Is Your Arrow Aimed Too Low?

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I am by no means an archer, but I have shot a bow and arrow from time to time. In Boy Scouts I launched a few arrows as part of a merit badge, and as a college student I competed with my roommates as we slowly made the top of a Styrofoam cooler look like Swiss cheese striving for the bullseye. It was fun, but believe me when I tell you that you wouldn’t want me to be your William Tell!

As you might expect, aim is pretty important when it comes to a bow and arrow. Aim too low and you’ll never hit your target. Aim too high and you’ll overshoot your target. Many people view financial goals as targets, and I think the same principles apply. That’s why I’d like to share a few thoughts with you on the importance of aiming your financial arrows to actually hit your financial targets.

In my experience I’ve found that people usually have more concrete targets than they have arrows. Most people have a general idea where they want to go and they may even know when they want to get there, but they don't always know if they're headed for the bullseye. This is where financial planning comes in to make sure you are not just shooting in the dark.

I meet with many people in their 20's and 30's who are carrying around loads of student loans. They are usually making their monthly payments, and in some cases even putting extra towards their loans, but their payment arrows are often flying all over the place. They know they want to eliminate all student debt, but they aren’t using their arrows as efficiently as they could. By prioritizing paying down the loans with the higher interest rates rather than simply making the automatic payments that are based on the size of the loans, they can ultimately pay less interest and hit their debt-free target faster!

I also meet with lots of people who share with me their goal of paying for their children’s education. It’s an admirable and loving goal, but the problem is that sometimes I find that the parents need those funds for their own retirement. Sometimes I also find out that the "child" we are discussing is a senior in high school. Either way, saving is best done over time with small savings arrows, rather than with a last-second, giant contribution.

My bread and butter is meeting with people contemplating or nearing retirement. Most of the people are not comfortable or convinced that their nest egg, Social Security, and any retirement pensions or income they may have are enough to provide for their desired retirement lifestyle by their desired retirement date. Sometimes I find people’s expectations are pretty well lined up, but other times I find people's expectations way off. I’ve had to tell someone who hated their job that they actually could have retired much earlier because their savings arrows had been aimed so high. I’ve also had to tell someone who had practically cleaned out their desk that they weren’t headed to a beach anytime soon because their savings arrows had been aimed too low. A challenging, but much easier conversation for me (and whoever I’m advising) is sharing with someone several years out from retirement that they need to aim their savings arrows a little higher and push their realistic lifestyle target expectations in a few yards in order to make things work, or better yet, that they really are on target for their retirement bullseye or better.

Aim too high with your financial goals and you could be missing out on opportunities and experiences now. Aim too low with your financial goals and you might not pay off your debt in a timely fashion, you might not be able to send your child to college, and you might not be able to retire with the lifestyle you’ve always wanted. If your aim is just right, you're either incredibly lucky or you’ve done some financial planning.

-Tom

Failing to Plan

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I don’t know about you, but the beginning of the year is when I usually do my greatest amount of planning. New Year’s resolutions, vacation itineraries, home improvement lists, and fitness routines can currently be found in my personal effects. Maybe I’m too rigid. Maybe I’m not spontaneous enough. What can I say? I need a plan of attack. Without one, I feel lost.

A lot of people I meet for the first time seem to view financial planning like a trip to the dentist. It’s not always fun, and you might not look forward to it, but it is necessary to keep your teeth clean and avoid a root canal. I’m no dentist, but I do firmly believe financial planning is necessary to accumulate and grow your assets, and to avoid the many financial potholes lurking around out there.

• Consider someone facing the huge burden of paying for their child’s college tuition the next four years versus someone who started a 529 Plan for their child eighteen years ago.
• Consider someone who wants to retire a year from now, but can’t possibly maintain their lifestyle in retirement versus someone who implemented a debt-reduction plan ten years ago so they could coast into retirement debt-free.
• Consider someone who made a generous charitable contribution the year after they retired when they were in a low tax bracket versus someone who more strategically made a generous charitable contribution right before they retired when they were in a high tax bracket.
• Consider the family of someone who is left in a coma after a tragic automobile accident with no estate plan in place versus the family of someone who took the time to execute a will, a Power of Attorney, and a Health Care Directive.
• Consider the family of someone killed in an automobile accident who never wanted to bother with the health questionnaire for life insurance versus the family of someone who made sure their family would be financially secure in the worst of circumstances.

 

Oftentimes it is better to be lucky than good, but I’m not always that lucky. I need peace of mind and confidence in my family’s financial security. I’m a firm believer in Ben Franklin's famous words that "If you fail to plan, you are planning to fail."

 

Just as a dentist can help a toothache, people often come to me at a time of financial crisis like imminent retirement, unexpected termination, a surprise job offer, a birth, a health tragedy, a death, or a divorce. Yes, I can certainly help, but it’s much easier and there are so many more options if you plan ahead. Maybe it’s me, but I prefer flossing a little along the way and having a few checkups every year to a painful toothache and a drill!

 

-Tom

What a Year!

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This time last year, my wife and I were trying to decide whether to move or not. This time last year, I was just beginning to actually think about being a dad. This time last year, I was a senior financial planner still learning the ropes.

Now, my wife and I’ve sold our first home and bought our second home. Now, I’m not quite “Superdad,” but I can change diapers faster than a locomotive and I’m able to soothe my teething son in a single bound (well most of the time…). Now, I’m a wealth advisor, and finally doing what I’ve always wanted to do, yet I still learn something new almost every day!

2015 has been a year of change, and for the most part, a year of blessings. There have been a lot of peaks, but there have also been some valleys. Overall, I consider myself pretty lucky. What a year!

During the course of this mania, I learned several financial and life lessons first hand:

• The emotions, stress, and time consumption associated with a real estate transaction is insane. It’s a second job! However much you budget for a move, you’re going to be low. There’s a financial advisor joke out there that goes something to the effect of “What do you call downsizing? Half the house for just about as much money!” I used to laugh, but now I don’t. We weren’t downsizing. We were upsizing to our first house big enough for a family with a yard, and moving ended up costing us significantly more than we expected. All I can say is buy less than you think you can handle and maybe have more than one inspector or buy a home warranty!
• Baby furniture, car seats, strollers, clothes, formula, diapers, toys, and doctor visits can really add up! Remember that old game show Supermarket Sweep? Those people grabbing the expensive turkeys were crazy! Give me a cart on the baby formula and diaper aisle next to the greeting cards and I bet I’d be pretty hard to beat! Adding another mouth to feed does not financially benefit many households (despite the tax deduction), but being a parent is more miraculously wonderful and fulfilling than I ever imagined! In happier financial news, the “going out” expenses and vacation expenses do seem to naturally tick down, partially compensating for the costs associated with the mountains of diapers!
• Earlier in 2015 I was promoted from a senior financial planner to a wealth advisor. That meant that the firm I work for was ready to take off my training wheels and entrust me with working with clients on my own. That is a trust from my employer, and the clients I serve, that I do not take lightly. I continue to encounter new situations, I continue adding experiences, and I continue to learn new techniques and strategies to help people grow and preserve their nest eggs, save a little on taxes, give a little more to their favorite charities, and achieve personal goals. This year I got to be the anchored beacon to clients experiencing their first market correction in almost six years, I got to help a number of people who were in emotional and financial pain from suddenly being laid off, and I got to help a number of widows and children walk through the grieving process and the financial distribution and redeployment process of bequeathed and inherited assets. Money should not be anyone’s life, but money is part of everyone’s life. My job is not always easy and it’s not always fun, but being able to help people when they need it most is what motivates me to do what I do.

 

In 2016, my wife and I are going to go on the offensive against our mortgage and pay a little more than we have to so we can be debt-free a little sooner. In 2016, my wife and I are going to contribute a little more to our 401(k)s and continue to make our annual Roth IRA contributions so we can build up a reasonable retirement nest egg as soon as we can. In 2016, we’re going to save week after week and finish furnishing our new home. Those are our financial goals. What are your financial resolutions?

 

If you’re one of my loyal readers, you probably noticed that I didn’t post quite as much as I have in previous years. If you wondered why, now you know (move, baby, job responsibilities, etc.). Still, 28 posts in 2015 isn’t too bad, and I promise you, I have just as much energy and excitement about 2MuchCents as I ever have. Life happens, but I’m going to try to average at least two posts every month. And as always, if you have a question or an issue that you think I could help you with, please reach out to me. I’ll make time for you!

 

2016 posts will include why you should unplug from work, some things you need to consider if you or a loved one are considering a move to a retirement center, how to live in harmony if you and your spouse have very different incomes, some suggestions on what you need to teach children about money, a look at some financial mistakes we all make, and how to make sure you don’t face any tax penalties by hitting a “safe harbor.” I hope you’ll check them out!

 

Merry Christmas to all, and to all, a good 2016!

 

-Tom

Questions You Should Be Asking Your Financial Advisor

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A friend of mine posed an interesting question to me the other day. His parents are beginning to think about retiring in the next few years, and they didn’t leave their recent meeting with their financial advisor feeling overly confident that they were in good hands, so he asked me what questions they should be asking. I may get tarred and feathered by others in my line of work for sharing this, but today I offer you some of the questions I think you should be asking your current or prospective financial advisor.

• Do you feel my investments are appropriate (particularly if it has been a while since you met or your investment accounts were rebalanced/reallocated)? If the response you get is only a “Yes,” you should follow up with “Why?” I really think that having a general understanding of why you are invested the way you are is important. It gives you confidence through the market's ups and downs, and it ensures that your advisor’s strategy is in line with your goals and your objectives.
• What fees have I paid you? An advisor may not be able to rattle this off on the spot, but if they can’t get you a clear answer pretty quickly, this may be a red flag. Contrary to how some practice in the industry, fees and expenses don’t have to be hidden. It also doesn’t hurt to ask an advisor how they get paid based on the investments they recommend. If you hear the word “commission,” you need to at least consider the possibility that your advisor could have a conflict of interest.
• What licenses and credentials do you hold? There is so much alphabet soup out there that I don’t even know what some of the acronyms stand for! That being said, some licenses and credentials are impressive and should be confidence-inspiring, but some, not so much. You’re looking for things like CFP®, CFA®, and CIMA® from an investment advisor in addition to advanced degrees from respected business schools.
• How can I access my funds and my information? In today’s world, you should have the ability to view your account any time and withdraw money within a few days. If you don’t, you may want to see if your advisor has booked a one-way trip to the Caribbean…
• Who is your typical client? What’s good for one type of client is often good for another, but not always. If your advisor is used to working with people with backgrounds, needs, and amounts of money drastically different than your profile, you may want to find an advisor better suited to work with you. You want to be your advisor’s "bread and butter" and a client that is right in their wheelhouse!

 

I’ve been asked lots of crazy questions from clients including why I couldn’t guarantee an 8% return every year, why a particular beverage wasn’t for sale in their local grocery store, and if I was dating anyone (because their granddaughter liked blondes), so my proposed questions should be softballs for your current advisor. If your advisor's answers leave a lot to be desired, I’d suggest you ask these very same questions when you are interviewing candidates to be your new advisor.

 

-Tom

What Mark Twain Might Say

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You might think that a vast majority of my job as a financial planner would involve number-crunching, graph-making, and technical reading. My job does encompass some of those activities, but I have found that the majority of my time is actually spent counseling people. Sure, many of my conversations with clients involve talking people through the financial pros and cons of things such as moving, starting a family, or retiring, but a lot of my counsel and advice sometimes borders on being more personal. With that in mind, I’d like to share some thoughts based on tough conversations I’ve had recently with some people about their jobs.

I read recently that the average workweek in America has crept close to 50 hours a week, or 2,400 hours per year. Many of my clients seem to affirm that statistic, and sadly, make me wonder if that statistic might be a little understated. Either way, 50+ hours a week means that outside of sleeping, eating, commuting, and football, there’s not a lot of time left for anything else. I imagine I could write a couple of books on how your job can interfere with your family, friends, health, and faith if you’re not careful, but I’m just a humble blogger. So to summarize, let me just say that legendary adventurer and intellectual, Mark Twain, provided one of my favorite quotes as I went through school: “Don’t let schooling interfere with your education.” I bet he’d offer something similar in regards to work and life. I might even speculate that he would have said something along the lines of: “Don’t let work interfere with your life.”

“There is a limit to how much I’m willing to work no matter how much they pay.”

“If I quit working, I’ll have to spend time with my wife.”

 “Since I’ve retired, I thought I would have heard from my former co-workers more.”

“The way I’ve worked, there’s no way I’ll make it past 80.”

“I have to sleep on Sundays, or else I’ll never make it.”

Unfortunately, those are all quotes I’ve heard from various acquaintances, clients, and friends over the past few weeks, and frankly, it makes me very sad. My parents raised me to give 100% towards everything I do, and I’ve made that mantra part of my core personality, but as I’ve gotten older, I’ve also learned there is an important caveat to always giving all that you possibly can. I believe there is only so much one person can give, and I know you only live for so long, so if you’re giving too much to your career, chances are you’re not giving enough to another area of your life, whether that be your own happiness, your own health, your family, your friends, or your faith.

Just as I would never have the audacity to pressure someone about what they should do with their money, I would never tell someone how they should live their life. One of the differences between being a trusted financial advisor and a broker is that a trusted financial advisor is supposed to be more interested in your overall well-being than just your money. In short, I believe it is my duty to do what is best for clients, and as you might expect, what is best for someone personally and what is best for someone financially isn’t always the same thing. I don’t take lightly the opportunity to help people talk through what’s going on in their personal lives and to help them consider the current and future financial impact of any decisions they’re thinking about making. Seeing people go to less financially lucrative jobs that give them weekends, seeing people take that family vacation they kept putting off, and seeing people change careers to something they actually find enjoyable and meaningful makes me happy. In my opinion, you need to put food on your table and a roof over your head, but life is too short to let work ruin your life. 

As I’ve said before, I love math, numbers, history, and trying to keep up with all that’s going on in our crazy little world, but I do what I do so that I can help people. If today’s post speaks to you, I hope you’ll give it some serious thought. If you need a neutral party to listen or to help you think things through financially, or even personally, please know I’m here for you.

-Tom

Why I Don’t Fix My Own Car

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A question I’m sometimes asked that I don’t particularly look forward to is why someone should pay for financial planning and investment management services that they could do themselves. It’s certainly a valid question, but it’s also an awkward question for me to answer because it forces me to offer what feels like an arrogant response as nice as I possibly can. The gist of my response to, "Should someone be willing to pay a reasonable amount for financial planning and investment management services?" is usually something to the effect of “Yes.”

I’ve found that most potential clients who ask this sort of question are either very fee-conscious, they are do-it-yourself investors, or both. They may like me as a person, and they may even be impressed with my initial presentation or dialogue, but they are hung up on the irrefutable fact that if they devised the same financial and investment strategy that I’m going to work with them to develop, they’d be better off because they wouldn’t have to pay my firm’s fees. They are quite right if they devised the same (or even a better) financial and investment strategy, but what I really want to tell some of them is that I don’t fix my own car!

I don’t fix my own car not because I can’t or am not smart enough to learn how to, but because I work and have family and friends. Like many of you, I’m a busy man, and I simply cannot dedicate the amount of time it would take for me to be comfortable driving a car that I worked on. Not to mention, I don’t personally enjoy working on cars, nor am I a trained mechanic. I might pop the hood in an emergency or try to fix a blown brake light from time to time, but when it comes to something like a knocking sound in the engine or noticeably out-of-balance tires, I’m out. When it comes to something as important as my daily mode of transportation that happens to be worth several thousand dollars and could impact my family’s well-being, I want an expert mechanic whose sole focus is my car.

I hope you know me well enough to know that I’m not trying to be self-serving in anyway, but I have to say that when it comes to something as important as people’s financial well-being and their ability to fulfill their financial and life goals, I really wish they’d go with a “financial mechanic.” Whether you don’t understand finances, don’t want to understand finances, don’t have time to understand finances, are incredibly fee-conscious, or are a do-it-yourself investor, I really wish you’d let someone help you or at least occasionally offer a second opinion. Maybe from time to time you’ll want to fix a blown “financial brake light,” but when it comes to a knocking in your financial engine or an out-of-balance investment portfolio, wouldn’t you like some professional help?

Prudent, long-term investment advice can absolutely be a huge deal, but don’t underestimate the potential financial and emotional value of financial planning and wealth counsel. Figuring out a way for new parents to know they will be able to send their child to college is worth something. Figuring out how to implement a little-known tax strategy that saves real dollars is worth something. Having someone to convince you the sky is not falling some years and not to go all-in at the top of the market cycle other years is worth something.

As I said earlier, I’m not trying to be braggadocios in any way, and I’m not trying to pressure you into seeking financial advice from me or any other quality advisor out there, I’m simply trying to make a point. When I don’t feel well, there are some things I’ll try, but at the end of the day, if I’m still not well, I’ll go see a doctor. When it’s somebody’s birthday and I need a cookie cake big enough to feed a small army, I'll go see a baker. When something isn’t working with my car, I’ll go see a mechanic.

Do what you do, but please be careful if you fix your own car.

-Tom

One Size Does Not Fit All!

I love Halloween. Sure, it’s partially because of the Snickers and the Whoppers, and definitely because of the Reese’s, but it’s also because I love dressing up. Ever since I was old enough to trick-or-treat with my trusty, plastic jack-o-lantern in hand, I’ve always enjoyed pretending I’m someone or something I’m not one night a year. You can only imagine my disappointment when I tried on my “one size fits all” Batman outfit a couple of hours before it got dark on an All Hallows’ Eve only to find that one size did not fit Tom!

Sort of like a Batman costume that might look super cool on one person, but look like some sort of oversized armadillo costume on another, one investment strategy does not fit all. One investment strategy may not even fit one individual with multiple accounts!

I get to work with clients of all ages with all sorts of needs from and expectations of their investment portfolios. I get to work with clients who are frighteningly conservative with their investments, and I get to work with clients who are frighteningly willing to roll the investment dice. One of my jobs as a financial planner is to help someone have enough prudently diversified investment assets to sustain their desired standard of living, and I can tell you unequivocally that one size does not fit all! Your age and stage in life can somewhat dictate an appropriate investment strategy that might fit most, but it takes an understanding of your entire financial position, tax situation, tolerance for market volatility, and life goals to make an investment strategy a custom fit.

Suppose you have a taxable brokerage account and a 401(k). Let's say you’re going to need a car in the next year or two, and your taxable brokerage account is going to need to supply the funds. Do you think your taxable brokerage account, which you are going to be taking a significant withdrawal from in the short term, and your 401(k), which you are not going to need to touch for many years, should be invested in the same manner? Maybe, but probably not. You should probably have a little more cash or bonds in your taxable account than you do in your 401(k), so that you can buy that car even if there is a stock market downturn, but you should probably also have a few more stocks in your 401(k), so that you can have a real shot at growing and increasing your 401(k) balance in the long run.

If you’re in one of the higher tax brackets, you might want municipal bonds for your taxable brokerage account. These bonds are tax-free for federal income tax purposes, so even though they pay a slightly lower yield, they may offer a higher net (after-tax) yield. That being said, there is rarely any reason you would want municipal bonds in a retirement account such as a 401(k) or IRA because you don’t have to worry about income taxes until you actually take withdrawals from them. If you don’t have to worry about income generated inside a 401(k) or IRA, you might as well go with a normal, taxable bond that will pay a slightly higher yield than municipal bonds. Just keep in mind that one type of bond might not be optimal for your different types of investment accounts.

What if you find yourself watching the markets too closely and checking your portfolios every day? You may still be making money, but you’re losing sleep. It might not be the ideal investment strategy, but finding a strategy that is a little less volatile and a little more conservative might be the antidote if it helps you sleep at night. Of course there are also people who have set enough prudently diversified investment assets aside to support their lifestyle and really enjoy the idea of trying to “play the stock market.” Setting aside a little extra cash in a “sandbox account” to play with can be just what the doctor ordered for those people. They can give their speculative and undiversified strategy a go without having to worry about sinking their overall financial position.

There are also a lot of age-based or retirement date-based investment strategies out there, and they’re usually pretty good, but they are kind of one size fits all. Maybe you’re “normal” and one of these strategies fits just fine, but you may want to look at it closely and try it on before it gets too late, unlike me and the Batman costume.

I can’t sew a lick. I almost bled to death in Home Economics sewing a pillow, so unfortunately, I can’t help you with a costume. However, I can help with investment strategy and allocations, and make sure they're a good fit.

-Tom

The How to Retire Early Series

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I like my job as a financial planner. I really do. I like helping people try to achieve their financial goals, and I love helping people achieve their life goals. It took a while a first, but I’ve even come to enjoy wearing a suit and tie pretty much every single day and trying to look the part.

I also like the beach. I like getting up when I want to and going to bed when I choose. I like not shaving every now and then. I love spending lots of time with my wife, my family, my friends, and my dog. And oh, it would be nice to be able to read for pleasure again, do a little community theatre, and get out my old trombone…

My point is that even though I like what I do for a living, part of me is already looking forward to retirement. Now I’m pretty certain I’ll still be willing to help family, friends, and my favorite clients under the right circumstances even after I’ve turned the light off in my office for the final time, but I’m also pretty sure that my job puts enough pressure on me to make me not want to work as hard as I do if, financially, I didn’t have to.

Many people my age seem to feel the same way, and with that in mind, I think it is high time for me to write a series on what you need to do to retire early. Over the next several weeks, I’ll discuss how reaching financial independence really is now versus later and why it is absolutely critical for you to start strong so you can finish even stronger. I want to cover how important real estate and health insurance are to retirement planning. I will also give you some retirement cash flow strategies to consider, and even explore why you might not want to retire early after all, even if you could!

If you’re already shaking your head and wondering why someone my age might already have the audacity to be thinking about retirement, let me offer the simple response that you can’t blame us! My generation has seen our parents and grandparents laid off or forced out at the end of their careers, we’ve seen pensions reduced and “guaranteed” benefits cut, and we’re uncomfortable relying totally on Social Security. To the people roughly my age, I’d offer that if we’re going to have a chance of financially making it in retirement, we need to act now - not 20 or 30 years from now!

I hope you’ll join me on this exciting journey and consider my thoughts and suggestions throughout this series. Please spread the word to your family, friends, and anyone planning for retirement or already in retirement who you think could benefit. Thank you!

-Tom

Required Minimum Distributions

Credit: Stuart Miles

In my line of work, I get to surprise people all of the time. Sometimes my advice or the conclusion of my financial analysis evokes an elated and relieved response. Sometimes it does not, but instead confirms a painful reality or brings about sadness and temporary distress (not to worry: I’m happy to develop a new plan or strategy for my clients who find themselves in temporary distress).

One of the most frequent surprises I get to deliver is the news that in the year you become 70 ½ years of age, if you have certain retirement investment accounts like a 401(k), Traditional IRA, or qualified (tax-deferred) annuity, you are required to start taking minimum distributions, whether you want to or not! Technically, you could choose not to take your minimum distributions and agree to pay one of the most onerous IRS penalties of 50% of the amount you should have withdrawn, but since I’ve never had any takers on that strategy, let’s push forward assuming you will take your required minimum distributions (RMDs).

The amount that has to be distributed is based on IRS life expectancy tables and the age of your spouse (or designated beneficiary). It’s a relatively simple multiplication problem consisting of your account’s previous year-end value and your applicable life expectancy factor, but there are so many tables and beneficiary circumstances to consider that I’d suggest you let your financial advisor or CPA do it for you. There are some brokerage firms and custodians that will actually calculate your RMD for you on your brokerage statements when they become required, but please note that brokerage firm calculations will only be relative to the accounts you have with them. If you have multiple accounts that require RMDs, you’ll need to be careful, and make sure you take enough in total and from each account to avoid the before-mentioned “bear” of a tax penalty.

This required distribution can be a good surprise. If you’re not already withdrawing from your retirement account, this distribution can feel like a little extra income that could be used for anything from family trips to home renovations. I should mention, though, that your distribution does not have to be spent! You have to withdraw it and you have to pay taxes on your withdrawal, but you’re welcome to top off your savings account or reinvest the proceeds in your after-tax brokerage account.

This required distribution can be a bad surprise if you didn’t know you had to do it (or forget to do it), but even if you’re on top of things, it still stinks because the tax man cometh. Uncle Sam wants to wish you a happy birthday from age 70 ½ on, and to commemorate the occasion, he’s going to want ordinary income taxes from your distribution amount to help fill his empty coffers.

If you’ve read this post, there is no reason to let RMDs surprise you. If you are 70 ½ or older, please double check with your financial advisor and CPA to make sure you are taking your RMDs. If you’re almost 70 ½, I’d urge you to meet with your financial advisor and make sure you have a game plan in place for your RMDs as there is often an opportunity for meaningful and significant tax and cash flow planning. If you’re nowhere near 70 ½, I bet you can think of someone you care about who is and would appreciate you looking out for them.

-Tom

A Calculated Leap of Faith

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Do you love your job? If you do, that’s awesome! If you don’t, why are you still doing something you don’t like? Maybe you’re like most people and view your job as “just okay,” hopefully with more good days than bad.

I was flying back from meeting with a client last week and was reading everything I could get my hands on to try to drown out the wedding shower planning going on behind me. I was shocked to read that a recent study found that 80% of workers in their twenties want to change careers. That statistic strikes me as really high, but it inspired me nonetheless to share a few thoughts with those of you out there considering changing careers, whether you’re in your twenties or not.

First, try to bite the bullet and keep “suffering” through your current job as you explore ways to incorporate a portion of your desired career into your current routine. I’m not trying to rain on your dreams; I’m just suggesting that you gently test the waters before you do something drastic. You may find that hand-making wooden furniture, singing at a jazz bar, or making a whole lot of tiny cupcakes isn’t as glorious as you once thought, and by first approaching your desired career as a hobby or occasional activity, your finances probably won’t take that big of a hit.

If you've found that biting the bullet with your current employer or occupation is no longer a feasible option and you’re even more enthused by incorporating part of your desired career into your current lifestyle, it’s time to take the leap of faith. It’s time to take the leap of faith as long as you and/or your family won’t irreparably suffer should things not go according to plan. I’m still not trying to kill your dreams because life is pretty short, but sometimes you have to do what you have to do. Work is called work for a reason, and there is a reason someone is willing to pay you to do what you do. Despite being told as children that we could be whatever we wanted to be, a job you don’t completely enjoy that provides food and shelter may be better than a job you love that doesn’t. That said, if you’re convinced the risks of changing careers are worth the potential rewards, I’d advise you to make sure your spouse is completely on board and significantly boost your rainy day fund before you hand in your two weeks notice.

If you've taken the leap of faith, love your new career, and can adequately provide for your loved ones, congratulations! If you’ve taken the leap of faith and found that the grass wasn’t greener and you’re financially struggling more than you can withstand over the long haul, it’s important to know when to leap back. What I mean is that it’s important to know when to pack it up and return to your more practical, or at least more financially lucrative, career. You obviously want to make the leap back before financial ruin, but in some occupations it’s important you also consider how long you can be out of the field and still be able to pick up things relatively close to where you left off. If you made the leap of faith and things didn’t work out, don’t feel bad! At least you pursued your dreams; not everyone can say that.

Jumping from being a CPA tax preparer to a CPA/CFP financial planner was a big leap for me. I admire those of you chasing your dreams who have the courage to take even bigger leaps. Whether a big leap or a small leap, if you’re contemplating a career change, I wish you luck, but please make sure it’s a calculated leap of faith.

-Tom

The Best Time to Invest

Credit: Stuart Miles

One of the most common questions I get in my line of work is something to the effect of “When should I begin investing?” or “When should I invest this particular portion of money?” Many brokers and financial advisors would talk to you about their ultra short-term market expectations or about trying to time the market (investing right before the market goes up a lot), but you won’t get any of that hypothetical schmoozing from me. A dictator’s unforeseen actions, a politician’s ill-conceived comment, or a shocking corporate scandal can throw even the best short-term market forecast out the window, so more often than not, I reply to someone asking me about the ideal time to invest with a very simple answer: “Probably now.”

“Now” is not a cop out. “Now” is not due to lack of knowledge or experience on my part. “Now” is not because the sooner you invest, the sooner I can talk with you about investment allocations and options. “Now” is about statistics, probability, and history. (Please click on the link and watch the video created by Time Magazine showing how $1 invested in the U.S. market has grown from 1927-2012 as well as what was in the headlines of Time.)

From a long-term investment return point of view, I think it’s safe to say that the last 85 years have been pretty awesome, but that’s not to say things haven’t been volatile. What if I told you that the S&P 500 has either been up more than 20% (which is a lot) or down (you lost money) for 18 of the last 32 calendar years, meaning returns have been between 0% and 19% (moderate growth) in only 14 of the last 32 calendar years? Well the market has been, so in order to be in a position to possibly enjoy some future, compounded long-term investment returns (like the ones you just saw if you're a good person and watched the video), I’d argue that you need to go ahead and pursue a prudently diversified long-term investment strategy and agree to stay on the market roller coaster. I just don’t think “guaranteed” annual returns of any substance are possible.

Another statistic worth mentioning is that, according to J.P. Morgan’s September 30, 2013 Guide to the Markets, the S&P 500 has had an average intra-calendar year drop of 14.7% every year since 1980. This means that the stock market has been down an average of 14.7% at some point during the calendar year despite its strong overall returns! I know of no other statistic that more clearly emphasizes the importance of a strong and patient stomach for market volatility. I also believe that in order for investors to have a stomach for market volatility, they need to have enough cash on hand, an understanding of their long-term financial strategy, and confidence in their financial advisor.

I’ve thrown a video and a couple of statistics at you that you may have found a little surprising and encouraging, but I’m not sure I’ve yet made a solid case for why investing now is likely your best course of action. You should consider investing now because over a long enough time frame the stock market has always gone up, and if you’re a betting person, the market has gone up more than it has gone down. Please understand that I am not saying you will have a better long-term investment return if you invest today versus tomorrow. What I am saying is the odds are in your favor!

If the current risk of market volatility is holding you back from investing, please know that there will always be market uncertainty no matter how long you wait to invest. There is a lot of recent and not-so-recent history to support investing now. In the battle of current market uncertainty versus market history, I personally choose history, but if you’re still not sold on this, I’d be happy to share some more of my thoughts with you and offer some techniques that can help you finally put some of your cash to work over time.

-Tom

My Uncle’s Living Expenses

Credit: Stuart Miles

Throughout the course of my blog, I have frequently suggested that you take the time to gather some data and take a good, hard look at the sources of your living expenses. The results of such an exercise might be shocking, concerning, enlightening, comforting, or something in-between. Whatever the results, today I thought we’d practice this exercise together as we take a look at my uncle’s living expenses.

Looking at the chart below, you can see that my uncle spends a significant amount of his money in several categories. Now all these numbers are rough, but it looks like around 21% goes to medical expenses, 20% goes toward paying off a note payable (he owes some people some money they gave him a long time ago), and 20% goes toward his security system. I can’t believe more than 60% of his expenses are allocated just to those three categories! Continuing on, I can see that he has some sort of debt, since he spends 6% of his total yearly expenses on interest payments. He also gives around 13% to charities or to people less fortunate than he is, so I guess that’s nice. He’s only spending 3% of his total expenditures on transportation, and only 2% on education. That seems a little low to me, but what do I know? Finally, I guess the other 15% is all meshed together into other, smaller categories of living expenses.

Now be nice to my uncle because I really do think he means well, but I also think he could benefit from looking at the sources of his living expenses as a whole a little more often. When I break down someone's living expenses like this I try to help them figure out where their money is going if they aren’t sure, I try to help them figure out where they can cut back if they need to cut back, and I try to figure out ways to improve their overall financial standing by addressing specific expense categories such as my uncle’s interest payments. As you might imagine, this process can be personal and painful, but it can also be eye-opening.

So if you were my uncle’s financial planner and you knew he was spending too much, what would you advise? Would you solely go after his debt? Would you tell him to cut back on his giving to charity? Would you have him try to cut back on his enormous medical, note payable, and security system expenses? I’m serious, what would you do?

By now, I hope you know I would never share my uncle’s financial information with you or anyone else I am not authorized to speak with. After all, always keeping my clients’ personal and financial information strictly confidential is part of my job. That being said, I was able to share the details of my uncle’s expenditures with you today because you’re related to him, too, and his expenses are a matter of public record. In other words, he’s my uncle, he's your uncle - he’s our Uncle Sam!

I don’t want to wade into the ballyhooing of politics, but I do think some of you might find the pie graph above a little more interesting now that you know it was from a CNN report covering the United States government’s 2011 fiscal year. Switch out my uncle’s “medical expenses” for Medicare, Medicaid, and some children’s health insurance programs, my uncle’s “note payable” for Social Security, my uncle's "security system" for defense spending and international assistance, and my uncle's "charity" for safety net programs, and our government’s living expense picture should become a little more clear. It could just be me, but I imagine clamoring for more military spending or more health insurance versus spending more on education, for example, might give people pause when they look at the government’s federal budget as a whole, and keep them from getting so caught up in an impassioned speech or a fiery, late afternoon news show.

You may have caught on to my ploy from the very beginning, but I hope some of you are a little surprised and maybe even flabbergasted. Sure, take a look at Uncle Sam’s spending and reflect quietly on the sources of expenditures for our country if you’ve never done that before, but let me reiterate that the main purpose of this post was to demonstrate to you the true value and potential impact that looking at your living expenses as whole can offer.

I don’t claim to always have the answers for your budget, and certainly not Uncle Sam’s, but if you take the time to figure out the sources of your living expenses and look at their relative percentages, I bet we could get off to a really good start!

-Tom

Wag the Dog

Credit: Maggie Smith

Wag the Dog is a 1997 comedy featuring Robert De Niro and Dustin Hoffman in which a “spin-doctor” publicist and a Hollywood producer work together to cover up a presidential scandal. I won’t ruin the movie for you if you haven’t seen it, but the gist of it is that the publicist and producer help create a fake war against Albania to take the American people's attention away from the inappropriate actions of the president. While it’s quite a humorous movie (and I must confess that it makes me wonder how often “significant” events have been cooked up in the past to give our leaders a little breathing room), allowing something to divert one’s attention away from what it should be on (letting something “wag the dog”) isn’t funny at all.

As I’ve said before, it’s my job to try to help people and to make strategic financial suggestions to the clients I serve, but I never tell people what to do. Sadly, in spite of my best efforts and persistent explanations, I’ve had several experiences as a CPA and a financial planner where the clients I serve have been unable to focus on their overall financial situation because of their obsession with a specific portion of their financial situation - usually this has to do with their taxes. That’s why I want to focus on a few tax-related issues that I have seen “wag” my clients from doing what I truly believe is in their best interest.

• Capital Gains
• I’m convinced there is nothing that gets CPAs and investment advisors yelled at more than capital gains. If clients have capital gains, they are usually mad because they owe taxes, but if clients have capital losses, they are usually mad because they have lost money. Either way, in terms of recognizing capital gains, selling out of a stock position that has gone up a considerable amount often makes sense because you are taking your gain off the table and giving yourself the opportunity to buy a different stock position that has more potential for future, additional growth. Yes, you’ll have to pay taxes on the amount the stock position went up or appreciated, but isn’t that better than the alternatives? If you wait for the stock price to go back down before you sell, you probably won’t owe any taxes, but you also won’t have any gain, and if you’re not willing to sell the stock during your lifetime, what good is the stock to you in the first place (unless you plan on charitably gifting it or specifically bequeathing it)? No matter the stock or investment, there comes a time when it makes sense to sell your position, take your gain, and run. Please don’t let capital gain taxes solely wag you from considering taking that gain.
• Income Timing
• Some people have jobs with steady incomes, and their tax picture is about the same every year. Some people have jobs with fluctuating incomes; some years they will be in lower tax brackets, and some years they will be in higher tax brackets. Whether still actively working or retired, by taking a multiple-year view towards your income stream, you can attempt to manage unusual “bursts” of income, such as stock options, lump sum pension payments, deferred compensation payouts, IRA distributions, and annuity distributions, in a tax-efficient manner. The problem is that some people want all of their money at once and give Uncle Sam a massive portion of their income, as opposed to cumulatively giving the government less if income is more evenly spread out. There are also people who want to pay as little in taxes as possible every year and keep putting off stock option exercises, distributions, and payouts until they back themselves into a year when they have no choice but to give Uncle Sam a massive portion of their income. As usual, there is often a sweet spot in the middle where by prudently spreading out your income you can have long-term tax savings. Please don’t let a complete disregard for income tax implications or a blind focus on minimizing current year income taxes wag you from potential tax savings.
• Having a CPA
• It concerns me how many people choose not to have a CPA prepare their taxes. I know tax preparation fees can be high, but having someone who knows the latest in federal and state tax laws, gift tax laws, and estate tax laws is invaluable. Having the ability to point your finger towards someone else should there be an issue and the IRS comes calling is nice, too! If you don’t have a CPA, I would strongly encourage you to consider finding one unless you know all about the Georgia Retirement Income Exclusion, the changing AGI threshold for itemized medical deductions, and how to plan on utilizing the portability of your now inflation-adjusted estate tax exemption. I know, TurboTax and its brothers are great, but accidentally misusing tax software does not excuse you from any errors or penalties that may be related to those mistakes. As the Tax Court said in a case back in 2000, “Tax preparation software is only as good as the information one inputs into it.” Please don’t let the fees of having a CPA prepare your taxes (which are likely tax deductible) wag you from having your taxes done as correctly and as efficiently as possible.   

 

Taxes are the main “dog-wagger” I see, but there are others. Trying to save too much money too fast by shortchanging your quality of life is letting your savings goal wag the dog. Trying to pay down debt too fast by jeopardizing your emergency fund is letting your debt reduction plan wag the dog. Trying to max out your 401(k) contributions by cutting your ability to comfortably pay monthly expenses is letting your investing strategy wag the dog. I could go on and on.

 

Get some popcorn, watch the movie, and try to remember that just as a dog should wag its tail, your overall financial situation should drive your specific financial decision making.   

 

-Tom

Juggling

Credit: renjith krishnan

If you were hoping for some investment ideas, budgeting principles, or the latest in tax-saving techniques today, I’m going to disappoint you. However, I believe I can offer you something that may be more valuable to you than all of the above – my thoughts on juggling.

Juggling is an impressive skill that is also a very good exercise for your mind and body. Juggling is something I had to learn how to do to pass 12th grade physics. Juggling is the image I think of every day when I evaluate the priorities in my life.

A couple of years ago, a good friend of mine shared an article with me about a speech given by Bryan Dyson, a former CEO of Coca-Cola Enterprises, in which Mr. Dyson described life as juggling. Essentially you are juggling 5 balls: your health, your happiness, your faith, your family and friends, and your job. The premise is that if you drop any of the 5 balls (or fail to keep them high enough in the air), you will have a big problem. The thing is, the health, happiness, faith, and family and friends balls are glass – if they shatter you are sick or dead, unhappy, lost, or lonely. If you drop the job ball, it’s more like rubber. You may get reprimanded, you could get demoted, and it’s possible you might even get fired, but it is just a job. Even in the recent economic environment, you will eventually be able to find another job even if it’s different, doesn’t pay as well, or isn’t as fulfilling as your current one.

Look, this whole juggling act with the 5 balls of life is not my original idea, but it has become a part of my personal creed. I’m well aware that people need a job to provide for their families and to achieve their life goals, but I’m also cognizant of the fact that you can’t buy health, you can’t purchase happiness, faith is worth more than gold, and loyal family members and close friends are priceless. As a personal financial planner, it is sometimes part of my job to not only help people accumulate and preserve wealth, but also to encourage them to experience and enjoy life fully.

I juggle better some days than others, and I encourage you to keep trying to juggle the 5 balls of life in the best way you can. Just try to recognize if that smartphone, those never-ending emails and voicemails, and the constant stress and demands of your job are causing you to come close to dropping one of the balls of life. If so, you may need to drop the job ball to save the others. Remember, it’s just rubber.

-Tom

I Wanna Be a Billionaire

Credit: -Marcus-

Earlier this week, I spent a fair amount of time reading a very technical, highbrow article about many things someone could do with their wealth to build an enduring legacy. The article was very useful, and I even learned some new financial planning techniques and strategies I may mention to some of the clients I serve, but in the words of Ron Burgundy (Anchorman reference), it reeked of “leather-bound books and rich mahogany.”

I want to be clear - there is nothing wrong with a good leather-bound book or a rich mahogany bookshelf, but that article was simply not for everyone. I’d go so far as to say it was written for only a very small group of people. Now I always tell all of my clients the truth and try to give all of my clients the same advice I would give my mother if she were in their shoes, but the thing is, the clients I serve are very, very different from one another. Some have cufflinks, some have holey blue jeans. Some like beef wellington, some like a hamburger steak (I’d take the hamburger steak, myself!). There’s nothing wrong with being different, and quite frankly, I enjoy the daily challenge of being a financial planning “chameleon” as I tweak my approach, tactics, and explanations to try to provide the best advice I can in a manner that each, unique client can relate to and understand.

I tell you all this so you can hopefully appreciate my motivation behind today’s post. Today, I offer some financial thoughts and commentary for you to think about as you live your life and consider what type of legacy you want to build, and one day, leave behind. I’m attempting the same thing as the author of the aforementioned highbrow article, but I don’t think overly-technical speech and a rich mahogany vocabulary are always necessary when trying to help people financially. Here goes nothing, but let’s see what I can do with a slightly “PG-13ed” excerpt of Travie McCoy and Bruno Mars’ “Billionaire,” a reggae, pop rap song about what McCoy would do if he had a billion dollars. The song lyrics are italicized and green; my commentary is in parentheses and black.

I wanna be a billionaire so freaking bad
(You and me both!)
Buy all of the things I never had
(There’s nothing wrong with prudently spending some of your hard-earned money. You need to save, you need to pay down debt, and you need to invest, but it’s important to remember that when your time comes, you can’t take your money with you!)
Uh, I wanna be on the cover of Forbes magazine
(It’s true, with personal or financial success there often comes fame and public attention, so you need to be careful. Even if you don’t quite make the cover of Forbes, it’s probably a good idea to have a substantial umbrella policy like we discussed in "Surviving Mayhem," or one with liability coverage close to your total net worth.)
Smiling next to Oprah and the Queen
(As I’ve gotten older, I realize more and more that there is sadly some truth to the phrase, “It’s not what you know but who you know.” If that is indeed the case in this cruel world, at least try to leverage your contacts and relationships to do good and make a difference!)
Oh every time I close my eyes
I see my name in shining lights yeah
A different city every night alright
I swear the world better prepare
For when I'm a billionaire
(The world better prepare and so should you! Planning in advance and examining the pros and cons of a life or financial decision before you make it is absolutely crucial. You don’t want to start a business and then worry about the wording in the partnership agreement, you don’t want to begin thinking about saving up money to send your kid to college when they’re already a senior in high school, and you don’t want to weigh the impact of choosing an annuity pension versus taking a lump sum at retirement for the very first time on your last day on the job!)
Yeah I would have a show like Oprah
I would be the host of everyday Christmas
Give Travie your wish list
(You can currently give someone up to $14,000 per year without their being any gift tax consequences.)
I'd probably pull an Angelina and Brad Pitt
And adopt a bunch of babies that ain't never had stuff
(Adopting is a wonderful thing to do. If you want to help, but you’re not in a position to adopt, there are many, very good charities you can assist with your time or resources that benefit children in need.)
Give away a few Mercedes like 'Here lady have this'
(Please talk to your financial advisor, insurance agent, and family BEFORE you give away a Mercedes!)
And last but not least grant somebody their last wish
(Contributions to the Make-A-Wish Foundation are tax-deductible…)
…I'd probably visit where Katrina hit
And do a lot more than FEMA did…
(Once again, there are numerous charitable opportunities where you can make a difference. Oftentimes in the case of a major disaster, you can specifically direct your contributions with many national and international charities.)
…Toss a couple million in the air just for the heck of it
(Please don’t.)
But keep the fives, twenties, tens and bens completely separate
(It is critical that any money of substance you have accumulated be diversified and secured. Investments need to be properly allocated, too much cash in one bank account isn’t as secure as it could be and the interest isn’t going to keep up with inflation anyway, and having cash stuck under the mattress can be a huge security risk (theft, fire, etc.))
And yeah I'll be in a whole new tax bracket
(You got that right! The new top federal tax rate is 39.6%. Add in state taxes, payroll taxes, and the Medicare surcharge, and your overall tax rate is likely getting on up there. It’s always a good time for tax planning with your CPA or financial advisor.)
We in recession but let me take a crack at it
I'll probably take whatever's left and just split it up
So everybody that I love can have a couple bucks
(It’s important to have an up-to-date estate plan in place. The current estate exemption amount is $5.25 million per person, so many people will not face estate taxes, but with as many tax laws that have changed in recent years, you need to make sure your money is still going where you want it to go!)
And not a single tummy around me would know what hungry was
Eating good, sleeping soundly
(It is more blessed to give than to receive.)
I know we all have a similar dream
Go in your pocket, pull out your wallet
And put it in the air and sing…

We can’t all be billionaires, but it is fun (and important) to think about what we can do with what we have. I’ve got a meeting later this week with a couple, and we are going over their estate plan to do just that. Perhaps, I’d better split the difference and go with something between rich mahogany and reggae lyrics. Either way, if you feel like your life and your purpose are bigger than just you, I encourage you to think about what fingerprints you’re leaving behind. Please keep in mind that your actions and your finances can be powerful tools in leaving a legacy that you can be proud of.

-Tom

Uh-oh!

Credit: imagerymajestic

Have you ever had one of those Snickers “Wanna get away” moments? I know I have. There was the time when I was playing the White Rabbit in a comical version of Alice in Wonderland, and right in the middle of my solo, I looked over and realized my nice, fluffy, white tail had become detached from my pants. There was also the time when I complimented the beauty of someone’s relative’s cremation urn. Most recently, there was that moment when I came downstairs to see my “angelic” dachshund playing in the confetti of what used to be my wife’s work time sheet and to-do list for the week that she had asked me to move a little earlier in the day if I was going to let the puppy out. Uh-oh!

Uh-oh moments are a part of life, but some can be prevented. Part of my job as a financial planner is helping clients try to prevent financial uh-ohs, and the most common areas where I see blatant financial uh-ohs are actually estate planning and beneficiary designations. Today, I want to talk about a few common estate planning uh-ohs that you will want to make sure you and your loved ones avoid.

• Whose Name is Where?
• Many people are surprised to learn that their designated beneficiaries on retirement accounts and life insurance policies trump any designations in their wills. If a husband was suddenly killed and left everything in his will to his second wife, but the most recent beneficiary designation on file with his company’s 401(k) plan still lists his first wife as the beneficiary, the first wife will walk away with the 401(k) plan proceeds. If a grandmother’s relationship has fallen apart with one of her three grandchildren, and in her will she states her wishes to transfer assets to only two of her grandchildren, but the most recent beneficiary designation on file for her life insurance policy lists all three, the grandchild who has fallen out of favor will still receive his/her share. Wills and estate plans are not worth the paper they are written on if you do not make sure your beneficiary designations are properly coordinated with your wishes!
• Are Your People Still Your People?
• I’m not naive enough to think that most people enjoy updating their estate plan, but it really is necessary to periodically examine what you have in place to ensure that your wishes are actually fulfilled. Are your children’s named guardians still the people who you would like guarding your children? Have you even named a guardian for your children? Do you still want to give your uncle who has developed that gambling problem a share of your earthly wealth? At his age, is your older brother still mentally and physically capable to serve as your executor? Is your daughter who has now moved across the country still the best person to be your financial and health care power of attorney should something happen? Life changes and people do, too. If it’s been awhile since you looked at your will, there is a chance someone has passed away, someone has moved, someone is no longer capable to act in the capacity you formerly intended, or someone is no longer an individual who you would like to benefit through your final wishes. If any of these possibilities are the case, it’s probably worth dusting off your old estate plan to make sure there is no stone unturned.
• Is It Still Going Where It is Supposed To Go?
• Attorneys often use relatively flexible language in their client’s wills so that every time Congress slightly tweaks the tax law, their clients don’t have to come running back to rewrite their wills to match the new laws. While this is a great practice and an idea appreciated by all parties involved, the estate tax law has changed a good bit over the past few years - enough that I would urge you to take a look at your estate plan if it’s been awhile. For example, let’s say a lady has $3 million, and she specified in her 2003 will that she wanted to leave the maximum estate tax exemption at the time of her death to her son and the remainder to her husband. Well at the time the will was written in 2003 that meant $1 million to her son and $2 million to her husband. However, in 2013, that means $3 million to her son and not a dime to her husband because the current estate tax exemption is $5.25 million. I know this example has a lot of zeroes, but the point is the same - if the lady with the $3 million dies without reading this post and updating her will, her surviving husband will probably be saying more than “Uh-oh!”

 

Death is one of the two certainties in life according to Benjamin Franklin, and it is often a big enough burden on the deceased’s friends and family without a nasty financial surprise. If this post has given you the slightest doubt in your current estate plan’s ability to fulfill your wishes, I urge you to please make time to take a look.

 

-Tom

Household Spending Breakdown

Credit: jannoon028

One of the things I sometimes ask clients for is a breakdown of their living expenses for several months. Just like a tax return, you can actually tell a lot about someone based on their living expenses. Think about it - if someone had a few minutes with your checkbook or credit card statement, don’t you think they could develop a decent theory about your current income, paint a rough picture of how you typically spend your money, and maybe even infer a few things about your personality? Scary to think about, huh? (Don’t worry; I treat all client information with the highest degree of confidentiality.) Anyway, back to living expenses…

I usually ask clients for a breakdown of their living expenses for one of a few common reasons. Maybe I’m trying to figure out if they can retire, or why they’re finding it difficult to hit their saving goals. Perhaps they have a consistently negative cash flow (they are spending more than they are taking in) that is threatening their financial independence, or, sometimes, they simply have no idea where all their money is actually going. I don’t judge anyone’s expenses as I wouldn’t want anyone to judge mine, but it really can be eye-opening. I’ve had clients go through this exercise and realize they can retire if they pay off their mortgage and get rid of that fixed monthly expense, I’ve had clients realize to their horror they are spending more than five digits in a year at a particular discount retailer, and I’ve even had clients who appeared to actually spend more on drink than food. It’s their money, and I would never attempt to tell anyone how to spend their hard-earned money, but I’ve seen many people right before my very eyes become truly enlightened after we have taken the time to break down their household spending.

Rewind to the 2012 holiday season - sometime between Thanksgiving and Christmas: I harassed my very selective, very thrifty, and always-conscientiously-saving wife about how many “bargains” she acquired in a relatively short period of time. It wasn’t an accusation, and it didn’t lead to a “domestic difference of opinion,” but it did help motivate me to take the time to perform the very same analysis on our living expenses that I've done for so many others. I would later find out that I was dead wrong about my wife's spending and the magnitude of our joint discretionary spending relative to our living expenses. As a CPA and CFP, I didn’t even know my own household spending breakdown as well as I thought I did! As a friend of mine in college often used to say, “How embarrassing!”

I won’t bore you with all the details of the Presley Household Spending Breakdown, but I will share with you a few observations:

• Gas and automotive expenses are considerable. When I was a kid, I remember when gas was $.79 a gallon… I must be getting old.
• The costs of going out to eat can add up. I think I’ll ask my wife for a few more homemade dishes and cook a little more myself going forward. It’s probably healthier, too!
• University of Georgia football expenses for tickets and tailgating should not be a separate category from discretionary (optional) spending. Anyone who knows me at all knows I’m a loyal alumni and a huge fan, but I realized that I was actually viewing UGA expenses separately from our discretionary spending, like a normal person would view utility bills. I bet I’m not alone in this twisted logic, as trying to convince some people I know that golfing, hunting, tennis, and seasonal clothes shopping are not required would be a “tough row to hoe.” I’m still trying to convince myself that I really don’t have to go to every home game, but it’s still a work in progress.
• As many of you have probably picked up on from reading my other posts, I’m not a big advocate of debt. My wife and I work really hard and save really hard to try to put additional principal towards our mortgage whenever we can. This analysis actually showed me that we were putting unnecessary pressure on our cash flow and probably saying no to some opportunities that we should take advantage of as a relatively young couple. I still hate debt, and everyone should still have an emergency fund, but by closely examining our living expenses, I came to the somewhat obvious realization that taking a little more time to pay off our mortgage and having a full (and less financially stressful) life would probably be a better choice than paying off our mortgage as soon as absolutely possible and having a lot of spare time.

 

I hope you will take the time to look at the entries in your checkbook for the past few months, view those spending reports that are available online through many bank accounts and credit card accounts, or look at last year’s W-2 to see if you can figure out where all that money went. It can be helpful financially, but it can even be personally enlightening, too.

 

I still want to know what one client was feeding her cat. It had to be surf and turf!

 

-Tom

The Lightning Round

Credit: FreeDigitalPhotos.net

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 fiancés. 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