Assume you have money set aside to cover emergencies, and you have money in a savings account as well. Or perhaps you just received some money through an inheritance. Should you use any of these sources to pay off your mortgage or take that money and invest it?

The simple answer

If, in the past, you have had trouble managing your finances, particularly managing debt, then you are probably better off continuing to make mortgage payments. You can see the progress you’re making with these payments by simply looking at your bank statements.

On the other hand, if you have demonstrated in the past that you can successfully manage your finances and you are willing to spend time in the future managing them, then you should consider using the money for investing. While investing can do a better job of building wealth than paying off debt, this is by no means a certainty.

Relevant factors in your decision

General factors to consider are your age, your home’s current market value and anticipated future appreciation, your marginal income tax rate now and your estimated marginal tax rate in retirement, your current mortgage interest rate and terms, and your estimate and confidence of future returns in alternative investments such as stocks and bonds.

Paying down, or paying off, a mortgage, pros and cons

If your mortgage rate of interest is 4%, then your mortgage is costing you 4%  in interest payments providing you do not itemize your deductions for federal tax purposes. If you itemize, your cost is less than 4%; the actual cost will depend on your marginal tax bracket. Note that as a mortgage balance declines or is eliminated, any tax benefits you get with itemizing deductions also decline and are eventually eliminated.

In your retirement years having lower monthly expenses is always good; having a small or zero mortgage payment could be a valuable benefit especially for people who rely heavily on social security payments or who have minimal or no pensions.

Sinking all your money into an illiquid asset – a house – is a big drawback. You probably never thought of your “free and clear” home as having an associated cost, but that’s exactly what it is – the opportunity cost of the money tied up in it. Home equity lines of credit and reverse mortgages can be used to offset this drawback, but they have their own downsides.

A house does not care whether it has a mortgage or not. It exists for people to live in and enjoy. Mentally coupling money tightly with housing can restrict your overall financial options when thinking about strategies appropriate for your total financial circumstances.

Going with investing, pros and cons

Assuming you can capture only half the return of stocks in the last 80 years, that’s half of 10% or 5%; you are still getting a better return on these investments than the 4% you’re getting paying down or paying off the mortgage (ignoring taxes). But that return may fluctuate considerably over time. A more conservative and predictable approach would be to compare the percentage return from a very low risk investment such as a Treasury note or bond with your mortgage rate. When comparing returns always consider the tax effects – taxes potentially reduced from the mortagage interest deduction and taxes potentially owed from investment returns.

Investments such as stocks and bonds are far more liquid than real estate. Asset diversification is improved as you now have investments, real estate, and investments that can be turned easily and quickly into cash when needed.

Unlike your monthly mortgage payment, you will have to monitor the performance of your investments either by yourself or through turning them over to a broker or financial adviser. And these values will fluctuate. You should ask yourself how comfortable you are with that –  How to Gauge Your Tolerance for Investment Risk.

Two different simple but meaningful perspectives for deciding

From an emotional perspective, consider what is most appealing to you, and what you can live with. Decisions based on emotion are not necessarily bad; they merely need to be acknowledged for what they are.

From a practical perspective, consider how easy it is to undo whichever choice you make, as there may come a time when you need to do exactly that. Having options is always good given the difficulty of predicting the future.

The post Should I Pay Off the Mortgage or Invest? appeared first on Thoughts On Mastering The Three Phases of Life.

Challenges for Millennials: significant student loan debt, challenging job markets, frequent job changes, distrust of investing money in the stock market, elimination of pensions as their parents had, fewer traditional employer-sponsored retirement plans, and concern that social security will not be there when needed.

The good news – you have one huge advantage over the rest of us: time. If you make good use of that you will likely do fine. Here’s a plan to support that claim.

Step 1 – Don’t even think about investing any money in the stock market or anywhere else until you have successfully met these prerequisites.

Invest in yourself first – your “human capital”. If you need to improve your job skills by taking a course, set aside money to allow for that. You have complete control over investing in yourself, and you will never have that level of control over investing or anywhere else. You can also make extra money apart from a regular job by developing a second or related set of skills.

Establish an emergency fund for yourself. Think about what your biggest exposure is and set aside money to cover it. Examples include an unanticipated car repair bill or vet bill.

Understand the difference between good debt and bad debt. Good debt is money owed on an asset that is likely to appreciate such as a house bought at a fair price. Bad debt is money owed on credit cards or money owed on assets that depreciate such as a car.

Pay off credit card debt and make a solemn vow never to charge anything that you are not able to pay off in full the following month.

Start developing a sense of what economists refer to as “opportunity cost”. Simply put, if you have a choice between putting money towards option A or option B, choosing one means you lose the benefits (or sometimes the costs) of doing the other. If you decide to try to pay off student loans earlier than the terms your loans require, you do not have that same money to invest, to save towards retirement, or to do anything else you could have done with it.

These decisions can be complicated and may have considerable ramifications years later; if you think you need help then consider meeting with a financial adviser How to Choose and Work With a Financial Adviser.

Be clear on your income and outgo. If you’re not sure you need a budget, read Should You Have a Budget?.

Do your own taxes. Not only will you have control over the data in your returns, you will learn about the US tax system in the process. And you might pay less taxes the more you learn.

Step 2 – You’ve gotten past step 1 and now wonder what to do next.

Take 10 minutes and define your long term goals in general terms: be debt-free, start your own business, hold satisfying jobs, do some traveling, buy a house, get married and eventually start a family, be able to retire at a reasonable age. Your goals are probably not significantly different than your parents’ were at your age, but how you get there is likely to be different.

Take 10 more minutes and do an honest assessment of your personal strengths and weaknesses. And then distinguish between what you can change, what you think you cannot change, and what you don’t want to change.

Accept the idea that living on a percentage of your income is likely to be the single smartest thing you can ever do for achieving financial stability over a lifetime. Start with a small percentage – say saving 5% and living on 95% – and ratchet that upwards as you are able.

Make it a way of life; over the years the compounding effect is significant. Think about it as paying yourself first – your best and wisest investment.

Work smarter, not harder. Use your research skills and familiarity with electronic media to look for apps help you like Mint, Clarity Money, Digit, Stash, Tip’d Off, Wealthfront, FutureAdvisor, SigFig, Learnvest.

Go to Annual Credit Report and pull your free credit reports. Make sure they are accurate. Also look for sites such as Credit Karma where you can get your credit score. You want one above 700.

Familiarize yourself with Bankrate. You will find a wide variety of useful information and applications there including where you can get better deals on checking and savings accounts than you are probably getting now. For those who want to start with very low risk investments, you can use this site to look for institutions offering CDs and shop for rates.

Look for free money. The first place to look is a company match if you are fortunate enough to work for a company that matches a percentage of your contributions to its 401(k) plan. If you work for a company that offers a 401(k) and you haven’t signed up, read Should you participate in a 401(k) plan?.

Step 3 – Now decide what to do with your “extra” money.

Do a brutally honest self-evaluation as to your knowledge, willingness, availability of time, and emotional skills to manage your own investments. Don’t underestimate your ability to learn, and don’t ever think you’re smarter than everyone else. Read I’ve Got Money to Invest – Should I?.

Consider some tools to build an investment portfolio by searching “building an investment portfolio”.

Step 4 – Don’t be in a rush to buy a house.

Create a separate savings account for a house fund if your goal is to eventually buy one.

Monitor your credit score. Your minimum goal should be at least 700 (average score nationwide for April, 2022 is 716). 

Don’t start the process by looking at houses and then trying to figure out how you can meet the monthly payments. Start with what is an affordable monthly payment, and then look at the houses that are in the price range for that monthly payment.

You’ll likely be tempted to use some of your retirement savings either through borrowing from a 401(k) if your employer allows it, or simply withdrawing the money altogether. Don’t do it. Seriously.

Step 5 – Consider hiring a fee-only financial planner or investment manager when you:

Do not have the time, interest, or emotional detachment to make some financial decisions.

Need someone to help clarify your lifetime goals.

Want a single point of contact for financial advice.

Need a second opinion on an upcoming important financial decision.

Need someone to explain complex financial jargon in clear and understandable terms.

Need someone to clearly explain analyses such as paying off student loans versus investing the money.

Are making investment choices when you may be unaware of the behavioral issues influencing them.

Need someone on occasion to review your progress and to keep you on track for achieving your goals.

Want someone who is legally obligated to give you advice in your best interests.

Want someone who is always available and who can give you occasional advice at no cost on simple issues.

Step 5 – How do you find a professional adviser who is trustworthy?

 Think about what you want help with, and read How to Choose and Work With a Financial Adviser.

Look for a fiduciary What’s a Fiduciary and Why Should I Care?.

Ask friends and relatives for referrals. But don’t choose on that basis alone as a recommendation might not be right for you for many different reasons including the fact that advisers may be good in some areas of financial planning and investment management and less good in others.

Do a search on The National Association of Personal Financial Advisers.

Be willing to interview more than one, and don’t be shy about asking questions!

Don’t be dismayed or overwhelmed by all of the above. The important thing is you start somewhere and build on it over time. Good luck!

The post Millennials – A Blueprint for Success appeared first on Thoughts On Mastering The Three Phases of Life.

Advantages of owning a home

Purely emotional reasons. This should not be discounted as a factor.

Possible deductions for mortgage interest and property taxes depending on income and your overall tax situation, and also dependent on the state in which you live or are thinking of moving to.

Fixed cost in recurring mortgage payments provided you get a 15 or 30-year fixed mortgage.

Possibility of building equity. Contrary to popular opinion, this is not guaranteed, and depends greatly on where the property is located.

Stability. Assuming you pay your mortgage on time you can’t be forced to move except under unusual circumstances.

Option of getting a reverse mortgage when you’re much older and have built up substantial equity.

Disadvantages of owning 

Requirement of a down payment that could strain or exhaust your financial resources.

Upfront purchase costs including realtor’s commissions. That money is gone forever.

Ongoing costs of maintenance and repair, typically 1% – 4% annually of the value of the home depending on its age. And frequently not considered by new buyers.

Ongoing time required for maintenance and repair. Don’t underestimate this.

High probability of future rising property taxes.

High probability of future rising homeowner’s insurance premiums.

Lack of liquidity. You cannot easily and quickly convert your house to cash.

Advantages of renting 

Flexibility. It’s much easier to move to a different rental than selling a house and moving elsewhere. You might surprised at how many times people on average move to other residences.

Liquidity. Since you do not have money tied up in a down payment for a house or tied up in the equity of a house, you have greater control and more options of what to do with that money. Don’t underestimate the importance of this.

Possible lower monthly cost. See the financial analysis below.

No hassle maintenance. If something breaks, it’s someone else’s problem to fix it.

Upscale amenities usually not found in homes: gyms, swimming pools, movie theaters, basketball courts, and wine cellars.

Disadvantages of renting 

Emotional – “I’m throwing money away”. Not really valid: you’re spending money on a place to live as contrasted with spending that same money on something else.

Potential loss of control. Possibility of eviction through changes in ownership of the rental.

Exposure to rising rents over which you and other tenants have little if any control.

Less flexibility in choosing neighbors. Another one not to underestimate.

Financial analysis – the Price to Rent ratio

Here’s a way to look at this more objectively. Go to Zillow and find the median home price and median monthly rent for the area you’re interested in. Divide the median home price by the median annual rent to give you a price/rental number. The number could be anywhere from 12 to 25.

Now take the sale price of a specific house you’re interested in, find a rental in the same area that’s roughly equivalent to the house, and then compute the price/rental number.

The higher the number compared to the median P/R number the more you should consider renting. You can compare the two numbers – the median P/R number and the house-specific P/R number to get an idea as to whether the house is reasonably priced for that particular area.

Possible outcomes of your financial analysis

1) The costs of renting and owning are comparable. With no clear financial advantage with either choice, I would spend some time defining where you expect to be and what you expect to be doing in 3-5 years. The more uncertain your future, the better renting looks as it avoids all the sunk costs that come with purchasing.

And it doesn’t tie up money in a house in the event of an unanticipated downturn in housing prices like the US experienced in 2008/2009. This could happen again and could be initiated by a nationwide credit crisis.

2) The cost of renting is higher than the cost of owning on a monthly basis. First thing I would do is ask “Why?”; what is it about the local market that is causing this? If the answer is acceptable, then I would consider buying, but only after I had done the 3-5 year exercise mentioned in the previous paragraph.

3) The cost of owning is higher than the cost of renting on a monthly basis. I’d choose renting to give you the maximum flexibility and options. It gives you the opportunity to familiarize yourself with the entire area relative to costs, traffic, and school systems, while monitoring price changes in neighborhoods of interest.

And you can save or invest the difference in the cost between owning and renting in the meantime.

Recommendations for deciding 

Consider both the emotional aspects and financial implications.

Be clear on your assumptions, including how long you expect to live there.

Do the price/rental analysis.

If buying, buy the least expensive home that meets your needs in an area that has the greatest potential for appreciation. Do not be swayed by realtors who try to get you focused on the most expensive house you can “afford”.  Never buy into the sales pitch “you’ll grow into it”.

If renting, try hard to save the money you expect to save having made the decision to rent rather than buy.

The post Rent or Buy? appeared first on Thoughts On Mastering The Three Phases of Life.

If you decide an annuity may be appropriate for your needs, first realize that typical commissions for a sales person average around 7%, meaning that selling a $100,000 annuity results in an upfront commission of $7,000. That’s like walking in the door with $100,000 and writing out a check to the salesperson for $7,000. Therefore it’s critical that you find a financial professional you have considerable confidence in, meaning a person you believe will act in your best interests when discussing the various types of annuities available to you for purchase, and whether an annuity is the best option for you in the first place relative to your total financial situation.

What is an annuity? 

An annuity can be thought of as buying insurance to protect against outliving your financial assets. No retiree wants to confront being unable to meet living expenses sometime in the future.

Where should I start?

You should begin by categorizing your assets into three buckets: your stable and consistent income base (Social Security, pensions if you have one), your total investments and variable return from these investments, and your emergency fund.

If your income base is sufficient to meet your recurring expenses and your emergency fund is adequate to meet unanticipated future expenses, then you can focus on whether you want to convert some or all of your liquid investments to one or more annuities.

Note that when you consider your entire financial circumstances as an integrated whole made up of the three buckets, your current objectives for your investments could change.

For example, if you bought an annuity to meet your present and expected future basic living expenses, you could consider raising the investment risk on your remaining investment assets and then characterizing this bucket as a “growth” portfolio as contrasted with an “income” portfolio. That could be beneficial should you live longer than you planned for.

Why might I want to convert some or all of my liquid investments to an annuity? 

For two reasons: emotional – I want to stop worrying about fluctuations in their values, and financial – I believe a large, highly-rated insurance company is likely to do a better job than I or my investment advisor has done in the past. 

Are there good alternatives for annuities that could also meet my objectives? 

There may be: laddered strategies with CDs, Treasury bonds, or other highly rated bonds or bond funds.

Note the income from these types of investments is 100% income as contrasted with annuities that return a combination of income and capital (your original capital).

If I decide to purchase an annuity, what should I pay attention to? 

First make sure you have clearly defined your objectives for purchasing one. Include in these whether you have a legacy goal to pass money to heirs or to charities. If there is any foreseeable reason that you might need access to these funds in the future, be able to explain why you are willing to tie up your liquid assets in an annuity.

What is your inflation expectation for the future, and for how many years do you expect this to potentially impact your future expenses? Will you require an annuity with a fixed COLA, or a variable COLA tied to an index?

What are your assumptions in terms of living to what age? This is important as it will change fairly dramatically the amount required upfront for purchase.

For example, if you are in your 80s and start looking at estimates you may find the return is much higher than you expected. There is a simple reason for this: the insurance company is betting that you will not live longer than they plan for, meaning  they will get to keep most of your money.

What are the ongoing fees and surrender charges? These can be substantial depending on the type of annuity.

Are there commutation options? Commutation options allow policyholders access to funds in the annuity in the event of unexpected need. This can be a valuable option depending on how you have allocated your total assets.

How will the income be taxed? Will some of the monthly income be treated as income and some as return of capital? How will this affect your tax planning for your financial assets in total?

An example of a basic, straightforward annuity  – SPIA – Single Premium Immediate Annuity 

Pros: longevity insurance at a reasonable cost, protection against cognitive decline, and no annual fees. Note this does not mean there are no fees, only that the fees are included in the upfront purchase price you are quoted.

Cons: lack of liquidity (depending on commutation options), inflation risk, and risk of insurer default.

Where can I go to find good online resources to help with my research? 

To get cost estimates of annuities: https://ImmediateAnnuities.com.

For asset allocations, life expectancy data, and computing fair SPIA prices:  https://AACalc.com.

This site can be a bit daunting, but it has lots of good information and analyses and will be worth your time and effort if you can deal with detail.

My bottom line on annuities

Be able to explain to anyone your reasons for purchasing one. Keep your reasoning simple and explainable in your own words.  If you can’t explain your reasons for purchasing one, don’t do it.

Make sure you have evaluated alternatives before making any decision. Whenever I have an important decision to make given several options, I always ask what it would take to undo a decision that turned out not to have been the best one. Undoing the purchase of an annuity will be costly.

Evaluate annuities as part of your total retirement plan by assessing what role they could play. For example, if you have a need for a specific amount of fixed income but also want to keep investment growth as another important goal, you could put some of your retirement funds in an annuity and invest the rest in stocks.

Annuities should never be considered in isolation, they should serve as one option in meeting your overall financial needs.

The post Annuities appeared first on Thoughts On Mastering The Three Phases of Life.

I believe I can make better financial decisions for myself than anyone else.

While it’s theoretically possible that you might be able to make better financial decisions than anyone else, it’s a remote possibility. Why do you think Warren Buffet has a business partner? Did you know that some of the smartest and most competent people in the financial world discuss their opinions and practices with their peers?

These people spend their lives studying financial matters, and the best of them still seek out others to discuss and debate ideas.

My financial life is so simple that I don’t need anyone advising me what to do. 

You may think your financial life is simple, but if you started writing down all the financial decisions you make on a regular basis you’d be amazed.

Anyone who has taken the time to put together a budget will tell you of their surprise when they looked at the result. And then there are taxes, insurance, managing debt, dealing with emergencies and, when you get past all that, investing and risk management.

Many people mistakenly believe that the most important financial decisions are made when they are older when in fact the opposite is true; financial decisions made when you are younger have greater long term implications which are frequently overlooked at the time these decisions are made.

I don’t need to be concerned about saving for retirement because I’ll just keep working as I get older and work things out as I go along. 

You cannot predict whether you will want to continue working in your 60s or 70s because you cannot predict your health later in life, the possible future obsolescence of your job skills, and the job market in general. Of these three, the first – health – is probably the most critical. Statistics on declining health, both physical as well as mental, are readily available, and can be sobering.

I can wait until I’m in my 40s to start thinking about saving for retirement since I can easily make up the money later. 

You can, in fact, wait until your 40s to think about setting aside money for retirement, but you cannot “easily” make up the money at that time. Why? Because the amount you will have to put aside will be substantially higher than if you had started 15-20 years earlier. Compounding is the reason.

Here’s a way to grasp this: in the first 15 years of a 30-year period, the money you contribute makes up most of the balance. After that, appreciation on this money begins to take over and subsequently far exceeds the amounts you contribute. The earlier you start the better.

I know exactly how much money I’ll need to save for my retirement.

No, you don’t. See How Much Do I Need to Retire? 

I don’t need to be concerned about the future because I’ll be getting a big inheritance later.

Inheritances are great. I wouldn’t ever rely on getting one. Catastrophic medical expenses can wipe them out before they even get to probate. Divorce and remarriage can complicate things. Poorly written wills can cause unforeseen problems. Wills can be contested after the fact especially when one sibling is favored over another. And people can and do change their minds as they age.

Relying on something that is totally out of your control is not the best way to plan for your future.

Only wealthy people need the services of financial planners.  

Have you considered the possibility that some people became wealthy by embracing financial planning when they were younger? Defining and setting goals and making plans to support them is financial planning. Some financial planners manage investments, and some do not.

Financial planners can help with budgets, insurance needs, college financing, retirement projections, estate planning, mortgage guidance, and debt management, among other things. 

One of the biggest benefits a financial planner can provide is to get you thinking like a finance person – setting financial goals for yourself, figuring out ways to achieve these goals, and then tracking your progress towards meeting them.

Financial planners are far too expensive to even consider. I don’t need yet another expense on top of my already challenging financial life. 

“Expensive” is a relative term. It’s possible that some financial decisions you’ve made in the past are costing you far more than you realize; a $100,000 student loan with a degree in art history is expensive. A $60,000 new car that depreciates 35% in the first three years is expensive. Paying someone outrageous fees for managing your investments and getting mediocre results is expensive.

A financial planner who charges $150 an hour is expensive, but a good planner may be able to show you how you can make up that fee many times over through better budgeting, reduced taxes, and lower investments costs with better investment choices.  

Consider thinking of it this way; if you see your family physician for a checkup every few years or change the oil in your car every 5,000 miles, then you might consider getting a period checkup for your financial life.

I can rely on advice from financial planners that is always in my best interests. 

Yes, you can, but only if they are fiduciaries, are willing to sign a fiduciary statement, and are therefore legally obligated to always act in your best interests. See What’s a Fiduciary and Why Should I Care?.

I’m a “now” person and just don’t have the interest or discipline to plan for the future.

I am reminded of this comment usually attributed to Eubie Blake: If I knew I was going to live this long I’d have taken better care of myself.

You don’t have to choose between good health and financial stability – you can have both. Go for it!

The post Questionable Financial Beliefs appeared first on Thoughts On Mastering The Three Phases of Life.

Some things to avoid:

Not having an emergency fund.

Spending that exceeds your income, resulting in building up unhealthy levels of credit card debt.

Failing to take into account the amount of student loans you take out relative to your future career possibilities and your ability to subsequently pay them back.

Paying too much in rent or buying a house that exceeds a reasonable percentage of your income, making it difficult or impossible to allocate your income in productive ways.

Waiting too long to begin saving for retirement, thinking you can make up for the shortfall later.

Some things you can do:

Create and fund an emergency fund.

Ignore most of what you may have read about how much such a fund ought to contain; that depends on factors such as your age, health, and job security. Think of this fund as an insurance policy that pays you when you need it.

Document what your potential exposures are: job loss, health expenses, car repairs or replacement, home maintenance expenses, etc. You want enough money in the fund to avoid catastrophic events such as getting evicted from your apartment, foreclosure on your house, losing your means of transportation, and being unable to pay unforeseen and unreimbursed medical expenses (including pet expenses), to name a few of the critical ones.

It may be helpful to divide your list into known ongoing or anticipated upcoming expenses, and possible unanticipated future expenses. You don’t have to cover every possible catastrophe – start with your biggest exposure and go from there. The point of an emergency fund is to allow you to get back to where you were prior to getting slammed with a catastrophe.

Don’t confuse your emergency fund with a sinking fund. A sinking fund is a special kind of savings fund dedicated to a specific short-term or long-term goal. Examples include a house down payment, a car, a vacation, and everything in between. Keeping this money separate from your emergency fund will help you resist the urge to dip into your emergency fund, use credit cards, or borrow from friends or family.

Determine what your goal is – define a dollar amount for it – and open a separate savings account for it. Online savings accounts are a good choice for this as they generally pay the best interest rates and offer the capability to have multiple accounts.

Live below your means and pay yourself the difference.

This requires separating wants and needs not once but on a continuing basis. If you live paycheck to paycheck you are never going to make any progress.

To make progress, you (and your spouse, if married) first need a quick assessment of where your money is going – what you’re spending it on. Track your spending for a month or two; that will give you a good idea as to what your priorities are as reflected in what you’re spending money on. Many people are surprised and even shocked to find out.

Take the time to make a budget. Pay attention to what constitutes fixed expenses in your budget and what expenses are controllable and discretionary.

Divert a percentage of your income automatically from every paycheck to a savings account. Note this should be considered in addition to creating a separate emergency fund.

Set some financial goals.

Only pick those that are relevant – have good reasons as to why you are choosing and setting each one.

Now put them in categories: short term, medium term, and long term. And then think about which are well-aligned (complementary), and which ones might conflict.

Finally, find a way to make them visible so you are reminded of them and review them periodically.

Budget some money for self-indulgence. This is often overlooked – don’t make that mistake.

Some would argue this is just part of an emergency fund. I disagree. I think it should be totally separate, and should contain money you put aside to use any way you want, any time you want. This can give you a feeling of freedom that we all need and can help alleviate the ongoing burden of trying to be financially conscientious in every other way.

Do everything you can to avoid going into debt for assets that will do nothing other than depreciate.

Mortgage debt is “good debt” as housing usually, but not always, appreciates in value, although the expected appreciation will not be anywhere near what most people believe to be true.

Car debt is “bad” debt doubled down – you pay interest on the loan to the lender and you suffer instant and continuing depreciation on the asset.

Maybe you’re thinking you can’t possibly pay cash for a car – that idea is simply not realistic. Perhaps not, but you don’t have to succumb to these other behaviors: buying a car that is more expensive than your financial circumstances dictate, buying a car with a 7-year loan when you have every intention of trading it in before the loan period is up, buying a new car when you could buy one that’s 2-3 years old with low mileage at a price that is likely to be 35% lower in price than the same car’s price when new. Be smart and prepared about this, otherwise you are easy marks for salespeople at car dealerships.

Never charge anything that is not a true emergency on a credit card you know you cannot pay in full when the bill comes due.

Ignoring this means you’re investing in your credit card company without the benefit of owning their stock rather than investing in yourself. Would you rather pay a credit card company 24% interest or have an investment that pays you 24%?

Pace yourself – achieving financial security is like running a long-distance race.

Don’t try to implement all the above at the same time; tackle a piece at a time and build on your successes. Millions have succeeded and millions have failed. You only need to decide which group you want to belong to.

How do I know if I’m on track to be successful?

There are two simple but important ways: monitor your debt/income ratio, and keep track of what’s happening to your net worth.

Your debt/income ratio is the total of all your monthly payments divided by your pretax monthly income. It’s a measure, right now, of the role debt plays in your  achieving financial success. The lower the ratio the better: below 25% give yourself a pat on the back, over 36% you’ve got a long way to go.

Your net worth is the market value (current market value, not what you paid for it) of everything you own minus the total of everything you owe. Over time (every year), that number should go up. It may be small or even slightly negative when you are in your twenties, but over time it needs to go up. If that’s not happening, you need to examine your spending habits and overall debt. Think of rising net worth as a signpost on the road towards financial independence.

The post How Can I Achieve Financial Security? appeared first on Thoughts On Mastering The Three Phases of Life.

Why do I think I might need help?

I think I need an objective voice occasionally to discuss my financial life in general.

I get concerned when I see my investments decline and could use a little reassurance at those times.

I wonder if I don’t know as much about investing and other financial matters as I think I do.

I wonder how I would alter my financial plans if a major change occured in my life such as prolonged illness, marriage, children, or divorce.

I’m not sure if I need help on a continuing basis, a one-time basis, or an occasional basis.

What, if anything, has changed, or is soon to change in your life?

I’ve changed jobs and need to review my new company’s benefit package.

I’d like to purchase a house or trade up from my current residence and am uncertain as to what I could comfortably afford.

I’m getting divorced or married and don’t totally understand the financial implications of this.

A new baby is going to change everything and I’m wondering how best to deal with the financial implications.

I’m starting to think about the future costs of education for my children.

I’m wondering about the implications of deteriorating health of one or both of my parents and how that will affect me.

Who is the right person to ask – a personal financial coach, an investment adviser, or a financial adviser?

If you need help defining some high level goals for your life, help developing a written plan to achieve them, and having someone occasionally review them with you while offering some motivation as well, then you should look for a personal financial coach. This person will help you discover your relationship to money and help you to understand the decisions you make about money, but will not be involved in any direct way with your money.

In short, a personal financial coach will help you use your money as one critical tool to achieve your life’s goals.

If you need help primarily managing your investments, then you should look for an investment adviser. That person should either share your current investment philosophy or clearly explain to you why your current philosophy may not be the optimal approach to achieving your investment objectives.

Ask yourself whether you want to manage your own investments and would like a second opinion on them, or whether you want to turn them over to someone to manage them including making buy and sell decisions for you.

If you need help with budgets, insurance needs, retirement projections, estate planning, mortgage guidance, questions on how to best finance purchases and pay down debt, etc., then you should look for a financial adviser.

Relevant questions to ask a financial adviser

What is your business organization – are you an independent (e.g. an L.L.C.), a broker, an investment banker, or something else?

From what source do you derive the bulk of your revenue: financial advising or investment advising? You may think this question intrusive – it’s not – it’s one way to determine where emphasis and expertise lie.

In what do you specialize, and what does a typical client look like in terms of age, net worth, and financial goals?

Will you act as fiduciary in everything you do for me, or in some things but not others? Will you sign a fiduciary statement What’s a Fiduciary and Why Should I Care?

How do you charge for services: fee-only, fee-based, or commission based?  What are your rates, and are they negotiable? Are fees and expenses documented in writing?

Relevant questions to ask an investment adviser

How long have you been in the business of managing client investments?

Can you explain to me your overall philosophy when it comes to investing?

Do you prepare and update annually Investment Policy Statements  Why You Need an Investment Policy Statement (IPS) For Investments (IPS) specifically tailored for each and every client? If so, does this IPS address how you report investment performance?

Do you earn fees of any kind for investments you recommend or directly manage for clients?

Do you earn fees for referring clients to other professional such as CPAs, insurance brokers, or estate planning attorneys?

Will you give me a written breakdown of all fees that I will pay upfront and on an ongoing basis?

What credentials do you hold? There are many, including CFP (Certified Financial Planner), Chartered Financial Consultant (ChFC), and Chartered Financial Analyst (CFA).

Are you registered in the state as a Registered Investment Adviser (RIA)? If so, would you send me your ADV Part 2 (sometimes referred to as the “brochure”), and give me your CRD and IARD numbers so that I can look you up in the Financial Industry Regulatory Authority (FINRA) database?

Do not be reluctant to ask these questions and, if you receive evasive answers, look elsewhere!

Making the best of a working relationship with a financial professional

If you have a spouse or partner, bring him or her to meetings. Be forthright about how decisions are made between the two of you.

Be honest and thorough when going over your financial circumstances. Do not hold anything back, especially those things that you’re not proud of. You’re there to fix things that need to be fixed and to improve things that could be improved; you’re not there to impress anyone.

Respond to texts, emails, and calls promptly, just as you would expect and require from your adviser.

Notify your advisor of anticipated big changes in your life before they occur: weddings, divorces, birth of a child, purchase or sale of a house or disposition of other major assets.

When you’ve taken your advisor’s advice on specific actions, let him or her know that by communicating what steps you have taken. You should consider working with a financial professional as an ongoing partnership formed to discuss, define, and implement plans that are always in your best interests.

The post How to Choose and Work With a Financial Adviser appeared first on Thoughts On Mastering The Three Phases of Life.

You are the boss. Decide whether you want life to happen to you or whether you want to make it happen for you.

Recognize that your choices of spouse, friends, and neighborhood will influence your attitudes and behaviors about money.

Give up the idea that you must make “perfect” financial decisions; learn to embrace failure and learn from it. Wildly successful people inside and outside of the financial industry all have spectacular failures in their pasts.

Spend less than you earn. Simple, but remarkably effective if you make it a way of life. The road to financial success and independence is not based on math, it’s based on mindset, attitudes, and behaviors.

Do not be influenced by the nonsense printed or spoken in the media that presents itself as financial wisdom. None of these people cares about your money more than you do. In fact, many of them wish to separate you from your money.

If you don’t have any idea as to your monthly expenditures, prepare a budget, and update it annually. You’re likely to be surprised at what you learn since your priorities in your life are typically revealed by what you spend money on.

Don’t underestimate the value of setting financial goals. If you don’t have any idea where you’re going, you’ll end up somewhere you don’t want to be. And you’ll make worse decisions along the way because you have little or no context in which to make them.

Allocate your time and effort to get the best return. Don’t spend hours fussing over how to save a few dollars on an item that costs $100, while spending 10 minutes choosing a new car that costs $50,000.

Never run up credit card debt unless you pay it off every month. Keep a few cards for establishing good credit scores and for emergencies. If you don’t have a credit score of at least 700 then work towards getting one.

Never buy an expensive car unless you have the cash to pay for it.

Never let a debt go to debt collectors, no matter how angry you are with a creditor. Find a way to fix the problem or you will have to deal with the downside consequences for years.

Never forget “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Keep some reserves (cash, savings, money market accounts, short term CDs) on hand in an emergency fund for meeting unanticipated emergencies.

Be prepared to face the possibility of losing your job along with the resulting financial ramifications at some point in your working life. Having backup plans for significant exposures in your life is always helpful.

Cover your insurable needs up to a rational point. If the death of a spouse with surviving children would be financially catastrophic, consider term life insurance. On the other hand, don’t pay auto or homeowner’s insurance with low deductibles if you can afford to take the financial hit with higher deductibles.  Never purchase more insurance than you need, and be very wary of insurance sales people working on commission with the “more is better” philosophy.

Maximize your retirement-related investment opportunities: 401k(s), 403b(s), SEPs, traditional IRAs, Roth IRAs.

Don’t withdraw retirement funds early. Don’t be seduced into thinking of this money as “your” money, think of it as belonging to the person you’re going to look like in 30 years.

Accept that there will be significant economic downturns in the future like there have been in the past, and that you will likely not escape the effects.

Add to investment assets whenever possible. Homes do not count as investment assets; they are not liquid, you will always need a place to live in, and contrary to the usual thinking they sometimes decrease in value. And don’t assume that it’s always smarter to buy than rent Rent or Buy?.

Never act on a “hot” tip from anyone. Including your broker, if you have one.

Never let a real estate agent talk you into buying a house you can’t afford.

Do not be in a rush to pay down a mortgage. There are alternatives to consider.

There is good debt and bad debt. Learn how to use debt to your advantage, and always be aware of your level of debt and how well you are managing it.

Get over your aversion to taxes – prepare your own returns. It’s the only way to develop an understanding of how to keep your money while the government strives to take it from you. The IRS is not your friend. And the elected representatives who spend your tax dollars are not your friends either.

Financial institutions are not your friends; they exist to make money, frequently at your expense.

Financial independence is incredibly liberating. Think about whether you want to get there, and how you might achieve that. The earlier you start the easier it is.

The post Financial Wisdom Gained The Hard Way appeared first on Thoughts On Mastering The Three Phases of Life.

Let’s start with a financial plan containing:

An emergency fund to cover unexpected expenses without having to borrow money or charge them on a credit card.

A detailed understanding of your basic living expenses – a budget.

A timeline of how you expect to get from where you are to where you want to go.

Next define some goals

Define salary goals independent of any thinking you may have already done about careers:

What is your minimum acceptable salary amount? Note that if you have a spouse already meeting basic expenses, volunteering may be a viable option for you not to be quickly dismissed. I know people who started as volunteers who turned into paid employees.

What is your desired level of income, your “feel good about yourself” income, the amount that would give you a satisfying feeling that you are making appropriate use of your talents and skills?

What ideal amount of income would result in your thinking about what to do with the “excess” dollars?

Now ask yourself whether you can live with an important commitment: retirement savings (401(k) plans, traditional IRAs, Roth IRAs) are off limits for early withdrawals and borrowing. Vow never to use your retirement savings for anything other than retirement.

Now broaden your perspective with a few important questions:

How willing are you to trade time for money? Which is more important to you?

What financial impact, if any, would there be on your family?

How would additional education or training be financed?

Do you understand the tax implications on your minimum, desired, and ideal salary levels?

Are you allowing for additional future changes in direction and circumstances – do you have a Plan B?

Stay focused on the basics

I know this is all basic stuff. But it’s surprisingly easy to lose sight of basics. It’s easy to become unduly influenced by dollar signs and to make decisions solely on that basis. It’s also easy to succumb to the “this is what I ought to do” mode of thinking. What do you really want to do?

I’m on my third career, and I can state unequivocally that jobs where you can clearly see that you are making positive contributions to the lives of others are ultimately the most rewarding ones.

So, start with a written financial picture of what is possible, learn from your past but don’t be unduly influenced or limited by it, and be willing to make future changes as needed.

Good luck and best wishes!

The post Career Planning appeared first on Thoughts On Mastering The Three Phases of Life.

Don’t be misled by what you may have read.

You may have read that you need 70%, 80%, 90%, or even more of your pre-retirement income to retire. Or, you need X times your current income at age N. Nonsense. Higher income people with significant savings will not have the same retirement needs as lower income people with less savings. Ignore these so called requirements.

You need to focus on expenses, not income, and you need to recognize that the number and variability of factors that affect outcomes is so high that any number-based result is likely to be off by a very wide margin.

For example, how well do you believe these variables can accurately be predicted ten or more years into the future?

• Future investment returns and inevitable stock market declines.
• Future inflation and interest rates.
• Future healthcare cost increases that are likely to continue increasing faster than the overall inflation rate.
  
• Future Social Security benefits.
• Future tax rates.
  

Understand what your exposures are in retirement.

• You don’t have any assets that are expected to grow in the future, that is you have no protection against inflation.
• You do have assets, but they are not diversified. They all go up or down together.
• You have some assets, but they are not readily available for emergencies.
• Your income will be primarily based on Social Security, meaning you are subject to the whims of Congress.
• You don’t plan on living for 30 more years when, in fact, you very well may do so.
• You plan on working for longer than your health my allow you to.
• You don’t understand how various types of income are taxed. You pay more in taxes than you need to.
• You retire in a state with high state taxes. States that tax social security benefits are especially onerous.
• You begin giving family members money at the expense of your own well-being.
• You discover that you are underinsured. Think health problems and auto accidents that are not covered by insurance.
• You wish you had not taken out that 401(k) loan 15 years ago.
• You get scammed and are so embarrassed that you tell no one. This is far more prevalent than you realize. And despicable.
  

For your working years, 20-40 years to retirement

Many articles in the financial press suggest that you need to put aside for retirement a minimum of 10% of your gross income for your working years, 15% would be a better goal, and 20% would be optimal. This is more nonsense. You need to set aside something regularly. If you can learn to live below your means as a lifestyle you can set aside money for retirement and you will find it much easier to meet expenses in retirement and maintain your standard of living. 

Getting closer to retirement

When you have reached five or ten years of your desired retirement date, you need to guard against the possibility of a severe market decline that could take you years to recover from. If you manage your own investments consider moving into more conservative allocations of stocks and bonds. If you employ a registered investment adviser, discuss with him or her how your portfolio might be best allocated to reduce risk prior to your expected retirement date.

My experiences reviewing investment portfolios prepared by brokers for people who are close to retirement or already in retirement have been a bit shocking as I believe they are too aggressively invested and do not take into account the complete financial picture of the client. For example, I cannot think of a single reason why an 85 year old widow should be holding a portfolio that is made up of 60% or more of stocks. Your goal is not to make your broker rich, your goal is to assure your money is invested to meet your financial objectives while minimizing risk.

What if I haven’t put money aside all my working years, but want to know in how many years I might be able to retire?

You can get a very rough estimate for this using a business calculator, hiring a financial advisor, running online estimators you can find by doing a search on “retirement calculator”, or developing your own spreadsheet of anticipated future income and outflow.  These will give you only a rough estimate, but that’s superior to having no estimate.

If you are numbers oriented and can deal with basic calculations in spreadsheets, take a look at Lifetime Financial Roadmaps. These will go a long way to answering your questions about when you can retire.

The post How Much Do I Need to Retire? appeared first on Thoughts On Mastering The Three Phases of Life.