Very often, retirees or people almost in retirement don’t want to hear about issues involving their money if it suggests any type of long range view of things. Often I’ll talk to someone in that category about the long term performance of something relevant and they’ll reply that they don’t even want to look at long term issues and that they “don’t even buy green bananas”. While that makes for a great come back, it may be more short term in nature than is in the person’s best interest.
The biggest problem with a “no green bananas” attitude is that it assumes one of two things of which you can’t be sure. One assumption is that inflation and whatever you currently have your money in will cooperate so that you will have as much money as you need for the rest of your life. The other assumption is that you aren’t going to live long enough for it to matter. Both premises are pretty risky.
There’s good news in retirement planning and it’s that people are living longer. That means more time in retirement than your parents and grandparents had. It may mean that instead of having 10 years or less in retirement, most of you will have 20 or even 30 years. What can be bad news is outliving your money. It doesn’t take a Harvard economist to figure that if you’re going to be in retirement longer than your predecessors, you need to save more money and make it work harder to have the lifestyle you want in your Golden Years.
In terms of making your money work harder, you’re more likely to get higher returns over the long haul with some type of equity. CDs and money market funds are safe, but don’t really pay much – especially these days. And what little money you make in interest is subject to income tax. So even with low inflation, you might not even be breaking even.
The other important factor to consider is that you should not have all your money in the same place. There are a couple of reasons for this. One is that you probably need your money to do different things. Some of it needs to be available for emergencies, some needs to produce income, and some needs to grow for the long term. (There are those green bananas, again.) The other main reason is that almost any investment will have good years and bad years. Some years bonds have performed better than stocks. Most years stocks have performed better than bonds. Some years, the money in your mattress may be your favorite investment. If you have your money spread around in a variety of places short term events should not cause you major problems. Being willing to look into different alternatives can certainly help you get where you want to be financially and actually help reduce some of the risk of having all your eggs in one basket.
One of your biggest financial assets is you and your professional potential. Part of how you make the most of your ability to earn at your desired level and have a fulfilling career is your social capital, which is the academic term for your personal and professional network. You may have natural social capital. That’s your family, as well as the people you meet through work and other activities, past and present. You can develop your social capital.
There are three primary aspects of social capital – obligations and expectations, information channels, and social norms. Obligations and expectations involve the give and take of relationships within the network. Think of this in the vein of the old fable of stone soup. Someone puts a rock in a pot of boiling water and everyone who wanted some soup had to bring something to share – a potato, some meat, spices. The stone and water alone aren’t even a meal. But individual contributions and strengths make it good for everyone who participates. So with social capital, you need to give what you can and be respectful of other people’s contributions. Think of a networking event. If you listen to what people tell you about their business, what type of services they offer, and what type of clients they’d like to meet, you’re making the right steps toward your obligations. It’s also reasonable to expect people to listen to your offerings and needs. But you can’t be a viable participant only by selling your services.
Information channels allow appropriate communication. In the example of a networking event, you might exchange business cards with the folks you spoke to. You establish regular communications to make those relationships grow and prosper. That doesn’t mean that everyone you meet needs attention. But concentrate on the people where you have something to offer each other.
Social norms in social capital can be as general as common courtesy or as specific as what constitutes appropriate attire. One way to ascertain the norms for your social capital is observation. See how people interact, what they wear, how they keep in touch. Another is to ask someone you trust. And different groups in your social capital might have different norms. You probably don’t need to wear professional attire to meet with your neighbors, but wearing the clothes you wear to mow your lawn when you’re at work is probably not a good idea.
One of the best ways to make the most of social capital is to listen more than you speak when you’re with someone who’s a good contact for you. Ask thoughtful questions that can help you decide the direction you want to take your career, express respect for the person’s expertise and experience, and ask for their opinion. If your social capital is going to pay big dividends, nurture relationships and do your best to contribute what you can.
There are good, kind people who don’t have any desire to have a pet in their lives. And there are people who consider a pet a part of the family. If you’re a Pet Person, it’s a good idea to think through the financial impact of bringing a non-human animal into your life. Even if someone gives you a pet or you find a stray animal and decide to keep it, there’s no such thing as a free pet. The first year cost of owning a dog can vary from $500 to over $6,000, with ongoing annual costs running $200 to $2,500.
If you don’t find a stray on the street, the initial purchase cost can vary from a few hundred dollars to well over a thousand if you go through a pet store or specialized breeder. If you’re not looking to breed or do competitions with your pet, you might be very happy with an animal from a shelter. The adoption cost with these will range from $50 to $600 for cats or dogs, based on the web site for the Humane Society of Pikes Peak, where the adoption fee includes a discount on an initial visit to the vet, a discount on spaying or neutering, the first year license (required by the county), some vaccinations, and microchipping.
The biggest costs after acquisition are food and veterinary costs. Experts generally recommend that dogs and cats eat pet food, not people food, and buying pet food can run $250 to $750 a year per pet, depending on the size of the pet and the type of food. In regard to veterinarians, the first year of ownership should include a complete physical, vaccinations, and spaying or neutering if needed. These necessary services can cost $75 to $1,000 during the first year, but may decline if there are no health issues. Pet insurance isn’t just for the eccentric pet owner. Premiums will vary based on the pet, breed, size, and age. If your pet ends up in a terrible accident or with a medical condition that needs extensive treatments, insurance can save you a bundle. To search companies, check out consumersadvocate.org.
The odds and ends of getting set up with a pet can add up, too. A collar, leash, grooming, a kennel, and obedience training are important for just about any pet. You can bargain shop for some of these items, but they can still run $100 to $1,000 if you get everything. Some of the indirect costs can also add up. Animals can have mishaps that result in replacing shoes, cleaning carpets, or reimbursing neighbors for ruined landscaping. The cost of a good fence may be one of your best investments relative to becoming a pet household. A Pet Person is certain that, financially speaking, having a pet in the family is well worth cutting back in other areas.
Managing your finances has many aspects. It’s good to have an emergency fund, spend less than you make, and save for the future. But there’s a big financial asset that many of us take for granted and it’s worthy of your attention. It’s what academics call human capital and what you might call your talent and skill. This is basically what you could use to make money, now or in the future. Some of this is specific to who you are. It can include your great looks, sense of humor, or natural ability to fix mechanical things. The other type of human capital is what you acquire. Two common ways of acquiring human capital are through formal education and job experience.
So if you feel that you’d like to have more potential resources to enjoy life and have more financial options, work on your human capital. There are several ways you might approach this. Getting more education can help you change your career path. That might seem like a lot of trouble to make more money. However, the Department of Labor data show that, on average, higher levels of education seem to result in higher income. Even if you borrow a reasonable amount in student loans and take time away from a full time job, an education could have a positive impact on your long term earning capacity and result in a brighter financial situation.
If going to school doesn’t seem like a good approach for you, a job that gives you training and develops skills is also an excellent way to make good use of your capabilities. Many of us get a job when we need income and follow where it takes us, without realizing we can make choices around our work that can provide more than just a paycheck. General skills we might get from work can be things like negotiation techniques, supervisory skills, and project management. Specific job skills apply specifically to your current or future job. It’s great to have these skills to give you more job security where you are and, hopefully, you can take those skills with you to another job if needed.
You can manage your human capital. Find work that you enjoy that pays what you need to live. If you need additional skills, explore how you can acquire those skills. If your employer is willing to send you to training or provide the skills in the workplace, pursue that and repay the employer with your loyalty.
Even if you’re about to retire, there may be ways to use your biggest asset that are financially rewarding and interesting. Having a change in career or a continuation of career beyond your planned retirement age can be personally as well as financially worthwhile. We all spend so much of our waking hours in life at work. Doing something you enjoy can also have a gratifying financial impact.
There is financial advice that falls into the same category as advice that our moms gave us growing up. Standard advice from moms includes making good choices, dressing and acting in an appropriate manner, and being nice to others. Here’s some basic financial direction that a mother could love.
If it seems too good to be true, it probably is. Investments that promise fabulous returns and low risk need careful scrutiny. Often more conservative and diversified investments like mutual funds and exchange traded funds might be better suited for you than a hot stock tip or a packaged investment with high fees. There certainly are people who make money from high risk investments. Those results may be from skill or they may be from luck. But either way, high risk investments sometimes result in big losses.
Save something for a rainy day. This is simply a financial safety precaution. Put your emergency savings in something unexciting – a bank or credit union savings account, a money market account, certificates of deposit. When it comes to emergency savings, you don’t need a high yield. You need to know that if you need the money, it’s there.
Pay yourself first. It’s good to start out saving 10% of your gross income, which is your income before taxes and other deductions. This is how you can get that emergency savings going. It’s also how you can save some money for retirement. The best retirement accounts are usually your employer retirement plan. But if you don’t have a retirement plan through work, then an IRA will do the job.
Share your good fortune. Support the financial causes you care about. If they are qualified charities, get receipts and see if you can itemize deductions on your tax return. You can make donations by writing a check or, in the case of charities with thrift stores, you can donate used clothing, furniture, and other items.
Have a good attitude. What you expect can impact what you accomplish. That doesn’t mean that you can just pretend to have money and have it magically appear. But assuming that you can make good decisions and that you can live within your means will help you achieve that.
Don’t be greedy. Whether or not someone can live on what they have isn’t just a matter of money. It’s also a matter of what a person decides to do. There are plenty of people who have lots of money, but it never seems to be enough for them. There are also people who have very little money, but have a great life and everything they need.
Do a good job. Find a career path that you enjoy. Learn to live on what that career makes. It’ll be more rewarding than doing something just for money.
Everyone has the ability to follow these basic credos. They’ll make your life simple – and your mother would be proud.
When you ask for financial advice from professionals, what standard of care do you expect from them? Do you expect them to give you recommendations that are in your best interest? Or are you satisfied with having recommendations that are suitable for you within the range of what an advisor has to offer?
A fiduciary is someone who is dedicated to doing what is in a client’s best interest. That means they will make recommendations that they believe are in their client’s best interest and they will disclose if there is a conflict of interest for them in serving the client. As an example, let’s say Joe goes to Betty, a financial professional who has handled all of his insurance needs, and tells her that he just left his job and wants to move his 401k from his former job into an account with her. Betty works on commission from financial products she sells and has credentials to sell insurance. The only product she has that she believes is suitable for this is an IRA invested in an indexed annuity. With a suitability standard, Betty can get Joe set up with an IRA invested in an indexed annuity that she believes is the best indexed annuity for his account.
As a fiduciary, Betty needs to tell Joe if an indexed annuity IRA might not be in his best interest. She can still tell him the virtues of the indexed annuity, but she would be best living up to her fiduciary duty if she also tells him that there might be less expensive alternatives – such as moving the 401k to his new employer’s plan or putting the money in an IRA invested in a mutual fund. Joe might then do something different with his 401k and Betty won’t get paid for telling him that he has other options than what she has to offer. It’s also possible that Joe would say he trusts Betty and is willing to pay a little more in fees to have the account with her, especially since she manages all his insurance, he knows how conscientious she is with that, and he appreciates her telling him about other alternatives.
There are regulators and legislators that are concerned about the Department of Labor imposing a fiduciary standard on financial professionals handling retirement accounts. The concern is that investors who aren’t wealthy would lose access to good advice because regulations would make it financially impractical to serve these smaller investors and enforce fiduciary standards. Unfortunately, this suggests that these small investors aren’t currently getting advice that’s in their best interest. While that may be true in some cases, there are many advisors who give good advice that’s in the consumer’s best interest – even if the client doesn’t have large investments and the advisor loses business in doing it. Don’t be afraid to insist that you work with advisors who are fiduciaries – who keep your best interest in mind.
Owning a home has long been considered part of the American Dream. And most households need to borrow money to do that. Buying and financing a home can be a positive contribution to your financial situation.
Buy a home that’s appropriate to your situation. Some people want to buy one house and stay in it forever. That can work, but what works better for most people is to buy a home that fits their current financial situation, buy up as their careers take off, then downsize when getting ready for retirement. Generally a home that’s a good financial fit is one that’s one and a half to two and a half times your annual gross income. So if your household annual income before deductions is $130,000 a year, look for a home that costs $195,000 to $325,000. Also the ideal mortgage size is no more than 80% of the cost of the home. That makes a payment that won’t be a hardship to pay on your current income and generally avoids having mortgage insurance required by your lender. Some federal programs, like FHA for first time home buyers or VA for military members and former military members don’t require much of a down payment. That can be helpful in terms of getting into a first home, but it will take a bit longer to have the home be worth more than is owed on it. With a good credit score, you’ll qualify for a larger mortgage than this, but getting the biggest mortgage you can isn’t usually a good idea.
A fixed rate amortizing loan will have your mortgage paid in full over the amortization period. The most common amortization schedules are 30 year and 15 year loans, with 15 year loans usually charging slightly lower interest rates. Lori Sorrels with Caliber Home Loans recommends a 30 year loan, even if you want to have it paid off sooner than 30 years. You can pay more toward the loan to get it paid off early. And if you lose a job or have a financial emergency, you can always pay just the minimum payment – which will be smaller.
Studies indicate that the average age at which consumers have the mortgage paid in full is around 49. But there are also studies showing that some people who are financially sophisticated – those with investments, money in savings, and higher income – have mortgages well into retirement. This is part of a strategy of having money invested rather than tied up in their homes, accepting higher risk to get better long term investment returns, and the tax advantages of having a mortgage.
Do what’s comfortable for you in having your home and mortgage as part of your larger financial strategy. Don’t over commit to your housing budget, but don’t be afraid to get a reasonable mortgage or feel you have to be aggressive about paying your mortgage off early.
Excessive debt can be financially crippling. But what determines that a level of debt is excessive can depend on the type of debt and the overall impact on household finances. The right proportion and structure of student debt can be part of a balanced financial situation.
One of the first things to acknowledge in looking at educational debt is the advantage of education. The Department of Labor (DOL) has data indicating the value of education. In 2014, the average median weekly income for workers over age 25 was $839 per week. Average weekly earnings for these same folks with a high school diploma is $668 and for those with a bachelor’s college degree, it’s $1,101. During 2014, unemployment in this DOL data was 5%, but those with only a high school degree, even those who’d taken some college classes, was 6% while the unemployment rate among college graduates was 4.5%. Average earnings were higher and unemployment rates lower for those with master’s and professional degrees. All this suggests that the cost of education – in time and money – can be worth the investment.
The size and structure of the investment is the next analysis to do. Bert Whitehead, a thought leader in the financial planner profession for over 40 years, recommends that total outstanding student loans at graduation shouldn’t be more than the students first year’s professional annual income. So if a college graduate finishes school with $30,000 and makes $30,000 a year or more in a first professional job, that’s a manageable level of debt. The optimal type of debt is a form of government loans – subsidized for students from lower income households and unsubsidized for those from households of moderate means. These loans will have a reasonable interest rate and repayment schedule. Also, a full time student won’t need to make payments while in school. Private loans are most costly and should be used last, if at all.
There’s a balance between getting through an education as quickly as possible, working while in school, and borrowing money. Studies have indicated that taking more time to finish a degree while working full time might not be the best financial move. The longer it takes to finish school, the longer a student waits to start making money in a chosen profession. Borrowing too much to finish quickly can also be a bad idea if outstanding loan balances won’t be supportable.
Academic institutions aren’t always able to counsel students on the art of balancing a major, the career income implications, and the financing of an education. Many institutions have advisors who can address these issues, but students often don’t ask. Students who study what they love and follow careers in those fields will probably excel in the careers. Investigating the income of target careers, the type of financing, and the structure of education can make it worthwhile – financially and personally.
Reducing debt is a common new year’s resolution. If it’s on your 2016 To Do list, here are some tips to making headway on debt reduction.
There are a couple of things essential to keeping your credit score solid while you’re prioritizing cash flow and debt payments. One is to make minimum payments by the payment due date on all credit cards and loans. An easy way to make sure this happens is to set up minimum payments for automatic debit from your bank account. That doesn’t prohibit you from paying an additional payment in any month. The other is, don’t cancel a credit card with an outstanding balance. Failure to do either of these will have a negative impact on your credit score.
The next steps in reducing your debt involve setting priorities for your debt. For most of consumers, credit card balances are the ones that cause the most problems. Ideally, stop using cards while paying them down. If you tend to make impulsive purchases with your cards, leave them at home and don’t have the credit card information needed for online purchases easily accessible. An old trick to force thinking through use of a credit card is to put the card in a bowl of water and put the bowl in the freezer. If you chip the card out, you might damage it and if you microwave it, the card can melt.
Make goals of how much you can pay on your credit cards. Some say that paying a small credit card completely off is a good first goal. While the most cost efficient way to prioritize payments is to pay the most on the card with the highest interest rate. But there is a sense of accomplishment from paying off a small card and it simplifies how many payments to keep track of. Generally, you should pay the minimum payments on all cards and use the rest of your monthly card payment budget on the card with the highest rate. Once that card is paid off, start applying your extra payment amount to the card with the next highest rate. Eventually, you’ll be down to one card and can make one big payment until that card is paid in full.
Generally, you don’t need to pay additional payments on “good debt”. This is usually anything that might have tax deductible interest – your mortgage, home equity loans, and student loans. These debts typically have low interest rates and the tax benefit makes those debts less urgent. Also, if you have vehicle loans that aren’t too large, with reasonable interest rates, those can be paid according to their terms. Also, don’t buy another new car as soon as you get your loan paid off. You can put the amount you were paying toward that loan into savings. Continuing to save while paying down debt is important, so work for a balance between saving and debt reduction.
Folks can spend lots of time and energy saving for the future, living on a budget, and investing well. But poor insurance decisions on some basic assets – their home and their vehicles – can derail financial security. Insurance should cover large, unusual losses that would be difficult to pay for out of pocket. There are some good basic tips for getting insurance that’s affordable and effective.
If you own a vehicle and have a loan on it, you’re probably required to have comprehensive coverage. This means that if your car is in an accident and is a total loss, the insurance company will pay the pre-accident value of your vehicle. First they’ll pay off your loan and the rest can come to you. You also need liability coverage, which the policy provides payment toward a claim if someone sues you due to an accident. This is required in most states, including Colorado. You can have medical expenses for yourself and anyone who needs medical expenses due to an accident.
A common mistake purchasing auto insurance is having a deductible that’s either too large or too small. The deductible is the amount you have to pay in an accident. If you have a good driving record, you might not save much by having a high deductible. Linda Ousman, Account Manager with Don Bates Insurance, encourages consumers to get multiple quotes since each household can have different characteristics. For a family with one or more teenagers on their policy, the premium for a low deductible can be more expensive than if you didn’t have young people driving. Accidents you’ve had can also increase your premium, no matter how large your deductible is. As a planning tip, have at least the amount of your deductibles in emergency savings.
Homeowners insurance is wise for anyone who owns a home and necessary for anyone with a mortgage. A high deductible – $2,000 to $2,500 – is a good idea for home insurance. Ousman recommends that claims made on insurance be only for large losses. She has seen some insurance companies not renew a policy if there are two or more claims within three years or rates on the premiums increase as much as 40%. Make sure your policy provides replacement costs.
If you don’t own your home, renter’s insurance is worthwhile. Ousman suggests that even if you live with a relative, renter’s insurance can reimburse you for your belongings if they’re stolen or lost in an accident. Your insurance company may give you a discount on your auto policy if you also carry a renter’s policy.
One of the best kept secrets in insurance is an umbrella policy. An umbrella policy gives you coverage for liability if someone is injured in an auto accident or at your home. For a few hundred dollars a year, you can get $1,000,000 or more in addition to the liability coverage on your auto and home policies.