Should You Buy or Rent?

August 11, 2016

This is a question I recently got on our financial helpline and one that I’m struggling with myself right now. The conventional wisdom is that renting is “throwing money away,” but owning a home also involves throwing away a lot more money than it may seem. One way to see this is by using a “Buy vs Rent” calculator like this one from the NY Times. Not only are you paying interest on the mortgage, there’s also maintenance costs, taxes, the opportunity cost of not being able to invest any extra money you put towards buying, and the transaction costs of buying and selling. Here are some things to consider before making one of the biggest financial decisions of your life:

How long do you plan to stay? For most people, this is probably the single biggest deciding factor. The longer you stay, the more buying usually makes sense because it takes time for the financial benefits to outweigh closing costs and real estate agent commissions, not to mention the risk that the home could actually be worth less when you try to sell it. It’s generally better to rent if you plan to stay less than 3-5 years.

What mortgage rate can you qualify for? To get the best mortgage terms, you typically have to have a credit score of at least 750 and put down 20%. If your credit isn’t so great or if you can’t make much of a down payment, you may want to delay buying until your credit or savings is in better condition.

Where would you invest any extra savings? If you can save more by renting and earn a good return on those savings, renting may be better. For example, if you’re not contributing enough to max your employer’s match, or have high-interest debt to pay down, or are just an aggressive investor, the return on your savings can be quite high.

What’s your tax bracket? The higher your tax bracket is, the more you can save by deducting mortgage interest and property taxes. Just be aware that you only benefit to the extent that these itemized deductions exceed your standard deduction.

How handy are you? As a homeowner, you won’t be able to call the landlord anymore when something needs to be fixed. If you can keep maintenance costs down by doing a lot of your own work or even by being a savvy shopper, buying might be more beneficial.

I’ve been renting, but I’m now considering buying a home. I should be able to qualify for a good mortgage rate and I’m in a moderately high tax bracket. On the other hand, I think I can also earn a decent return on my savings if I rent, and I’m not the most handy person.

The tie-breaker might be how long I would plan to live in my next home, which is a tough call that involves a lot of big life decisions. In the end, the decision to buy or rent often comes down to an emotional one. There’s nothing wrong with that as long as you’re aware and okay with the financial consequences as well.

 

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).

 

 

Why Homes Actually Tend Not To Be Disappointing Investments

July 28, 2016

One thing I often hear people say (except right after the crash in the real estate market), is that their home was the best investment they ever made. However, a New York Times article titled Why Land and Homes Actually Tend to Be Disappointing Investments points out that real estate has increased by only .6% a year in real terms from 1929 to 2015 compared to a 3.2% average annualized increase in GDP over that same time period. The problem is that comparing just increases in price ignores a lot of the financial benefits of home ownership:

You don’t have to pay rent. If you don’t buy a home, you’ll probably have to pay rent and unlike a mortgage payment, rent tends to go up at least as much as inflation and never goes away. In fact, one of the biggest factors I’ve noticed in whether people are on track for retirement is whether they will have a paid off home by the time they retire. This “imputed rent” (or income from your home in the form of not having to pay rent) is one of the main sources of return. If you’d like to see whether buying or renting makes more financial sense for you, you can see how all the factors come out with this NY Times Rent v Buy calculator.

Real estate allows you to use leverage. Let’s suppose you purchase a $100k home and put down 20% or $20k. If the home appreciates with inflation by 2%, it’s now worth $102k. That doesn’t sound so great until you realize that the $2k increase in your net worth is actually 10% of the $20k you put down.

Being able to borrow from your home can help you in other ways too. Once you have equity, you can generally get a revolving line of credit or a home equity loan against it with relatively low interest rates and deduct the interest from your taxes. This can be useful in an emergency or to pay off higher interest credit card debt. (In that case, be sure you can make the payments because your home will be on the line if you can’t.) When you reach age 62, you can also take a reverse mortgage that allows you to supplement your retirement income by borrowing from your equity without having to make payments as long as you live in the home.

You’re less likely to over-react to market downturns. One of the biggest mistakes people make with stocks is to stop buying or to even sell when an investment goes south, only to miss the recovery. It’s not as easy to stop making your mortgage payments and if anything, people are less likely to sell when their home value is down.

Don’t forget the tax advantages. Not only can you deduct the interest and property taxes, you can also sell it and pay no taxes on up to $250k of gain (or $500k if you own it jointly) as long as it was your primary residence for 2 out of the last 5 years. You can also defer the taxes if you immediately reinvest the sale proceeds in a new real estate property, and if you pass it on to your heirs, they can sell it without paying capital gains taxes on all the gains during your lifetime.

You can rent it out. While you live in it, you can rent out an extra bedroom to a long term tenant or possibly for shorter stays on sites like AirBnB. If you move out, you can also rent out the entire home as an investment property (which also allows you to deduct depreciation and other expenses from your taxes).

There’s an emotional return. Not every benefit can be measured precisely in dollar terms. Homeowners also benefit from knowing that their home is truly their own. They can make renovations as they want and don’t have to be concerned with being kicked out by a landlord.

When looking at real estate as investment, don’t just focus on historical appreciation. Be sure to understand all the pros and cons. Then maybe one day you’ll be saying it was your best investment too.

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.

Yes, the Investing Game is Rigged

July 14, 2016

Do you ever feel like the investment game is rigged against the “little guy?” In some ways, that’s true. The “little guys” (and gals) generally don’t have enough money to access institutional funds (except maybe in their employer’s retirement account), can’t afford to hire the top investment managers, aren’t allowed to invest in hedge funds, and don’t qualify for some of the best bank rates. The value of many of those investment managers and hedge funds is dubious though. On the other hand, here are some investments for each asset class that the “little guy” actually has an advantage in:

Cash: Reward Checking Accounts. These accounts are insured and if you meet their requirements, they can pay up to 5% in interest and often reimburse ATM fees. The catch is that the high interest rate is only on the first $5-20k, depending on the institution. That may not be worth the hassle for wealthier individuals with hundreds of thousands or even millions in cash, but may be the entire cash savings for the rest of us.

Bonds: US Government Savings EE Savings Bonds. These bonds are fully backed by the federal government, do not fluctuate in value, and are tax-deferred (and tax-free for education expenses if you meet the criteria). Their interest rate is pretty low right now, but they’re guaranteed to at least double in 20 years, providing a minimum 3.6% rate of return. In comparison, the rate for 20-year treasury bonds is only 1.82%, and they can lose value if interest rates rise. However, each person can only purchase up to $10k a year of Series EE bonds, which is one reason why wealthier individuals and institutions stick to regular treasury bonds despite the lower rate and higher risk.

Stocks: Micro Cap Stocks. Studies have found that these stocks with a capitalization of less than half a billion dollars have produced higher returns than larger stocks even when adjusting for risk, and they tend to move differently from other stocks so they can help diversify a portfolio. Because these stocks are generally too small to be purchased by mutual funds and are seldom followed by Wall St analysts, they also offer more opportunity to find bargains. (In fact, this inability to invest in the smallest of stocks has made investing harder for Warren Buffett compared to when he first started.)

Alternatives: Direct Real Estate. The main reason that it’s so hard to beat the stock market is because knowledge about stocks is publicly available. It’s like trying to find money on the street when everyone else is looking too. That’s not true of the real estate market though. Big investment firms can’t afford to hire people to inspect every piece of real estate and even if they could, most properties are too small to be worth it for them.

When you’re buying your home or an investment property, you have the ability to add value by researching the location, having the property inspected, negotiating the price, fixing it up, and then managing it. All of that work can translate into higher returns. (Don’t forget that it is work though.)

Wall St has a lot of advantages over the rest of us, but that’s not always true when it comes to investing. You have the opportunity to earn returns that the Buffetts of the world can only dream of. So yes, the investing game is rigged…in your favor.

 

 

 

How Much is Your Rental Property Earning or Losing?

July 07, 2016

One of the benefits of investing in stocks, bonds, and mutual funds versus in direct real estate is that it’s a lot simpler. A good example is when it comes time to answer a key question: how much money am I actually making or losing in this investment? With stocks, bonds, and funds, this is relatively easy because it’s all spelled out for you on your statement. You can see how much you’ve collected in interest and dividends and how much the investment has gained or lost in value since you purchased it. With real estate, it’s not quite so simple.

After a couple of years of owning rental properties, including having a few big repairs, an eviction, and vacancies that lasted for months, I decided to sit down and calculate what I was really earning (or losing). The good news is that 4 out of my 5 properties have a positive cash flow of about $200/month over the last 6 months, which is about what I expected when I purchased them. The bad news is that the last property had a negative cash flow of about $500/month since it was vacant during most of that time. (Fortunately, I have a tenant there now.) This netted out to a positive cash flow of about $300 per month.

I was glad to see I wasn’t in the red even with a vacant property, but that still didn’t look very encouraging. However, when I annualized it as a percentage of what I spent on the properties, it came out to be a 5% positive cash flow. If you’ve seen interest and dividend rates lately, that’s not too bad. With the tenant in the 5th property, it would come to about a 17% return on cash. If you have rental properties or are thinking of investing in one, here are some of the factors to consider in determining the return on your investment:

Cost Basis: This is the upfront cost of purchasing the property (the down payment and closing costs) as well as the cost of any improvements you make. (Only some of the closing costs are included in the basis for tax purposes.)

Rental Income: This is the easiest part to measure. If you’re thinking about buying a property, assume a vacancy of at least one month per year.

Rental Expenses: This is the toughest part to measure and estimate. If you have a property, be sure to keep records so you can tally them up. Don’t forget to include the costs of advertising the property to prospective tenants and any property management fees in addition to the mortgage, property taxes, and insurance. You also need to separate maintenance/repairs from capital improvements since they affect your profitability (and taxes) differently. For prospective properties, maintenance costs tend to run 1-4% of the property value, depending on it’s condition.

Tax Breaks: In addition to non-improvement expenses, you can deduct mortgage interest, property taxes, and depreciation.

Cash Flow: Take your total rental income, subtract your expenses (including taxes on the rental income), and then add in your tax breaks. This is how much income you actually pocket.

Return on Cash: Take your annual cash flow and divide it by your cost basis. This is the cash return on your investment.

Total Return on Investment: Take your cash flow and add in any appreciation in the value of your property and reductions in the mortgage balance to get your total return. Then divide it by your costs basis to get your total return. This is the most fair comparison to your total return on other investments.

When you look at all the ways you can make money (rental income, tax breaks, and building equity), real estate can have some of the highest investment returns. (You can use this calculator to make the calculations above.) But with high returns, comes high risk. Sometimes those risks are obvious, but other times they come in the form of small costs that can add up to big losses over time. Make sure you do the math on any property to see if it makes financial sense to buy, hold, or sell.

 

 

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.

 

 

Would You Go Carless?

June 23, 2016

About 4 months I ago, I finally got rid of my 1995 BMW 325ic. I always knew that day would arrive and in many ways, it happened in the best way possible. Instead of breaking down in the middle of the highway or slowly eating away my bank account in small repairs, it simple failed the CA smog test and would have cost me more to repair than the car was worth. Since I couldn’t legally drive it, and it made no financial sense to fix it, my decision was easy. I sold it to a mechanic I met as my Uber driver and decided to go carless.

As with getting rid of cable TV, I’ve never regretted it. (The fact that I’m thinking of moving back to NYC helped too.) But kids, before you try this at home, here are several things you’ll want to ask yourself:

How much does you car really cost you? It’s not just the car payment. Think about the cost of insurance, gas, and maintenance and repairs too. I bought mine in cash so I didn’t have a payment, didn’t drive much, and had a no-frills high-deductible insurance plan. However, I still spent about $85 a month in gas and $35 a month in insurance plus a decent amount in repairs each year.

What’s your life like? What’s your commute to work? Where do you tend to go?

In my case, there are several reasons why I don’t drive much and am able to get along well without a car. When I’m not traveling, I work from home so there’s no need for a commute. I also live in a neighborhood in which I can walk to 3 grocery stores, countless restaurants of every cuisine you can imagine, and even my doctor, dentist, and eye doctor. Your mileage (pun intended) may vary.

How will you get around without a car? We all need to go places that aren’t walkable from time to time. Do you have a spouse with a car? How is public transportation in your area? What other options do you have?

My girlfriend has a car, but I can’t always rely on that. San Diego is also notorious for not having the best public transportation system so I tend to use Car2Go and ride sharing apps like Lyft and Uber. Car2Go allows you to rent little smart cars (gas and insurance included) for short trips and is generally the cheapest option if you park it in a home area (generally urban areas of major cities). If you’re not in a rush, you can also minimize the cost of Lyft and Uber rides by choosing the Lyft Line and Uber Pool options, which give you a lower rate in exchange for possibly having to share your ride with other people going in the same general direction. This is particularly beneficial in longer, more expensive rides as it can cut the cost almost in half (a recent ride went from about $26 to $16) and I’ve only had to share a ride a couple of times.

The best rewards of being carless aren’t financial though. It’s the lack of stress worrying about navigating through traffic (versus playing on my phone as a passenger), looking for parking, and dealing with car problems. Knowing you’re doing your part to literally save the world doesn’t hurt either.

 

The Father’s Day Gift That Keeps On Giving

June 16, 2016

Are you looking for a last minute gift for Father’s Day? Instead of another necktie that he probably doesn’t need, why not a gift that keeps on giving: financial wellness? Of course, none of us can actually give someone financial wellness, but the next best thing would be our CEO’s new book What Your Financial Advisor Isn’t Telling You.

Don’t worry. If your dad is like mine and acts as his own financial advisor, this book could still apply because much of it covers essential personal finance information that financial advisors typically don’t tell their clients like how to build wealth in the first place. (Advisors generally won’t work with you unless you already have some wealth for them to manage.) If your dad does have an advisor, the book discusses how to best work with an advisor, how to know if he has the right advisor, and how to find a new one if necessary. Specifically, here are some topics that would be particularly useful for dads:

Life Insurance and Estate Planning. These are important topics for dads because they’re still typically the primary breadwinners in their families, and men generally don’t live as long as women. To really see the value of estate planning for dads and what specific steps they can take, see this blog post by my colleague Greg Ward.

Basic Money Management:Money is often cited as a top source of stress and an issue that couples fight about. It can be particularly difficult for new parents. Among all the other challenges are the additional expenses and possibly a loss of income if one parent takes some time off work. Having a better understanding of money management can lead to lower stress and more marital bliss for both mom and dad alike.

Investing. In my experience working with couples, the husband usually manages the family’s investments. However, it turns out that most would probably be better off letting their wives handle this since research has found that on average, women are better investors than men. This is because hormones like testosterone and cortisol can contribute to more overconfidence and less patience in men, which leads them to invest more in things they don’t fully understand, take bigger risks, and trade more frequently (which costs more money). Learning more about investing from an unbiased source can help them overcome their biology and become better investors.

What Your Financial Advisor Isn’t Telling You or a similar personal finance book can be a great Father’s Day gift that benefits the whole family. At the very least, it will be sure to cost you much less than the $116 average that people spend on a Father’s Day gift. You can always use those savings to buy him a nicer tie next year.

 

 

When Not to Pay Down Debt

June 09, 2016

In her new book, What Your Financial Advisor Isn’t Telling You, our CEO, Liz Davidson, writes about how paying off debt can be your greatest investment. As they say, a penny saved is a penny earned so if you pay down credit card debt at 19% interest, it’s like earning 19% guaranteed tax-free. But as with most financial planning guidelines, there are exceptions. Here are some situations where paying down debt may NOT be your best investment:

You can’t pay your bills. If you’re in severe financial difficulty, make sure you prioritize keeping a roof over your head, your car in the driveway, the lights and water running, and food on the table even over paying the minimum on your debts. Don’t jeopardize you and your family’s basic well-being to pay down debt that you might have to liquidate in bankruptcy anyway. In fact, if you think you might file for bankruptcy, don’t borrow or take withdrawals from a retirement account to make debt payments since those assets are generally protected in a bankruptcy.

You don’t have sufficient emergency savings. To avoid the problem above, you’ll want to have some emergency savings. You should have enough cash to cover at least 3-6 months’ worth of necessary expenses.

You can consider your ability to borrow from a retirement plan or the Bank of Mom and Dad as part of your emergency resources but not lines of credit since they can easily be cancelled, especially if you’re in between jobs or the economy is weak. This money should be someplace safe like a savings account or money market fund. Yes, the interest you’ll earn is probably much less than the interest you’re paying on debt, but how do you value avoiding eviction or foreclosure on your home?

You’re not contributing enough to max your employer’s matching funds. The only thing that beats saving 19% interest is earning 50% or 100% on your money. If you’re not maxing the match, you’re leaving free money on the table and getting behind on your retirement saving.

Your debt is costing you less than 4-6% in interest. If the interest on your debt is below 4-6% (after any tax deductions you get for the interest), you could probably earn more by investing extra savings (particularly in a tax-advantaged account) than you’d save by paying down that debt. That’s why they call low-interest mortgages, car loans, and student loans “good debt.” If the interest rate is between 4-6%, your decision depends on how aggressive an investor you are. Conservative investors would likely be better off (and happier) paying down the debt, while more aggressive investors are likelier to earn more by investing instead.

None of this is to suggest that paying down high-interest debt isn’t generally a good idea. These are just the exceptions. If you’re able to pay your basic bills, have sufficient emergency savings, are maxing the matching in your retirement plan, and have high-interest debt, paying it off IS your best investment.

How to Build Your Own “Hedge Fund”

June 02, 2016

Hedge funds have long been considered the sexiest investments. Part of it is that they’re exclusive, legally limited to “accredited investors” and financially limited to those who can afford their high fees (typically a management fee of 1-2% plus about 20% of the fund’s performance). They’re also the largely unregulated bad boy of the financially world, which allows them to use complex investments and strategies to try to outperform or hedge against the market for higher returns and/or lower risk.

I’ve always been skeptical of hedge funds though, so I was interested to read an article titled “Hedging on the Case Against Hedge Funds.” It defends hedge funds from a lot of criticism they’ve been getting lately for charging those high fees while producing disappointing performance numbers. (For example, Warren Buffett is on track to win a $1 million bet that a simple S&P 500 index fund would beat a group of top hedge funds over 10 years.)

The article makes the case that hedge funds can’t be expected to always outperform the stock market when stocks are doing particularly well. After all, many hedge funds are designed to “hedge” against the market so while they may not do as well when stocks are up, they should do better when stocks are down. But the article still ends up arguing that hedge fund fees are too high and that they perform too similarly to the stock market rather than acting as a true hedge. Fortunately, there are ways to get that type of hedging without paying such high fees.

For example, one strategy is the “permanent portfolio,” described by the late investment author Harry Browne in his book Fail Safe Investing. The concept is to divide your money with 25% each to stocks, long term government bonds, gold, and cash. The idea is that since stocks tend to do best during prosperity, long term government bonds during deflationary recessions, gold during periods of rising inflation (which can be bad for both stocks and bonds), and cash during “tight money” recessions when all the others may lose value, part of the portfolio should always be doing okay no matter what the economy is doing. By periodically re-balancing, you would sell some of the best performing investments while they’re priced relatively high and buy more of the worst performing ones while they’re priced relatively low. This can reduce your risk and increase your returns.

The numbers speak for themselves. From the year the book was published in 1999 to 2015, the permanent portfolio earned a 6.13% compound annualized return compared to 5.76% for a traditional 60/40 stock/bond allocation and 4.89% for the S&P 500. More impressively, the permanent portfolio’s worst year was a loss of only -3% vs. -20% for the traditional portfolio and -37% for the S&P 500.

Unlike the high fees charged by hedge funds and other active managers, the portfolio can also be created with a mix of low cost index funds. The value of this shouldn’t be overlooked. A study comparing the model portfolio allocations of various financial institutions found that the difference in returns between the best performing portfolio (9.72%) and the worst (9.19%) from 1973-2015 was about half a percentage point. Since the average active stock fund charges .86% in expenses and the average stock index fund charges .11%, going from index to active funds could have turned the best performing portfolio allocation into the worst! (And no, active funds don’t generally make up for their higher fees with higher performance.)

So does this mean you should invest in the permanent portfolio? Not necessarily. You just need to make sure your portfolio is broadly diversified beyond the stock market (including more conservative investments like government bonds and cash and real assets like gold or real estate) and has low costs. If you do that, there’s a good chance you’ll actually outperform most hedge funds. Your portfolio may not be as sexy but you can take it home to mom and dad.

 

 

 

3 Lessons Millennials Can Learn From Previous Generations

May 26, 2016

With the recent release of our research report on the generations, our current Think Tank Director and former Financial Finesse blogger Greg Ward makes a second appearance to discuss what millennials can learn from previous generations…

I recently received an interesting call from a young woman asking how much the average person her age has saved for retirement. She was 35, and while I understand the nature of the question, I think it is a very bad one to ask. You can search “how much has the average 35 year old saved for retirement” and you’ll find a variety of articles (e.g., The Motley Fool and Personal Capital), but comparing yourself to others is a recipe for creating false expectations. Not only that, but the average balance is based on the average American who makes an average salary, and this is a terrible benchmark when it comes to planning for retirement. As our latest retirement research points out, less than 20% of Americans are on track to achieve 80% income replacement—a reasonable goal for most people—so why on earth would you want to measure your progress to this?

I find it interesting that millennials feel the need to compare themselves to other millennials. Wouldn’t it make more sense to compare themselves to older generations or at least listen to them? Ask any pre-retiree what they wish they had done to be better prepared for retirement and most will tell you that they wish they had started saving earlier. So while some may think that saving money in your youth is a waste of time, older generations will tell you it is the best way to achieve financial independence. Here are three things I want the next generation to know when it comes to planning for retirement:

#1 Save early, save often, and save as much as you can.

Albert Einstein is known to have called compound interest “the eighth wonder of the world,” so what could be smarter than listening to one of the smartest people who ever lived? The more you start with, and the earlier you start, the more you’ll have later in life; pretty simple, huh? The more you save when you’re younger, the more you will have when you get closer to retirement, which gives you more flexibility in what kind of work you do, how long you do it, and what kind of lifestyle you’ll have when you are done.

#2 Be aggressive.

Piggy backing off of number one, don’t let youth be wasted on the young.  You may be nervous about stock market fluctuation and who can blame you? After all, you witnessed several of the most volatile stock and real estate market years in recent history. That said, you have the most opportunity to recover from these short-term events, so you must take advantage of your youth and save with the intention of keeping this money invested for a long, long time. The longer you can keep money in the stock market, the more likely you will see the types of returns that have been produced historically.

#3 Stop comparing yourself to others.

Some will make more and have to save more. Others will make less and not need as much. Some look forward to a simple lifestyle. Others plan to live the high life. Higher income earners will receive less from Social Security as a percentage of their income than lower income earners.

YOU are unique! You have to plan your life around who you are, how much you make and what you want your future to look like so the best thing you can do right now is decide for yourself what you want your retirement to look like and plan accordingly. Then use this retirement estimator to determine whether or not you are on track.

As my oldest of four children prepares for college, these are the things that I am teaching her. Now I offer them to you as well. If you, the next generation, adopts these principles, you will give my generation hope that the impending retirement crisis will likely be averted.

15 minutes Could Save You $150

May 19, 2016

My colleague Tania Brown recently wrote a blog post about cutting her cable cord. It’s something I did many years ago too and never regretted it. If you’re not willing to go quite that far but still want to save some money on your cable bill, another colleague and former Financial Finesse blogger Greg Ward writes about how to negotiate your bill down…

When it comes to in-home entertainment, you have a lot of choices. Phone, television, and Internet services are available through a countless number of providers, but here’s something you may not have thought about. By having so many options, you can have these service providers compete for your business rather than just accepting what they charge you for their programming. Knowing this, here’s an easy way for you to save $150 or more over the next six months.

Contact your in-home entertainment provider right now and ask them what specials they are offering new subscribers. Unless you have recently subscribed yourself, I’ll bet that what they are offering new subscribers is better, either price-wise or programming-wise, than what you are getting today. If that is the case, then you need to be assertive and tell them that you want the same privileges that they are giving new subscribers. In other words, you want more service or a lower price (or both as the case may be).

Now most likely two things will happen. The first is that they will try to accommodate you by offering a different programming package. If you are really looking for a different programming package then hear them out, but if not, hold your ground. Let them know that unless they are willing to work with you, you are willing to work with someone else (i.e., a different provider). Have a few names of other providers that your provider competes with so that they know that you’ve done your homework.

Once you’ve determined that the first operator is not going to be much help, you’ll most likely have to talk with an “account specialist” to see if they might be able to do something for you. That’s good news, because in most cases, the initial person who answers the phone is NOT able to make any concessions. Once you have the account specialist on the phone, you can calmly let them know of your intention to discontinue service in the absence of reaching an agreement. They will also try to accommodate you through other offers, but stand firm.

My experience has been that they WILL make a concession as long as you are kind and persistent. I did this recently, and the specialist was able to apply a $25 discount to my bill for the next six months. That’s $150 in just 15 minutes!

A word of caution: know your other options. Account specialists usually know what their competitors are offering, so if you are going to suggest that you will terminate service if they are not willing to work with you, be prepared to walk.  Hopefully it doesn’t come to that.

A Cell Phone Case That Protects Your Phone, Your Money, and You

May 05, 2016

In What Your Financial Advisor Isn’t Telling You: The Ten Essential Truths You Need to Know About Your Money, our CEO, Liz Davidson, writes about the connection between our financial and physical health. In particular, financial stress is one of the leading forms of stress, which has a significant impact on our physical health and well-being. I recently made a purchase that also relates to both financial and physical wellness. It’s a cell phone case called SafeSleeve.

Aside from protecting your phone, the main purpose of the case is to protect your physical wellness by redirecting potentially harmful radiation from your cell phone away from your body. While it hasn’t been proven conclusively, many experts are concerned that exposure to this radiation could cause cancer. In fact, even the cell phone companies recommend generally keeping the phones several inches away from your body. But if you tend to keep your phone in your pocket like I do, that could be a problem. Someday, people may look back on our cell phone use the way people now look back at smoking cigarettes.

How could this case protect you financially as well? It obviously can help protect your phone from damage, which is important considering the cost of a new smartphone. If it works as intended, the value of avoiding cancer is arguably priceless.

It also includes slots to keep 3 credit or debit cards. This isn’t just for convenience though. The case acts to protect those cards from someone using an RFID reader to “skim” information from your cards and use it to make fraudulent purchases. Even if you don’t buy into the threat of RFID skimming, it can save you the expense and hassle of buying and keeping a wallet in addition to your cell phone.

So are there any downsides to the case? At about $40, it’s expensive for a cell phone case, although it was cheaper than competing radiation-blocking cases that lacked the wallet component. Another drawback is the risk of keeping your cards with your phone since if you lose it, you lose your cards too.

A third flaw is that there’s no space to hold cash. This could be a problem since some places charge more for using a card or don’t accept plastic at all. There’s also evidence that people tend to spend more with cards than with cash. Finally, I think it’s prudent to carry some cash at all times in cash of a power outage in which  credit card machines and ATMs aren’t working so I end up keeping cash in a separate money clip anyway.

Maybe you’ll never drop your phone, you won’t ever have your cards skimmed, and it will turn out that cell phone radiation doesn’t cause cancer. Then again, there’s a reason we keep emergency savings, buy insurance, diversify investments, and draft estate planning documents. Sometimes it’s better to be safe than sorry. At the very least, $40 is buying me some peace of mind…and less stress.

 

 

 

How Financial Wellness is Like Weight Loss

April 28, 2016

I always like to say that financial wellness is a lot like weight loss. When I came across this article in Vox about “surprisingly simple tips from 20 experts about how to lose weight and keep it off,” I realized just how true that is. Here are the weight loss tips and how they apply to financial wellness:

1. There really, truly is no one “best diet.” Scientific studies have found that all of the various diet plans have about the same modest long term results. What matters is finding one you can actually stick to. The same is true of money management systems and asset allocation strategies.

2. People who lose weight are good at tracking – what they eat and how much they weigh. They tend to count calories and weigh themselves at least once a week. In the same way, you need to track or otherwise limit spending, continually re-balance your investments, and periodically run a retirement calculator to make sure you’re still on track.

3. People who lose weight identify their barriers and motivations. Like with diet and exercise, we usually know what to do with our finances. The hard part is actually doing it. Start with knowing the “why” that motivates you. Then look for the barriers that are standing in your way of taking action.

4. Diets often fail because of unreasonable expectations. People tend to overestimate what they can achieve in the short run and underestimate what they can achieve in the long run. Don’t try to save too much too fast. Instead, set big long term financial goals that motivate you and then see how much you need to save to achieve them.

5. People who lose weight know how many calories they’re consuming – and burning. Similarly, you need to know how much income is coming in and going out. Making sure the latter number is lower than the former is the only way to increase your wealth.

6. There are ways to hack your environment for health. For example, don’t surround yourself with unhealthy foods. Simple things like where your food is served from and what size plate it’s on can also affect how much you eat. For your financial life, don’t put yourself in situations where you’re likely to spend more and try to automate your savings as much as possible.

7. Exercise is surprisingly unhelpful for weight loss. More accurately, exercise alone isn’t very effective since people often eat more to compensate for the calories they burn. Earning more income can have the same effect when we automatically spend more as well.

8. Weight loss medications aren’t very useful. Neither are “metabolism boosting” supplements. Complex, sophisticated, and high-fee investments are the weight loss medications and metabolism boosting supplements of the financial world. Stick to the basics.

9. Forget about “the last 10 pounds.” If they’re that hard to lose, people generally gain them back. Most of the health benefits came from the other lost pounds anyway. Likewise, trying too hard to save more can backfire if it starts to feel like too much deprivation. Allow yourself to splurge now and then too.

So what’s the main thing that weight loss and financial wellness have in common? They are both about making small changes over a long period of time. Instead of looking for the quick fix, find an approach that you can stick with.

 

Delaying Social Security May Still Make Sense Under the New Law

April 21, 2016
At the end of this month, two strategies (often called “claim now and claim more later” and “file and suspend”) to maximize total Social Security benefits between spouses will be going away. Under current rules, you could file for a spousal benefit equal to one half of your benefit at full retirement age and then switch to your higher benefit later. Under the new rules, it will be much simpler. When you file, you’ll either get your benefit or the spousal benefit, whichever is higher. Although you will no longer be able to collect a spousal benefit in the meantime, there are still several good reasons why delaying your benefits may make sense:
 
1) You’ll probably collect more over your lifetime. The Social Security benefits are supposed to be calculated so you get the same amount if you live until the average life expectancy. (A 65 yr old woman can expect to live to age 87 and a 65 yr old man can expect to live to age 84.)You’d be better off collecting earlier if you live to less than life expectancy and later if you live longer. However, those calculations were based on older life expectancy numbers that were lower and people are continuing to live longer and longer.
 
2) It’s probably a better investment. Your Social Security benefits grow by about 8% for each year you delay. That’s more than your investments can be guaranteed to earn and more than they’re likely to earn, especially if you’re more conservative in your retirement years. You might as well use your lower earning investments to cover your expenses and let your Social Security benefits continue to grow until age 70.
 
3) You may reduce the taxes on your Social Security. Since you won’t need to withdraw as much from taxable accounts to supplement the higher Social Security checks, less of those checks may be subject to taxes. Drawing down your taxable accounts while you delay will also mean smaller required minimum distributions when you turn 70 ½.
 
4) You can reduce the risk of outliving your money. One of the greatest risks retirees face is outliving their savings. In that case, you’ll be glad you have that higher Social Security check in your later years.
 
5) Your surviving spouse will be better protected. If you don’t live quite as long as you hope, you won’t miss not getting those Social Security checks but your spouse will be able to collect a bigger survivor benefit.
 
There are a couple of reasons I can think of not to delay. One is if you simply don’t have enough assets to cover your expenses while you wait. The second is if you think you have a below average life expectancy and no spouse to collect your survivor benefits. In that case, you might prefer to leave more of your assets to your heirs. But if neither of those apply to you, just remember that good things come to those who wait.
 
 
 
 

How The Self-Employed Can Defer Taxes On Retirement Savings Too

April 14, 2016

Updated March, 2019

In our CEO’s book, What Your Financial Advisor Isn’t Telling You, Liz Davidson writes about understanding the importance of taxes to your investing returns. After all, it’s not just what you earn but what you actually keep. In honor of National Retirement Planning Week, I thought I’d write about one of the best ways to reduce taxes on your investing: qualified retirement plans.

By allowing you to defer taxes on your contributions and earnings until you withdraw the money, these plans benefit you in a couple of ways. First, you’re likely to pay a lower average tax rate on the withdrawals than on the contributions. (Even if you retire in the same tax bracket, a lot of your withdrawals will probably get taxed at lower rates because of how the tax code is structured.) Second, your investments will grow faster since the money that would otherwise be going to taxes is instead being reinvested.

Savings options for self-employed

But what if you or your spouse is self-employed? You can contribute to an IRA but you’re limited to only $6,000 a year or $7,000 if you’re over age 50. (One advantage to not having a retirement plan at work is being able to deduct all of your traditional IRA contributions regardless of your income.) Here are some other options if you’d like to put away a bit more in a tax-advantaged retirement account:

Individual 401(k). Also called a uni-401(k), solo 401(k) or a 401(k) for one, you’re only eligible if you have no partners or employees (other than maybe your spouse). The main advantage is that you can contribute up to $19,000 per year plus 25% of your earned income (there’s a special calculation of this) up to a total annual contribution of $56k plus an additional $6k if you’re over 50. Withdrawals are limited and subject to a 10% early withdrawal penalty but you can also set it up to allow you to borrow from the plan.

SEP-IRA. With a SEP-IRA, you can contribute 25% of your earned income (up to a total annual contribution of $56k plus an additional $6k if you’re over 50) but you have to contribute the same percentage of pay to each of your eligible employees. However, you can vary the percentage each year. Withdrawals are subject to a 10% early withdrawal penalty.

Simple IRA. With a Simple IRA, you generally cannot have more than 100 employees. Employees can contribute up to $13,000 per year (or $16,000 if over age 50) and you must either contribute 2% of income for each eligible employee (up to $5,600 a year) or provide a dollar-for-dollar match (up to $13,000 per year) of employee contributions of at least 3% of their income.  The penalty for early withdrawals is increased to 25% in the first two years and then 10% after that.

When I was self-employed, I chose the SEP-IRA since the individual 401(k) was too expensive for my needs (fees have come down a lot since then) and I couldn’t contribute as much to the Simple IRA (also didn’t like that higher penalty on early withdrawals).

If you or your spouse is self-employed, the individual 401(k) will allow you to contribute the highest amount and take a loan if necessary. If you have employees, it all depends on how much you want to contribute for yourself and for them. In any case, being self-employed is no excuse not to save for retirement and reduce your taxes in the process.

What The New Fiduciary Rule Could Mean For You

April 07, 2016

You may have heard by now that the Department of Labor announced a new rule requiring any advisor of a retirement account like a 401(k), IRA, and even an HSA to act as a fiduciary, putting their clients’ interest above their own. The good news is that this will drive out many glorified salespeople selling high-priced investments for a commission from “advising” people on their retirement accounts. The bad news is that many people who need advice may not be able to meet the asset minimums required by many fiduciary advisors or may not be willing to pay their asset management fees. If you’re in one of those camps, here are some options for you:

Target Date Funds

Since these funds aren’t providing personalized advice, they aren’t affected by the new rule but they can substitute for an investment advisor in many ways. All you need to do is pick the fund with the year closest to when you plan to retire. You can put all of your money into that one fund (in fact, they’re designed for that so adding more funds can actually throw off the balance of the fund) and set it and forget it. That’s because they are designed to be fully-diversified “one stop shops” that automatically become more conservative as you get closer to the target retirement date.

This doesn’t mean that all target date funds are the same. While they each have slightly different investment mixes, it’s been found that low fees are actually more important than getting the best mix (which no one can know in advance anyway). To minimize your costs, look for target date funds made up of low cost index funds.

Robo-Advisors

If you want a portfolio more customized to your particular risk tolerance, consider a “robo-advisor,” a new breed of automated online investment advisors that design a portfolio for you based on a questionnaire you answer. They already act as fiduciaries so they won’t be negatively impacted by the new rule. However, they tend to have much lower minimums and fees than human advisors.

Flat Fee Advisors

If you’re looking for more comprehensive financial advice or just prefer to work with a human being, another option is an advisor that charges fees that aren’t based on how much they’re managing. Instead, they may charge an hourly, monthly, or annual fee. However, these advisors are relatively rare so the number of local options may be limited.

There will be lots of changes as a result of the new fiduciary rule. Many investors will pay less in fees but if you’re currently working with a non-fiduciary advisor for your retirement account(s), you may have to find a new one. Fortunately, there are a lot of good alternatives if you know where to look.

 

5 Areas That May Need Some Financial Spring Cleaning

March 31, 2016

With Easter weekend behind us and spring officially in the air, it’s time for some spring cleaning. Don’t forget about cleaning your financial life too. While it’s much easier to see the clutter in your home, the clutter in your finances could have much bigger consequences. Here are several areas that may need some cleaning up:

Your expenses. If you’ve never taken a look at what you spend money on, it can be a real eye-opener. Start by gathering at least 3 months’ of bank and credit card statements and record each expense. You can also use a tool like Mint or Yodlee MoneyCenter to track your spending online for free.

Then go through your expenses and see what areas of waste you can cut. Are there things you’re spending money on that you don’t really need? If you do need it, can you get it in a way that costs less? You can get some ideas for savings here.

Your credit report. It’s been estimated that about 70% of credit reports have errors that could be hurting your score. If you haven’t done so in the last 12 months, you can order a free copy of each of your 3 credit reports (TransUnion, Equifax, and Experian) at the official site: annualcreditreport.com and report any discrepancies. You can also improve your score by getting current on your bills and paying down debt. Just be aware that old debt falls off your credit report after 7 years and making a partial payment or even acknowledging the debt to the creditor can restart that clock so if it’s getting close and you’re past your state’s statute of limitations for being sued by a creditor, you may just want to wait it out.

Your retirement account. Do you have retirement accounts that you left at previous jobs? If so, your overall retirement portfolio may not be properly diversified or you may be paying more than you need to in fees. Unless you have employer stock or are taking advantage of some unique investment option in the plan, you might want to roll those accounts to your current employer’s plan or into an IRA to make them easier to manage.

Your savings and investment portfolio. Many people have accounts they’ve opened or investments they’ve bought for different reasons over the years and now their savings and investments are a cluttered mess. Having 10 different bank accounts or 5 US stock funds isn’t diversification. Here are some simple ways to make sure you’re properly diversified.

Your legal documents. Tax documents only need to be kept for 7 years at the most. After that, you might as well just shred them. Estate planning documents should be checked to make sure they’re still up-to-date. Once your spouse finds out that your ex is still listed as your beneficiary or your youngest child wasn’t included, it may be too late.

How about you? Have you spring cleaned any of your finances? If so, share your experiences in the comments section below.