Two Years Down, Many More to Go!

Credit: Stuart Miles

It’s hard to believe almost two years have passed since we dove into the personal finance world together with a crazy story about considering opportunity costs in terms of junior bacon cheeseburgers. I guess time flies when you're having fun. I have enjoyed 2MuchCents, and I hope you have as well. 2MuchCents.com will close out 2013 with almost 14,000 views spread over 14 countries! For that, I thank you.

A lot of bloggers start strong, but run out of ideas. I admit I have some spells where I battle writer’s cramp a bit more than I would like, but I’m definitely not afraid of topics drying up. Between your questions, your friends’ questions, your family members’ questions, new things I learn and experience, and never-ending changes and developments in this crazy world we live in, I think I could probably write forever. I already have plans in 2014 to post about why you need to save now as opposed to later, how you can keep as much of your family’s money in your family as possible, and why I think you should be a “contrary” investor. I also want to take a close look at index funds, offer some tips on buying a car, do another lighting round (where all I do is answer your questions), and write a short series on how I would advise someone to position themselves so they can retire early. (You’re not interested in retiring early are you?) Despite my plans and future posts already in progress, please know I get the most joy out of directly helping people like you by answering your questions; whether it gives me an opportunity to do a blog about your topic or not.

In case you missed any posts, the five most popular posts of the year were:

1. This Diamond Ring
2. It Happens
3. Last Call
4. The Homemaker Retirement Plan
5. All That Glitters Is Not Gold

I think one more blog post is worth mentioning, My Uncle’s Living Expenses, because I got a lot of in-person comments on that one. After mentioning it again, maybe I’ll get more!

Let me once again thank Mr. Andrew Davis for his tireless edits and content advice. I also need to thank my special lady, Mrs. Lindley Presley, for her continued encouragement, social media guidance, and grammatical expertise. I could not produce 2MuchCents without those two individuals.

Here’s to a healthy, happy, and financially successful 2014!

-Tom

One Awesome Baby Gift

Credit: Marcus

More and more of my friends are having babies. Some are on number two (or even three)! It certainly is exciting, and one of these days I hope to be a dad myself, but all of these baby pictures, registries, and showers are something else. My wife and I usually try to give an awesome toy or something we know the proud parents have said they really need, but if I were Bill Gates, there is one awesome baby gift I really wish we could give. It’s not financially viable for us to give (especially since the storks have been so busy), but perhaps I can give you a few more details about one of the most awesome gifts you can give to a newborn and their parents: a 529 Plan.

A 529 plan is a college savings plan designed to help address future college costs including tuition, books, and other education-related expenses at most public (and some private) institutions of higher learning in the United States. 529 plans, also known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions, and come with many favorable tax benefits authorized by Section 529 of the Internal Revenue Code. Essentially, all of the money contributed, as well as any money earned while invested in a 529 plan, is allowed to be distributed free of federal income tax (and most state income tax) as long as it is withdrawn for qualified educational expenses. That means by setting up and contributing to a 529 Plan for a new baby, you are helping the baby (and his or her parents) pay for college and giving the stock market around eighteen years to have a chance to generate some significant, tax-free appreciation.

There are lots of technical questions to consider, like whether to go with a pre-paid tuition 529 plan or a college savings 529 plan (I’d go with the college savings plan because it gives the beneficiary more flexibility to choose more colleges in different states). You’ll need to select an initial investment allocation, but I usually propose an age-based portfolio that automatically addresses investment allocation going forward and reduces more-aggressive stock exposure as the beneficiary gets closer to college age. There are also limits on how much you can give a new baby in a 529 plan, but unless you are a pretty financially blessed parent or grandparent, these probably won’t come into play. Still, be sure to talk to your CPA or financial advisor before you proceed.

My point is that you really can give the gift of a 529 Plan because many plans and many states have relatively low minimum contributions ($25 or less in many cases) to set up a 529 Plan. Besides, even without the small initial contribution gift, by simply informing new parents about the huge potential tax benefits of a 529 Plan and giving them a mechanism to go ahead and start saving for college sooner rather than later, you are already doing a whole lot! Cute, little shoes are great, onesies are adorable, and dangling crib mobiles can be amusing, but I really am sold on the potential benefits of 529 Plans. Shoes, outfits, and toys are necessary and address a definite, immediate need, but helping a child (and their parents) graduate from college with less debt, or even no debt, is a pretty swell gift, too.

My wife and I haven’t yet given a 529 Plan to any of our friends or family members’ newborns, but we’ve told people about them. If you can give a little one you care about a 529 Plan, I encourage you to do so, but even if you don’t, you can give two baby gifts: a super-cute one and this very valuable information.

-Tom

Lessons from Black Friday

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A couple of years ago my wife and I agreed to add two holidays to our calendar: Husband’s Day and Wife’s Day. On Husband’s Day, I can create a day where we do whatever I want (within reason), and on Wife’s Day, the day is hers. In 2013, we decided to celebrate Husband’s Day in June (it’s a floating holiday), and it was truly glorious. The highlights included trips with my wife to the driving range, the bowling alley, the shooting range, and a golf superstore, with guy movies and greasy hamburgers intermixed. Wife’s Day, on the other hand, seems to have become more of a “fixed” holiday, as once again my sly wife somehow settled on Black Friday. Being one that is always happy with bargains and sales, and already in my wife’s debt for her participation in Husband’s Day, I hesitantly agreed to enter the land of competitive shoppers and “door busters.”

This year was my second Black Friday experience, but I still don’t consider myself a veteran - I consider myself a survivor. However, Black Friday isn’t all bad. There are a few things you can do to help make sure your future Black Fridays are successes and not financial burdens you’ll carry into the New Year. 

First, make a list of stores you want to visit. My wife took the time to make a list of stores she wanted to visit in a relative order of importance, while also considering their locations relative to each other and our home. I’m a lucky man for many reasons, but the fact that my wife took the time to have an efficient game plan on Black Friday is certainly another one. It saved us time, it saved us gas, and it kept us from shopping more than we needed to (or I could stand). Sure, we walked in a couple of stores to see something cool we saw from the window, but we primarily stuck to the plan. Sticking to your list of stores is a simple way to prevent overspending.

Second, make a list of the items you’re looking for. We still needed a few Christmas gifts, and my wife and I were both looking for some things for ourselves that we knew could be discounted on Black Friday, so we made a master list of what we were looking for. My wife walked away with a beautiful jacket (that was even more beautiful on sale), but outside of that one, unplanned bargain purchase, we stuck to our list. Limiting your shopping to a single list of items can also be critical in keeping you from overspending.

My third suggestion for you is to have a hard purchase limit. We had a couple of gift cards from birthdays and previous holidays, but we also had a dollar cap in the back of our minds. It doesn’t matter how cute the purse is, how real the leather boots are, or how soft the sweater is, what matters is how far below the “Black Friday cap” you are. My wife and I are careful, thrifty, picky shoppers, and I’m proud to say we got almost everything on our list without coming anywhere close to our self-imposed limit.

Finally, do not open any store-specific credit cards, regardless of how sweet they make the offer. There may be a couple of stores that have decent-enough perks if you are a frequent visitor, but for the most part, just say no. The additional credit inquiries you’ll generate and constant mailings and emails you’ll receive are bad enough, but the main reason for my stance is that I don’t believe people need any more temptation (or capability) to go into short-term debt than absolutely necessary. I’m not one of those screaming debt management gurus who is going to tell you to cut up all of your credit cards, but I am going to tell you to cut up the mostly useless ones, or better yet, don’t even sign up for the mostly useless ones. When my wife and I visited Old Navy on Black Friday, they opened an express checkout line for people willing to apply for an Old Navy credit card, and you should have seen the masses flock. That was dirty, and very well-played by Old Navy, but I waited in the longer line instead of taking the bait. The new card holders may have saved a few minutes, but at least I don't have a new, tempting line of credit!

Black Friday is not all bad, and it does offer a lot of great deals, so fighting the crowds can help you get a bigger bang for your buck. Just remember, 30% off of something you don’t really need is NOT savings – it’s a 70% expenditure you weren’t planning for! If I were a betting man, I bet I’ll get to do Black Friday again on Wife’s Day 2014, but I’ll be ready. Don’t tell my wife or my very manly friends, but I’m beginning to look forward to it.

-Tom

A Calculated Leap of Faith

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Do you love your job? If you do, that’s awesome! If you don’t, why are you still doing something you don’t like? Maybe you’re like most people and view your job as “just okay,” hopefully with more good days than bad.

I was flying back from meeting with a client last week and was reading everything I could get my hands on to try to drown out the wedding shower planning going on behind me. I was shocked to read that a recent study found that 80% of workers in their twenties want to change careers. That statistic strikes me as really high, but it inspired me nonetheless to share a few thoughts with those of you out there considering changing careers, whether you’re in your twenties or not.

First, try to bite the bullet and keep “suffering” through your current job as you explore ways to incorporate a portion of your desired career into your current routine. I’m not trying to rain on your dreams; I’m just suggesting that you gently test the waters before you do something drastic. You may find that hand-making wooden furniture, singing at a jazz bar, or making a whole lot of tiny cupcakes isn’t as glorious as you once thought, and by first approaching your desired career as a hobby or occasional activity, your finances probably won’t take that big of a hit.

If you've found that biting the bullet with your current employer or occupation is no longer a feasible option and you’re even more enthused by incorporating part of your desired career into your current lifestyle, it’s time to take the leap of faith. It’s time to take the leap of faith as long as you and/or your family won’t irreparably suffer should things not go according to plan. I’m still not trying to kill your dreams because life is pretty short, but sometimes you have to do what you have to do. Work is called work for a reason, and there is a reason someone is willing to pay you to do what you do. Despite being told as children that we could be whatever we wanted to be, a job you don’t completely enjoy that provides food and shelter may be better than a job you love that doesn’t. That said, if you’re convinced the risks of changing careers are worth the potential rewards, I’d advise you to make sure your spouse is completely on board and significantly boost your rainy day fund before you hand in your two weeks notice.

If you've taken the leap of faith, love your new career, and can adequately provide for your loved ones, congratulations! If you’ve taken the leap of faith and found that the grass wasn’t greener and you’re financially struggling more than you can withstand over the long haul, it’s important to know when to leap back. What I mean is that it’s important to know when to pack it up and return to your more practical, or at least more financially lucrative, career. You obviously want to make the leap back before financial ruin, but in some occupations it’s important you also consider how long you can be out of the field and still be able to pick up things relatively close to where you left off. If you made the leap of faith and things didn’t work out, don’t feel bad! At least you pursued your dreams; not everyone can say that.

Jumping from being a CPA tax preparer to a CPA/CFP financial planner was a big leap for me. I admire those of you chasing your dreams who have the courage to take even bigger leaps. Whether a big leap or a small leap, if you’re contemplating a career change, I wish you luck, but please make sure it’s a calculated leap of faith.

-Tom

The Best Time to Invest

Credit: Stuart Miles

One of the most common questions I get in my line of work is something to the effect of “When should I begin investing?” or “When should I invest this particular portion of money?” Many brokers and financial advisors would talk to you about their ultra short-term market expectations or about trying to time the market (investing right before the market goes up a lot), but you won’t get any of that hypothetical schmoozing from me. A dictator’s unforeseen actions, a politician’s ill-conceived comment, or a shocking corporate scandal can throw even the best short-term market forecast out the window, so more often than not, I reply to someone asking me about the ideal time to invest with a very simple answer: “Probably now.”

“Now” is not a cop out. “Now” is not due to lack of knowledge or experience on my part. “Now” is not because the sooner you invest, the sooner I can talk with you about investment allocations and options. “Now” is about statistics, probability, and history. (Please click on the link and watch the video created by Time Magazine showing how $1 invested in the U.S. market has grown from 1927-2012 as well as what was in the headlines of Time.)

From a long-term investment return point of view, I think it’s safe to say that the last 85 years have been pretty awesome, but that’s not to say things haven’t been volatile. What if I told you that the S&P 500 has either been up more than 20% (which is a lot) or down (you lost money) for 18 of the last 32 calendar years, meaning returns have been between 0% and 19% (moderate growth) in only 14 of the last 32 calendar years? Well the market has been, so in order to be in a position to possibly enjoy some future, compounded long-term investment returns (like the ones you just saw if you're a good person and watched the video), I’d argue that you need to go ahead and pursue a prudently diversified long-term investment strategy and agree to stay on the market roller coaster. I just don’t think “guaranteed” annual returns of any substance are possible.

Another statistic worth mentioning is that, according to J.P. Morgan’s September 30, 2013 Guide to the Markets, the S&P 500 has had an average intra-calendar year drop of 14.7% every year since 1980. This means that the stock market has been down an average of 14.7% at some point during the calendar year despite its strong overall returns! I know of no other statistic that more clearly emphasizes the importance of a strong and patient stomach for market volatility. I also believe that in order for investors to have a stomach for market volatility, they need to have enough cash on hand, an understanding of their long-term financial strategy, and confidence in their financial advisor.

I’ve thrown a video and a couple of statistics at you that you may have found a little surprising and encouraging, but I’m not sure I’ve yet made a solid case for why investing now is likely your best course of action. You should consider investing now because over a long enough time frame the stock market has always gone up, and if you’re a betting person, the market has gone up more than it has gone down. Please understand that I am not saying you will have a better long-term investment return if you invest today versus tomorrow. What I am saying is the odds are in your favor!

If the current risk of market volatility is holding you back from investing, please know that there will always be market uncertainty no matter how long you wait to invest. There is a lot of recent and not-so-recent history to support investing now. In the battle of current market uncertainty versus market history, I personally choose history, but if you’re still not sold on this, I’d be happy to share some more of my thoughts with you and offer some techniques that can help you finally put some of your cash to work over time.

-Tom

Open Enrollment

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Let’s be honest: open enrollment stinks. At best, your human resources department goes over your medical, dental, and vision insurance plan options with you at a staff meeting and offers to help you fill out the forms. At worst, your human resources department sends you a bunch of information and a bunch of forms and asks you to make a bunch of decisions by yesterday. Either way, it’s probably not anyone’s favorite time of the year. It’s certainly not mine!

This year is particularly vile. With all of the changes going on in the realm of health care, there are a lot of new rules and revised wording in plan options, and most of the information I’ve had the joy of reading for friends, family, and clients seems to be a grotesque concoction of insurance jargon written by a group of long-winded lawyers. Fret no more, though. I’ve got 10 tips to help you get through your next open enrollment period:

1. Read it - all of it. It’s probably a daunting amount of confusing material, but we’re talking about your medical insurance benefits, and possibly your spouse’s and children’s medical benefits. You are about to make irrevocable decisions (at least until your next open enrollment or qualifying life-changing event) that could have real consequences (both medical and financial) to your overall well-being. Make sure you’re giving your elections the time and due diligence they deserve.
2. When in doubt, ask. If you don’t have any questions after reading through your materials, you should probably read them again! No question is too small, and you don’t want to find yourself wishing you had asked your “little” question back during open enrollment while you’re at the check-in counter in the ER!
3. What’s changing? This is probably the easiest and best question you can ask your human resources department (or your insurance provider if your company is keeping the same provider it had last year). If you are a really organized person and can get your hands on last year’s plan, lay this year’s plan next to it, side by side, and go at it. Highlight the differences so you can know the new rules of the game and be ready to go with a different plan option if needed.
4. What costs are increasing? Unless the benefits you are being offered are being reduced, there’s a pretty good chance your health insurance expenses are going up. We can argue about whether the government, the insurance companies, the hospitals, or the doctors are behind this, but at the end of the day, what matters is that your costs are still probably going up. It’s important to know what specific areas of your plan are becoming more expensive. Are your premiums (the amounts you pay for insurance coverages) going up? Are your deductibles (limits you have to hit before the insurance company starts substantially paying for health care costs) going up? Are your co-pays (fixed charges for visiting a doctor) going up? These increases should be considered when determining which plan option is best for you and your family.
5. In-network or out-of-network? An in-network doctor is one who your health insurance provider is contracted to work with, and an out-of–network doctor is one who your health insurance provider is not contracted to work with. Typically in-network doctor visits will cost you less because your health insurance provider has already negotiated set prices with the doctor for his or her services. If you love your doctor and are not cost sensitive, this may not mean much to you, but if you’re neutral towards your doctor, I’d suggest you make sure he or she is in-network, and if not, find a doctor who is. This is particularly worth looking into if your company is changing providers or you are looking into an obstetrician.
6. Consider dental insurance. If your company offers dental coverage, give it a look. I know it’s more coming out of your check, but you may find that for a relatively minimal cost you can have a lot more coverage and flexibility should that dreaded toothache strike. If you go to your dentist regularly, and you should, it’s possible your savings on basic preventative care could be almost equal to the cost of your insurance.
7. Consider vision insurance. I’ll just be frank and tell you that, in general, I rank basic health insurance needs in order of importance: medical, dental, and then vision. In a lot of cases, if something serious happens to your eyes, it’s possible your medical insurance will be there for you. That being said, vision insurance can also add a lot more coverage and flexibility to your insurance arsenal should something happen to your baby blues. Particularly in years where you know your prescription has changed, you need new glasses, or you need new contacts, your savings on those appointments, products, and services could almost equal the cost of your insurance. I’d give it a look (pun intended).
8. Make sure everyone is covered. This may seem obvious to some people, but trust me when I tell you this tip is embarrassing to some people. Please, please don’t leave off a spouse or a child who is eligible and needs insurance benefits. Even if your company and the insurance provider can fix your paperwork mistake, by the time you get through the process, you’ll wish you hadn’t forgotten anyone.
9. Ask about wellness programs. This suggestion may be a tad early, but I am beginning to see, read, and hear about more and more programs companies and insurance providers are putting in place that offer rewards, incentives, and in some cases, reduced costs to employees who participate in wellness programs. These programs can be yoga classes, gym memberships, online classes about eating right, and lots of other things, but if you’re interested in getting healthier and potentially getting some perks for doing so, see if you can participate in a wellness program.
10. What do you want your health insurance to do? I saved what I think is my most important tip for last. Many people I know go with whatever plan option has the lowest premium, and I’m not sure that’s the smartest move. In my book, health insurance is a last line of defense to protect you and your family’s assets should something really serious come about medically. Personally, I always look for the plan options that offer the highest coinsurance. Coinsurance is how medical expenses are shared between you and your insurance provider once the deductible is met. If there is an option that offers 100% coinsurance (or close to it), it will probably have a relatively high deductible and be one of the options that takes a bigger bite out of your paycheck, but it will likely offer more financial protection should a very expensive medical issue come up. If you don’t have the healthiest family history, you or your spouse are thinking about having a child, or your abdomen felt really bad the last time you had spicy food, I would certainly encourage you to consider this type of plan. Playing with your insurance election is not how you get a raise. Remember, if you have an adequate rainy day fund, you should be able to handle a higher deductible. If you follow this tip, you may curse me every two weeks, but I would wager there will eventually be a year where you will be glad you went with an option that offered more protection to your overall wealth. 

 

Today’s tips are pretty general, so please let me know if there’s something specific I can try to help you with. Just like you, I do hate reading the insurance lingo, but I love helping others.

 

-Tom

Two Nickels

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Anyone who knows me at all knows I love quotes, one-line “zingers,” good stories, and witty jokes. The chances are pretty high if I’ve heard a “good one” in the last few days, and you and I come into contact, you’re going to hear it, too. I’m sorry, but it’s just the way I’m wired. Unfortunately, in the last 48 hours I heard a saying that I really didn’t care for. I heard this same idiom twice, and both times, it made me cringe: “He doesn’t have two nickels to rub together.”

That phrase obviously means someone isn’t doing so well financially, but what stood out to me is how different the two scenarios were that people were describing to me using that same phrase. In the first scenario, someone was busting his tail to make ends meet, but he couldn’t seem to catch a break. In the second scenario, someone was making a lot of money, but he was choosing to spend all of his nickels before he ever thought about rubbing a couple of them together. Both instances of this phrase made me pause, and they led me to think about the advice I might give in these two very different scenarios.

Unless your last name is Rockefeller, you will probably go through (or have already gone through) at least one period in your life where it’s hard to rub two nickels together. I was fortunate enough to grow up in a family that could give me all that I needed, but even so, there have been times where things were tight. I remember in high school how quickly a weekend trip could eat away at my hard-earned minimum wage, maximum hour check from the local dry cleaners where I worked. I remember in college how serious things got when gas crossed three dollars a gallon for the first time, and suddenly going home was a little bit more of a financial commitment. I remember when my wife and I were just married, and our dining room had no light fixture, no table, and no chairs. I consider myself very blessed, and frankly, a little lucky, to have had as few lean times as I have, but I don’t take anything for granted and know that what I’ve been given can also be taken away. If you’ve been dealt a tough hand, even if you’ve been repeatedly dealt tough hands, I urge you to press on. Hard work will eventually pay off. You will eventually get that break. Your dining room will eventually have light, a table, and chairs. You will eventually get through the financial wilderness you have been walking through. In the words of my iconic role model Winston Churchill, “If you’re going through hell, keep going.”

As for non-savers, a recent talk at the Terry College of Business Leadership Speaker Series by Dan Cathy, the President and COO of Chick-fil-A, comes to my mind. Mr. Cathy was explaining the differences between wages and profits and the importance of future business leaders and future employees recognizing those differences. These are my words, not his, but what he was getting at is the fact that a company is only profitable if it makes more than it spends to sell or produce what it offers. Essentially, a company is no better off than it was if it doesn’t make a profit. How true this also rings on an individual or family level! I know there are hard times and bad things happen to good people, but if the waters are relatively calm and you are fortunate enough to have a good job, I might make the argument that you and your family are no better off financially if you don’t make a profit. How do you make a profit as a person? By spending less than you make and saving the surplus, investing it, or paying down your already-incurred debt and obligations with it. I can hear it now: “That’s great Tom, but I don’t have a surplus or that much of a surplus.” To continue my company/individual comparison, I’d tell you that a company can only increase its profitability by increasing revenues or cutting expenses. I believe an individual’s situation is very similar, and an individual or family can only increase their profitability (which increases their surplus, which improves their financial situation) by increasing their revenue or cutting their expenses. Now feel free to ask your boss for an increase in revenue, but personally I’d advise cutting those living expenses however much you need to until you have two nickels to rub together.

If you’re going through a tough time, keep your head up and keep on trying. If you’re going through a good time and not taking advantage of it, I’d encourage you to think about those people who would love to be in your position. As the country duo Montgomery Gentry says in their hit song “Something To Be Proud Of:” “You don’t need to make a million – just be thankful to be working. If you’re doing what you’re able and putting food there on the table, and providing for the family that you love, that’s something to be proud of.” And if you keep working hard and make sure you are earning profits and not just wages, I bet you’ll have two nickels to rub together. And if you keep on a little longer, I bet those nickels will become dimes, dimes will become quarters, and quarters will become real dollars.

-Tom

Rational Investors

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Last week, I read an interesting article in an old Forbes magazine that described an experiment conducted by Dr. Dan Ariely, a bestselling author and Duke University professor of psychology and behavioral economics. In the experiment, participants were given balances on multiple credit cards with varying interest rates and varying amounts of income over a period of 25 rounds. Then they were asked to decide how they would allocate their income towards paying down their debts. The participants’ stated goal was to maximize the money left over at the end of 25 rounds. Now maybe I’m a finance nerd, but the cash maximization strategy seems fairly straightforward to me. One should probably pay down the credit cards in order of their interest rates from highest to lowest, with no regard whatsoever for the principal balance amount. To my surprise, Ariely discovered that almost none of the participants could stick to the optimal strategy. Participants were evidently too tempted to pay back the smaller loans and feel like they were making “progress.” Ariely concluded that the satisfaction participants got from having fewer loans open overwhelmed their ability to do the financially optimal thing. I can see how people might convince themselves to do this. Actually, I can see how I might even pay off some of the smaller debts first. This got me thinking, are investors really rational?

I think Merriam-Webster’s definition of the word rational almost answered my question for me right off the bat:

rational: having the reason to think about things clearly, based on facts or reasons and not on emotions or feelings

I have some friends, family members, and clients who can certainly think about their finances and investments pretty clearly, but I have others who don’t really get it, and some who don’t even want to get it. I also know that some of the times I have added the most value (financial and emotional) to people I advise financially are when I have helped talk them into staying the course with their savings strategy or investment philosophy and out of buying that breakout penny stock, piece of speculative real estate, or going to all cash, bonds, or gold. Wow! All those painful economic lectures in college on the efficient market hypothesisis just got crushed in a couple of minutes by a Forbes article and a brief look in the dictionary!

Look, I like to think of myself as a rational person, but in some areas of my life, I know I’m not. I'm always a proud believer that there is not a football team in America that could take my Georgia Bulldogs in a game in Athens on a fall day after a delicious tailgate. I’ve said at the end of every season since 1991 that the Atlanta Braves were going to win the World Series next season before the champagne was even popped by whatever team was the current champion (Hey, I was right in 1995!). I frequently waste time and gas on the weekends with no hesitation when I drive to the other side of town for a club sandwich that there is just something about, while knowing good and well that any one of the delis or sandwich shops I pass on the way could probably produce something almost identical. When it comes to the Dawgs, Braves, and club sandwiches, I don’t have the reason to think about things clearly, and my actions, statements, and decisions are often based on emotions and feelings. I’m okay with that, and I don’t think it’s that big of a deal because I’m not being irrational about anything that is actually crucial - like my finances.

I believe being rational when it comes to your finances and investments is very important. I believe you have to stick to your goals and the strategies needed to achieve those goals as much as you possibly can in order to have a realistic shot at achieving financial success. I also believe you have to stick with a prudent investment strategy with a long-term time horizon no matter how badly you may want to sell out at the bottom of a market downturn or get more aggressive at the top after a long market boom. Because some investors do get caught up in emotions and feelings, I think there are two clear takeaways: 1) it’s important you recognize the risk of getting caught up in emotions and feelings and try to stay a rational investor yourself, and 2) you may actually have an opportunity to benefit financially in the market because of others who are not rational.

You may still disagree and think investors are always financially rational, the market is perfectly efficient, and that you, personally, are always rational, but I bet I could counter those thoughts if I introduced you to a few investors I’ve met and took you to get one of those special club sandwiches on the other side of town. As Dr. Ariely put it: “For some reason people are willing to put their lives at risk because their phone vibrates for a second (while they’re driving), but when it comes to money…they think people are perfectly rational.”

-Tom

Shutdown!

Credit: nirots

As of midnight on October 1, 2013, the U.S. federal government has temporarily been shut down. There is a whole host of reasons for the shutdown and many politicians are already playing the blame game, but the actual reason for the shutdown is that Congress and the President could not agree on a bill allowing the government to spend money going forward. Said another way, the Constitution requires Congress to pass spending bills to fund the government, and when they do not (or the President vetoes the bill), most functions of government come to an abrupt halt until they do.

It’s been a while since the last U.S. government shutdown in 1995-1996 when President Clinton and the Republican-controlled Congress got in a fight over the 1996 budget, but don’t get too excited. It’s not like this is really a rare event. According to the Congressional Research Service, there have been 17 shutdowns since 1977! Most shutdowns last less than a week, but the longest lasted 21 days in 1995-1996. Sure, there could be some stock market volatility, there could be a little damage to the economy, and some national landmarks and small agencies could very well be closed for a while, but most essential government services like air traffic control, the military, Social Security, and Congress members’ pay (that’s essential?!) will continue rolling along until this Congressional lover’s spat comes to an end.

I hope you know me well enough to know that I’m not going to try to convince you how you should assign blame among the House of Representatives, the Senate, and the President (that would be too easy as all of them have egg on their face in my book), but I couldn’t pass up this opportunity entirely. You see, the government shutdown offers some lessons for all of us.

• If you see that you have an approaching cash flow problem or major expense, pretending it’s not really there until it’s almost upon you is probably not a good idea. We citizens cannot simply increase our debt ceiling, sell some more bonds, or set a new interest rate to get around our problems!
• If you are facing a difficult or controversial financial decision that is not solely yours, waiting until late the night before the decision is due will probably lead to a verbal altercation. If you get into a disagreement with someone when trying to work out a financial compromise, stay away from name-calling, stay away from blaming, and try to stay focused on the issue at hand as opposed to bringing up all sorts of other issues from the past.
• If you are trying to successfully plan for something big, say, running a country, providing for your child’s college education, or retiring with the lifestyle you’ve always wanted, you need a long-term plan! Little-bitty, month-to-month, stopgap budget bills finally didn’t work for our country, and little-bitty periods of living within your means, saving, and investing won’t work for you, either! This may sound a little crazy, but a financial shutdown for an individual person or family is relatively more catastrophic than a government shutdown. A normal person can’t just retroactively go back and make things better.

Oftentimes when I try to consider the problems we face in today’s world, I find myself looking to history for answers. When it comes to this current government shutdown, I look to two of my favorite leaders, Abraham Lincoln and Winston Churchill. When addressing the division facing the union in his first inaugural address, Lincoln stated, “If the minority will not acquiesce, the majority must, or the Government must cease. There is no alternative, for continuing the Government [other than] acquiescence on one side or the other.” Lincoln was speaking about a different issue in a different time, but his words ring true today regarding this current government stalemate. Hopefully you’ll be able to sleep easier, like me, if you take the actions of our dysfunctional government in stride and reflect on the words of Winston Churchill: “You can always count on Americans to do the right thing – after they’ve tried everything else.”

 

-Tom

My Uncle’s Living Expenses

Credit: Stuart Miles

Throughout the course of my blog, I have frequently suggested that you take the time to gather some data and take a good, hard look at the sources of your living expenses. The results of such an exercise might be shocking, concerning, enlightening, comforting, or something in-between. Whatever the results, today I thought we’d practice this exercise together as we take a look at my uncle’s living expenses.

Looking at the chart below, you can see that my uncle spends a significant amount of his money in several categories. Now all these numbers are rough, but it looks like around 21% goes to medical expenses, 20% goes toward paying off a note payable (he owes some people some money they gave him a long time ago), and 20% goes toward his security system. I can’t believe more than 60% of his expenses are allocated just to those three categories! Continuing on, I can see that he has some sort of debt, since he spends 6% of his total yearly expenses on interest payments. He also gives around 13% to charities or to people less fortunate than he is, so I guess that’s nice. He’s only spending 3% of his total expenditures on transportation, and only 2% on education. That seems a little low to me, but what do I know? Finally, I guess the other 15% is all meshed together into other, smaller categories of living expenses.

Now be nice to my uncle because I really do think he means well, but I also think he could benefit from looking at the sources of his living expenses as a whole a little more often. When I break down someone's living expenses like this I try to help them figure out where their money is going if they aren’t sure, I try to help them figure out where they can cut back if they need to cut back, and I try to figure out ways to improve their overall financial standing by addressing specific expense categories such as my uncle’s interest payments. As you might imagine, this process can be personal and painful, but it can also be eye-opening.

So if you were my uncle’s financial planner and you knew he was spending too much, what would you advise? Would you solely go after his debt? Would you tell him to cut back on his giving to charity? Would you have him try to cut back on his enormous medical, note payable, and security system expenses? I’m serious, what would you do?

By now, I hope you know I would never share my uncle’s financial information with you or anyone else I am not authorized to speak with. After all, always keeping my clients’ personal and financial information strictly confidential is part of my job. That being said, I was able to share the details of my uncle’s expenditures with you today because you’re related to him, too, and his expenses are a matter of public record. In other words, he’s my uncle, he's your uncle - he’s our Uncle Sam!

I don’t want to wade into the ballyhooing of politics, but I do think some of you might find the pie graph above a little more interesting now that you know it was from a CNN report covering the United States government’s 2011 fiscal year. Switch out my uncle’s “medical expenses” for Medicare, Medicaid, and some children’s health insurance programs, my uncle’s “note payable” for Social Security, my uncle's "security system" for defense spending and international assistance, and my uncle's "charity" for safety net programs, and our government’s living expense picture should become a little more clear. It could just be me, but I imagine clamoring for more military spending or more health insurance versus spending more on education, for example, might give people pause when they look at the government’s federal budget as a whole, and keep them from getting so caught up in an impassioned speech or a fiery, late afternoon news show.

You may have caught on to my ploy from the very beginning, but I hope some of you are a little surprised and maybe even flabbergasted. Sure, take a look at Uncle Sam’s spending and reflect quietly on the sources of expenditures for our country if you’ve never done that before, but let me reiterate that the main purpose of this post was to demonstrate to you the true value and potential impact that looking at your living expenses as whole can offer.

I don’t claim to always have the answers for your budget, and certainly not Uncle Sam’s, but if you take the time to figure out the sources of your living expenses and look at their relative percentages, I bet we could get off to a really good start!

-Tom

This Diamond Ring

Credit: David Castillo Dominici

Over the last two years, a number of people have asked me to devote a blog post to engagement rings. As you know, I’m happy trying to help with any financial question, but to be honest, I’ve always shied away from this request. I’ve known what I wanted to write for a while, but I’ve been hesitant to put pen to paper because I have friends and family members with all sorts of different rings and rocks, and I didn’t want to make anyone mad with any of my candor. Well last weekend, my wife told me she could hear something when she shook her left hand, and when we took a close look, we quickly realized her ring’s center stone was loose! If that’s not a sign, I don’t know what is. It’s time to talk diamond rings.

I have a couple of thoughts to share, but I know what you really want to know: How much should you spend on an engagement ring? Some people and jewelers will tell you two months’ salary. Some will tell you three months’ salary. I’d tell you it depends. It depends on the girl’s style and her expectations if you’ve talked about it together. It depends on your salary and whether you are a corporate lawyer or an animal balloon maker. It depends on what you (and your bride-to-be) can afford after you consider any upcoming housing needs, wedding expenses, and honeymoon expenses, in addition to the financial pressure of any other debt you may already be facing. The average diamond engagement ring costs between $3,500 and $5,000 depending on which study you go with, but personally, I think that statistic is meaningless. I know plenty of girls with engagement rings that were below-average in cost who have, as best I can tell, above-average marriages. I also know plenty of people with above-average cost engagement rings who have below-average or even failed marriages. I’m not trying to step on any toes, but I am pretty convinced that the color, cut, clarity, and carat size of the diamond ring you decide to go with shouldn’t influence the answer to the popped question. If it does, Houston, you’ve got a problem, and it’s probably not the ring.

You should also consider the ring’s future costs when choosing a jeweler. Does your jeweler have a warranty or a lifetime guarantee on your purchase? Is maintenance, polishing, re-sizing, and re-dipping (if you have white gold) covered? How much does it cost to, let's say, re-tighten a center stone? All of these things are worth considering, and you should ask your jeweler about them before you become married to a particular ring. I know these considerations may not be enough to change your selection, but if it’s a tie between a jeweler with great customer service and a lifetime guarantee and a jeweler who’s going to charge you every time you and your bride come in, you can probably guess who I’d recommend you go with.

Finally, you may think I’m crazy, but I would strongly suggest adding a small rider on your renter’s or homeowner’s insurance policy specifically covering your engagement ring and any other valuable jewelry you may have. I say this because I know people who have had to dive into pools to recover a lost ring or even secretly replace a lost ring. I even know one person who decided to go through a Porta-John to retrieve an engagement ring that was lost at a most inconvenient time. Seriously though, for a small amount per year, you can have the added security of knowing that if your diamond ring is stolen (or with some policy coverages, lost) it can be replaced without you having to fork out a hefty, unexpected amount of cash. My wife and I were both unhappy that her center stone had become a little loose, but my reaction was much calmer knowing we had the proper insurance in place for one of our most valuable and sentimental possessions.

As Gary Lewis and the Playboys so eloquently put it, “A diamond ring can mean something beautiful. A diamond ring can mean dreams that are coming true. So if you’ve got someone whose love is true, let it shine for you.”

-Tom

Prudent Presents

Credit: phanlop88

Remember when you were a kid and you’d wake up on Christmas morning and excitedly run down the stairs or hallway to see what Santa Claus had left behind? Think about the excitement you felt the year you got that long-awaited and coveted basketball goal, dollhouse, or bicycle. Don’t get me wrong, I do believe it is more blessed to give than receive, but let’s be honest; there is probably at least one occasion you can think of where you received a gift that was pretty, epically awesome.

Fast forward to now. Batman and Teenage Mutant Ninja Turtle figurines don’t quite mean to me what they used to, and for me at least, I’ve seriously got enough clothes. I’m still genuinely appreciative and always happy with any gift I receive for any occasion (well, most of the time…), but somehow, receiving presents usually isn’t quite the same as it was when I was a kid. Occasionally though, a moment like those times from childhood Christmases and birthdays of yesteryear repeats, and a glorious gift breaks through. Based on some recent conversations I’ve had with a few friends and co-workers, I’ve concluded that glorious, break-through gifts don’t have to be expensive, and quite frequently, are less expensive than standard gifts. What if on the next occasion you gave…

• For a Wife’s Birthday: An IOU - Cook her dinner, fix her breakfast in bed, or take her to a chick-flick and promise not to complain. The list of possibilities is endless, and she can look forward to cashing in when she wants to.
• For a Wife’s Anniversary: A couple’s massage - I wouldn’t have been caught dead getting one of these until a few years ago, but look for a coupon, go for a basic treatment offer, and enjoy the rain forest and ocean waves sounds. It's still a gift for her, but it's not too bad for you either!
• For a Wife’s Christmas: Flowers for a year - I’m not talking about three dozen roses every day, but what about a $9.99 bouquet every month?
• For a Husband’s Birthday: Cheap tickets to a sporting event - There’s no shame in being in the upper deck and watching your favorite team steamroll a “cream puff” opponent.
• For a Husband’s Anniversary: Make his favorite inexpensive meal, favorite dessert, and serve it with his beverage of choice - With many of the guys I know, there is a little something to be said for the notion that one of the ways to a man’s heart is through his stomach!
• For a Husband’s Christmas: A few lottery tickets, a pocket knife, or a quality watch that happened to be on a sale are all good choices - Guys like excitement, gadgets, and gifts they are comfortable telling their buds about. Most men, me included, are fairly simple creatures; we don’t want that tight-fitting, maroon turtleneck that some of you females out there think looks chic!
• For Mother’s Day: Cook her brunch perhaps, but mainly, just spend most of the day with her - Most moms will treasure your time more than another gift!
• For a Mom’s Birthday: Take her out to dinner somewhere reasonable that she has never been - It gives her something to look forward to and tell her friends about, and it gives her a night off if she’s the main chef of the household. The restaurant doesn’t have to come with a wine list or require a reservation, but the lasting memory of quality time together doing something new, exciting, and different will outlast any flowery knick knack.
• For a Mom’s Christmas: Get her something she wants, but won’t get herself - Maybe it’s that new book she keeps mentioning on the phone, that movie she didn’t get to go see, or that stylish bracelet she always looks at that just happens to be on sale.
• For Father’s Day: In line with Mother’s Day, grill out - Most guys love being outside and breathing in the faint aroma of charbroiled beef. Dads can beam with pride as they get to make their famous burgers again for their family, or if they prefer, they can watch their children make the burgers just like they taught them!
• For a Dad’s Birthday: An expanded sports package for the television, an outdoorsmen magazine subscription, or even an XM Radio subscription are all possibilities if you can get a good deal, and if you keep your eye out far enough in advance, you probably can! As they say, “Boy’s don’t grow up; their toys just become bigger!”
• For a Dad’s Christmas: A box set of an old, favorite television show or movie series with a nice pair of slippers - It’s kind of a cool combo and can be purchased for a reasonable price, and your old man will be appreciative every time he slides into his chair for a little nod...I mean television, while he "rests his eyes."
• For a Grandmother’s Birthday: Family pictures - Whether it’s pictures of you and her, pictures of you and your parents, or pictures of you, proud grandmas love having new photos to show off. Get one of those nifty family tree things where you can slide in pictures, get a fridge magnet picture frame for one really good photo, or take the time to make her a small, old-fashioned album. It won’t cost a lot, and she’ll love it!
• For a Grandmother’s Christmas: Cookies in a jar - I’ve come across these several times and have enjoyed seeing them and eating their contents. Basically, you take all of the ingredients needed to make a certain type of cookie and pour them artistically into a big glass jar. If you and your grandmother ever baked something sweet together over the years, what a sentimental, useful, and frugal way to give a gift that will almost certainly generate a smile and a laugh!
• For a Grandfather’s Birthday: Afternoon Fishing - Your granddad probably likes to fish, garden, walk, or hunt. Depending on the weather and his health, see what you can do to give him one of these experiences. The two of you will enjoy it, and it probably won’t cost you much more than some time and insect repellent.
• For a Grandfather’s Christmas: Several of the people I talked to mentioned this as good clothing territory, so why not see if you can’t find your granddad a nice, crisp, new dress shirt, a tie that doesn’t remember the 70s, or maybe even a sporty-looking baseball cap that’s at a reasonable price? Who says grandparents can’t dress super swank?
• For a Girl’s Birthday/Christmas: This is the category I have the least personal experience with, so according to the people surveyed and based on some Internet research, I’d recommend art supplies, board games, and stuffed animals. Be careful not to get drawn into pricy clothes that will be outgrown and expensive jewelry meant for a slightly older princess.
• For a Boy’s Birthday/Christmas: Baseball equipment or a football - One of my all-time favorite activities growing up was playing toss with my dad, and I’d still be up for a game right now, come to think of it! When I think of a football that will generate good times for years, it sounds more like an investment than an expense.   

 

In my book, there are two kinds of gifts: good gifts and nice intentions. Gifts also have two costs: expensive and practical. If it’s a big anniversary, a birthday that ends in “0,” or you truly have one of those rare, “perfect” gift ideas, I say go for it as long as it won’t inhibit next month’s mortgage payment. If it’s just another overpriced item that has her favorite label on it, a golf club that will still, somehow hit all golf balls to the right, or a pair of argyle socks, I say you can do better. Some of the above gifts have actually worked well for me and people I know whether we were the givers or the recipients. The next time you are struggling to cook up a good gift idea for a friend or family member, I hope you’ll think of this list. At best, they will be glorious, break-through gifts; at worst, they will be prudent presents.

 

-Tom

Scared Silly

Credit: Nuttapong

What scares you? I mean what really makes all the hair on the back of your neck stand up, leaves you unable to utter a sound, and frightens you into a panicked hysteria?

I’m not a superhero or a he-man by any stretch, but not that much really frightens me. Sure, I’m like most people and don’t like thinking a lot about death, but it’s not like I have coulrophobia or something. Let’s see, I’m a little cowardly towards scorpions, I’m not a fan of snakes, I don’t like walking down spiral staircases that I can see through, and drowning has always been an utmost concern of mine, but all in all, I’m usually pretty level and calm. That’s why an article I read in the August edition of InvestmentNews surprised me.

The article focused on a recent study conducted by Nationwide Financial that sought to determine what investors fear. The study concluded that 83% of the people feared another financial crisis, 68% feared that their savings would not be enough to get them through retirement, and 64% were afraid of not being able to maintain their current lifestyle. These statistics didn’t make me happy, but they did not overly surprise me. However, the fact that only 58% of the people surveyed said they feared death did come as a bit of a shock to me. Am I really that weird? (Hey, don’t answer that!) Are people really more afraid of financial ups and downs than they are of the Grim Reaper? The only non-financial fear that scored anywhere near the financial fears was skydiving, with 81% of the people saying they were afraid of that extreme activity. You can call it my purpose, my goal, or my motivation, but I don’t want any members of my family, my friends, or the clients I serve to fear market volatility, retirement feasibility, or financial sustainability more than death or skydiving!

The financial crisis of the late 2000s was certainly terrible, but so were the Dotcom Bubble, Black Monday, the Great Inflation of the 1970s, and the Great Depression. I’m sorry to say it, but one day, there will be another financial crisis. And guess what? If your investments are prudently diversified, you have an adequate rainy day fund, and you can cut back on a little of your discretionary spending, you’ll probably be able to hang on until the recovery begins.

Not knowing when you can retire or not knowing what kind of lifestyle you can afford to live in retirement is a frightening proposition, and it should be, but that’s part of the reason why my profession exists. Outside of relying on blind luck, a technical analysis you’ve prepared yourself, or the work of a financial planner, how do you know when you can make it through retirement with the lifestyle you desire or at least one you can accept? Well, are you going to receive a pension? What did your last Social Security annual statement say, or what does your Social Security Benefit Calculator spit out? Add these together with any other "permanent" sources of income you may have, and that’s probably close to your “retirement paycheck.” Then, take a look at all of your investment assets (brokerage accounts, 401(k)s, IRAs, etc.) and think about how much you could probably afford to withdraw every year between now and when you kick the bucket, considering the expected returns of your investment strategy. This should give you some idea of your probable retirement lifestyle. What you come up with may still sound pretty vague to you, but it makes me wonder if the people surveyed were really afraid of being able to navigate through retirement, or if they were just afraid of not being able to spend as much in retirement as they had dreamed about. Don’t get me wrong, retirement planning and ensuring your financial independence require careful monitoring and frequent updating to make sure all systems are go, but it doesn’t have to be Freddy Krueger.   

Finally, if people are afraid of not being able to maintain their current lifestyle, I’ve found that probably means they have an inadequate emergency fund, unsustainable spending habits, or they foresee a life-altering event like having another mouth to feed, losing a job, or facing the financial consequences of the death of a spouse. You can’t always control life-altering events, but having a little extra saved up and almost always spending less than you are making will go a long way towards calming this fear.

I know financial crises can be dicey, retirement planning can be daunting, and lifestyle sustaining can be critical, but a predatory arthropod of the order Scorpiones in the class Arachnida with snapping claws and a poised stinger still scares me more!

-Tom

Two Recipes for Success

Credit: Vichaya Kiatying-Angsulee

My wife and I both enjoy cooking. She’s a much better baker than me, and I’m a little bit more of a grill master than her, but if you ever get the chance to eat at our table, I don’t think you’ll be too disappointed regardless which one of us is the head chef. One night last week I happened to be working on a grilled chicken Greek salad for our dinner and was thinking about my day at work. I had a simple yet profound realization: Achieving financial success is a lot like cooking. Financial success is like cooking in the sense that both take time, attention, skill, and most importantly, adding the right ingredients at the right time. What I mean is that:

• Owning a bunch of stocks and real estate without having enough cash on hand is like having a whole bunch of macaroni and not enough cheese. The first time you face some financially significant, unforeseen expenses or are forced to live through a downturn in the stock or real estate market, you will find it a lot less pleasant trying to make ends meet with potentially depreciated stocks or illiquid real estate than you would if you had adequate cash savings in place. It could just be me, but if I’m going to err on the ratio of macaroni and cheese, it’s going to have a little extra cheese.
• Having a bunch of cash, CDs, and bonds, but no stocks or “growthier” assets to keep up with inflation, is like serving oatmeal without raisins, butter, or brown sugar. Sure, the oatmeal may initially make you feel nice and warm, but it’s not going to be enough to tide you over against long-term inflation.
• Saving only in retirement accounts like 401(k)s and Traditional IRAs, but not saving any funds in taxable portfolios or brokerage accounts along the way, is like stockpiling nothing but hot salsa for your chips. It’s good that you’re saving up, but it’s going to burn from a tax perspective when you need assets to supplement your cash flow in retirement (withdrawals would be taxed at ordinary income tax rates). Wouldn’t the taste of a little milder salsa or maybe some queso from a taxable portfolio or brokerage account help break up the tax heat in retirement (withdrawals would be taxed at capital gain income tax rates)?
• Keeping a bunch of debt without purposefully striving to extinguish that debt is like resigning yourself to the fact that your salt shaker has a gaping hole in the bottom of it without doing something about it. Plug the hole in your salt shaker and your monthly cash flow by paying off debt and eliminating its nasty monthly strain on your finances!
• Having a great investment strategy without addressing your life insurance, disability insurance, property and casualty insurance, or estate plan is like painstakingly picking out all of the best strawberries for a nice fruit salad, but closing your eyes and randomly selecting all the other types of fruit required to complete the dish. It only takes one really bad banana to mess the whole fruit salad up. So remember that it is crucial to address all parts of your financial plan and examine all components of your overall financial security.
• Trying to plan for retirement in an afternoon or completely fix the path your finances are headed down in one quick swoop is like trying to make a Thanksgiving turkey five minutes before company arrives. Developing and implementing a successful plan that helps you achieve your financial and life goals is more like making that perfect turkey, a six layer cake, or a really delicious stew; it takes time and care.

I really do enjoy cooking, and most days, I really enjoy financial planning. Maybe that’s because in many ways they are not that different. In terms of being a chef or a wealth advisor, I know that I’m not yet Bobby Flay, but my recipe book and cooking techniques are growing every day. As always, please don’t hesitate to let me know if you or someone you know needs “a cup of sugar” and think I might be able to help.

 

Finally, you might have noticed I titled this post “Two Recipes for Success.” If you’ve read this far, you’re in luck! Here’s a second recipe, and it’s one of my family and friends' favorite meals I make:

Tom’s “Barcelona Chicken”

Requires:
Chicken Breasts
Sweet Baby Ray’s Original Barbecue Sauce
Cholula Hot Sauce, Tabasco, or Hot Wing Sauce
Grandma’s Molasses
Honey
Velveeta Cheese
Red Onion
Tomato
Salt and Pepper

 

Directions:
1) Preheat oven to 375 degrees.
2) Take chicken breasts and remove excess fat. Lightly season with salt and pepper on both sides and lay in a baking dish. Drizzle chicken breasts with Cholula (or Tabasco or hot wing sauce), Grandma’s Molasses, and honey. Generously smother with Sweet Baby Ray’s.
3) Place chicken in oven for 45 minutes.
4) Dice tomato into little cubes.
5) Slice onion and sauté in skillet with a little olive oil. If onions are very strong, throw in a little pinch of sugar. Sauté until slightly browned and then remove from heat.
6) After 45 minutes, remove chicken from oven and cut open one chicken breast to make sure it's almost done cooking. Then lay one slice of Velveeta cheese on each chicken breast. Toss back in the oven for 5 more minutes until the cheese is nice and melted.
7) Remove chicken from oven and serve on plates. Top each chicken breast with a few of the diced tomatoes and sautéed onions.

Bon appétit!

-Tom

It Happens

Credit: frankie_8

Late last year, my wife and I sat down and discussed some of our financial goals for 2013. Essentially, we agreed to four: to put into our 401(k) plans what was necessary to receive our employers’ maximum matches, to make our annual contributions to our Roth IRAs, to increase our “rainy day fund,” and to lower the amount of principal owed on our mortgage to a specific amount. Well, not to brag, but things were going pretty swimmingly. Well, until it happened…

You see, a couple of months ago, there was this period where our karma, luck, mojo, or whatever you want to call it, was not so good. It started when I had a small medical flare up (don’t worry, I’m all good now) that generated some expenses beyond our insurance coverage. Then, my wife’s car had an unexpected electrical problem. Shortly thereafter, we would find out my car needed major repairs to ensure my ability to steer, our digital camera would break, and my computer would make it known that its days were numbered. A week or two of better luck then mercifully came, but only to be vanquished by our garbage disposal giving up the ghost. Then, there was our dachshund Lucy’s annual checkup that yielded some dog toothpaste so expensive that I’m considering trying it out on my own pearly whites! I know in the larger scheme of things that these are “first world problems,” and I still have a lot to be thankful for, but sheesh! Enough is enough already! Uncle! Make it stop!

I don’t share my rotten luck with you to ask for sympathy or to make you feel sorry for my wife and me. You shouldn’t. Everybody has stuff happen to them, and everyone has unforeseen expenses that rear their ugly heads out of nowhere. I share all of this with you to let you know that it will be okay and to remind you that if you have an adequately established emergency fund, you can often be okay relatively quickly. My medical bills are now paid, our car maintenance is complete, we have a new digital camera, we have a much better garbage disposal, and Lucy’s toothpaste seems to be helping her. I still haven’t replaced my dying computer, but knock on wood, we’ll get there.

My wife and I have been able to overcome most of our unexpected expenses because we had an emergency fund in place. We addressed the medical bills and urgent car problems with that emergency fund, but we handled the other, less “mission critical” inconveniences over a period of time after we had more paychecks roll in and recharged our emergency fund. We also tightened our belts on our discretionary spending just a tad. Most of our ambitious 2013 financial goals are still achievable, but after those expenses, I’m no longer certain we can both increase our “rainy day fund” and lower our mortgage principal to the extent we had hoped without altering our desired lifestyle, but that won’t stop us from trying! I just know that after being reminded of how fast large, unexpected expenses can pile up, increasing our “rainy day fund” will be the priority.

I may have a pretty strong financial background, but I don’t have all the answers. I’m just like you, and not immune to the financial strains that come up in life. As Sugarland so perfectly puts it in their popular song It Happens:

Ain't no rhyme or reason
No complicated meaning
Ain't no need to overthink it
Let go laughing
Life don't go quite like you planned it
We try so hard to understand it
The irrefutable, indisputable fact is
It happens

-Tom

P.S. I kid you not that BOTH of our air conditioning units quit working within 48 hours of my original draft of this post! Argh! It happens.

How to Spend It All

Credit: scottchan

Usually I try to write something about how to save money, budget, or invest. Occasionally I’ll go a little further out on a limb and talk about tax-saving opportunities, the importance of adequate insurance, or even some estate planning considerations. I try to make my messages timely, truthful, fairly upbeat, and hopefully, helpful. Today I’m doing something different: I’m throwing a changeup. I’m going to tell you how you can spend it all. Based on my personal experiences, situations I’ve heard about, and things I’ve read, I’m going to try to convey to you a shockingly simple lesson I’ve learned: No amount of money is so large that it cannot be spent.

• If you own so many pieces of real estate that you can’t rattle off all of the zip codes, you could probably spend it all. Even if you can afford the properties, the upkeep, additional insurance required, and property taxes might whittle away at your financial position over time. Also, as we relearned in the mid-to-late 2000s, real estate does not always appreciate.
• If you are so concentrated in one (or even a handful of stocks) that an Enron-esque fiasco for your holding(s) would literally bring you to tears, you could probably spend it all. I know, “They’re a great company, always have been and always will be,” but please go talk to some undiversified General Motors, Wachovia, and Lehman Brothers shareholders and get their perspectives.
• If you can’t say no to a single charitable call-a-thon or “urgent” donation request form in the mail, you could probably spend it all. Giving to charity is great on so many financial and personal levels, but if you are giving more and more, and your income and assets are not keeping up, you might find yourself someday needing charity.
• If you frequently “binge shop,” you could probably spend it all. Whether it is shoes, purses, hunting equipment, or the latest technological gadgets and gizmos does not matter; whether you can control your spending or not when times get a little hard does.
• If you can’t possibly have fun at a restaurant, hotel, or golf course that is not 5 stars, you could probably spend it all. Sometimes a peanut butter and jelly sandwich, a Holiday Inn Express, and a countryside course without a “19th Hole Bar & Grill” can suffice.
• If you can’t stop giving money away to your family, you could probably spend it all. Helping those you care about can be such an admirable act and very much appreciated by the recipients, but sometimes tough love and an occasional “No” will actually help them more in the long run.
• If you can’t ever achieve emotional peace when it comes to how you are invested, you can probably spend it all. I once saw a cartoon sketch that showed a stock market chart where the individual kept buying at the top of the market and selling at the bottom of the market. The punchline read something to the effect of “Repeat until broke!” Life is too short to not have peace of mind and the ability to focus on what is truly important. Sure there are market ups and downs, but if you are ever invested in a way that leaves you constantly uncomfortable, you shouldn’t be.  

I’m not trying to be Scrooge. I just thought I’d take a different approach to my usual message of saving and being fiscally responsible, and instead, share a few, common ways on how you can make hard-earned assets disappear.

Being broke and working is bad. Being broke and retired is even worse. Potentially leaving a little to your heirs may not be your goal, but it isn’t the worst thing in the world, either. Remember, if you really don’t like your heirs, you can always bequeath whatever you have left to your friends or to charity.

Please, whatever you do, just don’t spend it all!

-Tom

The Homemaker Retirement Plan

Credit: Ambro

There is a lot of financial advice out there for people who are working and for people who are retired. I like to think I’ve helped add to that. However, there is also a pretty sizable group of people who a lot of the best and brightest financial gurus, and your humble blogger here, don’t address nearly often enough: homemakers. A few Google searches and a personal reflection on all of the financial articles, commentaries, and calls I’ve read and listened to over the past several years confirmed my suspicion that financial advice for homemakers is pretty limited, so I hereby dedicate this post to the homemakers of the world. This one’s for you!

“Stay-at-home moms,” “Mr. Moms,” spouses who don’t need to work, spouses who don’t want to work – whatever you want to call them – for a few minutes, let’s call them homemakers. As I mentioned earlier, it's the working spouses who are usually sought after by the lawyers, insurance agents, and brokers of the world, but I believe homemakers, too, have a need for some very important financial planning. So here are three suggestions to help homemakers work toward a successful retirement plan, hopefully just like their employed spouses.

• Insurance- It’s crucial to make sure both the breadwinner’s and the homemaker’s lives are adequately insured.
• It may seem like a no-brainer to have a sizable life insurance policy on the breadwinner, but is it enough? Is the policy large enough to allow the homemaker adequate time to jump into the labor force? Is the policy large enough to allow the homemaker and the rest of the immediate family to maintain their lifestyle if the homemaker’s salary is not going to be as large as the breadwinner’s salary was? If there are young kids involved, is the policy big enough to provide for the additional supervision expenses that will be incurred if the homemaker has to go into the office instead of run the household?
• Some of you may ask why you would want to pay for a life insurance policy on a homemaker. Well, if young kids are involved, is the breadwinner going to quit an income-producing job and run the household if the homemaker has an unfortunate demise? In many cases, that’s probably not a sustainable option, so factoring in the additional supervision expenses that will be incurred by the breadwinner if the homemaker is unable to run the household is a necessary consideration and can probably best be addressed by a relatively small and short-term life insurance policy.

• Spousal IRAs- Not many of those brokers obsessed with only the working spouse cover this, but the non-working spouse can now also make annual IRA contributions ($5,500 per year or $6,500 if over age 50) as long as their working spouse has enough earned income ($11,000 per year or $13,000 if over age 50) to cover both of their contributions. Five or six thousand dollars a year may not sound like a healthy retirement plan right off the bat, but let’s say a homemaker was able to stash $5,000 away in a Spousal IRA every year for the thirty years their spouse worked - that would be $150,000 assuming no stock market growth at all! Isn’t it crazy that by diligently saving and contributing a few thousand dollars a year to a Spousal IRA that a homemaker could end up with a retirement account comparable to many people who are actively employed for their whole working life?

• Managing Expenses- Some homemakers may consider themselves the head of their household, while others might consider their employed spouses the head of their household. Either way, I think it’s probably safe to say that the homemaker has a clearer understanding of the day-to-day operating expenses of the home. Therefore, I think it is crucial for the breadwinner (who probably has a better idea of the future income coming in) and the homemaker to keep each other updated on their financial forecasts. A homemaker’s insights on upcoming expenses and cash flow needs can be valuable information to the breadwinner (and even their financial planner) in making sure the family budget is going to work.

 

I think the three suggestions above should definitely be considered by all homemakers and their spouses, but if I haven’t convinced you, let me try one more way… I hope you will pardon me for being rude, but do you make more than $96,261 per year? You see, I read an article early last year that showed what you would have to pay a chef, house cleaner, driver, laundromat, lawn care provider, and child care provider to do the average tasks done by a homemaker, and $96,261 was the number the article landed on! With that being said, I think it’s safe to say that although a homemaker’s work may not earn the big bucks, a homemaker’s work is often worth the big bucks, and therefore deserves proper financial planning considerations!

 

-Tom