A Basic Estate Plan in 7 Simple Steps

July 15, 2016

What does your current estate plan look like today?  If you said you don’t have an estate plan, you’re not alone. LexisNexis says that 55% of adults in the U.S. don’t have a will in place, but you’re also probably wrong. Here’s why: the state you call home has a plan for your estate if you die without a will, trust, or other legal documents.

If your line of thinking about your estate is “What estate??? I don’t have anything left after my bills are paid” or “I’m single with no kids” or “I’m young and just getting started in my career,” understand that everyone has an estate (regardless of wealth) and should have an estate plan to make sure your individual, family, and financial goals are met. There are a few simple steps that can help you maintain control and protect the people (and organizations) that matter most to you. Here is a simple estate planning “to do” list to get you started:

Step 1: Set goals that matter to you. What do you want your estate plan to accomplish? Are you concerned about choosing a guardian for your children or protecting your kids’ inheritance from your spouse’s next spouse (remarriage happens!) after you’re gone?  Is charitable giving in your future plans? Give your estate plan more purpose and meaning by asking yourself these questions and writing down a list of the things that are most important to you!

Step 2: Evaluate your financial situation. Start by completing a net worth statement that includes a list of your assets and liabilities.  Once you’ve compiled a list of your financial resources, you are in a better position to determine who should receive your assets after you pass away. This step also involves reviewing your life insurance to cover your family’s needs for income, education costs and estate expenses. Reviewing disability insurance is just as important because it provides income protection for you and your family during your lifetime. For more information on life and disability insurance coverage, including needs calculators, visit LifeHappens.org.

Step 3: Have basic documents created. Here is a list of important documents that should be part of almost every estate plan:

  • Will
  • Advanced healthcare directive (living wills)
  • Medical power of attorney
  • Durable power of attorney

This is where your estate plan gets really personal. These important documents help you state your wishes for how to distribute assets when you die, name guardians for your children, and nominate someone to speak on your behalf if you can’t in a medical emergency. Get them done before you need them because by then, it will be too late.

Step 4: Update your beneficiary designations and title assets appropriately. Many people think that once a will has been created their estate planning work is done. That’s far from the truth, especially considering the fact that your will controls ONLY the distribution of assets that are subject to probate (the formal process of paying off debts and distributing property through the courts).

Not everything transfers through probate though. Any account with beneficiary designations such as insurance policies, retirement plans, IRAs, and annuities won’t go through probate. Any jointly owned property or accounts bypass probate as well as accounts designated as payable on death (POD) or transfer on death (TOD).

Step 5: Get organized. Have you ever been late for something and spent time frantically searching your house for your keys, only to find them in your hand? Not fun! Imagine searching for a family member’s bank account information, investment and retirement account statements, will, or key to a safe deposit box without any instructions or guidance during a time of grief.

It always makes sense to get your financial affairs organized. It’s also important to keep a list of online account passwords and digital assets in a convenient location for loved ones to access just in case something happens to you. I have a red folder in my desk labeled “When I’m Gone” with that list, and my kids and a few friends know where it is. Here’s a quick resource for what to consider about your online presence as it relates to your estate plan.

Step 6:  Communicate your plans to those involved in it. Discussing your intentions in advance can help avoid family conflicts and also minimize the potential for any confusion or questions regarding your true intentions. If you have a plan in place but nobody is aware of it, then your wishes may be ignored. If your plan is in place but no one knows about it, is it really a plan?

Step 7:  Review your plan regularly and as major life events occur. Life will undoubtedly throw a curve ball or two our way so it’s essential to review and adapt your plans periodically. Some situations that may require updates to your estate plan include marriage, the birth of a child (or grandchild), disability, the loss of a loved one, divorce, a financial windfall, or the creation or dissolution of a family business. If any of those life events occur, be sure to break out your documents, give them a quick read and highlight areas where a change is needed.

Let’s be honest. Estate planning isn’t always the most exciting topic (it’s quite morbid actually), but it is an important aspect of every personal financial plan. Be sure to personalize your goals and take action NOW so that you have a basic plan, at a minimum, to protect your family and people you care about the most. Some of these other steps are just good solid financial behaviors (not just for estate planning) to allow you to take control of your financial life.

 

Why I Left My Estate Planning to a Professional

July 08, 2016

Just a few days ago, we celebrated Independence Day by doing the traditional American thing – ate, drank and watched fireworks.  Fireworks are fun to watch and the 4th of July is always a great holiday as far as I’m concerned. Most years, I get to either be on a boat or near a marina and we watch fireworks over the water. There are usually two or three displays going on within minutes of each other, so the whole sky is lighting up, and it’s awesome to have some patriotic music playing from the speakers while enjoying the night sky lighting up. Family, friends, food, fireworks – a lot of good F words on the Fourth.

But all is not perfect even in the midst of celebrations. Last year, there were two NFL players who suffered significant injuries related to fireworks on the 4th.  Jason Pierre Paul of the New York Giants lost a portion of his hand in a grizzly accident and CJ Wilson of the Tampa Bay Buccaneers lost two fingers in a similar incident. Too many people are getting injured in at-home fireworks displays.

Not only are they getting hurt physically, financially, it’s a very expensive holiday! Americans will spend $800 million dollars this year. This is up almost $50 million from last year.

So let me wrap my head around this. Fireworks are expensive to shoot off at home (not to mention annoying to the neighbors who aren’t doing the same thing) and carry the risk of injury. Yep, sounds like a great plan! Maybe fireworks aren’t the best idea at home. Maybe it’s time to leave it to the professionals!

Another thing that I’m a fan of letting professionals handle is your estate plan. At one time, just about the only way to get your estate plan prepared was to visit your local attorney’s office. Today, there are a lot of low-priced software packages available at office supply stores,  there are countless free estate planning documents available on the Internet, and there are online companies like LegalZoom that can help you prepare estate planning documents.

Each of these alternatives can be a viable solution if you have very simple needs. But if your situation has more than a couple “moving parts” (kids, second marriage, second houses, owning a business, etc.) an attorney might still be the best option. Here are some basic documents and why I had a professional prepare them for me.

Will – This document lets the world know where you want “your stuff” to go after you die. My will was prepared by an attorney because my kids are still young (20, 17, 14) and if I die, there would be some money on the table from life insurance and retirement accounts. If they have my DNA, they may not become fiscally responsible until they are well out of their 20’s so my will creates a trust that doles out their inheritance at ages 25, 35 and 45 – with 25 being just a small (10 or 20%) dose, age 35 being a bigger slice of the pie and the balance paid out at 45. If they blow the age 25 payout, they will have a decade to live with that regret and the ability to make better decisions at later ages. Add in a divorce and not wanting my ex to get any assets after I die (she got plenty in the divorce), and you can see why working with an attorney was the right choice for me.

Living Will/Healthcare Power of Attorney – These documents nominate someone to talk to your medical team in the event you can’t and detail what life saving measures you want and don’t want taken in the event that you are in a grave condition. The reason that I had an attorney work with me on these documents is…Grey’s Anatomy!    When a patient gets rolled into Seattle Grace (early seasons, Grey-Sloan later) on a gurney, the ONLY thing the doctors are paying attention to is saving that patient’s life. Without getting into too much detail, my wishes aren’t to stick around if I can’t recognize my kids and friends so preserving life at all costs isn’t my plan. THAT is why it made sense for me to work with an attorney.

When it’s time for you to have your documents either prepared (NOW would be the right time if you don’t have them currently) or updated (if your life situation has changed or you have aged by more than a decade), consider the “moving parts” in your life. The greater the level of complexity in your life, the more likely it is that an attorney would be useful in drafting your estate plan. I’m not one who usually defends attorneys. I’m far more likely to make jokes about them, but when it comes to estate planning, let me be the first in line to say that they offer a service that is well worth the fee.

 

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.

 

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.

 

When “None of the Above” Isn’t an Option

June 17, 2016

As I type this, Hillary Clinton is giving a speech after winning the California and New Jersey primaries and becoming the Democratic party presumptive nominee. This is merely weeks after Donald Trump gave his speech after wrapping up the Republican primaries as their presumptive nominee. Most people I’ve talked to and seen commenting on my social media accounts wish that they had a “D – None of the above” option like there is on standardized tests.

I don’t think I’m going out on a limb by saying that, as a country, we should be able to do better than these candidates.  A lack of great available options isn’t just an issue in politics though. It’s a problem in the financial lives of many people that I’ve talked to recently.

If you are confronted with a bad situation, there are some things you can do. First, try to think of as many potential solutions as you can. Consider consulting with people you know and trust or an unbiased financial planner for ideas. You might be able to come up with a better solution this way. If not, make a list of pros and cons for each potential solution and prioritize what’s most important to you.

For example, one person I talked with was in a bit of a financial jam, and my goal was to help her find a way to a better place.  She had recently gone through a divorce, and her budget included receiving child support from her ex-husband. He has chosen to change jobs and now works “under the table” for cash so that it is not reportable. If it’s not reported, she can’t collect, and now her living expenses exceed her income.

The child support would have been deposited into savings for her kids’ education and for emergencies. Instead, she taps into savings for about $100/month to maintain her current lifestyle. We talked through a few options:

  • Sell the house and downsize. Reduce the mortgage by several hundred dollars per month so that there is wiggle room. (She just refinanced when she bought the ex’s portion of the house, so a simple refi is not an option.)
  • Get a part time job and work when the kids are with their dad in order to generate some income to cover the gap.
  • Cut the cord and get rid of her high end cable package.
  • Get rid of her car with a $500/month payment and get something less expensive.
  • Hire an attorney or investigator to track her ex-husband’s financial life and then go to court in order to get child support dollars flowing in.
  • Suck it up, hope for the best and continue to grind forward as is.

Each option has its downsides and she viewed all of them like many Americans are viewing Trump v Clinton. But just like in politics, there is no perfect solution, and trying to find one can prevent you from choosing a good one or at least the “least bad” one. I don’t know which option she’ll end up picking, but she’s now in a better position to make a decision. After all, sometimes making no choice can be the worst choice of all.

 

 

What Our Dads Taught Us

June 10, 2016

Since Father’s Day is right around the corner, I asked some coworkers what the best piece of advice their father gave them was. I’ll share their responses and add a bit of commentary with each one:

My dad is from Guyana and he stressed the importance of education in the U.S. He told me that my ability to grow my income will be based in part by finishing my degree- the rest is up to how hard I work.

As a dad who stresses the importance of education AND hard work (either one alone will not suffice), I totally agree with this dad’s advice. My kids have heard countless times that they are expected to do well in school and expected to put forth effort in all things they attempt to accomplish. This dad’s advice should be universally accepted as true wisdom.

Dad didn’t always say a lot, but he set a great example with how he prioritized his time.  He got to work early, was home on time for dinner with the family and helped us with homework if we needed it, then he went back to work until the job was done. If we had a ballgame or a concert, he adjusted his schedule to make sure to be there and he loved going to sporting events with me and my brother so he made that a priority as well.

Again, this is timeless wisdom from a dad who put family first. If more dads followed this path, perhaps we wouldn’t have many of the issues we see in this country today.

Don’t trust a man or get pregnant before having a job.

Well, this is certainly advice that served my coworker well. She’s a very independent and successful woman, and she’s raised lovely daughters as well. The principles of self reliance and good decision making that her father instilled, in his own unique way, have served her well. The lesson here, at least as I see it, is to find ways to communicate your financial lessons to your family members in ways that they will receive.

Mostly about being in a desperate situation or feeling down-trodden: 1 – You can’t fall off the floor. 2 – They can’t take away your birthday.

One of my favorite sentiments, this dad was all about the power of resilience. Resilience is a key trait in those who I’ve seen reach a high level of success. It’s what can keep a person moving forward toward a goal when most rational people would fold.

Have a firm handshake as it shows confidence.

A timeless pearl of wisdom, right there! A firm handshake and the ability to look someone in the eyes when holding a conversation sometime feel like “the way things used to be” rather than what I see in today’s higher tech world.

My dad was the one who taught me about how little changes add up. For example, when our credit union introduced debit cards back in the late 90’s, they were paying members $.25 PER TRANSACTION to encourage use of the card over checks. My dad was like, “Hot diggity, this is free money for spending money you’re already spending! You have to do this!” This was my first foray into taking advantage of rewards programs, discounts, etc, but ONLY on things I was going to buy anyway. I learned to be practical and frugal from my dad.

This dad should be a Financial Finesse blogger!!!

Your work ethic is something nobody can ever take away from you, so work hard and let it speak for you. It will take you further than your talent alone can and past the majority of people who aren’t willing to work as hard.

This reminds me of the first dad’s advice about education and effort. It kind of brings the list of dad tips full circle.

What I love about this list of tidbits from dads is that the children who received this advice ended up being successful adults and working here at Financial Finesse. Every single item on the list is also reminiscent of either what my grandfather taught me as a child or something that my kids have heard from me. None of these items seem like a “get rich quick” kind of message. It’s definitely a lot of tortoise and not much hare. If you absorb the messages from Financial Finesse’s dad squad, you are certain to be thankful this Father’s Day.

 

 

How to Manage Financial Stress in a Chaotic World

June 03, 2016

Periodically, there are times I look at my daughter’s life and think it’s a great time to be her. Right about now is one of those times. She is doing a study-abroad session in Italy, and since I travel for work a lot and know my way around airports, she asked me to take her to the airport.

We live in Baltimore and we use BWI as our “home airport” so I am there quite frequently. I knew that her flight was booked from Philly instead of Baltimore, but when I put the trip into my calendar I simply typed “Take Jordan to Airport” in Outlook about two months ago. As time moved forward, the Philly part slipped my mind, and when I put her bags into my car, I immediately headed toward BWI. 

As we got to BWI, my daughter’s face went white, and she gasped “Why are we here?” (She had been texting her classmates and making sure that she had packed everything.) It was at that moment that I realized my error.

I needed to get to Philadelphia and FAST! I fired up my Waze app, drove well in excess of the speed limit and got her to Philadelphia well in time to get through TSA and customs well for her flight. It was not a stress-free endeavor, but all’s well that ends well. It ended well, so now I’m looking back wondering if there was anything that could have prevented my “stupid human tricks” or a lesson to be learned.

Once she was safely at her gate waiting to board her plane, we had a chance to recap our crazy mini-adventure and think about how it could have been a quicker and less stressful event. She could have reminded me that it was Philly because she knows I sometimes go on “auto pilot” because of a busy calendar. I could have been more descriptive in my Outlook calendar and done a quick check-in with her before leaving the house, saying “we’re off to BWI…correct?” Just a little bit better communication could have prevented a mini-crisis.

I see this with couples that I talk to on a regular basis. They are both working hard to earn their incomes, raise their kids and plan for the future – but sometimes things get missed in the chaos that is life in today’s world. Financial stress is one of the leading causes of marital disagreements and when it becomes too much to bear, it can frequently lead to divorce.

When one spouse handles the financial affairs and the other is completely disinterested and uninvolved is when I see the stress level being the highest with couples. The financial manager often feels unsupported and the financially uninvolved partner can feel powerless or at the mercy of the financial manager. There’s a simple way to avoid that. Weekly, bi-weekly or monthly financial meetings are a great financial management tool, can be done quickly and can keep two people on the same page.

Here’s all you need for a successful family financial meeting: a calendar (I love the ones from the mall kiosks that you see every year around the holidays), 10 minutes and a pen. Since I’m single, I schedule a financial meeting with myself every other Saturday. I pull out my calendar and using June 2016 as an example, will write my “Payday” on the 15th and 30th. I’ll write “mortgage” on the 1st, “utilities” on the 22nd and every other recurring bill that I have on the date that the bill is due. There are sometimes random bills that come up and aren’t in my monthly budget like car insurance, which I pay quarterly or doctor bills if one of my kids has had a visit recently.

When I see it all laid out on my financial calendar (I don’t put anything else on that calendar and I use my phone for all of my other calendars), it helps me stay on track. I’ve shown this system to some of my married friends and some couples that I’ve worked with to help them solve their financial stress. When they see how easy it is, they promise to try it.

I’ve heard from quite a few couples that both partners, the financial manager as well as the uninvolved one, feel much lower stress levels and the “fights about money” go away or are tremendously reduced after implementing this system. For anyone who is struggling with how to reduce the level of discord around your financial life, try this easy way to engage either yourself or your partner in a discussion about money. A calendar, 10 minutes and a pen are WAY less expensive than a divorce!

Why I’m Thanking Google and the CFPB

May 20, 2016

It’s a regular part of my day to talk to people who are struggling with debt. Some people facing what they consider a crisis level of debt will occasionally make a hasty decision, one that they find helpful in the moment but later regret, and take out a short term loan.  These “payday loans” are available to borrowers with less than stellar credit scores and are readily available in nearly every community in the country, but they are often pretty terrible financial tools.  The interest rates, when looked at as an annualized rate (because rarely are they paid off in the required time, so they continually roll over into new short term loans with the interest continuing to accrue at a high rate), rank up there with the loan sharks in old gangster movies. As a result, the Consumer Financial Protection Bureau is working toward getting this payday loan industry regulated and reigned in a bit.

It was refreshing for me to read this article about Google banning payday loan ads on their search engine. The last few people I talked to who had payday loans found their payday lender online after searching for ways to get out of debt. If they used Google to search for ways to reduce/eliminate debt on a semi-frequent basis, payday lenders could show up on their computer screen and look like a way to reduce a short term pressure. Sure, it adds longer term pressure but in that moment of temporary weakness, the short term pressure release seems like a perfectly rational idea. Now, people who search for short term loans or ways to get out of debt will not see payday lenders showing up on their laptop with the promise of solving a problem (by creating a bigger one!).

I’m pleased with Google’s new approach to payday lending, and I’d love to see that industry shrink as more and more people learn more about how to manage their personal financial lives and master the basics. The “basics” as I see it are: spend less than you make, save a portion of each paycheck, build a comfortable reserve fund and avoid high interest debt. Those who do that will be able to avoid the perils associated with these loans.

For anyone considering a payday loan…DON’T! We’d be more than happy to help you consider other alternatives. Ask us a question on our Facebook page, send us a Tweet or mail us a letter with your situation and we’d be more than happy to help you find a better alternatives. The CFPB and Google are taking action on an issue that we have been helping people address for many years, and I, for one, am happy to see the progress.

 

Retirement Planning Shouldn’t Be Like Counting Jelly Beans

May 06, 2016

When I was growing up, there was a local store that would “give away” a huge stuffed animal to a person who could guess the exact number of jelly beans in a gigantic jar. I think that stuffed animal was still in the store when my kids were about the age I was when I first saw it. There may not be a right answer to that question. After all, did someone spend most of a day painstakingly counting jelly bean after jelly bean and keeping a running tally? Is the number that the store owner believes is correct an actually correct number?

After this long, I’m sure some of the jelly beans have merged together and that might change the correct number anyway. I don’t know if people have actually won the stuffed animal and there are lookalikes that keep getting placed where the old one was…or if it’s one constant big bear sitting there taunting everyone who guesses at the number of jelly beans. But it is certainly a source of entertainment and mystery for kids and for that, I’m thankful that it’s there.

Entertainment and mystery…that’s how many of the people I talk to view their financial lives. They see the “game” of planning for retirement a lot like the jar of jelly beans. “How many are in the jar?” Who knows? “How many will it hold?”

“How much money will I need to live the rest of my life?” “When should I take Social Security?” “How much should I contribute to my 401(k)?” “What will taxes look like in my retirement period?”

These questions aren’t that much different from the jelly bean question, but they certainly are a LOT more important in the grander scheme of life. The good news is that with some thought, some preparation and some planning, you’ll be able to get much closer to the “right answer” with your retirement questions than I ever got with the jar. I am a big fan of simplicity, so when I meet someone who is completely baffled by the concept of retirement planning, I go through a quick retirement reality check with them. It’s a two stage process and I’ll share it here:

Step 1: We use this Retirement Estimator calculator to see if their current course of action will get them close to reaching their goals. If they are on track, we check in annually to make sure they’re staying on track and to see if anything new has developed. If they aren’t on track, we tweak some things to see what it would take.

What happens if they increase their 401(k) savings rate? What if they work a few more years? What if they change their investment strategy and shoot for more growth?

During this step, we make sure they have current statements from any and all investment accounts, including their 401(k). We also talk about and enter any income streams like Social Security, pensions, rental income, etc. It’s a pretty straight forward calculator and we can usually build it in less than 15 minutes as we talk through the inputs.

Step 2: This is my “real world” sanity check of the numbers from the calculator. We look at their take-home pay based on their last few paychecks and figure out a monthly amount that they’re living on today. We can even shrink that number if they are regularly saving money, because those funds aren’t being spent now. We add back about $1,000 for medical coverage and some inflation, since that’s usually being deducted from net pay today.

Then we look at Social Security and pension income and come up with a gap that would be needed from investments. If it’s $1,000/month, I like to annualize that and call it $12,000 per year. Divide 12,000 by 3% (a fairly low withdrawal rate from a portfolio) to get to the amount of money they’d need in their investment accounts ($400,000 in this case – in today’s dollars). This is far from an exact way to calculate retirement needs, but it can help validate the results of the calculator. And, it’s a very easy and understandable way to see what retirement might look like.

Once people know the results, that’s when the real work begins. Sadly, not nearly enough people have ever run a retirement calculator. According to our 2015 Year In Review research, only 22% of the population knows that they are on track to replace 80% of their current income in retirement. That means there is a lot of work to do! Most people have never even run a retirement calculation.

Doing this quick two-step process puts you ahead of the game because at least you know where you stand. Only then can you knowingly make progress. Use the calculator – today! And use my way-too-simple sanity checker as a backup. If you do those two things, you’ll move from hoping you can retire at some point to knowing what it will take to retire when you choose and you’ll end up with a lot more than a stuffed animal.

 

 

Don’t Let Financial Advisor Speak Confuse You

April 29, 2016

“You have to get off the plane. I have the feeling that something is wrong with the left phalange”… “Oh my GOD…there’s NO phalange!”

That was Phoebe from Friends talking about her fear right before a plane took off. She had no idea what the parts of the plane were called and picked a fun word to say. Having broken a few phalanges in my life, I learned that word was a fun one in my youth. But what’s not so fun is having a professional, in any profession, talk to you in words you may not fully understand. When I’ve busted up parts of my body, I’ve asked the orthopedic surgeon to “dumb it down” a bit for me and explain the surgery in clear and simple terms.

When it’s your health or your money at stake, don’t be afraid to ask for an explanation of terms in real English, not industry jargon, so that you can make informed decisions. Recently, I had my kids (17 & 14) listen to a webcast about the “basics of investing” given by a local financial advisor. Here are some terms that the advisor dropped during the webcast that he thought everyone on the webcast would understand, but instead they had him lose kids who hear their dad and his coworkers talk about financial planning on a fairly regular basis:

Asset Allocation: This advisor must have used this term about 20 times and spoke of it as though everyone in the room would understand it. A few people did, but at one point a participant asked him what that meant and my kids said “Thank you!” very quietly. They have gone to my office and heard my end of work-related phone calls since birth, but they were confused by this one. The advisor believed it was universally understood. Asset allocation is simply how your money is divided between different types of investments like stocks, bonds, cash, real estate, etc. .

Diversification: This one goes hand-in-hand with asset allocation. Diversification simply means not having your eggs all in one basket. What diversification ISN’T is owning 6 different CDs at 6 different banks or 5 different S&P 500 (is that jargon, too?) index funds.

ROI: The advisor talked a few times about meeting with your advisor (who he hoped would be him!) to review your ROI frequently. My kids didn’t realize it was a 3 letter acronym. One thought it was something like “Ahroweye” and they had never encountered that word before. ROI, for those who aren’t sure, is “return on investment” or in English – “how much money did I make?”

Fiduciary: The advisor mentioned that he always acts as a fiduciary for his clients. That made me smile, but I know what that means. He talked about being a fiduciary about a dozen times, but never took it a step further to explain what that meant. After the formal presentation, one of the participants asked what that meant because he had said it so often. Sadly, most of the participants dropped off before he explained that a fiduciary MUST legally put his clients’ interests first, rather than his own.

It’s sad that this concept has a term that requires it to be done. Most clients of financial advisors would be shocked to know that the advisor isn’t required to put their interests first in most client/advisor relationships. That’s the way the world should work, but that’s not the way it actually works…unless the advisor is acting as a fiduciary. This is a very important term that the advisor simply assumed that the audience would understand.

There are a whole lot more terms that I hear advisors use with regularity that the general public wouldn’t understand initially. I will throw some more of them out there in a future blog post. Whether you’re talking about phalanges, uvulas, or hedge funds, the key is to make sure that the professional having this conversation with you slows down and makes sure you understand and don’t allow yourself to say “yes” to a surgery or an investment until you are completely confident that you have all the information you need to make the best decision possible.

 

 

Don’t Overspend on Assets That Depreciate in Value

April 22, 2016

My middle child, who is merely days away from taking his driver’s license exam, thinks that it is a major hardship that he isn’t going to have a car on day one after he gets his license. That’s not such a bad problem to have considering all the problems in the world. I asked him about the kind of car he’d like to drive and he said he wouldn’t mind a new Mercedes or BMW…a Ferrari would do. In a perfect world, a Lamborghini or Bugatti would be his preference.

That’s when I reminded him that the world is not perfect and that it was time for a quick re-visit of our reality. I had my hiking boots in my car and told him he is going to get a car that resembles those old hiking boots, probably not a car that a high level executive would drive, but it beats walking or riding a bicycle. My rationale: a first car is far more likely to be dented, dinged and wrecked than a car that you buy after 20 years of driving experience.  Inexperienced drivers pay higher insurance rates because they are a higher risk, so we are going to opt for an old ugly car that goes slow and is incredibly safe over a shiny, fast small sporty car. I’d like to see him live a long, healthy life and this car choice will help that along.

I use this theory for buying my cars:

Buy a high quality car that is 3-5 years old with 40,000–60,000 miles and coming off the first lease. I can pay pennies on the dollar based on the original price. I’ll drive it until it has 200-300k miles on it and leaseholders tend to take very good care of their cars. I’m getting a nearly new and high quality car at a low price. My current car is a luxury model that I bought for just under $10,000 2 or 3 years ago and has been a great purchase.

For my son:

If he wants a Mercedes or BMW, that’s great! But it’s not going to happen. Unless we find one that is 10+ years old, has 100k+ miles on it and can be had for a very low price. More likely, we will look for great deals on high quality cars with lots of mileage. He will be commuting a few miles to work or school and taking the occasional road trip.

I want him to have a 4 cylinder engine to be effective on gas mileage and not have much horsepower. And I want the car to have a great safety record from a car maker that has a reputation for safe cars. Looking at cars.com, I found 200+ cars for under $5,000 that my son, his mom and I can all pitch in and purchase together. Now his job is to pass his exam and come up with 1/3 of the cost of the car!

What do I hope you learn about from my son’s car? Don’t overspend on assets that depreciate in value!  Americans spend far too much on cars and other things that don’t increase in value. Set some rules about how much you’re willing to spend on things like this and stick to them.

My kids all laugh when they say they’re going to “invest” in a new computer or video game. They roll their eyes when I ask how much of a profit they’ll make if they sell their new “investment” 5 years later, knowing that they’re about to hear investing means trying to earn a profit. Spending is what we do when a purchase decreases in value. The moral of this long story is to minimize the cost of purchases so that you have room to invest for your future.

 

Two Ways To Make Next April 15 Less Taxing

April 15, 2016

In the early days of my career as a financial advisor, there were some “interesting” investments that my clients owned. There were a lot of oil and gas partnerships that were very mediocre investments if viewed solely as an investment vehicle, but they offered spectacular tax advantages that made them wildly popular. People wanted to buy them solely for the tax benefits. And then…tax laws changed and these investments tanked! Clients couldn’t get out of them because no one else wanted them.

Similarly, I have had many conversations lately with people who are looking for magic strategies to reduce or eliminate their tax burdens from 2015. (It must be close to April 15th.) Newsflash – there is very little you can do in April 2016 to impact your 2015 tax return. When it comes to tax planning, the key is to start early in 2016 (I’d suggest NOW if you haven’t already) to impact the tax return you’ll file on April 15th 2017. A couple of my favorite ways to reduce income tax burdens are available right through your employer in many cases:

Health Savings Account (HSA): This is my #1 favorite right now. The contribution limit for single in ’16 is $3,350 and for a family it’s $6,750. Contributions are either pre-tax (through your employer) or tax deductible (if you write a check) and if used for medical expenses, they are tax-free on the way out too.

Are you kidding me??? The IRS allows a vehicle to be tax-free in AND tax-free out? That’s remarkable. You can build a substantial bucket of money in the future, and the IRS can help subsidize it. I can’t think of another vehicle where you’re allowed to “double dip” with tax benefits in and out.

401(k): Another great way to minimize next year’s taxes is to get as close as you can to the IRS maximum on your 401(k) contribution. This year, it’s $18,000 ($24,000 if over 50 years of age). If you’re in the 25% tax bracket, getting to the $18,000 mark would save you $4,500 in current year taxation. Rather than just stop at 3% or 6%, whatever the employer matching contribution is…..work toward getting the max contribution. If you can’t do it this year, you can increase your contribution by 1-2% per year until you’re there.

I hear and read a lot of “experts” talking about stopping at the level of employer matching contributions and then opening an IRA or Roth IRA outside of the employer account. I’m not opposed to that, but not everyone is disciplined enough to make that work.  But if you get up to the maximum contribution and then do the IRA or Roth IRA, you’re going to be saving an enormous amount of money and getting closer to your retirement goals with each passing paycheck. For perspective – I’ve never met someone who was within months of retiring complain that they had too much money saved for retirement!

These are two quick and easy things that you can do to make next April 15th much more manageable and reduce your overall tax burden. These are the obvious ones, and a future blog post will touch on some of the not so obvious ones. Until then, get busy contributing to your HSA and 401(k)!

Don’t Make My Moving Mistakes

April 08, 2016

After a long process (it started with my first offer in August) of looking for, making offers for and securing financing for a new place to live, I just finished moving. Whew, that was a process…While I’ve done it many times in my life, I always forget how tough it is and how many things come up and how they can be budget busters. I re-learned a few things and maybe you can learn from my mistakes and not commit similar ones.

Always expect things to cost more than estimated! When you pay for a home inspection,  your inspector will find issues that need to be fixed – either by the seller or by you as the new buyer. In my recent experience, the issues that I needed to fix always cost just a bit more than anticipated.

For instance, there was some very worn and stained carpeting on the stairs that I wanted to replace. I looked under one area during the inspection that was a bit easy to peek under and I saw a nice wooden step. My plan was to simply pull up the carpet, have nice wood steps and remember NOT to wear slippery socks when going up and down the stairs.

Well, when the carpeting was removed, there were only two or three steps (out of 10-12) that looked decent. The rest were marked, scarred, virtually non-existent (a simple plywood plank, not a finished wood step) and my “nice wood stairs” idea went up in smoke. I called a friend who is in the carpet business and had him come out to salvage the situation with a newly carpeted staircase. It ended well, but that was a check I hadn’t anticipated writing.

What you can learn from my mistake: On your next move, either do some research into the pricing of each product/service that you will need or add in a “fluff factor” of 10-20% for the unexpected. It’s a bit cliché to say “expect the unexpected”…but, expect it! And do a room by room walk through with a notepad and build a list of projects that need to be done so that you have as much information as you can get to make your ballpark costs as accurate as possible.

You will pay for things you didn’t think you’d need!  When I moved, I thought I did a pretty thorough job of listing everything that I needed to pay for. I had movers, boxes, packing supplies, home inspection, appraisal, etc.

But there were two things that completely escaped my list. I forgot all about “service change” costs with my gas/electric provider and my phone/cable/Internet service provider.  Because my new place had never been serviced by these providers before, there were some installation charges added to the service change fees. In all, there were a few hundred dollars that I had no idea I’d have to spend.

Plus, my move was in April – which last time I checked was in the spring – but in Baltimore, the spring can have some cold days (as evidenced by the snow flurries I saw this morning). I completely forgot that my oil tank would need to be filled and it took about 250 gallons to fill. That was another big unexpected charge. Adding in a few other things that I hadn’t added to my list (shower rod and shower curtain, bath mats, outdoor deck chairs) – there was over $1,000 that I didn’t expect to pay but ended up paying.

What you can learn from my mistake: When you are calling your service providers, do it well in advance and ask about waiving the change fees in exchange for you being a loyal long term customer.  Ask for discounts. Ask if there is any way to lower your bill so that after you move, you have an embedded savings. I was able to do that with Verizon Fios and added a couple movie channels for less than my prior package price.

Finally, walk through with someone who has complementary skill sets. I understand the structural and mechanical pieces so I would have been better served to walk through (with my notepad) with someone who has more of a decorative slant than I do! (I’ll never be considered to have fashion/style sense.)

Moving is expensive…and exhausting….and frustrating. My budget was a bit busted and I am going to have to cut back in some other areas (dining out, coffee shops) over the next year or so in order to recover from the damage that the move did to my finances. But after spending a few nights in my new place and adjusting to the new sounds, I have to say it was very much worth the headaches! It’s a small price to pay for all of the reasons I chose to move and take on the financial trauma that a move can do to my regular budget.

 

 

 

If At First You Don’t Succeed…

April 01, 2016

Over the weekend, my youngest (he’s 14 now) built a computer all by himself. He saved up money from odd jobs and birthdays and bought a bunch of computer parts. Eventually, he had enough parts to build the computer and on his first attempt at turning it on, it didn’t work. He looked terribly defeated and thought he had completely messed it up.

I have some friends who work in the I.T. field and I was texting them to get thoughts on what was wrong. Everything they suggested appeared to be in good order. So he and I made a trip to the store where he purchased the parts and we were able to get a tech to look at his computer.

There was one very small connector that wasn’t fully engaged, and the problem was fixed within seconds! We took it home, fired up the computer and it worked!  But it didn’t have Internet access. To a kid who just built a gaming computer, that’s a deal breaker.

So we spent the next hour installing an updated operating system and working on his network connection to no avail. Once again, he looked defeated. I suggested that we step back for a minute, grab a bite to eat and think.

While we were having dinner, we started talking about the parts he bought and what each part was for. I asked the simple question “did you buy a wireless adapter or wireless card?” and he started hysterically laughing. We had just wasted time on a task that was NEVER going to be successful because we had no wireless network adapter.

So we went back to the store and spent $15 on a wireless card and once he installed it, the computer worked perfectly, even better than he expected. The look of happiness on his face when he was able to hit the “on” button and know that he took something from idea, to effort, to final product was pretty cool. He was very pleased and I was very proud.  There’s something about seeing someone reach a goal that is so very rewarding.

I saw the same look on someone’s face today. She and I have been meeting for about 5 years now on a yearly or sometimes quarterly basis. When we met the first time, she thought at age 50 that retiring at age 55 was a ridiculous and impossible goal. But she wanted to tackle it and if she “failed” in that goal, she’d at least be ahead of her current pace.

So she radically altered her lifestyle and started cooking more and going to restaurants less. She compromised and decided to buy only $14/bottle (or less) wine, as opposed to her $30-$40/bottle norm. She started using the “fluff” in her budget, which was now totally removed, to pay down debt and increase her 401(k) contributions. She got rid of her BMW 7-series lease and bought a nice, reliable, used Honda Accord.

Every quarter, we would meet again and go over her expenses and her debt reduction. On the annual reviews, we would do retirement projections and what started out as “You’ve got some SERIOUS work to do” projections turned into “You’re making some serious progress” conversations. The last two years have been “You’re almost on track” and “You could actually pull this off.” It won’t be the lifestyles of the rich and famous, but it will be a life that she would find enjoyable.

When we last ran her numbers, she realized that she could – if she wanted – walk into her manager’s office and call it a career. There would be not a lot of cushion or margin for error, and she may opt to work part-time or do some short term assignments, but she walked out of the office feeling confident that she had the capacity to retire. She isn’t making any quick decisions, and it might make sense to work a bit longer to build a bigger margin for error, but I wouldn’t be shocked if we have a conversation in the next month or two and she tells me that she is writing her letter of resignation.

My son’s first few attempts at turning the computer on turned out to be not so spectacular. My “frequent flyer” didn’t see success when we ran retirement numbers the first time. Neither one got discouraged. Both kept looking for ways to get closer to their goals.

What are your goals? Whether you’re looking to build a computer or make plans to retire earlier than you may think you’re capable of, don’t let the first attempt get you down. As you find yourself coming up short on a goal, which we all do periodically, go back to the beginning, remember why you set the goal and let that drive you toward your next attempt, which will inevitably be closer to success.

 

Follow These Steps To Stop Making Bad Decisions

March 25, 2016

In a world where things can “live forever” on the Internet, we all need to be careful when posting things to Facebook, Instagram, Snapchat or any other social media platform. A funny, in a not very funny way, example of that happened with the rapper 50 Cent before he appeared in bankruptcy court recently. He posted a photo of himself sitting on the floor with stacks of money spelling out “B-R-O-K-E.” His creditors were NOT amused. (Note to self – when trying to show impoverishment, it’s best to not have a flamboyant display of wealth posted to social media.)

We’ve all made mistakes or put our foot in our mouth or done something to help someone else point out the error of our ways, but this is one of my all time favorites. It’s not quite as colorful as a story in my local paper when I was a kid about a guy who tried to rob a gun store at knifepoint (I’ll let you do the math and figure out how that ended) but the concept is the same. I wonder if at any point before having that photo snapped, 50 thought “this just might be the worst idea I’ve had in a long time?”

Again, we all do silly and not brilliant things from time to time, and I’m no exception. I’ve pushed myself too far too fast when recovering from injuries and ended up needing surgery. The worst part is I knew that surgery could be a result if I didn’t dial back, but I didn’t listen to the little voice in my head that said “this is really stupid!”

This week, I spent the majority of my time talking with people in financial coaching sessions and I heard a lot of people acknowledge that they made very dumb (their word, not mine) financial decisions when they KNEW it was a mistake before doing it. It made me wonder how often that happens and why we do it. Why do we make bad decisions?

I’ll let you read that article and hit Google to do more research, but regardless of the “why,” it’s something we humans do. And I’m noticing it everywhere now. The more people I talk to, the more admit to knowing before they made a bad choice that it was a bad choice. We willingly disregard our instincts and move forward to make regrettable choices.  My challenge to myself and to you:  STOP IT!!!

When you are about to spend way too much money buying something that you don’t really need – don’t do it! When you are thinking about reducing your 401(k) contributions for a short term reason – walk away from your computer and don’t allow yourself to do it! When you are about to buy a car and the payment is almost as much as a mortgage on a small house – be like Nancy Reagan and “Just Say NO”

Prolific business authors Chip and Dan Heath have a book about decision making. Decisive: How to Make Better Decisions in Life and Work is a great read. It goes into the “4 villains” of bad decision making:  1 – Our focus it too narrow  2 – We have confirmation bias 3   – Short term emotions get in the way 4 – Overconfidence hurts us.  If you can understand why you are about to make a bad decision (I recommend reading the book so you get a full explanation of each of the 4 villains), you’ll be less likely to follow through with it.

Where the book gets even better is when it moves from diagnosing why we make bad choices to building a good decision making process.  There are a few simple steps there that we can all use to help us make better choices in life. They call it the WRAP method:

W – Widen your options. Move from “this or that” to “this AND that.” Don’t limit your view.

R – Reality test your assumptions. Try to see the decision from your point of view, the points of view of your friends and family, and people who would disagree with the decision. The more angles you see, the better your decision becomes.

A – Attain distance before deciding. I love the 10/10/10 rule. How will you feel in 10 minutes, 10 months, 10 years about this decision?

P – Prepare to be wrong. Build in time for the unexpected. Anticipate problems and don’t let a bad decision linger.

There is a lot of info packed into each part of the WRAP process. (Here is a great summary of it.) If you are looking for a way to improve your decision making process, whether it’s already good (like I claim mine is!) or if it needs some work, head to your local library (trying to be financially sound) or hit your local bookseller to look for this book. Maybe it can awaken your inner “is this a good idea?” voice. When managing your financial life, slow down, take a deep breath, and try to listen to that voice.

 

 

 

 

Why You Need Emergency Cash Reserves

March 18, 2016

Recently, Financial Finesse was fortunate enough to hire Steve White – a bright and handsome gentleman from Texas. If you doubt the handsome part, just ask him…he’ll tell you! Steve shared his view with me of why an emergency fund is critical for your life, and it sounded like something I should share with you. Continue reading “Why You Need Emergency Cash Reserves”

Why You Need a Plan B

February 26, 2016

I woke up one morning recently and scrolled through my emails on my phone before getting out of bed. I was shocked to see that one of my coworkers was involved in a hit and run accident. A car came barreling through an intersection, hit her car and drove away. She was injured in the accident and was, a day later, more upset that her workout routine was disrupted than being in a pretty major accident. Continue reading “Why You Need a Plan B”

Are Your Purchases Like Super Bowl Ads?

February 19, 2016

Less than a week ago, I had friends over to watch the Super Bowl. We had a bit too much food, drank a few adult beverages and watched a game filled with excellent defensive play. It was a pretty good game. Continue reading “Are Your Purchases Like Super Bowl Ads?”

How To Make That 1099 Less Taxing

February 12, 2016

One of the TV moments that I still find absolutely hilarious a long time after its first airing is Reverend Jim from “Taxi” taking his driver’s license exam. This clip STILL cracks me up every time I see it. While Rev. Jim not knowing what a yellow light means is not a big financial issue (although, I swear that A LOT of drivers I’ve seen lately have absolutely no clue what it means either), not knowing what a 1099 means could provide quite a shock to the recipient. Continue reading “How To Make That 1099 Less Taxing”

Are You Lip Syncing Through Your Financial Life?

February 05, 2016

I’ve recently become a huge fan of the show Lip Sync Battle. Seeing celebrities “sing” the hits of their favorite artists while doing some very entertaining dances is absolutely hilarious. While it’s one of my guilty pleasures and has led to some world class laughter (“The Rock” as Taylor Swift, Anne Hathaway as Miley Cyrus, Channing Tatum vs. Jenna Dewan Tatum), in one of my odd “connect the dots” moments, I realized that I was having a conversation with someone who was lip syncing her life. Continue reading “Are You Lip Syncing Through Your Financial Life?”