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What is the Coverdell ESA?

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Introducing the last account type on our quest to find the best way to save for college, the Coverdell ESA.

Without further delay, here’s what you need to know about the Coverdell ESA.

What is it?

Like the 529, the Coverdell ESA is an education savings vehicle for K-12 and secondary education. Coverdell ESA stands for Coverdell Education Savings Account.

It got its name from Senator Paul Coverdell, who introduced the legislation for a similar account, the Education IRA. In 2002, a new piece of legislation was introduced to make the account what it is today.

The 529 and the Coverdell ESA share many of the same characteristics, but there are some things that set it apart. All of these will be listed below.

Advantages

  • Savings and investments in the account grow tax-deferred and are withdrawn tax-free when used for qualified education expenses.
  • When it comes time to withdraw, those funds are not considered income, as long as you are using them for qualified education expenses.
  • Can use in conjunction with other education tax credits, like the Lifetime Learning Credit, as long as there’s no double-dipping.
  • These accounts are self-directed, so your investment options are plentiful. They include…
    • Age-based funds
    • Static mutual funds
    • ETFs
    • Stocks
    • Bonds
    • Real estate

Disadvantages

  • Contribution limit of $2,000 per child per year.
  • The funds inside the account are taken into consideration when you file for financial aid. The assets are considered their parents assets.
  • If the money is not withdrawn from the account by the time the beneficiary is 30, they could be subject to taxes and penalties.
    • After 30, the funds inside the account become fully taxable and you’re penalized 10%.
  • Like the 529, contributions to this account are not tax-deductible.

Unique Characteristics

  • Only eligible to families/individuals that fall below an income threshold ($110,000 for single taxpayers and $220,000 for couples who file jointly).
  • The contribution limit is $2,000 per child per year, so even if a family member opens an account for your child, you still can’t go over that number, or there will be a penalty.
  • Qualified expenses include…
    • Tuition
    • Books
    • Supplies
    • Equipment
    • Tutoring
    • Special needs services
  • And can also include…
    • Room and board
    • Uniforms
    • Supplementary and transportation services
  • With a 529, the account owner has control over the assets. Conversely, with a Coverdell ESA, the beneficiary has control.

Conclusion

Effectively, there are three education savings vehicles used today. The UTMA/UGMA, Coverdell ESA, and the 529 plan. I’ve written about the other two in the past so go check those out.

On paper, the 529 looks like the best option, with a high contribution limit, a large number of qualified expenses, and there’s no penalty for letting funds sit for decades.

That is all true, and honestly, I prefer the 529, but the vast, vast majority of people that are helping their children save for college will not come close to the high contribution limit.

The only drawback to the Coverdell ESA is the penalty if the funds aren’t used before 30. Other than that, I don’t think the $2,000 contribution limit is a factor because most people can’t put that much away, anyway. Not without sacrificing their ability to save for retirement, as well.

That said, they’re both great options and you can’t go wrong with either one.

What Is A 529 Plan?

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Education, especially secondary education, is getting more and more expensive. The cost of a 4-year public university has gone up 110% from 1994 to 2014 (Source).

Conversely, wages have grown an astounding 8 times slower than that (Source).

What can you do to save for college? How can you help your kids? Are there certain vehicles that work better than others?

We’ll take a look at one of those in the following article.

What is a 529?

A college savings plan that is exempt from federal taxes, if you use the funds to pay for qualified education-related expenses.

Those expenses include tuition, books, room and board, computer equipment, and necessary supplies for students with special needs, as long as the student is attending at least half-time.

Advantages

  • Funds can be used for K-12, university, graduate school, and trade schools.
  • Parents can withdraw $10,000 per student per year to pay for tuition ONLY.
  • Other people, besides the account owner, can contribute to a 529 plan.
  • If funds are used for the beneficiary you intended, they can be transferred to a family member.
  • Earnings grow tax-deferred

Disadvantages

  • Gift tax exclusions – You are exempt from paying gift taxes if you keep it under $15,000 per individual per year, or $75,000 as lump sum every 5 years.
  • A penalty of 10% will be assessed for funds used on non-qualified expenses.
  • Limited investment options – most plans offer mutual funds as investments
    • Risk-based – Aggressive, moderate, conservative, etc.
    • Age-based – You can select an age-based fund from the get-go, and the fund company will reallocate into new funds as your child gets older.
    • Self-selected

Miscellaneous

  • All plans come with federal tax advantages, but some states offer tax deductions and credits as well!
  • Every dollar in a 529 plan will deduct 5.6% from your family’s need-based financial aid
    • One way around that is to have a family member act as the custodian for the account, so it isn’t in your name
    • However, once the child begins withdrawing the funds and is still attending school, they could have 50% of their financial aid withheld because those withdrawals are considered income
  • You can open one using other state’s plans, besides your own state

Other types of accounts

  • Coverdell ESA – Similar to the 529 in that you use the funds to pay for education-related expenses, However, there is an annual contribution limit of $2,000 per beneficiary, and there’s also an income restriction (once you make above a certain amount, you can no longer contribute to a Coverdell ESA).
  • UTMA/UGMA – Stands for Uniform Transfer to Minors Act/Uniform Gift to Minors Act. I’ve written about this in the past, so if you’d like to learn more, check out the article here.
  • IRA – You can use a Traditional IRA or a Roth IRA to pay for education expenses. Similar to the 529 and the Coverdell ESA, the expenses must be qualified and the student must go to a qualified institution, as indicated by the Department of Education. The most beneficial way to use an IRA is to withdraw the funds from a Roth IRA, but only withdraw what you contributed.

Conclusion

Secondary education is expensive! If you start saving for your kids’ college right away, the compounding returns could really help you save a decent amount.

It’s important to use the right vehicle, and, in my opinion, there’s no better option than the 529.

If you’d like to learn more about paying for college, read this article here. Or if you’re a future or current student that need some finance tips, read this one here.

Be advised: Investments in 529 plans involve risks to principal and may involve additional fees such as enrollment charges and annual maintenance fees. 529 plans offer no guarantees. There are exceptions to the gift tax and estate tax exemptions; please contact a qualified tax, legal, or financial advisor for more information prior to investing.

 

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Saving Money With Regular Maintenance

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When was the last time you exercised, had your furnace worked on, or had your oil changed? Performing regular maintenance, in any part of your life, can be quite annoying at times, but it can really make a difference.

The difference can come in the form of money saved, longevity, and/or decreased stress. That said, let’s look into why maintenance is important.

Health

As a nation, the United States is unhealthy. We put junk food into our bodies and lead a sedentary lifestyle that is causing more problems than gaining weight.

Not only is physical exercise good for your body, with benefits like preventing bone loss, increasing muscle strength, improving coordination and balance, and reducing your risk of cardiovascular disease, but it also helps your mind.

Just over half of all Americans are meeting the physical aerobic exercise requirement (Source). The requirement is either 150 minutes of moderate aerobic activity per week or 75 minutes of vigorous aerobic activity per week. Not a lot, right?

Americans spend $3.4 trillion per year on healthcare (Source), and I believe this number could drop dramatically if we all just took better care of ourselves.

Bottom line, regular exercise, and a well-balanced diet can (depending on other genetic risk factors, etc.) can dramatically reduce your long-term healthcare costs.

Home

Regular maintenance of your home has a number of benefits.

  1. It saves you money because all the mechanical components are running optimally. Efficient use of utilities is less expensive. It also increases the longevity of that equipment.
  2. Maximizes your home’s value and resale potential
  3. Peace of mind knowing your home is well-cared for. Stress has negative health effects. Reducing it can improve your health and lower healthcare-related costs.

Car

Keeping your car in optimal running condition will extend its life. It also makes the vehicle more safe to operate because the odds that something breaks while driving is reduced.

A poorly tuned vehicle can use up to 50% more fuel (Source). Spending $50-$100 every three months on an oil change is definitely worth it.

For example, let’s say you fill up once per week at $25. Over a three month period, you’d normally spend $325 on gas. If you’re driving a poorly tuned vehicle, you’ll spend $487.50. Over 1 year, that’s a difference of over $600.

Budget

Creating a budget and regularly checking in to make sure that a) you’re sticking with it and b) it’s still appropriate.

Often when people start budgeting, they find themselves with more money to play with. If they have outstanding debt, they can use that extra money to pay it off.

This could free up more cash that can be used for saving, investing, or getting that cable TV back.

Another thing you should do is cut or eliminate expenses that are otherwise unnecessary. The average American spends almost half of their food budget on eating out (Source).

Investing

This section will revolve around asset allocation and not about picking stocks and the like, specifically, in ones’ retirement plan.

If you have a retirement plan (you really should) my advice is to allocate your assets according to your risk tolerance, time horizon, and comfort level (from a psychological perspective).

If you have a retirement plan through your employer, I strongly recommend utilizing a target-date fund. This takes the worry and the guesswork out of the equation.

Where was I, oh yeah, asset allocation? Unless we’re in a bear market, your stock allocation will do better than your bond allocation.

Over time, the stock part of your portfolio will take up a larger share of your overall portfolio. It’s wise to regularly (though opinions differ) to rebalance back to your original allocation, otherwise, you risk being more aggressive than you intended.

Conclusion

Whether you’re talking about your home, car, or anything else, regular maintenance can save you a lot of money.

Please visit our website to learn more and for our disclosures.

Read More:

Fuel Up and Save Big: Costco’s Secrets to Slashing Your Gas Expenses!

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Creating A Financial Plan You Can Stick To

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The more I read and the more I meet with people, the more I realize that setting up a financial plan is more than dollars and cents.

Yes, the better financial plans have your typical items. Save this much, invest in these things, and contribute to this retirement plan.

But the best plans not only have this to take care of your financial needs but they’re also set up in a way that your psychological needs are met as well.

Can you stick with it?

The best plan is anyone that you can stick with. When setting up your plan, go through it slowly. Take each item one step at a time and consider possible scenarios when determining a particular section.

For example, when setting up a plan for your emergency fund, figure out what’s realistic for how much you’ll need and how long it will take you to get there.

Also, figure out how it will be replenished if/when it’s ever used. Perhaps you’ll have an automatic deposit setup indefinitely?

Another thing to keep in mind is including some flexibility in your plan. For example, if part of the process is setting up a budget and your weakness is eating takeout, include a little bit of money for it.

I generally advocate for eating your meals at home, but if it’s inevitable that you’ll go out to eat, it’s better to include a little bit of it, rather than trying to avoid it.

Will you gasp every time the market dips?

Investing is a vital part of your financial plan. Investing is what helps your savings grow, but at times, your investments can lose value.

Our psychology plays a big role in our success as an investor. It’s said that we experience the pain of a loss two times stronger than we experience the joy of a gain.

That said, you need to plan accordingly to keep your emotions in check. If you let them take control of your decisions, you could end up selling your investments after you’ve already lost value, at which point it may be better for you to stay in.

Most investable assets are in a retirement plan of some sort, so your time horizon is, more than likely, long-term. 20+ years for instance. Your risk tolerance is the other part to take into consideration.

How much are you willing to lose until you say, uncle? In a six month period, would you have to sell after you lost 10%, 20%, 30%, or more? Your answer to this will help determine what you are able to stomach.

The next thing to do is to stress test your portfolio. The popular investing/research websites will have this. You plug in your portfolio with dollar amounts and ticker symbols, and then (depending on the site) you can select a variety of scenarios to see how your portfolio would do during that scenario.

The 2008 Financial Crisis is a common one.

Conclusion

Creating a financial plan that has the potential to meet your goals is important, and having a plan that you’re comfortable with and one that will help you sleep at night is optimal.

Make sure, when you are developing your plan, that you are factoring in your behavior as an investor and as a human. We are emotional creatures, and that makes investing a little more difficult.

If you’d like to learn more about what was discussed here and for our disclosures, visit our website.

 

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How to Make Long-Term Investing Decisions

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One of the most valuable attributes of successful investors is being able to stick to their guns and trust their analysis even when the market is tanking.

How do you invest for the long-term? Are there certain strategies and mindsets that can be used to your advantage?

We’ll explain that and more in the following article.

Know what you are willing to risk

Whether you are someone that allocates your assets between a select few mutual funds but are looking to use a small portion of your account to enhance your returns or an investor that owns a handful of stocks, you need to be wary of how much of your total portfolio is in one security/strategy.

With either scenario, the decision of how much of your portfolio you are willing to risk in an individual security is whatever you are comfortable with. Personally, if I were in your position, I wouldn’t use more than 5% in this type of situation.

Taxes matter

If you are investing in a qualified account (tax-advantaged account) taxes don’t really have any effect on whether you should buy or sell something, or what type of security you invest in.

You’re either taxed before you deposit the funds or you pay taxes when you withdraw, otherwise the account grows tax-deferred.

If you’re investing in a non-qualified account (standard brokerage/investment account) the taxes and what securities you invest in, matters.

For example, when you invest in a mutual fund, at the end of the year, that fund will pass capital gains to the investors. It’ll come in similar to a dividend, but a much bigger number (depending on the year). You have to pay taxes on that, just like you would a dividend.

Another example, if you invest in a security and sell it for more than you bought it, you have a capital gain. If you held the security for less than 1 year, it’s a short-term capital gain. If you held it for more than 1 year, it’s a long-term capital gain. A long-term capital gain is taxed at a lower rate than a short-term gain.

Asset allocation is important

Stocks/bonds/cash. They are the three most important asset classes in investing.

I’ve written about stocks and bonds before, but the cliff notes version is stocks are risky and can reward you with high returns. They get hit hard during bear markets.

Bonds are generally less risky so you usually get a lower return. However, they tend to hold up a little better during bear markets.

Depending on where you are in life and what you’re comfortable with determines how much (by percentage) you should have in each asset class.

Someone in their 20s should have almost all stocks and a little in bonds. Maybe 90/10 or 80/20. I’d only recommend cash if they were waiting for a significant pullback and wanted to put money to work at lower prices.

Conversely, someone in their 60s that has less time to make back what they lose, would be much more conservative. Their allocation could be 40/50/10 or somewhere around there.

Keep in mind these are general rules of thumb. The most important thing with any investment is your comfort level. If you are 25 and aren’t comfortable with hanging on to your stocks during a 40% decline, be more conservative.

Fees will eat your returns

There’s no denying that trading fees, advisor fees, and the various other types of fees will reduce your returns over the long-term.

On average, expense ratios on mutual funds are much higher than expense ratios on ETFs. Though I believe paying your advisor their fee (I don’t think it should be higher than 1%) is well worth the expense, not everyone needs an advisor.

If your financial situation is relatively simple, you’re comfortable and confident with how you handle things, and you don’t foresee making any significant changes, then it’s probably not worth it.

However, it might not be a terrible idea to see one every few years to have an objective set of eyes review everything.

What’s your exit strategy?

When you invest in a security, and this is more than just asset allocation, you need to have your exit already planned. Too often, people will invest in a stock, see it climb 10% higher and then fall back down. Instead of selling with a small gain or at cost, they’ll hang onto it in hopes it’ll climb back up, even if it keeps falling.

Our emotions and our behavior is our worst enemy in investing. Having a plan and a strategy in place before you even get started is a great way to help mitigate those things from getting in the way.

Regular contributions

If you have time to ride out down markets and are comfortable with the investments you chose/the asset allocation you picked, then hang onto what you have.

An added bonus is if you are regularly contributing and adding to those positions. In a down market, those securities you invested in will get cheaper. When you regularly invest at lower prices, you effectively lower your average purchase price.

Conclusion

Investing can be very difficult, but it doesn’t have to be. In my opinion, keeping your investment plan as simple as possible paired with a unique ability to keep your emotions out of the equation is a recipe for success.

For more information about investing and for my disclosures, visit www.crgfinancialservices.com.

 

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Personal Capital Review: What’s Good and What to Watch Out For

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personal capital review Most of us are familiar with the idea that there is no free lunch – but tech companies are very, very good at convincing us that this is not the case. If you’ve seen the news lately, you may have noticed that Facebook & Google have been in hot water because of the controversial use of their data. I don’t want to put Personal Capital in the same category, but don’t think for a second that they create and maintain all of their neat tools as a gesture of goodwill. Wondering how Personal Capital works and if it’s worth the cost? Here’s our review.

Personal Capital Review: How Does it Work?

Personal Capital’s crown jewel is an account aggregation system – a very unsexy term for something that actually does a bunch of really cool things. Essentially, you hook up all of your financial accounts – think credit cards, checking, investments, 401k from work, even your house! Personal Capital automatically crunches that data for you and lets you everything from what your total net worth is to your potential capital gains tax exposure. It’s like a financial Oracle – you after you’ve fed it your personal data, you can pretty much ask it any question you want to.

Here’s the thing – You aren’t the only one asking! Personal Capital anonymizes its data, so no one else is looking at your actual account numbers, but what they are looking at is how much you have, where you have it, and if Personal Capital can manage it. Personal Capital is actually a Registered Investment Advisor, which is a type of investment company that manages assets on a fiduciary basis (in your best interest).

This puts them ahead of traditional wealth management companies like Merrill Lynch and Morgan Stanley, but they like to sell themselves as being a FinTech company. In reality, their core business is much more similar to that of Fisher Investments, a traditional hard selling RIA firm.  A lot of Personal Capital’s senior management team came from Fisher, so it should not shock you that their company culture is similar.

The Good

  • .89% is a low price to pay for true fiduciary wealth management
  • Personal Capital uses low-cost ETFs and efficient investment vehicles

The OK

  • The amazing set of free tools is counterbalanced by the fact that all of that info is going to Personal Capital – you are a lead in their system

The Not So Good

  • The advice given is highly dependant on who you talk to
  • The financial advisors receive compensation primarily for getting new assets onto the books, not keeping existing clients happy
  • If you don’t take advantage of or don’t want the financial planning aspect, you are paying .89% for no reason
  • Vanguard has a similar experience for only .3% at higher account balances

What You Need to Know about Personal Capital

Personal Capital currently has about $8 Billion of assets under management, which is certainly more money than you or I have, but tiny compared the other giants in the investment space. What they do have, however, is over $674 billion of tracked assets via their app – assets that they’d like to get on their own platform and charge .89% to manage. Because of this, its shiny free to use tools come with a cost. Buried in the fine print which I’m sure you didn’t read is a clause that allows Personal Capital to solicit you for advisory services.

If you have more than $100,000 in financial assets linked to the platform, you’d better expect a call from Personal Capital. You can always block their number or give them a fake phone number when you sign up, but that’s not very nice, is it? Those financial advisors from Personal Capital will be calling to try and get you invested in one of the three options below, depending on how much you have.

Personal Capital operates on a 3 tiered investment plan system – but unless you’ve got over a million dollars or more to invest, there’s no guarantee you’ll talk to a Certified Financial Planner. In a world where there are over 80,000 CFPs, there’s no reason to settle for anything less. It’s important to note that Personal Capital is not a robo advisor. While the advisors will attempt to put you in a managed asset program that may trade on certain automatic triggers, there are humans involved in all investment decisions.

In fact, once you get over $200,000, they will stop investing you in an all ETF strategy and move you into a basket of individual stocks that will act like an index – which can have several advantages.  The ability to tax loss harvest at the individual stock level can increase real returns and should not be discounted. In addition, they offer full financial planning for free (which in my opinion they should position much more strongly).

Is It Worth the Fee?

The truth is that these days you can get an efficient investment allocation for pennies. If you choose the three fund portfolio, the cost for that allocation is something like .05% (the average weighted expense ratio of the funds). If you wanted to dial up the sophistication a bit, you could go to a robo advisor like Wealthfront and pay .25% (plus the expense ratio of the underlying funds) for a portfolio that trades automatically and can also tax loss harvest at the stock level – so why pay .89% for any of Personal Capital’s offerings?

Here’s the key difference – at Personal Capital you are (horror stories notwithstanding) not paying just for the investment management. Personal Capital is not a robo advisor – they even made a whole video explaining they are not a robo:

Now I tend to agree with them that one of the worst deals in finance is investing with a robo advisor. They are charging you a lot for taking a quiz once – and unlike a human advisor, no one’s there to talk you out of buying a bitcoin at $20,000 or letting you know how many years retirement you’ll postpone by if you go ahead and buy the house with the chef’s kitchen. Humans cost more than any robo (though with Vanguard’s Personal Advisor Services, not much more) but the value you get back from them is measurably higher because they serve as a wall between you and your worst impulses.

In addition to the above, a good human advisor can provide counsel to make sure that assets are correctly titled, can advise on trusts and wills, help you open a Donor Advised Fund to give to charities, review your tax return and more. Robo-advisors can only invest the money you’ve given them.

At Personal Capital they claim to offer you a ‘team’ of financial advisors at $100k, two financial advisors at $200k, and access to a Certified Financial Planner once you’ve accumulated a more than a million dollars with them. Because Personal Capital pays its financial advisors mostly for converting assets from off platform to assets under management – every minute their advisors spend talking to current clients is a minute they can’t use to convince potential new clients to join Prospect Capital. Most of these advisors are really just looking to gather up any of your assets that aren’t yet managed – providing them with additional fees and charging you more.

What About Vanguard’s Personal Advisor Services?

Most people know Vanguard as a go-to asset manager of choice for inexpensive, passively managed index ETFs and Mutual Funds. They currently have over $5 Trillion of assets under management – over $1 Trillion of which their discount brokerage account now holds.

Vanguard has taken a similar approach as Personal Capital, using this $1 trillion as a base to source clients for its own managed services program, called Vanguard Personal Advisor Services. There are a couple of key differences. Vanguard’s PAS is closer to a true robo advisor until you get to $500,000 – where you can get a CFP to do one time planning for free. At $1 million under management, you get a dedicated CFP for free.

So What Should You Do?

If you’ve got a million dollars or more, Vanguard seems like the no-brainer option to get a Certified Financial Planner (if you are ok with a call center delivering advice). If you have less than that or want a more experienced CFP focused on building a long-term relationship, try one of the many independent RIA firms out there that will treat you as a client and not a number.

You may pay more, but having a long, lasting relationship with someone who intimately knows your situation easily pays for itself when you need to make big life-changing financial decisions. If you just want investment management from a robo-advisor and to keep the pesky humans away, Schwab and WiseBanyan both offer a 0% fee algorithmic solution (though you will pay a small fee from the ETF expense ratios) – so you might as well skip robo advisors charging any price at this point.

Personal Capital is an underwhelming choice in any of these slots, so unless you really value the tools they offer, it is generally best to take your money elsewhere.

Author Info: Michael V. Spelman is a Certified Financial Planner, and co-owner of Myrmidon Private Capital, an RIA specializing in retirement planning.  He’s also president at The GUL Guy, a specialty life insurance comparison agency.

Are you taking on to much investment risk?

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Investment risk doesn’t apply to only a select few investments, it applies to everything because every investment has its own sets of risk.

Do you know what they are? Are there ways to avoid them, or at least limit how they affect you?

Let’s dive deep into this topic and learn more.

What is investment risk?

I suppose in its simplest form, investment risk is the chance that your investment will lose value.

If you have a stock or a bond, your investment could lose value. If you have cash, inflation could eat away at your purchasing power.

There are many other types of investment risk.

Types of investment risk

  1. Interest rate risk – The chance that an increase or decrease in interest rates could affect your investment. This specifically pertains to fixed income investments, like bonds. Interest rates and price are inversely correlated, so if rates go up prices go down, and vice versa.
  2. Business risk – This involves a particular security. If you are investing in a company’s stock, the chance of them going out of business and you losing some or all of your investment is the risk.
  3. Industry risk – As you can imagine, this relates to an investment within a particular industry. There are industries that are affected as a whole by certain events. If oil prices drop, the energy industry will suffer. If the economy is booming, the consumer staples sector will underperform. If tariffs are levied on steel and aluminum, the automotive and industrials sectors will be negatively affected.
  4. Credit risk – This relates to a debt issuers ability to make good on their obligations. If you invest in a bond that matures in 10 years, you are supposed to receive two payments per year, plus your principal in the tenth year. The chance that, that debt issuer can’t make those interest payments or pay you back the principal is credit risk. I should mention that there is also a risk to stock investors. When a company goes bankrupt, it has to pay back lenders, investors, and others, but there is an order to which people are paid back, and stockholders are last on that list.
  5. Taxability risk – This refers to a municipal bond. If a muni bond is issued with tax-exempt status, the risk is that it could lose that status before maturity.
  6. Call risk – The chance that an investment is called back. A callable bond is the most common example. More often than not, a company will issue and call back a bond if interest rates have lowered. The issuer is refinancing in a sense. They buy the bonds back in order to reissue them at a lower interest rate, and this will cost them less money in the long run. Fear not, however, because you have the added risk of your investment being called away, you are usually compensated with a higher interest rate.
  7. Inflation risk – Essentially, how severely inflation could eat away at the purchasing power of your investment. Cash is most at risk because you are getting zero return and inflation at any level is costing you money. Stocks, historically, are the best investment to outpace inflation.
  8. Liquidity risk – Your ability to sell your investment when you want to. Some investments trade more frequently, thus have higher liquidity. Stocks are a great example of an investment with high liquidity. An investment with low liquidity, depending on the market environment, is real estate, or physical items, such as precious metals, guns, or art.
  9. Market risk – The risk that at any point in time your particular investment, whether it’s stocks, bonds, real estate, gold, etc. will lose value. Prices in all of those investments can and will fall at one point or another, and no amount of diversification can save you from it.
  10. Geopolitical risk – Think war, terrorist acts, tariffs being levied on certain countries or products, etc. Geopolitical risk happens in your country or in other countries that yours is involved with. When 9/11 occurred, the NYSE and NASDAQ closed in anticipation of panic selling. On the first day of trading, the Dow fell 7.1% and closed the week down 14% (source). Heck, just this year the threat of tariffs has put investors on edge and increased volatility.
  11. Currency risk – This usually affects people who have investments or business operations in other countries. If the value of a currency compared to the USD (U.S. Dollar) goes up, that could negatively affect the bottom line for businesses.
  12. Mortality risk – The chance that you will die before fees, premiums, and payments will have been worth it. This usually revolves around insurance products, but could also relate to social security or money you’ve stashed away for retirement through the years. If you worked and saved for 30 years, but passed away in your sixties, and were unable to enjoy the fruits of your labor, that’s mortality risk.

Three asset classes and associated risks

There are many other asset classes and investments available, but these are the three that most people are associated with.

  • Stocks – Market risk, business risk, industry risk, credit risk, geopolitical risk.
  • Bonds – Market risk, business risk, industry risk, credit risk, geopolitical risk, inflation risk, interest rate risk.
  • Cash – Inflation risk

Diversification

Though not all risk can be diversified away, and you will take on some risk in every investment, no matter how careful you are, it’s important to diversify.

Each asset class and each investment have its own unique risks. In any portfolio, it’s important to diversify between stocks, bonds, real estate, cash, physical assets, and geographic location.

The allocation to each set of assets will vary depending on your risk tolerance. Traditionally, stocks are the riskiest of these but offer the most reward, then bonds, and then cash. Holding real estate and physical assets, like gold is just another way to diversify your assets. Gold, however, is usually a good investment to have when the market tanks, as it’s often referred to as a safe haven asset.

With regard to geographic location, the U.S. is only one-quarter of global GDP (source) and the U.S. stock market is only 43% of global market value (source) so you’d be silly not to invest money in other countries. Besides, if the U.S. market/economy tanks, not every country will follow.

Read more about diversification, here.

Conclusion

Investment risk is unavoidable, and depending on what type of asset you own, you may have more or less risk. The one thing you can do to help protect yourself it to diversify.

To learn more about investment risk, diversification, and our disclosures, visit www.crgfinancialservices.com.

Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Ways to Increase your Wealth

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Wealth, what is it? In a sense, it’s your net worth. Net worth is your assets minus your liabilities.

For a comfortable retirement, you’ll want to see that number tick upwards over the course of your working career.

But how to do you increase your wealth? Are there certain strategies that work better than others?

Let’s take a deep dive into some strategies for growing your wealth.

Decrease Expenses

You want to increase your wealth, decrease your expenses. I can probably list several things you’re wasting money on.

  1. Restaurant food
  2. Drinks at the bar
  3. Cable
  4. Movies at the theater
  5. Interest rate charges
  6. Transportation
  7. Clothing
  8. Frivolous purchases

It’s easy to reduce costs here. Restaurant food and bars – stop going out so much. Cable – cut the cord and sign up for Netflix, Hulu, or go to the library.

Movies at the theater – buy the movie or rent it from the library. Interest rate charges – negotiate your rate, use a balance transfer, or eliminate your debt.

Transportation – use public transport, walk, or ride your bike. Frivolous purchases – wait at least a day before you decide to buy.

Earn More

Ask for a raise, bust your butt to earn a promotion, which usually translates to higher pay, start a side hustle, become a freelancer, etc. There are several ways available to increase your earning power:

  • Drive for Uber or Lyft
  • Become a Tasker on TaskRabbit
  • Get paid for your skills – UpWork or Fiverr
  • Here’s a list of the most popular side hustles – Budgets are Sexy.

Real Estate

Real estate is a great way to increase your wealth. One of the more popular ways to do this is through rental properties.

Do your homework when looking for properties, you’ll want to look at:

  1. Location
  2. School district
  3. Real estate valuation
  4. Property taxes
  5. Community amenities
  6. Current listings and vacancies
  7. Natural disasters

If you find a good property, plan for a 20% down payment to avoid PMI. Once the rent starts flowing, you’ll find your wealth will climb. As you pay down the mortgage, the equity will increase, giving you more assets than liabilities.

Pay down debt

Debt is the number 1 detractor from building wealth. Not only does it prevent you from saving, investing, and/or acquiring assets, but you’re probably wasting money on interest payments.

You need to do what you can to get rid of your debt so you can start building wealth. As you pay off your debt, your wealth will increase because you will reduce your liabilities, which makes your net worth (aka wealth) go up.

In a general sense, there are five ways to help reduce your debt

  1. Debt snowball – Payoff your lowest balance first. Pay the minimum to all of your other balances and pay the most you can towards your smallest balance. Once that balance is paid off, redirect that money to the next lowest balance, and so on.
  2. Debt avalanche – Pay down your highest interest debt first. Pay the minimum to all of your other balances and pay the most you can towards your highest interest debt. Once that is paid off, redirect that money to your next highest balance.
  3. Balance transfer – There are many credit card companies that will offer an interest-free balance transfer. Take advantage of this if you have a credit card balance with a very high interest rate. This will save a lot of money on interest payments.
  4. Personal loan – Usually for credit card consolidation. Most credit card interest rates are crazy high. You get a personal loan to effectively lower your average interest rate. This will only work for you if you have decent credit, however, so do your homework.
  5. Refinance – This applies to students loan and mortgages (well really any loan, but these are the most common). You refinance to lower your interest rate, and sometimes (as is the case with student loans) to consolidate.

Increase your savings rate

A very common problem in this country is that people aren’t saving enough. The average savings rate in the U.S. is around 3% (source). That is a far cry from what people really need to save.

So what we have to do is increase our savings incrementally. Start with the highest percentage of your income you can possibly save. If that 1% that’s fine. If it’s 10%, that’s fine too. Just do what you can.

From there, we will take a few months to get used to that extra 1% or 10% not being there. Once you are familiar with less money, bump that percentage up 1. And once you get used to that, bump it up again.

The key is to make small positive changes for a lifetime. A small change each day or week for the rest of your life? You’ll see HUGE results from this.

Utilize retirement accounts

Retirement accounts are awesome. It’s a very effective way to save for retirement.

Plans for individuals – Traditional IRA and Roth IRA (Here to learn more about these)

Plans for businesses – 401(k) and SIMPLE IRA are the two most common. (Learn more here and here).

All four of these vehicles give your retirement savings the ability to grow tax-deferred. Meaning you don’t pay taxes while the money is inside the account. Additionally, three of these four could help lower your taxable income.

The two business plans are contributed to with pre-tax money. More money in the retirement account means less being taxes. The traditional IRA is contributed to with post-tax money, but you could receive a tax-deduction IF you qualify.

Roth IRA you use post-tax money, don’t receive a deduction or a reduction in taxable income, BUT your withdrawals will be tax-free.

Please look at those links for all the information and rules for each plan.

Develop a “delayed gratification” mindset

Having a delayed gratification mindset is so important when planning for your future. Our default behavior is to do the things that make us feel good right now, but it’s almost always in our best interest to delay that good feeling for a better one down the road.

You want that ice cream cone, but it will be more beneficial to your future self if you forego it and eat something healthy instead. You’d like to buy a new video game, but it would behoove you to buy a book, a course, or invest it.

Improve Financial Literacy

If you want to grow your wealth, you have to know what you are doing. Learn about budgets, retirement plans, and investing. Learn about assets and liabilities, and the various ways you can make money work for you.

If you know how things work, it’ll make it easier for you to follow through.

Automate

Automation can play a vital role in your quest for growing your wealth. Set your bills to auto-pay. This allows you to focus on more important things.

Also, automate your savings. Have it done right away so you don’t have the opportunity to spend it. Go next level with this and set your savings to automatically increase every so often. You’ll save more without even having to think about it.

Invest in yourself

Ben Franklin once said, “An investment in knowledge pays the best interest.” If you want to get promoted at work, get paid more for your skills, or just want to improve your life, invest in yourself.

Read books, take courses, listen to podcasts, watch YouTube videos, or find a mentor.

There is so much knowledge out there and there are so many opportunities to improve your life. Take the initiative and go get it!

Conclusion

Growing your wealth can be a challenging endeavor, but by using many of these tips, you can be on your way to making some very positive changes.

To learn more about growing your wealth and for our disclosures, visit www.crgfinancailservices.com.

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

How does Investment Strategy Change with Age?

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As we all know, as we age and our lives change. Our financial responsibilities and investment strategies change along with it.

In most cases, there are two truths to abide by. You have saved as much as you can and invest according to your risk tolerance, time horizon, and goals.

But what else is there? How do my financial life and my investment strategy change with time?

Starting career

Either you are just out of school or have been in the workforce for a few years. Regardless of which path you came from, there are two things on your list. Get rid of debt, or at least get it under control, and save for retirement.

There are several ways to plan for debt repayment.

  • Debt Snowball
  • Debt Avalanche
  • Balance transfers (credit cards)
  • Personal Loan (loan consolidation)
  • Refinance (student loans)

Check out this post on paying off your debt, here.

Step two is saving for retirement. If the company you work for offers a retirement plan, sign up for it. Max out your contributions if you can, but at the very least, contribute enough to get the employer match (if it’s offered).

Also, open a Roth IRA. If you have a little extra, contribute some to a Roth IRA in addition to your workplace plan.

Your investments. Time is your best friend at this point. Most of your investment allocation should be focused towards growth. Don’t put all of your eggs in one basket, diversify among stocks and bonds.

Again, the majority (at least 70%) of your portfolio should be in stocks, in some form or another.

Starting family

If you’re like the average American, your family starts to form around your 30th birthday. Hopefully, you’ve got a good head start on paying down your debt and saving for your retirement. Continue on that path.

With a family, comes saving for your kid’s college education, as well as other expenses (house, car, etc.). Contribute a little every month to a 529 College Savings Plan. The funds within this account can be invested aggressively, similar to your allocation in your twenties.

Your retirement savings is still in a good spot. Similar to your twenties, regarding the stock and bond allocation.

One last thing, get some disability and life insurance. If you have people that count on you, you need to protect them.

High earning years

More than likely, this will be your forties and fifties. At this point in your life, the average American is in their peak earning years, so take advantage of that and increase your retirement savings.

This will also be the time that your kids either go off to college or enter the workforce. Congratulations (kind of) you are empty nesters. You no longer have a college education to save for. More can go towards your retirement.

More than likely, though, you will have miscellaneous expenses from your kids that you will continue to pay for.

Your investment strategy will change slightly. You are getting closer to retirement so it’s time to start protecting what you’ve saved. A little less in stocks and a little more in bonds. Think 60/40 or 50/50.

Near retirement

You are in the home stretch! At this point, your debts (including your house, hopefully) should be paid off. All assets and your retirement savings should be looking healthy.

Your investment allocation will be similar to the last section. Definitely 50/50 if not 40/60, stocks to bonds.

Retirement

Congratulations, you’ve made it to your retirement. This can be liberating for some, but for others, this is an emotional challenge.

You’ve spent the last 40 or so years saving for retirement and now you are expected to start spending it. This is very tough for a lot of people.

From my experience and in my opinion, you should retain some sort of activity. Something that gets you out of the house, something that forces you to socialize, and something that makes you use your brain.

Staying social and sharp mentally could add some extra time to your life.

Your investments should be conservative. At least 40/60, but the more conservative the better. And it’s usually not a bad idea to keep some of your savings in cash, for emergencies such as health expenses (which will certainly go up at this point).

You don’t have many or any, more chances to earn more money, so it’s very important that you protect what you’ve saved.

Conclusion

The above information can be very useful to the average person. Paying off your debt and making your retirement savings a priority is very important.

Unfortunately, there is a retirement savings crisis in America. People aren’t saving nearly enough for retirement. They are counting on other sources, like Social Security or pensions to fund their retirement.

This isn’t enough. You won’t receive enough from Social Security to support yourself and pensions are few and far between, nowadays. We all need to do a better job of saving.

This article was created for informational purposes only. The above items are not to be taken for personal financial advice. Please consult with a professional about your personal situation.

To learn more about retirement savings and investing, and for our disclosures, visit our website: www.crgfinancialservices.com.

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

4 ICO Scams in 2018 and How to Avoid Becoming a Victim

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Interest in cryptocurrencies skyrocketed after the stunning rise of Bitcoin during late 2017. It also led new companies to join the game, creating new altcoins to attract investors.

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