September 25, 2012

You Just Got Married, Now What?

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Marriage is amazing. It’s even better than I imagined. That being said, I can definitely relate to the title and sentiment of this post.

To be exact, it hit me on the flight back from the honeymoon. I had just finished an amazing week in a Hawaiian paradise with my beautiful bride. Life was good. There she was sleeping soundly through the slight turbulence that had awoken me. It had been a great time, but it was time to drop her back off at her place and get back to my plans, right? No? I honestly remember thinking, “Oh yeah, I’m married to her. Now what do I do?”

Many of my friends have shared having their own “Aha moment” similar to mine, where they realized what they had done by getting married. Can you relate? I hear that from the “Aha moment” forward it’s a wonderful, lifelong journey, but always a work in progress, and after a few years of marriage, I believe it. This is a long way of saying that I do not have all of your marriage answers, but I might have a few ideas that can help your financial matrimony. Here are a few suggestions:

  • Have a Plan. This is by far the most important nugget I can offer. In a perfect world, part of this discussion would have probably happened before saying "I do," but making a plan shortly after marriage while you’re trying to get your name changed and write all those thank-you notes will be just fine. You need to decide which accounts to combine and which to keep separate. You need to be in agreement on what is going to be saved, know who is going to handle what expenses, and decide in what order your large, post-marriage expenditures are going to be addressed. I know couples who smash everything together. I know couples who keep everything separate. As long as it works, either is fine, but I personally would combine as much as possible. It’s easier to keep up with, it’s more transparent for both spouses, and at the bare minimum, it means less mail telling you that you have been pre-approved to buy the country of Lichtenstein! If you are completely truthful and talk about your finances frequently with your new spouse to ensure you are sticking to your plan (or adapting appropriately), I can almost promise you the rest will eventually work itself out.
  • Develop a Budget. Guys, you may no longer be able to save up money for golf by eating at Taco Bell three times a week. Girls, guys are always going to be in shock at how much it costs to do your hair. Now that those two bombshells are on the table, let’s move forward. Make a budget, just like you did or should have done when you were still flying solo, and stick to it. The good news is there are hopefully two incomes and a few duplicate expenses that can probably be eliminated by living together and combining your finances. The bad news is you have to mesh two spending/saving/investing philosophies into one or else this could be a battle for the rest of your marriage. Keep trying to save at least 10%, keep donating or tithing if you choose to, and keep making those Roth IRA contributions and at least maximizing your employer’s 401(k) or retirement plan match like we talked about last week. I know you need to buy furniture, but it comes a piece at a time. I find many newlyweds (myself included) have this itch to try to live like their parents from the very beginning of their marriage. Please realize that it took your parents years of saving, sacrificing, and working to achieve the lifestyle you were born into. Instant gratification and spending can feel good, but it can set you back terribly. Also, keep paying off all those credit cards and obliterate any remaining student loans or car loans that are hovering. In my book, the only long-term debt you should be considering is relative to buying a home.
  • Buy a Home. If you are uncertain about your job or you and your spouse aren’t fairly certain about where you want to live for the next 5-10 years, you might be able to skip this paragraph. I just know that I would be remiss to not address buying a home since this is so high on many married couples’ lists. What I can tell you is that in the short term, renting is better, and in the long term, buying is better. Here is an interactive graph by The New York Times that may help make my point and will give you the chance to examine your particular situation. Buying a home is a great way to work towards building equity and is a life goal for many people, but it is a decision that warrants careful consideration. With historically low interest rates and many discounted properties out there right now, it may still be a good time for you to buy, but make sure you can afford your obligations. By purchasing a home you will have a monthly mortgage payment, you will have to purchase homeowners insurance, and most painfully, you won’t be able to call the landlord to fix something when it breaks. Another consideration you will need to make will be relative to your life insurance and wills. If you purchase a home, you will at least partially own a fairly large asset, and with that large asset, comes responsibility. You must make sure you and your spouse can afford to keep that asset should something happen to either of you by likely taking out life insurance policies on both of you that exceed your loan amount. You must also make sure you and your spouse can easily and clearly keep that asset should something happen to either of you by likely drafting wills. I’m not trying to scare you from buying; my wife and I bought a home ourselves. I’m just telling you that home ownership costs more than you ever think, so save, save, save, and don’t rush into anything you could regret.
  • Save More. Whether you are saving up for that home down payment or not, my suggestion to save more deserves its own bullet point. I advised you to work towards having at least $10,000 in a rainy day fund as a bachelor or bachelorette, but it’s time to up the ante. After you’ve made that marital budget, you are going to want at least 3 to 6 months' worth of living expenses. In this crazy world, lean towards 6. After you have that saved up for emergencies only, your additional savings can go towards new pieces of furniture and buying things no one gave you off your wedding registry. After those expenditures, your additional savings can go towards debt principal payments, into a home purchase fund, or towards savings for the next car.

Of course, you could always start saving money for a baby fund. Wait, that’s next week…

-Tom

September 18, 2012

You Graduated from College, Now What?

Dummm ... da da dum daaa dummm .... dummm ... da da da dummm… Sorry, Sir Edward Elgar’s Pomp and Circumstance regrettably came to my mind as I started drafting this post.

Either way, today we begin our “Now What?" series, but I need to mention something before we get started. This series is only being broken down into five stereotypical (almost Utopian) life stages as a way for us to outline a suggested financial plan for a lifetime in bite-sized chunks. For example, this post is not just for college graduates; this post is primarily for young people, ranging from high school graduates to people who are relatively new in the workforce, but it can be a good refresher for everyone. Now that we’ve hopefully got that cleared up, let’s go back to that car ride home with the family after college graduation…

Go ahead and enjoy that celebratory lunch, take a few days off, and savor all the cards (and checks) you will probably get in the mail. Graduating from college is a huge accomplishment, but I need to burst your bubble with one of the lessons that hit me hardest right out of school: You have a lot left to learn. I had a master’s degree, I graduated with honors (lowest honors, but still honors!), and I had even passed portions of the CPA Exam, but I quickly realized I had a lot left to learn. I remember sitting at my desk at my first, real, full-time job realizing I had an impressive college pedigree, but somehow at the same time, I knew “diddly-squat.” The real world doesn’t let you go out on Thursday nights, take naps between meetings, or care about your GPA. The real world plays by a different set of rules, and your finances need to adjust accordingly. Here are some suggestions:
  • Do something. Whether you’ve graduated recently, have decided to try to change jobs, or have been forced to change jobs in recent years, you know how tough the job market has been. This is why I say “Do something” as opposed to “Get a job.” Doing something includes interviewing for a job like you’ve always wanted, going after a job that’s close to what you’ve always wanted or that could help you springboard into the job you’ve always wanted, getting an internship in the field you want to eventually work in, and even volunteering in any capacity you can find in your area of interest. If you exhaust all those opportunities, maybe consider going back to school to further your training or taking a different type of job. I believe many members of older generations would agree to some degree with the statement I’m about to make: A job is a job. Do something; don’t sit and wait on life, or it will pass you by.
  • Start saving. The Bank of Mom and Dad is about to close if it hasn’t already, but don’t fret, this is a once-in-a-lifetime opportunity. You can start living within your means now and likely avoid many of the financial problems that plague others. By that, I mean if you start earning a salary and immediately start saving 10% of it, donating or tithing 10% of it (if you choose to), and investing 10% of it, you will not feel like you are sacrificing anything. That 70% of your remaining salary (100% - 10% saving, 10% donating, and 10% investing) should be relatively easy to live off of as it is probably more money than you have ever earned anyway! When you get that next raise or bonus, keep the same percentages and you won’t even notice you’re saving, donating, and investing more; you’ll just feel like you’re earning more. My theoretical percentages aside, I’d try to save up at least $10,000 cash in a rainy day fund right off the bat.
  • Start investing. As I alluded to above, start investing. Many financial planners and wealth advisors have different theories on what you should do, but my personal recommendation would be to start maximizing Roth IRA contributions ($5,000 per year) and setting your contributions to your employer’s 401(k) or retirement plan to at least whatever it takes to get the maximum match amount. Remember that it’s important to invest sooner rather than later as $1,000 invested at age 18 averaging a 5% return per year would equal $6,081 at age 55, whereas, $1,000 invested at age 25 with the same average return per year would only equal $4,322 at age 55. The longer your investments can compound and grow, the sooner you can retire in style!
  • Fight off debt. If you have student loans, now is the time to lay waste to them. You do not want these hanging over your head any longer than you have to. Don’t nix your savings or investing plan, just try to live a little leaner so you can start making significant progress towards extinguishing your debts. Also, for no reason short of an alien invasion or maybe blowing out your car’s engine should you start carrying credit card debt! Pay it off every month, no excuses. The interest rate is simply not worth it!
  • Make a budget. One of the most amazing things I have realized as a financial planner is that no matter how much money you have, you can get in financial trouble pretty quickly if you spend beyond your means. Don’t adopt the approach that you will pay for everything and save what is left. Save some receipts and bills for a few months and figure out what you can save, donate, invest, and put towards debt first and still have enough left to live reasonably. Remember, you’re not in college anymore - large expenditures for Dixie Cups, grass skirts, and 24-packs of corn dogs (they were good) should not be the norm.

Congratulations again on graduating from college. I hope, and believe, these suggestions will help get your adult life jump-started. Don’t get me wrong, the world is still your oyster; you are just going to have to earn it!

-Tom

September 06, 2012

The Lightning Round

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Thanks for all of the questions you submitted. Please know that I am always happy to try to help with any questions you may have, whether they are related to one of my posts or not. Now, without further ado, here are my responses to 5 questions submitted by readers just like you...

1. What’s the best way for my friend to handle a credit card with a big balance? She’s thinking about transferring the balance to another credit card with a lower interest rate. Is that a good idea? After she pays it off, should she close it? My friend read somewhere that it doesn’t matter as long as it’s not your oldest credit card. Thoughts?

- Becky                        
                         
The best and only way to eliminate credit card debt is to pay more than the minimum. Pack your lunch instead of going out with your co-workers, temporarily decrease your cable package, wait an extra week between nail appointments, or pass on joining that fantasy football league with the buy-in. You must do whatever it takes to pay more than the minimum payment or else the high interest rates can eat you alive! Other options that are often suggested to handle credit card debt include taking out a Home Equity Line of Credit (HELOC) to pay off the debt, temporarily borrowing from your 401(k) or retirement plan (if the plan allows it) to pay off the debt, or even transferring the debt to a different credit card with a lower interest rate. Given the right financial situation, these techniques could be effective and save you interest, but I would urge caution with all of these options because you are only “robbing Peter to pay Paul.” If your friend is going to transfer the balance to another credit card, she should make sure there is no fee for transferring the balance from another card that could negate any interest saved. Eliminating credit card debt should arguably be everyone’s first financial priority, because once the debt is gone, the money you would have otherwise spent to cover your debt and interest payments can easily be saved to build up your cash and establish a rainy day fund.

I don’t think closing a credit card account is necessarily a good idea unless you think that’s the only way to prevent yourself from going into credit card debt again. Using a few credit cards responsibly can be a good idea, and some cards offer worthwhile incentives and rewards, but stay away from opening up all the "take an additional 10% off today’s purchase" cards that you're always harassed about at the checkout counter. Having too many credit cards, closing too many credit card accounts, and not having credit card accounts with long histories can affect your credit. If you have a card that you don’t want or no longer need, I’d cut it up and put the pieces in several different trash cans to minimize identity theft, but I normally wouldn’t recommend closing the account. 

2. What exactly is income streaming, when should we look at turning it on, and should we worry about it “running out” before we want it to?

- Jill                              

When you say “income streaming,” I imagine you are talking about an annuity. An annuity is a financial product that, for an initial investment or series of investments, entitles an investor to a stream of payments or a lump sum in the future for anywhere from a set period of time up to life. The future payments can be fixed or variable depending on what type of product you have. The benefits of an annuity are that it is a way to defer income taxes and guarantee a stable stream of income in retirement. The drawbacks are that annuities frequently come with high fees, limited investment options, and surrender charges if you pull out money in the first several years.

As far as when you should turn it on, it really depends on your specific situation and what type of annuity you have. Regardless, don’t turn on an annuity before age 59 ½ as you could face a 10% early-withdrawal penalty like you do with other tax-deferred retirement plans. If you have a lifetime product, don’t be as concerned about outliving your income stream, but if you don't have a lifetime product, wait (if possible) until you feel like you actually need the additional income. Please note that annuitizing, or turning on the annuity, is often an irrevocable decision, so consider it carefully before you decide. You may also want to consider the potential benefits of cashing in the entire annuity and exploring other investment options that may have lower fees and offer more flexibility.

3. I enjoy reading your blog, but could you tell me a little more about what you actually do?
      

 - Brett                            

Thanks for the question, and I am happy to talk about what I do for a living. I am a financial planner and a CPA. I work for a wealth management firm in Buckhead. My daily responsibilities include examining and evaluating clients’ investment strategies, reviewing and analyzing clients’ current financial situations in comparison with their life goals, and considering clients’ estate plans (wills, powers of attorney, health care directives, trusts, etc.) to make sure they are maximizing their tax planning opportunities and setting themselves up to leave behind a legacy they would be proud of. I help people figure out how to send their kids to college, when they can retire with a lifestyle they will be happy with, and how they can give to charity in the most advantageous ways. I am a jack of many trades, but my goal, and the goal of my firm, is to relieve our clients of the burden of worrying about their finances by getting them on a financial plan or path where they can achieve all their goals and live in a sustainable manner. I chose to work for the firm I did because we know there is a lot more to financial planning than investment management and insurance, and because we don’t work for commissions. This allows me to look my clients in the eye and give them advice with them absolutely knowing that I am advising them with their best interests in mind, not my end-of-year bonus. If I can ever be of assistance to you or anyone else you know, please let me know.

4. I have read a lot recently about the Black-Scholes Model. Can you explain it? Do you use it?

 - Anonymous                  

I know the basics and am capable-enough to have a conversation with you about Black-Scholes, but I’m not sure I can completely explain it. It was derived by some gentlemen who are a lot smarter than me and no doubt had a lot more time on their hands, but here goes…

The Black-Scholes Option Pricing Model was developed in 1973 by Fischer Black and Myron Scholes and is considered by many to be one of the most important concepts in modern financial theory. The equation derives the implied price of European-style stock options by essentially using five variables: the current stock price, the exercise or strike price of the stock option, the time until the stock option expires or matures, the annual risk-free interest rate (usually considered the interest rate on a U.S. Treasury Bill), and the annualized volatility (fluctuation of the stock price) of the stock. The formula is quite frankly disgusting, and I will show you a simplified version here. I can, and have, worked the equation with Excel, but I don’t stand a chance with pencil and paper. Luckily, there are some online calculators that can help you as well, but you need to make sure you are confident in the variables you enter before you rely on the output!

The reason the Black-Scholes Model was so groundbreaking in the financial world (and the reason it won a Nobel Prize in Economics in 1997) was because it was a method that finally allowed everyone to mathematically estimate what the value of a stock option is. If, after running the Black-Scholes Model, the current stock price exceeds the implied stock value, it might be time for the stock option holder to strongly consider exercising the stock option. I know many people who sell their stock options as soon as they receive them, and I know many people who hold them dangerously close to the expiration date, but I don’t know many people who exercise them sometime in the middle. Black-Scholes is great, and I run it for clients from time to time to give them perspective, but let me offer two, much more simple theories of mine relative to stock options:
  • Little pigs get fat and hogs get slaughtered- If your stock options are in the money (the current stock price is greater than your exercise price) by a fair amount, what are you waiting for? You can exercise the options and reinvest in a diversified portfolio that has much less risk and still has the opportunity to increase in value. Remember, if the stock price dips below your exercise price, your stock options are worthless.
  • The time until your stock options expire is like a runway- If I’m trying to land a big jet, I want the longest runway possible for maximum flexibility and the opportunity to succeed, and I feel the same way about stock options. If you are a couple of years out from the options expiring, you have more control over your landing as you can consider tax implications and your current cash flow needs. Also, if your stock options are in the money, you can eliminate the worry and go ahead and receive some additional money you weren’t guaranteed to receive in the first place! Whereas, if you hold the options until they are a couple of weeks from expiring, you have given yourself a really small runway, and all I can say is that I hope the stock price is up for your sake. You shouldn’t rush pulling the trigger on stock options, but too many people go down with the ship by holding on until the bitter end.
5. I've got two for you... 1. Is it possible to roll a traditional 401(k) into a Roth 401(k)? If not, should I open another account but make it a Roth? I like the idea of paying my taxes now instead of watching them go up over time. 2. Can the second stage in your upcoming series include a couple of tips for just before you say "I do"? Good stuff!

 - Chad                            

I’m glad you’re thinking the way you are. Everyone is trying to figure out what taxes will be like going forward, but I’m beginning to believe more and more that the best-case scenario with the lowest tax rates is what we have now, regardless of what party is in power. If you share that belief, it means that you want to pay taxes now, not later; you want a Roth 401(k), not a Traditional 401(k). It is possible to roll a Traditional 401(k) into a Roth 401(k), but your ability to do that and exactly what avenues you will have to take to do that depend largely on your employer. At best, go ahead and try to combine your 401(k)s into a Roth 401(k), but realize you will have to pay income taxes now on the traditional portion you are rolling over. If your employer won’t let you do the Roth rollover, go ahead and try to combine your 401(k)s together for convenience sake, but know that your plan will have to keep up with the pre-tax (Traditional 401(k)) contributions and after-tax (Roth 401(k)) contributions separately. It is crucial that you make sure this consolidation is handled correctly in the beginning because you don’t want to have to go back and try to figure out how much tax you owe 20 or 30 years from now. For what it’s worth, I had a traditional 401(k) at my first job and rolled it into my new job’s 401(k). I did not convert the old 401(k) to a Roth, I just went with Roth 401(k) contributions going forward.

I love the idea for a post on some engagement or pre-marriage tips! I have actually thought about doing a post on ways to save money when planning a wedding, but I feared the nuclear fallout I might start between some of my bride-to-be readers and their fianc├ęs. That being said, I will go ahead and offer a comment on one thing today that repeatedly bugs me: this mainstream idea that a guy is supposed to spend 3 months’ salary on an engagement ring. All I’ve got to say is that you should spend what you can and what you want to make the girl of your dreams say “Wow.” You don’t want her to ask you what bank you robbed. I know plenty of happy marriages with smaller rocks on the ring, and I know plenty of unhappy marriages or broken marriages with massive rocks on the ring. Getting engaged and married is not about ice sculptures, waterfall pictures, or exotic Venus Flytraps; getting married is about celebrating two people who have decided they want to be together for the rest of their lives.


Thanks again for all the questions. We’ll have another Lightning Round sometime soon!

-Tom