Who Wants to Be a Millionaire?

Credit: iosphere at FreeDigitalPhotos.net

Do you remember the game show originally hosted by Regis Philbin called Who Wants to be a Millionaire? The show consisted of contestants being asked multiple-choice questions that got more and more challenging as potential prize money increased, but contestants were also given a series of “lifelines” to help aid them with difficult questions. Well today I thought we’d have a little fun. I have a unique trivia question for every single one of you and I would like to serve as one of your lifelines and offer six tips that can help you reach your financial accumulation goal, whatever it is.

1. Save first, spend second. Live a lifestyle that is below your means and make sure you are steadily saving your money in cash accounts, retirement accounts, and taxable accounts. As Dave Ramsey says, “If you live like no one else now, later you can live like no one else!”
2. Make sure you are saving money in your employer’s retirement plan (401(k), 403(b), 457, etc.). This is a great way to reduce your current taxes and really grow your retirement nest egg over time. Put in as much as you can, but make sure you are at least contributing what is necessary to receive the full value of your employer’s matching contributions if they offer them. For employees under age 50, $18,000 is usually the most you can contribute each year. For employees over age 50, $24,000 is usually the most you can contribute each year.
3. Make sure you are contributing money into an IRA. Whether you are eligible or better off contributing to a Roth IRA or a Traditional IRA may be worth using a lifeline on to ask your financial advisor or CPA, but the important thing is that you are saving and investing money. For people with earned income under age 50, $5,500 is usually the most you can contribute each year. For people with earned income over age 50, $6,500 is usually the most you can contribute each year.
4. Make sure you are saving money in a taxable account. Saving money in your employer’s retirement plan and in an IRA is great, but you aren’t really supposed to access that money until your mid to late 50s. If you do, you may be subject to ordinary income taxes and a 10% penalty, so you want to make sure you invest some savings along the way into a taxable account that you can access anytime you want to or need to. Withdrawals from a taxable account don’t come with tax penalties, and if you withdraw from assets you’ve had invested for over a year, you could receive the usually more favorable capital gains tax treatment.
5. Avoid debt and attack what debt you can’t avoid. Pay off all your credit cards every month. Pay off your student loans as fast as you can. Pay off your car loans as fast as you can or maybe even save up enough cash for your next car. See if you can get your debt down to monthly credit cards and your mortgage, and then put a little extra towards your mortgage whenever you can. It will save you interest expense and help you get debt-free sooner.
6. Protect what you have. Some people try to save money on insurance. That’s very wise to an extent, but you, your family, and your stuff needs to be adequately covered. Having sufficient health insurance, disability insurance, homeowners insurance, and auto insurance is critical. On top of that, having an extra layer of liability insurance (an umbrella policy) equal to the value of your assets is a very wise and surprisingly inexpensive idea. (Sufficient life insurance is important, too, but today we’re focused on making you a millionaire, not your loved ones should you get hit by a bread truck…)

As promised, here is a link to your trivia question. How much money would you have today if you invested $1 in the S&P 500 every day since you were born? I think it’s an interesting thing to know, and I think it helps an investor keep things in perspective as to where we’ve been and where we are now even though all we’ve been through and all that undoubtedly lies ahead.

That’s my final answer.

-Tom

The Best Piece of Financial Advice You’ve Ever Received

Credit: patrisyu at FreeDigitalPhotos.net

Many of you who know me personally are familiar with my love of quotes and one-liners. What can I say? I like simple statements that can be remembered and candid statements that cut to the chase and don’t beat around the bush. That’s why I asked a number of friends, family members, and people I work with what the best single piece of financial advice was they had ever received. Here are some of the responses:

“Little pigs get fat, but hogs get slaughtered.” – This can have to do with greed or pressing your luck.
“Live below your means.” – This is the number one response for me personally because it’s so short, so powerful, and so true. If you spend less than you make, financial planning becomes a matter of determining the optimal order to go about achieving your financial goals, but if you spend more than you make, financial planning simply becomes a question of how best to take on water.
 “No one on their death bed has ever said they wished they had spent more time at the office.” – There are a lot of disenchanted former employees and retirees that can swear to this one. Then again, there are a lot of friends, spouses, and children who probably can, too.
“If you do something you love, you’ll never work a day in your life.” – There is much more to choosing an occupation than salary, bonus opportunities, vacation days, and benefits, and life moves pretty fast.
“Money often costs too much.” – Don’t let money cost you your happiness, your health, your friends, your family, or your faith. Don’t clinch your fist so tightly that you miss out on what really matters.
“An investment in knowledge pays the best interest.” – Especially right now given where today’s interest rates are!
“Wealth is the ability to fully experience life.” – I know some multi-millionaires who would be willing to admit they are poor and I know some people living paycheck to paycheck who seem to be quite rich.
“Never spend your money before you have it.” – This can lead to credit card debt and emotional disappointment. Don’t count on gifts, inheritances, bonuses, or equity awards tied to future performance until the money is in the bank!
“The stock market is designed to transfer money from the active to the patient.” Frequent action in a portfolio may feel good, but I firmly believe investing with a long-term approach gives you the best chance for investment success. Sure, make an occasional tactical move and rebalance your portfolio when there has been a sizable move in the markets, but be cognizant that transaction costs, fees, and taxes can kill investment returns.
“If you will live like no one else, later you can live like no one else.” You are going to have a finite amount of money pass through your hands during your life. It’s either more now or more later, and you’re going to need some later.
“Know what you own and why you own it.” I truly believe everyone wants a basic understanding of their finances. If you don’t know why you have something, you should find out why you do, or you probably shouldn’t have it. In practice I don’t ever suggest a technique, strategy, or investment to someone unless I can explain it.
“Try to be greedy when others are fearful and try to be fearful when others are greedy.” This is Buffettesque contrarian investment strategy at its core. It is usually "warmer" if you are in the herd with other investors, but it does often make sense to head in the opposite direction of the herd when it comes to investing. Buy low and sell high. Don’t buy high, sell low, and repeat until you are broke with the rest of the herd!
“Keep giving while you’re living so you’re knowing where it’s going.” – Giving to other people or even charitable causes can be quite fulfilling while you are still alive. It can also be a great way to test your potential beneficiaries and heirs with a little to see if they would be good stewards with a lot.
“Money is nothing more than a tool.” – If you can come to the realization that money is nothing more than a mechanism for peace of mind and a tool to purchase experiences, provide experiences, and further causes, your whole financial, social, and spiritual outlook could look a lot different.

It is my hope that these pieces of financial advice will be as valuable to you and your friends and loved ones as they are to me. If you have one that's not on the list please share!

-Tom

Five Years In

Credit: krishna arts at FreeDigitalPhotos.net

It was around November of 2011 that the idea for 2MuchCents popped into my head. I had just assisted a client in gaining clarity and confidence around their financial situation, and it felt good. I saw their light bulb go on. I saw the burden fall off their shoulders. They were appreciative. I was also satisfied, and I felt like I might have just figured out what I was put on this earth to do as a professional. My desire to see more light bulbs go on with financial clarity and more burdens lessened with financial confidence, coupled with my hunger to help my family, my friends, and others, mixed with a dash of my frustration with the large amounts of arrogantly written and unnecessarily complicated personal financial literature out in the world led me to launch 2MuchCents.

Five years, 178 posts, and over 61,000 unique views later, I’m proud to say 2MuchCents continues on! I thought I might try my hand at blogging for a year, but I never thought it would turn into this. Today, as some of you celebrate five years’ worth of 2MuchCents with me, I want to share a few thoughts.

First, in case you missed them, the five most popular posts of all time to this point are:

1. The Jr. Bacon Cheeseburger Postulate
2. Roth vs. Traditional
3. The Homemaker Retirement Plan
4. How to Save for a Vacation
5. Per Stirpes or Bust

Second, for 2016, my three “biggest hits” were:

1. Investing in Experiences
2. Brexit: European Disunion
3. Money Mistakes We All Make

Third, I wanted to offer you a preview of some of my upcoming posts. I’m already working on topics such as the best piece of financial advice people have ever received, what you need to do to be a millionaire, and why losses do not equal gains. I hope you’ll check them out!

Thank you to Kenny Wuerstlin, Andrew Davis, Ryan Halpern, and my wife for their help all these years. I could not have done or continue to do this blog without them.

Thank you, too, for reading! Please keep subscribing, following, sharing, and most importantly, letting me know any questions you may have or topics you would like for me to write about. Your questions and topics fuel many of my posts!

Happy holidays to you and your family! I hope 2017 will be a good year!

-Tom

What You Should Do With More

Credit: iosphere at FreeDigitalPhotos.net

Earlier this fall the U.S. Census Bureau released exciting data showing that real median household income grew an average of 5.2% in 2015 versus 2014. This represented the first statistically significant increase in income for the middle class since 2007. For the first time in almost a decade, most people have gotten a raise! This good news coupled with it being near the end of the year when sometimes employees are lucky enough to get a raise or a holiday bonus got me thinking that it might not be a bad time to suggest some things you might want to do with your additional income.

If you are fortunate enough to have additional income coming in, in general, here is what I would recommend you do, and in this order:

1. If you are getting a raise, do a little math and see how much more money you will be bringing in each pay period after taxes. That is valuable information to know as you consider your budget going forward.
2. Have some fun! Sure, I’m a numbers guy and a financial advisor, but I also know you only live once. Celebrate your hard work paying off and go eat at that new Italian place, buy that outfit you’ve had your eye on, or get that latest device. Now I’m certainly not suggesting you should blow all of your additional income, but I do think you should live just a little.
3. If your cash rainy day / emergency fund is still not up to at least 3-6 months’ worth of your living expenses, it’s probably a good idea to direct your additional income to rectifying the situation. It’s not an exciting use of assets, but trust me, you will be glad you have a cash safety net in place when life throws you a curveball, and it will!
4. As long as your modified adjusted gross income (MAGI) is below $132,000 if you are single or $194,000 if you are married and file a joint tax return, you should be eligible to contribute up to $5,500 to a Roth IRA ($6,500 if you are over age 50). This is a great way to save for retirement, and with any luck, your savings will compound over time into a larger tax-free asset.
5. If you have any high-interest credit card debt or you are close to paying off a student loan or car loan and that will erase a fixed, monthly expense, I’d suggest you plow your additional income into your liabilities. It will save you interest expense and improve your financial situation.
6. Top off your 401(k) or retirement plan. Unless you are already contributing the maximum amount, with additional income you should be able to contribute more to your retirement plan. This is a great way to boost your retirement savings and defer having to pay taxes on your additional income until you withdrawal money from your retirement plan later on.
7. Put some extra towards your mortgage or other long-term debt. Again, it’s not an exciting use of your assets, but it will save you interest expense and speed up your progress towards being debt-free!
8. If you are already charitably inclined, consider paying it forward and using your additional income for enhanced charitable giving, greater support of a cause you feel passionately about, or just helping out someone who you know could use a little help.

 

They say with more power comes greater responsibility. I agree, but I’d also say with more income comes greater possibility! If you are fortunate enough to have experienced a bump in your income or know you are about to get a raise or a bonus, use it thoughtfully. Have a little bit of fun, but also make it count!

 

-Tom

We Got Trouble?

Credit: Sira Anamwong at FreeDigitalPhotos.net

In the Broadway musical The Music Man, one of the most famous songs is called “Ya Got Trouble?” During the song, a smooth-talking con man named Harold Hill tries to convince River City, Iowa locals that they need to give him money for band uniforms and instruments so that he can put together a marching band for the young people and protect them from the debauchery of a pool hall. I’m no con man, and I’m not asking for money for a marching band, but I’m sad to say my words today sound a little like Professor Harold Hill’s in the sense that I think we might be about to be in for some trouble, right here in the good ‘ole US of A.

You see, for many employees and retirees, open enrollment is about to begin, and for people insured through the Health Insurance Marketplace, open enrollment starts November 1st. And the word on the street is not good. I have read numerous pieces from typically liberal-leaning and typically conservative-leaning outlets and I've listened to multiple industry experts talk about 2017 health insurance coverage, and they all seem to be saying the same basic thing: brace yourself. The number of insurance carriers is going down, the number of plans available is going down, and the quality of coverage seems to be going down while the cost of coverage is going up, considerably. Last week some of this projected trouble came to fruition as the White House announced marketplace plan premiums will go up by an average of 25% in 2017.

If you read my blog, you know I’m not often one to sound the alarm. I’m not sounding the alarm today either, but I am trying to get your attention. When your open enrollment packet comes, you need to treat it like you are a member of the bomb squad. Carefully analyze every detail of your situation and proceed only with extreme caution.

We’ll have to see what happens to your premium. We’ll have to see what happens to mine. For now, here are a few general thoughts:

• If you get a scary letter that your plan doesn’t exist anymore, don’t panic. You’re just going to have to pick another one.
• If your plan is discontinued, don’t assume you will roll into a similar plan. Likewise, if your plan is still available, don’t assume you will automatically be reenrolled. In some cases, insurance companies feel they are now better off if they don’t have you as a customer at all, so the days of them trying to keep you with some sort of automatic election or renewal may be over. Be careful. You need coverage.
• A lot of deductible amounts are supposedly going to be higher. If you are looking at a lower deductible plan option, look closely. It may not be as favorable as it once was.
• A lot of co-insurance percentages are supposedly going to be less, so read carefully.
• If you are considering going to a lower coverage plan to try and minimize increased premiums or to actually try to reduce your premium, consider your financial situation if you have a major medical event. You could be setting yourself up to win the financial battle if you’re healthy, but lose the financial war if you get sick.
• The length of covered physical therapy treatments is supposedly going to be reduced. Read the fine print, particularly if you are planning or expecting a surgery that will require extended physical therapy.
• Some procedures now require other procedures in order to be covered. For example, you might need a CT scan, but it might only be covered if you first have an X-ray. I can personally attest to that little quirk, so read the fine print now, and if the time to use your coverage comes, ask a lot of questions, work with your doctor, and be proactive with your health insurance provider to make sure you play the game as best as you can to reduce your out-of-pocket expenses.
• If you are considering changing health insurance providers or plans, make sure your doctors you really like are still going to be willing to see you. A trusted, experienced physician might be worth a little higher premium if you can still see them.
• If you are a retiree and your old employer has always paid your health insurance premiums, you might want to look into how much longer that is going to be the case. With the premium increases of recent years, the expected premium increases in 2017, and the projected premium increases going forward, many companies are beginning to pass some of the health insurance coverage burden to their retirees.
• If your deductible or maximum out of pocket figure is greater than your cash on hand and rainy day fund, it may be time to boost those up so you can remain financially solvent even if you get hit with a real medical issue.

I’m truly sorry I can’t offer you something more concrete. I just want to warn you about the common tremors I am hearing from media sources that rarely agree. I hope I’m wrong, I hope there’s no trouble in River City, and I hope I can just go play pool!

-Tom