Russell Bailyn -

Someone once asked me what the best financial investment is. While this is a fairly subjective question, I answered real estate, and I think many others would as well. Countless fortunes have been derived from land ownership and real estate investing including my very favorite example: In 1626, Peter Minuit bought Manhattan Island from the Dutch West Indians for $24. That’s about $600 in today’s dollars!* It would be quite difficult to quantify what Manhattan is worth now, but let’s just say he didn’t overpay. Anyway, I would answer real estate regardless of statistics which may show that the total return of the stock market over the last 50 years is actually more impressive, on average, than that of the real estate market. The primary reason is that we can live in our real estate and often factor the payments into our budgets. A home cannot be instantly converted to cash and therefore has a greater chance of building up equity. Besides this illiquidity advantage, real estate can be leveraged. You don’t need to secure the full purchase price of a home to buy it. Often 25%, 10%, or 0% will be enough money down to take possession. We’ll go into exactly why this is such an important advantage to investing in real estate below. We’ll also touch on mortgages, even though the subject can be quite boring, because the method of financing you choose will ultimately have an impact on your investment.

The most basic form of real estate ownership is your primary residence. Those who rent might notice that every month they send a chunk of money off to somebody else who owns their home. I’m not going to totally bash renting for two reasons. During volatile housing markets, renting can actually be a safe alternative to buying a home. Also, some people can’t afford to buy and therefore can’t be discriminated against for renting. That being said, given the evolution of the mortgage industry, it’s easier now than ever to secure a home, often without having to put in a down payment. At some point, many renters get frustrated with the process and decide to buy a home. This often happens when one gets married or has children, and the need for a home increases. Interestingly, statistics show that the purchase and eventual sale of a home tends to provide many retirees with an additional income source. After the kids grow up and leave the house, downsizing often makes sense and a portion of the home proceeds can be used to supplement government programs such as Social Security (more on that later). Here are some other advantages to owning real estate:

Appreciation Potential: While appreciation is never a certain thing, real estate has been one of the more reliable places to park money over the course of history. In the US, the economy has grown at a consistently healthy pace. There are a multitude of reasons why this happens including a large and productive labor force, a stable government (you may not love who’s in charge, but our government is incredibly efficient) and technology advances. The beauty of real estate ownership is that you can benefit from the expanding economy even if you don’t contribute to it, simply by holding on to your property. Your location contributes to appreciation potential as well. A friend of mine lives in an apartment building in New York City. Recently, her ground floor was converted into a luxury food market. Apartments in her building instantly became more expensive as a result. Similarly, if a corporation decided to build a huge corporate park in your city which employed 4,000 people, you’d likely see a great demand for property in that neighborhood. These are the sort of things real estate investors speculate on.

Income Potential: While many people buy homes to live in, others buy them as investments which will produce monthly income and hopefully appreciate in value as well. I have a friend who recently bought a two-family home instead of a single family home. His logic was that he had saved enough money to provide the down payment for the two-family home, so why not buy it and then rent out half the house? The renters would more than cover half the monthly mortgage payment and he’d try to find reasonable tenants who wouldn’t drive him too crazy. So far, his strategy has worked out exactly as planned. The real estate market has held up nicely and he’s two years into payments on a $700,000 home. Hopefully the home will continue to appreciate in value and he’ll have a nice profit when the property is sold. For tips on owning property for income, take a read of the landlord blog at www.thelandlordblog.com. It goes into detail on a variety of real estate investment strategies and gives a fresh, candid commentary on the intricacies of being a landlord.

Leverage: This is perhaps the greatest advantage to owning real estate and understanding why could improve your decision-making process forever. Consider the following hypothetical example which is both realistic and accurate of the recent market. It’s 1997 and you’re 30 years old. You have secured a job paying a stable $75,000 salary and managed to save $65,000 while sharing an apartment with an old friend. You’ve decided to buy a condominium in Miami which costs $350,000. The monthly payment is about $2,400 which you determine is reasonable considering your job stability and fairly responsible spending habits. The building requires that you put down 10% ($35,000) on the home. You move in, decorate the place and get comfortable. Six years later you and your significant other decide to have a child. You agree that a suburban home is more appropriate than the condo and decide to put it on the market. In 2003 you get a bite for your asking price, $600,000. The 72 payments you made since 1997 totaled $172,800, of which $45,000 was paid into the principal and $127,800 was paid to the bank as interest. While the interest is a bit paining, remember that you did get to live in a $350,000 home for a mere 10% down. You can think of all the bank interest as if it were rent. After paying back the bank $305,000 (your purchase price less your paid down principal) and giving the broker a $10,000 fee, your proceeds are $285,000! This is the advantage of leverage. You might now go and put $100,000 down on a million dollar home. With a leveraged purchase, even though you only secure the home with a fractional down payment, you are still entitled to the appreciation (or depreciation) which occurs. Granted, home prices don’t always appreciate so quickly, but if you pick a good location and are patient, you could eventually realize a profit. In fact, in the late 90’s you didn’t need much patience because home prices were soaring in many parts of the United States. Some people believe that the real estate market got way too hot. More details about the “bubble” phenomenon are discussed in some of the blogs mentioned below.

Lack of Liquidity: Logically speaking, an asset which takes a long time to sell should be less expensive as a result. This is why I included this attribute on the list of disadvantages as well. My reasoning here is more psychological in nature, a reaction to the impulsive nature of consumers regarding spending. If it’s difficult to sell a home, it’s more likely to be held a long time. Some financial advisors refer to homes as “forced savings vehicle” for this reason. The longer the homeowner makes payments, the more likely equity will build up. This equity can be used to purchase a bigger home, supplement retirement savings, fund an education, or any other large financial goal.

Before you go out and start buying property, let me emphasize that real estate investing isn’t all fun and games. You can lose your shirt before you ever step foot into a new property. A great blog to visit if you want an idea about some factors that may affect your purchase is www.curbed.com. Covering multiple cities, Curbed exposes real estate politics, neighborhood news, and gossip, all through user-friendly blog format. This allows for the user to get that insider feeling which makes blogs comforting and familiar. Let me explain some of the pitfalls in the real estate market since I’ve met so many people who don’t really consider the downsides before plunking down money. Part of this “real estate can’t lose” mentality may have to do with the blazing hot market since the early 90’s. In fact, with a few exceptions, real estate has been hot for decades. At the time I’m writing this book, there is talk about overly speculative purchasers and bursting bubbles in the housing market. What distinguishes an investment in real estate from an investment in the stock market is that you own a real, tangible item. Maybe you didn’t buy a house, but you bought five acres of land, either way you’re now exposed to the potential risks that are associated with owning a real, tangible assets. Some of these risks include:

Maintenance: Whether you live in the house or someone else does, the homeowner is ultimately responsible for maintaining the property. If you’ve ever lived in a house, you’ve probably noticed that home repairs aren’t cheap: a new boiler, paving the roof, replacing the garage door, etc. In theory, some of these improvements could raise the value of the home, but it’s difficult to focus on that while you’re shelling out money. Many homeowners take out lines of credit against the equity in their homes to finance home improvement and major maintenance. While this can be a good decision, always think twice before borrowing from an asset which can depreciate in value.

Tenant Liability: Many properties are purchased for the purpose of renting them out. The logic is that you take out a mortgage, and then rent out the house for an amount covering the mortgage, taxes, maintenance, etc. This way, the logic goes, your home will appreciate in value and other people will be making your payments for you. These things are all possible and do happen. Some people bought buildings in the 80’s and have rented them out since. They now own the buildings (which have appreciated in value) and have secondary income sources as well. Lewis Rudin, one of the great real estate legends of the 20th century once remarked “never sell, keep debt low, and stay liquid.”
The theory here is that you shouldn’t sell an income-producing investment. Eventually, after it’s paid in full, it will still remain an income source. This leads to the “liquidity” factor which makes you rich. I suppose this theory works well after you’ve gotten past the first investment. Many of the pitfalls of real estate investing occur when you’re first getting started. A common problem is dealing with a loony tenant who holds you responsible for every little thing, including those which may not be your responsibility. Once you’re a wealthier investor, you can afford to hire a management company to handle your property. For the time being, you might have to call a contractor to fix the leaky toilet. Remember, the pitfalls of being a landlord only apply if you’re renting out your real estate. If you live in it, you’re only responsible for you and your family.

Taxes: Property taxes are a reality. They often subsidize projects such as public schools and local improvements to a neighborhood. The classic example of a property tax debate is a family which votes in favor of a tax hike while their kids are in the school system and then vote against it after they graduate. Property taxes are much higher in some areas than others. While many people bundle their property taxes into their mortgage payment, therefore not taking notice of the expense, they’re still getting paid. This is why many retirees move down to places like Virginia, or North Carolina where the taxes are lower than places like Los Angeles, and Long Island. While the homeowner should carefully consider property taxes, from an investment standpoint it’s important to note that many expensive places to live (with heavy tax structures) have proved to be excellent investments since the 80’s.

Lack of Liquidity: Yes, I believe this disadvantage is often beneficial to homeowners. However, if you need to free up some cash in a hurry, liquidating a home can be a total mess. I used to know a guy who had minimal savings outside his home. The time came when he needed to free up money to meet some big payments including tuition for his child and alimony for his children. Because he had planned on downsizing anyway, he put the home up for sale rather than taking out a line of credit. A few days before the scheduled closing, the buyer backed out of the deal because of a smaller divorce settlement that would leave him struggling with the payments. Unfortunately, the seller didn’t know that the sale was contingent upon any factors such as a divorce settlement. Similarly, the buyer had no clue that the seller needed $20,000 in 30 days or would start defaulting on some very important payments. The seller was forced to lower the price $20,000 to get a buyer who would close within 30 days. These kinds of stories are not uncommon. When I create net worth statements, the issue of home equity comes up fairly often. It’s interesting to see how people assign astronomical values to their homes when planning their retirements. I tend to use more conservative figures since life has a way of throwing us surprises. Smart owners hold on to their primary homes for a while, giving the property a chance to appreciate and time to pay down the principal. Similar to the example above, making a low-ball offer on a home, with the promise of a quick closing could possibly land you a good deal.

These are some of the things to think about when buying real estate. Keep in mind that there are myriad potential ways to profit off real estate investments. The buy and hold philosophy is fairly conservative but not the only way to play the market. The quick flip tends to be quite profitable when the real estate market is hot. This happened frequently in 2003 and 2004. Buyers would secure homes, often with little or no money down, and simply pay interest for a few months until flipping the home. The hope was to make a few percentage points by taking possession of the property, but not have to make major payments. This strategy proved to be more dangerous in 2006 when home prices weren’t necessarily moving upward. Other real estate investors prefer the fix-up method. This entails buying a property at a discount because it has some sort of problem. Perhaps the floors are cracked, the roof is leaking, and the backyard hasn’t been touched in ten years. It might cost you $20,000 to restore the house, but it could potentially add substantially more than that to the resale price. If you did three or four of these a year, you could make a living at it, as many people do. You’d need access to handymen, good financing, etc, to practice this type of real estate. Some people chase after foreclosures because often homes will be sold at a steep discount when the banks want to get rid of excess inventory.

Having a decent credit score will help, along with buying your home when interest rates are fairly competitive. The length, amount, and type (fixed or variable rate) of your mortgage will factor in as well. We will get down to the nitty gritty on mortgages in the following chapter. On the blog front, I’ve got a few others notable mentions in addition to The Land Lord Blog and Curbed.com. If you’re concerned about issues surrounding overheating in the real estate market, check out Housing Doom. This “bubble blog,” is the creation of Debi Averett and John McLeod. They pull quotes and factoids from a variety of sources which discuss the pending “doom” of the housing market. If you’re in the Phoenix area you’ll get special attention. Housing Painc is another favorite of mine. The blog generates a lot of interesting feedback and has funny visuals as well.

Russell Bailyn
Wealth Management
Premier Financial Advisors
14 E. 60th St. #402
New York, NY 10022
212-752-4343 *31
rbailyn@premieradvisors.net

*Oregon State University Conversion Factor estimates $500-$700 on an inflation-adjusted basis. Actual purchase was 60 guilders of trade goods which converts to approximately $24.00.

Securities and certain investment advisory services offered through: FIrst Allied Securities, Inc., a registered Broker/Dealer. Member: NASD & SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

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Have you ever been confused by a designation printed on a business card? Perhaps it said “John Doe, XYZ.” Well, that’s excellent for Mr. Doe, and I don’t doubt he worked hard for those letters, but what exactly does that mean? What good is a designation which isn’t recognized by a majority of people? More importantly, how is a consumer to distinguish between prestigious designations and those which don’t necessarily represent better qualification for an area of study? For example, WMS and CFP are both financial planning designations. However, becoming a Wealth Management Specialist can be done through self-study and without continuing education requirements. Becoming a Certified Financial Planner has both experience and continuing education requirements, along with a 10-hour examination. Which one would you rather work with? As I continue investigating my own credentials as a financial advisor, I’m regularly learning new and interesting facts about how the designation business really works. The reason I say business, rather than process, is to clear up the misconception that all designations exist purely for the benefit of the consumer. Some of the ways issuing organizations make money is through study guides, classroom courses, and various examination and continuing education fees. That’s not to suggest that earning money for issuing an organization is never justified, but as we always say in finance, “disclosure, disclosure, disclosure.” The issuing organization should always be responsible for explaining their designation and where a profit motive may be lurking. At the same time, I want to make clear that having an artillery of letters doesn’t mean that an advisor is better suited for your needs. There is a definite correlation between the two, but ultimately, the decision is quite personal. I find this concept analogous to the education system we have in the United States. One might think that obtaining a bachelors degree from an Ivy League university necessarily indicates a better education, more career opportunities, and higher earnings potential. Statistically, this is still is probably true, however, none of these items is a given anymore. With billionaires lacking college diplomas, and graduates of Ivy League universities searching for jobs, we have to rethink some of our assumptions. Similarly, having designations may indicate that somebody is better qualified to advise, but not necessarily to advise you.

Below is a list of what I refer to as the “big three.” These are, in my opinion, the most significant financial credentials. Farther down I’ll go into a discussion of some of the other notable designations. If you come across some letter which aren’t mentioned here and you’re unfamiliar with, look into them. As I’ve mentioned, some letters indicate a high level of specialization and prestige, while others may exist primarily for the issuing organization to generate a profit.

•Chartered Financial Analyst (CFA): This is among the more difficult designations which a financial services professional can obtain. The process requires a lot of course work and generally a couple of years to complete. The candidate must demonstrate knowledge in securities analysis, accounting, economics, and investments. A CFA should have a decent advantage when it comes to getting a job in the securities, portfolio management, and financial advising industries. In fact, only 36% of applicants who sat for the CFA exam in 2005 passed the first round of testing .

•Certified Public Accountant (CPA): This is a state-issued designation which automatically gives it a certain degree of credibility. Like the CFA, sitting for the CPA exam requires a bachelor’s degree from an accredited university. In addition, CPA candidates are required to have experience in the industry and pass a series of exams (which I understand are quite difficult) administered by the state board of accountancy. There are ethical standards to adhere to and continuing education requirements which ensure that you stay up to date with news and changes in the industry that could affect you and/or your clients.

•Certified Financial Planner (CFP): This designation was created specifically for the financial planning profession. It is issued by the Certified Financial Planner Board of Standards and the qualifying examination (which currently takes two days and is ten hours long) is only offered upon completing a series of modules which cover over a hundred financial planning topics. A major part of holding this designation is adhering to the CFP Board’s Code of Ethics and Professional Responsibility. Naturally, a financial professional is held to the highest standard of ethics because of the importance of the responsibility they undertake. I don’t think it’s a secret that people are very protective over their money.

So, we have the above designations which are, with the possible exception of CFP, household names. Then, we have a variety of other designations which may be more highly specialized but may overlap with designations offered by different issuing organization. For example, Chartered Financial Consultant (ChFC) has considerable overlap with CFP, but ChFC is issued by the American College, and CFP is issued by the Financial Planner Board of Standards. The overlap is not so terrible in that it demands a certain level of competition to remain the “authority” designation. In the world of financial planning, here are some other letters which you may see floating around:

•Chartered Financial Consultant (ChFC): As stated above, ChFC has considerable overlap with the Certified Financial Planner designation. It’s my impression that somebody with a CFP would probably not consider getting the ChFC an immediate priority. In fact, those with a CHFC automatically qualify to sit for the CFP exam. My impression is that insurance professionals lean towards the ChFC for a broader knowledge on financial planning whereas new financial planners tend to sit directly for the CFP.

•Chartered Life Underwriter (CLU): This is an insurance designation. Its purpose is to ensure a high level of knowledge when dealing with life insurance. A financial planner who tends to do a lot of insurance business may consider obtaining this designation as a stand-out credential. Hopefully, they sit through the process with the intention of better serving their clients’ needs rather than strictly for the letters. The CLU, like the ChFC, is issued by the American College.

•Chartered Advisor for Senior Living (CASL): This is certainly less common than the above two, which are less common than the CFP, CFA, and CFP. The chartered advisor for senior living is primarily for those whose business centers around seniors. The heavy topics include long-term care, insurance, disability insurance, and estate planning. In terms of a specialty designation, I think this one is fairly useful.

The senior market is one that doesn’t get all the attention it deserves. Considering the rapidly aging population and increasing life expectancies, I’d certainly advocate more focus on elder care and a better understanding of the essential insurance policies to own. On a separate note, the AARP is a leading advocacy group dedicated to people over age 50. They offer resources such as product discounts for members, “non-partisan” discussions on politics, and one of the nation’s most popular newsletters, mulling over issues such as Social Security and Medicare.

Earlier in 2006, a new designation made its debut which I consider noteworthy. It’s the Qualified Plan Financial Consultant (QPFC) sponsored by the American Society of Pension Professionals & Actuaries. This new designation was launched at the 2006 401(k) summit in Orlando, Florida. The purpose is to further educate investment professionals who specialize in qualified plan sales and consulting. Qualified plans, for those who aren’t familiar with the lingo, refer to those plans (401k, 403b) that receive favorable tax treatment as defined by the IRS tax code. I think this might be a successful designation because of the number of people invested in these sorts of plans who have questions about them. Giving out inaccurate advice about retirement plans can be a particularly costly and aggravating experience. If the QPFC mark takes off as planned, it could put some focus on this area of financial planning ahead of the first round of baby boomer retirements. Not only do the boomers stand to benefit from this mark, but corporate America, which is rapidly transitioning to defined-contribution plans such as the 401k, and 403b, will stand to benefit from this improved knowledge as well.

In terms of the legitimacy of some newer and lesser known designations, opinions tend to vary. Personally, I try to give the benefit of the doubt to anybody who meets the requirement for a new designation, even if it’s not the most rigorous choice. At the very least, the candidate is making an effort to further their knowledge and stay focused on industry issues. Fortunately, there are some fairly easy ways to form conclusions about designations and the professionals who use them. For example, one who seeks out a credential with little or no continuing education requirement is more likely in search of quick letters than one who sits for the CFP or ChFC. Similarly, a designation which can be earned with self-study only will probably garner less respect from industry professionals than one which requires classroom interaction. The more important issue is that the public doesn’t have a strong understanding of financial designations. Therefore, it could be construed as misleading to hold out easy-to-obtain letters as decisive credentials. Furthermore, I’m sure the CFP who learned over a hundred topics and sat for a 10-hour exam would find that highly unfair. Another interesting question here is whether the investigative burden should lie with the issuing organization, the financial professional, or the consumer. I think it’s fair to say the consumer should not be expected to navigate through an industry in which they are unfamiliar. The issuing organizations tend to free themselves of wrongdoing by arguing why even the easy-to-obtain designations are worthwhile. I would say that, in most cases, the financial professional is held responsible for how they present themselves to the public. Remember, we live in a world of increasing corporate governance where we are constantly on the lookout for the little investor. Any inequality which could give an advantage to a financial professional or be considered misleading will probably be short-lived.

There are a few things you should take away from this discussion. The first is that designations really do matter. Most of the time, an advisor with more professional designations will be better qualified to serve you. Working with a series 7 stockbroker is not the same as working with a financial advisor armed with a CFA and CFP. As a consumer, you should take home that business card and verify the legitimacy of all those letters. This NASD web address is among the web’s best resources for understanding most of those letters. It discloses information about the issuing organization, the examination requirements, how the professional studies for the exam, and what the continuing education requirements are. I’ve also included the websites of some of the more reputable accrediting organizations for reference. Unfortunately, not many bloggers have taken an interest to this subject yet, although there are some articles on the topic spread throughout the Web.

Posted by Russell Bailyn at 02:13 PM | Permalink | Comments ( 2 ) | TrackBacks ( 0 )

Having a handle on your budget is a building block for other good financial practices. If you can grasp the concept that sacrificing a few items today will allow you to buy more items later, you’ll have a better chance at affording the important things: houses, cars, vacations, educations, etc. I had a difficult time conveying this concept to my brother, who believes that money is better enjoyed as a young wonderer in the world and becomes an item of necessity rather than pleasure as one gets older. I think he’s referring to life events such as marriage, children, housing, and education which are expensive and typically require a large percentage of your after-tax funds. I agree with him in one respect: that money has more of a shock affect when spent on items that pass quickly, such as vacations and meals. However, he (and many others) may be overlooking a crucial link: responsible spending on the not-so-fun things such as mortgages and retirement savings is directly related to one’s ability to spend more later on in life. Believe it or not, there are objective realities (the classic examples being death and taxes) which we need to plan around. If we are to lead fruitful lives, understanding the impact of spending will be very helpful down the road. Below I will discuss some budgeting basics that I consider to be important and integrate the financial journey of my hypothetical friend, Jay. He will be a single male from Chicago who is having some trouble with his budget. I’ll also point out some websites and blogs which give fascinating if not overly detailed discourse on the budgeting tactics that people use.

The three areas of life which tend to cost the most are housing, transportation, and food*. Think about how much time you spend either in your home, getting from place to place, or eating. It’s a very funny thing to think about as it puts into perspective just how similar the activities of most human beings are. In fact, the percentage of money spent on these three items is nearly identical for both low-income and wealthy families; the difference being the size of the home, the newness of the cars, and the variety of meals. As a rule of thumb, spending approximately one third of net income on housing is a responsible figure. This means if you earn $40,000 but your take-home pay (after taxes) is $30,000, you should be spending approximately $850/month on either your rent or mortgage payment. Keep in mind that each person’s situation is different, and many factors could alter this percentage higher or lower. The next third of your after-tax pay should cover food and transportation. While I tend to think this percentage could be lower, food is both a shockingly popular and expensive industry throughout the world. I suppose it makes economic sense because people love to eat and have no qualms about paying for food. Transportation has a similar story: a majority of people could drive economy cars which utilize alternative energy sources, but choose not to. We drive sport-utility vehicles that cost $50 or more to fill up at the gas tank. The economic explanation for this is that we don’t feel the pressing need or collective desire yet to radically alter the way we transport ourselves. While these subjects warrant discussions of their own, the point is that much of what could be comfort money is spent to cover the sky-high costs of eating and getting around.

Let’s move on to Jay, our financial planning example. Jay’s a real city personality; a computer programmer, single, active lifestyle, all that stuff. I chose him as an example since his after-tax, disposable income is around $2,500/month, fairly close to the median statistics in the United States. I believe his situation typifies in many ways the sort of budgeting mistakes which people tend to make. The rent on Jay’s studio apartment is $1,000 per month. While this is above the $850/month I would have recommended, he partially compensates for it by not keeping a car in the city. Jay’s apartment, including his cable and energy bills costs $1,200/month. He spends a total of $14,400 each year, or 48% of his disposable income on the apartment. Jay could easily lower that number to $1,000 by either getting a roommate or taking a place a bit further from the center of town. Besides the fact that Jay likes where he lives, he insists on keeping the apartment because transportation costs would become too high if he moved further away from his job. Food is an important expense for Jay as well; he eats only organic and tends to shop at stores like Whole Foods and Wild Oats. However, he doesn’t eat out at restaurants very often which offsets the expense of locating organic foods. He estimates $4,800/year or 16% of disposable income on food. Transportation is the third largest expense at 8% of his disposable income, or another $2,400/year. It would seem that most of the big ticket items are out of the way at this point. However, Jay not only spends his disposable income each year, but he saves nothing and is starting to develop credit card balances (It’s not actually a syndrome). His other hobbies include taking an annual trip to Florida with friends, buying music online and playing poker. Jay says there are probably a lot of expenses he is forgetting such as birthday gifts, haircuts, gym membership, etc, which push him over his spending limits. Our estimate is that of the $30,000 in disposable income, Jay spends $31,000/year and saves nothing. Saving, he insists, is something he’ll start thinking about in his 30’s.

The first thing I like to teach “non-savers” is that they can save. The secret, which I’m happy to share with everybody, is to treat saving like a monthly bill. If you get paid on the first of the month, have $100 taken out of your account on the 3rd of the month and directed into an interest-bearing account. If you have a retirement plan at work, it should be utilized first as there are often tax benefits to participating in these plans. You should start this habit of automatic saving as early as possible and never stop. Granted, you may start earning larger sums of money in which case $1,000/month is better suited for you. Regardless of the amount, saving money should be as high a priority as any bill is. If it’s not, cut your HBO and start with that extra $10/month. Next, ditch high-priced coffee and start making it at home. That piece of advice alone could save you $100,000. Does that figure sound crazy? Take a look at the chart below which examines the opportunity cost of spending $3.00 a day. If coffee is a bad example for you, substitute it with some other habit you could cut back on: cigarettes, buying lunch, dry cleaning etc.

Y Cost/Cup Cost/3% Infltn Total Paid Invested Instead at 7%

1 $3.00 $1,095.00 $1,095.00 $1,172.00
2 $3.09 $1,127.85 $2,226.00 $2,267.00
3 $3.28 $1,197.20 $3,384.00 $3,520.00
5 $3.48 $1,270.20 $5,814.00 $6,297.00
10 $4.03 $1,470.95 $12,553.00 $15,129.00
20 $5.42 $1,978.30 $29,423.00 $44,890.00
30 $7.28 $2,657.20 $52,095.00 $103,434.00

This chart could be used to illustrate other financial planning concepts, such as the time value of money, and the effects of compounding. For now, we’re only concerned with opportunity cost; what we forego when we spend
$3.00 instead of putting it into the bank. Anyway, these are changes which could be beneficial to Jay:

•$100 automatically deducted each month and directed into an interest bearing account.

•Capping food store runs at $50/week ($16 less than his current average). This would save approximately $862 per year which could be invested. We made this decision upon a further discussion where Jay revealed that he tends to overspend slightly and could buy just as much food even at $50/week.

•Starting to use a debit card or cash rather than a credit card for expenses. Studies show that people who spend mostly cash tend to be more frugal, while active credit card users tend to overspend. Jay was a classic credit user who paid back less than his full balance at the end of the month. This practice gradually leads to higher credit card balances.

•Jay is starting to investigate his situation at work. He will begin contributing the minimum to the company 401k plan next year. He will also discuss with his employer opportunities to increase his pay next year.

Keep in mind that budgets aren’t just for the struggling. Many smart and rich people have less than perfect financial habits too. Did you ever hear that both Mike Tyson and Michael Jackson had severe financial problems? That just doesn’t sound right. If somebody gave me three million dollars to punch people out I promise I’d save at least half. The tendency for people with larger incomes to fail at budgeting is a more complex issue as is the process of keeping to a budget when you don’t receive a regular salary. A classic example of this would be sales or commission-based jobs such as brokers. Some of these people may earn $20,000 one month, take three months off, and then earn $20,000 again. It can be very tricky to make a longer term spending plan with this type of erratic earnings schedule. However, the steps are the same: write down your expenses, analyze what you could be cutting back on, and be sure to save a little something each month.

On the web, there are a lot of bloggers who publicly track their spending. One such blog is Consumerism Commentary. The master of this site, Flexo, posts a balance sheet each month illustrating changes in his net worth for his readers. He breaks down his assets into cash accounts, investment accounts, and intangibles such as accounts receivable and automobiles. The blog also features articles on various topics that tie into personal finance such as shopping and selling things on Ebay. Flexo is also a contributor to the Money Blog Network which conveniently compiles the entries of top personal finance bloggers onto one site. One such blogger on this network, "FMF” writes Free Money Finance. This is another well-written and comprehensive blog loaded with tips on saving money, sorting through financial documents, navigating retirement, and a host of other topics. Finally, I have a great website for those truly focused on their budgets. Visit www.stretcher.com to really find out how to squeeze every last penny out of your dollar. This incredible resource will help you save money in ways you haven’t even thought of. Visit the topic library at the bottom of the home page for the long list of articles.

Russell Bailyn
--
Wealth Management
Premier Financial Advisors
14 E. 60th St. #402
New York, NY 10022
(212)752-4343 *31
rbailyn@premieradvisors.net

*U.S. Department of Labor, Bureau of Labor Statistics' Consumer Expenditure Survey 2004

Securities and certain investment advisory services offered through: FIrst Allied Securities, Inc., a registered Broker/Dealer. Member: NASD & SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 05:12 PM | Permalink | Comments ( 3 ) | TrackBacks ( 0 )

We're well into September now and it seems the market has carefully tiptoed around its current worst fears: inflation, recession, and expensive oil. The Federal Reserve apparently pleased investors when it stopped raising interest rates last month, giving the bond market a chance to breathe as well. It will be interesting to see how the Fed proceeds from this point forward. It's my feeling that the retail season may be fairly strong this year, especially if a barrel of oil can stay in the $60 range. Remember, some people aren’t overly dependent on oil (such as city dwellers), but others spend a lot of money on gasoline both for heating their homes and powering their cars. If corporate earnings are strong in October and throughout the holiday season, the stock market may start hitting some fresh highs. Some of the major indexes have already closed in on multi-month highs this week, a good sign for September, which is traditionally not a great month for the stock market.

Interesting News
The Pension Protection Act was signed into law on August 17th. The Act aims to fix the underfunded pension problem surrounding the private sector. It also has provisions to increase enrollment and contributions to retirement plans such as IRAs and 401ks. Below is an outline of the key reforms to fix outdated pension laws, strengthen workers’ retirement security, and reduce the prospect of a future multi-billion dollar taxpayer bailout:

• The Act establishes an interest rate to accurately calculate pension liabilities to ensure corporations fund their promised worker pensions.
• The Act gives employers incentives to help build up a cushion in their worker pension plans during good economic times, raising the maximum deductible amount for pension plan contributions.
• The Act closes funding loopholes and reduces volatility by ensuring employers make adequate and consistent cash payments to their plans.
• The Act ensures workers and retirees are given timely, accurate, and straightforward information about the health of their pension plans.
• With hundreds of significantly underfunded pension plans across the country, the Act includes reasonable restrictions to ensure employers and union leaders cannot dig the pension hole even deeper by promising extra benefits.
• The bill helps resolve legal uncertainty to ensure hybrid plans such as cash balance pensions, which offer portable benefits that allow workers to earn more generous benefits steadily throughout their careers, remain a viable part of the defined benefit system.
• In addition to reforming the laws governing traditional private pensions, the Act contains provisions to help workers save through defined contribution plans (IRA, 401k, 403b). It will remove barriers that prevented companies from automatically enrolling their employees in these savings plans.
• It will make permanent the higher contribution limits set up through 2006 on 401k, 403b, and IRA plans that were set to expire after 2010. This is a huge tax advantage for employees stashing away pre-tax dollars into retirement plans.

Savings Tips
The average consumer spends 15% more in December than they do in other months . Part of this has to do with the holiday shopping season, the other part with vacations. Try to cut back in October and November so you don’t feel the “January pinch.”

General Notes
Here at Premier Financial Advisors we’re encouraging clients to come to us with financial questions. Too many people procrastinate when it comes to planning their futures or running budgets and retirement scenarios. Feel free to make a phone call or come in for an appointment anytime.

Russell Bailyn
Premier Financial Advisors
14 E. 60th St. #402
New York, NY 10022
212-752-4343 *31
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: FIrst Allied Securities, Inc., a registered Broker/Dealer. Member: NASD & SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 02:36 PM | Permalink | Comments ( 0 ) | TrackBacks ( 0 )

The question of whether or not to work with a financial advisor is very personal. For some people, dealing with financial issues is unpleasant and requires a great degree of undesired discipline. For these people, the real question will be how to choose the right advisor, rather than whether or not to work with one. Others choose to embrace the financial decisions which we cross in our lives, such as investing and purchasing real estate, and may be resourceful enough to work without an advisor. Interestingly, many of those who are most eager to seek help are actually very knowledgeable about financial issues. They confer with professionals to reinforce ideas and seek second opinions about what they may already know. Perhaps my cousin Laura has a good feel for investing but she doesn’t know much about how to determine insurance needs. Or, insurance may not present any problem for her, whereas issues surrounding her will and choice of beneficiaries does. I had a professor once tell me that anybody wise enough to handle all aspects of their personal finances on their own should probably be in the business of advising others. This wasn’t always the case, but financial issues have become so complex and convoluted that even experts must meet up to refresh themselves from time to time.

Let me give a few scenarios in which one might work with a financial advisor. This will help you understand the various topics and decisions which can be costly to you if overlooked.

•Traditional Financial Planning
Take for example a married couple with one or two children and a stable income. This is a great case for financial planning because of how many issues a family in this situation will deal with. They may be trying to help support elderly parents while putting money away towards college for kids and planning for retirement at the same time. They probably want their family to live in decent style, dress well, and take an occasional vacation. Most importantly, they need adequate funds to comfortably cover all the necessities- because these are items one can’t ever ignore.

•Goal Planners
This financial planning scenario may appear for a client who is reaching 40 and starting to pull down some decent bucks. She may want one million dollars saved up by age 59, not including the value of her home. This amount, she’s concluded, will provide her with adequate income for the rest of her life. We will deal with this type of client in two phases: accumulation and dispersion of assets. The process here is mathematical in nature, involving timing and monthly savings targets.

•Speculative Clients
There are plenty of people who are less concerned with an exact age when they can stop working and more focused on taking risks now to make money. This is not as short-sighted as it may seem. We’ve all heard the phrase “risk and return” and many of those who understand the concept of calculated risk are living in better style as a result. These clients may obtain an advisor to help them study the risks in a potential investment. They may also need the advisor because they can’t utilize financial instruments such as options and futures without one. Or, they may simply need advice on putting together a portfolio of stocks which meets their objectives and risk tolerance.

In reading these three scenarios you’ve probably crossed at least one which sounds familiar to you or somebody you know. Your financial advisor, if properly trained, can do a number of things for you. The first is to expose your current situation in such a way that you can get a good grip on it. There are traditional ways of doing this, such as putting together personal financial statements which you can use to track your progress. Then, there are client-specific methods for those advisors who get a good understanding of a client’s psychological process.

Your advisor should also teach you about investment vehicles that exist for different forms of savings. For example, 529 plans exist to save for higher education expenses*. It’s named after section 529 of the IRS tax code and allows for distributions for qualified higher education expenses to be exempt from federal income tax. This provides a nice incentive for using the plan rather than accumulating funds elsewhere. The 529 plan gained in popularity after the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). Other examples of beneficial savings vehicles include IRA’s for tax-deferred savings, and 401k plans for corporate workers looking to reduce their taxable income base and, depending on the plan, possibly catch an employer match. However, not everyone knows that these different vehicles exist and knows how to properly utilize them. Your planner can help expose these benefits for you.

Your financial planner can also administer a plan for specific goals. This process goes hand in hand with creating and maintaining a budget. If you need $30,000 for a car, and you have $10,000 today plus your future earnings potential, you can figure out with excellent accuracy a savings pattern which will make this possible. Perhaps you’ll figure out that $2,000 saved annually for 7 years plus accrued interest will be sufficient. If you divide this cost monthly, this difficult expense will run you only about $175 per month. That isn’t quite as scary, is it?

Further, your financial advisor may have a specialty. Some advisors like to hone in on certain demographics, such as the high net-worth market or clients in retirement. Others will specialize in an investment product such as insurance needs. In the following chapter, we will discuss some of the different types of financial professionals and how they get paid. This will give you a better understanding of the financial planning process and perhaps lead you to becoming a more knowledgeable consumer.

I’d like to briefly return to my original point that financial advisors are not just for the wealthy. Nowadays, personal finance issues can be as complicated for the middle class as they are for the wealthy. Often a simple flat-fee can be enough to retain the sort of financial plan which can dramatically improve your personal financial situation. Try to keep an open mind, and find a planner who will sit down with you and develop saving, spending, and investment plans. You may find it the most valuable few dollars you will ever spend.

As always, feel free to contact me with any questions or comments.

Russell Bailyn
Premier Financial Advisors
(212)752-4343 *31
rbailyn@premieradvisors.net

*As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments. The tax implications of a 529 plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.

Posted by Russell Bailyn at 10:34 PM | Permalink | Comments ( 4 ) | TrackBacks ( 0 )

I field a lot of questions regarding the various rules that govern 401k and 403b plans. Not only is it a confusing topic for the average investor, but the issue has been gaining in importance recently as these plans become more popular. The reason why they have similar names which often confuse people is that both reference the section of tax code which defines how they are organized. It may be easier to refer to them as “for-profit” and “not-for-profit” plans because therein lies the primary distinction.

If you work at a for-profit corporation, you probably have a 401k plan available to you at work. If you don’t, well, that’s an issue you may wish to raise with human resources. Most financial advisors would agree that funds accumulated through company retirement plans will be essential in light of future uncertainty regarding government benefits. A 403b is only available to tax-exempt organizations, the most common of which are schools, hospitals, and religious groups. Section 501(c)(3) of the tax code goes into considerable detail about the rules regarding organizing your business as tax-exempt. As for what the benefits are to contributing to either a 401k or 403b plan, here is the short list:

• Participants set aside money on a pre-tax basis through payroll. Let me explain what that means: If $100,000 is your taxable income in 2006, and you defer $10,000 through payroll into either plan, your taxable income is now $90,000. This is the primary benefit to contributing on a “pre-tax” basis.

• The deferral amount, $10,000 in our example, is directed to the authorized vendors working with your organization. I will discuss the vendor issue in the next paragraph as there are things to know about where you are sending your money. If you get paid monthly and you have twelve pay cycles per year, $833 would be taken out of each cycle and sent to the vendor managing your plan.

• The money invested in your 401k or 403b plan grows tax-deferred until you take a distribution, presumably at retirement. It is important to note that the “retirement” age in which you can take a penalty-free distribution is 59 ½. If you take a distribution before this age, you may be subject to a 10% early withdrawal penalty. Assuming you had contributed a total of $50,000 to your plan and it grows to $100,000 through the years, you would not have to pay capital gains tax on that appreciation. Assuming this scenario, you saved money by contributing to the plan on a pre-tax basis while you were working, and your assets grew without the concern of having to pay capital gains tax on any proceeds. Now those are some nice benefits don't you think?

As I mentioned in the second bullet, the issue of which company manages your retirement plan is quite important. Both 401k and 403b plans come in a wide variety. Once an executive decides on a 401k plan which works with his/her business, the employees generally have only that plan open to them. This keeps matters simple and provides a certain level of uniformity which is important when making decisions regarding retirement plans. Also, participants in a 401k plan are often eligible for a company match from their employer. The tax code encourages employers to match employee contributions by offering a tax-incentive to those who do. Here is an example of how an employer match works: a company matches ½ of your contribution up to 3% of your salary in a given year. If you earn $100,000 and deposit $10,000 into your 401k, your employer would answer with an additional $1,500 (1/2 of $3,000). In essence, this is free money. Most financial advisors will encourage you to research the rules regarding matching contributions and make that an early priority in your retirement planning efforts.

401k plan administrators are often subject to strict legal requirements in terms of monitoring both the contribution levels and investment activity of the participants in their plans. Many of these requirements are the result of the Employee Retirement Income Securities Act (ERISA) of 1974- designed to improve disclosure and protect employee interests. In some cases, a 403b plan may sidestep ERISA requirements. An example of this would be a plan in which the salary deferrals are at the discretion of the employee as is the method in which it is invested. Assuming no matching contribution is being made, the employer has little involvement in this plan arrangement short of announcing that the plan is available. In many cases with 403b plans, multiple vendors may be available to manage the funds. While the benefits of the 403b vehicle is uniform, there may be additional benefits or drawbacks to the provider you choose to manage your plan. For example, some 403b providers offer asset allocation tools such as quarterly rebalancing. This feature requires determining an initial "asset allocation." When your portfolio fluctuates in value, it will rebalance, once per quarter, back to your original allocation percentages. So, if the stock portion outperformed the bond portion, a certain percentage of stocks would be sold off in exchange for more bonds. This feature may help smooth out the volatility associated with having too much money invested in one asset class. Further, research shows that portfolio rebalancing may improve portfolio performance over long periods of time*. The employer or organization will generally provide you with a list of their registered 403b vendors for you to choose from. In the event that you don’t like the options available to you, getting a new vendor registered to your organization may be an option as well. Contact your plan administrator for more information on how that process works.

In terms of contribution limits, the recent passage of the Pension Protection Act makes permanent the contribution limits defined in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. These limits are $15,000 for 401k and 403b plans if you’re under 50 years old, and an additional $5,000 (up to $20,000) if you’re over 50. These limits will be indexed for inflation beginning in 2007. You gain penalty-free withdrawal access to your retirement funds when you turn age 59 1/2. Again, I don’t know why the federal government has selected this specific age as “retirement age” but this is the magic number. There are few exceptions in which you can access this money without getting penalized such as the 72(t) withdrawal**, if you become disabled, die (in this case your beneficiary will likely get your money) or have a qualified “hardship withdrawal.” The hardship withdrawals include a few scenarios such as needing it to pay for a medical emergency which you otherwise couldn’t afford. The rules are few and far between because the goal is that you let the nest egg sit. Also, some plans do have loan provisions in which you can borrow against your account, however, check with your benefits department to determine if this feature is available to you.

There are numerous web resources which are available to help you navigate retirement plans. The 401k help center is a fabulous resource for 401k plans. The site is user-friendly and doesn’t make any endorsements which could jeopardize the site’s credibility. For questions regarding 403b plans, 403bwise is the authority site. They have an excellent forum with experts who will answer your questions regarding both 403b and 457 plans. For more broad news on the retirement plan environment, including updated news on legislation and current trends, visit PlanSponsor.com. The information on this website is very comprehensive and most often geared towards financial professionals. That being said, I recommend you visit the site and evaluate its resources on your own. They also have a blog written by the talented Nevin Adams.

As always, feel free to contact me with your questions.

Russell Bailyn
Wealth Management
Premier Financial Advisors
14 E. 60th Street, #402
New York, NY 10022
212-752-4343 *31
rbailyn@premieradvisors.net

*www.bernstein.com The Science of Psychology of Rebalancing
**Section 72(t)(2)(A)(iv) provides an exception for payments that are part of a series of substantially equal periodic payments made for the life of the account holder/s and his or her designated beneficiaries.

Securities and certain investment advisory services offered through: FIrst Allied Securities, Inc., a registered Broker/Dealer. Member: NASD & SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 04:11 PM | Permalink | Comments ( 13 ) | TrackBacks ( 0 )