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Roadmap to a strong financial foundation

Your income is the fuel that helps you meet financial goals. Here are three ways to strengthen your financial foundation.

http://ow.ly/L6czf

Try these next time you shop online

If you're a regular reader, you know that most of the articles and tips I share are to help you be more efficient with your money, or to have your money work harder. I really don't think much about coupons or different ways to save money when shopping. Still, these tools may be helpful, and I use 1 of them personally.

http://www.cnet.com/pictures/chrome-extensions-that-can-save-you-hundreds-of-dollars/


How will you do on this quiz?

I didn't score 100%. I'm not sure what the average score on this particular quiz is, but it does ask some practical finance questions.

Give this a try - and only you will know what you score.

http://www2.cuny.edu/about/university-resources/financial-literacy/financial-literacy-quiz/

Planning = Flexibility and Flexibility = Freedom

It was a whirlwind week with lots of different client scenarios that I’ve been asked about, but they all have some common themes.

First, let’s take the story of a local high school senior who didn’t have enough savings to pay for college. I had the opportunity to meet this young woman, and she is simply amazing in pursuing the money for college. She resorted to unconventional means to raise money. That, in turn, attracted world wide attention on the news and social media.

Her story and fundraising page are here.

Personally, I’m glad to have been a small part of this, trying to help her achieve her college goals.

Take a step back, and think about what happened here. How did this happen? Both of her parents have professional jobs and an otherwise comfortable existence. For whatever reason, her parents didn’t plan for her college and were in no position to help her in substantive way.

That lack of foresight and planning when she was younger have now limited her flexibility regarding school choices and ultimate ability to go to college.

Please note that I am not judging her or her parents in any way. Rather, they are facing the results of their actions (or lack thereof). Not every parent feels the need to help pay for college, so the fact that this girl’s parents aren’t in a position to help really isn’t that unusual in my experience.

What this means is that this girl is likely to take on much more student debt to help pay her way through school.

In an article that likely surprised absolutely nobody, Morningstar wrote an article about their subsidiary HelloWallet and a study conducted looking at the relationship between student debt and retirement savings.

The bottom line here – people who are saddled with student debt save less for retirement than people who don’t have student debt. This revelation is like predicting yesterday’s weather!

The article does make an interesting point in that by not prioritizing debt payments, and instead saving, a person’s long term net worth is much higher than if the debt was paid off first.

Why is this? Compound interest.

Compound interest simply means that interest earns interest, so does so as long as the money is left in an account.

When you pay off debt, interest doesn’t compound (thankfully). If you have a credit card balance and pay off that balance, there’s no more interest. And zero interest paid results in zero additional interest!

Personal finance articles often state that by paying off your debt gives you a guaranteed return of whatever interest rate was on the loan. True enough, but that doesn’t consider that the return is only one time. Instead, saving the money earns a return that can compound for many years!

Hopefully, the graduating high school student will understand this article and save for her long term wealth – and health!

Not the type of flexibility I'm talking about,
but impressive given that I can't even
touch my own toes!
What the article doesn’t talk about is what types of vehicles to use for retirement savings, and that lack of planning can reduce flexibility.

This brings me to the other type of client I saw this past week - the recent retirees.

Two couples recently asked me about their retirement savings. Both couples were high earners, appeared to have plenty in savings, and enjoyed a comfortable lifestyle. The combination of Social Security and retirement withdrawals allowed each couple to travel, buy gifts for grand kids, and otherwise do what they wanted.

Their questions though dealt with a topic one would not normally associate with retirees – taxes! Because they had saved diligently in their work 401ks and IRAs, they now have to take “required minimum distributions” from those accounts per IRS regulations. Those withdrawals, plus their Social Security, were leading to higher taxes and higher Medicare premiums.

Why higher taxes? No more kids in the house so fewer tax exemptions. Mortgage paid off so no more interest deductions. And no more tax deductible 401k contributions. The net result is that income may have dropped from their final working years, but taxable income has gone up!

Because they didn’t have the flexibility of adjusting, or even stopping their withdrawals, they had to take out more money than they wanted to cover taxes. In turn, that is now leading to worries that they might outlive their money.

Instead, had they diversified the types of accounts used for retirement savings based on tax treatment, they could vary the timing and tax impact of their withdrawals to make their money last longer – and pay less in taxes!

Their lack of planning limited their flexibility. And their lack of flexibility is limiting their freedom because they’re worried about making the money last.

This brings us back to the high school girl.

It is impossible to say that her life would follow a pattern suggested here, but it’s not unreasonable to think that it would.

She’s going to have to take on extra debt to pay for school.

She’s likely to save less for retirement because of that debt.

She’ll have less money in retirement, or unknowingly limit her own flexibility to help make the money last.

What’s my point with this?

People often think of money and goals in silos. One doesn’t affect the other. But they really do. If I told this 18 year old girl and her parents that by not planning properly for college, it was going to hurt her retirement, do you think they would have believed me? Of course not!

Ask yourself this question – based on what you know now, what would you have told your younger self about finances that would have led to better results today?

What do you think the 65 year old future self would tell the 18 year old of today?

Leave your answers, comments below!


How do you compare?

This chart is just a guide, and there's a lot of built in assumptions, but it's a way to measure whether your savings are on track.


Here's to Freedom!

It's Tax Freedom Day! Today is the day that the country, on average, has earned enough to pay for all of the income taxes for the year.

If you're in MA, your tax freedom day is May 5th.

In NH, your tax freedom day is April 22nd.

Time for a celebration?



Give your budget a fresh look!

Think about events that are coming up that might need advance planning.  Do you have a plan for college savings or retirement?  A financial professional can help you create a plan to meet your savings and investment goals. http://ow.ly/Ks8c2
#springcleaning

Read it all here

One of the common questions I get from people is how I'm different than other financial professionals. It can be a difficult question for people to figure out. It's sort of like asking if 1 doctor is better than another in the same field. It's like asking which is better - Tylenol or Advil. Ford or Chevy. Android or Apple. And so on.

For me, I'd like to think that I help clients think about money differently, and help build wealth. Being good with money is one thing, but building wealth is another. My philosophy on money is different as well.

I'm sure you've seen all of those articles about the "5 best ways to do..." or the "10 best way to save...".  What I always want to know is the "3 things you need to watch out for when you do those 5 best things..."

To that end, I always look for articles that go against conventional wisdom and challenge people to think differently about money.

If you'd like to see the articles I'm talking about, I curate From the Clipboard - a magazine on the Flipboard app. Look for it in the app, or use the link to view the desktop version.

http://flip.it/8.A7H

Take a look and let me know what you think!




Learning the lessons

This article is from 2009, but is still one of my favorites because it's real people sharing what they would have done differently. Hindsight is always 20/20, but it's always interesting - to me, anyway - to hear about these stories.

http://www.bankrate.com/finance/savings/20-savings-mistakes-that-people-make-1.aspx


How much do you have in your retirement account?

Take a look at your 401k or IRA statement. See the account value figure? Now, how much do you actually have?


Tax Day!

Tomorrow for MA residents.

Tax Day is a great time to review your financial plan. Periodically check the status of your plan to ensure you're on target to reach your goals for your family and business.

Stay in balance!

As people get closer to retirement, they typically become more conservative in their attitudes toward investment. When was the last time that you reviewed your risk tolerance? See if you need to make any changes to your retirement funds. In addition, returns on your investments may skew your risk tolerance. Rebalance your portfolio allocations on a regular basis to stay in alignment with your risk tolerance. http://ow.ly/Ks8c2 #springcleaning

If only we could be perfect in our timing


Here's the clip

In this episode, Kevin and I discuss college planning and retirement planning.

Here's the link to the recording:

http://www.blogtalkradio.com/friendsofkevinradioshow/2016/04/04/jack-wang--longhorn-financial

If you have questions you would like answered on the show, use this link. We'd love to hear from you!

Doesn't seem like much, but it is

Last week, there was a major development regarding financial advice in this country. At its core, the concept is a good one – advisers have to put their client’s interest first. For many people, this represents a surprise because after all, one would assume this has always been the case.

http://www.usatoday.com/story/money/columnist/powell/2016/04/06/investors-new-fiduciary-rule-protection/82661384/

The rules govern retirement accounts such as 401k and IRAs, but do not consider other types of accounts like 529 plans. That means when you get financial advice for retirement accounts, providers have to act in your best interest, but when dealing with non-retirement money, advisers just have to provide “suitable” advice.

It’s a very fine line.

The underlying reason for the rule is flawed – it basically assumes that financial advice givers are shady thieves. I personally take offense to this.

The rules also favor certain products and providers over others. Index funds, with their low cost, are favored but that doesn’t mean index funds are right for everyone. And robo-advisers, investment services driven by computer programs, are also favored but certainly do not provide any guarantee against loss despite their low cost structure.

Compensation rules also change. Fee based compensation is the preferred method over commissions, but the fear is that smaller investors will lose access to professional advice, which I predict.

Why?

Commissions are neither good nor bad. After all, real estate agents and many other professions are paid this way. Fees are designed with fewer potential conflicts of interest, in theory. You could pay a flat fee for advice – a set amount, or set amount per hour like an attorney. Or you can pay a fee that is more typical, which is a percentage of amounts invested, known in the industry as an AUM (assets under management) fee.

The idea behind an AUM fee is that your interest is aligned with the adviser. The more your account goes up, the more they make. But even that has an inherent conflict. What if you need to take money out to pay cash for a house? Your adviser’s AUM would go down and so would the fee, so would your adviser give you that advice?

The real key difference for smaller clients is this: the process to invest $1 million is the same as to invest $100,000, but the pay is a lot less for the smaller account. But the potential for legal liability is the same!


The alternative is to pay a flat fee or hourly charge. I've personally seen anywhere between a few hundred dollars to $10,000 for a financial plan, or up to hundreds of dollars per hour! It's like paying an attorney to handle a big legal case. At least in that instance, you know legal cases come to an end eventually. Your finances don't "end".

The bottom line is this - if you find an adviser you trust, then these rules really don't matter. But be educated and engaged with your adviser.

I personally always try to do the best for my clients and their needs, because reputation is more important than money. Plus, going to jail or getting fined are really big detours in business and life!

The important aspect these rules miss is that a person's entire financial life works together - retirement, debt, taxes, etc. These rules only address one aspect of a person's finances. To me, that just doesn't make sense.

There will be more details to come on these rules, and I'm sure there will be changes.

It's disappearing...but it's not a surprise either!

I'm sure everyone has heard in the news about the 1%, or the bottom 99%. Whether you measure it in income or wealth, there appears to a greater split between the top and bottom. And the middle seems to be disappearing, as this article suggests.

But that doesn't have to be the case, You can't save everyone, but you can help yourself!

http://www.foxbusiness.com/markets/2016/03/13/1-chart-every-middle-class-american-needs-to-see.html

Tax time is a good time to review your retirement plan

Use your income reported on your most recent tax return as a guide to determine if you are saving enough for retirement. For a quick assessment, estimate that you’ll need about 70 percent of your annual pre-retirement income. If you are not on track to retirement, make an adjustment to your 401(k) contribution. http://ow.ly/Ks8c2 #springcleaning

Is it a rule?

“There seems to be an unwritten rule on Wall Street: If you don’t understand it, then put your life savings into it.”
      - Peter Lynch


How much do you know?

This is a simple 5 question financial literacy quiz. The average score is 3 out of 5 correct. How will you do?

(Don't worry - only you will know the score)

If you don't do well, that doesn't matter. The important part is to get help so you understand these concepts because each question can have a big impact on your finances.

If you scored 100%, that's great. But the key is to understand how these concepts apply to you.

Take the quiz:

http://www.usfinancialcapability.org/quiz.php

Scheduled, simple and a little reward can go a long way

People ask me for debt pay down strategies fairly regularly. The answer is always the same – it depends. I’m not trying to avoid answering, but the answer does depend on the balance, interest rates, payments, etc.

There’s another concept that people don’t really think about, but it can make a difference in how quickly you pay off debt and how much interest you pay over time - Scheduled versus Simple.

Scheduled interest is commonly found with mortgages and home equity loans (not lines of credit). The principal balance is amortized (paid down) and interest is charged according to a schedule over the life of the loan. Even if you make your payment a day late, you still pay the scheduled amount of interest for that given month.

Everyone knows that if you pay extra principal on a loan, you save interest and shorten the time to pay off that loan. But what people don’t know is when you actually save the interest.

In a scheduled interest loan, you save interest because you paid off the loan early. But the interest you pay in any given month is still the same.

Take this example:

$35,000 loan
4% interest rate
10 year term

Based on those terms, the normal payment would be $354.36 per month. And you would pay over $7,500 in interest over those 10 years.

Instead, let’s suppose you paid an extra $100 per month principal. You would pay off the loan in 7 years, 9 months. And you would only pay just over $7,000 in interest, thus saving over $500 in interest over the life of the loan.

But when do you actually save that interest? You avoid the interest payments from 7 years and 10 months until the end of the 10 years - the gap in time on the lower right of the chart.

Simple interest loans are usually credit cards, auto loans, and student loan and interest is calculated differently. Instead of a regular amount any given month, the interest is based on the number of days since your last payment and the balance of the loan.

The US Department of Education shows how interest is calculated on a student loan:



A way to pay less interest is to pay more often. If you get paid weekly, bi-weekly (every other week), or semi-monthly (twice per month), consider making a payment each time you get paid. So if you get paid twice per month, pay ½ of the regular payment each paycheck.

In the formula above, the “number of days since last payment” would drop from 30 to 15, and over the 10 years, you would save a little in interest.

Let's compare the results using the same terms from the previous example:

Making regular monthly payments would result in just over $7,500 in interest.

Making ½ payments every 15 days would result in $7,487 in interest.

It’s not a lot in savings, but you do save some.

Simple interest loans such as credit cards, auto loans, and student loans typically don’t have pre-payment penalties so if you get a bonus at work, or earn some extra money, you can make an extra payment. And you would benefit from saving interest now instead of at the end of the loan in a scheduled interest loan.

BEWARE though if you make late payments. Even paying 1 day late adds interest - paying in 31 days instead of 30, for example. Every time you pay late, more of your payment goes to interest than principal, so if you’re expecting to pay off a loan in 10 years, it might not be paid off in 10 years! And you really will have debt a lot longer than you expect.

On a somewhat related note, one of the challenges people have when trying to save or improve finances is maintaining the discipline to keep their “eyes on the prize” when it means denying oneself. With my younger son going off to college in the fall, my wife and I tightened our belts and committed to paying off some debt and building more savings.

We don’t want him to end up with a ton of student debt, nor do we want that.

In the few months we’ve been at this, we’ve made some progress. We’re paying down debt and have more in savings.

AND IT’S KILLING ME!!!!
 
I like my iced tea from Dunks. I like going out to eat occasionally. And we still do, just not as often. Denying myself little things like these make it tough to stay disciplined!

So, my advice to you is this – while you are saving, paying debt or whatever you’re doing to improve your finances, take a little bit of money to reward yourself. You’ll stick with the program a lot longer if you can enjoy the journey along the way. If you continually deny yourself, you won’t stick with the plan.

Yes, I’m sticking with our plan, but it can be pretty hard driving past Dunks and not turn in!


What do you think of these topics? Please comment below.

Also, please share this blog with anyone you think may find the information useful!


Listen to me on the radio today!

Hi everyone!

I'll be on Friends of Kevin radio today at 4pm answering your questions about personal finance.

You can listen here:

http://www.blogtalkradio.com/friendsofkevinradioshow

This major issue plays a big part in bankruptcies and politics

This is one of the main reasons people declare bankruptcy. And it's a major issue this election season. Even if you don't have trouble with this, it is likely that you will feel increasing costs more and more.

http://fortune.com/2016/01/05/health-insurance-bills/

Baseball is back!

Opening day for Major League Baseball!



Take me out to the ball game...



When was the last time you even thought about this?

Nobody enjoys tax time, but it’s a good time to see how much you made last year and consider whether your life insurance would be enough to replace that income if something were to happen to you. Also, if you are married, consider the need for life insurance on you and your spouse. http://ow.ly/Ks8c2 #springcleaning

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