1-2%/year until you get there. If you have a rate escalator in your plan, sign up for it today!

Question: If I close out some of my credit cards, that should improve my credit score, right?

My view on it:  MYTH

Well, it’s not that simple! There are a lot of factors that go into your credit score. A few great places to see the multiple factors are CreditSesame.com and CreditKarma.com.

If the credit cards you want to close are relatively new, closing them may help you because it could increase your average “age of credit” (how long your open accounts have been open). But it may decrease your score because it reduces your overall credit limits and if you carry balances, it makes your “utilization ratio” higher. That’s the amount of overall credit balances divided by overall credit limit. Keeping that ratio below 25%, ideally at 0%, will be additive for your credit score. If closing accounts increases your utilization percentage, then closing the accounts can harm your score.

The thing to take away from this is that credit scores are fluid things. They change constantly. But if you take the time to review your scores and factors on the sites above, you will be able to make well informed decisions that impact your credit score.

As you go about living your life, learn how to discern the differences between good, solid personal financial management and misapplied financial principles. How? Ask a financial planning professional, pose a question on our Facebook page or ask me a question in the comments section below. Having the facts on your side can help save you from the many conflicting theories of managing your personal financial life.

 

Can a Computer Replace Your Financial Advisor?

June 30, 2016

If driverless cars can replace your Uber driver, should a computer replace your financial advisor too? This isn’t just speculation. Automated investing services called “robo-advisors” are becoming more popular and even your 401(k) plan may offer an online investment advice program. Let’s start by taking a look at some areas that computers do well when it comes to personal finances:

Expense tracking. Many people use computer programs like Mint and Yodlee MoneyCenter to track their expenses. This can be very helpful if you don’t have the time or inclination to do it yourself.

Insurance needs. Since there can be a lot of variables, a computer program can be very helpful calculating how much insurance you need, especially with life insurance.

Debt payoff. Computers programs can also calculate how long it would take to pay off your debt and the effect of making additional payments.

Credit analysis and monitoring. Online programs like CreditKarma, Credit Sesame, and Quizzle can provide you with a free credit score, advice on improving it, and free credit monitoring.

Retirement and education funding projections. As long as the inputs and assumptions used in the calculation are reasonable, a computer program can do an excellent job here too. In fact, any human financial planner will probably NEED a computer program to calculate whether you’re saving enough for retirement or education expenses. Of course, there are a lot of unknowns but a good program can help you determine if you’re in the ballpark and allow you to measure your progress over time.

Asset allocation. Deciding how to optimize your investment mix is another task that financial planners typically use a computer for. It’s also the quintessential service provided by robo-advisors. The ability to customize your investments around not only your time frame but also your personal risk tolerance and possibly even to minimize your taxes and complement your other investments is one of the advantages of a robo-advisor over a more simple asset allocation fund.

Investment management. A robo-advisor can also add value to a portfolio by automatically rebalancing it periodically. Some robo-advisors even sell losing investments in a taxable account so you can use the losses to offset other taxes.

Simple tax preparation. Programs like TurboTax, TaxAct, and TaxCut are widely used for tax preparation. However, I would suggest using a professional tax preparer if you have a rental property or a business since there’s some judgment involved in knowing which category to classify various incomes and expenses.

Basic estate planning. If you just need basic estate planning documents like a simple will, a durable power of attorney, and an advance health care directive, you can use a computer to draft these documents and even store them online at little or no cost. If you have a more complex family or estate situation, you may want to hire an attorney to draft a trust though.

Account aggregation. Finally, if your financial life involves a lot of the above, you might want to use an account aggregation program to compile all the info in one place.

So what are computers NOT good at?

Getting you to use them in the first place. For example, our research shows that 76% of employees who are not on track for retirement haven’t even run a retirement calculator at all. The fanciest workout equipment won’t do you any good if you don’t actually use them. A financial planner can be like the personal trainer that gets you to go to the gym.

Motivating you to take action after the calculation. Many people run a retirement calculator but then never actually increase their savings enough to get on track. Some programs use a gamification model that can turn action steps into a game, but they aren’t always effective. A good financial planner can both get you to the gym and make sure you actually do the workouts.

Stopping you from sabotaging yourself. How many of us are tempted to overspend on something we don’t need, to make a risky bet with money we can’t afford to lose, or to bail out of our investments during a temporary downturn in the market? Just like a personal trainer can keep us from breaking our diet or over-training to the point of injury, stopping you from making costly mistakes is one of the most important functions of a financial planner. Even the most sophisticated investors can benefit from at least having a second opinion to bounce ideas off of.

This doesn’t necessarily mean that everyone needs a financial planner. You do need to be honest with yourself though. How disciplined and motivated are you when it comes to your personal finances? If you just need the right information to make decisions, a computer can certainly provide that. If you need more, you might need an actual human being.

 

 

3 Reasons We Spend Beyond Our Means

June 29, 2016

While the US personal savings rate is higher these days at 5.4% than it was a year ago, Financial Finesse’s research shows that 34% of people are living beyond their means or spending more than they make. Some of this overspending is due to factors beyond their control like medical expenses or other emergencies. But in many cases, it’s more from a lack of planning ahead combined with rationalizing what one can “afford,” a measurement that is often more emotional than based in reality.

For example, when it comes to meeting up with friends after work for happy hour, I’ll go to great trouble to avoid paying $15 for parking or a taxi cab, but don’t think twice about ordering a glass of wine that costs the same. When I stop to question this logic, it sounds nuts. How can I mindlessly afford $15 for a glass of wine but schlep for several blocks from the bus to avoid spending the same amount for more convenient transportation? We make the same kinds of bargains with ourselves all the time. If you’re looking to save more money by cutting back on spending, it’s important to be aware of these three reasons that often cause us to compromise our savings goals:

1. It feels good. Emotional buying is a lot like emotional eating. When we’ve had a bad day or are tired, sad or sometimes even ecstatic, our emotional mind tends to rule out our rational thoughts. But while a purchase may temporarily lift your spirits, it won’t solve the emotional need you’re seeking to fill.

One way to overcome this trap is to build a “bad day” spending amount into your monthly budget. I have a friend who keeps a fifty dollar bill in a hidden fold of his wallet for those days. Another way is give yourself visual reminders. I keep a sign in my office that reminds me, “Until you make peace with you are, you’ll never be content with what you have.” Rather than trying to buy your way to happiness, think about what’s really missing and take the baby steps to get closer to that.

2. The Pinterest effect. Social media has taken celebrations like weddings and even simple backyard barbecues to a whole new level of creativity and even competition to have the prettiest, the hippest, and the most impressive decorations and ideas. I cannot believe the themes some of my friends pull off for their kids’ birthday parties. To me, it’s a modern day version of keeping up with the Joneses times ten.

If your 5-year old’s classmate has a farm-themed party complete with pony rides, there’s an element of peer pressure to match or better that with your own kid’s party. That’s fine if it’s part of your budget, but if it stresses you out to think of what you’ll have to pay for a bouncy house or to have a live Elsa show up to the party, take a step back and assess your priorities. Your child won’t miss what’s NOT there, and you can use the money you save toward their education. “I wouldn’t mind taking out student loans if it means my parents had thrown me extravagant birthday parties as a kid,” said no college student ever.

3. We all love a good “deal.” It’s a proven fact that when large retailers go out of business, they often hire liquidation firms who come in and actually mark up prices so that they can “discount” them in an effort to clear items out of the store. They’re banking on buyers’ perception of getting a deal and it works. Same goes when you’re shopping online and buy more simply to qualify for free shipping.

When you find yourself buying something that you weren’t actually seeking out, take a pause and first consider whether it’s something you need and can afford. Try to fast-forward in your mind to the next time you’re cleaning out your closet or packing up to move and whether you’ll be glad you have that thing or wish you hadn’t purchased it. If you do decide it’s something you need, then do a quick check on your smartphone to make sure the price is actually a deal. Stores call this “showrooming,” which means they hate it when people do this, so try to be inconspicuous, but if you do find a lower price online, see if the retailer will honor it.

Finally, when you do find yourself overcoming the urge to spend, don’t let that money find itself being wasted somewhere else. Consider turning that victory into actual savings by transferring the amount you were considering spending into your savings. It adds up and you’ll never regret saving more.

 

How to Spend Less On Eating Out

June 28, 2016

We all know eating out less can save us money. It sounds easy but at times, it can be hard to execute, especially with late work days, kids’ activities and frankly, days where I would rather have a root canal than step foot in my kitchen to cook. If this sounds like you, here are ways you can have your budgeting cake and eat it too:

1. Set an “eating out” budget. I find eating out is such a big budget buster because like with a diet, most people have good intentions but cheat. Just accept the fact that you will eat out occasionally and budget an amount of money you will spend on it. It may be $10 for breakfast, $10 for lunch and $10-20 for dinner as a starting point. Consider committing to brown bagging it four days out of the week and eat out with friends on Friday and/or on the weekend.

2. Come up with strategies to reduce your eating out costs. If you are the group organizer, you have the home court advantage. Choose a place that costs less. Even better, consider using websites like Groupon or Living Social to scope out coupons.

If you have a spouse or significant other, consider splitting a plate. You wallet and your waist line will thank you. Save money on drinks by drinking water. At $2 each, that is an $8 saving for a family of four and $416 over a year.

If you have kids, take advantage of kids eat free programs. If you have a family with hungry little ones, consider using websites like MyKidsEatFree.com or FrugalLivingTV to find programs. Plan out your day and look for places where kids can eat for free near you. Alternatively, this may be hard, but if you can get your kids to agree on the same meal, you can also have them split an adult meal.

3. Use grocery store prepared meals as a compromise.  You are technically eating at home with a prepared meal.  Stores like Whole Foods and Publix have fully prepared meals that you can heat up for a few minutes and have a meal with minimum kitchen time.

Yes, you can have your cake and eat it too. Just remember that your cake has limits. Budget the amounts, plan your eating out days and enjoy!

 

Have You Made a Big Financial Mistake?

June 24, 2016

Lately, I have been spending more time in the kitchen. One of my sons has become addicted to the Food Network and we have been watching a lot of Chopped lately. We will watch a few episodes and come up with a few dishes that we want to cook, head to the grocery store and then come back and experiment.

Surprisingly, it has produced some very nice results. We’ve eaten some very tasty meals and laughed a lot at our mistakes. It has been a great learning experience for us.

Laughing at mistakes is easy when it’s in the kitchen. When it’s in our financial lives, it’s not as easy. I can scrape some overcooked or horrible tasting food into the trash can and order a pizza. We can’t make such a quick correction if we really botch something up in our financial life.

For instance, I met someone recently who made the mistake of putting her name and her name alone on a lease for a rental house. She and her new boyfriend went from first date to wanting to live together within about 6 weeks. They found a place that fit both their lifestyles and when they went to sign the lease, she discovered that his credit score was very low and that he had a checkered financial past. She was in love so she overlooked those data points and merrily signed the lease for a place that required each of them to pay a bit more than they had been paying on their own.

It was a very beautiful place…or it was until 3 months into the lease, when he decided that he’d opt out of the relationship and into one with someone else. She was left with her name alone on a lease that she couldn’t afford. It was tough just to cover her half of the rent.

Paying the whole amount…impossible. She still had 9 months to go, and the landlord had very inflexible terms. She would be responsible for the rent, even if she moved out, until it was rented to someone else.

It was a terrible lease, but she signed it willingly. She put two months’ rent on a credit card while sorting out the details of her life and her short-lived relationship. Eventually, one of her friends moved in and was able to share the rent, but the credit card bills still lingered.

The rent was a challenge to pay, especially after a few car repairs – which also went on the credit card. When I met her, she had $10,000 on the credit card and was only able to pay the minimum payment. The balance was going nowhere, and she was not patient. She wanted it gone and gone fast.

We put together a plan for her to increase her income since she couldn’t reduce her expenses in any significant way. She was very knowledgeable about wines so she took on a part-time job as a server at a very high end restaurant with an extensive wine list. The upside…she had very few tables on any given night and was able to talk about spectacular wines. She decided that every dime she made from that job was going to be used to pay off the credit cards and when they were paid off, she’d use the money to save for the down payment on a house.

When she checked in with me last, she was halfway through the debt and loving the job at the restaurant. Not only can she talk about great wines, she gets to sample some ridiculously good food and pair it with spectacular wine at the end of her shift.  She figures that by the end of the year, the debt will be paid, and she’ll have enough to put 3 ½% down on a house. If she goes another year beyond that, she might get 10% down.

If you find yourself in a position where you’ve made a critical mistake in your financial life, don’t panic. One of my friends is fond of saying that once you dig a hole for yourself and you’re ready to get out, the first step is to simply put down the shovel.  A great way to do that is to ask for help! And be patient. While it’s not as easy as dumping a plate of food and ordering a pizza, with the right strategy and some effort, you’ll be able to dig yourself out of any jam.