Unexpected Cash Flow Crunch

By Linda Leitz - Last updated: Tuesday, December 20, 2016

Just about everyone gets surprised by a month that has more expenses than income. As with any unpleasant surprise, how we handle it can determine whether it turns into a long term problem or just a short term bad situation that we learn from. Here are some ways that might help with cash flow and, depending on the next steps you take, keep it from causing you angst in the future.

While dealing with the cash flow crisis, rethink your needs and wants for the short term. Trimming some spending around movies, restaurants, weekend trips, and other niceties for a while may get you out of your tight financial spot. Then you can have some of these luxuries go back into your spending patterns. Look in your pantry and freezer. Most people who grocery shop regularly have some canned goods and frozen foods that can be a good meal at home. Cooking instead of eating fast food or living off heat-and-eat foods can also save money. An entrée or meal with a few different food groups that you make in bulk from scratch may feed you for several meals of leftovers, cost less than the convenient pre-made items, and actually be better for you.

Don’t let sunk costs trick you into spending money. A sunk cost is a business concept that is basically money that was spent that you can’t recover. Let’s say you’d planned a weekend trip to the mountains and have already put down a non-refundable deposit on a condo or hotel room. You’re hit by a surprise budget crunch and are trying to decide if you should go on your trip or not. While there might be some variations of a right answer, don’t let the deposit weigh too heavily in your decision. If that lodging payment is a small piece of the entire cost of the trip, you might be better off seeing if the money can be applied to a future stay or accepting the loss, rather than spending several times the amount of the deposit to avoid having it go to waste.

If you work at a job where there is an opportunity to pick up some extra income, do it. Two things that can generally be traded are time and money. We pay extra to have someone do our laundry, yard work, or prepare meals. If we need money, using some of our leisure time to get extra money is a practical trade off.

All these austerity measures, of course, assume that you don’t have enough in savings or credit card availability to take care of the financial crunch for the month. This is evidence of a bigger financial concern for the household. While getting through this short term problem, take a close look at your income and expenses. And be willing to make major changes to avoid tight financial times in the future.

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Your Money Script

By Linda Leitz - Last updated: Tuesday, November 29, 2016

Views about money come from our upbringing, our personal experience, and the people who influence our opinions. When these financial feelings become extreme, they can lead to dysfunctional decisions, so making yourself aware of any severe money attitudes can help you achieve your financial goals. The Klontz Money Scripts were developed to identify some common negative financial scripts to help financial professionals assist clients in meeting goals.

Money Avoidance is the belief that money is bad or undeserved. Money avoiders feel fear, stress, or anxiety. Their concerns may lead them to be their own worst enemy in regard to finances. Their beliefs include that money corrupts people, that there is virtue in having little or no money, and that it’s not likely that rich people are good people often mean that they don’t make decisions that will have good financial outcomes.

At the other extreme is the money script of Money Status. This attitude relates a person’s self-worth to financial worth. Rather than concentrating on goals of the greater good or personal satisfaction, these people concentrate on acquiring financial things, to the detriment of their happiness, well-being, and sometimes even their health. They are aware of socio-economic class and are competitive with those around them in regard to acquiring financial status. Ironically, many people with this outlook are not very wealthy.

Money Vigilance is a state of mind in which people feel shame and secrecy about money. It doesn’t matter whether or not these folks have a lot of money or not, they cannot comfortably discuss or share information about money. While an individual’s money situation isn’t generally a topic for public discussion, the money vigilant aren’t able to even share information about finances within their immediately family. They are unable to spend without guilt or enjoy financial benefits available to them.

Money Worship is a belief that money is the solution to everything, which is a common belief among Americans. People who believe this also often believe that money is the source of happiness, that they can never have enough money, and are distrustful with people in regard to money. Many people with this attitude have low income and tend to carry credit card debt that they can’t pay off each month.

Like so many areas of life, balance is a good way to make goals realistic and manage day-to-day finances. Extreme actions and beliefs, especially ones that are harsh and judgmental about a life necessity like money, make achieving accomplishments difficult. In regard to money, it can be something that is part of your life without becoming the driving force, a source of stress, or a cause for shame. You can earn money in a career you love, and spend and save with your financial resources. Keep your finances in perspective, giving money neither too much nor too little control over how you see yourself and those around you.

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So What Do All Those Letters Mean?

By Linda Leitz - Last updated: Tuesday, October 25, 2016

Many of us look to professionals to give us valid financial planning and investment advice.  This seems reasonable.  People choose to have a professional help them with many aspects of their lives.  It may be having a competent attorney write or review your will or having a professional auto mechanic change the oil in your car.  In some areas, their is really a need for professional help to guard against making costly mistakes and protecting the interests of the ones we care about, including ourselves.  Other times professionals are more a matter of convenience.  (I never wash and iron my cotton dress shirts.  It’s not that I can’t, I just don’t want to take the time and the folks I take them to do a better job.)  Financial planning and investing are areas where many people choose to have some degree of professional help.  Lots of times professional qualifications can pay a big role in deciding who you ask to help you.  All of the designations and initials that can get thrown at you can be confusing.  Here is a basic primer on what some of those designations entail.

A Chartered Financial Analyst (CFA) is someone who has completed an extensive set of examinations on ethical and professional standards, tools and input for investment valuation and management, asset valuation, and portfolio management.  There are also professional experience requirements.  CFAs often work as institutional money managers or stock analysts.

A Certified Financial Planner (CFP) is predominantly involved with individual clients.  A CFP is required to have educational expertise and pass a test covering estate planning, income tax, retirement, insurance, and investments.  Also, they must have applicable work experience and subscribe to a code of ethics.  A CFP may or may not hold licenses to sell investments or insurance.

Chartered Life Underwriter (CLU) is a designation held mostly by life insurance agents.  They have completed a college level curriculum of 10 college level courses, have at least three years of professional experience, and subscribe to a code of ethics. With 3 more courses, they can become a Chartered Financial Consultant (ChFC).

A Certified Public Accountant (CPA) has an extensive education in accounting, has passed an extensive exam, received from state accountancy boards, and qualifying work experience.  The knowledge and experience of CPAs about investments will vary.  The American Institute of CPAs issues the Personal Financial Specialist (PFS) designation also.  A PFS designee has passed an additional test and has professional experience in personal finance.

Enrolled Agent
Enrolled Agents (EA) must pass a test on tax law.  They are authorized to practice before the IRS.  Like CPAs, the knowledge and experience of independent EAs about investments will vary. If you want financial planning from an EA, look for additional designations.

This is a graduate degree in business, a Master of Business Administration (MBA).  The degree will vary with whether or not there is a specialization to their degree.  It may be a general degree which covers a broad base of business issues or it may have a special focus.  You may find a great deal of comfort in working with an MBA in Finance, but do you want to take financial advice from someone with an MBA in Marketing?

Registered Representative
These professionals are also often referred to as stockbrokers or investment representatives.  These people are generally licensed to sell some type of securities.  They are generally versed in the types of investments for which they are licensed, but their experience and training in regard to financial planning varies with the individual.

A Registered Investment Advisor (RIA) has registered with the Securities and Exchange commission or a state securities agency to be able to charge for investment advice.  The registration requires a listing of qualifications and business practices.  The appropriate regulatory agency can perform examinations of RIAs to see that they are complying with applicable laws and record keeping requirements.

In choosing your financial professional, look at the qualifications that meet your needs.  If you expect them to help you with financial planning as well as the actual investing of money, you should get a sense of their qualifications in both areas.  Also, an understanding of what they are licensed to do will sometimes explain why your planning and investments take a given turn.  For instance, if your financial professional is only licensed to sell insurance and is not licensed to sell securities, that may have something to do with the fact that your retirement plan, your kids’ college fund, and all your other long term goals are funded solely with life insurance.  Also, if your professional is not licensed to sell insurance, that may explain why they think you don’t need any.

You should also have a sense of how your professional gets paid for their services. Many consumers are now seeking out fee-only advisors. Even in that arena, there are differences.  Some charge hourly, some charge a flat fee for specifically agreed upon advice, some are paid a percentage based on assets you own that are held by them. If you want a fee-only planner, don’t be confused by someone who says they’re fee based. They could charge fees or they could be paid through commission from products sold or some combination of the two. If your questions about how they are paid aren’t answered well, you might want to consider another professional.  Answers like “It’s all built in”, which refuse to specify how and how much are red flags.  Most financial professionals are not one person non-profit agencies, so you have a right to know how they’re paid.  As a consumer, it’s not an area where you should be too stingy either.  Someone who helps you meet a long term financial goal shouldn’t make more money than you do from the advice, but they should be compensated for their work.

Don’t ever forget to follow your gut reaction to someone.  Working with someone you trust is one of the most important criteria.  All the credentials, degrees, and fast talk in the world can’t outweigh the need for honesty.

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No Green Bananas?

By Linda Leitz - Last updated: Monday, October 3, 2016

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.

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Your Social Capital

By Linda Leitz - Last updated: Tuesday, September 6, 2016

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.

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The Money Pet

By Linda Leitz - Last updated: Monday, August 29, 2016

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.

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Develop your Biggest Resource

By Linda Leitz - Last updated: Tuesday, August 2, 2016

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.

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Motherly financial advice

By Linda Leitz - Last updated: Wednesday, July 20, 2016

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.

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Standard of Care

By Linda Leitz - Last updated: Tuesday, July 12, 2016

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.

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Effective Mortgages

By Linda Leitz - Last updated: Wednesday, June 22, 2016

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.

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