The Free Financial Advisor

You are here: Home / Archives for Planning

How the Repo Guy Nearly Took My Car

by 12 Comments

Repo ManWhen people ask, “What do you really know about the average guy? You manage money for rich people?” I always smile.  I’ve had the privilege of working through my share of wonderfully challenging personal financial situations.  And when I say “challenging” I mean the worst timing and situation imaginable.

Here’s one you’ll love and can learn from:

I’ve been a member of an entrepreneurial coaching group for a long time. Early in my career I was getting ready to head out of town.  My job was to pick up two additional participants and get the heck on the road since we were getting some pretty crappy winter weather.  As I was just finishing loading my bags in the car, my phone rang:

“Hello, is this TheOtherGuy?” (clearly someone who doesn’t know me. They even pronounced TheOtherGuy incorrectly!)

I answered with the affirmative.

“Hi, this is Rick with American Recovery…”

“Hey, Rick, whatcha trying to recover?” I said, half jokingly…and kinda wondering who this guy was.

“Uh, let’s see here…an Acura.  We need to get that picked up today.”

What?  That was my car!

AT this point I’m sure what’s happening: My wife listens to a radio program in the morning where they call people and get them all riled up and then surprise them with the fact that it’s all a big joke.  I’ve listened a couple of times and have told my wife that there was NO WAY I would ever fall for that stuff.

Ever.

So, immediately, I thought it was a joke.  So I sort-of played along.

Then Rick says, “So, ’cause you filed bankruptcy, Acura wants the car back.”

Now it’s getting serious…I’m pretty sure I would remember filing bankruptcy.  I assured Rick I had not ever (and would not ever) file for bankruptcy, and that he must have the wrong number.

Then he said the magic words…

“Who’s Sally?”

Mutha f*$#er.

Sally is my mom.

And here’s why that matters.  Several years earlier, when I’d bought my nicely used car (doing the right thing…Dave Ramsey would be proud), I decided that I was smarter than the people who figure out interest rates.  I was a young, aggressive financial planner and knew a thing or two about leverage.  So, I figured out that if my MOM co-signed the loan, it would save me another 0.5% per year in interest, thus making it worthwhile for me to take the financing (instead of paying cash for the used car) and invest the difference in some investment that would beat the interest rate.

In fact, I distinctly remember thinking how smart I was.

As Julia Roberts said in Pretty Woman, “Big mistake.  Huge.”

I figured that I could clear this whole thing up by calling Acura.  You see, it was true. I’d just found out that my mom HAD filed (long story there, but a good reason) and not me!

Without boring everyone with all the details – I have never been treated worse in my whole life.  The people on the phone at Acura actually said “Well, if you weren’t such a deadbeat and wouldn’t have filed bankruptcy, this wouldn’t be going on.”

It really didn’t matter that I HADN’T filed for anything. They kept repeating what a loser I was.

White. Hot. Burning. Rage.

Finally, I ask for solutions – they offer two:

  • Pay off the balance of $10,680
  • Have car repo’d

Obviously, I’m choosing option 1, so I inquire: Can I just wire you the money?

Their answer: “No.  It must be Western Union.”

For those of you who don’t know, I found out that day that sending money via Western Union is a giant pain in the ass.  Trust me.

Oh, and did I mention the joys of going to the bank to take a withdrawal of $10,700?  The IRS likes those forms they make you fill out…they’re called Currency Transaction Reports.  And, I happen to know that 100% of CTR’s are reviewed by an IRS Criminal Agent.  Lovely.

All because I was too smart to just pay cash.

So, I went on my trip – worried the whole time that the repo dude was going to take my car while I was 800 miles from home. When I returned, I had to drive 4 hours round trip (since we bank online) to get $10,700 withdrawn from my bank account, then I filed out a CTR which basically invites the IRS over for dinner, I enjoyed standing in line at Walmart for 45 minutes…with TEN THOUSAND DOLLARS IN MY POCKET to fill out this long-ass form to Western Union a payment to Acura.

All because I didn’t pay cash.

…and because I thought I was smarter and could make a couple extra bucks on my own.  I guarantee that the time, energy and stress associated with this incident taught me a lesson – it’s not worth the time.

So, yes, I manage money for rich people…and average people. But many of the lessons I’ve learned are because I’ve also been there myself.

The lesson for today? Pay cash for your car and be done with it.

That’s my lesson: What’s a costly lesson you’ve learned?

Photo: David Berkowitz

5 Steps Before Tying the Knot

by Leave a Comment

It’s your big day. Are you prepared financially?

We’ve all heard that statistics: many marriages end up in divorce. The #1 issue couples fight about is finance. Instead of ignoring these stats, why not meet them head on? There are clear steps you can take to ensure that your family will have a chance of succeeding where others fail.

Create a Debt Strategy

These days many people head into “wedded bliss” woefully unprepared for how to handle real life as a married couple.  Quite often, one or both spouses have student loans or other debt that can be a drag on the beginning years of married life.  Before tying the knot, sit down with your future spouse and walk through both of your credit reports.  This will be a refreshing a “financial cleanse” right before the big day.  Together, you can develop a plan to improve your scores (if necessary) before any large purchases.  You can also put together a plan to eliminate debt as quickly as possible. You’ll have a much stronger chance as a couple if both people know the entire playing field before the wedding.

Set Up Your Budget

The budget discussion is one of the most challenging ones a couple can have.  Depending on how long it’s been since college days, money can be tight during the early part of one’s career.  You should both agree to the “family” financial meeting (Joe and I discuss this over and over and over again…) and make it a priority each week.  Then, both of you are caught up on each bill, how you’re doing as a couple working toward your goals, and there are no surprises.

Plan For/Against Kids

Children are expensive.  It’s that simple.  You’ve probably already discussed your feelings with your future spouse about kids – how many, your favorite names, etc. – but it’s unlikely that you’ve had the chat about how much they cost.  To put it in perspective, if a client came to me today and wanted to fully fund a 4-year public university degree for a newborn, they’d have to set aside around $400 per month from day one until the child’s 18th birthday to be close.  That’s a lot of money.  Start now if possible – open a 529 plan in your own name, and then if you have children change the beneficiary to them.

Retirement Planning

Planning for the long-term seems so difficult at the beginning of any relationship, but it’s one that must be considered.  Begin your married life by contributing as much as you can to your retirement plans – at least up to the company match, if offered – and plan to add a small increase each time your pay is increased.  The road to millions of dollars starts at $100 a week into your 401(k) plan.  Get started right away.

Commingling Finances

If you’ve been single for a long time, the thought of having someone else pouring over your bank statements questioning every transaction sounds like death by a thousand paper cuts.  Simplify this by having the “his, hers, and ours” accounts and setting up through your budgeting process a small amount that each of you can spend – no questions asked – out of your own accounts.  By using this approach, combined with budgeting together, your financial lives will be blissfully combined, yet separate as well.

Marriage is a big decision and a life changing one at that.  By spending a few hours before you’re married discussing the financial impacts, you can spend more time enjoying your spouse and less time wondering if their credit score is going to make it impossible to buy a new house.

Photo: epSos.de

5 Reasons Your Cash Reserve Isn’t Working

by 28 Comments

All of us know that we’re supposed to have a cash reserve right? There are always going to be emergencies that come along that we didn’t expect, and that’s when our cash reserve is the most important. So, why is it that many of us struggle to even have a comma in our cash reserve? We’ve gone through our whole lives attempting to save, but we don’t even have a thousand bucks in cash. Here are five reasons why your cash reserve might not be working.

 

1) It’s Too Accessible – Many of us are just trying to beef up our checking account and keeping our emergency money in with the funds we use to pay bills. When you do this, it’s just way too easy to dip into your cash reserve. Instead, you need a completely separate account that you can’t spend with a debit card. If you really need to use the money, you’ll have to make a transfer either online or at the bank. This small barrier will help keep your reserve safe.

 

2) Not Enough Flexibility in Your Cash Flow – One of the biggest reasons we dip into our cash reserves is because we don’t have enough cash flow from month to month. Money is so tight that the slightest unexpected expense leads us into our reserve. To ensure that your cash fund doesn’t go anywhere, you need to reduce your monthly expenses.

 

3) Too Much Instant Gratification – We live in a world where everyone expects to get what they want right now! I urge you not to be that person. Most of the time, what we want and what we need are two totally separate things. If you don’t need that special something and you’re going to have to dip into your reserve to get it, just don’t buy it! I know it can be tough to walk away, but there are always deals to be had elsewhere.

 

4) You’re Feeling Rich, Time to Spend – Everyone has their number where they start to feel wealthy. For some, this is $1,000. For others, it’s $10,000. When their cash reserve reaches “their number”, they suddenly feel like they are rich and can afford to spend some money, rather than just leave it in their account for a rainy day. My friends recently did this when looking for a car. Initially, they were only going to spend $6,000, but when their cash reserve kept growing and growing, so did their “need” to have an expensive car! All of the sudden, they spent $13k on a car rather than their initial plan of $6k. Now they’re feeling tight with money. Go figure.

 

5) No Incentive to Keep It There – Saving money is honestly pretty boring. When you put that money into a savings account, it probably earns 0.05% interest, which equates to a few bucks a year. Your savings don’t have to earn such a low amount though. There are some banks out there that will pay more than 1.0% for your savings, and if you have the will-power to have your reserves in your checking account, you could earn more than 3% at some credit unions. Getting $20 or more per month is way more fun than a dollar or two.

I Forgot To File My Taxes

by 16 Comments

Every year I meet a couple people who tell me “I forgot to file my taxes.” How do you forget to file???? Here’s the steps to make it all right with the government.

Did you file your taxes this year? Did you know that nearly 10 million U.S. citizens fail to file by April 15th each year? Some avoid filing on purpose, but many just plain forget. So don’t worry. If it slipped your mind, you’re not alone.

If you still have yet to calculate your refund/payment, do this immediately. Even though you’re late, the process is still the same. Get the appropriate forms and gather all of your tax information and either head to your accountant or calculate your taxes yourself (whatever it is that you typically do). Once you know whether you owe money into the government or if you’re getting a refund, you can take the next steps to file.

 

What Is The Penalty?

 

For most of us, we plan on receiving a refund each year. Some of us even plan on getting as much back at $4,000 or more. This shouldn’t really be your goal since you’re basically allowing the government to use your extra money interest free, but that rant is for another article I suppose. If you have always received some money back each year, then you have absolutely nothing to worry about for filing late. There is no penalty. I was actually surprised to learn this, but it makes complete sense. Why should the government charge you if they just get to keep your money a little longer. In fact, they would probably rather that you never filed your taxes!

If, however, you typically owe money into the government each year, then you will most likely have to pay in a little extra for your late payment. There are three types of penalties that you’ll have to pay: Failure to File Penalty, Failure to Pay Penalty, and Interest.

Failure to File Penalty

This penalty occurs because you did not file your taxes by the deadline and you owe money to the government. The amount of money you owe depends on how late you are to file. If you’re a month late, then you owe and additional 5% on top of what you already owe. For each month that it’s late, you have to add an additional 5%, up to a maximum penalty of 25% (if you’re 5 months late or more).

Failure to Pay Penalty

This penalty occurs when you file, but you just don’t pay the amount you owe. The penalty is 0.5% for each month that you have still not paid in full. There is not maximum penalty, so it’s definitely best to pay the full amount as quickly as you can.

Interest

In addition to the traditional penalties, the government also want’s the money back with interest. While this amount changes all the time, it is currently set at 3% interest per year, but it is calculated based on every day that your return/payment is late. Again, it’s best to pay this sooner rather than later.

Basically, to sum it up, if the government owes you money, you have nothing to worry about. Just file your taxes and you’ll receive your check shortly, with no penalty. If you owe money in, then you’ll have to pay quite a few penalties. So, rather than play the “wait and see” game, you should calculate your taxes and file them as soon as possible.

Photo: 401(k) 2013

Enhanced by Zemanta

Bad Advice? Here’s Some From Top Money Gurus

by 49 Comments

Don’t let experts paint your future with a broad brush. Reach down to understand where you disagree, then latch on to the rest.

 

Early in my career I made a horrible mistake: I disagreed with Suze Orman’s advice in a discussion with a potential client. Guess what I found out? I don’t have a big enough megaphone to win that argument. The potential client went away. I learned not to fight with Suze, even if she isn’t in the room.

Now, however, as a slightly more mature (and infinitely more handsome) individual investor, I’ve learned that it’s okay to disagree. It takes an understanding of the guru’s overall approach to reaffirm the other 95% you agree with. I’ve realized that Suze Orman, as much as I dislike the finger pointing and incredibly ego-driven persona, is a credit to the financial community (did I just write that?). Experts like Suze and those below speak to a wide audience so they have to use broad terms.

Sometimes I just think the brush is a little too wide.

 

5 Topics Where “Experts” Get It Wrong

 

Liz should be writing "I'm a little off on the "Risk" chapter of this book."

Liz should be writing “I’m a little off on the “Risk” chapter of this book.”

5) Liz Weston – Don’t Avoid Risk, Embrace It. While Liz Weston is far from controversial, I’m not a fan of the way she presents risk. She says that to be an investor, you can’t be afraid. You must have some risk in your portfolio to reach results.

In short, if you want it, you need to gamble a little.

Being afraid is a good thing. Fear motivates. What are you afraid of? Here’s what you should be afraid of

…that you won’t reach your goal

…that you’ll leave your family destitute

…that you’ll become disabled and be unable to care for yourself or anyone else.

This fear helps you look closely at all the risk, not just stock market volatility. Afraid of losing money? Try sticking it in a CD for 30 years and see what it buys. Afraid of flushing your money down the toilet? Pay off that loan at 3% (before the itemized tax deduction) instead of keeping up with inflation. While I understand the sentiment, you owe it to yourself to get ahead, not bust your ass paddling like a salmon against the current.

 

4) David Chilton – Budgets are a myth. I enjoy the book the Wealthy Barber, and love the message in Chilton’s smackdown on budgets: budgets create frustration, because it’s so difficult to adhere to one. The key instead, is to focus on saving money. If you have an emergency fund and know how you spend, you’re more likely to “win” with your financial picture.

While I can see Chilton’s point (probably more than any of the other four I’ve outlined here), there still is a place for budgets. By attempting to stick to a budget and knowing ahead of time that it won’t always work, you’re a step ahead of those who just don’t budget at all. You need to know where you spend your cash.

theFreeFinancialAdvisor.com Financial Gurus Bad Advice

You don’t need an advisor! Just buy all forty of my books….

3) Suze Orman – You Don’t Need an Advisor. Suze’s main premise here is spot on: nobody knows your money like you do, and nobody will care as much as you do. That’s 100% true. I couldn’t care about my client’s money emotionally. In fact, my clients would have fired me if I’d been making emotional decisions with their cash.

Here’s the difference between Suze and I: I live in the real world.

I practiced financial planning for some of the brightest minds in the metro Detroit area. These people could financial plan their lives on their own. So, if I don’t care as much as they do, why did smart people hire me?

Simple. I disagreed with them and broadened their horizons.

How many CEOs don’t have advisors? How many heads of state don’t have advisors? If you’re looking to get ahead, decide when the right time is to add an advisor to your team, and then make sure you pick a good one. I think we spend too much time clustering the whole financial world into one big ball of money-grubbing rotten advisors. Keep that approach and you’ll find yourself starved for time and falling behind the people who decided to find top notch help.

 

2) Dave Ramsey – Debt Snowball. Okay….first, I know that Ramsey’s method was recently commended for working more often because people are emotional beings and pay down debt more quickly when they set smaller milestones. I get it.

What I don’t get is why people don’t ask themselves the question, “How do I do this faster?” What if you could have use the portion of the debt snowball plan that works–the psychological part–but combine it with a method that attacks interest payments most quickly (that’s how you’ll save the big bucks).

With options around like Ready For Zero, Payoff, and others, there is no reason to continue using the Debt Snowball method. You can psychologically attack your debt AND eat up those extra interest payments. You’ll laugh your way to the bank.

 

We discuss Dave Ramsey’s fight with the internet over 12% rates of return on our podcast: Two Guys and Your Money, Episode 35: Pat Flynn Lets Go.

 

1) David Bach – The Latte Factor. What idiotic, absolute drivel. I’ve never seen a person become wealthy by avoiding a latte. Sure, maybe there’s a bigger message here, because the poor person who’s drinking an overpriced Starbucks drink is the same person who’s also buying up clothing on credit at Nordstrom. They’re over their head.

Want to become rich? Stop thinking about $4 decisions with 95% of your brain and instead prioritize. If you could make a $150 decision while in a Starbucks, why wouldn’t you? Decide which action pays the highest, avoid complexity, and jump.

No latte or evaluate your insurance? – Evaluate insurance!

No latte or clip coupons? – Clip coupons!

No latte or restructure your portfolio? – Restructure your portfolio!

No latte or find money-saving vacation ideas? – Vacation ideas!

 

Read the “big” books by the financial gurus and understand the REAL message. Weston, Orman, Ramsey, Chilton and (sigh) even Bach all offer good advice…just avoid the bad stuff that sounds good. How do you know which is which? Think!

Photos: Liz Weston: marubozo; Suze Orman: David Shankbone; BucksFee: JellyDude

Where do you disagree with “the Experts” in your financial plan? 

 

Jemstep Portfolio Manager Review: Finding the Asset Allocation Middle Ground

by 15 Comments

How do you review your investments? We give Jemstep a test-drive to see if it’s worth your time and money.

As OG bemoaned last week when writing about his broken garage door, at some point, calling a professional is the right move. In the comments, there were some wonderful discussions about finding “experts” without consulting with a person locally by using YouTube videos, better online tools and calling trusted friends.



The Middle Ground in Asset Allocation

There’s plenty of middle ground between wingin’ it and hiring a financial advisor when picking the right basket of investments. One tool I’ve had the opportunity to test drive is Jemstep. After meeting a Jemstep rep at FINCON last year, I was impressed enough with the product to have Simon Roy, the firm’s president, on our 2 Guys & Your Money podcast. He informed me that they were upgrading the product, and now it’s available.

The “New” Jemstep Portfolio Manager

Jemstep is a program that helps you diversify your investments. You know that dartboard you’ve been throwing at? No longer. Jemstep takes the guesswork out of discovering which investments you should be using and pinpoints suitable replacements for duds (or, surprisingly, good investments in asset classes that really don’t meet your investment needs). During my trial run, JemStep told me some things I’d (shamefully) already knew: I’d let my winners run a little too long, and Jemstep recommended cutting back in those “overgrown” areas where the risks now exceeded the chance for rewards.

How Jemstep Portfolio Manager Works

The Jemstep approach is consistent with that of an advisor. First, JemStep asks you questions about your goals. What do you need your portfolio to do? It asks questions about how far away the goal is, how much you may need to access at a time, and other relevant questions. I found this process fun. The interface is intuitive and the style of the website draws you in.

Jemstep Portfolio Manager Review at The Free Financial Advisor

Jemstep asks you for information about your retirement goal, among others. The interface is easy to use, and the blue lines below tell you just how far you still have to go: I have to still fill in information on my finances and investment preferences.

Once you’ve answered goal-related questions, you can upload your portfolio directly from your broker or add in funds manually. Finally, JemStep does it’s work and voila….gives you the correct asset allocation for your goal.

Jemstep Portfolio Manager basic recommendations

Here is the basic recommended portfolio. With these changes, I stand to gain over $9,000 per year in retirement. Yee-haw!

The premium version of Jemstep includes lists of what investments you should sell (in many cases only trim back), which investments you should accumulate, and new suggestions for your portfolio (often in asset classes that don’t exist in your portfolio). Here’s what that looks like:

jAction-Plan

Jemstep not only tells me which investments to sell, but alerts me to potential capital gains taxes. Every sell recommendation is accompanied by a detailed reason why this investment is on the chopping block. In this case: Apple is one of my worst performers and I have too much individual stock for a portfolio of this size.

The Cost

The Jemstep pricing model isn’t surprising. You can access basic advice for free (this includes the asset allocation you should be using, plus the differences between your portfolio and the suggested one). The premium model, which includes continuous tracking, rebalancing advice, a detailed breakdown of recommended sale quantities and investments, is also free for people just starting out. Pricing begins at $17.99 per month for portfolios over $25,000, and increases based on the amount of money Jemstep is helping you manage. While some who are looking for a freebie might be turned off by the price, this is less than the 1% fee often charged by a financial pro. Want professional advice in your corner without having to sit in an office with some team of people? Great. Jemstep won’t call you with hot stock tips and is there when you need it. In exchange, you’ll pay a model comparable to those used by seasoned investors for less than half the cost.

What I Like, What I Don’t

Here’s what I love: this asset allocation is a proven winner that points you toward the low cost, high return investments in a balanced portfolio. If you’ve ever wanted to have a well-managed portfolio but didn’t know where to start, Jemstep is a great place to begin. Different than some generic asset allocation models that I’ve used, JemStep points you toward specific investment options. For the person who wants to make sure they have low cost investments with a proven track record, Jemstep is for you.

Jemstep partnered with Windham Capital Management to create their recommendations. When back-tested against the S&P 500, Jemstep’s recommended portfolio was impressive: all five of their model portfolios outperformed the S&P 500 over the last 14 years with significantly less risk.

Here’s what I don’t like: results. Yes, JemStep provides impressive results, but will you use them? As I’ve stated before, financial advisors exist for one reason: to make sure that the job is finished. When people left my office, the portfolio moves were complete and people could go about their lives, knowing that the important decisions had been made. A JemStep rep was excited to tell me that 12% of JemStep users actually made changes to their portfolio “because it’s so hard to get people to take action.”

She’s right on.

While 12% usage is a great number for an often-free tool used by people on the internet, you should examine yourself. Are you going to follow through and actually take the advice on JemStep? If you don’t trust yourself to do the job, pay more and hire a human being who’ll give you a shove.

Overall Impression

If you’re managing your own money and aren’t sure how to do it well, give Jemstep a shot and follow the recommendations. If you don’t like your advisor or wonder if the recommendations you’re receiving are any good, take the time to use JemStep to give yourself a “second opinion.” The tool is robust enough that you’ll know immediately if your advisor isn’t diversifying your portfolio in a way that makes sense for your goals.

Jemstep can be found at Jemstep.com. I am not an affiliate of Jemstep and was not compensated for this review.

Enhanced by Zemanta

Is It Time for the Market to Crash?

by 27 Comments

Every once in a while, I like to shake the Magic 8 Ball to see what might happen next.  Recently, I’ve been getting a lot of “Reply Hazy.  Try Again” and “Cannot Predict Now.”  This is very frustrating, since I’m supposedly a ‘professional.’ I’ve taken those answers to mean that I need to do a bit more research on my own.

On a complete side note: You now can just use the internet to “shake” the Magic 8 Ball: http://8ball.tridelphia.net/  Too funny.

Whenever we trend up to either a new high, all-time high, or a cyclic high, I start to get a little antsy…almost like the sensation right before you go over the big hill on the new rollercoaster.  Unfortunately, that analogy works too well.  It seems like whenever we go higher – whenever you start hearing Jim Cramer, etc. telling us all to BUY BUY BUY – a big pullback happens.  Let’s look at where we are today:

This is a Year-to-date chart of the S&P 500.  Up, up, and up some more. (Up 5.35% YTD)

Here’s a chart for the 1-year S&P 500 (Up 10.37%)

And another 5-year chart (Up 11.29% – which also includes the 2008 recession)

And finally, a 10 year chart – up an astonishing 77.14%

Since March 13, 2009, the S&P 500 is up over 119%!  This is wonderful!

But it makes me pause.

As I look through history, and it’s the only guide we have, it seems like every 5-7 years something comes along and knocks the wind out of our sails.  It’s 2013, five years ago was 2008.  Before that was 2000-2002.  Before that was the LTCM mess is 1998.  Then the recession in 1991.  Black Monday in 1987.  Are we on the verge of another recession?  Worse maybe?  A depression?

If you listen to the news, or better yet, the commercials on satellite radio, the answer is an unequivocal “yes!” (I’m talking to you, Mr. “Critical Warning number 6”  guy).

So, what do all the recessions, depressions, declines, flash-crashes, etc. have in common?  The market has always rebounded from them all.  Each an every one.  Ask your grandparents what they thought of investing in stocks in 1940.  Or your parents and grandparents about investing in the 70s.  They’d all say the same thing…”This time is different.”

This time isn’t different.  Today’s apocalypse du-jour is tomorrow’s back page story.

You might think, then, that I must be all smiles all the time and a traditional buy-and-hold forever type of investor.  I’m not.  But neither am I chicken little.  At times like these – when the market’s doubled in just inside 4 years – you must plan for dark days ahead.  If you do, and you make logical, fact-based plans today, when the markets turn tumultuous, you can just pull out the plan you made when you were level headed.

 

Here’s what might be in your “Time for the Market to Crash” plan:

 

1.  A profit maximization strategy.  If you’re like some investors, you’ve continued to buy your bi-weekly allotment of 401(k) funds and Roth IRA stocks over the past several years.  That has served you well. It’s time to make sure you have a profit strategy in place.  If you own individual stocks, set a stop-loss price on your positions.  If you have mutual funds, set a day every two weeks or so to review the price.  Write down at what price you’ll sell to lock in some profits.  In my business we try to aim for a trailing 10% stop loss.  For example, if I bought GE at $7, and today it’s at $23, my stop-loss might be at $20.  I’ll continue to adjust that upward as the stock moves higher.

2.  A cash accumulation plan.  Investors who were well prepared for 2008 weren’t prepared by selling all their positions in 2007, but rather they had accumulated a large cash position so that when GE was trading at $6 a share and Warren Buffet plunked down $5 billion, they could do the same.  Since the market’s near an all-time high, it may be time to start directing some of your monthly savings into a pure cash position – ready to strike when the fire sale happens.  Whenever it happens.

3.  A plan for choppy markets.  What happens if the market doesn’t do anything, a la 2011?  Can you still make money?  You sure can.  Consider investing in options, high dividend paying stocks and bonds, as well as investments that profit from volatility.

4.  A plan to educate yourself.  It amazes me how many people I see and talk to each and every day who are completely OK with being an idiot.  You don’t have to go get a master’s degree in actuarial sciences, but it doesn’t hurt to read a little (unbiased) commentary about stocks, investing, the markets, and the history of all those things.  Being prepared for the next “event” whatever it is, means more than just having money set aside in the right places.  It means having a prepared mind as well.

No one knows what’s going to happen tomorrow in the market.  Anyone who says they have even the faintest idea are fooling themselves.  But, that doesn’t mean you should just throw in the towel and bury your head in the sand.  Winston Churchill once said, “Plans are of little importance, but planning is essential”

Make sure you take time this weekend to do a little planning.  Your investment portfolio will thank you later.

All charts from Big Charts

Behind on Your Bills? 5 Easy Steps to Sanity

by 9 Comments

Impossible? You can do that…but you can’t keep doing the same thing you’ve been doing.

I was talking to my friend Tony last week. “I can’t seem to get ahead,” he said. Every time something good happens, something bad comes along to knock me back down.

I remember this feeling. When I spent an entire year with little income, it seemed like every time I did something good, like get a credit card below the maximum, my muffler would be dragging behind my car.

How did I get ahead? How did I counsel my clients in this situation to get ahead? Put away the firehose.

When the fires from debt collectors are all around you, it’s easy to panic. They make good arguments. You read well-meaning pieces telling you how your credit is gonna be screwed for at least seven years if you don’t pay this bill NOW. Even though you’re avoiding the phone, you still see the caller I.D. You know exactly who’s calling, and the pit in your stomach grows bigger and bigger.

One night I came to a realization. I couldn’t sleep, so I’d grabbed a beer and a movie and was sitting staring at the screen. It hit me.

I was screwed anyway, so why was I sitting awake, worried about debt collectors? I’d never kill the fire unless I started walking toward the actual furnace.

That day I forgot about the debt collectors. I actually laughed at one guy when he threatened me. Do you know how empowering that is? At the time, I think he thought I was some deadbeat nutjob. But once I realized that he couldn’t hurt me, I became stronger.

My New Debt Payment Plan:

1)      We set up automatic savings. From then onward, whenever money came in ¾ went to debt and ¼ went to build a reserve.

2)      I scheduled financial meetings with Cheryl so we were on the same page (at the time she paid the bills and I took care of the debt repayment people…for the first time we were doing it all together).

3)      Instead of solving every fire by throwing cash at it, we started to get creative. Our weekends were spent going to garage sales for school clothes for the kids. Pot luck game nights at our house became a boon (people would all bring over food and nobody would take it home…we’d eat other people’s leftovers for a good part of the week).

4)      When things broke I learned to fix them myself. I’m an oil change and vacuum cleaner repair expert.

Maybe they didn't all look great, but I saved a ton of money!

Maybe they didn’t all look great, but I saved a ton of money!

5)      I began bringing work home to cut down on daycare bills. Sure, it took me longer to get stuff done with twin five year olds running around, but I adopted the motto that I can “sleep when I’m dead.”

Every dollar we came in under our original “budget” went to debt. It didn’t matter that our budget wasn’t balancing. I could starve a little today. I didn’t want to live this way forever.

I can definitively point to that day as the time when things turned around for me. Did things get better right away? Ha! Of course not! They got worse, as you would expect. The second I put down the fire hose, we were consumed by the little brush fires. But I was finally moving toward the actual furnace, and was able to turn the tide much faster than if I’d just kept trying to handle all the little problems.

Photo: Official U.S. Navy Imagery

Long Term Care Planning: What Would You Do?

by 38 Comments

Be the bigger adult and address the hard problems with people you love before you’re forced to make tough decisions down the road.

My father in law was a smart, active man. An engineer who built houses on the side for fun and profit, he ran nearly every day and lived on healthy foods. He was that guy who everyone knew when you went out to lunch. He had an easy smile and a nearly easier laugh.

I was lucky that a guy this smart would come to his daughter’s son for financial advice. In some ways (like most of my clients) he didn’t need it. He was at the top of his game in most aspects. He just had one big gaping hole in his plan: he didn’t want to talk about illness or mortality.

One problem I saw in most financial plans, including my father in law’s, was that although they did a fine job of picking investments that they knew, their plans generally had no escape valves. Some people only invested in stocks,. Others owned only real estate. Some had all their money in the 401k plan at work and wanted to retire at 50.

My father in law’s problem? He was so insurance-adverse that he’d decided to do nothing.

 

Disturbing Long Term Care Stats

 

The threat of a catastrophic illness is real. While the threat of a fire burning your home is 1 in 1,200 and the risk of an automobile accident is 1 in 240, the chance you’ll need some sort of long term care help is 1 in 5. Those ain’t good odds.

So, as I did with every client, my job was to talk about it. Did I like this talk? Absolutely not. It was my least favorite meeting. But I had a job to do. What action they took was up to them.

When you talk about long term care, talk about the three options available:

 

Long Term Care Strategy: Your Three Choices

 

Assume the risk. This option is best for people with nothing to lose or for people with enough money that they can “self insure.” Much like most life insurance uses, long term care protects assets you can’t afford to lose.

What’s interesting about long term care is the way many of my wealthiest clients saw the products. Based on past comments here on the blog, many of my readers are like me: they want as little insurance as possible. That’s smart for people who are struggling to reach the “finish line” on financial independence. But when financial independence is assured, I met many wealthy individuals who could afford to self insure who decided not to because the cost in assets was potentially so great. In short: the premium payments on an insurance policy is so small that they’d rather insure the risk.

 

Hand the risk to an insurance company. Regardless of what I said earlier about wealthy individuals, this is a tough pill to swallow. The reason my father in law didn’t want to talk about long term care? It’s uber-expensive. The funny thing is….the reason it’s expensive is why you need it: actuaries for the insurance companies price policies higher when they think the product will be used. LTC is expensive because they think you’re going to need it.

 

Here’s a creative strategy that worked for a few people: I had some clients that weren’t worried about outliving assets, but who did want to make sure they still had a legacy for their family. Instead of buying a long term care policy they purchased an immediate annuity. The money from the annuity purchased long term care and an insurance policy in the amount of the annuity. While the person lived the annuity paid the insurance cost and when they died the insurance policy replaced the money that was spent.

 

Take some of the risk and hand some of the risk to an insurance company. In this scenario, you play the statistics. The average person will need long term care for 2 and a half years, so buy a policy that covers just longer than that. Sure, it doesn’t cover the horror stories of long, long term care, but you’ll cover the likely amount of time. Raise the deductible so that you pay for anything short term out of pocket. Moves like these can decrease the cost of insurance so that you can still focus on your goals while not worrying about the “what if’s” associated with long term care.

 

How it turned out for us:

 

My mother in law was very worried about the threat of long term care, but my father in law decided to assume the risk, even though they weren’t wealthy. His family had a history of Parkinson’s disease. Sadly, it struck him, too. Because they didn’t have enough money to afford long term care, my mother in law ended up caring for him. He fell a lot. She couldn’t help him up so she’d have to call an ambulance. He became harder and harder to take care of. In some ways it was lucky that he fell and hit his head while insisting that he walk the dog. He passed away before the big bills would have happened. However, the toll on my mother in law, seven months after his death, is noticeable.

 

What you should do: If you have anyone over age 50 in your family, talk to them about catastrophic illness. If you talk about your options early, you’ll never have to worry about the topic again.

Have you had to have this hard talk with a friend or relative? How did it turn out? What would you advice people to say or avoid?

5 Smart Money Moves For Young Families

by 18 Comments

Even a small step in the right direction counts. The best Valentine’s gift for young families? Getting on the same page.

As a Certified Financial Planner™ practitioner, I meet with clients from all walks of life.  One of the things I say to all my clients is, “I’m never too busy to meet with anyone you’d recommend.”  Which, of course, is a nice way of saying – “l’ll meet with anyone as a favor to you.”

Usually clients have a pretty good idea who we’re after from a prospecting standpoint, but on occasion, I am asked to meet with a client’s grandson or nephew – someone who may not be in our “target audience” as it relates to practice growth.

But, I’ll always gladly help them.

 

Why I’m Telling You This Story

 

Last week, I had the privilege of meeting with a young couple – Jack and his lovely spouse…Jill.  (We’ll change the names to protect the innocent).  They were the typical American young family – just out of college, a young child, tons of college debt, a handful of credit card debt, no real savings, and a meager job just to pay the rent.  They looked like deer in the headlights when they walked into my office.

I know the type – I used to be Jack and maybe you were (or are) too – young, arrogant, (heck, I’m still that one), confused, unsure of oneself – so much unknown, you don’t know even where to start.  That was Jack and Jill, except they wanted help, but they had no idea where to start.

And frankly, hiring our firm wouldn’t help them that much either, and I told them as much.  They looked exasperated – I could see it on their faces – “if this guy can’t help, we’re doomed.”  So we sat down and started making a list of all the small things – things you can do with under $1,000 – to get the ball rolling in your financial and personal life.  I’m narrowing them down to my top 5:

 

Build a portfolio early

 

If you search around, you can find a nice discount broker who won’t rob you in commissions, and then buy two exchange traded funds (ETFs): one which tracks the S&P 500 and another that follows a bond index.  For example, 5 shares of SPY or IVV (S&P 500 funds) and 2 shares of AGG (Aggregate Bond Index) will give you a 70% equity / 30% fixed income portfolio.  That’s quite a start.

I explained to Jack and Jill that if they start early, a little guy called “gains” can work in their favor. Make your money work for you as quickly as possible and you’re reap huge rewards down the road.

 

Pay attention to tax shelters

 

If you need the money, save it into a spot where you can get it. But taxes can drain from your returns, so if possible, shelter the funds.

Small steps…investing even $1,000 in a Roth IRA and adding $100 a month from age 22 to 65 would turn into $478,000!  As we’ve mentioned several times, you can access your contribution at any time so it could double as a little cash reserve if you need the money.

There’s also good news at the end of this tunnel: in most families, they’re able to contribute more later as they earn more cash. Set a good foundation with small amounts today and

 

Cash is the key to your debt repayment

 

I’ve seen too many people attack debt with every dollar, only to find the dishwasher broken or the muffler dragging behind the car. Where do you go for cash then if you’ve drained all of your funds?

Right back into debt.

Don’t start the habit of pulling plastic out of your wallet. It gets easier and easier every time you do it. Keep a cash reserve. By cash, I mean cash. With our increased reliance on ATM machines, credit cards, etc., a simple power outage can cause quite the disruption.  Live through the next Zombie apocalypse by keeping $500 or $1,000 in cash at home in a safe.  But remember, this is for emergency only! I’ve met too many new investors who spend their emergency funds on vacations or credit card repayment. That’s not why that money’s there.

Speaking of emergencies…with a young family, don’t forget insurances. I told Jack and Jill to focus on disability insurance at work and cheap term life insurance.

 

Manage your energy

 

Huh?  Are you talking about vacation?  Jack and Jill can’t afford anything! Are you nuts?

They thought I was crazy at first, but like I’ve said…I’ve been there before. Let me explain. When you’re buried in debt, the last thing you need is an expensive, week long trip. But you need to keep a clear head to move the ball forward, so take smaller vacations…but still take some!

These vacations aren’t because you deserve them. You don’t. They won’t help your debt in a direct way. But indirectly? You’ll notice a huge difference in your ability to attack your problems when you’re fresh and relaxed.

Find a deal to hop the train to Toronto or Chicago for the weekend if you’re in the Midwest, or Austin if you’re in Texas.  Use a travel site like Hotels.com to book your reservation and save money.  Take a quick cruise to the Bahamas.  Remeber to do whatever it takes to keep away the cobwebs and return fresh. It doesn’t need to be expensive…it just has to be “away.”

Recent studies have shown a direct correlation between physical health and monetary wealth (unintended rhyme…happy Valentine’s Day!) If you’re lucky enough to have short commute – try a different method for a week and see how you feel.  Could you walk?  Ride a bike?  Adding a little cardio exercise to your day will make you feel better and will improve your work attitude and output.  Give it a try –if you rode your bike to work only 3 days a week and it was 5 miles each way, you’d ride 1,500 miles a year!

 

Educate your children

 

I told Jack and Jill that this was the most frustrating part of my job: meeting too many new investors who had no idea what moves to make first. Stop the cycle by helping your kids become money-savvy. Most people think I’m going to say, “Invest in a 529 plan.”  Wrong.  IF you do invest in a 529 plan, teach them to track the funds with you. Play board games that help them think about strategy and money. Let them sit in on your budget meetings. Track electrical output in your house and make it a game. Heck, invest in a Kindle from Amazon.  They’re $150 or so, and if they’re young enough, sign them up for Amazon Free Time, (a service that pre-screens kid-approved content for one low monthly cost of $3). Don’t leave them alone with the stuff and expect your kids to learn. Make it family time with the Kindle, or heck, with a book. Remember those?

Recent studies have shown a direct correlation between physical health and monetary wealth (unintended rhyme…happy Valentine’s Day!) If you’re lucky enough to have short commute – try a different method for a week and see how you feel.  Could you walk?  Ride a bike?  Adding a little cardio exercise to your day will make you feel better and will improve your work attitude and output.  Give it a try –if you rode your bike to work only 3 days a week and it was 5 miles each way, you’d ride 1,500 miles a year!

 

Bonus:  Communicate

The closest we’ll get to a good Valentine’s gift today is this: communicate. Especially communicate if you’re worried, but also when things are going well. Practice our weekly meeting plan. Real budgets are about keeping the family on the same page, not about dollars on a spreadsheet. Especially in married or cohabitating couples, I find that one generally knows what’s going on with the money while the other is in Fantasyland. Don’t make this mistake. When you both own your financial life,

Jack and Jill left looking relieved. They didn’t have to hire an expensive financial advisor and had a pretty clear road map on how to start down the road to prosperity.

 

Who delivered your first financial lesson?