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Thanks to all of you who submitted a question. Now, without further ado, here are my responses to five of your questions...
1.) I am looking at getting a new car, but I can’t decide how much I should spend. Do you have any tips?
- Hayley
How much to spend on a car or how much not to spend on a car, that is your question, and it’s a good one! Strictly financially speaking, I’d recommend you take a close look at your monthly income and your monthly expenses, and see how much extra cash flow you usually have on hand at the end of each month. Let’s say you find that number to be around $500. Then I would recommend you make sure you buy a car that allows you to have a monthly loan payment of less than $500. You should talk to the dealership or your local bank to see what kind of car loans and interest rates you could qualify for. That will help you calculate how much car you can probably afford to buy and still make financial progress month to month. If you are one of those people who saves up to buy a car and doesn’t need a loan, I’d recommend that you make sure you will have enough cash in the bank after your purchase to cover somewhere around three to six months’ worth of your living expenses.
Outside of the financial nuts and bolts, I would like to share a couple of other thoughts. First, it may not make sense to get a certain brand or a certain model if it costs a lot more than a very similar brand’s equivalent or the next best model. For example, my Jeep is a souped-up less expensive model that has almost everything the more expensive model has on it except the model name. Second, it may not make sense to go with a lesser brand or lesser model than you really want if you can afford it and the savings are only a few thousand dollars. A few thousand dollars is nothing to sneeze at, but if you will be driving your car for the next 10 years (like most people are these days) it might be nice to drive something you are excited about and proud of!
Please let me know if you would like to discuss this further or talk about your specific situation.
2. Other than a will, what are some other things someone can do to be prepared if they pass away?
- M. Tyler
So often when someone passes away they leave behind a very large and time-consuming mess for their loved ones. This is not intentional, but throw in a few surprise accounts or insurance policies, a few calls to Social Security, and a house full of possessions, and a monumental task is often what heirs, and certainly the executor, inherit first!
Outside of a current and well-drafted will, there are a few things you can do. One, you can make sure you have your primary and contingent beneficiaries in place for any insurance policies, annuities, and retirement accounts you may have. Remember, this is critical, as beneficiary designations trump a will, and if there is no beneficiary designation in place, assets might not be distributed how you want or intend. Second, you can give away special possessions/heirlooms that are below the annual gift exemption ($14,000 for 2015) while you’re still alive to make sure they end up where you want them. You could also potentially direct the distribution of certain special possessions in writing after death as long as your will allows it (consult with your estate attorney to make sure you have the proper language). This can help reduce the chance that two sisters will be fighting over a plate “mother wanted them to have.” Third, having a list of who you want as pallbearers, who you want to officiate your services, what hymns you want sung, and what you would like your obituary to say can also be of great benefit and relief to your grieving survivors. Fourth, having a list of important people to contact in the event of your death with their applicable information can really help your family, too. Finally, selecting and prepaying for your burial/cremation arrangements can also ensure that you get what you want and you don’t create an immediate financial burden on your loved ones at the time of your passing.
I hope this is what you were looking for. Not a happy topic, but certainly one worth considering.
3. What do you think about what’s going on in Greece? Will the European Union last?
- John
I’ll be happy to share some thoughts on this, but this is obviously just my opinion.
I forget exactly what I was reading or where I was, but someone once explained the Eurozone problems to me with a very powerful example that I’d like to now share with you. Essentially think about the United States, a union of states, versus the European Union (EU), a union of nations. If you were to stop and ask a stranger from Georgia and a stranger from North Carolina what they are, what would they tell you? They would probably both say they were Americans; not Georgians or North Carolinians. If you were to stop and ask a stranger from Germany and a stranger from France what they are, what would they tell you? The German would tell you he is a German, and the Frenchman would tell you he is French. See the difference? This is why I think the EU may always have some serious problems.
I think the situation with Greece is too far gone to be worked out unless the rest of the Eurozone just flat out forgives their debts. The Greeks are tired of the austerity measures, and the Germans are tired of loaning money to the Greeks. Greek and German politicians know this. They keep kicking the can down the road and putting band aid after band aid on the problem, but eventually I think there will be a “Grexit,” a humorous and witty term that many have already come up with for Greece’s eventual exit from the EU. I guess we'll have to wait and see what this next round of called Greek elections holds.
As far as the EU, there are a lot of powerful people and countries that really want this to work, so it may continue to exist for quite a while. Personally, as I read about the unemployment and economic contractions going on in other counties such as Spain, Italy, and Portugal, Greece looks a little like the first domino to me. I think Great Britain may have been very wise to have joined the political union, but to have stayed out of the currency union when they joined the EU. There are simply too many little economies and country-specific industries in play. That said, there are still high-quality and thriving companies in Europe, and some countries such as Germany are still doing very well. My best guess, however, is more political, economic, and currency storms are on the horizon. Stay tuned!
4. Are you worried about robo-advisors?
- Anonymous
A timely question, and one being discussed by many in my industry. For those of you not familiar with the term “robo-advisor,” a robo-advisor is an investment platform that allows an investor to have their portfolio managed online with little to no human intervention. Robo-advisor platforms, such as Betterment or Wealthfront, have made a splash in the brokerage industry by being less expensive, more user-friendly, and more interactive than most of the traditional investment management platforms offered by human advisors.
Am I worried about robo-advisors? Not really. I think their popularity may cause human advisors to step up their game, but as braggadocios as this may sound, I really don’t think a computer can do all that I do. Investment allocation is just a piece of what I help clients with (there’s also tax planning, cash flow planning, estate planning, insurance planning, scenario analysis, and lots of decisions where both finances and emotions both need to be considered), so I really don’t feel that threatened. I’m also very curious to see how robo-advisors do when we get a cyclical market downturn, and investors want to be reassured that the sky is not falling. I want to see what robo-advisors say when a client needs to decide whether to save for their children’s education or retirement. I want to see what robo-advisors say to a son trying to gain control of his late father’s account. If the robo-advisors’ support staffs start taking client calls – and I think they will have to – they will have to raise their prices, and suddenly, they won’t be so robo anymore!
I am also skeptical of robo-advisors because I’ve already seen some of their shortfalls first hand. For example, I had an individual bring me an account that they had elected to rebalance after every deposit. Well, with a little bit from each paycheck going into their account, that meant they rebalanced 24 times in a year, resulting in a lot of tiny, annoying, and tax-inefficient short-term capital gains having to be recognized at ordinary income tax rates. By selecting a friendly looking box to rebalance offered by the robo-advisor, this investor incurred additional trading fees, higher taxes, and a much more complicated tax return than was likely necessary. The investor meant well and knew it was prudent to rebalance his portfolio periodically, but any decent human advisor wouldn’t have allowed a portfolio to be rebalanced twice a month!
I may be in the minority of financial advisors out there who think this, but I’m sort of excited about robo-advisors. I think they can be a helpful tool so people invest sooner rather than later. I think they can make basic analytics more available to more people. I think their gadgets and apps will help modernize some of the ancient and confusing monthly statements being generated by large investment custodians. As a CPA who lived in the world of Turbo Tax and now a CFP in the world of robo-advisors, I welcome the technology and I encourage you to carefully try it, but my caring, easy-to-understand, and customized-to-working-with-you human self will still be ready to take your call when you need me!
5. What about you? What are you most worried about as far as your finances?
-Kristin
Hey now! I’ll be the one asking questions around here. Just kidding! Thanks for the question!
I’m worried about a lot of things. I’m worried about the new expenses my son just brought into my monthly budget. I’m worried about the mortgage my wife and I took on when we moved. I’m worried if we’re saving enough for retirement considering neither one of us has a job that offers a pension, and I’m less than bullish on the chance of us receiving any meaningful Social Security income by the time we qualify.
How do I sleep with those worries? We spend less than we make. We save as much as we can. By growing our family and buying a house we’ve made a bet on ourselves, and I have faith we can do it.
Sure, there will be hard times and bumps in the road, but I believe we can do it. And I might or might not have a pretty sophisticated financial progress spreadsheet somewhere...
If you build up an adequate rainy day fund, you adequately insure your family should there be an unexpected death, disability, long-term illness, or liability, and you have an adequate estate plan in place to execute your wishes and desires, there’s really not much left to do. Do the best you can, live below (or at least within) your means while still making memories and enjoying experiences, and carry on. Monitor your progress and adjust your strategy as necessary. That’s what I tell clients, and that’s what I do myself.
Still, I do savor diaper coupons, I can’t wait to be debt-free, and I’m not above picking up pennies in the parking lot (heads or tails).
Thanks again for all the questions. Remember, our series on “Normal Investors” starts next week. I hope you’ll check it out because I’d be willing to bet that there is a pretty good chance you aren’t as normal as you might think. Just saying!
-Tom
