Personal finance can be a tricky subject to master. You may feel comfortable with the stock market or perhaps you’ve taken on a mortgage or two, but there probably are a few areas you haven’t mastered yet. For this reason, I’d like to discuss five common blunders people make when it comes to their money. Read carefully, and you could avoid some major pitfalls.
We’re entering the heart of tax season so I figured now would be a good time to do this post. If you are a client and haven’t brought in your tax documents for 2007 yet, please get in touch with us sooner than later. For those who read my blog from other parts of the world besides New York, here are a few tips that may help you this tax season. Let’s start with the best part: free money the government may give you this year as an ‘I’m sorry’ for the recessionary pressures hanging over all of us. I’d like to thank the broader financial services sector for creating a $500 billion liability we all must grapple with.
Continue reading "The Economic Stimulus Package + Other Helpful Tax Strategies" »
Becoming wealthy is not only about how good you are at earning money. It’s also about understanding and protecting your money. Below I’ve outlined a few concepts which plenty of people—plenty of very smart people—often overlook. Perhaps you can pick up an idea or two which improves your own personal financial life.
A common misconception is that all mortgage rates drop when the Fed cuts interest rates. The truth is that the exact opposite may be the case. When you hear that the “Fed cut rates today” the reference here is the Federal Funds Rate, the overnight lending rate that the Fed uses with other banks. The stock market often gets excited about the lowering of this rate because short-term borrowing becomes cheaper, generally increasing economic activity for businesses. However, homeowners with 15 and 30-year fixed mortgages shouldn’t be so sure that a lower federal funds rate will equal a refinancing opportunity.
The Real Deal posted a front page article earlier this month on the growing popularity of mortgage contingency clauses found within buyers’ purchase contracts. For those who aren’t familiar, this is a provision in the purchase contract in which the buyer is only obligated to the sale if he/she is able to get a mortgage. Put another way, the buyer doesn’t risk losing their deposit--often 10% or more--if factors affecting the credit markets force them out of a deal.
I understand the value of a dollar extremely well. Each day I break the world around me down into dollars and cents. I try to assign a value to the meals I eat, the clothing I buy, and the services I pay for. If I can’t justify my purchase, I won’t make it based on principal. Because I’m in my mid 20’s, there are plenty of expenses which I haven’t covered yet. College tuition would be a good example. Clearly this is a good thing because shelling out for education expenses is hardly what I feel like doing right now. The big-ticket purchase which I’m curious about today is weddings. I’ve been to plenty and have a pretty good idea about what the financial breakdown looks like, but I still have to wonder, why does it need to be so expensive?
There was a great article on Bankrate last week called “Surviving the Sandwich Years.” The reference here is to people typically in their 40’s and 50’s, grappling with paying for aging parents while saving for both kid’s educations and retirement. The article points out that only 20% of people can rely on an inheritance and proper planning should really disregard any potential windfalls. Here are the ‘survival tips’ pertaining to estate planning which are offered by the article along with some of my own commentary:
An interesting article in Worth magazine this month talks about how many of the country’s leading attorneys are helping their clients grapple with how to pass money along to their kids. The problem, of course, is making sure the wealth is treated as an opportunity and not as a tool to derail motivation and the desire to succeed. The lawyers in the article point out that in the 70’s and 80’s, a typical meeting between a client and his or her attorney or financial advisor would be comprised of strategies which ensure giving the IRS as little money as is legally possible during a wealth transfer. The goal was to maximize the amount of money being transferred to younger generations and minimize the tax implications. Nowadays, the shift is away from taxes and onto the effects of inherited wealth.
Continue reading "Wealthy Parents & Inheritances: Transmitting Values with Money" »
Do you love what you do? When I pose this question to my clients about half say yes and the other half say no. From what I’ve read, the actual number of people who truly enjoy their day job is around 30%, indicating the other 70% are either miserable at work or just plain accepting it. To be fair, not everyone can do exactly what they love. Once you have a family and a mortgage, the ability to take risks with your career and “pursue your passions” can quickly dissipate. Also, once you reach a certain level of job security and income stability, change may take a backseat to sheer survival and maintenance of our current lifestyles. What I envision for an improved work-world would be more people getting fired up to take charge of their destiny and make positive changes in their life.
Continue reading "Do What You Love & You May Earn More Money" »
I had a client come in last week to create a budget. As usual, I pulled out my template which attempts to capture all of one’s income and expenses for a given month. The budget worksheet we use at my firm is very detailed and includes all household expenses, funds which get earmarked for savings and investments, transportation costs, insurance premiums, etc. My most common experience when creating budgets has been that more money exists than one realizes. On paper, it seems near impossible that a shortfall could exist. It’s the casual discussion afterwards when the “oh yes, I’m addicted to downloading music” and “I needed those sunglasses” comments come out.
I keep my checking and savings accounts with a major corporate banking chain. For compliance reasons, we’re going to call it “bank X.” At least once a week I stroll inside my bank for some reason, whether a deposit, withdrawal, transfer of funds, etc. I’ve noticed that during approximately 20% of my visits, a smiling young “personal banker” (wearing a suit which matches the bank X logo) wishes to have a word with me. It happens so frequently that I’ve started saying yes just to see what it is they have to say. I figured the collection of conversations could lend itself to a good blog entry. Well, here it is. The irony, of course, is that these young and inexperienced bank employees are told precisely what to say when they pitch the bank’s clients. It’s very unlikely any of them could teach me, a research-obsessed financial planner with a published book about finding unbiased financial information, anything which I consider to be valuable or new. In fact, nearly every word they breathe has me cringing with disagreement and questioning their honesty and integrity. Bottom Line: Banks are good for checking and savings accounts. Be extra careful about letting them manage your investments
I field a lot of questions about indexes. What's the S&P 500? How is it different from the Dow Jones? What is the Russell 2000 and why does it regularly outperform its peers? I think this is important information for the average investor to know. I had one client call me on a day when the Dow Jones was down over 100 points to ask how poorly his stocks were performing. I explained that while the market averages were trading down that day, his individual portfolio was actually up. How is this possible? Well, the Dow Jones Industrial Average only represents 30 companies out of thousands which are publicly traded. On a separate note, indexes are also growing in popularity because of the explosion of exchange-traded funds--investments which track indexes. Let's talk more about indexes and what you should know.*
Have you ever heard of this concept? I had a potential client contact me recently to get my take on whether “Missed Fortune” financial planning is as brilliant as its famed promoter (Doug Andrews) claims it is. Like many other financial advisors (and bloggers) I’m going to award Andrew’s concept a NO from my perspective. Granted, I’m sometimes referred to as a “conservative planner” but Andrew’s concepts seem more than risky--some are downright dangerous.
In doing research for one of my book chapters, I uncovered some great information about behavioral finance. For my purposes, this science explains the ways in which emotion affects financial markets along with other mediums such as saving and spending. I realized while reading that a deep enough understanding of this stuff could lend itself directly to becoming a better financial planner. So much of what a planner does each day is specific to their clients. Rather than arming ourselves with just blanket financial advice, we try to understand the individual circumstances which each client grapples with. This allows for more client-specific solutions. A cookie-cutter financial planning practice will only grow so much until it can’t fully meet the increased demands of clients. This is why I choose to call myself a “wealth manager” as opposed to a “financial planner,” even though financial planning is part of what I do every day. I think the former title indicates an increased awareness of a client’s overall financial situation.
Continue reading "Behavioral Finance & Financial Planning: Related Sciences" »
In doing research for one of my book chapters, I uncovered some great information about behavioral finance. For my purposes, this science explains the ways in which emotion affects financial markets along with other mediums such as saving and spending. I realized while reading that a deep enough understanding of this stuff could lend itself directly to becoming a better financial planner. So much of what a planner does each day is specific to their clients. Rather than arming ourselves with just blanket financial advice, we try to understand the individual circumstances which each client grapples with. This allows for more client-specific solutions. A cookie-cutter financial planning practice will only grow so much until it can’t fully meet the increased demands of clients. This is why I choose to call myself a “wealth manager” as opposed to a “financial planner,” even though financial planning is part of what I do every day. I think the former title indicates an increased awareness of a client’s overall financial situation.
Continue reading "Behavioral Finance & Financial Planning: Related Sciences" »
I’m writing this post because of an e-mail response I got from my friend JLP over at allthingsfinancialblog.com. First, let me point out that JLP runs an excellent blog- one of my favorites. I sent him an e-mail recently because he has a section on his site which links to others financial planners, specifically those who write blogs. I figured it would be appropriate to get a link on his site, being as how I’m a financial planner, a fellow blogger, and have a book coming out this summer with Wiley & Sons which features JLP along with about 70 other bloggers. But JLP asked me the ultimate question- a question which earns so much publicity that I could talk about it in my sleep- a question so great that it transcends time: do I earn commissions? Hesitantly, I explained that, while I’m predominately a fee-based advisor, my firm, as a comprehensive wealth manager, does earn commissions. I think I got a bit defensive and went on to explain in my e-mail some of the pro-bono work that my firm does. This morning when I sat down to write a post, it occurred to me that not every advisor who earns a commission needs to apologize for doing business this way. More importantly, I don’t think the average consumer truly understands what it means to be a fee-only financial advisor. Some advisors are touting their fee-based model of doing business when a commission could actually save their clients money. Allow me to disseminate the truth about this situation once and for all.
Continue reading "The Truth Behind "Fee-Structured" Financial Planning" »
Social Security is a federal program which provides retirement and disability income to workers through the collection of Social Security taxes. Every worker in the United States is responsible for paying these taxes during their working years and entitled to receiving benefit checks when they are eligible for retirement. That fact alone should make you at least a little bit curious about what all the recent chatter is about. The program is on its way to financial trouble because not enough workers exist to provide adequate benefits to the rapidly aging population. The most perplexing aspect of the Social Security problem is that the people who are most concerned about it really aren’t the same people who will likely be most affected by it. For example, I’m the youngest financial advisor at my firm and stand to lose the most from an underfunded Social Security system. At the same time, I not only talk about it less than my co-workers, but I don’t lose sleep over it either. That’s not to say I’m unaware that 12.4% of my paycheck goes towards these taxes, I’m just too far from receiving benefits to worry about it. Perhaps part of that irresponsible logic stems from how the system is organized. Rather than each taxpayer’s Social Security dollars getting earmarked for their own retirement, they get paid into a common pool of money allocated by the federal government. It’s a controversial system because workers currently in their 20’s and 30’s may not ever see the money they’ve paid in. It’s also impractical because of the baby boomer generation. Millions of people will soon be applying for benefits and the program needs some sort of reform if it wants to remain financially solvent. The irony of this problem is that Social Security was set up in part as a reaction to the Great Depression. Its inherent purpose was to provide a safe and stable income during retirement. When the Federal Insurance Contribution Act (FICA) was passed in 1937, the payroll tax needed to fund the system was only 2%, not a bad deal for a promise of secure income during retirement. Needless to say, that payroll tax has increased gradually up to its current 12.4% level. Some politicians may finally be realizing that raising taxes isn’t necessarily the solution. It’s more than questionable what the affects would be of raising FICA taxes another few percentage points. Some believe that would infuriate many hard working people, and potentially risk a shake-up in the economy. It seems to me that the system makes less sense each and every year it continues. So, what are we to do about all this? Keep in mind throughout this discussion that eliminating the Social Security system along with the taxes that fund it is not an option currently on the table. The government understands that they need to, at least in the short run, implement a uniform program which provides some form of income to older Americans.
Continue reading "Solving the Social Security Problem in America" »
Americans tend to have mixed feelings about credit cards. They appreciate having easy access to funds, but largely resent the tendency created by credit cards to overspend. Credit Card issuers pollute the problem by pushing the use of credit on consumers and tangling a web of fees and interest charges along the way. However, having access to credit is an extremely important part of today’s financial world and helps to validate the consumer. It allows one to conveniently buy things located anywhere, and creates the ability to make reservations for services such as car rentals, hotels and restaurants. I would say that credit cards are already an item of necessity rather than luxury. It’s difficult to make it through a year as an active person without having some sort of access to credit. The convenient record-keeping and surveillance aspects of using credit over cash have made it an appealing choice for consumers and vendors alike. As this dependence on credit cards continues to spread, it’s important that one understand the benefits and drawbacks to credit cards, why they cost consumers so much money, and how one can avoid falling into credit card traps.
There comes a point in many investor’s lives when they decide to dabble in the stock market. I consider this to be a turning point in the life of an investor, a coming of age in which one graduates from a passive strategy and demands more control over their investments. Some people return to managed investments shortly after trying their hand at stocks because of a bad experience, while others have success and maintain permanent involvement with their investment decisions. Besides the potential for profitability, researching your own stocks has derivative benefits as well. First, your understanding of individual corporations and the economy in general will likely improve. Also, your journey into stocks may inspire a curiosity about other areas of the investment arena such as bonds and real estate. I remember back in college when I first took an interest in the stock market. I dedicated a chunk of my spare time to examining financial statements, listening to quarterly earnings reports and researching executives to find out who’s who. On the topic of research, it should be noted that the Google finance portal launched in early 2006 and is a must see for new investors. While many loyalists still prefer the Yahoo portal, Google Finance has truly unique features such as interactive charting and a search tool specifically designed to navigate the blogosphere. I remember when the market dabbling phase happened in my own family many years ago. My father installed a satellite dish on the roof of his dental office to give him improved access to stock quotes. Each time his stocks went up the computer would make a sound like a cash register. Each time they moved down you’d hear something of a train wreck. Ah yes, those were the days of dabbling. So, how should you go about picking stocks?
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.
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.
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.
Continue reading "Budgets: Does Anybody Really Stick to One?" »
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.
Continue reading "What Is The Role of a Financial Advisor?" »
The science of financial planning is relatively new. While pinpointing the career’s starting point is difficult, I’d put it somewhere in the neighborhood of 1969 with Loren Dunton and the Institute of Consumer Financial Education. Dunton had a vision of educating the public on financial planning techniques. His initiatives led to the creation of the College for Financial Planning. The College distributes the Certified Financial Planner designation to students who complete a series of modules. The Certified Financial Planner designation is now a standard of excellence in the industry. Dunton focused the late part of his career on educating financial professionals on how to teach financial planning.
Continue reading "The Past, Present, and Future of Financial Planning" »
In the world of financial planning, a variety of factors may affect the advice one receives from an advisor. I’ll tell you an obvious one: a company which sells their own products. Without volunteering names, you probably will if you haven’t already, bumped into this kind of business. Be aware when meeting with an advisor or broker that does so, that his/her advice may be slanted towards selling in-house products- which sometimes pay higher commissions to the selling broker. Even if current law requires this sort of incentive to be disclosed, good luck reading through and understanding financial disclosure documents.
Continue reading "Fee-Based vs. Commission-Based Financial Planners" »
Many people don’t understand the differences between stocks and bonds. It occurred to me recently that even those who invest in these types of securities through either personal investment accounts or retirement plans can’t really articulate what the differences are. I’ve noticed that people have a general idea- such as associating stocks more with risk and bonds more with safety, but that’s about the extent of it. While both are types of investments which can earn you money, they are different as night and day in terms of the potential risks and rewards.
Continue reading "The Difference Between Stocks and Bonds" »
The cost of college funding has taken center stage for financial planners in recent years. The reason for this is the dramatic increase in cost, averaging 8% annually for the past 30 years. The average cost for a private college education, including tuition, housing, books, and spending money is approximately $157,000 for a 4-year private university. The costs for a state school are more reasonable, but still alarming at $68,000. These figures could be lower if alternate plans for housing are investigated. While scholarships, grants, and both state and federally funded loans are available to students and their parents, some people like to pay in advance. For this reason we investigate the savings plans which are most conducive to meeting college costs.
