Stumped!

It was slightly more than a routine trip to the vet, but it was not supposed to be a big deal. Our dachshund, Miss Lucy Bristow, was going in for her five-year dental cleaning and some X-rays. Sure, it wasn’t a “normal” visit, but I wasn’t ready for what was coming my way. I wasn’t prepared for the financial question on page two of the obligatory paperwork. It read something to the effect of:

Should your pet experience a life-threatening injury or illness, every effort will be made to reach you. However, if you are unable to be reached, you authorize $__________ worth of treatment/services/materials to be performed/used by the veterinary practice in an effort to save your pet’s life.

Woah! What a question! I may help people with their finances for a living, but I’ll be honest with you, at that moment, with an unexpected question like that, I didn’t have a clue. I was stumped! To make matters worse, I knew my wife was tied up in a client presentation. This decision would be mine and mine alone.

In my efforts to stall so I could regain some composure, do some soul searching, crunch a few numbers, and consider what my wife might do to me if something were to happen to Lucy and I didn’t put quite a big enough number in that giant blank space, I asked one of the nurses what people usually put. She laughed and said, “It’s a tough question, isn’t it?” I nodded. She said she had seen everything from $0 to $15,000! Woah again! Still, I was relieved to hear her words as the number I was considering was definitely between the two she offered.

I tell you this story for two reasons: 1) So if you are a pet owner you can go ahead and be thinking of your answer should you ever be asked that question and 2) To make the point that there are some really hard financial questions out there that you need to be able to tackle. Questions such as:

• Can you afford that bigger house?
• Can you afford for one of you to quit working?
• How much auto, home, life, disability, long-term care, and liability insurance do you need?
• Are you saving enough for retirement?
• Can you retire?
• How much can you afford to spend?
• Who should be your Power of Attorney?
• How would your assets be distributed if you passed away tomorrow?

Sometimes life throws you a financial surprise (like a blank space on a veterinary form), and it’s okay to be temporarily stumped. Take a deep breath, think through your options, talk to a clear-headed, neutral third party if need be, and figure it out. Other tough financial questions are the “five-hundred-pound gorillas in the room” until they are answered. I’d suggest you go ahead, bite the bullet, and answer those. Knowing how you are doing is important. Knowing what you can afford to do and not do is important. Knowing all would be financially okay for your loved ones if something happened to you is important. Those questions can and should be answered.

I finally gave the nurse a number. Later, when I was telling this story to my wife and asking her what she would have put, I found out that our numbers were actually really close, but mine was a little higher. Whew! Either way, I’m happy to report Lucy came out just fine, and that’s what matters!

-Tom

12 Simple Things You Can Do to Pay Down Debt

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One of the key requirements to making it financially is to work towards paying down your debt and becoming debt-free. It’s a marathon process, not a sprint, and it’s not very much fun, but it is oftentimes critical in order to really achieve financial success. Financial author Dave Ramsey has a quote related to this that I like a lot: “If you will live like no one else, later you can live like no one else.” With that goal in mind, here are twelve simple things you can do to give yourself more cash to put towards paying down your debt.

1. Request rate reductions. At least once every couple of years, call your auto and home insurance provider, your television provider, your security system provider, and anyone else who is sending you a bill and see if they can give you a better rate. Ask them if there is anything they can do to lower your costs as you are looking at your monthly expenses. Look at it this way, there’s no harm in asking!
2. Plan before you go to the grocery store. This works for any store, but especially the grocery store. Buy what you came to get, and unless it’s truly the deal of the century, nothing else. If you want to take a few minutes and look through the coupons before you go, that could lead to additional savings, too.
3. Unplug the home phone. Other than telemarketers and maybe a family member or two, who calls you at home? This is a real easy way to save some cash every month, so go ahead and call the phone company if you haven’t already. Besides, you’re probably already paying more than enough for your cell phone!
4. Sell your unused items. If you have a possession that has dust on it or you’ve forgotten you own it, you probably don’t need it. If paying off debt means more to you than those types of objects, it’s time for a garage sale and some online listings. Put the cash proceeds towards something you do need; less debt!
5. Grow a small garden. If I had $3 for every time I buy a squash or a zucchini. What? My wife likes squash and zucchini (and now I do, too). Seriously, have you seen how expensive fresh produce can be? I’m not talking about growing your own farmer’s market, but a few berries, a few vegetables, or even some herbs could go a long way towards reducing your grocery bill. Besides, I could use a little sunshine on the back of my neck!
6. Lower your cable package. So many channels, so little time. So many channels, so much cost. So many unused channels. Need I say more?
7. Bye bye magazines. The next time you’re over at someone’s house look at their magazines. More often than not, I’ve observed that they will be in mint condition. Lots of people pay for lots of magazines they don’t read. The savings may not be substantial, but by cancelling unused subscriptions, you save cash, you save clutter, and you save your mailman. Win, win, win!
8. Read a book. I’m serious. It may be the year 2015, but you can’t forget the enjoyment of one of the original entertainment devices. Books are relatively inexpensive, can offer hours of pleasure, and are a lot of fun.
9. When you go out to eat, get two hydrogens and an oxygen on the rocks (just ask Jennifer Lawrence…). Seriously, iced tea, soda, lemonade, beer, wine, and cocktails are all delicious, but they aren’t free. Improve your personal health and your wallet’s health and consider going with delicious, usually free water.
10. Eat at home. In line with my beverage comment, the food from eating out can be expensive, too! Sure, go on those date nights and celebrate the weekend, but if you’re trying to save cash, having a reservation at home is often the frugal way to go.
11. Make bigger meals. Oh I can hear the super health-conscious people screaming already, but please hear me out. If you are making a salad with lots of vegetables and balsamic vinaigrette for dinner, why not make enough for lunch the next day? It is probably cheaper to add another tomato, another bag of spinach, and use a little bit more off that cucumber you’re going to throw away at the end of the week than if you make a totally different meal for your lunch. Yes, you’re eating the same meal twice in rapid succession, but you’re working towards paying off your debt in rapid succession, too!
12. Make your coffee at home. I see so many lattes and chai teas in elevators. They are delicious, there’s no doubt about it, but they’re expensive, too. I once wrote about one expensive cup of coffee turning into a sports car as some of you may recall. Right now we’re focused on debt, not a sports car, but the principle holds true. Like other frequent pleasures and splurges, daily cups of expensive Joe can slow your financial progress.

 

I didn’t title today’s post “12 Easy Things” or “12 Ideal Things” because they may not be easy for you or sound highly desirable. That’s okay. These 12 things are just relatively simple to implement, and they can be good “medicine” for your financial health. It’s not quite Mary Poppins, but a few spoonfuls of these medicines might just help your debt go down.

 

-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

Why You Need to Rebalance



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Suppose you invested $100,000 on January 1st, 1995. You invested $50,000 in the Barclays U.S. Aggregate Bond Index and $50,000 in the S&P 500 (U.S. stocks). Between January 1st, 1995 and December 31st, 2002, you were in for quite a ride as the Dotcom Bubble expanded and eventually popped. Your bonds would have offered annual returns of 18.46%, 3.64%, 9.64%, 8.70%, -0.82%, 11.63%, 8.43%, and 10.26%. Your stocks would have offered annual returns of 37.58%, 22.96%, 33.36%, 28.58%, 21.04%, -9.11%, -11.89%, and -22.10%. Declining interest rates and the mania surrounding Internet-based companies fueled some really good returns during that period. In fact, if you didn’t touch your $100,000 portfolio at all during that period, I’d estimate you would have had around $206,000 by the end of 2002.

Do you notice how the last three years of S&P 500 returns from 2000 – 2002 were negative as the bubble popped and a recession began? Wouldn’t it have been nice to have liquidated your portfolio on December 31, 1999 and missed the stock market pullback? If you had, your portfolio would have been around $248,000 on December 31, 1999; $42,000 better than it would have been worth three years later!

By now I hope you know me well enough to know I’m not the type to ever advise you going all in or all out of the market. When it comes to market timing like that, I’m just not that smart, and I don’t think anyone else is, either. I believe in calculated tactical adjustments to a portfolio if you see a medium to long-term trend, but I do not believe in ultra-short-term trading and all-in / all-out investing. There's just too much uncertainty!

Some of you that were investing back in the late 1990s and early 2000s may be able to remember how hard it would have been to sell out of your high-flying stock portfolio on December 31, 1999. That was a time (like many times before) where the sky felt like the limit.

Great, Tom. You’ve told me this story about how I would have been better off selling my January 1st, 1995 portfolio on December 31st, 1999 versus holding it until December 31st, 2002, but then you told me no one can know exactly what the future holds and not to invest all-in or all-out. What can I do? You can rebalance.

Rebalancing your portfolio is something you should periodically do to bring your portfolio strategy back in line with your initial investment strategy. Sure, it can be a hassle, it can generate some capital gains taxes, and it can generate some trading fees, but oftentimes, it’s worth it. Hopping back to our 50% bonds and 50% stocks January 1st, 1995 portfolio example, did you know that by December 31st, 1999 your portfolio would have only had 29% bonds and would have swelled to 71% stocks? Would you be happy if the portfolio strategy you agreed to in 1995 drifted that much? I don’t know many investors who would be pleased with a divergence from their investment strategy of that magnitude. That’s why in the spirit of trying to more closely maintain your investment strategy and hedge your bets on the markets continuing to roar upward vs. correct downward, periodically rebalancing your portfolio is the way to go. Excluding taxes and fees, if you would have rebalanced your January 1st, 1995 portfolio at the end of every year back to a 50% bonds and 50% stocks portfolio, your portfolio would have had around $216,000 by then end of 2002; $10,000 better than if you had done nothing at all. Rebalancing your portfolio can generate taxes and transaction costs, but it also, and more importantly, allows you to not drift too far from your investment strategy. Rebalancing is a prudent way to hedge your bets on the market going up or down in the future.

I don’t often trade a portfolio, but when I do, I prefer to rebalance. Does that make me the most interesting wealth advisor in the world?

-Tom

Diversifying Your Life

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Do you know what I do when I’ve had a crappy day at work? I smile as I drive home.

Do you know what I do when one of my friends rubs me the wrong way? I get together with another one of my buddies.

Do you know what I do when my golf swing starts launching balls further to the right than straight ahead? I pick up my tennis racquet.

Why am I telling you all of this? Because since I’ve been in the financial services industry I’ve noticed a surprising and profound pattern. Diversification is good for your portfolio, and it is also good for you.

Unless you’re luckier than I am, it’s pretty rare for everything to be going well at once. I mean I’ve been very blessed, and compared to many in this world, I have absolutely nothing to complain about, but, even so, there is usually at least one area of my life that could be a little bit better. I think many of you feel the same way. From what I’ve heard from countless friends, family members, and clients, I think it’s pretty common for a spouse to occasionally get under your skin, a friendship to cool off, or a family member to make you seriously consider DNA testing. It’s fairly normal for a boss to act like a “Michael Scott,” a co-worker to make you over-utilize a stress ball, or to occasionally have a bad day at work due to your own actions or lack thereof. There are times when the beach is more fun than the mountains, when you are more excited about learning to play the guitar than your softball league, and when Atlanta Hawks games are more entertaining to you than Atlanta Braves games. None of these occurrences should make or break your life if they are part of your life. What is important is that they are part of your life.

Most investors diversify their portfolios because it reduces the overall risk of their portfolio. Everyday translation: by having your eggs in more than one basket, there’s less of a chance of them all breaking at once. By not being frighteningly obsessed with your job, by having friends outside of your spouse and kids, and by having more hobbies and interests than your weekly poker game with the same foursome, there’s less of a chance that all parts of your life will be going poorly at the same time! If you’re not happy at work, maybe you’re happy at home. If you’re not happy at home, maybe you’re happy at work. If you’re married to your job and are more of a father figure to your subordinates than your own children, and you don’t have a good day at work, what could possibly make you happy at home? If 100% of your friends seem to hang out with you Monday through Friday from about 9:00 – 5:00, who will your friends be when you or they stop working at the same company? If your hobbies are answering work e-mails after work or leaving voicemails at strange hours, what are you going to do when you retire? You know that most companies take your computer and disconnect your phone number when they take your key card, right?

As good as diversification can be for improving an investment portfolio’s risk-adjusted performance, diversification also follows the law of diminishing returns. What I mean is there comes a point after your portfolio is diversified where adding another position or fund in the mix really doesn’t add that much value anymore. To some extent, your investments can become so spread out that you can’t really be in something enough for a gain or loss to significantly move the needle. I think this holds true for life, too. You can be involved in too much. There can come a point where you are spread so thin with your own activities and social obligations that you really can’t take the time to excel in the activity or enjoy the obligation before you have to move on to the next one. Having too many acquaintances can prevent you from having genuine friends. Having too many time-consuming hobbies can hurt your family.

In the investment advisory arena there is a document called an Investment Policy Statement (IPS) that is often drafted between an advisor and a client. In essence, this document provides the general goals and objectives of a client and specifically states ranges of acceptable investment allocation (ex: % allowed in stocks vs. bonds). This allows the advisor to know how much he or she can change the makeup of the portfolio and gives the client the comfort of knowing there are limits to how much the makeup of a portfolio can be changed. Here again, based on my experiences as a normal, everyday person, I think it might be a good idea to apply the IPS mindset to our families, friends, and careers. If you have a busy week ahead at work and you need to rebalance your time to spend more hours at work than usual, that’s fine, but don’t adjust the allocation of work/life balance beyond the amount that is acceptable to your family. If your family is keeping you busy and you need to disappear from your friends for several weeks to do what you have to do, that’s fine, but don’t leave the allocation to your friends below what they expect for too long. If your new stamp collecting hobby has encroached on some of the allocation of your time normally set aside for your wife, that may be fine for a while, but it might not be the best long-term strategic allocation if you know what I mean.

Earlier in this post I said that there was usually at least one area of my life that could be a little better. That’s still true. However, it’s also true that there is usually at least one area or my life that is going pretty well. By diversifying my life, I can focus on what’s going well in the midst of whatever could be a little bit better, and I believe that makes me an overall happier person. On a given day I may not be as happy as an obsessed bird watcher who finally spots some sort of rare finch, but I also won’t ever be quite as sad as a total workaholic whose proposal wasn’t well received. Diversification can help your long term investment returns, but it can also help your return on life!

-Tom