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Prepared for Financial Emergencies

March 19, 2010 by Somnath Basu

There is a heartening change that we are observing today, an event that is truly national in character. At the bottom of the financial abyss, we single-handedly turned around our personal savings for the first time in 12 years.  The chart (Dept. of Commerce publications data) below expresses this turnaround emphatically. 

 

It is the timing of this turnaround that is so heartening. The realization that this crisis may truly be worse than any other enabled us as a nation to halt this decline. We have our emergency “nest eggs” rebuilt again. Amazing still is that this feat was achieved with a determined effort to curtail our consumption levels to ensure that our emergency funds were rebuilt. Again, a similar chart expresses this aspect better.

What next then? With our emergency nest eggs rebuilt, we must now ponder the question as to continue to increase our savings or not. For seniors, the objective would be to ensure they did not outlive their funds. For those between 45-65, in general, retirement must loom somewhere, and retirement is sweet. Similarly, for those between 25-45, thoughts would turn towards families, home purchase and children’s education. All worthwhile savings objectives. Thus the central question is whether we should increase our current consumption or postpone consumption to attain our future objectives. Only time will tell whether we continue the trend of increasing savings and moderating consumption or whether we go back to drawing down on our savings to increase current consumption.

somnathBasuSomnath Basu
President
AgeBander
Thousand Oaks, CA

Posted in Education | Tagged , , | Leave a Comment »

Ac-Cent-Tchu-Ate the Positive

March 18, 2010 by Sam Hull, CFP®, ACC

I’ve just come back from a wonderful week in beautiful Savannah, Georgia and had a chance to visit the Mercer mansion there. Johnny Mercer, a Savannah native and legendary contributor to the Great American Songbook, wrote a hit song back in 1944 called “Accentuate the Positive, Eliminate the Negative –and Don’t Mess with Mr. In Between!” that came to mind recently as I watched the news.

Weekday evenings I try to watch the MacNeil/Lehrer News Hour at 7 PM on Maine Public TV as part of my daily ritual in switching from “work time” into “family time.” Frankly, it’s hard not to feel really discouraged and overwhelmed by what I see – and that’s not factoring in what I don’t see by not exposing myself to the semi-hysterical business news presented by the folks on CNBC and Fox Business News!

The bad news keeps rolling in every night- all real and all tragic, to those who are experiencing it, to be certain. And right now it seems as if that’s all we have to look forward to – more hard times and bad news. Living in the aftermath of the global debt catastrophe is like looking into the wicked witch’s cauldron. It bubbles and seethes with glimpses of new mischief awaiting us in the unholy brew that is the result of unregulated credit default swaps, over-leveraged hedge funds and whatever else may have been dreamed up by the geniuses of financial engineering. We are still learning what the Law of Unintended Consequences really means!

Congress appears to be taking a “pass” on doing anything meaningful about fixing the structural dislocations in our financial markets that got us into this mess, demonstrating once again how much the functioning of our Government has been hobbled by the power (and money) of special interest groups, both public and private. We seem to be wasting a once in a generation opportunity to reform our system of government regulation and administration. So here we are, living in our own Great Recession, with a $12 ½ trillion dollar public debt (that’s $40,000 per person, adult & infant) and 10% (at least) unemployment as far ahead as the mind can see, with no obvious plan to get us out of trouble.

Now add to the economic & financial muck, natural disasters like the huge earthquakes in Haiti and Chile, devastating snow storms in places where it usually doesn’t snow, avian flu, Orange Level terrorist alert conditions and never-ending war in Afghanistan and it’s easy (and human nature) to think that there is nowhere to go but down. It’s very easy to get discouraged, isn’t it? One’s natural urge is to just hunker down, pull in your wings and wait the storm out, living a joyless life until somehow we’re certain the storm has passed. But guess what? Suppose this storm is just replaced by another (and another) storm? Is living in fear what you want for yourself and your loved ones? Equally as important, are you missing out on a great opportunity here?

My suggestion is to try to take a different perspective. Consciously be aware of your choice on how to see yourself and your future. Stay out of the natural landing spot in the Valley of Despair where just absorbing all the bad news can put you if you stay an unaware participant in the drama of daily life. But where can you find a different perspective –a Hill of Possibility?

Well, let’s start with the unbelievable resiliency and inventiveness of the human race as the foundation of building some really high ground to stand on while we look down at the seeming chaos of today’s life and think about our future. While the arrow of time is linear, the arc of technology (and progress) seems to be exponential. Did you know that the computing power in your Blackberry or iPod cell phone is thousands of times greater than all of NASA’s computers when man first walked on the moon – and is a million times less costly and smaller? I grew up using a slide rule in school and my first personal computer back in 1984 was an Apple IIC with 128 kb of memory and a 5” floppy drive. Can you even start to imagine what internet magic and new technology will be there for your great-grandchildren- and will be as natural for them to use then as driving a car is for you today?

How about the future of better (and cheaper) health care, affordable (and green) energy, more (and healthier) food, safer (and more efficient) transportation and all the other basics of a good life? Do you really think discovery and inventiveness to improve these fundamentals of life will slow down and even stop or will technology and human inventiveness accelerate the pace of progress as we continue into the future? Think about how your grandparents lived, fed themselves, what they had for health care and transportation. Now compare that to your life today – and then imagine your grandchildren’s world. That always makes me feel a lot better.

Fine, you say- that’s OK for the rich countries. How about the developing world, where life is too often mean, short and hard? I’ve lived in countries like the Philippines and Pakistan where grinding poverty tears away at the human spirit but I’ve also seen how micro-financing programs and people’s creative capitalism can spark entrepreneurial success and restore human dignity. The transformational impact of the internet age and continued technology innovation will surely be greater in Dacca than Dallas- and that’s good news for all of us.

So what does this all mean in a blog about financial planning? Well to me it means that the technology revolution is not over- not by a long shot – and the transformative power of the internet and computers has just started to take effect on the shape of our future world. If you can find the courage to change your perspective and look at things from atop your own Hill of Possibility, then now is the time to steadfastly believe – and invest – in the power of human creativity and imagination. Those who cower down in doubt and wrap themselves in CDs and cash will miss the opportunity (as they always do) to share in the rewards – both financial and emotional – that the future will bring to those who see their world with courage and from the high ground of optimism.

Sam Hull, CFP®, ACC
Partner
Whitewater Transitions, LLC
Arundel, ME

Posted in Credit/Debt, Investments | Tagged , , , , , , , , , | Leave a Comment »

Things That Make You Go “Hmmmmm “. . .

March 17, 2010 by Bonnie Hughes, CFP®

Things that make you go "Hmmm..."There are lots of things that don’t make sense on any given day but sometimes it feels like lots of things don’t make sense in a relatively short time frame. That’s what it has felt like to me in this new  year 2010 and I wanted to share some of them. Maybe these are things that make you “hmmmm” too. 

The government shut down for 4 to 4.5 days in February this year (you would think it would be obvious how many days it is, but it’s the government after all and it depends on which source you read) and at $100 million a day it was certainly expensive. What makes you go “hmmmm” though is that few people seemed to notice that it was even shut down. Since the world didn’t end (or blink) couldn’t we consider doing this on a monthly basis?

Reuters reports that there is little ethical discussion of what activity is ethical or not in a modern economy, even though 2/3 of those asked at the World Economic Forum said they believe our current problems are the result of a crisis of ethics and values.

There is this basic law of nature (the financial kind) called Time Value of Money and in a nutshell, it says it’s better to save the dollar you have today and earn either interest or invest it versus waiting until more time passes to do either. An essential piece of this is that once time has passed, it can never be recovered. So waiting to save and invest costs you many more dollars in the future than today. What makes me go “hmmmm” on this one is that when you’re young, full of energy and optimism and presumably healthy, this would be an ideal time to start saving up to 20% of your gross income so that later when a spouse, kids, house, job changes, starting a business, retirement come in later, you can weather those changes more easily and those early savings have been spending their days compounding! It’s like an installment plan in the direction of your dreams.

The turf regulatory wars may not require brokers and other colleagues to put their client’s interests ahead of their company’s interest. This is pretty basic — do you want your financial professional to put you first or their company first? Your legislators are not in agreement that you should be put first — “hmmmm.”

The average taxpayer gets a refund close to $3,000. If any of the taxpayers who are getting large refunds are also carrying credit card debt, they could be reducing their debt by simply lowering their withholding. 

There are lots of head scratching things going on in the world — lots of things that make you go “hmmmm”.

bonnieHughesBonnie Hughes, CFP®
Principal
American Capital Planning, LLC
Reston, VA / Miami, FL

Posted in Credit/Debt, Disaster Planning, Investments, Savings | Tagged , , , , , | Leave a Comment »

Not Quite From Mount Sinai but…

March 15, 2010 by Lee Baker, CFP®

Charlton Heston depicting MosesI can see it now, Charlton Heston standing on the mountain top, winds swirling and lightning flashing as he holds aloft two stone tablets. Inscribed on these tablets as we all know are the Ten Commandments. These rules were set forth as a guide for the people of Israel to follow. Heston delivered a masterful portrayal of Moses in this epic film directed by Cecil B. Demille.

While I surely do not measure up to the standards of Heston or DeMille (let’s not even get into Moses) allow me to take a stab at some financial commandments. Think of these as rules for financial advisors to live by. Introducing The Five Commandments. 

Thou shalt put your client’s best interest first.
When we all were much younger, we learned the Golden Rule. Do unto others as you would have them do unto you. This lies at the heart of the most important aspect of a client/advisor relationship. The advisor should at all times operate with your best interest in mind. 

Thou shalt act with due care and utmost good faith.
When you engage a financial professional you should have certain reasonable expectations. One of those is that the advisor will act with due care and in utmost good faith. So what am I talking about here? Your advisor should use a sound method or follow a prudent process to come up with the recommendations that are made regarding your particular situation. A professional owes you the benefit of sound judgment. 

Thou shalt not mislead clients.
You deserve to be dealt with fairly and in an upfront fashion. Perhaps you would assume that you would not be misled, but events in the era of Madoff suggest otherwise. 

Thou shalt provide full and fair disclosure of all material facts.
Full and fair disclosure of all material facts is paramount to having an engagement that works for your benefit. Everything needs to be put on the table at the beginning. Make sure that you know how your advisor is being compensated. Understand the terms of the engagement and what services you should expect to receive.

Thou shalt disclose and fairly manage all material conflicts of interest.
Sometimes conflicts of interest may arise. When that happens you need to be told about it in plain English. Not only should you be told about the conflict but it should be handled or managed properly. Whatever conflicts that arise should result in an outcome that is fair to you. Of particular note is the fact that how your advisor gets paid does not necessarily eliminate potential conflicts of interest.

Maybe it would be asking a little too much to have your advisor chisel the above into stone tablets. But wouldn’t you feel a little better about if he or she at least put it in ink?

Note: The preceding “commandments” are derived from the Financial Planning Association Standard of Care.

leeBaker

Lee Baker, CFP®
President
Apex Financial Services
Tucker, GA

Posted in Education, Investments, Retirement | Tagged , , , , | Leave a Comment »

No Shame Zone

March 12, 2010 by FPA Guest Blogger

The current economic environment has prompted quite a buzz about the link between how we think (our brain) and the way we live with our money. I know that my beliefs and feelings about money have shaped the way I spend, save (or not) and share my financial resources. Often I find that I must do quite a bit of self-talk prior to making financial decisions, since I am not always good at putting my financial well-being first – you know the “pay yourself first” thing. I also know from my own experience, as well as in my work with clients, that there is often so much shame around financial choices and behaviors that people sometimes have difficulty changing their money behaviors, even when they desperately want to make better choices.

Right now I am reading “Mind over Money: Overcoming the Money Disorders that Threaten our Financial Health” by Drs. Ted and Brad Klontz and find their assertion that “[financial] information is not enough” absolutely true for the majority of people I meet. People who are intelligent, hard working, resourceful, creative, and able to overcome significant challenges in other areas of their lives often are taken to their knees when faced with financial difficulties. Now more than ever I find myself having conversations with people who never believed they would have money troubles. The look on their faces is undeniable – they are ashamed. After all, shouldn’t they have known better?

I have never believed shame to be a good motivator and I think it can be detrimental to a person’s financial wellness (I’ll talk more about this at another time). So, whenever I am talking with clients, leading workshops, or conducting trainings I guide people through a process of creating a “no shame zone” regarding their financial circumstances.

  • Reflect – on what is really going on. What emotions come up when you think about the way you have handled money in your past?
  • Recognize – the limits of your knowledge, skill and financial resources; identify areas where you may need help. You may find that you need to talk with a financial coach, planner or therapist if you feel “stuck” and unable to see any possibilities.
  • Resolve – to “call out” shame whenever it arises or enlist the support of a trusted friend or advisor when that emotion surfaces. This simple step can often remind you to focus on what you want to move toward rather than focusing the negative situations. A brief deep breathing exercise or taking a brisk walk to move your body around can “shift” your thinking from problems to possibilities.
  • Redesign – claim your desired relationship with money by writing down how you WANT to behave with your money. Begin building your financial plan. There are several free resources at FPAforFinancialPlanning.org or if you need an objective perspective consider working with a professional.

According to author John Bradshaw “Guilt says I’ve done something wrong; shame says there is something wrong with me.” In keeping with my belief that net worth and self worth are two VERY different measures I encourage you to create your own “no shame zone.”

Saundra DavisBy Saundra Davis
Special to FPA

Posted in Education | Tagged , , | 1 Comment »

10 Web Sites to Help You Save Money on Travel

March 11, 2010 by Jude Boudreaux, CFP®

In one of my earlier posts on this blog, I wrote about clarity and how important it was to making good financial decisions. The clearer you are on your goals, the easier it is to make good decisions with your money. This idea is what has allowed my wife and I to spend significant time and resources every year since our wedding pursuing our passion, which is travel. Below are 10 sites that I use to help us make good decisions and save money while planning our trips and later while on the road.

Finding a great deal (Farecompare, Kayak, Farecaster @ bing.com/travel)
Often, just finding a good deal is enough to get us out on the road. I once found a round-trip fare from New Orleans to Moscow for $424. Sadly we could not get our visas together in the short notice required, but it’s just an example of the deals that are out there. The silver lining in the weak economy is that there have never been greater bargains for travel. My three favorite tools are listed below.

1.  Farecompare.com – My favorite feature by far of farecompare.com is the getaway map. With a quick click, I can see what the best deals are from my home airport to domestic locations, or international locations by continent. It’s a wonderful tool for getting a quick lay of the land.

2.  Kayak.com – While farecompare.com gives me the best flight information, I find that Kayak has the most user-friendly interface for finding deals on everything else. Cars to hotels, it’s simple and fast to search rates and get information. 

3.  Bing.com/travel - This site used to be farecaster.com, but it now integrates a flight search engine along with a prediction on whether fares will go up or down. Often it’s worth a quick search if a fare looks high to you, to check it out on farecaster and get its take on the rate. It’s not foolproof but it has been helpful a time or two and that has saved us money.

Learning from others (BootsNAll, TripAdvisor, FlyerTalk)
Once we have decided on a destination, we then invest some time in research. My three favorite research sites are listed here in no particular order, although each serves a unique purpose in my planning. These tools allow me to get information from those who live in, or have recently visited, destinations that we are considering. It takes some time but we’ve come upon special hidden places on our trips based on tips from these sites. You can pick up tips about which bargain lodging options are worth staying at, using public transit effectively, and what restaurants offer the best bang for your buck. 

4.  BootsNAll.com - This is a wealth of information for the independent traveler. The site features unique articles about locales and has a wealth of information on travelling inexpensively. If you’re looking into long-term travel they’re the source for planning tools and it hosts a very active community who is willing to answer your questions. They also seem to have the most comprehensive resource on Round The World (or RTW) trip planning. 

5.  TripAdvisor.com – I use TripAdvisor.com to find the top-rated tourist destinations along our path, along with traveler reviews and tips about them. Their seasonal travel guides offer bite sized information (with addresses and phone numbers included which can be a real lifesaver) and the forums offer a diverse range of opinions about restaurants, hotels, etc. My golden rule of forum participation – for every question I ask, I answer two about my home city or places we have been. It helps keep people involved and encourages others to add their opinions to the mix.

6.  Flyertalk.com – The participants on flyertalk.com are some of the most road-hardened business travelers I have run across. If you are a member of a frequent flyer program or hotel loyalty program and have questions about using points or miles, this is a wealth of information. Search the forums and quickly you can get answers to tricky questions. You can also browse the forums for innovative ideas on status-earning strategies. 

Staying Organized (TripIt, Award Wallet)

Now that you’ve got all of this information, you’ve got to have one source to keep it all organized. Below are two of the best I’ve found. 

7.  Tripit.com – Sign up for a free account at Tripit.com, and you then get the ability to forward your travel confirmations from hotels, airlines, rental cars, etc. to Tripit.com. It automatically pulls your reservation information from these emails and creates an itinerary for you. You can customize this itinerary with maps and directions, and share it with other travelling companions or family members. It’s a wonderful free tool. You can also manually add in other information about show tickets, dinner reservations, or the address of the church for the family wedding and have it all saved in one spot.

8.  AwardWallet.com – If you’re like us, finding the best fare is more important than flying one specific airline so we have airline miles scattered through several programs. AwardWallet.com allows you to create an account to track multiple programs in one place simply by entering your username and password. For an inexpensive six month subscription, you can also track your spouses’ airline miles so that you don’t end up having miles expire without having had the opportunity to use them.

Investing time in research (New York Times Travel, Local Library Web site)

One of my favorite quotes about travel is “To have an A+ trip, you need to do A+ research.” – Rick Steves.  Above, I mentioned three travel forums, but there’s still a place in my heart for traditional travel media.  My two favorites are listed below.

9.  travel.NYTimes.com – The New York Times’ travel articles are wonderful to read in print and the Web site does a great job of making stories relating to one location easy to find. Their 36-hour stories are a personal favorite, and often have tips for locations that might escape a traditional guidebook. 

10.  Your local library’s Web site – I love browsing traditional guidebooks before our trips, but I hate paying for them and carrying them around. Fortunately, our local library has lots of recent guidebooks for free. Typically we will check them out when doing our trip research and capture our notes, and then simply carry our notes on the trip, instead of the bulky guidebook. Even when we have wanted to carry a guidebook, we can usually just check it out in time for our trip and return it after we get back. 

I hope the above sites help you planning your next big adventure, and please let me know about some of your favorites in the comments.

judeBoudreauxJude Boudreaux, CFP®
Director of Financial Planning
Bellingrath Wealth Management
New Orleans, LA

Posted in Savings | Tagged , , , , , , , , , | 7 Comments »

Annual Fiscal Review: Spending

March 10, 2010 by John Comer, CFP®

Annual Fiscal Review - SpendingThe medical profession used to recommend that everyone have an annual physical. A physical can help identify many diseases in their early stages when you still feel healthy. Most people paid attention to that recommendation and had their body checked out to look for these early warning signs.

Some people are also committed to an annual fiscal checkup. This is a process of reviewing their key financial indicators to provide an early warning of financial diseases. Annamaria Lusardi, the Joel Z. and Susan Hyatt professor of economics at Dartmouth College and a research associate at the National Bureau of Economic Research, recently wrote a blog (November 24, 2009) about the need for such a fiscal checkup.

Lusardi points out that many people have used some recent “negative shocks” to make adjustments in their finances. Those negative shocks might be personal experiences or the experiences of those around them. She says, “Throughout the current financial crisis, we’ve witnessed people losing their jobs and having little savings to fall back on, with many ultimately losing their homes. As a result of this crisis, saving has increased to an unprecedented level, but it is unfortunate that it took a negative shock to lead to appreciation for having a buffer stock of savings. Wouldn’t it be better if good saving habits were instead the result of routine assessment and maintenance of one’s financial ‘health’?”

Sounds like a simple process, your temperature should be 98.6 degrees, your pulse 70 and your blood pressure 120 over 80. Over time, you can adjust these numbers for your body and get an early warning of disease. What are the fiscal equivalents?

One key measure of fiscal health is an income statement (what you earn and what you spend). Your financial position will improve if you spend less than you earn. As we perform Lusardi’s routine assessment, we have to identify standards to serve as early warning of too much spending.

Bankers have identified spending standards for loaning money. Lately, they have stretched those standards with disastrous consequences but in the 1980s they had pretty good standards and pretty safe loans. At that time, they wanted no more than 25% of your pre-tax income spent on mortgages or rent and no more than 33% of your income spent on fixed expenses.

If you make $48,000 per year, your monthly income is $4,000. By this standard, your mortgage (just principal and interest) should be no more than $1,000 per month (25%). When you add your utilities, your auto loan and any other loans to the mortgage, they should total less than $1,320 (33%). 

When you factor in your taxes, savings and charitable contributions as additional fixed expenses, you still have some flexibility in your spending each month. These additional fixed expenses might total another 35% of your income leaving you 32%, or $1,280 per month, for your expenses that vary. Groceries, eating out and clothing might consume the rest of this monthly income but, in a month when you have an unexpected expense, these expenses can be reduced somewhat to get you back on course quickly.

Lately, bankers have allowed as much as 50% of your income to go to fixed expenses. Increasing the mortgage, utilities and other loans to $2,000, then adding taxes and savings at $1,400, you now have $600 for groceries, eating out and clothing. That may not be enough for groceries, much less providing a cushion for emergencies.

That exercise points out how important it is to plan for flexibility in your spending. You know you will have car repair expenses during the year, you just do not know exactly how much or when those expenses will need to be paid. Making adjustments in your restaurant spending to cover those car repairs will hurt a lot less if you have $1,280 in flexible spending instead of $600 in flexible spending.

Manage the pressure your spending places on your income by keeping your rent or mortgage payment to 25% of your income or less and to keep your total loan payments under 33% of your income. As you refinance your mortgage, buy a new car or adjust to changes in income, take your spending pressure as an indicator of your financial health. Annually, consult with your financial planner or evaluate your spending on your own to make sure you have the needed flexibility in your budget.

With an annual review and some safe guidelines for spending, you can avoid the negative shocks we all experienced in the last year. We all know too many people who have lost their job; some of us know people who have lost their home. An annual review may not eliminate the risk that those events could happen to you. An annual review will improve your chances of coming out of the recession with your home and a majority of your savings intact.

John Comer, CFP®
Consultant
Comer Consulting, LLC
Plymouth, MN

Posted in Banking, Employment, Home Ownership, Investments, Medical & Health Issues, Retirement, Savings, Taxes | Tagged , , , , , , , , , | 1 Comment »

Financial Planning Issues for Military Families

March 9, 2010 by Francis St. Onge, CFP®

Part 2 of 2

In my last blog, I offered advice to all service members. This post is for service members who are single. Also included are some ideas for all service members upon their return form active duty.


Single Service Members

For those of you who are single (including those who are divorced), there are some additional things you may want to consider in your planning:

  1. If you are single and living at home before you deployed, you may have very little in ongoing expenses. This means that most of your pay can be saved while you are deployed. This may also be a good time to accelerate paying off credit card debt you may have accumulated.
  2. If you have a car with a loan, you might want to consider selling the car if you will be deployed for a long period. This would reduce the expenses you have to maintain the car, including the monthly payment, insurance, and upkeep and storage costs.
  3. If you are divorced, you want to be sure about who is the beneficiary on your life insurance policies at work and the military life insurance as well as any tax deferred investment plans. Whoever is the beneficiary will be the one who receives these assets should you suffer a life ending event.

Actions Upon Your Return – All Service Members

As noted above there are certain benefits that you receive because you are being deployed. Unfortunately these benefits cease once you have left the combat zone and return to civilian life. As such there are things you need to do upon your return form active duty:

  1. Notify your employer that you have returned from active duty and be prepared to return to that job when you are required to do so.
  2. If you had special arrangements with any utility company, notify them that you have returned so they can make any adjustments they need to with your utility service.
  3. If you had a reduced interest rate on any loan or credit card debt, notify them in writing that you are no longer eligible for this benefit. Again notify them in writing.
  4. Update your credit records and FICO score to be sure that nothing adverse occurred while you were deployed.
  5. Revisit the spending plan for income and expenses that you prepared before deployment to see what needs to be changed in your lifestyle now that you are back in civilian life.
  6. If you deferred filing your tax return while deployed, be sure to get the returns completed and filed.
  7. Review any Power of Attorney (POA) or will that you prepared before your deployment and make sure that you still need what these documents provide.
  8. Education Benefits. For all veterans who served at least 90 days in the aggregate on or after September 11, 2011, or who served 30 continuous days and were discharged with a service-connected disability, there is a more comprehensive education benefits program to provide financial support for education called the Post 9/11 GI Bill. This bill will provide financial support for the active duty service member as well as the spouse and children of the service member if the service member does not need or use all the benefits for themselves.

    This benefit covers a broader scope of education expenses than other GI Bills have and it covers housing, books, supplies in addition to tuition and fees. View the VA Benefits Estimator to help you in estimating your benefits and which program best suits you.Your benefits under this new bill will be impacted by your use of the Montgomery GI Bill, so it is important to check out the status of both bills before making any decision. By applying for the Post 9/11 GI Bill benefits, you irrevocably surrender your ability to receive benefits under the Montgomery GI Bill.

    Maximum benefits are available to you if you served a total of 36 months of active duty or after 30 days of continuous service and were discharged for a service-related disability. Service between 90 days and 36 months will make you eligible for benefits between 40% and 100% of benefits.

There are many more things that could be covered in this blog but the above provides a great starting point for taking more control of your financial life. Thank you for your service to our country and the protection you are providing to all of us and, most of all, be safe while serving.

FrancisStOnge

Francis St. Onge, CFP®
President
Total Financial Planning, LLC
Brighton, MI

Posted in Education | Tagged , , , , , , | Leave a Comment »

The Myth of Investment Bargains

March 8, 2010 by Robert Schmansky, CFP®

The Myth of Investment BargainsWe all know there are deals to be found in the shopping world. But do we ever consider the value we receive for the price we pay?

William Poundstone’s book, Priceless: The Myth of Fair Value (and How to Take Advantage of It) points out most of us are really suckers when it comes to shopping. (Poundstone has written more than dozen books, his first, published in 1983, was titled Big Secrets: The Uncensored Truth About All Sorts of Stuff You Are Never Supposed To Know.)

We overwhelmingly lack the information we believe we possess to be ‘price’ experts. The result, Poundstone argues, is we’re often taken advantage of, and prone to paying just about any price (and sometimes more today than we would have yesterday).

In this video, Poundstone gives another example of the ways price can be misleading by demonstrating how one can leverage psychology in their Internet sales to increase the price of a product on eBay.

In the investment world, it can be even more difficult to consider cost and value. And it’s understandable why that is when product prospectuses are longer (and more dull) than a textbook. Often, investors will rely only on hypothetical or recent returns equate to value, and costs — and by this I mean the total costs of a strategy — are never considered.

A few of my biggest concerns are with products that investors believe “guarantee” growth in “retirement income,” or products that shed sound, investment principles to employ strategies that you would like to have owned yesterday, but have no promises for tomorrow. (I wrote more about that topic in a blog post on what I call the “Barnyard Rules of Investing.”) 

Total costs include more than just a percentage of your investment dollars paid in annual management fees (when annual management fees for a product go above 1.5%, alarm bells go off for me.)

Total cost of a product may include:

  • Reduced growth or cash flow compared to traditional investment strategies;
  • High back-end penalties for leaving. My personal rule of thumb is to be wary of any back-end charges;
  • Fees that are low initially to attract dollars, only to rise when you are trapped in the product (the classic “bait-and-switch” tactic). 

Whenever you review an investment proposal, consider your thoughts on the proposal before jumping in:

  1. If you have the feeling that you are getting a real “deal”, or bargain — STOP! There are no “deals” in the investment world. Investing is not shopping.
  2. If you sense that you are being pushed to make a decision today, or in the next week, stop and ask why. I hear stories from clients being told a product will no longer be offered over the next few months, so they need to invest now. Would you consider buying a car that is being discontinued? How about if your grocer told you a product is being recalled… buy now? Clearly you need to stop, and don’t walk, but run from this offer.
  3. If you haven’t taken the time that’s necessary to analyze and compare the costs and benefits of an investment comprehensively by comparing it against low-cost strategies, stop and perform this exercise.
  4. If you don’t have a clear understanding of how this product fits into your plan, stop and ask why you are not discussing how this product meets your future cash flow needs specifically. The product should be about a fit for your plan, not about exotic features that sound exciting.

If you don’t understand a product or strategy, don’t invest. It is sad to say, but most people who have been burned by products have not done their homework, and simply trust in an expert. They accept the sales pitch that they will receive “more” that is well worth paying hefty fees.

Clearly, it can be a tough job to compare products based on value. Because of that, I am a strong advocate of getting help explaining value by a second professional opinion before settling on a strategy. You would get a second opinion before major surgery, or even before buying a major household appliance. Your long-term financial security is far too important to squander on investments that drain, rather than provide, value.

Find qualified advisors for a second opinion with FPA’s PlannerSearch.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Northern Financial Advisors, Inc
Franklin, MI

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