Year in Review

Credit: Danilo Rizzuti

Assuming the Mayans are wrong, and thankfully we know they are (leap year wasn’t a part of their calculation, so the apocalypse date has already passed), it’s time to start thinking about New Year’s resolutions. I love coming up with resolutions, and frankly, I think it’s important to periodically consider aspects of your life and reflect on how they could, and should, be better.

I have 3 resolutions for 2013:

1. Lose the remaining 14 lbs of my 2012 goal- Hey, I lost 11 lbs. this year, but I didn’t quite make my goal of 25 lbs. Comfort food is so good, and exercising in the cold weather is so hard…
2. Do less- Many of my friends and family often compare me to the Energizer Bunny, but I saw the bottom of my fuel tank a couple of times in 2012. I need to get a little more rest and set aside a little more time to do what’s important with the important people.
3. “Attack” the mortgage- My wife and I are going to still contribute to our retirement plans, but we are going to make a conscientious effort to pay as much extra principal in 2013 as we possibly can. This will strengthen our financial position, give us a guaranteed rate of return (our mortgage interest rate), and allow us to work towards lowering our fixed monthly expenses.

I wouldn’t begin to tell anyone (well, at least most people) what their personal resolutions should be, but I thought I’d take this last 2012 blog post and offer a few financial resolutions that might help you in 2013:

• Attack any long-term debt you may have by making an “extra” payment in 2013. As this example shows, if you make this resolution a habit, you may be able to cut substantial costs and shorten how long you will be in debt by more than you might think. I’m talking like $56,000 and 6 years off a $200,000, 30-year mortgage!
• Save an extra amount from each of your paychecks. Maybe this is $50 a paycheck, maybe it’s $500. The amount does not matter; the action does. Do something as simple as putting this extra money in an envelope or as complicated as setting up an automatic deposit to a different account, but give this a try. If you keep this resolution, you will have a nice, little sum set aside at the end of 2013 that can create or strengthen a “rainy day fund,” be used to fund an IRA contribution, or be used as a “jump-start” towards a major purchase.
• Increase your contributions to your employer’s retirement plan. You are probably having to fill out a lot of 2013 enrollment and benefit election forms anyway, so you might as well adjust your retirement plan contributions and add 1% to whatever you are already contributing. 1% more coming out of your check probably won’t hurt much now, but 1% more invested compounding year after year in a tax-deferred account could end up being a pretty sweet sum when you finally head towards your retirement home on the beach.
• Collect your change. It depends how often you pay with cash, but if you throw all your spare change in an old shoebox, a chic-looking jar, or even a very manly looking piggy bank, you may be surprised what you end up with by the end of 2013. It sure would be nice right about now to have a jar full of change to help buy that perfect Christmas gift for my wife…

I hope you will try one of my suggested resolutions or come up with at least one financial resolution on your own, but before I sign off for 2012, there are a few more things I want to mention:

First, I’d once again like to thank Kenny Wuerstlin for designing my banner and logo, Andrew Davis for helping me edit my content, and my lovely wife, Lindley Presley, for her grammatical editing and blog expertise.

Second, I’m very proud that, in its first year, 2MuchCents.com had a little more than 6,600 page views from 10 different countries. Let me assure you though, we’re just getting started! In 2013, we’ll unravel technical topics like family gifting, long-term care insurance, and the risks of a fixed income portfolio. We’ll also take a look at how rational investors are (or aren’t), why I don’t think you should always let a “tax tail” wag your dog, and how you can spend everything (though I don’t advise trying).

Finally, let me thank you for checking out my weekly ramblings. I appreciate your questions, your ideas, and your encouragement. I hope that at least a little of what I have shared has been interesting, educational, and maybe even helpful. Please continue to let me know how I can use my training and experiences to try to help, please keep telling me what financial topics you are interested in, and pretty, pretty please keep sharing your favorite posts with your family and friends. There’s no telling where 2MuchCents can go in 2013!

I hope you and your family have a healthy, happy, and financially successful 2013!

-Tom

Changing Jobs

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December is an important month for many reasons: it’s the end of the year, there are a lot of holidays and days off from work, a lot of things go on sale, a lot of people receive their annual reviews from their employers, and it’s your last chance to eat what you want to before you try that truthfully disgusting diet of beets, tofu, and sit-ups in the New Year to shed those pesky pounds. Directly related to a lot of people receiving their annual reviews from their employers in December is the fact that a lot of people also consider changing jobs because of the feedback and future outlook they receive in those year-end review meetings. I’m not having the itch to change jobs this holiday season, but I know many people who are. Today, let’s take a look at four considerations I believe a potential job-changer should ponder before they take a leap of faith.

1. Your Potential New Role
       a. What would your day-to-day activities and responsibilities be?
       b. What hours and how many hours would you be expected to work?
       c. Will you have to work from home or check your phone after hours?
       d. Who would your boss be? Who would your subordinates be? Can you meet them?
       e. What’s your position’s typical career path? How would you advance?

2. Your Potential Compensation and Benefits
       a. What would be your pay? Is it commission-based, hourly, or is it a salary? How will it increase over time?
       b. What retirement plans (401(k), 403(b), etc.) does the potential employer offer? Does the company match your contributions?
       c. Would you be eligible for a bonus your first year?
       d. Would you and your family receive health insurance, disability insurance, and/or life insurance? How good are the potential benefits?
       e. How many vacation days would you be allowed? Do you have to work for a period before you receive days off?

3. What’s Being Left Behind?
       a. Would you be forfeiting any bonuses, company matches, or vacation you would have had with your old job? Would your new company be willing to make up for what you would be leaving behind?
       b. Would you or your family be losing any insurance coverage or quality of insurance coverage? If so, what can your new company do to make up for your reduction in benefits?

4. The Happiness Factor
       a. Would your potential job make you be more or less energized when you wake up in the morning?
       b. How would your commute be? Would you have to travel a lot?
       c. How stable is your potential position and potential employer? In what direction is that stability headed - more stable or less stable?
       d. Would you be an addition, or are you replacing someone? If you are replacing someone, what happened?
       e. What does your spouse/family think?

If you are thinking about changing jobs and have considered all these questions, and where you are currently employed ends up looking pretty sweet, stay! You need to realize that in the current environment, there are a lot of people out there who would gladly take your job and its shortcomings.

If you are thinking about changing jobs and have considered all these questions, and you are ready to jump ship, proceed cautiously. Realize that no matter how favorably a new role or a new employer can look, you’ve only seen their best side, and changing jobs will be scary. The uncertainty, the simultaneous fear and excitement, the feeling that you are betraying your current employer and coworkers, and the nervousness about being the new guy or girl on your future employer’s campus are all emotions you are going to have to wrestle with. You should also know that there are very few social situations more awkward than finishing your last few days or weeks after you have given your resignation. However, all of my warnings being said, life is too short not to have a job you love, or can at least mostly like, 40, 50, or 60 hours a week for possibly thirty or more years.

The grass isn’t always greener on the other side, but it can be. Please pass this on to anyone you know who is considering changing jobs.

-Tom

The Fiscal Cliff

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In recent weeks, there have been a lot of people talking about a little something called the “Fiscal Cliff.” Some people seem to be worrying a great deal about it; other people don’t think it’s that big of a deal. I’ve had several friends and readers of this blog ask me about it, so today I thought we’d take a look at this so-called “Fiscal Cliff” our country is scheduled to fall off of on January 1, 2013.

The “Fiscal Cliff” gets its name because of the tremendous tax increases and spending cuts that are currently scheduled to happen all at the same time: the beginning of 2013. Some compare the immediate effect of these substantial tax increases and large spending cuts to jumping off a cliff. Personally, I think it's a better comparison to imagine yourself sitting by the side of a tranquil pool watching a hippopotamus on the diving board that is going to jump when the clock strikes midnight on New Year’s Eve.

This hippopotamus is made up of tax increases and spending cuts. The scheduled tax increases include:

• The end of the Bush tax cuts (if you are in the 10% tax bracket, you’ll be in the 15% tax bracket, if you are in the 25% tax bracket, you’ll be in the 28% tax bracket, if you are in the 28% tax bracket, you’ll be in the 31% tax bracket, if you are in the 33% tax bracket, you’ll be in the 36% tax bracket, and if you are in the 35% tax bracket, you’ll be in the 39.6% tax bracket),
• The end of the 2% 2011 and 2012 payroll tax cut,
• Sharp adjustments in the estate tax rate from 35% to 55% and in the estate/lifetime exemption amounts from $5.12 million to $1 million,
• The end of the distinction between ordinary dividends (now taxed at your ordinary income tax rate) and qualified dividends (now taxed at 15%), and
• The end of the special tax rate on long-term capital gains for investments you've held for more than a year (now taxed at 15%, scheduled to be 20%).

The second part of the hippopotamus is the automatic spending cuts that are scheduled to take place because Congress failed to reach a debt-reduction deal in August of 2011. These cuts will eliminate $1.2 trillion in projected federal spending over ten years, with about half the cuts coming from the defense budget and about half the cuts coming from other government programs like education, air travel safety, and food inspection. Discretionary spending limits are also supposed to be formally capped.

Before we talk about how we get the hippo off the diving board, let’s take a minute to figure out how the hippo got there in the first place. From an economist’s standpoint, when a country’s economy is slowing, or not growing at a fast enough pace, its government can do two things to try to encourage growth: cut taxes and/or spend more. The theory behind cutting taxes is that individuals will have more money to spend in the economy if they owe less in taxes, which will stimulate the economy. The theory behind the government investing more money into the economy is that the increased spending will lead to more jobs, more products, and new growth that will get the economy moving again, and eventually the revenue generated will be worth the government’s initial investment. Our government has tried both of these option in recent years, and people will argue over the results, but either way, less tax revenue and more government spending has caused our national debt to skyrocket.

The funny (or not-so-funny) thing about the “Fiscal Cliff” is that our leaders purposefully scheduled these tax cuts to expire eventually and knew our government could not sustain its recent spending sprees when they provided stimulus. They were trying to do what they could to get our slowly-growing economy going again, but they really can’t afford to try much longer. What I mean, is that the hippopotamus represents the conundrum our government now faces: if they keep the tax cuts and keep on spending, our national debt could turn into a national security issue, but if they allow taxes to return to their previous norms and cut their spending, our economy could slow or even contract.

The “Fiscal Cliff’ is the scenario where Congress does nothing and allows the scheduled tax increases and spending cuts to occur. Essentially, the hippo jumps on New Year’s Eve. Sure, the impact on the economy could be dramatic, but I truly believe the tax increases and spending decreases need to happen to fix our national debt problem. If Congress does nothing and the hippo jumps, it is surgery by chainsaw, so to speak, but it is surgery we need. Some politicians, economists, and people are actually rooting for this to happen.

If Congress does act, other scenarios such as “Fiscal Ramps,” “Fiscal Ladders,” and “Fiscal Ledges” are out there. Under these proposals, some of the tax increases and spending cuts will go into effect, but not all fully or all at once. The theory is that these options would begin to address our national debt issues, but could avoid a possibly huge negative splash in our still slowly-growing economy. Under these scenarios, the hippo is essentially off the diving board and gently getting in the shallow end. Some politicians, economists, and people are actually rooting for this to happen.

I, nor anyone else, know what Congress is going to do (or not do), but I do know our national debt situation is as serious of an issue as our still slowly-growing economy. I don’t know what the short-term impact will be if the “Fiscal Cliff” scenario plays out, but I do know it will finally address some of our nation’s long-term concerns. The short-term impact will be less severe if a slower-instituted series of fiscal reforms is adopted in the next few weeks, but I don’t know how well it will address our nation’s long-term budget deficit. I do, however, believe that the longer Congress and our leaders remain indecisive, the more volatile markets, businesses, and individuals will become with anticipation.

So, how do I tell you all of this and still sleep? Easy - NyQuil. Seriously though, the important thing to remember is that, even if a hippopotamus jumps into a pool, the water will eventually settle. No matter how, if our country takes steps to reform its budget and lower our national debt, our country and our economy will be stronger in the long-term. As an investor and an American, I’m more interested in the long-term.

-Tom

Price vs. Value

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My Georgia Bulldogs recently clinched a berth to the Southeastern Conference (SEC) Championship Game to be held in Atlanta on December 1, 2012. I, like many of my Bulldog brethren, am very proud and excited that they have the honor and opportunity to play in such a game. Since I’ve been a true Georgia fan, I’ve only seen the Bulldogs actually win one SEC Championship. The game on December 1 is not a once-in-a-lifetime opportunity, but it’s a very valuable and rare opportunity to say the least. That is what got me thinking about the value of the $90 ticket to the game.

Don’t get me wrong - $90 is a lot of money for a football game, but when it means I’ll have the chance to see my favorite team win a championship in person, $90 doesn’t seem that expensive anymore. Why is that? It’s because price does not equal value, and that’s what I’d like to talk about today.

Price can be defined as the sum or amount of money or its equivalent for which anything is bought, sold, or offered for sale.

Value can be defined, in this case, as the usefulness or importance to the possessor, the utility, the merit.

In the case of $90 SEC tickets to see the Georgia Bulldogs, the value of owning tickets and the thrill of being able to go to the championship game greatly exceed the money I will spend and the sacrifices I will have to make going forward to cover my unplanned and unbudgeted expenditure.

If the $90 tickets were to see another team that I don’t passionately root for (and wear lucky garments for) in the SEC Championship, there would be no way I’d pay that price to go to the game! The value of being at a championship game that my team isn’t in is easily dwarfed by the money I would have to fork over.

Price and value decisions are part of our everyday lives, and everyone needs to understand the differences. The price of a manicure and pedicure may be worth it to you, but for me, the value of such services is minimal. The price of a really nice bottle of wine may be worth it to you, but for me, the value that I would get out of a glass or two just isn’t there. You might be perfectly content with a serving of apple cobbler at a lower price, but the value of that ice cream a la mode deliciousness is worth the extra cost to me! No one is right or wrong as long as they can afford their price and value decisions, but when it comes to living within a budget and cutting back expenses, you need to take a close look at all of your expenditures and make sure the value of each of your purchases justifies its price.

As MasterCard might say, “SEC Championship tickets: $90 a piece, parking pass: $30, seeing my Bulldogs win a championship: priceless.” Well not priceless, but in my book, worth a few sacrifices over the next couple of weeks to make happen.

Go Dawgs!

-Tom

Fantasy Football

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When I sit at my desk in the fall and should be thinking about investing, I occasionally have my thoughts wander to football and fantasy football. A few glorious Saturdays ago at a splendid tailgate I came up with the notion that instead of fighting my fall thoughts it might be fun to combine them and see what fantasy football can teach us about investing. Maybe it was that 7-layer dip, or maybe it was my Dixie Cup “talking,” but the more I’ve thought about it, the more I think there are some simple investing lessons buried in the fantasy football world:

• Diversify- In one of the leagues I’m in, I walked away from the draft with an unusually high number of Green Bay Packers. It wasn’t my plan, it just kind of happened that way. Aaron Rodgers, Randall Cobb, Mason Crosby, and the Green Bay defense aren’t too shabby, but they are all from one team. My fantasy team seems to do well when Green Bay does well, and it stinks when Green Bay stinks. When Green Bay had their bye week, do you think that was fun? No, my fantasy team was a wreck. This could happen to your investment portfolio, too! If most of your investments are in one stock, one industry, or even one mutual fund, you can lose a lot when your investments don’t perform well, just like I lose a lot when the Green Bay Packers don’t perform well. Had I sprinkled in a few more 49ers, Falcons, and Steelers who didn’t have Week 10 byes in my fantasy football portfolio, I could have avoided relying on the Green Bay Packers every week, and skipped my Week 10 bye problem entirely.
• Long-Term Strategy- If you are in a “keeper league,” you already know where I’m headed. Most fantasy leagues have completely new drafts every year where every manager starts from scratch, but some leagues allow you to keep a certain number of players from the previous year. If you know you are going to have the opportunity to keep some of your players, deciding between drafting Peyton Manning (who is nearing the sunset of his career) and drafting Robert Griffin, III (who could be around for the next fifteen years) becomes a little bit more difficult of a decision. In a “keeper league,” you probably should lean more favorably toward the up-and-coming players with potential and a high probability of future growth. The stock market is also a keeper league, as you don’t get to start fresh every time you invest and your previous gains and losses go with you. Therefore, in the stock market you need to think long term and focus on earnings potential and future cash flows - not how the stock will briefly overreact to tomorrow’s earnings announcement.
• Buy Low, Sell High- Take my team for example: had I traded away Tony Romo after his Week 1 307 pass yards and 3 TDs performance for Alfred Morris, Washington’s little-known running back at the time who has been lighting it up lately, I would have bought low and sold high. Everyone in my league would have thought I was crazy then, but my team would be better now as we speak. It’s almost counter-intuitive to buy low and sell high, but that’s how you win fantasy leagues, and come to think of it, make money investing. When do you want to purchase a stock? When it’s very cheap or low. When do you want to sell a stock? When it’s high or overpriced. This sounds easy, but it’s very hard to do. Did you naturally want to buy Bank of America at $3 and sell Apple at $700? I rest my case. 
• Active Management- Let me go on the record for all fantasy sports enthusiasts out there and express my displeasure with those of you who draft your team and don’t keep up with it. You sadden me. You don’t have any idea when your fantasy team does well, and you don’t have any idea when your fantasy team gets crushed. There is nothing more frustrating than losing to someone who has not updated his or her team, but I can honestly say I’ve never been in a league where, by the end of the year, someone who had not managed his or her team took home the trophy. I believe the same holds true for investing. You, or at least your financial advisor, need to pay attention to what’s going on in your investment portfolio, or the risk of terrible losses is huge. Passively letting your investment portfolio (or drafted fantasy team) roll on its own can work for a while (cough, cough, team I beat in the playoffs last year), but I’m a firm believer that, eventually, active management will win.

For those of you who play fantasy sports, I hope you got something out of this. For those of you who think fantasy sports are for geeks or crazed sport fanatics, you’re right, but you’re also missing out on the fun. Either way, I believe diversifying, having a long-term strategy, buying low and selling high, and actively managing your investments add up to a simple recipe for success for your fantasy and  financial portfolios.

And, as I always tell my friends, [insert your favorite team here] before fantasy. Go Falcons!

-Tom

My Fellow Americans

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My Fellow Americans:

By this time tomorrow, President Barack Obama or Governor Mitt Romney will be our next president-elect. By this time tomorrow, television channel 2, channel 46, and channel 202 will either be rejoicing or mourning. Channel 360 will have launched fireworks across its scrolling bottom line, or its pundits will already be discussing the year 2016. By this time tomorrow, close to 50% of the country will be happy and 50% of the country will be disappointed, but we need to keep this in perspective.

Regardless, the campaign or “easy” part will be over, and our elected leaders will face the same challenges our country did this morning. Our national debt will still be more than $16,000,000,000,000, our annual budget (which Congress hasn’t officially passed in more than 3 years) still isn’t sustainable, our unemployment rate is still high, our consumer sentiment is still pretty low, and our individual and corporate tax laws need substantial reform. In order to save you from additional political fatigue, I’m not even going to begin listing the serious national security and social issues our country is facing.

However, even if the candidate you preferred does not win, it’s important to take comfort knowing that our nation still remains one of the strongest in the world. Other countries still flock to our economy and currency for stability and opportunity, we have the best armed forces, and in the words of Winston Churchill, “Americans can always be counted on to do the right thing after they have exhausted all other possibilities.” We can only hope that our nation and its leaders prove the late prime minister correct going forward.

I’m expressing my perspective because my friends, family, and clients have driven me to be neither a Democrat nor a Republican. I simply believe both parties have done America wrong, and it’s going to take both parties to set America right. While I acknowledge many of my values and beliefs are fairly ingrained, in this historically divided political climate, I often find myself trying to pull supporters of the far left to the right and pull supporters of the far right to the left. The Democratic Party has better plans and ideas on some issues, and the Republican Party has better plans and ideas on others. It’s important to acknowledge that there is no way that 150 million other Americans have a “stupid” opinion just because it is different than your own. In my opinion, our government and we, the people, should recognize the need for swift action from our government on many issues and start walking towards each other in a middle-of-the-road, compromising kind of way. Since when did it become more important to win red versus blue and not win as the red, white, and blue?

So what does politics have to do with personal finance? More than it should. Many of those same friends, family members, and clients who have driven me to try to see things from the middle have slowly been allowing their political views to seep into their investment philosophy. As a financial planner who is trying to be a trusted advisor, I cannot let you do that. It’s at least my duty to try to help you differentiate your politics from your portfolio.

What impact should the immediate election results have on your long-term investment strategy? Probably not much. Look, neither I, nor anyone else, know what the markets are going to do in the short term, but I do know that over the long term, they will rise. I don’t know which sector will perform the best in the first quarter of 2013 under a Romney or Obama administration, but I do know that your current interest rate on your cash accounts or Treasury Securities isn’t going to win versus inflation. I don’t know which candidate is going to hit the magic 270 in the Electoral College tonight, but I do know that the intrinsic values of well established companies like Home Depot and Coca-Cola are not going to diminish that much regardless of the election outcome.

If by tomorrow you are not sure you can emotionally or physically get through the next four years based on how your investments are allocated, then maybe you should do something. If you feel this way though, chances are you probably should have started doing something differently a long time ago, not just because of this election. If the election results give you an impulse to change your portfolio to 100% equities or 100% cash and gold, please step away from the televisions, radios, and social media sites, go to sleep, and call your financial advisor in the morning after you have had some time to cool down and differentiate your politics from your portfolio.

I stay away from politics on 2MuchCents as much as I can, but I felt like this needed to be said. Next time we’ll also be looking at some investing tips, but in terms of fantasy football.

Go vote.

-Tom

How Much is That Doggy (or Cat) in the Window?

Many of you who know me personally have by now had a chance to meet Lucy. My wife and I could not be happier with our miniature dachshund we rescued a little over a year ago and the joy she has brought to our home. At times she is childlike, at times she is a full-fledged friend, at times she is a loyal companion, and she’s always a mess…

There was the time when she ate a Plink as I was rearranging things under the sink, and she started belching up lemon-scented bubbles. That was hilarious only after I had her treated at the emergency vet and convinced my wife not to kill me. For the record, Lucy had great puppy breath for almost a month.

There was also the time that Lucy learned what an ant hill was as she chased some sort of beetle in the grass straight into the mother of all anthills. She owes me a lot of itching and a tube of ointment, but I didn’t think twice about rescuing her from the divisions of ants that were none too pleased by her intrusion. I’d do it again if I had to!

There was also that time when Lucy jumped off the ground onto the sofa and then onto the coffee table because she undoubtedly wanted a glass of eggnog. Little did she know that she would get several glasses and a pitcher’s worth in the process as she slid off the slick table. I was irate as I cleaned things up. Everything looked pristine, and I was finally headed towards my milky, nutmeg-covered pup when she looked me dead in the eye and decided to shake her coat clean herself. I couldn’t help but laugh as I was back at step one of the cleanup process.

Why do I tell you all these stories? Two reasons, really. One, I love Lucy and all the fun she provides. Two, owning a pet can be expensive, and I’d like to offer a few thoughts on how you can experience the joys of owning a pet without crying cats and dogs!

• Consider adopting a pet. Adoption fees are often much less than what you would pay a breeder.
• Consider the pet’s size. Most small animals eat less food than their larger counterparts. Less food means less expense. Enough said!
• Don’t go treat or toy crazy. Sure it’s fun to hold out a piece of pig ear, a cheese and bacon flavored ice cream, or a squeaky toy that resembles your rival team’s mascot and see your pet’s excitement, but treats are an additional expense and most of the time are not the healthiest thing in the world for your pet. Remember that undivided attention, back-scratching, and head-patting can get you a long way with your pet (and maybe even your husband come to think of it), and they are free!
• Think about your upcoming trips. It doesn’t take many nights of boarding a pet before your 5-star hotel will need to become a 3-star hotel in order to make ends meet. If you have a pet, think about day trips, or trips you can take your pet on with you, to avoid this expense. If you’re lucky, you may also be able to find a trustworthy friend or relative who will periodically be happy to pet-sit for you.
• Do not try to skimp on health care. Get your pets their vaccinations, buy them quality food, and get them the medicine they need when they are sick. A few dollars saved every month on less than desirable care can go up in smoke quickly with a serious illness or infection.
• Consider passing on pet insurance. I know people who swear by pet insurance and people who swear at pet insurance. All I will say is consider the premiums, consider the deductibles, and read the details about what sicknesses and conditions are covered before you reach a conclusion. If you make me choose, I say pass on pet insurance if you have saved up a decent-sized rainy day fund because you are somewhat self-insured. This strategy allows you to decide what is in your pet’s best interest and your financial interest when you actually have to, as opposed to throwing a little into the pet insurance pot every month wondering if you or your pet will ever need it. To be honest with you, when I look at Lucy’s unexpected medical costs versus the pet insurance premiums I would have paid, it looks about even so far.

I hope this gives you some things to consider if you are thinking about becoming a pet owner or even if you already have a dog or a cat of your own. I’d like to write more, but I just heard a crash and a bark. There is simply no telling…

-Tom

Making Your List, Budgeting It Twice

Credit: Kittisak

I ran out this past weekend to grab some paper towels and cough drops at a local store, and I saw something that would make Dracula, Frankenstein, and even Edward Scissorhands writhe in horror: Christmas merchandise already for sale. I’m as jolly of an elf as they come when it’s December, and I’ll be blaring those catchy Christmas tunes the day after Thanksgiving, but I could have sworn we were still in the middle of October! Yes, next to the Halloween decorations, candy, and costumes were Christmas cards, wrapping paper, and lights. I had planned on saving this post for a few weeks down the road, but the stores have left me no choice. Today, we’re going to look at how to budget for Christmas gifts.

Some say you should keep the Christmas spirit all year long. While I tend to agree with the sentiment, many families take their credit card bills from the holiday season with them into the next year, and I don’t want you to start the new year like that! Even many families who do not overspend around the holidays, or have more than enough assets to smoothly absorb the financial damage taken during the twelve days of Christmas, still don’t have any idea how much Christmas costs. Christmas is expensive! I’m not trying to be the Grinch or Mr. Scrooge, I’m just trying to make sure you have enough cash left over at the end of the holiday season to buy your favorite financial planner a gift, or at least start 2013 in good shape.

In order to spread your Christmas cheer effectively, you need a budget. Figure out how much you can, or want, to spend on Christmas gifts. This amount is totally your call, but I really don’t think you should go into debt for Christmas beyond what you can immediately pay off. Once you have your budget, get some cute Christmas stationary, a nice sheet of notebook paper, download a Christmas list template, install a Christmas list app, or make your own spreadsheet and start listing who all you will be shopping for. Once you’ve done this comes the hard part - putting a dollar amount next to each name, and when you are done, seeing how the sum of your dollar amounts next to names looks versus your originally budgeted amount. If it’s higher, keep tweaking or crossing “naughty” people off your list until you get within your budget. If it’s lower, keep what you have; chances are you forgot someone or will end up spending a little more for “the perfect gift” for someone else anyway.

Now you’ve got a really organized and financially responsible map on how to Christmas shop. Hit all the stores and do your worst, but always take your list with you to keep you on track. Do not deviate from your original budget no matter how great the sale, how pretty the handbag, or how swank the new electronic device. Otherwise, this process really won’t help you.

Feel free to pay with credit cards you already have (Do not open up all those store credit cards for their little, one-time discounts, no matter how tempting), but paying with cash isn’t a bad idea either to help keep your spending in perspective. Also, save your receipts. The receipts will help you reconcile your spending and allow someone on your list to return the argyle socks and T-shirts you got them should something else strike their fancy.

I know these suggestions may seem pretty obvious and fairly simple, but not a lot of people take the time or invest the effort to do this. Trust me; writing up a Christmas list budget can really help the craziness of holiday shopping go a lot smoother and faster, without the overspending.

This is going to sound weird, but Happy Halloween… and Merry Christmas!

-Tom

You’re Retired, Now What?

Credit: stockimages

Just because you are retired does not mean you need to stop managing your finances. It does mean that after a long day at work, I’m a little jealous of you, but what do you care? You’re retired! After all those hours, all of your sacrifices, all of your savings and retirement plan contributions (hopefully), you deserve it. Today, I’m going to wrap up our suggested financial plan for a lifetime and offer some suggestions on how to make the most out of retirement without running out of money. Here goes…

• Get your cash up. I’ve found that most people have a “magic number” they like to maintain in their personal cash account. What’s yours? (I bet a number just popped into your head.) Some people I know have $10,000 or less because they don’t trust themselves with temptation, and that’s fine, - they know themselves. Some have almost 5 years’ worth of living expenses in cash because that gives them enough security to turn off the radio and television personalities who are telling them that the world is about to end for the 276th time. There is no correct answer, but I’d figure out how much your annual living expenses are above your annual incoming Social Security and/or pension payments, and I’d set aside somewhere between one and two times that amount in cash. If you stay above your “magic number,” you’ll be happier.
• Fine tune your asset allocation, again. No, this is not a copy and paste from last week; this is a genuine suggestion. If you don’t want to risk running out of money in your eighties and wondering where you can get a job, make sure your portfolio is in a prudent place. You want to have a sizable allocation in cash and bonds to ensure the stability of your nest egg, but you also need a sizable allocation in equities to allow for principal growth and to protect against inflation. What’s your checking account earning you right now? What do you think the inflation rate will be over the next decade? What do you think the stock market’s volatility will be over the next decade? See why you need an adequate amount of cash and bonds for income and stability, but at the same time, you also need an adequate amount of stocks for growth and inflation-protection?
• Vigilantly watch your annual withdrawal rate relative to your investment assets. No matter how wealthy you are, your investment assets get to dictate your lifestyle in retirement, not the other way around. If you look back and see that you are withdrawing more than 4 or 5% per year and you are in your 60s or early 70s, my alarm bells are going off, and yours should too! 5 to 6% in your 70s and 80s is likely doable, but don’t push it. I know you can’t take your money with you, but running out of funds to support yourself is a lot worse on you and your kids than leaving them a little.
• Update your Estate Documents. Not to be morbid or anything, but most of the time when people retire, they have a good portion of their life behind them. You need to make sure you have an up-to-date will that fulfills your desires and leaves behind the legacy you intend. As tax laws change, you may need to revisit your will periodically to make sure your plan is still on track. It’s also a good idea to redo your power of attorneys and health care directives as states frequently update these documents. It is not only crucial to have these forms in place, but you also need to have current versions in place to make sure your doctors, hospitals, and financial institutions will honor your intended wishes and listen to those you wanted to act on your behalf.
• Give while you’re living. I know, I know; I just told you to be careful about withdrawing and outliving your nest egg, and now I'm telling you to give it away. The key is thoughtfully balancing your wants, needs, and wishes, and avoiding acting on a whim. Back to my original point though: a colleague of mine often tells people to “Keep giving while you’re living so you’re knowing where it’s going,” and I couldn’t agree more. If you are in a comfortable enough financial position, wouldn’t it make you happier to see your grandson’s excitement if you took him to the Grand Canyon yourself as opposed to having to look down on him through some clouds and pearly gates? Wouldn’t it mean more to your kids if you set aside funds for your new granddaughter’s college tuition right off the bat as opposed to giving them the assets posthumously after they’ve been sacrificing and struggling to save for years? Again, I’m not trying to be morbid, and you need to be careful not to become the sugar momma or sugar daddy for several generations, but at least consider doing what you can, and actually want to do for others you care about, while you are able to enjoy the memories.
• Move on. I recognize I’m still a relatively young guy in this wild and crazy world, but I am often just as much a counselor to clients as I am a CPA or financial planner. I can’t tell you how many people I’ve seen struggle with retirement emotionally. You need to realize that retirement is not just sleeping in and going to the beach. Retirement is a financial, life-changing event. You no longer have a boss (except your wife). You may no longer have deadlines. You may have more free time than you actually want. You may see many workplace “friends” fade into just former co-workers. Many people love retirement from the start, and I hope you do, but it can hurt emotionally. My suggestions would be to find or dust off some hobbies, volunteer with some organizations you care about, find some television shows or a good book, travel, exercise more, and reconnect with some old friends or make some new ones. Most importantly, diligently and patiently work on reshaping your life with your spouse and family. You may not be used to being around them as much as you are in retirement, but they aren’t used to being around you as much either!

I hope you’ve gotten something out of the Now What? series. I encourage you to save these posts and put them in a place where you will periodically stumble across them to see how you’re doing. I’m not saying this because I think I’ve got it all figured out or because my plan is tailor-made for you; I’m saying this because I want you to be able to live a full life and retire in style without always fearing your finances. My suggestions won’t work for everyone, but in many cases, I believe they will get you off to a really good start.

Well, I finished the Now What? series, now what? Guess you’ll have to check back in next week.

-Tom

You’re an Empty-Nester, Now What?

Credit: tratong

This post is going to be special because it’s the only one thus far that I’ve written while cruising at 26,000 feet (I was flying back from visiting an out-of-state client). If you like what you read, let me know, and I will try to travel a little more often. If this post ends up not being one of your favorites, I blame the stale peanuts and the guy next to me who did not turn off all of his electronic devices before take-off.

I tell you about my flight because I think landing a plane is a fitting metaphor to describe what you should be preparing for in the “Empty-Nester” stage of life. What I mean is that the flight of parenthood is largely over, and now it’s finally time to get back to focusing on you and your spouse (and your financial well-being.) I know clients who admittedly are quite sad that their children have driven off into the real world, and I know clients who are secretly (or even not so secretly) taking a big sigh of relief and considering throwing a party. Whatever your emotions, it’s time to take a closer look at planning for retirement. You can choose to plan ahead and have a nice, smooth landing, or you can choose to wing it and hope things work out. Considering my wife’s and my mother’s disdain for turbulence, I’m going to recommend planning ahead and making a smooth landing. Here are a few tips on how to make sure you arrive at your retirement destination confidently and successfully:

• Make sure you get your “raise.” In my last post, I mentioned that it should be your eventual goal as parents to get your kids off your payroll. Stopping or significantly lowering your financial support of your children is not mean or wrong; it’s about simply being a mother bird and forcing them to fly out of the nest. Some kids may fly out on their own, but based on many of my clients’ experiences, gently pushing those hesitant kids out of the nest is oftentimes the best thing you can do for them! Once your children fly away, it’s going to feel like you have gotten a raise, and maybe even a big one! Take this extra money from your reduced kid expenses and boost your savings, eliminate your debt, or contribute more to your retirement plans. Having your kids off in college or working in the real world does not mean the random greeting card with a $20 bill needs to stop or that short-term assistance with replacing a transmission is a bad idea, but you need to make sure that any remaining “financial umbilical cord” between you and your children is not stunting their growth or independence, or more importantly, damaging your ability to retire.
• Take your debt down to zero. If at all possible, you want to go into retirement debt-free. Not only will your fixed monthly expenses be lower, but you will also sleep better. I say this because I’ve found it’s rare to have a calm or even a happy client who is not working and is still in significant debt. I frankly don’t care what the interest rate is, what the monthly payment is, or whether it’s your mortgage, the remaining principal on your new car, your utilized home equity line, or the debt you worked up that weekend in Vegas, I would almost always advise you to be debt-free by the time you go into retirement. Figure out when you are going to retire and how much money it’s going to take to eliminate your debt. Figure out if you are going to utilize any extra cash you may have, start applying your “raise”  money we just talked about, or if you should consider dipping into one of your investment accounts to pay down your debt. Hopefully as an “Empty-Nester” you can implement a plan to be debt-free by retirement, but if you cannot figure out a plan that will work, you may need to push back that retirement date you have in mind.
• Figure out how much you will need or how much you can afford. This may take some homework on your part, but you need to figure out how much you are planning on spending every month in retirement. Do you want to keep your current lifestyle? Are you willing to cut back your lifestyle a little? Are you planning on living it up? Look at the monthly income you need to allow you to live the way you want in retirement, and compare that to your pension (if you have one) and your expected Social Security income. You’ll probably begin to look at your investment assets in a whole new way. You may conclude that you have enough and are still working simply for personal satisfaction or to achieve those retirement benefits. You may also conclude that you need to build those investment assets up by working longer and contributing more, but at least you now have the motivation to keep punching the time clock. Whatever your financial situation, you need to know how much you have versus how much you need versus how much you want. Please realize that this is much more valuable information when you are preparing for retirement as opposed to beginning retirement.
• Fine tune your asset allocation. I’ve been preaching to you since the beginning of this blog to think about investing as a long-term strategy, and I’ve meant it. However, if you are an “Empty Nester” considering retirement, your time horizon is not as long as it used to be. This does not mean you need to put your cash in a shoebox, buy a bunch of precious metals, or start looking at lots of Certificate of Deposits (CDs), but it does mean you should take a look at your holdings. If you are conservatively invested, it may be time to stay the course. If you are aggressively invested, it is probably time to dial back the risk a little. You should remain invested to beat inflation and allow for principal growth of your assets, but you want to make sure you are not subjecting your hard-earned nest egg to any undue risk in the eleventh hour. A big market downturn, an industry’s bubble popping, or a sharp fall in some undiversified stock hurts a 60-year-old a lot worse than a 30-year-old. Do not try to strike it rich by going “all-in” with risky investments so late in your career either!

I cannot stress to you how important it is for you to have a financial plan in place going into retirement. In fact, I’d argue this is the single, most-crucial time in your life to have a detailed financial plan. Please do not risk crashing and burning; it’s just not worth it, and you literally can’t afford to be wrong.

Well, we have one chapter left in the Now What? series. Be sure to read next week’s post as we will wrap up our lifetime financial plan overview and take a look at what you, or others you may know, should consider doing after retirement.

Have a good week, and remember to go with the cookies over the peanuts the next time you fly, trust me.

-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

You Graduated from College, Now What?

Dummm ... da da dum daaa dummm .... dummm ... da da da dummm… Sorry, Sir Edward Elgar’s Pomp and Circumstance regrettably came to my mind as I started drafting this post.

Either way, today we begin our “Now What?" series, but I need to mention something before we get started. This series is only being broken down into five stereotypical (almost Utopian) life stages as a way for us to outline a suggested financial plan for a lifetime in bite-sized chunks. For example, this post is not just for college graduates; this post is primarily for young people, ranging from high school graduates to people who are relatively new in the workforce, but it can be a good refresher for everyone. Now that we’ve hopefully got that cleared up, let’s go back to that car ride home with the family after college graduation…

Go ahead and enjoy that celebratory lunch, take a few days off, and savor all the cards (and checks) you will probably get in the mail. Graduating from college is a huge accomplishment, but I need to burst your bubble with one of the lessons that hit me hardest right out of school: You have a lot left to learn. I had a master’s degree, I graduated with honors (lowest honors, but still honors!), and I had even passed portions of the CPA Exam, but I quickly realized I had a lot left to learn. I remember sitting at my desk at my first, real, full-time job realizing I had an impressive college pedigree, but somehow at the same time, I knew “diddly-squat.” The real world doesn’t let you go out on Thursday nights, take naps between meetings, or care about your GPA. The real world plays by a different set of rules, and your finances need to adjust accordingly. Here are some suggestions:

• Do something. Whether you’ve graduated recently, have decided to try to change jobs, or have been forced to change jobs in recent years, you know how tough the job market has been. This is why I say “Do something” as opposed to “Get a job.” Doing something includes interviewing for a job like you’ve always wanted, going after a job that’s close to what you’ve always wanted or that could help you springboard into the job you’ve always wanted, getting an internship in the field you want to eventually work in, and even volunteering in any capacity you can find in your area of interest. If you exhaust all those opportunities, maybe consider going back to school to further your training or taking a different type of job. I believe many members of older generations would agree to some degree with the statement I’m about to make: A job is a job. Do something; don’t sit and wait on life, or it will pass you by.
• Start saving. The Bank of Mom and Dad is about to close if it hasn’t already, but don’t fret, this is a once-in-a-lifetime opportunity. You can start living within your means now and likely avoid many of the financial problems that plague others. By that, I mean if you start earning a salary and immediately start saving 10% of it, donating or tithing 10% of it (if you choose to), and investing 10% of it, you will not feel like you are sacrificing anything. That 70% of your remaining salary (100% - 10% saving, 10% donating, and 10% investing) should be relatively easy to live off of as it is probably more money than you have ever earned anyway! When you get that next raise or bonus, keep the same percentages and you won’t even notice you’re saving, donating, and investing more; you’ll just feel like you’re earning more. My theoretical percentages aside, I’d try to save up at least $10,000 cash in a rainy day fund right off the bat.
• Start investing. As I alluded to above, start investing. Many financial planners and wealth advisors have different theories on what you should do, but my personal recommendation would be to start maximizing Roth IRA contributions ($5,000 per year) and setting your contributions to your employer’s 401(k) or retirement plan to at least whatever it takes to get the maximum match amount. Remember that it’s important to invest sooner rather than later as $1,000 invested at age 18 averaging a 5% return per year would equal $6,081 at age 55, whereas, $1,000 invested at age 25 with the same average return per year would only equal $4,322 at age 55. The longer your investments can compound and grow, the sooner you can retire in style!
• Fight off debt. If you have student loans, now is the time to lay waste to them. You do not want these hanging over your head any longer than you have to. Don’t nix your savings or investing plan, just try to live a little leaner so you can start making significant progress towards extinguishing your debts. Also, for no reason short of an alien invasion or maybe blowing out your car’s engine should you start carrying credit card debt! Pay it off every month, no excuses. The interest rate is simply not worth it!
• Make a budget. One of the most amazing things I have realized as a financial planner is that no matter how much money you have, you can get in financial trouble pretty quickly if you spend beyond your means. Don’t adopt the approach that you will pay for everything and save what is left. Save some receipts and bills for a few months and figure out what you can save, donate, invest, and put towards debt first and still have enough left to live reasonably. Remember, you’re not in college anymore - large expenditures for Dixie Cups, grass skirts, and 24-packs of corn dogs (they were good) should not be the norm.

Congratulations again on graduating from college. I hope, and believe, these suggestions will help get your adult life jump-started. Don’t get me wrong, the world is still your oyster; you are just going to have to earn it!

-Tom

The Lightning Round

Credit: FreeDigitalPhotos.net

Thanks for all of the questions you submitted. Please know that I am always happy to try to help with any questions you may have, whether they are related to one of my posts or not. Now, without further ado, here are my responses to 5 questions submitted by readers just like you...

1. What’s the best way for my friend to handle a credit card with a big balance? She’s thinking about transferring the balance to another credit card with a lower interest rate. Is that a good idea? After she pays it off, should she close it? My friend read somewhere that it doesn’t matter as long as it’s not your oldest credit card. Thoughts?

- Becky                        

                         

The best and only way to eliminate credit card debt is to pay more than the minimum. Pack your lunch instead of going out with your co-workers, temporarily decrease your cable package, wait an extra week between nail appointments, or pass on joining that fantasy football league with the buy-in. You must do whatever it takes to pay more than the minimum payment or else the high interest rates can eat you alive! Other options that are often suggested to handle credit card debt include taking out a Home Equity Line of Credit (HELOC) to pay off the debt, temporarily borrowing from your 401(k) or retirement plan (if the plan allows it) to pay off the debt, or even transferring the debt to a different credit card with a lower interest rate. Given the right financial situation, these techniques could be effective and save you interest, but I would urge caution with all of these options because you are only “robbing Peter to pay Paul.” If your friend is going to transfer the balance to another credit card, she should make sure there is no fee for transferring the balance from another card that could negate any interest saved. Eliminating credit card debt should arguably be everyone’s first financial priority, because once the debt is gone, the money you would have otherwise spent to cover your debt and interest payments can easily be saved to build up your cash and establish a rainy day fund.

I don’t think closing a credit card account is necessarily a good idea unless you think that’s the only way to prevent yourself from going into credit card debt again. Using a few credit cards responsibly can be a good idea, and some cards offer worthwhile incentives and rewards, but stay away from opening up all the "take an additional 10% off today’s purchase" cards that you're always harassed about at the checkout counter. Having too many credit cards, closing too many credit card accounts, and not having credit card accounts with long histories can affect your credit. If you have a card that you don’t want or no longer need, I’d cut it up and put the pieces in several different trash cans to minimize identity theft, but I normally wouldn’t recommend closing the account. 

2. What exactly is income streaming, when should we look at turning it on, and should we worry about it “running out” before we want it to?

- Jill                              

When you say “income streaming,” I imagine you are talking about an annuity. An annuity is a financial product that, for an initial investment or series of investments, entitles an investor to a stream of payments or a lump sum in the future for anywhere from a set period of time up to life. The future payments can be fixed or variable depending on what type of product you have. The benefits of an annuity are that it is a way to defer income taxes and guarantee a stable stream of income in retirement. The drawbacks are that annuities frequently come with high fees, limited investment options, and surrender charges if you pull out money in the first several years.

As far as when you should turn it on, it really depends on your specific situation and what type of annuity you have. Regardless, don’t turn on an annuity before age 59 ½ as you could face a 10% early-withdrawal penalty like you do with other tax-deferred retirement plans. If you have a lifetime product, don’t be as concerned about outliving your income stream, but if you don't have a lifetime product, wait (if possible) until you feel like you actually need the additional income. Please note that annuitizing, or turning on the annuity, is often an irrevocable decision, so consider it carefully before you decide. You may also want to consider the potential benefits of cashing in the entire annuity and exploring other investment options that may have lower fees and offer more flexibility.

3. I enjoy reading your blog, but could you tell me a little more about what you actually do?
      

 - Brett                            

Thanks for the question, and I am happy to talk about what I do for a living. I am a financial planner and a CPA. I work for a wealth management firm in Buckhead. My daily responsibilities include examining and evaluating clients’ investment strategies, reviewing and analyzing clients’ current financial situations in comparison with their life goals, and considering clients’ estate plans (wills, powers of attorney, health care directives, trusts, etc.) to make sure they are maximizing their tax planning opportunities and setting themselves up to leave behind a legacy they would be proud of. I help people figure out how to send their kids to college, when they can retire with a lifestyle they will be happy with, and how they can give to charity in the most advantageous ways. I am a jack of many trades, but my goal, and the goal of my firm, is to relieve our clients of the burden of worrying about their finances by getting them on a financial plan or path where they can achieve all their goals and live in a sustainable manner. I chose to work for the firm I did because we know there is a lot more to financial planning than investment management and insurance, and because we don’t work for commissions. This allows me to look my clients in the eye and give them advice with them absolutely knowing that I am advising them with their best interests in mind, not my end-of-year bonus. If I can ever be of assistance to you or anyone else you know, please let me know.

4. I have read a lot recently about the Black-Scholes Model. Can you explain it? Do you use it?

 - Anonymous                  

I know the basics and am capable-enough to have a conversation with you about Black-Scholes, but I’m not sure I can completely explain it. It was derived by some gentlemen who are a lot smarter than me and no doubt had a lot more time on their hands, but here goes…

The Black-Scholes Option Pricing Model was developed in 1973 by Fischer Black and Myron Scholes and is considered by many to be one of the most important concepts in modern financial theory. The equation derives the implied price of European-style stock options by essentially using five variables: the current stock price, the exercise or strike price of the stock option, the time until the stock option expires or matures, the annual risk-free interest rate (usually considered the interest rate on a U.S. Treasury Bill), and the annualized volatility (fluctuation of the stock price) of the stock. The formula is quite frankly disgusting, and I will show you a simplified version here. I can, and have, worked the equation with Excel, but I don’t stand a chance with pencil and paper. Luckily, there are some online calculators that can help you as well, but you need to make sure you are confident in the variables you enter before you rely on the output!

The reason the Black-Scholes Model was so groundbreaking in the financial world (and the reason it won a Nobel Prize in Economics in 1997) was because it was a method that finally allowed everyone to mathematically estimate what the value of a stock option is. If, after running the Black-Scholes Model, the current stock price exceeds the implied stock value, it might be time for the stock option holder to strongly consider exercising the stock option. I know many people who sell their stock options as soon as they receive them, and I know many people who hold them dangerously close to the expiration date, but I don’t know many people who exercise them sometime in the middle. Black-Scholes is great, and I run it for clients from time to time to give them perspective, but let me offer two, much more simple theories of mine relative to stock options:

• Little pigs get fat and hogs get slaughtered- If your stock options are in the money (the current stock price is greater than your exercise price) by a fair amount, what are you waiting for? You can exercise the options and reinvest in a diversified portfolio that has much less risk and still has the opportunity to increase in value. Remember, if the stock price dips below your exercise price, your stock options are worthless.
• The time until your stock options expire is like a runway- If I’m trying to land a big jet, I want the longest runway possible for maximum flexibility and the opportunity to succeed, and I feel the same way about stock options. If you are a couple of years out from the options expiring, you have more control over your landing as you can consider tax implications and your current cash flow needs. Also, if your stock options are in the money, you can eliminate the worry and go ahead and receive some additional money you weren’t guaranteed to receive in the first place! Whereas, if you hold the options until they are a couple of weeks from expiring, you have given yourself a really small runway, and all I can say is that I hope the stock price is up for your sake. You shouldn’t rush pulling the trigger on stock options, but too many people go down with the ship by holding on until the bitter end.

5. I've got two for you... 1. Is it possible to roll a traditional 401(k) into a Roth 401(k)? If not, should I open another account but make it a Roth? I like the idea of paying my taxes now instead of watching them go up over time. 2. Can the second stage in your upcoming series include a couple of tips for just before you say "I do"? Good stuff!

 - Chad                            

I’m glad you’re thinking the way you are. Everyone is trying to figure out what taxes will be like going forward, but I’m beginning to believe more and more that the best-case scenario with the lowest tax rates is what we have now, regardless of what party is in power. If you share that belief, it means that you want to pay taxes now, not later; you want a Roth 401(k), not a Traditional 401(k). It is possible to roll a Traditional 401(k) into a Roth 401(k), but your ability to do that and exactly what avenues you will have to take to do that depend largely on your employer. At best, go ahead and try to combine your 401(k)s into a Roth 401(k), but realize you will have to pay income taxes now on the traditional portion you are rolling over. If your employer won’t let you do the Roth rollover, go ahead and try to combine your 401(k)s together for convenience sake, but know that your plan will have to keep up with the pre-tax (Traditional 401(k)) contributions and after-tax (Roth 401(k)) contributions separately. It is crucial that you make sure this consolidation is handled correctly in the beginning because you don’t want to have to go back and try to figure out how much tax you owe 20 or 30 years from now. For what it’s worth, I had a traditional 401(k) at my first job and rolled it into my new job’s 401(k). I did not convert the old 401(k) to a Roth, I just went with Roth 401(k) contributions going forward.

I love the idea for a post on some engagement or pre-marriage tips! I have actually thought about doing a post on ways to save money when planning a wedding, but I feared the nuclear fallout I might start between some of my bride-to-be readers and their fiancés. That being said, I will go ahead and offer a comment on one thing today that repeatedly bugs me: this mainstream idea that a guy is supposed to spend 3 months’ salary on an engagement ring. All I’ve got to say is that you should spend what you can and what you want to make the girl of your dreams say “Wow.” You don’t want her to ask you what bank you robbed. I know plenty of happy marriages with smaller rocks on the ring, and I know plenty of unhappy marriages or broken marriages with massive rocks on the ring. Getting engaged and married is not about ice sculptures, waterfall pictures, or exotic Venus Flytraps; getting married is about celebrating two people who have decided they want to be together for the rest of their lives.


Thanks again for all the questions. We’ll have another Lightning Round sometime soon!

-Tom