Buying A Home Personal Worksheet

January 01, 2020

Use this worksheet to get organized and make a plan for purchasing your new home. The following information can help you to start thinking about becoming a homeowner and what you need to do to make your dream a reality.

1. Make a Mini Wish List:

The top 3 things you absolutely must have for your dream house are:

__________________________
__________________________
__________________________

2. Purchase Price:

The price range of the homes you are looking at is $ _________ to $ _________

3. Down payment and closing costs:

What percentage of the home’s price will you pay upfront?

_______% X $ _________ purchase price = $ _________ down payment amount

Remember: If you put down less than 20%, you may be required to pay Private Mortgage Insurance (PMI).

Don’t forget to allow for closing costs when deciding how much to have available for a down payment. Loan fees, escrow and title cost, transfer tax and other items due at closing can total one to five percent of the price of the home!

Where will you find the money for your down payment and other closing costs? Mark all that apply.

_____ Monthly savings

_____ Current assets/investments

_____ IRA

_____ Retirement plan loan

_____ Family members

_____ Other sources (list) ___________________________________________________

4. Your Mortgage:

You have determined your purchase price and down payment but you will probably still need to borrow money. How much will you need to borrow? (Purchase price of the home minus your down payment equals the amount you will need to borrow in the form of a mortgage loan.)

I will need to borrow $ _____________________________

A mortgage is usually the biggest loan you’ll take on in your lifetime. One rule of thumb lenders often use is that your total monthly debt payments (including car loan, credit cards, etc.) should not exceed 36% of your pre-tax monthly income.

What mortgage payment can you afford based on the 36% guideline? Find your income in the gross annual income column. Then add up your monthly car payment, credit card payments, and other loan payments and subtract that total from the amount in the column on the right. The amount left over is approximately the monthly mortgage payment you can afford.

Gross Annual Income	Monthly Income	Allowable Total Monthly Debt Payments
$30,000	$2,500	$900
$40,000	$3,333	$1,200
$50,000	$4,167	$1,500
$60,000	$5,000	$1,800
$70,000	$5,833	$2,100
$80,000	$6,667	$2,400
$90,000	$7,500	$2,700
$100,000	$8,333	$3,000
$110,000	$9,167	$3,300
$120,000	$10,000	$3,600
$150,000	$12,500	$4,500
$180,000	$15,000	$5,400

Example: Joe and Joan have a combined income of $70,000. They have a car payment of $320, student loan payment of $150 and a credit card payment of $80, for a total of $550. Their total allowable payment of $2,100 must be reduced by $550, so the maximum amount of their potential mortgage payment is $1,550.

5. Your Mortgage Payment:

Now that you know the monthly mortgage payment that you can afford, use the chart below to see the mortgage loan amount you may qualify for at different interest rates.

Mortgage Payment (30-year term)(Principal and Interest) at different interest rates
Mortgage Amount	3.50%	4.00%	5.00%	5.50%
$50,000	$225	$239	$268	$284
$75,000	$337	$358	$403	$426
$100,000	$449	$477	$537	$568
$150,000	$674	$716	$805	$852
$200,000	$898	$955	$1,074	$1,136
$250,000	$1,123	$1,194	$1,342	$1,419
$300,000	$1,347	$1,432	$1,610	$1,703
$350,000	$1,572	$1,671	$1,879	$1,987
$400,000	$1,796	$1,910	$2,147	$2,271
$450,000	$2,021	$2,148	$2,416	$2,555
$500,000	$2,245	$2,387	$2,684	$2,839

Another rule of thumb is that your annual pre-tax salary should equal at least four times your annual mortgage payment. Do this quick calculation to see if you will meet this guideline. (Use the monthly mortgage payment amount from above and multiply by 12 to get the annual payment.)

Annual mortgage payment x 4 = $ _________________ , which should be less than your annual pre-tax salary.

6. Things to consider before taking on a mortgage:

A mortgage is a big financial commitment and before taking one on, be sure that you are ready. Answer these questions to see if the timing is right for you.

a. How would you describe your current financial situation?

_____________________________________________________________________

b. Any significant changes in the foreseeable future?

_____________________________________________________________________

c. How long do you think you will stay in your new home?

_____________________________________________________________________

d. How comfortable are you with a varying (instead of a fixed) mortgage payment?

_____________________________________________________________________

7. My estimated total monthly mortgage payment:

In addition to the principal and interest payments, your monthly mortgage payment can also include property taxes, homeowner’s insurance premiums, and Private Mortgage Insurance (PMI; if applicable), if you set up your monthly escrow to include these items. Even if you choose not to escrow your taxes and insurance, be sure to find out how much both will cost so you can budget accordingly.

Estimated property taxes for the home I wish to purchase:

Annual amount $ __________ Monthly amount $ __________

Estimated homeowner’s insurance for the property I want to buy: Annual amount $ __________ Monthly amount $ __________

If your down payment will be less than 20%, here is a guideline for estimating the annual amount for PMI:

PMI is .0078 times the loan amount with a 5% down payment
PMI is .0052 times the loan amount with a 10% down payment

Annual amount $ __________ Monthly amount $ __________

Now bring all the monthly amounts together to calculate your total monthly mortgage payment:

Principal and interest payment (from #5 above) $ _____________

Property Taxes $ _____________

Homeowner’s Insurance $ _____________

PMI (if applicable) $ _____________

MONTHLY TOTAL: $ _____________

Next Steps:

Get a copy of your credit report. (For a free one go to www.annualcreditreport.com.)
Line up professionals to help you.
Save for a down payment and closing costs.
Get pre-approved for a mortgage.
Begin to look for properties.

How To Create A Plan To Payoff Your Student Loans

January 01, 2020

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 Vault.

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

January 01, 2020

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 6% (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 4% (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 4-6% (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 To Choose An Estate Planning Attorney

January 01, 2020

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

January 01, 2020

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

January 01, 2020

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:

You’ll qualify for better loan rates if you need a mortgage to buy your first property, and
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

January 01, 2020

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

January 01, 2020

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

January 01, 2020

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 states such as Arizona, Kansas, Maine and Pennsylvania 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, but if we don’t, only the earnings will be subject to income taxes and a 10% penalty. If possible, rename the beneficiary to someone that will likely use the funds for qualified expenses. You might even name the child of the child that did not go to college (that would be your grandchild, by the way).

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.

For those of you that may be planning to withdraw funds from a 529 account later this year, check out Joseph Hurley’s article on 529 withdrawal traps to avoid. If you’d like to learn more about using a 529 plan to help save for future college expenses, check out this website and this website from the IRS.