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A Systematic Approach to Goals

December 25, 2019 by Jacob Sensiba Leave a Comment

With 2020 staring us in the face, it’s time to review goal setting and the systems you can put in place in order to reach those goals.

“A goal without a plan is just a wish.” – Antoine de Saint-Exupery

That said, let’s look at systematic ways to approach goal setting and actionable tools you can use to smash those goals.

How to begin

Large/Lifetime goals – These are things you want to accomplish throughout your life. They can be philanthropic, health, financial, etc. Figure these out first.
Short-term – Now that you have your long-term/lifetime goals determined, you can break them down into shorter-term goals. Consider these stepping stones, and a lot of these will change as you age. For example, your philanthropic goals. There may be causes you care deeply about now, but that can change.
Actionable steps – Once you have your lifetime goals broken down into manageable targets, it’s time to create steps to get there and I’ll illustrate that using the three examples above.
1. Philanthropic – Research causes and charities. Pick the ones you most identify with. Review your budget to find out how much you can give. Do a little more research to find out if your donations are tax-deductible (most, if not all, should be).
2. Health – Establish the specific reason you want to be healthier (for yourself, your partner, your kids, grandkids, etc.). Research a diet that could work for you. Research an exercise regimen that could work for you. Consult experts (i.e. nutritionist and personal trainer).
3. Financial – Create a budget/spending plan. Cut expenses. Save for emergencies. Insure you and your belongings. Save for retirement.

Here are a few articles I’ve written in the past about financial goals:

Worthy Goals For You To Set And Crush

How Do You Set Financial Goals?

Systems

We can think of systems as the sub-category of actionable steps. A routine is another word for it. When it comes to goals and habits, you can’t rely on will power. You have put a plan in place to do the work for you.

Take exercising for example. You need to create low barriers for yourself. Wear your gym clothes to bed or have your bag packed the night before.

If you go to the gym, put your bag and your keys in a place where you have to pass them to get to your car.

If you exercise at home, have your routine and your equipment laid out and ready for you.

Habits

When it comes to creating habits, James Clear, the author of Atomic Habits, likes to break down the habit into bite-sized pieces.

For example, if your saving for a down payment, go to your banking app and transfer $1 from checking to savings every morning (or whatever amount is realistic for you).

When that becomes second nature, bump it up a dollar a day.

Another thing that James says is, “People ask me all of the time, how many days does it take to create a habit? My answer, all of them because if you stop doing it for one day, it’s no longer a habit.”

External versus Internal

This section is speaking specifically to mental health versus other goals. You could also consider physical health as an internal goal, but for this article internal relates to mental health.

There are several things you can do to work on your mental health. See a therapist, exercise, and start a journal. Those three are low-barrier, easy things you can implement into your day to help.

Meditation, medication, and other forms of mindfulness training/practice can also help. There’s a podcast that I listen to regularly called “10% Happier” that will help you with establishing a meditation practice.

Do some research about this. Meditation can and will take many different forms, and not each modality will be right for you. Reading has also proven to have meditative benefits.

Financial Goals

It really is up to the individual as to what they consider, short, medium, and long-term, but my definitions are as follows: Short-term – less than 3 years. Medium-term – 3-15. Long-term – 15+.

My definitions are almost entirely based on the investability of those assets for that specific time period.

Short-term – Emergencies, a new car, what have you. This is money you will need soon, so risking it in the stock market is out of the question. High-yield savings accounts should be your go-to in this scenario.
Medium-term – Things like down payments for a house or sending your kid to college. What you’re saving for will dictate the vehicle that you use. If it’s saving for college, a 529 or a Coverdell ESA should do the trick. If it’s for a down payment, your best bet is usually a taxable brokerage account, as there are no fees for early withdrawal.
Long-term – This should be strictly focused on retirement. Assets should be in a retirement account(s) and invested (investment selection should be based on risk tolerance and time horizon).

Once you’ve established your short, medium, and long-term goals you can break them down into actionable steps as we talked about earlier.

Wrapping it up

Each New Year brings about resolutions that we hope to achieve. Whether it’s getting in shape or paying down debt, your barometer for success should be progress and consistency.

Are you in a better place than you were on January 1st? Do you have more saved? Are you still committed to the goals you set in the first place?

Yes. It feels great to set a target and hit it, but as far as I’m concerned, if you’re better than you were yesterday, that’s all that matters.

Take it one day at a time and keep your eyes on the prize. You got this!

Guide to Cash Home Buyers: 3 Ways They Help You Sell Your House

August 24, 2019 by Susan Paige Leave a Comment

Cash home buyers are a relatively new trend, but have become an alternative to selling your house traditionally through an estate agent. Cash house buyers are generally companies with a team of people that are experts in surveying, estimating, buying, and selling houses. By having all of these skills in the business, they don’t have to rely on third-party people or companies to estimate or survey your house. This means you can get an estimate on your house very quickly, and the company will make a cash offer for your house. This comes with several advantages.

Avoiding selling fees

As cash home-buying companies have all of the stuff necessary to make the sale, you avoid the significant fees that come with selling a house. This includes the money spent on getting an estimate, which will usually be done by a third party for a cost. It also includes solicitor fees. Usually, both you and the seller will pay solicitors to do all of the communications and negotiations. With a cash home seller, this isn’t necessary. Some cash home sellers will try to add in a fee for the survey and estimate of the value of your home. If this is the case, then make sure to avoid them, as some can charge over $1000 for this service. Find a company that’s as inclusive as possible.

Quick sale

Most house sales take a considerable amount of time. Depending on if the house is a new build or not, you may find yourself in a chain of sellers all needed to get confirmation on the purchase of their own home before you can buy theirs. If one sale falls through, then you’ll need to wait for your seller to buy a new house before you can move in. This process can sometimes take a year or even more. This is how cash home buyers can help. Because cash home buyers are never in a chain and are buying your house with cash, the time of the sale is reduced significantly. There’s no waiting for your seller to find a new house, and there are no issues with mortgages falling through.

Lower stress

Selling a house is a traditionally stressful job. There’s a lot of money at stake, and the process can take a long time. This is particularly stressful if you need to sell the house of a loved one that has passed, or if you need to sell quickly to get the money to cover another investment. This is where cash house buyers can be very useful. You can get your house sold in a short amount of time with the least amount of stress possible. Be aware that the amount that a cash house buyer will buy your house will typically be 10-15% lower than if you sold privately through an agent. Some of these fees will be covered by the saving you make in fees, though, and the rest can be attributed to the cost of having a stress-free sale.

The Questions You Need To Ask Yourself

August 14, 2019 by Jacob Sensiba

Questions are a fantastic way to understand things better. They are vitally important in our everyday lives.

One area where I think they are underutilized is personal finance.

You NEED to ask yourself questions on the regular so you can discern if you are doing the right things and taking the correct steps for YOU.

In the following article, we’re going to explore the various questions you need to ask yourself in order to be financially effective.

What is my goal with money?

This is a fairly general question, so we’ll break it down into three buckets: short term, medium-term, and long term.

Short-term (Under 2 years) – If you are saving for a short-term goal, what is it? A vacation? Down payment on a house? No matter the goal, that money will be used soon so the best place for it is in a savings account.
Medium-term (2-10 years) – This could be anything from a down payment for a house to saving for your kids’ college education. What you do in the interim depends on when you’ll need it and the goal you are saving for. If it’s less than 5 years, I’d still recommend a savings account or short-term bonds. Something that can earn you a little interest, but is still relatively safe. That 5-10 year period depends on the goal. If there’s a particular dollar amount you need to it (down payment, for instance) I’d go no more than moderately aggressive. You want to earn a little, but you don’t want that saved amount to go under what you need.
Long-term (10+ years) – Most often, a goal that’s over 10 years away can be invested in the stock market, though the percentage of your assets that’s actually in the market depends on the risks you are willing to take and when you need to access those funds.

Related reading: Financial planning for all ages

How much am I willing to lose before I sell?

I almost always propose this question to new clients because it gives me a good understanding of their risk tolerance.

If they are only comfortable with losing 10 percent of their portfolio, they’ll be invested pretty conservatively.

On the other hand, if they can tolerate a 50 percent drawdown and not bat an eye, then we can “put the pedal to the floor”, excuse the expression.

Determine how much of a loss you can stomach and that will give you a good idea of how to allocate your assets.

How long will it take to adjust my allocations?

Questions regarding asset allocation, typically, pertain to risk and time horizon. For example, if you start saving for retirement when you’re 25, the majority of your portfolio will be in equities (stocks).

This allocation, generally speaking, is suitable for you for a couple of decades. At which point, you’ll probably (again, speaking generally) want to shift a little more of your portfolio to bonds.

Your allocation will, and should, shift over time, and once you get within a few years of your goal, the primary objective of your portfolio becomes capital preservation.

Related reading: Why asset allocation matters

Are my actions suitable for my current financial situation?

Financial situation takes everything into consideration (income, debt, spending, savings, etc.) Actions can be anything related to those items.

Specifically what I’m talking about is how much you are saving, how much you are spending, and how much $ you’ve dedicated to paying down debt.

If you have a sizeable amount of debt and not a whole lot of savings, it’s time to cut your spending. Conversely, if you’ve paid down your debt and are ahead of the game with your savings, it would be alright if you loosened up a little and enjoy yourself.

Like everything in life, your personal finances are a delicate balancing act, and when you ask questions, you can figure out how to shift your priorities.

How is my money being spent?

Kind of related to the last point. Tracking your spending to find out exactly where all of your dollars are going is an important step.

Another recommendation I usually make is to create a financial playbook. Here’s a brief outline of how I create a financial playbook:

Big picture – List all assets and liabilities. How much you have saved and how much debt you have.
List your necessary expenses – These are things that you have to pay (rent, utilities, transportation, food, minimum debt payments, etc.)
List your monthly income
Total up your monthly necessary expenses and your monthly income and see how much you have leftover. What’s leftover will help you discern what to do with it.
I would list another line item for “fun,” though I would keep it to a minimum.
What’s left after fun should be saved and used on debt.

Related reading: How to cut your spending

Conclusion

As I said in the beginning, questions help us understand the world, and ourselves, better.

Having a better grasp on why and when we make certain changes or do certain things is a must if we are to be more effective in managing our finances.

What It Take To Be A Successful Investor

July 31, 2019 by Jacob Sensiba

What makes a successful investor? Is it your ability to beat the market or to beat your competition?

In my opinion, being a successful investor doesn’t have to do with out-earning your peers or leaving the S&P in the dust. No, my definition is very simple.

Develop an investment plan using a variety of factors, and be able to execute and follow that plan indefinitely.

Suitability

This is step 1. You need to figure out what your “suitability” is. Your suitability will lay a very good foundation upon which you build your investment plan. Suitability involves three things:

Risk tolerance – This is your ability to handle drawdowns in your portfolio. If you crumble with fear every time you lose 5 percent, then you’ll probably want a fairly conservative portfolio*. On the other hand, if you have no problem seeing your portfolio drop 50 percent, then you’re ready for a more aggressive allocation.
Time horizon – Probably the most important factor of the three. Your time horizon is basically when you’ll need the money. A long time horizon allows an investor to take on more risk because there’s more time for them to recover from drawdowns. The inverse is true for short time horizons. You’ll want to be conservative because you have little time to earn back what’d you lost.
- Long time horizon – 10+ years
- Medium time horizon – 2-5 years
- Short time horizon – Less than 2 years
Goals – What’s your plan? Is this savings going to be used as a down payment for a house? If so, there’s probably a minimum dollar amount you have in mind and you’ll want to tip the odds in your favor that you don’t go below that. Similarly, if this is for retirement and you have 30 years to invest, you have the green light for risk assets.

Keep in mind that all three of these things, plus one other, need to be used together when determining your asset allocation. If you are tolerant of risk, but need the money in 5 years, somewhere in the middle between aggressive and conservative is probably better. That one other thing is your behavior as an investor.

Investor behavior

The finance/investment world is coming around to this, but your psychology is a HUGE factor as an investor.

Obtaining a high return on assets is one of your goals, but it should not be the primary goal. When you create an investment plan you have to make sure it’s something you can actually stick with.

I wrote about it previously, here.

You could be tolerant to risk and you could have a long time horizon, but if you lay awake at night every time the market drops, then you need to rethink your approach.

That kind of fear and anxiety hinders your ability to follow your plan. What normally happens, is someone sets an unrealistic investment plan, one where they take on too much risk.

Thereafter, volatility picks up. They check their portfolio and it’s declined 15 percent. They wait a day and check the next.

Another 2 percent drop. Then the thought of 2008 creeps into their heads and the panic sell.

You can set up a great investment plan, but your behavior will ultimately make the decisions. Keep that in mind.

Asset allocation

Using your suitability and behavior, you can then determine your asset allocation. The types of assets you use in your allocation can vary. If you wanted to invest a small percentage of your portfolio in gold, for instance.

The three most common assets are stocks, bonds, and cash. With risks ranging from high risk to virtually (there’s always some risk) no risk.

Speaking very generally, people with long time horizons and are more tolerant of risk, have a more aggressive portfolio. The inverse is true for people with short time horizons and a low-risk tolerance.

That said, the ultimate goal is to develop a plan that meets your goals in the smoothest fashion possible.

Ignore the noise

Throughout your investment “career” you’ll run into people, friends, family, or even random people on the street that will tell you the sky is falling or that the newest IPO will go gang-busters and you need to get in now!

Put your blinders on. There are two things that hurt investors. Their own behavior and their ability, or lack thereof, to tune out what’s happening around them.

This is extremely difficult because we, as humans, have evolved to use our peers to compare or judge, our standing in society.

Stay in your lane and focus on your goals.

Never stop learning

Every single experience in your life is a learning opportunity, especially the bad one. I recommend journaling daily, recount your day, and dig little nuggets of knowledge from your experiences.

Additionally, take in some form of content every day that improves your understanding in your line of work, or in an industry that you’re interested in.

With regard to your finances, give our Toolkit page a look. There you’ll find a number of books and resources to enhance your financial know-how.

Please be advised: Everything written in this article is for informational purposes only and should not be taken as investment advice. Opinions are my own and do not reflect the opinions of this publisher or my employer.

Financial Planning For All Ages

June 26, 2019 by Jacob Sensiba

Don’t you hate it when you Google financial planning tips, and it spits out articles that don’t apply to you? This could be because you’re a different age than the article is directed towards or you’re in a different position.

Well, look no further. I’ve created a rough outline of how you can plan, regardless of your age or situation.

But I’ll be honest with you, a lot of this article will link to resources or previous articles that explain these topics in more detail, but I wanted to create a rough outline of how people in different age groups can plan.

Twenties

Ideally, you want to get a budget started, but nobody likes doing that. Instead, give your money a job. Figure out when you would like to have your debt paid off, then do the math to determine how much per month you need to pay.

List that payment plus housing, transportation, food, and other bills. That total tells you how much MUST go out, everything else is extra to do what you please.

In terms of saving for retirement, you have a lot of time to put money away, but if you start sooner, you’ll have to save less later. 10% of your salary is a good goal. If you can’t get there just yet, save what you can, but try to incrementally increase it over time.

Investment allocation here, as well as in your thirties and forties, should primarily be stocks. Not 100%, but definitely the majority of what you own.

Thirties

The financial plan in your thirties is similar to the one in your twenties. Pay down debt and save for retirement. However, at this point, you probably have more assets and you may have some children as well.

With the cost of tuition constantly rising, saving for their future education costs is important. The 529 is the most popular, and probably the best vehicle available to do just that. (Be advised: 529 plans do involve risk so please talk to your financial advisor prior to investing)

With more assets and children, comes more insurance. Make sure your property and belongings are adequately protected. Additionally, if your children depend on your income for support, life insurance and disability insurance are a must!

Fourties

Same story, different decade. Pay down (off) debt, save for retirement, and make sure you have adequate insurance. (Honestly, the save more, pay down debt, and have insurance is a great catch-all financial plan).

At this point, however, your retirement plans should become more detailed and concrete. Through your twenties and thirties, retirement planning essentially was just saving for retirement.

Now you should think about where you live and what you’ll do. You should also calculate if you’re on track and increase your savings if you’re behind.

Fifties

Hopefully, by the end of this decade, your debt will be mostly paid off, you have a good idea of what retirement will look like, and you’ve determined what needs to be done (if anything) for you to hit your target number.

As you age through your fifties, you should start thinking about adjusting your investment allocation. You don’t have as much time to gain back what you lose during a down market.

Reallocating to a 60/40 or 50/50 (stocks/bonds), depending upon your risk appetite, is a good way to reduce your risk and still participate in a bull market.

Sixties

Where you are at this stage in life depends on a few factors. Have you saved enough to live comfortably in retirement? Do you enjoy what you do? Are you healthy? Plans for Social Security?

If you haven’t saved enough, then you’ll probably have to work a little longer so you can save more. If you like what you do, then why not continue if you are able? If you don’t, consider a career change or (if you’ve saved enough) volunteering for a cause that’s meaningful to you.

If you are healthy, I recommend staying active and social as long as you can. Activity and a healthy social life are two of the three important variables for a fulfilling retirement.

Social Security and when to receive it is a huge decision. Obviously, I’m going to recommend waiting as long as you can so you receive a higher monthly benefit, but there are other things to consider.

Are you healthy? What’s your family history like? Do you have adequate savings/retirement income from other sources?

Health and family history help determine longevity. Poor health and/or poor family history may give you a reason to start receiving earlier.

There are calculators out the web (like this one here) that can help you discern what’s the best strategy for you. That’s to say, how do you optimize your Social Security and other retirement income so you receive the most possible?

Seventies

We’re living longer, healthier lives now, and down the road, the retirement age will probably make its way into the seventies.

If you have to work for the income, you’re not alone. As of 2017, the percentage of the population that are 70 or older and still working was 19%. Up from 11% in 1994. (Source)

My recommendation. Develop an income strategy that will a) afford you to live a somewhat comfortable lifestyle (obviously, cutbacks are necessary if money is tight) and b) help your savings last as long as possible.

There are a variety of calculators out there to help figure this out.

Conclusion

Financial planning is tough. As I said in the beginning, not many like to budget, so it’s important to give your money a job. $100 goes towards emergency savings, $1,000 to retirement, and $250 for debt repayment.

Do this, along with several of the other items I listed (as well as the ones linked below) and you’ll do just fine.

Helpful articles and resources:

Creating A Financial Plan You Can Stick To

April 24, 2019 by Jacob Sensiba Leave a Comment

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

April 3, 2019 by Jacob Sensiba Leave a Comment

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.

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.

More Changes for Payday Loans?

July 30, 2014 by Average Joe 2 Comments

I’ve written previously about some of the changes to payday loan practices in the UK. Maybe this is a harbinger of things to come in the USA?

Here’s the latest:

Payday loan sector members agree: Charter governing good practice but government regulation continues to loom in 2014

Businesses within the payday loan sector have taken many steps towards self-regulation since 2012, yet as continued government intervention in the industry looms, the topic of self regulation continues to be hotly debated.

Let’s focus on the self regulation charter agreed to by much of the UK payday loan sector in 2012. This will help us examine the impact this has had on the payday lending industry after 2012, so we can debate the issue. Here’s the key question: has the government has gone too far in the regulation of the payday loan industry? Maybe even better: is government intervention necessary?

A cynical take on the self regulation stance taken by the payday lending sector since 2012

A cynic might argue that as with any voluntary assumption of a self regulatory framework, the measures were designed to stave off government intervention in the regulation of the industry. It is just as easy to take the opposing stance and argue that self regulation creates enough protection for customers, thus dispensing with the need for further government regulation. However, whatever your stance on the self regulation assumed by much of the payday loan sector in 2012, there is no disputing that the self regulatory framework adopted has improved standards within the payday loan sector as a whole and made the experience of obtaining a payday loan a fairer, more transparent and easier process.

Self regulation within the payday lending sector: a new consumer – focused Charter

In 2012 much of the payday loan sector in England took significant steps towards agreeing a self regulatory framework. At the center of the framework was a consumer – focused charter which made voluntary commitments to fairness, transparency and responsible lending.

Specifically the Charter established commitments towards fairness, reasonableness and responsible lending that are agreed to by all governed by the Charter. The Charter specifically outlines a commitment not to encourage irresponsible borrowing, and imposes an obligation on lenders to inform customers of the suitability of payday lending, only for short- term lending requirements.

Other rights created by the Charter include a right to have payment arrangements explicitly explained and a right to have the implications of the loan fully explained before the loan is entered into. The Charter also provides customers protections in the form of notifications relating to any payments taken, and a notice period of three days is nominated as the minimum notice period required.

Other areas governed by the Charter include the freezing of charges and interest in circumstances where a consumer has agreed a reasonable repayment plan, and a commitment to deal with issues of financial difficulties sympathetically.

Your views

What are your views of the regulation of the payday loan industry? Have you used Wonga – the current top competitor in the payday industry? Do you have thought on where this industry is headed with the new regulations coming in or do you have you any experience of loan sharks? Please comment or reply so you can share you opinion on these hotly debated issues. Payday lending has been a controversial matter for some time, but given the recent regulatory changes affecting the industry the debates surrounding the regulation of the industry have intensified. Let us know what you think, and don’t be afraid to tell us what your view is!

Self regulation of the payday lending industry: is it enough and is it effective?

Clearly government intervention within the regulation of the payday lending industry in the form of the Financial Conduct Authority oversight policy shows that the government believes the industry should not be allowed to self – regulate. Perhaps, central to the new proposals for regulation of the industry is the rise in the number of people using payday lending services. In 2008 the payday lending industry in the UK alone was worth 900 million, and this has sky – rocketed to an estimated 2.2 billion in 2012.

Some may argue that too much regulation of any service industry is a bad thing and results in unfair outcomes for consumers, whose access to a full range of services is typically limited by strict regulation. People who can’t access services legitimately inevitably go looking for the same service elsewhere. Enter the illegal money – lender, and the pressure to resort to their services.

On the other hand it can be argued that the industry will contribute to debt problems and create other long term social problems, if left unfettered. Despite the commitments made across the board in the payday lending sector, many commentators argue that the measures have not been effective in tackling spiralling debt within the UK as a whole.

Long Term Care Planning: What Would You Do?

February 19, 2013 by Average Joe 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?

Stock Market Punishment: The First Lesson of 2013

January 7, 2013 by Average Joe 38 Comments

The podcast team is giving the interns a well-deserved week off, so lucky reader….YOU get a FREE extra blog post from Average Joe. I know. Pinch yourself. It’s real. Almost like our awesome rare Saturday post this week.

Look at what the media did to you again.

The sky is falling! Fiscal cliff! Doom! Stock market will be in shambles! Hide your children!

Big ratings for the financial channels, huh?

If you listened and moved your money out of the market, it destroyed your chances for a great return in 2013.

MAYBE you’ll recover if you jumped out before the big two-day run up in stocks. The chances, though, are against you: historically, if you miss the 10 best days in the stock market, you lose about 5.18%, or nearly half your return for the year. If you paid trading fees to avoid the “fiscal cliff disaster,” this only exacerbated your problem.

Here’s what the panicked investor missed in the S&P 500 last week:

December 31: 1.7%

January 2: 2.5%

January 3: –.03%

January 4: .05%

In short, if you missed two days last week you lost out on 4.2%. Those types of returns don’t come around often.

By the way, don’t go in the comments and tell me that “all you lost was a little time….” go back and read the stats above first. You lost a ton.

let’s calculate the cost of listening to the media on this one

Suppose you’re 25 years old and you have managed to save $10,000 into your 401k plan. You lost out on $420. Sounds like no big deal, right?

Let’s use the rule of 72 to determine just how much you really lost:

The rule of 72 says that if you divide the interest rate you think you’ll achieve into 72, you’ll come up with the approximate number of years it’ll take your money to double. Cool, huh?

Assuming that you wanted this money for retirement (401k, right? That’s not your “mad money” account….I hope), we’ll use age 70 for your withdrawal. We’ll also use a realistic return assumption of 8%.

8% / 72 = 9 years for your money to double.

So, that $420 you lost wasn’t really $420, was it?

It would have doubled when you were 34, 43, 52, 61, 70.

Your “little” $420 wasn’t $420. By 32 it was $820. At 41 it was $1,640. By age 50 you’d lost $3,280. At 59 the gap was $6,560. When you went for the money at 69 you had $13,200 less.

it gets worse

If you’re 30 and gambled $50,000 that the market would tank, it’s uglier. Let’s also use 9% rather than 8%, since people looking long term historically have used 10% as their assumption (which I believe is too high, BTW).

Check out what more money and a “little” one percent difference do to your loss:

Rule of 72 = 8 years for money to double.

Funds double at 38, 46, 54, 62, 70

$2,100 lost during two day run-up in market.

= 4,200 loss at 38, 8,400 loss at 46, 16,800 at 54, 33,600 at 62 and

…$67,200 at age 70.

On our “What Did We Learn in 2012” podcast, expert after expert told you the same thing: don’t listen to national media finance porn and don’t chase short term results.

If you did, I’m going to play Dr. Phil now: How’s that workin’ out for ya?

Photo: Joe Shlabotnik