March 27, 2012

"The Bear Necessities"

Credit: Michael Elliott
I was talking to one of the good people who read my blog and he asked me to do a post on the nuts and bolts of managing your money. He wanted me to take a step back and offer the most basic, general suggestions I could on how to best manage your money. What should you do and in what order? Well, your wish is my command! If we could completely start over from the very beginning, here is how I would manage my finances and yours, too:

1. Start a new checkbook where your current balance is exactly what the bank says it is. This time it’s going to be different. Keep up with it. Write neatly. This way you know how much you have and you are protecting yourself from additional expenses, duplicate expenses, and identity theft. If you absolutely refuse to keep a checkbook, at least carefully review your monthly bank statements. If after a few months of keeping good records you notice your bank account is going down, spend less!

2. Once your bank account is actually growing, start an emergency fund or make sure your rainy day fund is adequate. Remember that you’re looking to save up at least 3 to 6 months’ worth of expenses in a checking or savings account. Work towards 6 months’ worth if you can. Go back and take a look at my post “Check Engine Now!” for more details.

3. Now that you’ve started making money and have saved up a safety net, let’s get fancy. Make whatever 401(k) withholding election you need to with your employer to get their maximum match. If they don’t have a match amount, I’d recommend withholding 3%. Make simple, diversified investment choices. Go back and take a look at my “401-OK” post for more details. If your employer doesn’t offer a 401(k), don’t worry, just keep reading.

4. Pay off all outstanding credit card balances. Chances are the interest rate is pretty high, and you always want to have the best credit score you can possibly have. Feel free to keep using credit cards as long as you can pay them off entirely each month. If when you make your monthly credit card payments your bank account starts steadily going down compared to the previous months' balance, spend less! If your credit card balance is more than you can currently pay off, try to minimize your expenses so you can pay a little extra each month, working towards that coveted zero balance.

5. Life insurance, while not that simple on the surface, is something you should actually consider on your money management short list. Particularly if you have a family or kids, make sure you have a policy in place that will provide enough cash to cover your final expenses, pay off all your debts, and allow your family to continue their current lifestyle for at least 6 months to a year. If you are fairly young, reasonably healthy, and especially if you’re female (you usually outlive us males), a policy won’t be that much annually. The security it will provide you and your loved ones is well worth it!

6. Roth IRAs are one of the best things ever. They are wonderful because they provide you with a retirement investment vehicle that can grow over time, tax free. The only catches are that you are limited to contributing $5,000 a year ($6,000 if you are over 50), and you can’t withdraw the earnings on your contributions before you are 59 ½ without potentially facing penalties. (There is also a Roth IRA income threshold of  $173,000 if you file your taxes married filing jointly, but you can always contribute to a traditional IRA.) Setting up an IRA is fairly easy, and it is one of the best retirement planning tools out there. Even if you can’t put in the full $5,000 every year, every little bit will help.

7. If you have followed all of these steps and still have some cash flow left over, it’s time to start eating away at those large debts. Any additional principal you can put down on car loans, student loans, home loans, wedding loans, or any other large loan will help you be debt-free sooner and be charged less interest in the process. Be sure to start with whichever debt has the highest interest rate. Your additional payments may feel like you are spitting into the ocean, but over time, those extra payments will make a difference.

7. For those of you who were excited I made a typo, I regret to inform you that opening an additional investment account is currently tied with paying off your loans in my suggestion book. Over the long run, your investments will offer a higher rate of return than your loans will charge you interest, but with markets the way they are right now, I will leave the choice between loan repayment and investing to your personal discretion. If you still have leftover cash, opening an additional investment account is the way to increase your wealth. Depending on your available assets, you should either purchase some simple mutual funds you’re willing to hold long-term or maybe even open a monitored investment account with a brokerage or wealth management firm. Please note: I would never advise a client to make individual stock picks on their own unless their last name is Buffett, and I don't mean Jimmy!

I hope you found this money management roadmap helpful. Although following all of these steps would help almost anyone financially, a different order might be more appropriate depending on your cash flow needs and your point in life. That being said, this list is intended to be a crude hierarchy, so if you find you are faltering with number 4, go back and fix numbers 1-4 before you continue to move to number 5.


March 20, 2012

The Best Home Loan You Could Possibly Hope For

Credit: ddpavumba
In January 2010, my wife and I needed to take out a loan so that we could purchase our present home. We ended up with a pretty good loan that fit our needs, and it was at an interest rate that the home buyers of the 1970s and 1980s could have only dreamed of. I tell you this because I was pleased with the result of my efforts, but I would not wish that huge, confusing, time-consuming, frustrating endeavor of getting a loan on anyone! So when my wife's friend asked for my thoughts on how to get the best loan possible, I thought it was a great topic for a post. Based on my own personal walk through the loan application “minefield” and my client experiences since then, here is what I suggest you do to get the best home loan you could possibly hope for.

I first suggest that you go to You are allowed to view your credit report once a year for free, and you definitely should. While this will not tell you your credit score (unless you are willing to pay $8 or so), it gives you a chance to verify your credit history and correct any inaccuracies before banks and lenders start looking at your credit report for themselves. Once you know the report is accurate, your credit score is what it is. Just so you know, anything above a 720 is usually considered a pretty good credit rating.

The second thing I would do is figure up how much of a down payment you can cook up. 20% is the magic number. Although most lenders do not require a 20% down payment, not being able to put 20% down usually leads to the lender requiring the buyer to purchase PMI (private mortgage insurance). This will be an additional expense that must be factored into your purchase analysis. Without destroying your quality of life and financial security, I would generally advise you to put down as much as you can, but it really is a lot easier to get a favorable loan if you can hit at least 20%.

Third, you need to determine what time frame works best for you. The shorter the loan period, the less interest you will pay, but that means higher monthly payments. If you have concerns, I would advise you to get a longer term loan with no prepayment penalty so you can enjoy the lower required monthly payments. This way you still have the option to contribute additional funds to pay off the loan sooner without having to worry about any extra fees.

Now it’s time for the “fun” part: letting lenders compete for your business. Try to tell yourself throughout this process that they need you more than you need them because someone out there is going to be willing to give you a loan! I would start with your home bank, I would ask for your realtor’s recommendation, and I would ask your soon-to-be neighbors who they used. You’re trying to find out who was pleasant to work with, not the numbers at this point. If you are feeling lonely or want to feel important, go ahead and enter in your information like I did on a website like Lending Tree or Quicken Loans. The response was overwhelming, but quite informative as my phone rang off the hook for 2 days with people wanting to give me a loan!

Once you narrow your lenders down to 3 or 4 based on likability, think R-P-F; rates, points, fees. Determine who has the lowest rate and pitch it to the others to drive them down or mark them off your list. Will they let you lock in that rate for free? Find out how much points are, decide if that is something you want to do, and then pitch it to the others. Get the lenders to provide you with an estimate of fees and pitch the lowest fee amount to the others to drive them down or mark them off your list. Suddenly you will be left with a couple of lenders that you have squeezed as much as you can, and they will be offering you the best home loan you could possibly hope for. At that point, go with whoever is nicer!


March 13, 2012

One Expensive Cup of Coffee

Credit: Paul
I’ve never been that big of a fan of coffee. Don’t get me wrong, I’m not saying it’s bad. I mean it’s warming and it can smell quite delicious, especially if you put some fancy French vanilla or hazelnut creamer in it. I just happen to be more of a hot tea/hot chocolate kind of guy myself. Whenever I do drink coffee, it’s always for one of two reasons: I can’t stay awake or I’m really cold. Why do you drink coffee?

My last few posts have been pretty intense, so I thought I’d offer up a “decaffeinated” post today about coffee, well sort of. You see, it’s been a long-standing piece of financial advice to tell people an easy way to cut spending is to quit buying that morning cup of coffee. Most people ignore that advice and continue down their daily caramel macchiato path, but the person offering that piece of financial advice was actually not kidding. Check out the facts…
  • In a March 10, 2011 interview conducted by USA Today, Starbucks CEO Howard Schultz stated that their most popular beverage was the tall latte. 
  • Starbucks has slightly different prices in various locations, but for argument’s sake, I’m going to assume that the Starbucks on 14th Street in Midtown Atlanta is about average. At that location, a tall latte costs $2.97 (I called them).
  • There are 52 weeks in a year. There are 5 standard workdays in a week, and let’s assume you only drink coffee on workdays. That’s 260 cups of coffee in a year (52 x 5). Wait, you have a pretty sweet job and have 20 days of paid time off a year, so let’s still assume you only drink coffee on workdays. That’s 240 cups of coffee per year (260-20).
  • Finally, let’s assume you work for 30 years. That would be 7,200 cups of coffee (240 x 30). Well 7,200 cups of coffee at $2.97/cup totals in at $21,384. For a career of “better” mornings, we both might be willing to pay that, but I’m not done yet. If you had refrained from that coffee, you could have saved $713/year ($2.97 x 240). Had you saved $713/year and invested it in a prudently diversified portfolio with an average historical return of around 8% since your first year of work, you would have earned a little more than $80,000 by your last year of work! Suddenly that 2012 Porsche 911 seems a little more doable, doesn’t it?

Well if I’ve made you spill your coffee or pour out your coffee as you are reading this, please accept my apologies. As you might expect though, this doesn’t just apply to coffee. I know plenty of people who have to have a daily diet beverage. I know plenty of people who have to have that daily beer. Heaven forbid if you are accustomed to having a daily glass of fine wine!

It’s your life and you should do whatever you want within your means. I just ask that you take a moment and consider your seemingly innocent daily or at least frequent splurges. I’m a financial planner - not a magician, but I bet I can show you how you could potentially turn a cup of Joe into a luxury sports car!


March 06, 2012

Fed Up

The Seal of the Federal Reserve System
“The Fed,” “the central bank,” “the counting house,” “the clearing house,” Ben Bernanke - all are commonly and currently used as synonyms for the Federal Reserve, the banking system of the United States. The Federal Reserve has periodically been in the news since its creation in 1913, but lately, it seems like it is the news. Some politicians praise the Fed for preventing a double-dip recession, while others blame the Fed for creating the first dip. Some economists believe in the power of the Fed to preside effectively over the economy, while others think the Fed should have never been created in the first place. What drives me crazy is how so many people have such absolute opinions on a topic that is extremely complicated! Do they even understand the Federal Reserve? Come to think of it, do I even understand the Federal Reserve?

I agree with Henry Ford when he said, “It is well that the people of the nation do not understand our banking system, for if they did, I believe there would be a revolution before tomorrow morning.” Now I don’t claim to entirely understand the banking system either, but I am fed up with all the misinformation about the Fed that we hear from some of our politicians and media. So today, let me tell you what little I do know, and maybe you can help me straighten everybody out!

As I mentioned earlier, the Federal Reserve System, also known as “The Fed,” is the central bank of the United States. In plain terms, it is a bank for banks, and it's the bank of the federal government. The Fed is made up of a network of twelve Federal Reserve Banks and a number of branches that fall under the oversight of the Board of Governors. The board is made up of seven members appointed by the President and confirmed by the U.S. Senate. Ben Bernanke is the current chairman.

The Fed is charged with being responsible for providing financial services to the federal government, distributing coin and paper money to the nation’s banks, supervising and regulating banks to ensure they are safe places for people to keep their money, protecting consumers’ credit rights, and conducting the nation’s monetary policy. With all the economic volatility in recent years, it’s that “conducting monetary policy” bit that has been in the media, and that is the part I want to really focus on.

You see, the Fed is supposed to conduct the nation’s monetary policy to maintain or increase employment, stabilize prices, and keep interest rates low. The Fed has three tools to do this:

1.       Open Market Operations- buying or selling of U.S. government bonds to control the amount of cash  available in the banking system.

2.       The Discount Rate- the interest rate charged by the Federal Reserve Banks to other banks on short-term loans.

3.       Reserve Requirements- the portions of deposits that banks must maintain in their vaults.

·         If the Fed buys bonds, lowers the discount rate, or lowers the reserve requirements, then the supply of money available to the market increases, interest rates go down, the economy should grow faster, and employment should increase - all positives. However, prices will also rise (inflation), which is potentially a big negative.

·         If the Fed sells bonds, raises the discount rate, or raises the reserve requirements, then the supply of money available to the market decreases, interest rates go up, economic growth should slow, and employment should decrease - all negatives. However, prices will also fall (deflation), which is potentially a good thing.
Not so easy sounding is it? Well at least we now know some of the basics about the Fed.
Perhaps you will agree with me that it is not always clear what the Fed should or should not do. However, it is clear that the Federal Reserve’s actions do have an impact on the economy. Regardless of the Fed's decisions, I conclude that the Fed doesn’t ever deserve all the credit or all the blame for the results.