Should You Let A Robo-Advisor Pick Your Investments?

February 07, 2025

Technology has revolutionized everything from choosing a restaurant to getting directions or even a ride to that restaurant, but is it time for technology to get you to your investment destination as well? While this may sound like science fiction, the rise of “robo-advisors” has made this into a plausible option.

These online automated investment services can provide investment advice or management for typically a lot less than a human advisor. But should you really entrust your nest egg to a computer and if so, which of the many options would make the most sense for you?

Pros of robo-advisors

  • It’s convenient. You don’t have to have a large amount to invest or go to a fancy office and talk to a pushy salesperson. Most robo-advisors have very low minimums and allow you to set up and fund the account from the comfort of your smartphone or at least, your computer.
  • You get a customized asset allocation. “Asset allocation” is a fancy term for dividing your money into various types of investments (called “asset classes”) like stocks, bonds, and cash. Rather than having to make this decision on your own, robo-advisors generally do this for you based on your responses to questions that are designed to determine your time frame and comfort with risk. All you need to do is then fund the account.
  • The costs are relatively low. You could get asset allocation advice from a human advisor, but that typically costs about 1% of your assets. They may also put you into funds with high fees. Robo-advisors generally charge a lot less and use low cost index funds.

Cons of robo-advisors

  • The “advice” is very limited. Robo-advisors generally only help you with your investments. You typically won’t get help with other financial planning issues like how much you should be saving, what type of accounts to invest in, and whether you have adequate insurance coverage and estate planning. The investment advice you do get may also not incorporate taxes or how your money is invested elsewhere.
  • There’s no “hand holding.” One of the most valuable services of an advisor is to talk you out of doing something stupid – whether that’s putting too much in an aggressive tech stock or bailing out when the market takes a downturn. To the extent that robo-advisors do this, they still lack the emotional connection and persuasive/motivational ability of a trusted human advisor.
  • There are generally still advisory fees. Even a small advisory fee can add up over time. You could do a lot of what robo-advisors do without paying their fees by simply investing in an asset allocation fund that matches your risk level or taking a risk tolerance questionnaire and following the asset allocation guidelines.

How to get started if a robo-advisor is what you need

  • Know what you’re looking for. If you’re investing in a taxable account, you might want to look for a robo-advisor that offers tax-efficient investing and/or tax loss harvesting. A few offer access to a human advisor by phone. Make sure you’re also comfortable with the program’s investment strategy.
  • Know your options. Your employer’s retirement plan may offer a robo-advisor program. Some are also offered by particular brokerage firms for their clients.
  • Know what you’re paying. Look at both the fees that the robo-advisor charges and the expenses of the funds it recommends. “Free” robo-advisors may put you in their own bank accounts and mutual funds, which may be more expensive than another program’s fees.

For investors who are looking for investment management or advice but are unwilling or unable to hire a financial advisor, robo-advisors can offer a simple and relatively low cost solution. (Just be aware of their limitations.) At the very least, they will make human advisors work that much harder to earn the fees they charge.

How To Become A Millionaire In Just 15 Minutes

February 07, 2025

I was recently speaking with my colleague Doug Spencer about how many people joke about winning the lottery and he asked me: “What are your odds of winning a lottery?” I know the odds are always outrageous, so I’ve never played the lottery, but I decided to look up those odds and give Mr. Spencer a smart answer. I searched the Internet and found that, according to the lottery mathematics page in Wikipedia, the odds of winning a standard lottery (picking six numbers correct numbers out of 49) are 1 in 13.98 million. It doesn’t matter how many people play. Those are just the odds of picking those numbers. By comparison, you have better odds of becoming an astronaut, giving birth to identical quadruplets, or winning a gold medal in the Olympic Games.

The point Doug wanted to make to me is that the odds of collecting a massive amount of wealth by chance are slim, and the odds of doing so on purpose, however, are actually very certain. His method is simply to add 1% to your annual savings rate every year from now until you retire. It can even be done automatically in most cases through your employer’s auto-escalation feature in a 401(k) or other retirement savings plan. This got me to thinking about those numbers more seriously, and that’s when I discovered just how true his secret is – and how I can become a millionaire in just 15 minutes with incredibly little effort.

The first five minutes of your day = 1%

The standard American work week is 40 hours or eight hours per day. It just so happens that 1% of that eight hours is 4.8 minutes. I’m going to round that off to 5 minutes here. That means that in the first five minutes of every day, I’ve earned 1% of my income, and that’s what I’m going to add to my savings.

It takes four minutes to calculate how this might work

I used an auto-escalation calculator to learn what would happen if, starting at age 25, I contributed 1% of my income to my 401(k) and used moderately aggressive funds, and increased that contribution by 1% each year until I was contributing 20% (45 years old). According to a Tower’s Watson survey of employers, the average pay raise per year is 3% for American workers, so by adding just 1% each year to my savings rate, I’m still getting the advantage of my pay increases and not missing that 1%. If my company matching contribution is 6%, and I start off making $48,000 a year, then by the time I retire at 65, I will have amassed over one-million dollars in my 401(k) account! It took me four minutes to open up and run this calculator with a few different scenarios. Your time may be quicker.

In just three minutes I can sign up

Actually signing up for an auto-escalator in most 401(k)s is a breeze. Just log in and find it as an option under contributions. In some plans, it happens automatically when you sign up for the 401(k) or when you are auto-enrolled at the beginning of employment. When I walked through the process with a participant in a plan with whom I recently spoke, the whole process took less than three minutes!

Two minutes to check your investments

While you’re accessing your 401(k), take just a couple of minutes to review your investments and re-balance to fit your investment plan, if necessary.

Take a minute to think of future you

Write yourself a quick thank you note from the future.

Should You Be In An Asset Allocation Fund?

February 07, 2025

One of the most common questions we get on the Financial Helpline is how to choose investments in your employer’s retirement plan. Investing can be complex and intimidating so it doesn’t surprise me that people are looking for help with their decision. What does surprise me is how few of them understand and use an option that was created to help simplify their decision.

Target date or target risk funds

Depending on your plan, you may have a target date or a target risk fund available to you. Both are “asset allocation funds” that are designed to be fully-diversified “one stop shops.” All you need to do is pick one fund that most closely matches your target retirement date or your risk level. (Target date funds can also be “set it and forget it” because the funds automatically become more conservative as you get closer to the target retirement date.)

If you think of investing as getting you from point A to point B, asset allocation funds are like the commercial jets of investing. They’re much cheaper than a private jet (a financial advisor) and much simpler than piloting your own plane (picking your own investments). That’s why when I first heard about these funds early in my financial career, I assumed they would take over much of the mutual fund industry and even replace the need for a lot of financial advisors. While they have seen a meteoric rise, especially as the default option in retirement plans, they still aren’t utilized as much as I thought they would be. I think there are 3 main myths responsible for this:

1. Putting everything in one asset allocation fund is having all my eggs in one basket. What you don’t see is that an asset allocation fund is actually a basket of baskets. Each fund is composed of several other funds. In fact, one asset allocation fund is usually more diversified then the typical mix of funds that I see people in.

So why not have other funds in addition to it? Isn’t that making your portfolio even more diversified? The problem here is that these funds were professionally designed to hold a certain proportion of investments so adding others will throw the balance off. It’s like adding extra ingredients to a chef-prepared meal. Only do it if you really know what you’re doing (in which case, you probably don’t need an asset allocation fund anyway).

2. I can probably do better on my own. Remember that these funds were put together by professional money managers who’ve been trained in investment management and do this for a living. What’s the chance that you’ll create a better portfolio? One study of 401(k) participants showed that investors who chose their own funds did worse on average than those who just went with a target date fund.

Part of that is due to lack of knowledge. However, a lot is also likely due to the temptation to buy investments that are performing well and then sell them when they eventually underperform, which is a recipe for buying high and selling low. If nothing else, asset allocation funds provide discipline… assuming you don’t trade these funds too of course.

3. Asset allocation funds are always more expensive. You would think that this professional management would come at a steep price. After all, paying for investment management typically costs .5-1% of your portfolio. However, asset allocation funds are generally only slightly more expensive than other funds and if they’re composed of index funds, they can actually cost much less than most actively managed funds. Check the fund’s expense ratio before making assumptions as to their cost.

That all being said, there are reasons not to use an asset allocation fund. You may not have one available in your plan or the one you have may be too expensive. Sophisticated investors or those with an advisor may want to create a more personalized portfolio that better matches their risk level or complements outside investments to maximize tax-efficiency. But if those situations don’t apply to you, consider an asset allocation fund. Flying commercial may not be a perfect experience, but it’s better than the alternatives for most people.

Choosing A Top 2% Financial Planner

February 06, 2025

Are you looking for a financial planner to help you sort out all the volatility in the stock market? Not to mention the constant discussion of potential tax law changes? Don’t worry. This is not a sales pitch.

In fact, as workplace financial educators, we often get asked if we provide financial planning and coaching directly for individuals. Unfortunately, we have to turn them down since we only work with employees through financial wellness benefits their employer provides. Financial Finesse strives to have the most impressive team of financial planners that anyone would recommend to a friend or family member.

So how did we find them? The answer is a rigorous series of interviews and auditions from which only the top 2% are hired. While you can’t duplicate the process exactly, there are many aspects that can be applied to your search.

Follow the money

Before we even begin looking at resumes, we make it very clear that we are not hiring commissioned salespeople. In fact, our planners have to give up any sales licenses upon being hired. After all, even the most honest planners can talk themselves into believing something that their paycheck is dependent upon.

To avoid these types of biases, look for planners that don’t sell financial products. Look for planners that charge a fee. However, be aware that “fee-based” planners usually charge a fee and collect a commission. Instead, you want a “fee-only” planner that doesn’t accept commissions at all.

One resource is the National Association of Personal Financial Advisors or NAPFA, which is an organization of fee-only financial advisors. Many of them charge fees based on a percentage of the assets they manage. They also typically require a minimum level of assets to work with them. However, some charge fixed annual, monthly, or hourly fees instead. I find this to be the most unbiased approach and usually the most cost-effective as well.

Know your ABCs and CFPs

You wouldn’t go to a doctor without an MD or a lawyer without a law degree, would you? Doctors and lawyers are legally required to have certain designations in order to practice, but not so for financial planners. They must simply pass two tests. One on securities law to sell or provide advice on investments and another on insurance law to sell insurance.

To fill the gap, an alphabet soup of designations has arisen that planners can purchase with the hope of buying some credibility. It’s essentially just another form of marketing. This has led to a lot of confusion for people looking for expertise.

While there are many respected financial planning credentials, all of our planners are required to have the CFP® mark. The CFP® mark has long been the most widely recognized designation in the profession. To become CFP® certified, a financial planner must attain a certain level of financial education, pass a comprehensive financial planning exam, have at least three years of full-time experience, and undergo a background check. To stay in good standing, planners must continue taking continuing education courses and maintain high ethical standards. While no screening process is perfect, it can weed out a lot of people you don’t want handling your money. Other worthy designations include the ChFC and PFS (which is only available to a CPA, which is another trustworthy credential).

Experience matters

While you must have three years of experience to gain a CFP® certification, Financial Finesse requires at least ten years. Research has shown that it takes about 10,000 hours of deliberate practice to master a skill, including financial planning. This is especially important in the financial industry. Many financial planners enter the profession with no financial background then set loose after little more than sales training.

For example, I started my financial career right out of college largely based on having done well selling cutlery. Needless to say, I’m a much better planner now than I was then. I wasn’t the only one without any real financial experience though. Most of my colleagues were in the same boat, and many decided to switch careers within the first few years, forcing their clients to find a new planner.

Ten years also usually gives financial planners exposure to a full market cycle. That’s important because there many hard-learned lessons at each stage of the cycle. It’s probably best if a planner isn’t learning those lessons with your life savings.

Personality matters too

Once we screen resumes for credentials and experience, we conduct a series of interviews and auditions. These interviews test the candidate’s financial knowledge, ability to provide education and guidance, and whether they’re a good cultural fit. Likewise, once you’ve narrowed your search, interview at least three to determine the one most personally compatible with you. Are they easy to talk with? Do they seem to listen and really understand you? Do they come across as trustworthy?

Trust but verify

Before we hire anyone, we check their references and credit report. Ask your prospective planner if they have any clients similar to you that you can call for a reference. Almost anyone can find someone to provide a good reference so you’ll want to do your own research too. You can find information on the Investment Advisor Public Disclosure website if the planner is an investment broker or advisor.

It may seem like a lot to do, but choosing a financial planner is a big decision. This can be a lifelong relationship with someone that can help you achieve some of your most important goals. Don’t you want them to be in the top 2%?

How to Be Financially Independent in 5 Years

February 06, 2025

One of the things that makes the lives of financial planners so difficult is that we usually have to get people to do what they don’t want to do, so that they can get what they want. In other businesses and professions, you’re generally either providing a good or service that will provide some immediate pleasure or alleviate some immediate pain.

Financial planning is more like dieting and exercise. Almost all the pain (saving money, taking a little more investment risk, diversifying out of your favorite stock, or taking the time to draft boring estate planning documents) is upfront for a gain (being debt free, having enough money to retire, or making sure your family is taken care of in case something happens to you) that seems so distant and far away.

Find one goal that really motivates you

Most of us know that financial planning is something that we need to do, but it’s easy to procrastinate because it’s rarely urgent (and by then it’s often too late to do much). So how can we overcome the challenge of our own inertia? I think it begins with finding at least one goal that really motivates you.

Becoming financially free in just 5 years

One of the things that has inspired me is a blog called earlyretirementextreme.com, which shares stories and tips from people who were able to retire in their early 30s, not through get rich quick schemes, but by “extreme” saving. The math works out so that if you save 75% of your after-tax income, and earn about 8% a year on those savings for 5 years, you’d have enough to maintain that standard of living indefinitely by withdrawing a sustainable income of 4% a year from those savings. Imagine being financially independent 5 years from now and being able to do whatever you’d like to do for the rest of your life?

I also know this is possible firsthand because I have a very good friend who will be financially independent, and essentially able to retire, this year at the ripe old age of 32. He did this without ever earning a six-figure income or making any noticeable sacrifices (he doesn’t make his own clothes or go dumpster diving). In fact, you wouldn’t notice much different about his lifestyle at all.

Why aren’t more people doing this?

So why don’t more people do this? Obviously, it’s quite difficult to live on only 25% of your after-tax income but the blog is full of more real-life examples of individuals who’ve been able to do just that with middle-class incomes of $30-70k. The most important thing is changing your perspective on money and how much you really need to live a happy and fulfilling life.

As an example, I read an article about how many wealthy technology executives and entrepreneurs live incredibly modest lifestyles. Warren Buffett, the second richest man in the country, is also notorious for his frugality. When you really think about it, you may discover that you need a lot less than our consumer society would lead you to believe.

Just try some of the ideas

That all being said, saving the full 75% may not be realistic for most people, especially if you’re used to a certain standard of living or have a lot of financial obligations that are hard to get out of. But, if you could apply just a few of these ideas to your life and save, say 30% of your income, it could still make quite a big difference, whether your goal is to pay off debt faster or retire a few years earlier.

I’ve actually been able to save and invest about 75% of my income. Does that mean I’m planning to retire in 5 years? Not necessarily. I enjoy my job and can’t imagine not working at all, even when I’m well into my golden years. To me, it’s more about the security, freedom, and peace of mind that comes from not being dependent on anyone else for my livelihood.

Where you are in life matters

A final point is that the younger you are, the easier, more necessary, and more beneficial these changes will be. It will be easier because young people tend to have fewer financial obligations. For example, recent graduates often just need to maintain the lifestyle they’re already used to in college (and have enjoyed quite a bit) instead of automatically increasing their spending to match their higher incomes once they start working.

At the same time, it will be more necessary because younger generations won’t be able to count as much on government entitlement programs that are going bankrupt and defined benefit pension plans that are going the way of the dinosaur. The good news though, is that they will benefit more from having a longer time for their savings to grow and compound and for them to enjoy the freedom that comes with financial independence.

Is It The Right Time To Convert To Roth?

February 06, 2025

Are you wondering if you should convert your retirement account to a Roth by the end of the year? After all, there’s no income limit on IRA conversions. Many employers are now allowing employees to convert their company retirement plan balances to Roth while they’re still working there. At first glance, it may sound appealing. Earnings in a Roth can grow tax-free, and who doesn’t like tax-free? However, here are some reasons why now might not be the time for a Roth conversion:

3 reasons you might not convert to Roth this year

1) You have to withdraw money from the retirement account to pay the taxes. If you have to pay the taxes from money you withdraw from the account, it usually doesn’t make financial sense as that money will no longer be growing for your retirement. This is even more of a tax concern if the withdrawal is subject to a 10% early withdrawal penalty.

2) You’ll pay a lower tax rate in retirement. This can be a tricky one because the tendency is to compare your current tax bracket with what you expect it to be in retirement. There are a couple of things to keep in mind though. One is that the conversion itself can push you into a higher tax bracket. The second is that when you eventually withdraw the money from your non-Roth retirement account, it won’t all be taxed at that rate.

You can calculate your marginal tax bracket and effective average tax rate here for current and projected retirement income. (Don’t factor in inflation for your future retirement income since the tax brackets are adjusted for inflation too.) The tax you pay on the conversion is your current marginal tax bracket. However, the tax you avoid on the Roth IRA withdrawals is your future effective average tax rate.

3) You have a child applying for financial aid. A Roth conversion would increase your reported income on financial aid forms and potentially reduce your child’s financial aid eligibility. You can estimate your expected family contribution to college bills based on your taxable income here.

Of course, there are also situations where a Roth conversion makes sense:

6 reasons to consider converting to Roth this year

1) Your investments are down in value. This could be an opportunity to pay taxes while they’re low and then a long-term investment time horizon allows them to grow tax-free. When the markets give you a temporary investment lemon, a Roth conversion lets you turn it into tax lemonade.

2) You think the tax rate could be higher upon withdrawal. You may not have worked at least part of the year (in school, taking time off to care for a child, or just in between jobs), have larger than usual deductions, or have other reasons to be in a lower tax bracket this year. In that case, this could be a good time to pay the tax on a Roth conversion.

You may also rather pay taxes on the money now since you expect the money to be taxed at a higher rate in the future. Perhaps you’re getting a large pension or have other income that will fill in the lower tax brackets in retirement. Maybe you’re worried about tax rates going higher by the time you retire. You may also intend to pass the account on to heirs that could be in a higher tax bracket.

3) You have money to pay the taxes outside of the retirement account.  By using the money to pay the tax on the conversion, it’s like you’re making a “contribution” to the account. Let’s say you have $24k sitting in a savings account and you’re going to convert a $100k pre-tax IRA to a Roth IRA. At a 24% tax rate, the $100k pre-tax IRA is equivalent to a $76k Roth IRA. By converting and using money outside of the account to pay the taxes, the $100k pre-tax IRA balance becomes a $100k Roth IRA balance, which is equivalent to a $24k “contribution” to the Roth IRA.

Had you simply invested the $24k in a taxable account, you’d have to pay taxes on the earnings. By transferring the value into the Roth IRA, the earnings grow tax free.

4) You want to use the money for a non-qualified expense in 5 years or more. After you convert and wait 5 years, you can withdraw the amount you converted at any time and for any reason, without tax or penalty. Just be aware that if you withdraw any post-conversion earnings before age 59½, you may have to pay income taxes plus a 10% penalty tax.

5) You might retire before age 65. 65 is the earliest you’re eligible for Medicare so if you retire before that, you might need to purchase health insurance through the Affordable Care Act. The subsidies in that program are based on your taxable income, so tax-free withdrawals from a Roth account wouldn’t count against you.

6) You want to avoid required minimum distributions (RMDs). Unlike traditional IRAs, 401ks, and other retirement accounts that require distributions starting at age 73 (or 70½, depending on your age), Roth IRAs are not subject to RMDs so more of your money grows tax free for longer. If this is your motivation, remember that you can always wait to convert until you retire, when you might pay a lower tax rate. Also keep in mind, Roth conversions are not a one-time-only event. You can do multiple conversions and spread the tax impact over different tax years if you are concerned about pushing your income into a higher tax bracket in any particular year.

There are good reasons to convert and not to convert to a Roth. Don’t just do what sounds good or blindly follow what other people are doing. Ask yourself if it’s a good time for you based on your situation or consult an unbiased financial planner for guidance. If now is not the right time, you can always convert when the timing is right.

Where Should You Save For College?

February 06, 2025

The long-term trend is that college costs have increased at nearly twice the inflation rate. That’s astounding!

That rising cost factor contributes to an enormous and ever-growing student loan debt. It now totals over $1.7 trillion in the U.S. That number continues to grow each year and is an alarming trend.

What’s driving these costs? Competing for students by hiring top faculty, building and maintaining facilities and ever-nicer amenities, greatly increasing non-teaching staff positions, and a transfer of financial responsibility from government subsidies to the students and their families are all factors increasing the cost of attending college. For someone facing this burden in the future, the question of “Where should I save for college?” is a very common one. There are a lot of choices out there and I’ll walk through the pros and cons of a few.

UGMA/UTMA (Uniform Gift (or Transfer) to Minors Act):

  • This is a very common way that parents open accounts for young children to collect birthday checks and random other funds that the child receives and where my son’s paychecks from his first job are currently being deposited. The best part of this type of account is that many financial institutions in the country offer these and your investment options are almost unlimited.
  • The downside of the UGMA/UTMA is that at the child’s age of majority (between 18 and 21 depending on the state), the assets become the property of the child so if they see a shiny new car or motorcycle or guitar that they want to buy…they can do that rather than pay tuition. Also, significant assets in the child’s name have the ability to negatively impact a financial aid package.

529 savings plan

  • Typically, when I talk to people and they say they want to open a college funding account, they are talking about a 529 savings plan. (My favorite college planning website www.savingforcollege.com started out as a 529 plan review website and has built other capabilities over the course of time.) 529 plans can offer a state tax break for dollars on the way into the plan, growth that is tax deferred, and if used for education, a nice tax break on the way out. They are a GREAT way for grandparents and other relatives to contribute to the cost of education. When my daughter was very young, I set up a 529 and let all her grandparents, aunts, uncles, etc. know that it existed and suggested that rather than buy a toy that might end up at a yard sale in 18 months, throw a few dollars into the 529. Surprisingly, they listened! She isn’t going to be able to fund college with birthday/Christmas gift money, but it’s paying for books and we are happy that she has that plan in place.
  • The downside of the 529 is that investment options are quite limited and while it’s technically an asset of the parent on the FAFSA form, many schools consider it an asset of the child and can alter the financial aid package accordingly. To combat this, I’ve seen grandparents or a non-custodial parent open the 529 so that it avoids being reported on the FAFSA form. Just be aware that withdrawals from non-parental 529 accounts can be considered income to the child, which has an even greater impact on financial aid eligibility, so you might want to wait until the last couple years of school to tap those savings.

Prepaid 529 plan

  • The prepaid plans are far less common than the traditional 529 above, but where they are available, they can be very attractive options. The way these usually work is that you buy a number of credit hours today at current prices and when the child goes to college, those credit hours are already paid for. The rate of return on the investment equals the rate of tuition increase, which has been staggering over the last 20-30 years. If the child goes to school in another state or at a private university, the funds on deposit cover the average cost of attendance that year at a state public school so there is a nice “bang for the buck” historically since the costs have risen so quickly.
  • The primary downside of prepaid plans is that since they’ve been so good for the investor, many states have frozen or terminated their plans. At a time when many states are struggling to pay the bills (trying not to go on a rant about budgetary restraint here), giving investors a very hefty return on their money puts added strain on a budget.

Taxable account in parent’s name

  • Opening an account in a parent’s name is one of my favorite ways to see education funded. It has a far less harmful effect on financial aid and if the funds aren’t used for education, they are there for retirement or debt reduction or a really awesome vacation! The universe of investments is unlimited and the control of the assets remains with the parent. If there was one place I wish I had spent more time focusing on for my kids’ education, it would be here.

Retirement account

  • Retirement accounts are an area that people are widely using to fund education costs now. From a FAFSA standpoint, these are favored assets since they don’t cause the EFC (expected family contribution) to rise (although withdrawals generally do have an impact since they are counted as income). But the funds are available, either through a loan or a hardship withdrawal from a 401(k) or a penalty-free withdrawal of principle from a Roth IRA to fund a portion of education expenses. It’s a ready pool of assets that can be tapped when other resources might not be available.
  • The downside of using a retirement account as an education funding vehicle is that every dollar removed is a dollar that isn’t available for retirement. Are you willing to risk having fewer retirement dollars, especially in an era where downsizing, layoffs and an uncertain future (gone are the 40 years and a gold watch at retirement employment situations) are the new normal. This seems like a good short term option for many, but the risks are high. This is a “tread with caution” type of way to fund college costs.

Equity in your home

  • During the housing boom that ended in 2008, a lot of people used the quickly building equity in their homes to fund college. Today, post-housing bust, that isn’t as common but for those who have been in their homes for a long time and have significant equity, this is still a “go-to” strategy. As someone who is wired to be debt-averse, I’d like to point out that if you pay your mortgage down with additional principal payments and your child gets a full scholarship, I’ve never heard anyone complain about owning their home free and clear. It sure makes retirement easier since cash outflows are easily handled.
  • Much like the downside of using your 401(k), using equity in your home to pay for college could have you paying a mortgage well into retirement, which could mean a reduced standard of living post-retirement or working a few extra years to pay down that debt.

If you are looking for “the best way” to invest for future education expenses, I can’t say that any one of these options is the absolute best in every situation. What can you afford to do today? Do you want to factor in the financial aid impact of your investment strategy, or is your income high enough to make financial aid a moot point? Do you want an investment that can be used for your goals if your child gets scholarships or opts for a non-college career path? Look at each option’s pros and cons to determine the most suitable choice for your family.

What is a 403(b) Plan?

February 06, 2025

What is a 403(b) Plan?

If you have ever worked for a nonprofit organization, you likely have heard the term 403(b) retirement plan. While not as common as the 401(k), a 403(b) shares many of the same benefits that make it a very powerful retirement tool for those working for public schools and other tax-exempt organizations.

The Details

As noted above, 403(b) plans have much in common with the 401(k) plan, which is very common in the private sector. Participants that may have access to 403(b) include:

  • Employees of public schools, state colleges, and universities
  • Church employees
  • Employees of tax-exempt 501(c)(3) organizations

The 403(b) plan has the same caps on annual contribution as 401(k) plans.

Employers can match contributions based on the specific plan details, which vary from employer to employer. 

Employees may also be able to contribute to a pre-tax 403(b) and/or Roth 403(b), as both options may be available based on the plan details. A traditional 403(b) plan allows employees to have pre-tax money automatically deducted from each paycheck and deposited into their retirement account. The employee receives a tax break as these contributions lower their gross income (and income taxes owed for the year). The taxes will be due on that money only when the employee withdraws it in retirement.

A Roth 403(b) is funded with after-tax money, with no immediate tax advantage. But the employee will not owe any more taxes on that money or the profit it accrues when it is withdrawn (if they are 59 ½ and have a Roth for five years).

Pros and Cons

Being able to save for retirement automatically is a tremendous benefit of the 403(b) construct. The tax-deferred (pre-tax) or tax-free growth(Roth) nature of these savings is also a huge incentive for employees to save as much as possible – not to mention the free money an employer match may provide. Many 403(b) plans will have a shorter vesting period relative to their 401(k) cousin, which allows. This means employees will have access to the matching funds quicker should they change employers.

On the downside, withdrawing funds before age 59 ½ will likely result in a 10% early withdrawal penalty. And many 403(b) plans offer a more limited range of investment options than other retirement plans.

Summary

Like the 401(k), the 403(b) retirement plan is critical to retirement planning and saving for individuals with access to them. The automatic saving nature of the plan makes it very convenient to save for the future. Saving early, often, and as much as you can afford will set you up for your coveted retirement. Happy Saving!

How To Invest For Education Expenses

February 06, 2025

Today, I conclude my investing series with how to invest in an education savings account. The first question is whether you even should at all. Before investing for education, make sure you have adequate emergency savings, no high interest debt, and are on track for retirement. This may sound selfish but there’s no financial aid for your retirement. If you’re ready to save and invest for education, here are some things to consider:

How good is your state’s 529 plan?

529 plans are state-based education savings plans in which the earnings can be used tax-free for post-secondary education expenses (but otherwise subject to taxes and possibly a 10% penalty) and you’re not limited to the state in which you live or the state in which your child goes to school.  There are a couple of things to consider in deciding whether to use your state’s plan. The first is whether your state offers a state income tax deduction or lower expenses for residents contributing to the plan. The second is the fees charged by the mutual funds in the plan. This resource can be used to compare 529 plans.

Want more flexibility?

If your state isn’t on the “Honor Roll,” you may also want to consider contributing the first $2k per year (the contribution limit) to a Coverdell Education Savings Account (ESA), which also allows tax-free earnings for education (and otherwise subject to taxes and a 10% penalty as well). You can also use an ESA for tuition, books, and computers at K-12 schools if needed while 529 plans are eligible to use only up to $10,000/year for tuition at K-12 schools. Here is a list of low-cost Coverdell ESA providers. (Coverdell ESAs have income limits on the contributors but you can easily avoid this by gifting the money to your child and having them contribute it to the account.)

Another option is to open a custodial account in your child’s name. This allows you to invest it in anything and use the money in any way penalty-free for the child’s benefit (not just qualified education expenses). You will still get some tax breaks with custodial accounts, but not quite as good as those on 529 plans. Money in your child’s name can also reduce their financial aid eligibility more than other savings and they can legally use it for any purpose once they reach your state’s age of majority.

How soon is your child going to school?

If your state offers a state income tax deduction and your child is going to school soon, you may want to contribute to a 529 even if your state isn’t on the “Honor Roll.” That’s because the value of the tax deduction can outweigh the higher fund fees in the short term. In fact, in some states you can even contribute to the plan to get the state tax deduction and then immediately use the money for education expenses. In that case, you won’t even be investing the money at all.

If you’re still not sure which option is best for you, you might want to consult with an unbiased financial planner. If your employer offers you access to one-on-one consultations through your financial wellness program, take advantage.

Should You Invest In A REIT Or A Rental Property Directly?

February 06, 2025

What if you want to invest in real estate without all the risks and hassles of being a landlord? Another option is to invest in a REIT (real estate investment trust), which is kind of like a mutual fund for rental properties (although there are mutual funds of REITs too).  Let’s look at some things to consider when deciding between the two:

How easily might you need access to your money?

This is one of the biggest differences. You can sell a publicly traded REIT immediately like a stock. (There are also non-traded REITs that come with their own rules.) On the other hand, a directly owned rental property can take months to sell and can cost thousands of dollars in transaction costs. The advantage here clearly goes to REITs.

How important is diversification for you?

A single REIT can invest in a range of commercial and residential properties. As if that wasn’t enough, you can also buy multiple REITs individually or through a real estate fund. You need a lot more money to buy enough individual properties to even approach that level of diversification. Otherwise, you’re taking more risk with less diversification and it’s a risk that doesn’t necessarily come with higher returns.

How involved do you want to be?

With a REIT, your only involvement is whether to buy the REIT and when to sell. With a rental property, you have a lot more control over the type of property you own and how it’s managed. If you know the real estate market well and/or are good at property management (or choosing good property managers), this can be a huge advantage.

For example, many real estate investors are able to keep their maintenance costs low by doing their own repairs or having a network of contractors who they trust to deliver value. If you don’t want to be that active, you might want to delegate those decisions to a REIT.

Which provides a better tax benefit?

REITs can easily be held in tax-advantaged accounts like a 401(k), IRA, and HSA. While rental properties can be held in a self-directed IRA, that can be quite complex. However, a rental property can allow you to write-off depreciation and have the basis stepped up at death. That could make it preferable from a tax standpoint if you’ve already maxed out your tax-advantaged accounts and are looking to invest in a taxable account.

At the end of the day, the decision is a personal one. If you’ve maxed out your tax-advantaged accounts and want to be actively involved in your investing, you might prefer owning a rental property directly. If you’re investing in a tax-advantaged account or prefer having easy access to your money and being more diversified, you might choose to invest in one or more REITs.

How Your Company Stock Plan Benefits You

February 06, 2025

It wasn’t long ago (the late `90s, actually) that workers by the hundreds were becoming enviably wealthy through dot-com stock options. While those days of fast fortunes might largely be behind us, employee stock ownership plans, which make owners of all or most of a company’s workforce, can still provide a nice boost to compensation.

Stock ownership (otherwise known as equity compensation) plans come in a variety of forms, with some companies offering more than one type of opportunity to their employees.

Types of Plans

Restricted Stock Units (RSUs):

Restricted Stock Units (RSUs) represent an employer’s promise to grant employees one share of stock per unit based on vesting requirements or performance benchmarks. An employee receives the shares when they vest. Because this is taxable income, often the employer will sell the number of shares needed to cover the income and payroll taxes, thus giving the employee a tax basis on the remaining shares equal to the value of the shares at the time of vesting (vesting date price). The employee is not deemed to own the actual shares until vesting and does not have voting rights.

Because taxes have been paid on the shares when they’re received, short or long-term capital gains tax will be owed on the difference between the selling price and the vesting date price when the shares are sold.

Employee stock purchase plans (ESPPs):

An ESPP gives employees of public companies the chance to buy their company stock (usually through payroll deductions) over a specified offering period at a discount of up to 15 percent off the market price.

As with a stock option, after acquiring the stock, the employee can sell it for a profit or hold onto it for a while. Unlike with stock options, the discounted price built into most ESPPs means that employees can profit even if the market value of the stock has gone down a little since it was purchased.

Employee stock ownership plans (ESOPs):

An ESOP is similar in some ways to a profit-sharing plan. Shares of company stock are allocated to individual employee accounts based on pay or some other measure. The shares vest over time, and employees receive their vested shares upon leaving the company.

Employee stock options (ESOs) and related plans:

A stock option gives an employee the right to purchase a specified number of shares at a fixed price for some period in the future. For example, if an employee has a vested option to buy 100 shares at $10 each and the current stock price is $20, they could exercise the option and buy those 100 shares at $10 each, sell them on the market for $20, and make $1,000 profit. If the stock price never rises above the option price, the employee would simply not exercise the option.

Early on, companies gave stock options only to “key” employees (often to just the executive team). These days, many companies that give options extend them to all or most employees.

Keep in Mind

Equity compensation may not always be a sure road to the country club life, but company equity still offers great potential for financial reward. Just be sure that any company stock you own fits into your overall financial strategy. A good rule of thumb is to avoid having more than 10% in any one individual stock, so your investments are diversified. Consider contacting your personal financial coach to further discuss how these plans can play a part in achieving your financial goals.

How To Create A Plan To Payoff Your Student Loans

February 06, 2025

Once you decide to tackle your student loans, it is important to be proactive and work student loan debt management into your overall financial plan. When it comes to managing student loans, here are some action steps that may help you reach your financial goals related to paying down student loan debt:  

How much do you owe? 

Before you can create a plan to pay off student loan debt, you need to assess how much and what type (federal vs. private) of student loan debt you have. You also need to determine the terms of your loan(s) including the length of the loan, interest rate, minimum required payment, and payoff date. 

Action Step 1: 

  • Determine the amount of federal loans borrowed (Direct, FFELP, Perkins & Grad PLUS) and contact information for the servicer of each loan via the National Student Loan Data System at StudentAid.gov. For Private Student Loans contact your loan servicer directly. If you are unsure of the private lender, review your credit report for free.  

Estimate your payoff date 

Determine how long it will take to be student loan debt-free (and the total cost of debt). After organizing and possibly refinancing your various student loans, you are able to use a student loan calculator to see when you will be debt-free. If you continue to make the minimum required payments, this figure is much easier to calculate since it will be based primarily on your original loan payoff date. However, many people are motivated by the desire to reduce the cost of borrowing and want to see how extra payments help them in the long run.  

Action Step 2: 

  • For Federal Student loans use this Loan Simulator  to estimate federal student loan payments under various repayment plans (standard, graduated, pay as you earn, income-based, income-contingent, etc.). For Private Loans, try the Cost of Credit Calculator. 

Refinance or consolidate? 

Another proven method to lower the cost of borrowing and put more of your money to work chipping away at those student loan balances is to refinance or consolidate loans to a lower interest rate (if available). Just remember that extended repayment plans may lower your monthly payments but they can also increase the total interest paid over the life of your loan, so you might want to try to stick with the shortest loan term you can comfortably afford. Keep in mind that if you are refinancing federal loans with a private loan you may be forfeiting flexible repayment options offered by federal loans. Also review if you are eligible for Public Student Loan Forgiveness. You will need to maintain the Federal Loan in the proper repayment plan in order to remain eligible.  

Action Step 3: 

  • Look into refinancing your private loans to get a lower interest rate. Investigate if refinancing a federal loan is the right move for you. 

Check for employee benefits 

While most employers do not currently have a student loan repayment plan, more and more companies are offering special deals on student loan refinance programs like SoFi or actual repayment plans like Tuition.io or Summer.   Services like Candidly help you optimize your debt repayment strategies to reduce payments, refinance at a lower rate, or accelerate repayment to reduce the overall cost of borrowing.   

Action Step 4 

  • If your employer does offer some type of assistance, make sure you’re fully aware of the rules so you can take advantage. 

Free up extra cash 

Instituting a budget can help you monitor and track your spending while setting limits in advance. This process will enable you to identify potential areas to cut back spending or free up extra dollars that may then be applied to your highest interest debt (or the loan with the lowest balance if you want a quick win). The Debt Blaster calculator  helps you see how extra payments can fast track the loan payoff process.  

Action Step 5 

  • Pay the minimum on all loans and put extra dollars towards the highest interest rate student loan.  But also consider your other financial goals before making extra payments on student loans.   

Student loan payments do not have to be a constant burden. Whether you are already overwhelmed by your student loans or simply want to reach a state of financial freedom a little faster, there are a variety of repayment options that can save you significant money. The most important thing is to make sure your student loan repayment strategy fits into your total financial plan and meets your short and long-term objectives. 

How To Prioritize Debt Payoff Against Your Other Priorities

February 06, 2025

Whether it’s student loans or credit cards, it’s tempting to want to make paying off debt your top priority, but should it be? In some situations, other goals might come first. Here are some questions to ask yourself: 

Am I able to pay essential expenses? 

If you’re in a really tight financial situation, make sure you can pay your rent/mortgage, make your car payment, keep food on the table and the lights on even if that means falling behind on credit card bills. Instead, see if you can negotiate those debt payments, work with a credit counseling service, and possibly consider bankruptcy protection.  

Do I have adequate emergency savings? 

 You want to be able to pay your essential expenses in the future even if your income is reduced by a job loss. That’s why financial planners generally recommend your first savings goal should be to build up an emergency fund that covers at least 3-6 months of necessities.  

Am I contributing enough to my retirement plan to get the full match? 

If not, don’t leave that free money on the table! Even paying down high-interest debt can’t compete with a guaranteed 50-100% return from getting your employer’s match.  

What’s the interest rate on the debt? 

 If the interest rate is above 8% (like most unsecured consumer debt such as credit cards), you’re probably better off paying down the debt before saving or investing for any other goals (except the above) because there’s a good chance you’ll save more in interest by paying down the debt than you’d earn by saving or investing that money. If the interest rate is below 6% (like a lot of secured debt, such as mortgages and car loans), you are probably better off investing extra money. That’s what’s called “good debt” because the interest rate is lower than what you are likely to earn on your investments in the long term. If the interest rate is between 6-8% (like a lot of student loans), you can go either way.   

Once you’ve decided to prioritize paying down your debt, pay it off fastest by putting any extra payments towards the highest interest debts first. As each balance is paid off, you would then put those payments towards the remaining debt with the highest interest rate. You can use our Debt Blaster calculator to keep you motivated by seeing how quickly you can pay the debt off and how much interest you will save with this strategy.  

How We Are Deciding Which Spouse’s Insurance Plan To Use

February 06, 2025

My husband recently changed careers and is starting with his new employer at the end of this month. We’re all very excited about the transition as a family, but we have a very important decision to make: are we going to stay covered under our current health insurance plan that I have through work or are we going to move over to his plan? Or should the kids join my husband on his plan while I stay on my own? Decisions. Decisions.

How do you decide whose health insurance to use?

When both partners have benefits through work, it’s a good idea to re-examine your family coverage each year. Here are some of the things that we are considering as we decide which benefits to choose. These questions might trigger some points that are important to you and your family as well as you make your decision whether to stay put or move on to your spouse’s plan:

Questions to ask

  1. Are our current doctors considered in-network under my husband’s plan (especially the kids’ doctors)?
  2. Do my husband and I like the primary doctor options who fall in-network under his plan?
  3. If my husband has employee-only coverage at work, does his employer cover his monthly premium? (mine does)
  4. How do the monthly premiums and deductibles compare to what’s available under our current plan?
  5. Once we hit the deductible, how much is our coinsurance (the percentage we are responsible for paying)?
  6. Is a high deductible health plan (HDHP) an option with his employer and how much, if anything, does his employer contribute to a health savings account on his behalf?
  7. Are there any upcoming specialists we’ll need to see? Surgeries any of us will need? If so, are they covered? And how much would we be responsible for paying?
  8. Are there any specific medications we know we’ll need that are not covered under my husband’s plan?

These are some of the things we’ve started to consider. Thinking through your situation and coming up with your list of questions like these, or points that you want to be sure you address, will help you choose the coverage that best meets your needs. Be sure to break down the costs and compare apples to apples when choosing the right health insurance plan and steer clear of common mistakes that are often made during enrollment.

When you need to switch mid-year

It’s important to note that our decision happens to fall during my open enrollment period at work, but if it were outside of my company’s open enrollment period, my husband’s change in employment status (and thus his new eligibility to be covered under a health plan) would be considered a qualifying life event and we’d have a short time frame (typically 30 days) to make changes to our health plan.

How To Choose An Estate Planning Attorney

February 06, 2025

Decide what you need

Before you set out to find an Estate Planning attorney, take some time to think about what you want an attorney to do for you. Once you have determined what your estate planning needs are, it is easier to find an attorney who offers the services you desire. So before you start contacting attorneys, take a moment to think about what you want to accomplish – setting up a basic will, living trust, or a comprehensive estate plan.

Finding the right person

You will probably want to interview at least three attorneys before you choose the one to work with. Consider asking people you know if they work with someone they would recommend. Ask your other advisors as well; your CPA or financial planner may have a few estate planning attorneys that they work closely with.  Find out if you have an Employee Assistance Program (EAP) at work.  If so, your EAP may offer attorney referral programs that help you find an attorney and receive a discount on their services.

To assist in your search, here are a few databases to help make the search easier:

American Academy of Estate Planning Attorneys

(800) 846-1555

AAEPA Member Directory

National Association of Estate Planners and Councils (NAEPC)

(866) 226-2224

Search for Estate Planners

When you call each attorney, here are eight questions to ask

1. How much of your law practice is devoted to estate planning?

Some attorneys work with their clients in different areas of the law. Others focus on one or two specialized areas, such as estate planning or elder care. Because attorneys have various levels of expertise in different areas of the law, it’s a good idea to know what level of estate planning you want so you can find out if the attorney is a good match.

2. What are your credentials?

While every attorney must have passed their State Bar exam to practice law, there are no formal requirements to practice as an Estate Planning attorney. However, an attorney can attain a “specialization” in the specific area of estate planning. An attorney who specializes in estate planning must have taken and passed a written examination in their specialty field, demonstrated a high-level of experience in the specialty field, fulfilled ongoing education requirements, and been favorably evaluated by other attorneys and judges familiar with their work.

Another credential is the Accredited Estate Planner designation (AEP). This designation is awarded by the National Association of Estate Planners & Councils to certain professionals who meet stringent experience and education qualifications.

3. What types of estate planning do you offer?

Find out what estate planning services they offer, as well as other services they provide. Some estate planning attorneys may offer basic services such as will formation and the construction of simple trusts, while others may have more comprehensive services that include more complex trusts and charitable giving programs. Make sure you choose an attorney that will meet all of your needs.

4. How long have you been handling wills and other estate planning matters for clients?

It’s important to know how long the attorney has been in practice, and with what firms. And you’ll want to know if they have experience working with clients who have estate planning issues like yours. If they have been with a number of different firms in a short period of time, ask why.

5. Will other attorneys be working with me?

Depending on the size of the attorney’s practice, there may be other attorneys (or paralegals) you will also work with. Be sure to find out who will be working on your estate plan and inquire about his/her educational background in addition to actual work experience with estate planning issues like yours.

6. How are you compensated?

There is a wide variety of ways that attorneys get paid. Attorneys can be paid with a fixed fee, an hourly rate, or on a contingency basis. It’s important to ask this question upfront, so there are no misunderstandings. A written fee agreement should clearly spell out the compensation arrangement. The fee agreement should define what you want the attorney to do, what the attorney has promised to do and what it will cost.

7. Have you ever been sued by a client, reported by a client to your state’s attorney licensing board, or subjected to disciplinary action by your state attorney licensing board?

Generally, each State Bar will post on their website any disciplinary actions that have been placed against a practicing attorney. Check with your State Bar’s website to verify that the attorney(s) you work with do not have any current or pending actions against them.

8. What questions do you have for me?

A good estate planning attorney wants to know what your needs are, your wishes and family situation, and what kind of estate planning you are seeking. If an attorney does NOT ask you a lot of questions when you call to interview them, it could be a red flag. You want an estate planning attorney that focuses on your goals, not theirs.

After asking these questions of three or more attorneys, you may find one that clearly fits the bill. If not, don’t be afraid to keep looking for more referrals. As you talk to these attorneys, get a feel for their style – you want to make sure you’ll be comfortable revealing personal information to your attorney.

How Should I Invest In Real Estate

February 06, 2025

Know your investor personality

When it comes to managing your real estate investments, would you prefer to be heavily involved in the day to day or a passive investor that puts their trust in someone else to manage things?

If you want to be a “hands-off” real estate investor, then you’ll have little to no involvement in the selection and management of investment properties themselves, and instead will be putting your money and trust in a team of real estate professionals to make those decisions for you.

Alternatively, if you have the time, knowledge and interest in the real estate world, you may choose to be a “hands-on” investor. That means you’ll be actively researching, selecting, and managing individual investment properties, although you may choose to hire a property manager to handle the day-to-day work associated with any of your investment properties.

Evaluating Your Real Estate Investing Options

ACTIVE REAL ESTATE INVESTING OPTIONS FOR HANDS-ON INVESTORS

Single-family home

A single-family home is a standalone house meant for one family.

Pros

  • Families can be long term tenants
  • Most potential for appreciation
  • Easiest to sell

Cons

  • Maintenance is more expensive
  • Lots of capital is required to develop a diversified portfolio

Condominium/Townhouse/Co-op unit

Single unit condos and townhouses have similar investment characteristics as single-family homes. Co-op units are similar, but may have additional community regulations for owners and tenants.

Pros

  • Generally less expensive
  • More urban opportunities
  • Condo association pays maintenance

Cons

  • Condo or co-op association fees and assessments
  • Co-op board must approve tenants (but typically not condo boards)

Fix and flip

A fix and flip involves buying a house that needs updating, making renovations, and then selling quickly (hopefully for a profit).

Pros

  • Potential for a quick profit
  • Flipping looks so fun on HGTV
  • Get paid for sweat equity

Cons

  • Unanticipated renovation costs
  • It could take longer to renovate or sell
  • Carrying costs if the home doesn’t sell

Multi-family (2-4 units)

Multi-family housing contains independent dwellings for more than one family. This could be a duplex (2 units), a triplex (3 units), a quadplex (4 units) or an apartment building (5 more units).

Pros

  • Multiple monthly rents
  • You can be an owner-occupant and investor
  • Owner-occupied 2-4-unit buildings can be financed with lower down payment loans

Cons

  • Increased landlord responsibilities
  • Maintenance is more expensive
  • Apartment buildings (5+ units) are financed by an apartment loan

Manufactured/Mobile/Tiny homes

A manufactured home is ready once it leaves the factory. A mobile home is a standard sized trailer which is placed in one location.

Pros

  • Inexpensive
  • Lower maintenance
  • Easier to purchase multiple units

Cons

  • Lower rent
  • Hard to finance
  • Higher tenant risk

Commercial buildings

Commercial buildings house businesses such as offices, retail stores, restaurants, etc.

Pros

  • Comes in many sizes and purposes (office complex, shopping center, medical building, industrial, warehouse, etc.)
  • Multiple monthly rents and flexible lease terms (e.g., tenants pay maintenance)
  • Objective standards for valuation
  • Tenants have strong incentives to maintain the property

Cons

  • Increased landlord responsibilities
  • Requires professional help to maintain property
  • Specialized commercial loans which may require a personal guarantee (recourse)
  • Large down payment

PASSIVE REAL ESTATE INVESTING OPTIONS FOR HANDS-OFF INVESTORS

Real Estate Investment Trusts (Publicly traded REITs)

Pros

  • Funds must pay out at least 90 percent of income in dividends
  • Publicly traded – easy to buy and sell during market hours
  • Own real estate without the headaches of managing it

Cons

  • May need to invest in multiple REITs to be diversified
  • Requires faith in management to pick the right properties
  • Rising interest rates affect profitability

Mutual funds and exchange traded funds (ETFs)

Pros

  • Actively managed or passive index funds available
  • Diversification across real estate sectors
  • Publicly traded – easy to buy and sell during market hours
  • Own real estate without the headaches of managing it

Cons

  • Mutual fund trading can pass unexpected capital gains to shareholders
  • Stock market risk
  • Requires faith in portfolio manager if buying actively managed funds
  • Management fees

Crowdfunding sites

Crowdfunding sites match real estate investors looking for funding for their real estate project with investors looking to invest.

Pros

  • Invest in real estate loans
  • Crowdfunding site does the underwriting
  • Easier to build a loan portfolio

Cons

  • Poor investor protections/higher potential for fraud
  • Hidden fees
  • Loan risk and bankruptcy risk

Private placements – REITS and Real estate limited partnerships

Higher net worth (“accredited”) real estate investors have access to private real estate funds through private placement.

Pros

  • Potentially higher dividends or net income
  • Diversified portfolio of properties or loans
  • Funds which specialize (e.g., hospital properties, manufacturing, apartments, etc.)

Cons

  • Only available to higher net worth investors
  • High fees
  • Illiquid

Know your exit strategy before you invest

When investing in real estate, you must begin with the end in mind — before you even make an offer or purchase a fund, you need a plan for if and when you will dispose of your investment.

Decide ahead of time under what circumstances you will sell — after a certain number of years? Once the property has appreciated a certain amount? When you need the capital for something else? It’s important to establish this up front so that you aren’t at risk for emotional selling.

No matter what type of investor you are, or what type of property you would like to buy, if a short-term loss of value is something that would cause you to “cut your losses” and liquidate, you may not yet be ready to invest in real estate.

How To Know If You’re Really Ready To Become A Landlord

February 06, 2025

Becoming a landlord can be a great way to grow your wealth and develop a way to earn income “while you sleep,” with less chance of wild swings in value that can happen when investing in the stock market. However, there’s more involved than just finding the right property, so it’s important to make sure you’re truly ready.

Don’t base your decision on this

Deciding whether to become a landlord or not actually has very little to do with the real estate market. And that’s why so many people make bad decisions in this area. They base their decisions on what they think the real estate market is going to do, when instead, they should be looking at their own financial situation to make a decision.

Can you answer yes to most of these questions?

If you can answer yes to all or most of these questions, then you may be ready to invest in real estate:

  • Do you have a stable job and a decent cash cushion? Ideally that would be 1 year plus of your living expenses in a liquid account that you can tap into immediately with no or very minimal penalty (i.e., it’s not in a retirement account).
  • Do you have excellent credit? A credit score of 750 or above will help in two ways:
  1. You’ll qualify for better loan rates if you need a mortgage to buy your first property, and
  2. If you end up having more vacancies or home improvement expenses than you expect, you will have better access to credit to cover these expenses if need be.
  • Are you really ready to become a landlord? Ideally you would enjoy that responsibility and/or you can cover the costs of paying someone to maintain the property like a building super who can address issues that tenants face and ensure the property is properly maintained. This becomes very important when you are ready to sell, not to mention it is your legal obligation as a landlord to maintain the property for tenants.
  • Are you looking for a good tax shelter to offset income taxes and capital gains? While all of us want to reduce taxes, investment property can be particularly attractive for those who are in a high-income tax bracket. Some ways you can take advantage of this are through write-offs on such things as mortgage interest, property tax, gardening, property management, etc. You may also be able to write off as much as $25,000 in real estate losses against your total income depending on your adjusted gross income (AGI).
  • Are you able to separate your emotions from the process and buy for purely financial reasons rather than personal preferences? Remember, you won’t be living in this property so whether or not it’s your favorite style of architecture is irrelevant. But whether or not you have a positive cash flow (meaning your rental income exceeds mortgage and other property expenses) is very important. So, you need to be ready to cast aside a love of real estate as an art form and cultivate a love of it as an investment vehicle in order to be financially successful.

Bonus criteria, although not essential

  • Do you have a spouse with a stable job? This further reduces risk of a major cash flow problem if you lose your job.
  • Do you know a lot about real estate and/or have people around you who are experts in real estate and can advise you? Key knowledge areas include:
    • home improvements/renovations that are most likely to enhance retail value;
    • understanding of rental and vacancy rates in the area you are looking to buy;
    • trends in real estate prices and key facts about the neighborhood and how the local economy may impact future housing prices.

Real estate agents can help here, but it’s nice to have people with expertise that you know and trust on your side as well. This is why large real estate investors have teams of people who work for them.

Think twice if you answer yes to any of these questions

Remember, finding a good deal on a property is just part of being ready. If you answer yes to any of these questions, you could find yourself in dire financial straits regardless of how prime the property may be.

  • Are you stretching to buy the property, or do you have any reason to believe that your job is not secure? If your debt to income ratio begins to exceed 35% after the purchase, then you are stretching. If you do not have a liquid cash cushion (1 year plus of your living expenses is recommended) and would have to tap into your investments to cover a financial emergency (e.g., longer than expected vacancies, roof begins leaking), you are stretching and until you develop this cash cushion, you should probably not purchase the property.
  • Do you enjoy a life free of hassle and try to limit your responsibilities? In other words, you don’t want to be tied down. In this case, it doesn’t matter how attractive the deal is, you may not be ready to be a landlord and buy an investment property.
  • Do you have fair or poor credit (below 700)? In this case, you may not even qualify for a loan. Or if you do, the interest rate could significantly drive up the cost of the mortgage and make the property a money pit where you are consistently paying more in mortgage than you are getting in rent.
  • Are you already heavily invested in real estate relative to other assets? “Heavily invested” meaning 20% or more of your wealth, not including your primary residence, is tied up in real estate. This is particularly important if most or all of your real estate holdings are in one area — if housing prices plummet in that area, you could run into serious financial problems.

Making the best decision for you

Rental income can be a great way to diversify your retirement income sources, just make sure that you’ve laid the proper financial foundation before taking the plunge into investing in real estate.

How To Evaluate Your Financial Advisor

February 06, 2025

A good financial advisor can be an invaluable member of your financial team (along with your tax professional and estate attorney). They can help you pull all the pieces of your financial lives under one comprehensive plan, offer investment advice/management, make sure your family is protected when unexpected things happen, and can help you work toward all your financial goals.

However, there may come a time when you’re wondering whether it’s time to move on from your financial advisor. Whether you feel like you’re paying too much, not getting what you expect from the relationship or even just feeling intimidated by jargon and a fancy office, how do you really know if that’s how it’s supposed to be or not?

Having a framework to evaluate your advisor will give you the confidence to ask the right questions and the peace of mind you have the right person on your team. Know that a good advisor will not mind you asking questions – if they seem upset or defensive, that may be a red flag.

What factors to evaluate

Criteria: Fees

This is probably the biggest area of scrutiny when it comes to deciding whether your advisor is worth it or not. What’s most important is having an understanding of ALL the fees you’re paying — not just the ones you may see coming out of your account, but also any fees within the products your money is invested in.

For example, all mutual funds have expense ratios. Make sure you’re factoring that in when calculating your total fees.

An example: Many advisors charge 1% of your account value to manage investments – this is very common. If your account is invested in mutual funds and you’re also being charged a percentage fee, you should make sure that your account is invested in institutional shares of the mutual fund and/or index funds, which tend to have lower expense ratios.

Let’s say the expense ratio of the funds you’re invested in is .10%, another common rate for index and institutional funds. That makes your total fee 1.1%. If you have $100,000 invested with your advisor, that means your annual fee would be $1,100.  Are you feeling like you’re getting $1,100 worth of support?

When it’s ok: Nothing good comes for free, so it’s absolutely reasonable to pay some fees for the service your advisor is providing you. What you need to consider is value. Are you feeling like what you’re getting from your advisor is worth what you’re paying?

When it’s not ok: If your advisor is being dodgy about providing you with a total fee amount, or you’re paying over 1% but not getting any type of service beyond stock picking, it may be time to move on to a better advisor. It’s also a red flag if your advisor points you toward more expensive products such as annuities or insurance contracts when what you were originally seeking was advice on investing in the stock market.

The best advisors are up front and comfortable with the fees they charge, and they are confident that they are providing you value.

Criteria: Performance

This is another area that is often scrutinized by investors, but sometimes through the wrong lens. It’s perfectly acceptable to expect your advisor’s investment advice to help your investments to match or exceed the benchmark you’ve set, but many people chase performance without the correct context.

An important part of a financial advisor’s job is to understand your personal goals and risk tolerance, then recommend the appropriate investment mix AND explain to you how it should be evaluated.

When it’s ok:The stock market goes up and down, so low returns WILL HAPPEN. Just because your account shows a negative return over the near past does not mean your advisor is failing – it depends on what else is going on in the world. As long as your performance is in line with or better than the benchmark you’re using, it’s ok if your account is down a little bit or even not up as high as your friend’s, as long as it’s matching or bettering its benchmark.

In other words, if you’re a conservative investor, comparing your account’s performance to the S&P 500 or the Dow Jones is unfair – those are 100% stock indices, and not appropriate for a conservative investor. On the flip side, if you are an aggressive investor, you wouldn’t be comparing your portfolio to the US Treasury yield either.

When it’s not ok: If you’ve told your advisor you have a high risk tolerance and the market is going gangbusters but your account is floundering, you may need to find a new advisor. Likewise, if you’re a conservative investor and you’re seeing wild fluctuations in value, your advisor may not be heeding your preference and could be taking too much risk.

Another red flag to look out for, believe it or not, is if you never see a negative return or you are seeing great performance despite hearing that the market is down. In order to have great performance over time, a legitimate investment portfolio is bound to have down times. If your account performance only goes up and it’s up by an amount that’s notably higher than current interest rates, that could be a sign of fraud. (Bernie Madoff’s clients never saw losses in their accounts, despite being invested with him through bear markets – a huge red flag)

Criteria: Could you do this yourself?

Obviously the reason you’re hiring a financial advisor is to give you financial advice so that you can invest your money to meet your goals. It’s a good idea to take a look at how they are investing your money to see if that’s something you could’ve figured out for yourself.

When it’s ok: There are advisors out there who will invest their clients’ money in index-based mutual funds, which is definitely something you can do for yourself using discount brokerage services. However, if your advisor is also providing you with comprehensive financial planning services including areas like retirement, education savings, taxes and life insurance, then it’s probably worth it to stick with them.

When it’s not ok: There is no need to pay an advisor to help you select an asset allocation fund such as a target retirement date fund, which may be available inside your workplace retirement plan. The whole reason you hire an advisor is to customize the distribution of your investments among different areas of the market based on your personal goals and risk tolerance. If you’re paying an advisor and only see one or two funds inside your account, you’re probably better off doing it yourself.

Criteria: Your relationship with the advisor

One of the frustrating things about the investment world is that in order for financial advisors to make a living, they either have to have a lot of clients and accounts, or they have to find a select number of clients with a lot of money. That means that unless you have more than 7 figures to invest with your advisor, chances are that he/she will have thousands of clients. That doesn’t mean you shouldn’t work with them though.

When it’s ok: You should always expect your advisor to return phone calls and emails within a reasonable amount of time, even if he/she simply says, “I’ll get back to you on this shortly.” You should also expect your advisor to be transparent and honest with you. That means that they sometimes may tell you things you don’t want to hear, such as letting you know you’re spending too much or sharing bad market news. A great advisor addresses the uncomfortable stuff in an empathetic but firm way.

When it’s not ok: If you only hear from your advisor when he/she is trying to sell you something, that’s a red flag. Another one is if you ever feel like your advisor is being patronizing, impatient or pushy.

There are far too many great people out there in the industry who would love to provide you with help in a transparent, friendly way that works toward your best interests. If you’re getting the feeling that your advisor doesn’t value your business or is up to something shady, trust your gut and move on.

How To Choose Between A Will Or Trust

February 06, 2025

1. Is privacy important to you?

A. No, I don’t mind that the distribution of my estate is public record via the Probate Court. (0 points)

B. Yes, I want to keep how much I have and where it goes between me and my heirs. (1 point)

2. Do you or your spouse have children from a previous marriage?

A. No (0 points)

B. Yes but we view our children as part of one big family (0 points)

C. Yes and it’s important that they are cared for along with my spouse (1 point)

3. Do you have a family member that will require help managing their inheritance upon your passing or that qualifies for government assistance?

A. No (0 points)

B. Yes, I have someone I care about that either needs help managing money or whose government benefits would be compromised by inheriting money from me (1 point)

4. Do you own a lot of assets besides your home, retirement accounts and life insurance?

A. No, that’s pretty much it (0 points)

B. Yes, I/we have a notable amount in brokerage accounts and other savings that won’t pass by beneficiary of law (1 point)

5. Do you or your spouse own a business?

A. No (0 points)

B. Yes, one or both of us has a business that would need to be wound down or passed along upon death (1 point)

6. Do you own property in another state such as a vacation or rental property?

A. No (0 points)

B. Yes (1 point)

7. Do you expect to have a taxable estate?

A. No (0 points)

B. Not under current law, but if it changed, I might (1 point)

C. Yes (1 point)

Results

Add up your total points to review what might make the most sense for your situation:

0 points: You will probably be fine with just a Will, which requires you to name an executor and will be processed through the local Probate Court in the county where you live.

1 – 2 points: A Trust probably makes sense for you, although depending on your situation, an Intestate Trust created inside your Will could provide the same benefits of a Living Trust. Consult with an attorney to decide.

2 points or more: Some type of Trust is the best way to ensure that your assets are distributed the way that you wish while also possibly saving on fees, administrative headaches and taxes to your heirs.

5 Myths About 529 College Savings Plans

February 05, 2025

As the school year winds down and the invitations to high school graduations start pouring in, I can’t help but think about the day when my own little girl Rachel—who is finishing up her sophomore year—will be sending out her own invitations.  It all seems to be going by so fast but fortunately Susan and I have been preparing for that day by saving in a 529 college savings account.

For some of you moms and dads out there, you too have been using this savings vehicle to help pay for those oncoming college expenses but there are a number of myths floating around out there that could cause confusion when it comes time to using these accounts. Understanding each one will help you and I when it comes time to funding our child’s higher education.

Myth #1: Money in a student’s 529 account will not affect financial aid eligibility

Although 529 assets are included in the calculation for financial aid, the good news is that an account owned by the parent is considered a parental asset so its impact would not be as great as it could have been if it were the child’s asset. That said, some advisors (including yours truly) have suggested allowing non-parents to own the account. While that may prevent the assets from being counted, notice that distributions are treated as untaxed income to the beneficiary. For that reason, we suggest non-parents wait until your child’s junior year to pay for the education with those funds.

Myth #2: A child has legal rights to money in a 529 account

Unlike a custodial account where the child is the rightful owner and has a legal right to control the assets upon reaching the age of majority, a 529 account is the property of the owner, which is typically the parent. Owners have discretion over if and when assets are distributed, may roll over assets from one plan to another, and may change beneficiaries as long as the subsequent beneficiary is related to the original beneficiary.

Myth #3: I am required to use my own state’s 529 plan, and the funds must be used toward a college in my own state

This is a common myth that I often hear in workshops but the simple truth is that you may use a 529 college savings (but not necessarily prepaid) account from any state and your child may attend college in any state and still receive the federal tax benefits. However, some states offer state income tax benefits to residents who use the program from their own state. Even better, residents of many states are eligible for state income tax benefits regardless of which state’s plan they use. Now how’s that for spreading the love?

Myth #4: If my child doesn’t go to college, or I use the money for something else, I’ll get hit with a penalty tax on everything I’ve saved

Obviously, the reason we put money into the 529 account is because we hope to use it to pay for qualified higher education expenses, however, unused 529 funds can be rolled into a Roth IRA.

Myth #5: I will have to pay a penalty tax if my child is awarded a full ride

If your child is fortunate enough to receive a scholarship, you may be eligible to withdraw up to the scholarship amount without penalty. Just remember that if the scholarship is tax-free the amount withdrawn from the account that is attributed to earnings may be taxed as ordinary income.

If you’d like to learn more about using a 529 plan to help save for future college expenses, check out SavingForCollege.com.