How Much Insurance Do You Need?

Although I don’t sell any type of insurance, I do frequently offer to examine my client’s life insurance policies, disability insurance policies, homeowner’s policies, auto policies, and umbrella policies. Proper risk mitigation is a huge part of a complete and well-executed financial strategy, so I always want to make sure my clients are adequately protected. Often after my examination and analysis I am able to give my clients additional confidence in how they are insured, but there are times where some work needs to be done. Everyone’s situation is unique and there are tons of different types of insurance policies out there, but I would still like to share a few tips and general thoughts that I hope you will find helpful.

How much life insurance do you need? Tell me when you’re going to die and what kind of lifestyle you want your survivors to have and we can talk, but there are some real deep, personal questions to think through, too. Most people wouldn’t want their surviving spouse to starve or the house to be foreclosed on, but do you want to leave so much that your surviving spouse and the infamous pool boy can fill the pool with cash? I typically advise each working spouse to have enough life insurance to pay off all debt plus a little extra to allow flexibility and comfort while the grieving takes place, emotional and financial. I often times see a non-working spouse with young kids (who is doing plenty of work at home!) with no life insurance coverage at all. If the non-working spouse raising the young kids passes away, the working spouse probably can’t financially afford to swap places, so some sort of insurance on the non-working spouse to cover daycare and nanny expenses is worth factoring in. If you have children, it’s also wise to factor in other future expenses such as college expenses and wedding expenses and adding on enough insurance coverage to make sure those items would be funded and covered as well.

How much disability insurance do you need? Well, in my opinion, Yogi Berra wasn’t that far off in Aflac’s commercial when he said you want disability coverage so that “If you get hurt and miss work, it won’t hurt to miss work.” I’m more along the lines of you want enough coverage so that if you get hurt and miss work, it won’t hurt too much to miss work. In many cases you could tighten the belt and make things work if your disability income was not your normal income, but you need to make sure you have enough disability benefits and for long enough so that you could cover your fixed expenses and still maintain a tolerable lifestyle. One other thing, if you can pay for your disability insurance with after-tax dollars (most employers take money out pre-tax), I would recommend you do so. If you’ve paid for disability insurance with after-tax dollars and you do end up getting hurt, you won’t ever have to pay income tax on your disability income!  If you paid with pre-tax dollars, you will. Double whammy!

How much home insurance do you need? Think how much would it cost to rebuild my home?  This usually goes up over time even if your house’s value stays about the same. If your home value appreciates over time, you really should keep a close eye on your coverage and discuss with your agent from time to time. You should also factor in things like the value of your furniture, clothes, jewelry and how much it might cost you to temporarily live somewhere else while your home is repaired or rebuilt. Flood insurance, earthquake insurance, identity theft insurance, and specific belonging coverage (like for an engagement ring) can be added and should also be considered. If you think you only have home insurance in place below or equal to the value of what makes up your home, you may want to give your agent a call.

How much auto insurance do you need? If you get an umbrella policy (see below), this becomes a lot easier because the excess liability piece of your coverage considerations becomes a little less important. Still, you want a reasonable amount of coverage to cover the cost of medical injuries to multiple people and property damage. You might hit a Leaf with only one passenger or you might hit a BMW with 4 passengers. Also consider things like uninsured motorist coverage and windshield coverage that may or may not be adequately included in a base auto policy. I came across a pretty neat suggested auto insurance coverage calculator the other day put together by. It’s worth your checking out and comparing to what kind of auto policy you currently have in place!

How much umbrella insurance do you need? This excess liability coverage comes in multiples of a million dollars’ worth of extra liability coverage and usually only costs a few hundred dollars per million. Should you hit a school bus and the parents of the children on the bus find out you’ve been moderately successful, you’re going to want this coverage if you want to keep your stuff. And since the purpose of this coverage is to help you keep your stuff, you usually want as much coverage as you have stuff, rounded up to the next million.

It’s always better to have insurance coverage and not need it then to need it and not have it, but it can be expensive to have more coverage than you need. If it’s been a while since you’ve taken a look at the risk mitigation part of your financial plan, go kick the tires!

-Tom

Insurance vs. Investments

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Not that long ago I had a meeting with a gentleman who candidly shared a frustration with me that I think is felt by many who interact with the insurance and brokerage worlds. The man told me that every time he expressed a desire to save a sizable amount of money for a new cause his insurance agent recommended a new life insurance policy and his broker recommended investing in new securities. The type of cause the man wanted to save up for and the timeframe never seemed to matter to the insurance agent or the broker. How could his insurance agent and his broker both be making the “right” recommendations?

What makes the feud between the insurance and investment industries so confusing is that neither side is necessarily wrong for trying to convince a consumer that they need what they are offering. There are plenty of really good life insurance agents out there. There are plenty of really good brokers out there. The thing is, there are times when what insurance agents are able to offer their clients may not be what is best for their clients versus investment accounts, and what brokers are able to offer their clients may not be what is best for their clients versus insurance policies. Essentially people have a “nail,” a desire to save money for a particular purpose, and they go to see two different types of “carpenters,” an insurance agent with an “insurance policy hammer” and a broker with an “investment hammer.” No matter the type of nail or the timeframe before the nail needs to be hammered in, each carpenter only knows to do one thing – use their particular hammer. As a Financial Advisor paid only by my clients, I don’t have any allegiance whatsoever to commission-based life insurance policies or commission-based investments, so I feel that puts me in the unique position of being able to serve as a neutral, third party for people such as the frustrated gentleman who find themselves caught in this age-old insurance versus investments fight. I believe that by focusing on the underlying reasons a person wants to save money and the relative timeframe before the person needs the money that I can determine whether it’s a job for life insurance or a job for investments.

Merriam-Webster defines insurance as “a means of guaranteeing protection or safety.” I tend to agree as I view life insurance as primarily a risk mitigation tool. If you are worried about your family having enough money to get by with a reasonable lifestyle, or you are trying to replace the loss of your future earnings if you prematurely pass away before your retirement years, a temporary risk mitigation tool commonly known as term life insurance is often the way to go. Because there is a temporary period of time when the insurance company might have to pay out benefits and it is relatively unlikely they will have to pay out benefits given most people’s life expectancies, this coverage tends to be relatively inexpensive. If you are worried about your heirs having enough liquidity to pay income or estate taxes after your death, or you are worried about having enough liquidity to buy out your deceased business partner’s share of the business from their heirs after their death, a permanent risk mitigation tool commonly known as whole life insurance is often the way to go. Because the insurance company is going to have to one day pay out benefits (as long as you keep covering the premium payments), this coverage tends to be pricier.

The issue of insurance versus investments usually arises when an insurance agent suggests that someone buy a whole life or universal life policy (essentially a whole life policy with a savings element) as a savings mechanism because part of your premiums can be invested and can later be borrowed tax-free and you aren’t just “throwing money away” like you might be doing if you go with a term policy and don’t happen to be “lucky enough” to die during the term. The problems with that typical pitch are that the money you invest is usually subject to very high fees (including investment management expenses and fees to the insurance company which can eat up the before-fee returns guaranteed by the financial solvency of the insurance company), and if you do decide to one day borrow from your policy, you will create a policy loan that starts charging you interest at usually a fairly high rate and can start eating away at your policy’s ability to remain in-force. Not throwing money away on a term policy you might never use really does sound appealing at first, but what about all that additional money you are using up year after year paying those higher whole life insurance premiums that could be invested, could appreciate, and could be used while you are actually alive?

Now to this point I’ve been pretty hard on insurance as an investment, but commission-based investments carry plenty of red flags in my book as well. How do you know a broker is investing in your best interest and not just to get their commission? How do you know they are not just trading or opening new accounts as frequently as they can to earn extra commissions at your expense? You are also going to be susceptible to the volatility and returns of the security or market you are invested in less the applicable investment management expenses, and if things don’t go well over a given time frame, that guaranteed investment return by the insurance company (even before all of their investment management expenses and fees to the insurance company) could end up looking pretty stable and pretty nice.

So what are you to do? Unless you have a real need for permanent life insurance, I typically recommend getting the less expensive term life insurance to mitigate the financial risk to your family of you dying before you reach your retirement years and investing the difference between the whole life insurance premiums and term life insurance premiums you saved with an investment advisor who is only paid by their clients. I’ve found this strategy often lets people get the most out of insurance and the most out of investing, at lower fees, while having more assets available for use during their lives.

I don’t see the complex debate surrounding the different saving strategies available to people through insurance and investments coming to an end any time soon, but before you decide which strategy is best for you, I’d definitely suggest you talk to somebody who has more than just one type of hammer in their toolbox.

-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

Switching to a Single Salary

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I’ve had a number of friends and blog readers ask me about switching from a two-income household to a one-income household over the past few weeks, so I can’t help but wonder if this is a topic many more of you may be interested in. Sure, this post is going to be primarily directed towards a family where one spouse has decided to stay at home, but many of the thoughts and tips I’m about to offer can also be applied by a family if one person thinks they are about to be laid off, a family if one of the breadwinners’ health is failing, or even an individual who is going from two jobs to one. Here are some suggestions:

• If you can, experiment before you try it. If Mom is considering staying at home to look after the newborn, agree to stop spending Mom’s current take-home pay for several months to see what it’s like. Except for an absolute emergency, I’d really urge you to hold true to not spending Mom’s take-home pay because lessons you may learn such as not being comfortable with your remaining emergency fund when you had to unexpectedly pay for that new HVAC unit are important lessons that may affect the overall decision and/or timing of going from two incomes to one income.
• Make a painfully detailed budget and see if you can make one income work. If Jane’s career is soaring and John’s career is painful, Jane and John should take a look at what would happen before John tells them to take the job and…, well take the job. There are going to be relatively fixed expenses such as mortgage payments and utility bills, and family revenue will be going down if John quits, so unless Jane makes enough to cover all of the fixed expenses and the discretionary expenses, it’s likely some of the discretionary expenses are going to have to go or at least be trimmed in order to make ends meet. Look to things like shopping, golfing, massages, lattes, unused gym memberships, vacations, and eating out. In happier news, if income is going down, it’s quite possible your taxes will naturally go down, too, so that will at least help a little! This is also a time where it could be beneficial to finish off debts such as student loans or car loans to reduce your fixed expenses and help the math work.
• In some ways, realize up front that you cannot keep up with two-income families. That being said, realize that they cannot keep up with you, either. What I mean is that if one spouse quits working in Family A, it’s possible that Family A’s financial trajectory and spending power may go down when compared to two-income Family B. However, when it comes to the percentage of the family’s time taken up by work, the flexibility of the family, and the amount of time on the weekends the spouses have to spend doing chores around the house, Family B may be a little jealous of single-income Family A. I’m certainly not saying one approach is better than the other. What I am saying is that from the onset, you need to realize there are often pros and cons that can make you different from other families you are close to.
• Put it all out there with your spouse. Going from a two-income household to a one-income household temporarily or permanently is far more than a financial decision. Why are you doing this? Do both of you want this? What if it doesn’t work for the stay-at-home spouse emotionally? What if it ends up not working for the family financially? Do the household chores/responsibilities change? Should they? What will the stay-at-home spouse do for entertainment and social interaction in light of the loss of friendly co-workers? Will the new entertainment and social interactions add to the family expenses? Should they? These are deep questions, and only you and your spouse can hack through them. The hacking does need to be done, though, as I’ve seen some serious resentment and jealousy fester from the employed spouse vs. the non-employed spouse and vice versa.
• Make sure the working spouse is properly insured. There are many careers where once you leave the working world, you become a little “stale” and lose some of your ability to become gainfully employed in the future. With this in mind, the breadwinner’s income stream usually becomes a little more valuable and, accordingly, needs a little more protection. I’d suggest you take a long, hard look at the employed spouse’s life insurance, short-term disability insurance, and long-term disability insurance. Don’t go crazy, just make sure you are adequately protecting the non-employed spouse’s financial well-being should the employed spouse become disabled or meet the proverbial fatal bread truck. If the stay-at-home spouse is providing a service such as looking after children that would still be needed if they were to become disabled or unexpectedly pass away, some additional insurance may also be needed on that spouse to protect the-income generating spouse's financial well-being!

Thank you to those of you who asked me about this topic. I’m always happy to help, but sometimes I can only help if you ask.

 

-Tom

When the Stork is Looming

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I don’t know about you, but I know a lot of pregnant people right now. Maybe it’s my age and stage in life, maybe there is something in the air, or maybe there is something in the water! I don’t know what it is, but there are going to be some overworked storks in 2015!

If we know one another personally, you probably know that my wife and I just had a child of our own. I'm still working on my swaddling technique and I haven't quite figured out how to shove the “pack and play” back in that tiny little bag, but I have learned a few things over these past several months. For my currently pregnant and maybe one-day pregnant readers out there (and their spouses), here are seven financial tips:

1. If possible, get health coverage where the insurance company will pay 100% of your costs after your deductible and copayments have been met. Call me Captain Obvious, but births are significant health care events, so they are going to have a price tag. If you’re on a plan that covers 100% after you reach your deductible, you have the comfort of being able to back-in to what your birth medical expenses will likely be without having to wonder how much it could cost if there are complications. If you are planning to have children, health insurance is a good thing to address before you are pregnant because you don’t always get an open enrollment period before the baby arrives. You can also go ahead and strategize about whose plan the baby is going to be on if both parents have health insurance.
2. Boost your life insurance or get life insurance if you haven’t already. If Mom is going to stay at home for a while or shift to part-time, Mom needs to have some significant life insurance on Dad should something happen to Dad and his paycheck. If Dad is going to keep working and Mom is going to look after the baby, Dad needs to have some significant life insurance on Mom should something happen to Mom and her child care services. Interchange “Mom” and “Dad” here as needed, but you get the picture. An article I recently read pointed out that going ahead and boosting a woman’s life insurance early in her pregnancy may be a good idea as complications such as gestational diabetes could arise during the pregnancy and obviously, situations could occur at birth. As you would probably expect, it’s cheaper and easier to get life insurance if you have fewer health issues and less treatment history.
3. If Mom is going on maternity leave, there is a good chance she will be drawing short-term disability that will very likely not be 100% of her pay. This means you have a pay cut coming, and you need to plan accordingly! I’d suggest ratcheting up the savings now if Mom is still working so that you can offset your upcoming pay cut when the time comes and not have to significantly change your lifestyle.
4. Many of our friends that are already parents have warned us about looking after “us.” A baby can be a wonderful addition, but he or she takes time and energy, and can subtract from what you can offer your spouse and your friends. In that spirit, I’d also start saving for date nights and friend nights. It’s not just dinner and a movie anymore! It’s going to be dinner, a movie, and a babysitter. Look after the baby, but look after your marriage and your friends, too!
5. Pay off your credit cards! You should do this whether you are having a baby or not, but I can already tell you that you’re going to want to have as much spending power available to you as you can. Baby stuff is expensive! I’m sure you’ll get some gifts (and my wife and I are very appreciative of what we have received), but you’re not going to get all that you need without buying some of the stuff yourself.
6. In the spirit of my comment about baby “stuff” not being terribly cheap, don’t overspend or overbuy baby stuff, either. It makes me sound like an old man, but I can tell you for a fact I wasn’t raised with all the gadgets and gizmos that some of these baby stores tell you that you “have to have.” My wife asked a good friend of hers who was a recent Mom to accompany us as we started considering what we would need for our new family member, and I think that was one of the best ideas we’ve had. My wife may have invited her friend for comfort, support, and wisdom, but every time she told us we didn’t need the premium plus version of that bottle, or the spa edition of the bath apparatus, or the nuclear-powered thermometer, I literally felt money going back into my wallet!
7. Try to figure out what the new normal budget is going to look like. Whether it’s pay cuts, health insurance expense increases, double income households becoming single income households, daycare expenses, or lots and lots and lots of diapers to be purchased, your budget probably won’t look the same after the little one arrives. No matter how cute those little hats and booties are, your financial principles need to stay the same: spend less than you make and live within your means.

I’ve got a feeling I’m going to be writing a lot of posts at strange hours over the next few months…

-Tom

How Saving Money Can Cost You

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I bet you thought I’d lost my marbles when you read this post’s title, but the title is as I intended. Saving money is wonderful, and I often preach the value of saving until I am blue in the face, but not always. Sometimes (hard swallow) saving money may not be so good for you. Saving money can be bad if…

• You buy something with a coupon that you would have otherwise not purchased. You didn’t save money; you got a good deal on an unnecessary expense.
• You buy something that is incrementally or insignificantly cheaper than a higher quality or longer lasting product. I’m talking canned soup, car batteries, air filters, toilet paper, Oreo’s, and other products like these.
• You already have an adequate rainy day fund yet you keep adding to your cash account that is earning you little interest while you have credit card debt, student loans, car loans, and home loans that are costing you lots of interest.
• You already have an adequate rainy day fund, and you are not contributing to your employer’s 401(k) or retirement plan (or you are not contributing enough to get your employer’s match if they offer one).
• You already have an adequate rainy day fund, and you are not investing anything in the stock market. Whether through annual IRA contributions or deposits to a taxable brokerage account, you need to be investing sooner rather than later so you will have a longer time frame to reap the rewards of long-term growth.
• You already have an adequate rainy day fund, but you do not have or adequately have life, disability, property and casualty, and/or excess liability insurance. Having no premiums or low premiums is nice until you need your insurance!

 

Finally, there are two currencies in life: money and time. Saving money is really important, but so is utilizing time. I once had a meeting with an elderly client whose health was beginning to fail, and he asked me what he was supposed to do now that he had all this money and no time to enjoy it. His degree of saving and holding onto his money was self-imposed, so I didn’t feel guilty, but I did feel sad for him. I’ll probably never recommend that you risk your financial security to make a memory, but it is important to be careful how many times you say, “No” or “Next time.”

 

Anything in enough excess can be bad for you. This includes fanaticism for a sports team, chocolate, and saving money. Keep saving, but not too much.

 

-Tom

Keeping It in the Family

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A common goal of many of the clients I serve is keeping “it” in the family. No, that’s not a south Alabama reference; I’m talking about keeping heirlooms, assets, and wealth inside the family clan. There are many financial aspects that families need to consider, and some may require complex, technical, and creative solutions to get the intended job done. My intent in this post is to scratch the surface and bring a few common issues I’ve seen to your attention.

Annual exclusion gifting- In 2014, you can give $14,000 or less to another individual, and it will be exempt from gift tax implications. This is a great way to keep assets in the family, as the transfer is exempt from gift taxes and can reduce the assets of older family members that could potentially make up an otherwise taxable estate. However, this practice can also create problems if the recipients start feeling entitled to the gifting or become dependent on it and the donor can’t bring themselves to cut off the giving if their own financial situation becomes less favorable.

Unintended Will Consequences- Leaving things to family members by will is also a great and somewhat obvious way to keep things in the family, but there can still be problems. What if you leave your residence to your two kids 50/50 and one wants to sell it and one wants to keep it? Your bequest just became a family feud! What if your will leaves all of your assets to your second wife and her will leaves all of her assets to her kids from her first marriage? If you have kids from your first marriage and predecease your second wife, your kids could be totally left out if the proper estate planning is not in place! What if you leave all of your stuff to your daughter and she couldn’t care less about your beloved coin collection that your brother would love to have? Without specifically bequeathing personal effects, the possessions that some people in your family view as treasures could be treated as trash, literally!

Forgotten Beneficiary Designations- What if you forgot to change the beneficiary designation of your company’s life insurance policy to your second husband after you remarried and the proverbial bread truck comes by? Forget you look like Wile E. Coyote - your second husband would be left without an asset he could have really benefited from while your regrettable ex-husband would be the recipient of a most pleasant and unexpected surprise! Remember, beneficiary designations trump your will!

The “Tax Bite”- There are numerous strategies that you can employ right before the end of your life (and even at death) to reduce Uncle Sam’s potential income and estate tax bites out of your estate. Less tax means more money to your charities, causes, and heirs. Uncle Sam’s share can be sizable, so tax planning should always be considered if you want to keep as much in the family as you can.

Closely Held Family Business Succession- If there is a closely held family business involved in your affairs, there definitely needs to be a clear succession plan in place to ensure the business entity stays in your family or at least compensates your family. Far too often when a business’s founder or leader passes away, a family disagreement between heirs with different objectives, expectations of the business, and degrees of interest or experience with the business comes to light. If the business just automatically goes to the spouse, that person could be forced into a position they don’t want to be in, or frankly, aren’t good at. Think of how painful it would be for the former business owner looking down to watch the value he or she painfully built up brick by brick fall apart, fail, or become a relationship strain for their family.

Annual exclusion gifting, careful will considerations, proper titling and beneficiary designations, advantageous tax planning, and thoughtful family business succession planning can help keep it in the family. Many people don’t want their heirs to know too much, and I totally get that, but I’d also counter that you don’t want your heirs to know too little either. I’ve heard it said that people spend forty years accumulating assets, twenty years trying to preserve assets, and about thirty minutes figuring out how to distribute their assets. If you want to keep family peace, leave the legacy you intend, and keep as much of your wealth in the family as possible, I’d advise getting together with your financial advisor, estate attorney, and accountant to take a look.

-Tom

Two Recipes for Success

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My wife and I both enjoy cooking. She’s a much better baker than me, and I’m a little bit more of a grill master than her, but if you ever get the chance to eat at our table, I don’t think you’ll be too disappointed regardless which one of us is the head chef. One night last week I happened to be working on a grilled chicken Greek salad for our dinner and was thinking about my day at work. I had a simple yet profound realization: Achieving financial success is a lot like cooking. Financial success is like cooking in the sense that both take time, attention, skill, and most importantly, adding the right ingredients at the right time. What I mean is that:

• Owning a bunch of stocks and real estate without having enough cash on hand is like having a whole bunch of macaroni and not enough cheese. The first time you face some financially significant, unforeseen expenses or are forced to live through a downturn in the stock or real estate market, you will find it a lot less pleasant trying to make ends meet with potentially depreciated stocks or illiquid real estate than you would if you had adequate cash savings in place. It could just be me, but if I’m going to err on the ratio of macaroni and cheese, it’s going to have a little extra cheese.
• Having a bunch of cash, CDs, and bonds, but no stocks or “growthier” assets to keep up with inflation, is like serving oatmeal without raisins, butter, or brown sugar. Sure, the oatmeal may initially make you feel nice and warm, but it’s not going to be enough to tide you over against long-term inflation.
• Saving only in retirement accounts like 401(k)s and Traditional IRAs, but not saving any funds in taxable portfolios or brokerage accounts along the way, is like stockpiling nothing but hot salsa for your chips. It’s good that you’re saving up, but it’s going to burn from a tax perspective when you need assets to supplement your cash flow in retirement (withdrawals would be taxed at ordinary income tax rates). Wouldn’t the taste of a little milder salsa or maybe some queso from a taxable portfolio or brokerage account help break up the tax heat in retirement (withdrawals would be taxed at capital gain income tax rates)?
• Keeping a bunch of debt without purposefully striving to extinguish that debt is like resigning yourself to the fact that your salt shaker has a gaping hole in the bottom of it without doing something about it. Plug the hole in your salt shaker and your monthly cash flow by paying off debt and eliminating its nasty monthly strain on your finances!
• Having a great investment strategy without addressing your life insurance, disability insurance, property and casualty insurance, or estate plan is like painstakingly picking out all of the best strawberries for a nice fruit salad, but closing your eyes and randomly selecting all the other types of fruit required to complete the dish. It only takes one really bad banana to mess the whole fruit salad up. So remember that it is crucial to address all parts of your financial plan and examine all components of your overall financial security.
• Trying to plan for retirement in an afternoon or completely fix the path your finances are headed down in one quick swoop is like trying to make a Thanksgiving turkey five minutes before company arrives. Developing and implementing a successful plan that helps you achieve your financial and life goals is more like making that perfect turkey, a six layer cake, or a really delicious stew; it takes time and care.

I really do enjoy cooking, and most days, I really enjoy financial planning. Maybe that’s because in many ways they are not that different. In terms of being a chef or a wealth advisor, I know that I’m not yet Bobby Flay, but my recipe book and cooking techniques are growing every day. As always, please don’t hesitate to let me know if you or someone you know needs “a cup of sugar” and think I might be able to help.

 

Finally, you might have noticed I titled this post “Two Recipes for Success.” If you’ve read this far, you’re in luck! Here’s a second recipe, and it’s one of my family and friends' favorite meals I make:

Tom’s “Barcelona Chicken”

Requires:
Chicken Breasts
Sweet Baby Ray’s Original Barbecue Sauce
Cholula Hot Sauce, Tabasco, or Hot Wing Sauce
Grandma’s Molasses
Honey
Velveeta Cheese
Red Onion
Tomato
Salt and Pepper

 

Directions:
1) Preheat oven to 375 degrees.
2) Take chicken breasts and remove excess fat. Lightly season with salt and pepper on both sides and lay in a baking dish. Drizzle chicken breasts with Cholula (or Tabasco or hot wing sauce), Grandma’s Molasses, and honey. Generously smother with Sweet Baby Ray’s.
3) Place chicken in oven for 45 minutes.
4) Dice tomato into little cubes.
5) Slice onion and sauté in skillet with a little olive oil. If onions are very strong, throw in a little pinch of sugar. Sauté until slightly browned and then remove from heat.
6) After 45 minutes, remove chicken from oven and cut open one chicken breast to make sure it's almost done cooking. Then lay one slice of Velveeta cheese on each chicken breast. Toss back in the oven for 5 more minutes until the cheese is nice and melted.
7) Remove chicken from oven and serve on plates. Top each chicken breast with a few of the diced tomatoes and sautéed onions.

Bon appétit!

-Tom

The Homemaker Retirement Plan

Credit: Ambro

There is a lot of financial advice out there for people who are working and for people who are retired. I like to think I’ve helped add to that. However, there is also a pretty sizable group of people who a lot of the best and brightest financial gurus, and your humble blogger here, don’t address nearly often enough: homemakers. A few Google searches and a personal reflection on all of the financial articles, commentaries, and calls I’ve read and listened to over the past several years confirmed my suspicion that financial advice for homemakers is pretty limited, so I hereby dedicate this post to the homemakers of the world. This one’s for you!

“Stay-at-home moms,” “Mr. Moms,” spouses who don’t need to work, spouses who don’t want to work – whatever you want to call them – for a few minutes, let’s call them homemakers. As I mentioned earlier, it's the working spouses who are usually sought after by the lawyers, insurance agents, and brokers of the world, but I believe homemakers, too, have a need for some very important financial planning. So here are three suggestions to help homemakers work toward a successful retirement plan, hopefully just like their employed spouses.

• Insurance- It’s crucial to make sure both the breadwinner’s and the homemaker’s lives are adequately insured.
• It may seem like a no-brainer to have a sizable life insurance policy on the breadwinner, but is it enough? Is the policy large enough to allow the homemaker adequate time to jump into the labor force? Is the policy large enough to allow the homemaker and the rest of the immediate family to maintain their lifestyle if the homemaker’s salary is not going to be as large as the breadwinner’s salary was? If there are young kids involved, is the policy big enough to provide for the additional supervision expenses that will be incurred if the homemaker has to go into the office instead of run the household?
• Some of you may ask why you would want to pay for a life insurance policy on a homemaker. Well, if young kids are involved, is the breadwinner going to quit an income-producing job and run the household if the homemaker has an unfortunate demise? In many cases, that’s probably not a sustainable option, so factoring in the additional supervision expenses that will be incurred by the breadwinner if the homemaker is unable to run the household is a necessary consideration and can probably best be addressed by a relatively small and short-term life insurance policy.

• Spousal IRAs- Not many of those brokers obsessed with only the working spouse cover this, but the non-working spouse can now also make annual IRA contributions ($5,500 per year or $6,500 if over age 50) as long as their working spouse has enough earned income ($11,000 per year or $13,000 if over age 50) to cover both of their contributions. Five or six thousand dollars a year may not sound like a healthy retirement plan right off the bat, but let’s say a homemaker was able to stash $5,000 away in a Spousal IRA every year for the thirty years their spouse worked - that would be $150,000 assuming no stock market growth at all! Isn’t it crazy that by diligently saving and contributing a few thousand dollars a year to a Spousal IRA that a homemaker could end up with a retirement account comparable to many people who are actively employed for their whole working life?

• Managing Expenses- Some homemakers may consider themselves the head of their household, while others might consider their employed spouses the head of their household. Either way, I think it’s probably safe to say that the homemaker has a clearer understanding of the day-to-day operating expenses of the home. Therefore, I think it is crucial for the breadwinner (who probably has a better idea of the future income coming in) and the homemaker to keep each other updated on their financial forecasts. A homemaker’s insights on upcoming expenses and cash flow needs can be valuable information to the breadwinner (and even their financial planner) in making sure the family budget is going to work.

 

I think the three suggestions above should definitely be considered by all homemakers and their spouses, but if I haven’t convinced you, let me try one more way… I hope you will pardon me for being rude, but do you make more than $96,261 per year? You see, I read an article early last year that showed what you would have to pay a chef, house cleaner, driver, laundromat, lawn care provider, and child care provider to do the average tasks done by a homemaker, and $96,261 was the number the article landed on! With that being said, I think it’s safe to say that although a homemaker’s work may not earn the big bucks, a homemaker’s work is often worth the big bucks, and therefore deserves proper financial planning considerations!

 

-Tom

Per Stirpes or Bust

Credit: Grant Cochrane

Do you have a will that leaves things to friends and family you care about? Do you think there is a pretty good chance you might inherit some money from someone who is still alive? If you answered yes to either or both questions, listen up!

Say you have a will and you wish to leave your fortune to your three sons: Alvin, Simon, and Theodore. Say Alvin, Simon, and Theodore have all grown up, and each has a son of his own. Well, if you wrote your will to state that the remainder of your estate was to be divided up equally between Alvin, Simon, and Theodore, what would happen if Alvin died before you had a chance to update your will? If you had the Latin legal phrase known as “per stirpes” included in your wishes (which means “by root or representation”), then Alvin’s son would inherit Alvin’s portion, and Simon and Theodore would inherit their portions. If you do not have per stirpes written, and instead have the phrase “per capita” included in your wishes, then Alvin’s son would get nothing, and Simon and Theodore would split your estate 50/50. Talk about a family feud! If you don’t have “per stirpes” or “per capita” included in your wishes, and Alvin died before you, I honestly couldn’t tell you how your will would pay out without carefully reading the entire document.

I’m not writing this today to scare you to death so we can see how your estate plan shakes out. I’m writing this to encourage you to dust off your latest will and make sure it actually reflects your last wishes, whether per stirpes or per capita. If you think you might inherit some money from someone who is still alive, I encourage you to figure out a way to share this post or drop some sort of hint to make sure your heirs are looked after should something happen to you before your likely grantor.

Finally, please make sure your retirement accounts (401(k)s, IRAs, deferred compensation plans, etc.) and life insurance policies’ beneficiary designations also reflect the last wishes of your will. This is imperative because retirement accounts and life insurance policies' beneficiary designations trump a will. For example, if your 401(k) beneficiary designation says Alvin, Theodore, and Simon per capita, and your will says everything to Alvin, Theodore, and Simon per stirpes, your 401(k) will actually be split per capita! Remember, that would mean your grandson (Alvin’s son) would not see a dime from your 401(k) should Alvin predecease you!

Most of the clients I work with seem to want “per stirpes” to be in place, but that is neither right nor wrong. If you want to ensure that only the people you have specifically named will be able to initially receive your assets, it’s perfectly fine to have “per capita” in place. I just want to encourage you to take a look at your will and beneficiary designations if you are not sure what you have in place because relying on the defaults could lead to your final wishes being skewed and some pretty unhappy chipmunks.

-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

You Just Had A Kid, Now What?

Credit: Maggie Smith

I love kids. One day I want one; maybe even two. Okay, you caught me, I’d take three, but that’s about as many as I care to think about. My wife and I will be thankful for however many kids we end up having, but we already know kids are hard work.

Take me for instance: I once threw such a fit in a shopping mall that, as my dad carried me out, I started kicking and screaming violently. I’ve been told a cop stopped my father because the officer thought I was being kidnapped… until my mom could set the record straight. There was also a period where I perfected the art of throwing my pacifier under tables to the most difficult spot to reach possible. My proudest moment though, came when a cook at a Waffle House told my parents they would have to leave because their kid was “disturbing the regulars.” Hard to believe anyone could forgive that, but my parents forgave me, and in time, my whole family forgave the Waffle House chain. We laugh about it now.

I hear there is no greater love than a parent has for a child, and as I said, one day I hope to experience it. I look forward to laughing with my wife and children as our family grows and the years roll by, but I can also tell you from professional experiences that being financially responsible for a child is no laughing matter. Today, I’ve got a few quick tips for you after you start having children to make sure you’re not the one saying, “Wahhhhhhhhhh!”

• Increase your savings. Your cost of living just got more expensive. You may have gotten a new tax exemption, but the tax savings will come nowhere close to what having a child will cost. According to new government data, a middle class family may spend nearly $235,000 on a kid from birth through age seventeen. That’s more than most people spend on a house, and that figure doesn’t even include college! Because your living expenses are on the rise, your rainy day fund needs to be on the rise, too. I know formula and diapers are expensive, but even if you are temporarily becoming a one-income family, you have got to adjust to get your savings up to 9-12 months’ worth of living expenses. Your kid could get sick, your car could fail, or you could have a pipe burst in your home. I know increasing your savings will require sacrifice, but it’s not just about you (or even your spouse) anymore!
• Get adequate life insurance. I was fairly serious when I mentioned this last week after buying a house, but now I literally want you to envision me banging my fist on the table. If something happens to you and you can’t work, can your spouse and child live comfortably? How is your spouse going to earn money if he or she is staying home with the kid? How can your spouse keep working and afford for someone to look after your child during the workday? See the paradox your untimely death could put the people you care about most in? You can prevent this danger by getting enough life insurance to eliminate your debts, provide for adequate childcare for a number of years, and provide a replacement stream of income in case, due to unfortunate circumstances, you aren’t able to contribute. Life insurance premiums are often not as expensive as you might think, and can your family really afford you not having life insurance? You could get hurt instead of passing away, so disability insurance may also be worth some careful consideration.
• Get a will. Once again, you really should have taken care of this when you got married, but if you did not, now is the time. I say this not for you or for your assets; I say this because a will is how you name a legal guardian for your child. I don’t know about you, but I want to have some say as to who would look after my offspring should my wife and I pass away. Just a thought, but if you’re going to pay an attorney to draft a will, you might as well finish your estate plan with power of attorneys and health care directives while you’re at it.
• Start saving for college. As I mentioned in a previous post, there are many effective ways to pay for college, but the most important thing is to start saving sooner rather than later. I personally recommend 529 qualified tuition plans as the best technique, as they are relatively easy to set up, and many investment platforms have an option for your investment allocation to change automatically from more risky to more conservative as the child gets older. After the initial setup, all you have to do is save and watch your plan assets, and your child, grow. All that being said, let me reiterate that your retirement plan is more important than saving for your kid to go to college. Putting your child in a situation years down the road where you do not have the assets needed to sustain yourself in retirement can be a lot more emotionally difficult and financially burdensome to your child than asking him or her to apply for scholarships or to pay off their own student loan.
• Teach your kids about money as they grow. This needs to be an ongoing process from not always giving a quarter for every gumball machine, to offering an allowance in return for chores, to encouraging your child to get that first job. Everyone is different, but the “money messages” my parents instilled in me as I grew up to always live within my means, to save whatever I could, and that I could be whatever I wanted, but would have to earn every inch and dime are still with me today. These lessons taught me that I would one day have to spread my wings and fly, and they have molded me into the person I have become. I’ve heard it said that, as parents, you need to remember you are not just raising kids, you are raising adults.

Don’t worry. The diapers and screaming will quickly turn into borrowing your old car and dating. Follow the above steps, teach your kids a little about life and finances, and love them a lot. One day your kids might just fly away, make you proud, and come off your “payroll!”

-Tom

You Just Got Married, Now What?

Credit: FreeDigitalPhotos.net

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

Zilch?

Credit: FreeDigitalPhotos.net

It seemed like a normal day. I was simply riding in an elevator. There was the stereotypical older, corporate-looking gentleman who was clearly running late and giving off a slight aroma of coffee grinds and cigarette smoke. The friendly-enough looking lady who had just finished her morning jog, but was completely engrossed in her smartphone, was also present. With these two characters to choose from, who could really blame me for going with the always-safe, silent elevator ride approach? Luckily, as we zoomed upward into the Atlanta skyline, there were some news headlines scrolling across the bottom of a small television in the elevator to save me from my momentary imprisonment. Then I saw a most disturbing headline: "Survey: 49% of Americans not saving for retirement." Say whaaaaat?

As the bell chimed and the doors to the elevator opened, this horrified financial planner raced to a computer. As much as I would like to report to you that the disastrous news in the elevator was fiction, it was not. I quickly found an article on CNNMoney titled "49% of Americans saving zilch for retirement" that seemed to confirm my fears. Not only did the article say 49% of Americans are saving zilch, but it also stated that 56% of people ages 18-34 are currently not contributing to any retirement plan. Worst of all, the article reported that almost 50% of people aren't even planning on contributing to a retirement plan. I cannot reiterate enough that in today's world, YOU CANNOT AFFORD NOT TO BE SAVING FOR RETIREMENT!

Retirement, "schmetirement" you say? Are you willing to bet that you will have a nice pension or can live off of Social Security? You'll start saving for retirement when it gets closer, right? Well that's at least what 49% of our peers are evidently saying! They don't realize that when I tell people they need to save for retirement today, it is not a polite suggestion. If people don’t save for retirement, they may never be able to retire! Simply put: If you ignore reality and do not make the necessary sacrifices to save for retirement now, you will most likely die working, because you will have to.

It's because of these strong feelings and convictions that I want to share with you a high-level view of the short-term and long-term plans you need to follow in order to secure your financial future, and your retirement chair at the beach.

Short-Term Retirement Plan:

• Start building up your savings- $25 a month, $100 a month, $500 a month… It doesn’t matter how much at first; it matters that you are starting a habit. Work towards a cash reserve of 6 months’ worth of expenses.
• Pay off your credit cards- Make all the minimum payments on all your debts you have to in order to avoid late fees and protect your credit score, but also start hacking away at any credit card debt you may have. Once you pay off all your credit cards, make sure you keep them paid off every month.
• Start saving for retirement- Start contributing to your employer’s retirement-savings plan. Put in what you can afford, but make sure you are taking full advantage of any company matching. If your employer doesn’t have a plan, open your own IRA with a wealth management firm or someone like TD Ameritrade or Fidelity.

Long-Term Retirement Plan:

• Keep on saving- Replenish that 6-month cash reserve after your emergency dental surgery or car problem. Work towards 12 months’ worth of expenses.
• Pay off debt- Look up all the interest rates on all of your student loans, car payments, house payments, home equity lines of credit, etc. Order them from highest to lowest. Make regular payments on all of your debts, but direct all of your excess cash flow at the debt with the highest interest rate. Once that debt is gone, move on to the next highest. Being debt-free lowers your living expenses and gives you a sense of security.
• Keep saving for retirement- Prudently increase your contributions to your employer’s retirement plan. Start contributing to an IRA if you haven’t already. Think two words: nest egg.
• Make sure you have adequate insurance- You need to have a back-up plan in case you get hit by a falling refrigerator or lose a fight with a wood chipper. See what disability benefits you have with your employer, but go ahead and ask your car insurance/homeowners insurance provider(s) about life insurance and disability insurance. You especially need to consider these unlikely and unpleasant scenarios if other family members are depending on your wages.

Please plan for retirement so you're not part of the 49%, I beg of you. Follow the short-term and long-term principles I outlined above, and I can almost promise that one day you will be well on your way to a comfortable retirement.

Finally, friends don't let friends not save for retirement. Please pass these principles on to people you know who need them.

Well I’ve got to run. After that elevator ride, I think I'll take the stairs! 

-Tom

"The Bear Necessities"

Credit: Michael Elliott

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

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

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

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

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

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

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

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

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

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

-Tom