Wedding season is in full swing. And I’m super excited to see two of my good friends tie the knot this Saturday. They inspired a post last year on practical to tips to getting married. So in honor of their big day, I wanted to remind you all of those tips to making your wedding the day you’ve always dreamed of.
It Can Be Whatever You Want It to Be
Above anything else, remember that it’s your day and you get to make it whatever you want. I still remember the excitement of my proposal to Ben and the anticipation of our wedding day. A great thing about the newness of marriage equality is that there isn’t a traditional type of ceremony or process that you have to follow. In fact, our friends didn’t have a typical engagement, where one person asks another. They decided together that it was time and started planning.
One of the first things you should do is decide what you both want and find a way to meet your desires. This includes things like the amount of people, type of ceremony, and how much you want to spend. Ben and I wrote down what we wanted individually and then shared, keeping the things we agreed on and compromising on the rest. Whatever you decide, make sure it’s what you want, not what other people tell you it “should” be.
Book Your Venue Early
One of the hardest parts for us was deciding on a place to have the ceremony. And we found out quickly that venues book up well in advance, especially in a place like Chicago. Once you’ve decide what type of ceremony that you want, you have to start searching for the venue that will meet your needs. You may have a better luck (and a cheaper bill) if you choose an off day like a Friday or Sunday, rather than a Saturday. Luckily, our friends found the right venue with the first place that they saw. But I wouldn’t count on that. You’ll likely need to see several places.
It’s Okay to Fight
Planning a wedding is stressful. Trying to mesh your ideas on the ceremony, find the right venue, decide who to cut from the guest list will likely lead to a few arguments. That’s okay. The best thing you can do during that time is remember why you’re getting married (because you love each other) and that you will get it figured out eventually. And sometimes it’s nice to take a break from planning and do something else that you enjoy to relieve some stress.
Don’t Forget the Photographer
For a split second, I was ready to forgo a photographer at our wedding. My thinking was that all of our family and friends would be taking pictures, and we didn’t need to pay someone to do the same thing. I was also trying to save us money; we were paying for the wedding and buying a house at the same time. Luckily Ben wasn’t hearing any of that. He was adamant about the photographer, and I’ve never been so happy to have been so wrong. We ended up getting a great photographer, who captured the day perfectly. And now we get to relive the moments and share them with people that didn’t get a chance to come. It’s a day that you will never forget that will pass by in the blink of an eye. Make sure to have someone there capturing it for you.
Try to Enjoy the Process
The time goes so fast. Ben and I were both saying to our friends that we can’t believe it’s been almost two years since our ceremony. And hearing Ben say he enjoyed “everything about that day” really makes me happy. Yes, there will be stress and hard times, but try to do all that you can to enjoy the moments of the planning process.
So that’s my two cents on the practical side of getting married. I’ve also offered tips for the personal financial side as well. I hope those of you getting married in the next couple of weeks have the happiest of weddings.
Britain’s vote to leave the European Union (known as Brexit) has caused quite the financial panic in markets worldwide. U.S. Stocks lost $1.4 trillion of market value on Friday and Monday. The FTSE 100, Britain’s main benchmark fell 5.6% in the first two trading days. Lawrence H. Summers, Former Secretary of the Treasury for President Clinton and the Director of the NEC for President Obama, called Brexit the worst shock since World War II.
Thankfully many are cautioning to take a breath and be patient. Those writers understand that this is what markets do. They go up; they go down. And instead of panicking, you should continue to invest in your diversified, low-cost index funds as you have been.
Know Your History
What I love about times like this is that they offer perspective. Remember when you said you weren’t afraid of taking risk with your investments? Well, here’s your chance to prove it. How do you feel now?
When I try to explain to clients, friends and even my husband that investing is a marathon, I use the Great Recession as a fresh memory of why you need to stay on the course and keep running.
On October 9, 2007, the Dow had reached a high of that time of 14,164.63, only to plummet to a low of 6,594 on March 5, 2009. (More perspective: The Dow closed at 17,409.72 yesterday). From that low in 2009, we saw a record high in 2015 of 18,312. (If you’re confused by what these numbers mean, read this and comeback.) Had you continued to invest the entire time, you would have made more money than you lost.
And it’s not just the Great Recession when this type of market mayhem has occurred. Manias have been happening for centuries! In his book, The Four Pillars of Investing, William Bernstein gives a fantastic history of market bubbles starting in the late 1600s and continuing through this century. The cycle has repeated itself and will continue to do so.
Your Shares are Still There
Have you ever wondered what you actually lose or gain when fluctuations like this occur?
Nothing.
You have the same amount of shares that you did previously. They are just worth less at the moment. So say you bought 10 shares of Mutual Fund A at $20 a share. You invested $200. Now let’s say that the value of Mutual Fund A rises to $30 a share. Your investment is now worth $300. If it subsequently plummets to $10 a share, you only have an investment worth $100.
The key thing to remember is that these values are theoretical until you sell Mutual Fund A. You will always have 10 shares. The price/share (determined mostly by supply and demand) at the time of sale determines how much you’ve gained or lost on the investment.
This fact is what makes selling in a down market so dangerous. In a time of steep decline, people get nervous and sell their riskier equity investments in exchange for safer investments like bonds or money market accounts. As such, they lock in their losses because they have not given an investment the chance to regain or increase its value.
Granted, they could be preventing a further loss if they invest in a stock or mutual fund that won’t ever recover (part of the danger of investing in individual stocks). But if you have a well-diversified portfolio and a long time horizon, your investments will have many ups and downs, and you will buy more and more shares at different prices.
Odds are you’ll never be able to time the market perfectly where you always buy low and sell high. Your goal should be to lower your average share price and spread your investment risk of a long period of time by contributing a fixed amount on a regular basis (dollar-cost averaging). With dollar cost-averaging and adjusting your asset allocation over time, you give yourself the best chance of investment success.
Stay the Course
Overall, investing in the market has provided a benefit to investors the majority of the time. However, you do significant damage to your portfolio if you miss even the smallest number of the best recovery days. Younger investors should rejoice that the money they contribute now will buy more than it has before. And older investors can take solace in the fact that they have scaled their asset allocations to something that isn’t as affected by the market’s current volatility.
So yes…take a breath. Also take stock of how this recent plunge has made you feel. There’s nothing wrong with fear or trepidation, as long as you can keep perspective and stay on the investing path that you intended.
How to Make the Most Out of Your Charitable Giving
In the wake of the Orlando shooting, there has been an outpouring of support both in terms of money and time. These actions show us the good that still exists in the world despite times of great despair. The generosity also reminds me of the importance of carving out a portion of your spending for giving, not just in a time of tragedy but on a continuing basis. I suggest three central questions when determining how to get the most out of your charitable giving.
Why Give?
To me, this question is the most important. When Ben and I first started to give to charity on a regular basis, I really wanted to know the rationale for giving. It sounds like a strange question, but I wanted to make sure that I gave “for the right reasons.”
I ended up asking a lot of people in my life - family, friends, coworkers - why they give. And of course, I got a variety of answers. Some people give because their parents always have, others give because their religion asks them to, and others still because they just feel the need to help.
When deciding for myself, the rationale that rang most true was giving to provide opportunities for those around me. I have benefited from many caring people who have given me the tools and opportunities to better my life. Consequently, I want to pay it forward for those around me. So whether it’s feeding the poor, funding AIDS research, or fighting for marriage equality, my giving strives to empower others. And to me, that’s money well spent.
You shouldn’t just abstractly think about this question. Write down your answers, ask people around you and take the time to really understand why giving is important to you.
Where to Give?
This question is tricky because there are sooooo many charities. And especially in the wake of tragedies, many con artists pray on the generosity of others to profit from horrific events. I’ve also heard horror stories of gross mismanagement of funds for some legitimate charities.
An obvious starting point was choosing a cause you feel passionate about. I chose one that was money related (modestneeds.org), food related (chicagosfoodbanks.org), and relief related (redcross.org).
After choosing the charities, I researched each organization on the Charity Navigator website. The site evaluates and rates different charities. It also provides in depth analysis of the charity’s budget, so you know exactly how the organization spends the money you donate.
You can also check out the IRS Exempt Organization Select Check site for eligible charities. I eventually narrowed my choice to the Greater Chicago Food Depository since it’s a local organization, spends its money efficiently, and benefits a large amount of people.
Again, writing down these answers and discussing with others will help make this process a lot easier for you. But don’t forget to do your own research.
How much to give?
The personal-finance nerd in me wanted to know a specific number that was standard to donate. I thought it would be easier to create space in my budget if I had a percentage of my income to build from.
I again looked to the web and asked my friends and family. And again, I got a wide variety of answers: some people gave 1% of their gross income, others 10% of their net, and others just gave sporadically. Even our government leadership varied widely. According to the Obamas’ 2015 tax returns, they gave almost 14.7% of their adjusted gross income to charity versus 1.8% for the Bidens.
Since I couldn’t find a standard amount of giving, I started with how much I could afford while still meeting my living expenses and savings goals. From there, I adjusted my other expenses to meet an amount I considered reasonable for charitable giving.
You will have to find what works with your budget. It will likely vary from year-to-year, given what budgeting goals you focus on. I suggest even starting with something small ($5 a month?) just to get into the habit of giving.
Other Best Practices
When you give, you should employ a few other best practices:
Don’t give personal information: A charity won’t ask for personal information like your Social Security Number or passwords to online accounts. Avoid any solicitations asking for information of that sort.
Don’t give or send cash: For security and tax record purposes, you need to have a paper trail of how you gave your gift and who you gave it to.
Pay close attention the name of the charity: Bogus Web sites may solicit funds for victims of this tragedy, by mimicking the name and sites of legitimate charities.
Concentrate your giving. Once you have found the charity that you like, giving your support just to that organization allows them more of opportunity to make substantive change.
As I learned, figuring out charitable gifts is a personal endeavor. But I urge you to really consider why, where, and how much to give rather than giving blindly. This type of focused giving will serve both you and your cause more effectively
The news out of Orlando this past weekend has me a bit shaken. When I woke up Sunday morning, the headlines of 23 people dead at a gay club made me think I was still dreaming. By 12:30pm, the number dead had doubled, and I still couldn’t believe this nightmare was real. Now headline after headline states it was “the worst mass shooting in American history.”
Ben and I spent hours reading stories online, dissecting posts on Facebook and Twitter, and watching press conferences on TV. Tragedies like this always remind me of how quickly life can change. The men and women in Pulse had no idea June 11th was the last day that they would see their friends and family. Yet in an instant, spouses, mothers, fathers, brothers, sisters, friends, etc. all had their lives change due to one man.
I grieve for all of those lost - the couple that hoped to get married, the cancer survivor who died protecting her son, and the students that were just out looking for a good time. I grieve for them just as I did the students at Virginia Tech and Sandy Hook Elementary, the church members in Charleston, S.C., the soldiers in Fort Hood, and the many more that have lost their lives due to gun violence and hatred.
This one hits close to home because I’ve taken particular joy in the gains that the GLBTQ community has made recently. But in the midst of the month when we are supposed to be most prideful, we get a harsh reminder that hate still exists in the world, and we have a ways to go.
This fear of the unknown - the fact that your life can dramatically change at any time - motivates me to do the work that I do. One of my money mantras is to “hope for the best and prepare for the worst.” Thinking about the worst isn’t fun, and you will never be fully prepared for tragedies like these. Having been through several significant losses myself, I can attest to how difficult it can be. But hopefully being able to put money worries aside will make coping easier.
If there is a silver lining to events like this, it’s the coming together of our people - the stories of perseverance through the tragedy, understanding that we are all in this together, and gratitude for all of those throughout history who have sacrificed so much so that we can continue to move forward.
I urge you to read these stories. Learn more about our history. Give what you can.
Fear and hate will not conquer us. Our pride will endure.
Three Tips to Keep Your Relationship Healthy and Wealthy
When I started thinking about my blog and my business, I knew I wanted to serve the GLBTQ community, specifically gay and lesbian couples. Marriage equality was creating exciting, financial opportunities for many of us, and I realized that I could provide good insight with my financial knowledge and experiences in the trials and tribulations of coupledom.
I’ve mentioned before how managing your money as a couple proves much harder than handling it by yourself. You have to figure out how to meld your different money personalities, develop a money system that works for you both, and deal with the myriad of financial issues that arise when getting married.
The good news is that couples often create more wealth than individuals. However, the key is staying together. Having been in my relationship for 15 years, I understand how hard that can be. I’ve learned so much about myself, attributes and faults, by having another person see the best and the worst of me. Ben reflecting his observations and understanding of me has been critical in my becoming a better person and partner. (And why I’m so grateful to have him in my life.)
Today I want to do something a little different and focus on practical tips for creating a healthy relationship. Obviously I’m not a relationship expert or counselor, so I’ll just share information that I’ve found particularly helpful. And hopefully learning these tips will help you keep your relationship healthy and wealthy.
Understand that Same-Sex Couples are Different and Create Your Own Path
Overall, gay and lesbian couples and heterosexual couples have a vast amount of similarities in the triumphs and struggles of their relationships. However, some particular distinctions exist that same-sex couples should keep in mind when navigating their relationship.
In a blog post last year, Kathy Gottberg examined many “social and legal barriers that are unique to their situation that influence [same-sex] relationships.” She highlighted that gay and lesbian couples employ different relationship strategies to deal with conflict, including accepting “conflict in a more positive way” and using “fewer controlling, hostile or emotional tactics.”
Another study that she examined found that, “[f]or lesbians, affection was more important than it was for gay males, while for gay males, validation was more important than it was for lesbians.” She also pointed out that individual autonomy plays a bigger role in gay and lesbian relationships.
My favorite distinction stems from the fact that same-sex couples don’t rely on cultural and relationship gender roles to determine power dynamics in their relationships. She states, “ rather than fall into cultural or religious norms as many of us do unconsciously, gay and lesbian couples must come to a mutual agreement about the details of their lives in order to stay together.” And this mutual agreement can help balance equality and fairness in the relationship, key components in making it last.
I love the idea that gay and lesbian couples should embrace these differences and learn to foster a sense of mutual respect in their relationship. We can create our path in a way that both spouses feel respected. As Gottberg eloquently explains, “conversation, equality, negotiation and a willingness to create something new — not because you can, but because you want to — is something every straight couple could learn from same-sex couples.”
Learn How to Communicate In Ways Your Spouse Understands
My mom is one of the most spiritual and reflective people that I know. And as much as I tease her for all of her relationship and self-improvement advice, she actually got Ben and I a book that changed the dynamic of how we interacted and saw each other.
The book was The Five Love Languages by Gary Chapman. It focuses on understanding the way you and your spouse express and experience love.
The Five Love Languages are:
Words of Affirmation - using words to affirm other people
Acts of Service - where action speak louder than words
Receiving Gifts – what makes a person feel most loved is a gift
Quality Time – giving another person your undivided attention
Physical Touch – a person feels the most love through physical closeness
The book provides a quiz to help you figure your primary and secondary love languages. And once you know the languages for each other, you can start to express love in a way that your spouse understands and can receive.
I was skeptical at first, especially at the thought of having to fill Ben’s “love tank.” But it actually made a huge difference for us. It gave reflection points and concrete language to use in understanding our conflict and how to resolve it. When I don’t feel like I’m able to communicate my love for Ben during a conflict, I can now express it in a way that he recognizes.
The Perfect Spouse is the One that Continues to Work on the Relationship
My most recent favorite article was published last week in the opinion section of the New York Times. Alain de Botton titled his article “Why You Will Marry the Wrong Person.”
Despite such a provocative and cynical title, the article provided an eye opening analysis of why many of us fall into the trap of marrying for the wrong reasons. Some of the “bewildering array of problems” that emerge when trying to find a partner include the lack of self-awareness, seeking familiarity rather than happiness, and choosing a relationship out of fear of being alone.
But “the good news,” according to de Botton, is that “it doesn’t matter if we if we find we have married the wrong person.” He said we should abandon the idea that there’s a perfect person out there that will “meet all of our needs and satisfy our every yearning.” Rather “the person who is best suited to us is not the person who shares our every taste (he or she doesn’t exist), but the person who can negotiate differences in taste intelligently — the person who is good at disagreement. “
This article hit home with me because I’ve often thought about finding that “perfect person” after Ben and I have had an argument. If only I found that person who I will never disagree with and whom I have everything in common, I would think, life would be perfect. But I eventually understood that he doesn’t exist. And even if he did, life would be extremely boring.
I love that Ben pushes me to become better and exposes me to ideas and experiences that I never would have considered on my own. And what I love the most is that he’s always willing to keep trying to resolve whatever issues that we have because he loves me and knows I will do the same because I love him.
I hope these articles provide some helpful tips on strengthening your relationship. Having a healthy relationship will only increase your ability to thrive financially.
Kicking Off Pride Month with a Nod to Those that Came Before Us
Happy June everyone!
June is LGBT Pride Month. It’s a month filled with nationwide celebrations of, as President Obama put it, “the tireless dedication of advocates and allies who strive to forge a more inclusive society.”
I love this time of year, not only for the Pride parties and parades, but for the reminders of just how far we’ve come.
We are approaching the 1st anniversary of the Obergefell vs Hodges decision, which forever changed the landscape of gay rights in this country. And while the anti-trans laws and continued discrimination against the GLBTQ community show us that we still have a ways to go, we should take time to appreciate the battles that we’ve won.
So to kick off Pride month and show some gratitude for those that have come before us, I want to highlight some of the important legal decisions that lead to one of the biggest civil rights wins of our generation.
Baker v. Nelson - Oct. 10, 1972: The first same-sex marriage case to make it to the Supreme Court came out of Minnesota when Richard John Baker and James Michael McConnell sued the Hennepin County District Court Clerk Gerald Nelson for refusing to grant them a marriage license because they were the same sex. Baker and McConnell argued that they had the fundamental right to marry under the Due Process and Equal Protection Clauses of the 14th amendment. The Court dismissed the case “for want of a substantial federal question,” in a one-sentence order.
Baehr v. Lewin - May 5, 1993: The issue made its way back to the forefront when three same-sex couples in Hawaii - Ninia Baehr and Genora Dancel, Tammy Rodrigues and Antoinette Pregil, and Pat Lagon and Joseph Melilio – appealed a lower court’s dismissal of their law suit against the Director of the Department of Health John C. Lewin. The circuit court held that the plaintiffs failed to state a claim on which relief could be granted. However, The Hawaii Supreme Court ruled that the lower court erroneously dismissed the suit because it did not appear “beyond doubt that the plaintiffs cannot prove any set of facts in support of their claim that would entitle them to seek relief[.]” Of note here is that the court did not decide the merits of the case, just the fact that it could proceed on its merits. The State had to prove that it had a compelling interest to deny same-sex couples the right to marry.
DOMA - Sept. 21, 1996: The Hawaii decision, despite not being final, caused a backlash throughout the nation, the biggest of which was President Bill Clinton signing the Defense of Marriage Act (DOMA). The law would deny federal benefits to married same-sex couples.
Baehr v. Miike (Baehr v. Lewin Part 2) - Dec. 3, 1996: Judge Kevin S.C. Chang in Hawaii did not find that the state had compelling reasons to deny same-sex couples marriage rights and thus held that denying marriage license to the plaintiffs was unconstitutional. Chang later stayed his ruling pending appeal.
Hawaii’s Constitutional Amendment - Nov. 3, 1998: The backlash of the Baehr case continued resulting in Hawaii voters approving a constitutional amendment allowing the state to “reserve marriage to opposite-sex couples.”
Baker v. Vermont - December 20, 1999: The Vermont Supreme Court ruled that the Vermont Constitution entitles same-sex couples to “the same benefits and protections afforded by Vermont Law to married opposite-sex couples.” However, instead of allowing the three couples in the suit – Stan Baker and Peter Harrigan, Holly Puterbaugh and Lois Farnham, Nina Beck and Stacy Jolles - to marry, the court left it to the legislature to come up with its own solution. That order resulted in the first civil unions for same-sex couples on July 1, 2000.
Goodridge v. Department of Public Health - Nov. 18, 2003: The same lawyers from Baker v. Vermont, Gay and Lesbian Advocates and Defenders (GLAD), also brought a suit in Massachusetts on behalf of seven couples who were denied marriage licenses. The Massachusetts Supreme Court held that “the Massachusetts Constitution affirms the dignity and equality of all people.” And with that decision, Massachusetts became the first state to legalize same-sex marriage.
In re: Marriage Cases - May 15, 2008: After the California legislature unsuccessfully tried to pass bills allowing same-sex marriage in 2005 and 2007 (both were vetoed by Governor Arnold Schwarzenegger), the California Supreme Court, when hearing six consolidated cases, struck down state laws banning same-sex marriages because they violated the state constitution. Gay couples began marrying a month later. However, in October of 2008, the citizens of California voted to approve Proposition 8, by a 52.47% to 47.53% majority, that amended the state constitution to restrict marriage to opposite-sex couples.
Gill v. Office of Personnel Management - July 8, 2010: From May 2008 through July of 2010, same-sex marriage became legal through court rulings in Connecticut and Iowa and through legislation in Vermont, Maine, (although the law was later overturned by Maine voters) , New Hampshire and D.C. With marriage equality gaining momentum, on July 8th, 2010, U.S. District Court Judge Joseph Tauro in Massachusetts held that section 3 of DOMA, the section that defines marriage between and man and a woman, was unconstitutional. He was the first federal judge to do so.
Perry v. Schwarzenegger - Aug. 4, 2010: Federal District Court Judge Vaughn Walker declares California’s Proposition 8 unconstitutional. This was the first time a state law was found unconstitutional in a federal court. While the appeal was pending U.S. Attorney General Eric Holder says the Obama administration will no longer defend the DOMA. On February 7, 2012 a federal appeals court upheld Walker’s ruling.
Windsor v. United States - June 6, 2012: In the following months, federal courts in California, New England, and New York held that section 3 of DOMA is unconstitutional. The latter case being Windsor v. United States. which was upheld on appeal on October 18th 2012. On December 7, 2012 the Supreme Court agreed to hear both Windsor and Hollingsworth v. Perry, another case that ruled Proposition 8 was unconstitutional.
Perry and Windsor in the Supreme Court - June 26, 2013: The Supreme Court struck down section 3 of DOMA in Windsor and dismissed the challenge to the Proposition 8 ruling on standing grounds in Perry, making same-sex marriage legal once again in California. This ruling opened the floodgates for marriage equality in state and district court cases, propelling the legalization of same-sex marriage in New Jersey, Hawaii, Illinois, New Mexico, Oklahoma, Utah, and Virginia. District Court Judges for both Kentucky and Tennessee held that those states must recognize same-sex marriages from other states.
Supreme Court Refuses to hear Marriage Appeals - Oct. 6, 2014: At this point, same-sex marriage had become legal in 19 states either through legislation, state court or district court rulings. All of the district court cases were upheld by different appellate courts, and they were appealed to the Supreme Court. However, the Court refused to hear the appeals presumably because no disagreement existed among the appellate courts. Because of the jurisdiction of the appellate court judgments, the amount of states allowing same-sex marriage jumped from 19 to 30.
6th Circuit Upholds Marriage Ban - Nov. 6, 2014: The U.S. Court of Appeals for the 6th Circuit became the only federal appellate court to uphold same-sex marriage bans. The bans were from Kentucky, Michigan, Ohio, and Tennessee. The cases were later appealed to the Supreme Court.
Supreme Court Agrees to Hear Marriage Cases - Jan. 16, 2015: The Supreme Court agreed to hear six consolidated cases from all four states where same-sex marriage bans were upheld in November – Kentucky, Michigan, Ohio and Tennessee.
Obergefell v. Hodges – June 26, 2015: The lead plaintiff in the case, Jim Obergefell, and his husband, John Arthur, were legally married in Maryland, but their marriage was not recognized in the state of Ohio where they lived. When John later died of ALS, Jim was not listed as a spouse on Arthur’s death certificate. Jim filed the lawsuit to be recognized as John’s spouse and won. However, the state appealed. Jim, along with another widower, and 12 couples now find themselves at the center of a case that could decide marriage rights for all same-sex couples. In a 5-4 decision, the court held that the Fourteenth Amendment requires a state to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-state.
As the notable mantra states, you can’t know where you’re going until you know where you’ve been. Many people have sacrificed a lot to shift the tide from staunch discrimination to full equality. And I hope that you take a moment to appreciate them in your celebrations this month.
It’s that time of year. Short-sleeve shirts become everyday wear. Restaurants put out their patio furniture and open up their windows. And you see crowds of people out enjoying the sites, especially in places like Chicago.
Summer is a time of vacations, shorter work days, and extended hours of sunshine. However, that extra enjoyment comes with a cost. And of course, I’m talking actual dollars. So before you get too deep into your summer spending, I want you to keep a few things in mind.
Spend Your Money!
Regular readers of the blog know that I’m all about balance. Even as someone who is pretty militant about his spending, I’ve learned to appreciate the benefits money can give.
Money you have or money that you save is not beneficial in and of itself. It’s a tool to help you do other things: feed your family, get a kid through college, or explore the world around you. And you need to use that tool for enjoying your life today and planning for the future.
So spend your money! I know it’s not the typical advice from a financial advisor. And I’m not saying you shouldn’t save, track your expenses, and talk about money. In fact, this principle highlights the importance of doing those things. By using these money fundamentals, you can mindfully make choices of where you want to spend and how to use your money most efficiently. You will catch yourself holding off purchasing a leather jacket in order to save for that cruise your spouse wanted to take. And that kind of decision-making is a good thing.
Make Sure Your Spending Reflects Your Values
I’ve read a couple of great articles recently about aligning your spending with your values and determining whether an expense is worth the cost.
I love both of them because they focus on consciously spending money on what you truly value and appreciate. Asking questions like “If I only had twelve months to live, what would I spend my money on?” Or “what is most valuable to me?”
You can also go through your credit card or bank statements to see what types of things you buy the most and asses the utility, cost, and enjoyment of each expense. By doing so, you can figure out whether your most common expenditures align with what you value most. If not, change your spending accordingly.
Whatever you do, don’t just passively think about these questions. Write them down, post photos or give yourself concrete reminders of why you spend the money that you do. In the end, you want to get the most enjoyment out of the time and money that you spend.
Focus on Experiences
I’m sure you’ve heard this last tip before, but it’s worth repeating.
Study after study after study has shown that people get more fulfillment out of buying experiences rather than material objects. In short, experiences like taking a vacation, a dinner date with your spouse, or a night out connecting with friends lead to more satisfaction than a new watch, a hot shirt, or fancy car.
The theory behind this concept comes from getting enjoyment before, during, and after an experience. For instance, you look forward to a vacation that’s coming up, you enjoy the vacation while you’re on it, and you get to reflect and tell stories about that experience for the rest of your life. In addition, with personal experiences, there’s less social comparison, since your experience is unique to you.
I’ve been a huge subscriber of this theory ever since I learned about it several years ago. I’ve also found three tips that have helped me get the most happiness out of my experiences.
Share the Experience: you’re more apt to enjoy an experience if you get to do it with someone else, whether a spouse, friend, or a coworker. I’m lucky enough to get to share a lot of great experiences with my husband and some amazing friends. Sharing the experience will only intensify the anticipation, enjoyment during, and reflection afterwards.
Reflect on the Experience: As the studies point out, the main advantage an experience has over a thing is that we continue to gain happiness from an experience long after it’s over. (Just think about how many times you’ve fondly said “Remember when….”) By contrast, we get used to the new tv, computer or appliance and usually end up taking it for granted. So capture the experience in a way that will make reflection easy. For example, taking pictures, creating a scrapbook, or journaling afterwards. And, of course, don’t forget expressing gratitude for the experience itself.
Don’t Overspend: Keep in mind that you get to pick what experience brings you the most satisfaction. And there’s no direct correlation to how much you spend on an experience and the happiness it brings. The point is to feel that the experience outweighs the money that you spent. If you overspend, the stress and anxiety of how you will pay the bill or meet your basic living expenses the next month will only impeded your happiness.
It turns out money can buy happiness. You just need to make sure your spending aligns with what’s most important to you and do your best to capture the happiness that those experiences bring.
When most people think of the pillars of estate planning, the trinity of will, trust and advance care directives come to mind. While I think all of these instruments are good to have, not all are essential, at least at the beginning, to your estate plan. Specifically, a trust might not be worth it, especially for younger generation X and Y consumers that have just started building their assets. Today, I’m going to cover the basics of trusts and how to determine if you need one.
What is a Trust?
A trust is a legal entity that lets you dictate how you want certain assets distributed upon your death.
If you’re thinking it sounds very similar to a will, you’re right. Both documents help you make your wishes known. However, a trust usually only deals with specific assets, like a piece of property or life insurance, while a will governs everything else in your estate. Both documents go hand-in-hand to provide an efficient distribution of your assets at your death.
Trusts include many key components. You must have a trust objective. In other words, you will have a specific type of trust (e.g., Qualified Personal Residence Trust, Irrevocable Life Insurance Trust, Generation Skipping Trust, etc.) to achieve your purpose for the trust.
All trusts have three key roles. The settlor or grantor establishes the trust. The trustee manages the trust. And the beneficiary benefits from the trust. Different people can fill each role, or at times, one person can have all three.
Lastly, trusts should also contain trust property (i.e., the property contained in the trust) and the trust should be governed by certain rules outlined in the trust agreement. A word of caution here: assets you want protected by the trust must be titled to the trust. If not, it will still be considered a personal asset and have to go through probate (more on this later).
Two basic types of trusts exist: living trusts and testamentary trusts. A living trust or an "inter-vivos" trust is established during a person's lifetime, while a testamentary trust comes into existence via a will after a person’s death. Additionally, living trusts can be either revocable, where you retain control of the assets and terms of the trust, or irrevocable, when you no longer have the assets and can only change the terms of the trust with a beneficiary’s consent.
Why You Don’t Need a Trust
Now that we’ve gotten some of the vocabulary out of the way, we can explore the advantages of a trust.
The main advantage that you will hear people tout is the ability to bypass the time and cost of probate. Probate is the process of administering a deceased person’s estate and usually involves filing fees, publication fees, document fees, attorney and executor fees, as well other court costs and fees. The process can easily costs thousands of dollars and can take several months to resolve. By contrast, the average cost of creating a trust is $1,500 to $4,000. Obviously, the more complicated the trust, the more costly.
However, many assets already avoid probate by their very nature. Property owned jointly with the right of survivorship, retirement accounts with a designated beneficiary, or even payable up death accounts like a checking account are transferred easily and quickly after death.. In addition, some states even streamline the probate process for “small estates.” You can check out those rules for each state here.
Lastly, if you’re married and you and your spouse plan to leave the bulk of your estate to one another (and you’ve likely already purchase those assets together), you also don’t have to worry about probate for the majority of your assets.Yet another advantage of marriage that all couples can now take advantage of.
With all of these workarounds and estate taxes being excluded for estates smaller than $5,450,000 for 2016, the majority of younger people with minimal assets and a valid will won’t need a trust.
When You Might Consider a Trust
Even given the considerations above, you may find yourself as a younger person that needs a trust.
First and foremost, if you think your estate might have to be probated (maybe you have more than the federal and state exemption amounts), then the costs of probate itself will likely outweigh the costs of a trust, let alone save your heirs the time, stress, and grief of having to deal with the probate process.
Other scenarios where a trust might be beneficial:
You Own a Business – Probate may prevent your business from operating or it might have to be sold to create cash for your estate. That risk might push you to create a trust at a younger age.
You Own Property in Multiple States: If you have property in another state (or another country), you will have to go through each state’s probate process. Again, setting up a trust for those pieces of property avoids the hassle and expense of going through that process.
You Want to Keep Your Financial Life Private: Probate is a public process. So in order to avoid any public or family scrutiny over the division of your assets, you may want to create a trust.
You Have a Dependent that Can’t Manage Assets Him- or Herself: If you have a special needs child or family member that you wish to care for after your death, you may arrange for the management of their support through a trust. Providing an inheritance directly to them may disqualify them from some government support.
You Have a lot of Beneficiaries: If your have multiple people or charities that you plan to give money to at your death, it’s likely worth your while to spell out the specifics in a trust.
Deciding whether you need a trust as a part of your initial estate plan boils down to a balancing test of costs and hassle. No matter what decision you make, you will need to review whether your need for a trust changes as your financial situation grows.
Since becoming a RIA, I’ve had the opportunity to create more comprehensive financial plans for clients. Through that process, I’ve been able to see what people find most valuable about their financial roadmap.
My first few plans were 40-50 page behemoths that covered every detail of the five essential planning areas – personal finance fundamentals, tax, investing, insurance and estate planning. While many clients appreciate the effort and detail associated with such extensive analysis, the large documents tend to overwhelm them. What they really want to know boils down to two questions: “How am I doing? “ and “Can I do what I want to do?”
In order to answer those questions accurately, I focus on one very important concept – cash-flow analysis. Whether figuring out if they are on track for retirement, saving enough for a child’s education, or can buy that dream home, I need to fully understand their current situation and what they have to work with in order to see what they can accomplish.
Today I want to explore why cash-flow analysis is the most important part of your plan and how you can stay on top of your income and expenses.
Cash-Flow Planning vs. Goal-Based Planning
Most financial planners conduct one of two types of planning strategies: goal-based financial planning or cash-flow financial planning.
Goal-based planning starts with identifying an end goal and the creating a plan to help achieve it. This approach necessitates clear goals like knowing when you want to retire, how much house you want to buy, or when you would like to be debt free.
Cash-flow planning, on the other hand, focuses more on the details of your current situation – income, expenses, spending habits, etc. and then using that information to develop goals and a plan for achieving them.
I prefer cash-flow planning because it’s a more accurate and productive form of planning. Many younger clients don’t have clearly defined goals or any idea what dreams they can accomplish. Alternatively, they may have too many or unrealistic goals. Crafting a plan with that type of uncertainty will only lead to ineffective, and maybe even detrimental, plans.
Part of my job is to open your eyes to your current financial situation and help you develop feasible goals. I can use the information from your cash-flow analysis to show you what can achieve on your current path, as well as what changes we can make to ensure you have the future that you want. The amount of scenarios are endless by just tweaking parts of your current situations like savings rates, cutting spending, or having higher growth-rate assumptions.
The Key to Your Cash Flow
To make cash-flow planning successful, you have to have accurate data. This is the real stumbling block for clients because most people don’t track their income and expenses. Hopefully that will change now that you know how important this information is to your financial plan. You can get accurate cash-flow data in a few ways.
I give my clients a cash-flow spreadsheet to provide a starting point of what expenses to think about and allow them to estimate what they spend. We then verify the data through a bank and credit card statement analysis, or by having them sign up for a service that tracks the expense automatically like Mint or Quicken.
Singing up for a cash-flow aggregator does most of the work for you, as you only need to verify transactions rather than entering information yourself. However, you have to keep track of those expenses that you pay in cash or avoid transactions that require payment that can’t be tracked.
Some people find it easier to carry a notebook and jot down their expenditures as they make them. Use whatever approach works best for you; just make sure it’s something that you will stick with on a consistent basis. You have to be disciplined enough to have several months of information.
Personally, I prefer to track my expenses through Excel. I’ve already shared this template with several of you, so I figured I would attach it for everyone else. You can get more information on how to use it here.
Lastly, I also suggest adding a balance sheet to your financial analysis. It allows you keep track of what you have and measure your progress on a monthly, quarterly, or even yearly basis.
Monitor Your Cash Flow
The last aspect of making the most out of your cash-flow analysis is to keep tabs on it. You’ve worked hard to make sure the figures are correct, develop your goals, and craft a plan. Now you can compare the reality of your spending to ensure things progress as you like.
Your plan says you have $10,000 at the end of every year. Did it work out that way? If not, why? Can you add more life insurance? Did you keep your clothes shopping in check?
Cash-flow planning allows you to accurately track your progress and keep you focused on achieving your goals. Only then, can you truly know what you can accomplish and what other dreams you should shoot for.
My firm is going through a bit of transition at the moment. As one of the many changes that are coming, all employees just received notice that the company will no longer match 401k contributions. This spawned a few questions from my coworkers on what we should do with our 401k accounts. Here’s some of the advice that I gave.
Why the Match Is Important
According to 401khelpcenter.com, about 40% of companies that offer a 401k match contributions. A fixed match is most common, which usually involves something like $.50 for every $1 up to a specific percentage of your salary (e.g., 4-6%).
In other words for every dollar that you contribute, your employer also adds 50 cents to your account just because you contributed. If your salary is $60,000 and your match is up to 6% of your salary, your employer just gave you $1,800 (($60,000 * .06) *.50) to help you save for retirement. That’s free money and a 50% return that you can’t replicate anywhere else.
If you’re lucky enough to work for a company that does offer a 401k match, you should take advantage of it by contributing at least to the specified match percentage. Whether you should contribute more depends on a couple of other factors.
Assessing Your 401k
Even if your employer doesn’t match your 401k contributions, a 401k may still be essential in building a successful retirement. 401ks have several advantages over an Individual Retirement Arrangements (IRAs) including higher contribution limits, no income limits, and you can borrow from it if need be.
However, you should be diligent to make sure that your 401k plan is up to snuff. I’ve already discussed combing your annual statement for your plan administration fees and fund expense ratios. If you work for a large company and are paying over .75% in total or 1.5% for a smaller company (unfortunately they have less leverage), it’s time look at your other options.
Sites, like Brightscope or America’s Best 401k, provide plan ratings and fee comparisons between many 401ks. If you discover that your 401k charges you high fees, try contacting the committee or person responsible for managing the plan to have it changed. Our firm did that exact thing when we found out that each participant was paying over 2.25% for their account.
What to Do If Your Plan Stinks
If you find that you have a lousy 401k with bad investment options and high fees (and you’re not inclined to sue your company for breach of fiduciary duty) you still have several options to help build your nest egg.
First, if you’re married, compare your and your spouse’s 401k to see who has the best plan. You can then pool your resources and strategize which one to max out first. You can also adjust your combined asset allocation to where you can use the lowest costs mutual funds in the higher-fee plans. In the event of a divorce, marriage protects spouses from one person running off with all of the money in his or her retirement account, unless you specify in a prenuptial agreement that they are separate property.
Second, consider contributing to an IRA initially and using the 401k for any overflow. You’ll be able to find many providers that can give you low costs and diverse investment options. Even if you run into income limits, you may be able to get around them by taking advantage of a backdoor Roth.
Lastly, you also may find that your company offers a self-directed brokerage option or “brokerage window” which may allow you more control over your fees and investment options. Be forewarned that if you’re not experienced in picking investment vehicles, you may find this option overwhelming.
Making the Switch
If you’re in a situation like some at our firm where you’re looking to move your 401k entirely, you have to keep a few things in mind.
In general, you can only move your account if you’re no longer working at the company. Some plans offer in-service rollovers, but it’s usually for those who are 59 ½ or a specified retirement range. You’ll have to look at your plan details for your particular options.
If you know your leaving, you have four options:
Leave the money in your old 401k
Roll it over to your new employer’s plan
Roll it over to an IRA
Cash out the account.
You should avoid the fourth option based on the taxes and penalties alone. I also wouldn’t suggest leaving it with your old employer since you won’t be able to contribute more money to the account, you may have limited investment options, and you may be charged an extra maintenance fee since you’re not an active employee. But it may be a good place to park your money while you figure everything else out.
When considering a rollover, perform a proper assessment of the fees and make sure that it’s a trustee-to-trustee rollover to avoid any possible unintended tax consequence.
Job transition is never easy. Hopefully some of this advice can help take some of the stress off of what to do with your retirement money when change happens.
Wedding season is approaching, and I can’t wait for several unions to take place in the next few months. As those of you getting married start to solidify your guest list, food, flowers, etc., I want you to keep one other bit of preparation in mind - a prenuptial agreement (prenup, for short).
I get it. Discussions about prenups aren’t the most romantic to have before you get married. They can cause quite a bit of anxiety and stress, in an already stressful time.
However, as I’m assuming you’ve heard ad nauseam, some 50% of marriages end in divorce (41% of first marriages, 60% of second marriages, 73% of third marriages). Some have argued that same-sex couples have a lower divorce rate in this short time of marriage equality, but that number has come under fire as of late.
I hope your marriage lasts. I also hope that you stay happy, healthy, and wealthy your entire life. But, I wouldn’t be doing my job if I didn’t prepare you for the pitfalls that may come your way. And just as I’ve talked about wills, disability insurance, and life insurance despite being difficult subjects to discuss, today I’m going to cover why you might consider a prenup.
How to Best Start the Conversation
Simply put, a prenup establishes property and financial rights of each spouse if a divorce occurs. It covers issues like who gets certain assets acquired before marriage, splitting items acquired during marriage, support arrangements for a non-working spouse, and how debt is allocated. Again, not the most pleasant thought when you are about to marry. But there are a few ways to make the conversation as easy as possible.
First, emphasize the reason for the conversation. Good financial planning helps you plan for the best and prepare for the worst. A prenup is just another tool to protect your financial health in the long term. And its best to do this in a time of love, caring, and concern for each other, rather than a contentious and expensive divorce proceeding down the road.
Second, make sure you both are in a place that is free from distraction and have time to really give the conversation your attention. Trying to discuss these agreements when you have just fought about the guest list or the amount of money you spent on flowers is a terrible idea. Save this wedding discussion for a time on its own.
Last, make sure the beginning part of the discussion involves thoughts and fears around prenups. People have many preconceived notions about the purpose of a prenup or what it actually does. Validating your spouse’s concerns and then exploring the basics can help sort through some of the baggage you each have around it.
The Basics of Prenup
As a forewarning, you should understand that courts don’t always enforce the terms of a prenup given their sensitive nature. This is why you still see court battles in divorce proceedings even with a valid prenup. The court could find that the prenup is unfair or a person was pressured into signing the agreement.
Many states have adopted the Uniform Premarital Agreement Act (UPAA), which establishes minimum standards for prenups including:
A prenup is presumed to be invalid unless each partner has an independent lawyer review the agreement before it is signed.
Each partner must make a full disclosure of all assets owned and debts owed before the agreement is signed, including separate as well as jointly owned assets.
The agreement must not encourage divorce in any way.
The agreement must meet basic standards of fairness.
If the couple doesn’t get married promptly after signing the agreement, it is void.
These considerations should be given to your prenup, if you agree to make one. Most states also provided that an agreement has to be signed a minimum amount of time before the wedding takes place (although this is not a part of the UPAA).
Good practice is allowing each spouse at least a week to review the final draft of the agreement before signing it. And while no “ironclad” prenup exists, following these basic rules will increase the chances of the agreement being upheld should one spouse decide to challenge it in court.
I highlighted above what prenups usually cover, but I should also mention things you can’t do with a prenup. You can’t set child custody or support, opt out of divorce court, give up inheritance rights, or set agreements on personal behavior.
When You Need A Prenup
Every couple should decide for themselves whether this type of agreement suits them. Here are some common situations where a prenup is advisable.
You have a lot of assets
You are in line for an inheritance.
You own a business
You have kids from a previous marriage
You may leave the workforce to care for children
You make considerably more than your spouse
Your partner has a lot of debt and you don’t
In the end, you never know what twists and turns your life will take. Just because you have nothing now, doesn’t mean you wont’ have a lot later on. In my discussions with Ben, I would tell him he would be happy that he signed a prenup when he becomes the next JK Rowling.
As an added bonus, the process of creating a prenup causes you and your spouse to get honest about your finances and really take stock of your current situation. Couples can only benefit from sitting down and putting everything that they have on the financial table.
When You Don’t Need a Prenup
Despite the many benefits of getting a prenup, there are certain circumstances where you don’t necessarily need one. Many couples may have already purchased joint assets like a house or a car. Or your other assets already have the other as a beneficiary.
Here are some other circumstances where a prenup may not benefit you:
You Both Come to the Marriage on Equal Footing: A prenup can help protect a much richer person or much poorer person from inequitable treatment should the marriage dissolve. However, couples with fairly equal income, wealth, and education levels shouldn’t run into many problems in the event of a divorce.
Neither of You Have Much In Assets: If your not coming to the marriage with much in the first place, there is not much for you to protect. Additionally, many states have also already adopted the concept that what was acquired up to the marriage by each individual stays separate property.
You Want to Split Everything Evenly: One of my main arguments of getting a prenup was making sure that Ben was treated fairly if something should happen to the marriage. To that point, many courts are adopting simple formulas for a division of assets, which would likely lead to a fair splitting.
In the end, Ben and I decided against getting a prenup because the only significant asset that we had was our jointly purchased home, and we were both on fairly equal financial footing otherwise, having been together already for 13 years. Still, the discussion was worthwhile and helped us both understand that we needed to prepare for every aspect of our marriage.
Going Forward With the Prenup
If you do decide to go forward with the prenup, you should employ a few best practices.
First, you should see a lawyer. You each need legal counsel in order to make sure the prenup is valid. You can both consult mutual lawyer initially to learn the specific state laws around how state separate laws may affect you and the framework for what type of issues you would like to include. This lawyer can even right up an agreement that you both feel comfortable with. However, you should each have an independent lawyer review the agreement.
You should also prepare for some conflict. Creating a prenup will likely bring up emotional issues and dispute on what fairness really means why trying to get to a resolution. But having these arguments now will prepare you for being open and honest about your finances. I’m not an experienced family lawyer, but I know the process has brought some couple’s closer.
Lastly, remember that these tools are not cheap. Each spouse at least have their own counsel review the prenup And at hundreds of dollars an hour, lawyer fees add up quickly. The cost of a prenup could cost anywhere from $750 to $5,000. Make sure you research or get recommendations for several lawyers and include that type of expenditure in your budget. And despite the initial cost, remember that lawyers will still cost hundreds of dollars an hour should you need one in a divorce proceeding. And you will likely need one for more time in a divorce than you will in negotiating a prenup.
The prenup discussion is an important one to have, even if you decide against it. Taking time to set the proper foundation for your marriage can only help your marriage become more stable in the long run.
Five Things That You Should Do Right After You File Your Tax Return
The passing of the first tax return deadline brings a huge sense of relief. The scramble to get your documents in order and rushing to get everything done really takes a toll on your mental energy. And while it’s tempting to throw your return in a drawer and not think about your income or deductions for another year, I want you to do a few things while your taxes are fresh on your mind.
Review Your Return
So many people don’t take the time to sit down with their return and make sure all of the information is accurate, especially if they are trying to get it done quickly. But there are many benefits to reviewing your newest document.
First, and most obvious, is you can catch mistakes. All of us, including professional tax preparers, can make errors. And even with the best tax preparation software, anyone can still transpose some numbers or forget to enter something all together. Go through your return and make sure your income figures and the amount of tax withheld match what was reported on your tax documents. If you find a mistake, you can always file a 1040X and make whatever adjustments you need to.
Additionally, this year’s return will likely mirror next year’s. As such, it can help guide you to the types of deductions that you need to keep track of. You will find what deductions you took and how you might maximize them next year. For example, you might find that you can advantage of increasing your charitable contributions or unreimbursed employee expenses since you have started itemizing. Or for your schedule C business, you can take advantage of more business-related expenses that you didn’t track the previous year. Taking 15 minutes to understand and review your previous return will save you a lot of time, money, and stress in the next year
Get Organized Now
Along with reviewing your return for the types of deductions that you can take, you can also review it to learn what income documents you’ll have to gather for the following year. I always have clients that aren’t sure if they have all of their required information. Part of the problem is that we get so many tax documents that we can easily miss or forget to download them. Paying student loan interest? You’ll see you have a 1098-E. Got some interest from a bank account? Look out for your 1099-INT. You can create a checklist to quickly identify what you need. Once you get the documents, keep them all in one envelope or folder for easy access.
Adjust Your Withholding to Keep Your Money
The moment of truth comes when you finally finish your return and figure out whether you owe or will get a refund. Most people are elated when they get a refund (the larger the better, right?). And others feel inadequate or like they’ve done something wrong because of the stigma associated with owing the IRS.
However, owing is actually good, to a certain extent. It means that you’ve kept more of your money to spend how you like, rather than giving the government an interest free loan. The time value of money principle states that that money is worth more to you now than in the future because of the interest you can make on it. So keep more of your money in your pocket.
If you’ve received a huge refund adjust your W-4 exemptions to get more money in your monthly paycheck. If you owe, make sure it’s not so much that you can’t pay it back. If it is too much to pay, you can have more money taken from your paycheck or make additional payments quarterly to ensure that you can pay any balance that comes next year.
Deal with Your Debt
As I said, owing is good for you. The problem comes when you owe more than you can pay back and/or you incur an underpayment penalty for not paying enough in during the year. If you do run into this situation, I’ve already given some suggestions for dealing with your debt. You will want to resolve the problem right away rather than hide your head in the sand because of the penalties and interest that you incur for doing so.
In the future you, you can avoid an underpayment penalty if you either owe less than $1,000 in tax after subtracting your withholding and estimated tax payments, or if you’ve paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
If you do incur the penalty, you have to file form 2210 to figure out the amount that you owe. And immediately adjust your W-4 withholding with your employer or figure out what you need to pay to the IRS on a quarterly basis in order to have just the right balance.
Review your Budget
Lastly, now that you have your total gross income and the total amount of tax you pay in front of you, it’s a good time to review your yearly budget. You can use the figures on the return to make sure you’re budgeting an accurate amount of income and expenses. Ben and I also use our tax return to calculate the appropriate percentage each of us contribute to our joint household bills. Since you are forced to look at your income at this point of the year, use the time to review all of your income and expenses.
Having the tax season over with is a huge relief. But if you can take just a little more time to do these five things, your future tax seasons and financial planning will go a lot smoother.
I recently read an article by Bruce Horovitz in the Washington Post about picking a financial advisor that really caught my interest. I agreed with a lot of it, especially the point that picking the right advisor can be one of the most lucrative decisions you can make.
Horovitz asserts that “…you don’t have to be a financial lightweight like me – or wait for a crisis – to need a financial advisor.” He also rightly points out that the decision to choose an advisor should be based on necessity.
However, a line later in the piece highlights a common misconception of the purpose of financial advising: “If you have a six-figure household income — and $250,000 or more in investments — it’s probably best to let someone else call your financial shots.” He then explains how advisors help pick the right investing strategy and manage the emotions that come with being in the market.
While I agree investing plays a big role in good financial planning, it’s only part of the picture. Other issues like risk and debt management, learning about the tax system, and understanding the benefits and pitfalls of owning a home play just as crucial of a role in your overall financial health, especially for younger people who face these decisions early on in life, without having a structured financial education.
I’ve already written about key factors to look for when choosing an advisor, but today I want to emphasize why good financial advice is critical to those in their 20s and 30s.
The Current Model
Most people assume that financial advising only involves helping those with large portfolios figure out how to best grow and use that money for retirement. Horovitz felt lucky to get an advisor that worked mostly with “seven-figure portfolios,” when his next egg “struggled to reach six figures.” A lot of young people feel similarly that they somehow don’t deserve financial advice from a professional because they don’t have a high-net worth.
And it’s not only consumers that think that way; some advisors believe that as well. In an article published last September, Retirement Advisor Melody Juge argued that most Americans under 50 have no need for financial advice. Juge only works with people over 50 and claims “ [m]y industry wants me to say that everybody needs an advisor, but I don’t think they do.”
She added that pushing services to Generation Xers and millennials for advice that they might not need does more harm than good. Juge said, “When people are in their 20s and 30s and just starting to earn money, why would we want them to spend one to two percent paying for an advisor when they should be accumulating?”
You’ve probably heard that 1% number a lot. Most advisors that currently focus on managing investment portfolios make money by taking a 1% fee from the portfolio. This charge is in addition to mutual fund expense ratios or transaction costs for portfolios held in a brokerage account. You can see how the total cost of advising can easily jump from 1% to 2 or 3%. And that’s why it takes fairly large portfolios to justify those types of fees.
A Newer Approach
Despite the this fee based approach having been around for decades, a new trend is emerging in who advisors serve and how those advisors are paid. Younger advisors who know that their peers need financial guidance are trying to find ways to get them quality, personalized advice through a pay-structure that they can afford.
In fact, two of those advisors – Alan Moore and Michael Kitces – developed an entire network called the XY Planning Network which seeks to develop a financial planning model that can help younger generations. (Full disclosure: I am a member of this network.)
Most advisors in the network charge an upfront fee for a financial plan (e.g., $1000-$2000) and then provide continual advice for a monthly retainer (e.g., $100 - $300). This pay structure gets the client invested in the process and provides a comprehensive analysis of their financial situation, not just based on investing. The plan focuses on money management, taxes, insurance, estate planning, investing and more. The continuing retainer funds future monitoring, counseling, and plan adjustments for the life changes that will inevitably come.
Some advisors also offer additional lower cost (e.g., 300 - $500) sessions that allow the client to focus on one or two important issues.
The main goal is to give access to affordable, independent, and client-focused advice in a time when young people need it most.
Is It Worth It?
The crux of this question becomes whether this newer approach is actually worth it to this younger clientele. It provides advisors with an income stream that can make it profitable to serve these generations, but is it a mutually beneficial endeavor?
One of my favorite quotes regarding the importance of early advice comes from New York Times Your Money columnist Ron Lieber when he said “You have to win your 20s at this point.” He was referencing the crippling financial decisions 20-year-olds have to make when it comes to student loans, picking the right type of insurance coverage, and investing for their future.
Making a misstep early on can put you in a large hole that takes time, effort and of course money to get out of. Getting on the right track becomes all too important as safety nets like pensions and social security slowly dwindle away, and we take on more and more responsible for our financial well-being.
In their response to Juge’s assertions, Moore and Kitces highlight all of the decisions 20- and 30-somethings make that have lasting impact – marriage, divorce, starting a business, paying down debt, etc.
I also think of situations that I’ve already encountered where clients need guidance on managing their credit score, how to prepare financially for adoption, having the right property insurance coverage, or switching out of a retirement account that was set up through a high-cost annuity.
All of these situations involved young people that could have lost tens of thousands and even hundreds of thousands of dollars over the span of their lifetime by making a poor decision early on.
So yes, good decisions early in life matter….a lot.
I’m proud to serve generations that can really benefit and find value in the advice that I give. And I hope this change in the industry benefits us all.
Haven’t Filed Your Taxes Yet? Don’t worry. You Still Have Options.
The first tax deadline is less than two weeks away. And even with an extra three days until April 18th, I know some of you are scrambling to get your information together.
First things first - don’t panic. You still have time to gather all of your income documents and either enter them into your software or get the information to your preparer. And if not, you can always get more time to file. Today, I’ll cover how to do that, as well as other last-minute tips for filing.
How to Request More Time to File
The all-important form that you need to request an extension is Form 4868. You can file the form online if you or your tax professional has Efile access. Or you can mail the paper form into one of the IRS service centers. (You can find your particular service center on the form’s instructions.) If you choose to mail the form, make sure to get it postmarked by 4/18.
The 4868 is pretty straightforward. You fill in your contact information (name, address, and social security number), estimate your tax liability, and make a payment if you need to.
Some people freak out about the balance due estimation because the IRS says in the instructions: “If we later find that the estimate was not reasonable, the extension will be null and void.“ However, you just need to make the best estimation with the information you have.
So, if you had a balance the year before and are making a similar amount of income, you will likely owe about the same. You can also adjust accordingly for any increase or decreases in your income.
If the IRS accepts your extension request, you get an additional six months to file your return. You should know that the extension only gives you additional time to file, not to pay. If it turns out that you didn’t properly estimate your balance due, you will owe interest when you do file and may incur a failure to pay penalty. (Although owing a balance or filing the form without payment doesn’t negate the extension.)
The last thing to keep in mind is that you don’t need to file an extension if you know you’re getting a refund. A refund means the Government actually owes you money. You have three years from the return due date to file your return and still receive the refund. I suggest you file as soon as possible to start putting your money to work.
Watch Out for Those Penalties
If you don’t file on time or file an extension, you will be penalized.
The most substantial penalty you face for missing the deadline is the failure-to-file penalty. As the name indicates, you incur the penalty for failing to file on time. Again, you can skirt this penalty by filing Form 4868. Unfortunately, there’s no way to avoid this penalty if you miss the second deadline.
The failure-to-file penalty is 5 percent of the unpaid taxes for each month or part of a month that your return is late, up to 25% of the unpaid taxes. If you file your return more than 60 days after the due date, the minimum penalty is the smaller of $135 or the unpaid tax.
Along with the failure-to-file penalty, you will likely receive the failure-to-pay penalty. Again, the name is pretty self-explanatory: you incur this penalty for not paying your tax balance on time. The failure-to-pay penalty is ½ of 1 (.05) percent of your unpaid taxes for each month or part of a month you have not paid after the due date.
Like the failure-to-file penalty, this penalty can rise as high as 25% of your unpaid taxes. However, unlike the failure-to-file penalty, the failure-to-pay penalty isn’t avoided when you file an extension on the initial filing deadline. You have to pay at least 90% of your tax liability by the original April due date and the balance by the extension date, if you want to avoid the failure to pay penalty. You may get a small reduction in penalties if you incur them together.
You Have Options If You Can’t Pay the Amount You Owe
You may find that you owe more on your tax return than you previously thought and can’t afford to pay the balance in full. That’s okay. There are plenty of options in order to resolve your tax debt. For example, you can apply for an installment agreement or hardship status.
Under the IRS’ Fresh Start initiative, individual taxpayers that owe under $50,000 can easily set up a payment plan, if the taxpayer pays his or her debt in full within 72 months (6 years). You can request the agreement online or mail in Form 9465 to a service center. Keep in mind that it may take a while for an installment agreement requested through the mail to be set up, as the service centers are really behind.
If you need longer the 72 months to pay your debt or you owe over $50,000 the IRS will request a Collection Information Statement (Form 433-A or Form 433-F). These forms provide an in-depth analysis of your assets, as well as your income and expenses to help determine what you can pay on a regular basis. For example, if the financial statement shows that you can only afford $400 a month after you’ve paid your necessary expenses, that will be the amount of your installment agreement. If the financial statement shows that you can’t pay anything, you can be placed in currently-not-collectible status or hardship status.
Know What You’re Signing
Last, but certainly not least, remember to review what you sign. Because of the tight time frame, it’s tempting to have a preparer complete the return and for you to sign it without reviewing it in order to get it filed as quickly as you can.
Don’t do that.
Even if someone else prepares the return, you are the one ultimately responsible for its content. And your preparer is more likely to make a mistake in the mad rush to complete everything before the deadline. So take the time to understand your income and deductions for 2015. For an overview on how returns work, you can check out my previous regarding what you need to know.
I know that the title of this post already has some of your eyes glazing over. Insurance is the type of thing that most ignore until they really need it. It amazes me how many clients come to me underinsured or not insured at all. A lot of them are couples with children or others depending on them.
You can easily make all the right moves with investing and your taxes but have that progress wiped away by an untimely and costly accident. The good news is that learning the fundamentals of the kinds of insurance you need is pretty straightforward.
In addition, if you happen to be a newly married couple you may be able to get better rates just from being married and combining your coverage. So today I’m highlighting the five fundamental types of insurance that you need and some tips on picking the right policies.
Health Insurance: Insuring against the risk of a large monetary loss from illness.
Not only is it beneficial to have this type of coverage, it’s now required due to the “individual mandate” in the Obamacare law (if you don’t qualify for an exemption). No matter where you fall on the health care debate, all sides can agree that health care is expensive. As Consumer Reports points out, “person for person, health care in the U.S. costs about twice as much as it does in the rest of the developed world.”
So what do you do? Most of us have health coverage through our employment. If not, you can find coverage through the Healthcare Exchange at Healthcare.gov. You can also participate in a Health Savings Account (HSA) to save money on the cost of your medical expenses.
Married couples save extra money by being able to pick the best coverage through multiple employers or being able to cover a spouse that is self-employed. Same-sex couples who previously had domestic partner benefits, can now avoid having to pay income tax on employer-paid premiums by getting married.
Homeowners/Renters Insurance: Insuring against the loss of your residence or its contents.
This type of insurance helps protect you from catastrophic fires, floods, or earthquakes that may make your residence inhabitable and/or destroy your belongings. Homeowners especially need to protect their most valuable asset with this kind of insurance. I’ve shared Ben’s story of how renters insurance really saved him when his apartment caught on fire. The last thing that you want to do is lose where you live and not hae enough money to find another place or replace your belongings.
When choosing dwelling coverage, you’ll want to focus on a few key things. First, make sure you have the right type of policy. There are six basic homeowner forms.
HO-2: Homeowners 2 Broad Form – protects against 16 perils named in the policy.
HO-3: Homeowners 3 Special Form – protects against all perils, except those specifically excluded from the policy
HO-4: Homeowners 4 Contents Broad Form – specifically for renters to protect their contents and provide liability protection.
HO-5: Homeowners 5 Comprehensive Form – a premium policy that protects new, well-maintained homes. Like HO 3, it protects against all perils, except those specifically excluded.
HO-6: Homeowners 6 Unit-Owners From – covers personal property, liability, and improvements to the owners unit.
HO-8: Homeowners 8 Modified Coverage – Policy for older homes, with similar coverage to HO 02. It only covers cash value.
HO-3 provides appropriate coverage for most homeowners. However, if your insurer offers HO-5, and you can afford the premiums, I say go for it.
Secondly, understand your property and liability limits. For property, insure up to 100% or more of the replacement cost of the asset. For liability, get enough coverage to protect your assets and income.
Lastly, know what your policy doesn’t cover. Many policies don’t cover the loss of pets, cap the amount of jewelry insured, or for condo owners, wall coverings, appliances and fixtures. You can buy riders to make up for coverage you want but may not have.
Auto Insurance: Insuring against the loss of use of your vehicle and/or protecting against your personal liability in an accident.
Most states require this insurance, although many people are underinsured without knowing it. Coverage includes liability, personal injury protection, collision, comprehensive, and uninsured or underinsured motorists. You can also spring for optional provisions like car rental, travel expenses, and emergency roadside service.
When picking the amount of liability protection. you likely have a minimum amount required by your state. (You can find your minimum coverage here.) However, as with homeowner’s insurance, you should purchase enough to protect your assets and total net worth, if someone were to sue you.
For most middle income families 100/300/100 should meet your needs in the beginning. You can get similar amounts of coverage for underinsured/uninsured motorist coverage as well.
Married couples, men in particular, save money because in the eyes of insurance companies, married men get lower rates than single men. Additionally, many companies offer multi-line or multi-car discounts for families with more than one vehicle.
You definitely want both comprehensive and collision if you have financed a vehicle. (You don’t want to be stuck with no vehicle and a loan payment.) And I suggest keeping some collision and comprehensive, even if you own your vehicle outright
If you find that your wealth and/or income require larger than a 250/500/100 limit, you should ask your insurer about a personal umbrella policy (umbrella policy, for short). This policy can extend your liability coverage anywhere between $1 million to $5 million, if needed. In addition, it applies to potential liability from a home or boat incident.
Disability Insurance: Insuring again the risk of long-term illness or injury.
This insurance protection may be the most underutilized form of risk transfer, despite the fact that about one in four 20-year-olds will become disabled before they retire. In addition, a disabling accident occurs once every second in the U.S and 18.5% of Americans are disabled.
Most disability policies cover 50-70%% of your lost income. The lack of 100% reimbursement is supposed to incentivize you to go back to work as soon as possible. But if you can’t, you can purchase additional riders that will allow you for automatic increases without a medical exam should your income increase and will allow inflation increases should you need to receive benefits.
You can choose from both short-term and long-term disability. Short term benefits usually last 10 to 26 weeks. If you’re going to be out longer than that then you will need to purchase a long-term disability policy. This is especially crucial for married couples who likely have another person depending on their income and whose expenses will increase on the whole from a disabled spouse.
Two last things to consider: 1) pay your premiums after tax, so the benefits are not taxable to you if you receive them, and 2) consider a retirement protection policy, as a supplement to your disability policy in order to protect your retirement in the case of a long-term disability.
Life Insurance: Insuring against the loss of income due to a death in the household.
Money will never replace the joy and love people bring into your life. However, having to deal with a financial loss (especially the loss of a breadwinner) on top of the personal loss can be devastating. As you’ve guessed by now, it’s more crucial for couples who have each other and/or dependents relying on the lost income. Luckily, the amount of coverage may lessen by having another person who works.
You have to option of two types of policies – term and permanent. I’m a firm believer in just buying level-term life insurance. Term policies cover you for a specific period of time – usually 10, 20, or 30 years. In return, you pay a level premium (the amount you pay the insurance company for the policy) and get a fixed death benefit (the amount the insurance company pays your beneficiaries if you die while the policy is in place).
I like to think of it in terms of winning a bet. If you die during that specified time frame, your beneficiaries win because they receive the insurance proceeds. If you don’t die, the life insurance company wins and gets to keep the money you paid in premiums.
Having the right type and amount of insurance is crucial to building a solid financial foundation. Don’t ignore this part of your plan until it’s too late.
How to Navigate Filing Your First Joint Income Tax Return
It’s that time of the year again. The tax deadline is a little less than a month away Remember that the deadline is April 18th this year because April 15th is a federal holiday. And with the explosion in same-sex marriages, this may likely be your first year filing a joint return.
Being the tax nerd that I am, filing a joint return was one of the most significant signs that my new marriage was a reality. As a married couple, you must file either a Married Filing Jointly (MFJ) return or Married Filing Separately (MFS) (with the exception of filing Head of Household if you’ve lived apart for the last half of the year and have a dependent). In the end, nothing says married like having to file a joint income tax return.
I’ve already received questions about some of the nuances of filing a joint return, so today I want to cover some of those questions and how to navigate the different issues as you file for the first time.
What is the Marriage Penalty or Bonus?
I’ve already written quite a bit on the marriage penalty and the marriage bonus, so I won’t rehash everything now. It’s the most common tax issue that comes up when a married couple deals with their taxes for the first time. In short, you may incur a bonus (i.e., lower tax liability) by combining two incomes or you incur a penalty (i.e., higher tax liability) when combining your incomes. The determining factor usually rests on the similarities in income. The closer the incomes, the more likely you will incur the penalty. The more disparate the incomes, the more likely you will get a bonus.
Below is a simple example of how the bonus and penalty plays out on $100,000 of income for 2015. This example assumes taking the standard deduction and not having dependents. The impact also changes the more income and deductions that you have.
Tax Impact on Combined $100,000 Salary for Married Couples
100% income earned by one spouse
Tax due when filing MFJ - $11,438
Tax due if filing separate, individual returns - $18,219
Difference in total tax - $6,781
90%/10% Split
Tax due when filing MFJ - $11,438
Tax due if filing separate, individual returns - $15,351
Difference in total tax - $3,913
80%/20% Split
Tax due when filing MFJ - $11,438
Tax due if filing separate, individual returns - $14,213
Difference in total tax - $2,775
70%/30% Split
Tax due when filing MFJ - $11,438
Tax due if filing separate, individual returns - $13,213
Difference in total tax - $1,775
60%/40% Split
Tax due when filing MFJ - $11,438
Tax due if filing separate, individual returns - $12,213
Difference in total tax - $775
50% 50% Split
Tax due when filing MFJ - $11,438
Tax due if filing separate, individual returns - $11, 438
Difference - $0
Why Not Just File Married Filing Separately if You Incur a Penalty?
I also received a very astute question from a reader who found out that he and his wife will incur the marriage penalty. They itemize their deductions, instead of taking the standard deduction, so he thought they would be better off filing separately with him taking all of the itemized deductions on his return and his wife taking the standard deduction on hers.
Unfortunately, it doesn’t quite work that way.
If you decide to file Married Filing Separately, you both have to take the same type of allowable deduction. In other words, if one spouse decides to itemize and take all of the deductions, the other spouse still has to itemize as well, even if his or her itemized deductions are lower than the standard deduction.
In addition, you may limit or lose some important credits like the child and dependent care credit, the adoption credit and the Education Credits (American Opportunity or Lifetime Learning) by filing separately.
Most of the time, it’s going to benefit you to file jointly. So make sure you carefully consider and discuss with your tax preparer whether filing separately is right for you.
What if My Spouse Has a Tax Problem?
One good reason that a married couple wouldn’t file jointly would be if one spouse owes back taxes. For instance, if you have a spouse that is self-employed and owes for several back years because he or she didn’t pay estimated tax payments, you may have any current joint refund obtained applied to that debt. In this situation, it might be more advantageous, despite paying more total tax by filing separately, to do so to keep more money in your pocket.
There is another way around this issue as well. If you know that your spouse has a tax problem, but you still want to file a joint return, you can file form 8379 Injured Spouse Allocation with the return (or after if you realized too late) to have the non-liable spouse’s portion of the tax refund given back to him or her. This way you still get any potential bonus of filing jointly and get to keep some of your refund. You can even do this in community property states where each spouse is entitled to half of their spouse’s income.
Keep in mind that injured spouse is different from innocent spouse. Innocent spouse relief relieves a spouse from responsibility for paying tax, interest, and penalties, if his or her spouse (or former spouse) improperly reported items or omitted items on your tax return. The rule for this get a bit sticky because of knowledge requirements, so I will leave the details on this for another post. I just want to point out that these are not the same thing and require different forms and procedures.
Can We File Amended Returns?
Lastly, I want to cover a topic that specifically applies to same-sex couples who may have been married before the Supreme Court outlawed same-sex marriage bans. After Windsor, the federal government recognized union as of the date you were married, as long as it was performed in a state that recognized your marriage (despite whether you live in one that recognized the marriage). This recognition allows couples to go back and amend their returns as joint filers. For those couples, they have the option, not obligation, to amend their prior year returns. In other words, you could amend your returns to a joint filing and maybe take advantage of a marriage bonus.
The rules for amending your tax return are pretty straight forward. You can only claim a credit or a refund within three years from the due date or from two years from when the tax is paid. Therefore, if you were married in 2010, as of October of 2013, you could amend your 2010, 2011, and 2012 tax returns. Unfortunately, if you are just reading this rule now in 2016, you’ve lost the advantage of filing your 2010 and 2011, unless you qualify for the second prong of the test. You can meet the second prong if you owed back taxes and made a payment within the last two years. For example, if you owed on 2010, but you just now paid the balance, you could still go back and file the return for a refund if it benefits you.
The form you need to amend your return is the 1040x. You will need to provide this form plus a correct 1040 return when you file. Additionally, you can’t efile this form, you have to mail it. Because of a time restrictions on getting a refund or credit, you have to hop on this situation right away, if this has happened to you. You should also consult a tax professional to make sure you have covered all of your bases in filing the right forms. The IRS is taking an extraordinarily long time when processing these returns, so its best to have all of your Is dotted and Ts crossed when they finally review it.
For future reference, there are a couple of different nuances when it comes filing amended returns for married taxpayers. You have three years to amend a tax return if you want to go from Married Filing Separately to Married Filing Jointly. However, you can’t ever amend from Married Filing Jointly to Married Filing Separately if the due date for the return has passed. I’m not sure why this rule exists, but it is the law of the land at this point. So make sure you understand that when filing.
I hope that overview was helpful in giving you foundational knowledge for filing a joint return. Filing the return can be tricky, so make sure to consult your tax professional if you have additional questions about your return. Happy filing!
Five Essential Questions to Ask When Planning Your Retirement
Many of the most common questions that I get from young, married couples concern how to save for retirement. Saving for retirement, like getting married, seems like an adult thing to do. Our elders have told us to start saving sooner rather than later, but they haven’t mentioned many of the practical aspects of how to begin. How much do I need to save? What’s the best way to save? Are there specific companies I should use?
The lack of direction often leads to paralysis or haphazard investing decisions. In a recent GoBankingRates survey, the site found that one third of Americans report that they have $0 saved for retirement. Additionally, another 23% have less than $10,000 saved. That’s 56% of Americans having less than $10,000 saved for retirement. That just won’t cut it.
Whether you’re in your 20s, 30s or beyond, making a plan for your retirement will become one of the most important financial moves that you make. Today, I want to get back to the basics and give you some practical steps to start planning for your retirement. When it comes to creating your plan, you should consider the following five essential questions.
What Do You Want?
Most people’s initial question to me is how much money should I save or should I have saved at this point. That’s an impossible question for me to answer without knowing what you want in your retirement. Do you want to live the same lifestyle you have now? Do you want to take road trips? Do you want to start your own side business?
Your initial step in your planning should involve thinking about and writing down what you imagine for yourself. You can even take it a step further and have different goals:
Maintaining your current standard of living
Maintaining your current standard of living with a few perks
Funding your fantasy retirement.
Don’t limit yourself here. Discover what really drives and appeals to you and take away any judgment of whether it’s feasible. You might find that your ideal retirement is closer than you think.
What Do You Have?
Next take an inventory of what you have. This step often makes people uneasy because facing where they are causes feelings of inadequacy. But you have to know where you are to know where you’re going and how you will get there. And as you refrained from judging your retirement dreams, use the same uncritical lens when discovering where you are.
Start with a quick personal balance sheet. What are your assets? What are your liabilities? Your assets include things like a house, car, bank accounts, current retirement accounts, etc. Your liabilities are debt like your mortgage, student loans, credit cards, etc. You calculate your net worth by subtracting your liabilities from your assets.
You will also need to perform this analysis with your income and expenses. It’s essential to know what is coming in and what’s going out to see what you have to work with as far as creating your plan.
How Much Will it Cost?
Now that you’ve figured out what you want and what you have to work with, you can start thinking about how much it will cost you to get to your goal. The easiest way to begin this process is looking at what it costs you to live now, based on the income and expense analysis that you just did. You can then use an inflation calculator to see what those costs will grow to and estimate what additional costs you may have or may be able to get rid of before you retirement.
For example, your health care costs are likely to be higher. You may also want to increase your budget for travel. Alternatively, maybe your costs will go down substantially because at that point you will have paid off your mortgage. Having a detailed list of expenses allows you to manipulate the figures as you see fit.
You can also use an online calculator such as the one on Bankrate or CNN Money and base your projections on the amount that you need on your household income. A common starting point is 70 to 90% of your gross income. However, having more general numbers like this make it a little harder to adjust specific expenses that may increase or decrease at that time.
Can We Get There?
The three prior steps have built the foundation of your plan. You know what you want, you know what you have, and you know how much it will costs you to get to where you want to be. Do these three pieces fit together? In other words, can you actually get to where you want to be based on your current situation?
You can again use an online calculator, like the ones I mentioned above, to see if you can actually get to where you want to be based on your current savings rate and anticipated rate of return.
If you’re not going to make it, you will now have to wrestle with either adjusting your current circumstances (e.g, save more, cut your current expenses) or changing your goals to fit your current situation. I’m a big believer in having balance in your life. So I wouldn’t suggest living miserably for 30 years just so you can have your fantasy retirement. In addition, I wouldn’t suggest living only in the now in the hopes of merely surviving in retirement. The actual balance is different for everyone and only you can decide what is most important to you.
Where Do We Invest
The last step is determining where to invest your money now that you have a plan in place. If you haven’t read my previous posts about investing take some time to learn the fundamentals of that process before you get started. In short, investing comes down to three essential keys – controlling costs, having the right asset allocation, and diversifying your investments to hedge against unnecessary risks. Investing in diversified index funds can help you easily accomplish all of these steps in one investment.
As far as vehicles to invest in, couples have the distinct advantage of getting to pick and choose the best ones based on the options available to two people rather than one. Start with looking at your workplace retirement accounts – 401k, 403B, 457 plans. Your employer may match your contributions, which will automatically give you the highest rate of return on your money. Keep an eye out, though, for those plans that may be costly or not give you good places to invest.
Next you can look individual retirement arrangements (IRAs). You can set up your own IRA through discount brokers like Fidelity or Vanguard. These vehicles often give you more options when choosing your investments and allow you to contribute up to $5,500 in each account. They also offer flexibility in with spouses that don’t work, as well as pre- and post-tax options. The self-employed also have additional options with solo 401ks and SEP IRAs.
Parting Words of Encouragement
I know this may seem like a lot of information already. So I want to offer a few words of encouragement when it comes the creation of your retirement plan. Remember that creating a plan is a process. You should take time to do each of these steps and sit with them for a little while. Trying to do everything at once will only overwhelm you and likely cause you to burn out.
In addition, your goals, desires, and circumstances will undoubtedly change as time goes on. The great thing about having a plan and knowing your target is your ability to adjust as time goes on.
Overall, creating a plan can be a fun but intimidating process. But taking this step and getting started will be one of the best decisions you’ve ever made.
