Maximizing Life In Retirement

By Shelley Murasko

“But why think about that when all the golden land’s ahead of you and all kinds of unforeseen events wait lurking to surprise you and make you glad you are alive to see?”

–Jack Kerouac, On the Road

As a financial planner, I often have a front-row seat to what clients are doing with their lives. For some, life is a constant struggle regardless of how much money and time they have. For others, financial resources might be tight, but they work tirelessly to live rich lives. They succeed by focusing on the things they highly value, rarely letting fear, busyness, or ego get in the way of their higher priorities. And between these two lie an endless variety of other scenarios.

On the road of life, the critical matter is whether we put enough of our time and energy into the things that matter most. By occasionally assessing priorities, we’re able to focus attention and time into the stuff that really makes a difference. Despite the current challenges in our world, such as wars, politics, and inflation, we carve a way through the noise to live fully according to our own definitions.

Getting the Most Out of Retirement

While we make time for our most important values in our working years, it’s even more relevant to maximize precious moments in retirement. This is especially important when it comes time to acknowledge that it might be the last quarter. Some will reach this stage of life where earning money no longer matters, and they will continue to work joyfully. Others will emphasize other values like spending time with friends and family, donating time or money to charities, being a good neighbor, and teaching other generations. Ultimately, these efforts may become a priority over hours at a job.

I’m often inspired to learn how people are maximizing their time in retirement. In this article, I’ll share a story from my mentor about how he incorporated his personal values in retirement to experience the trip of a lifetime. 

This individual and his wife—I’ll call them Bill and Kelly to retain their anonymity—headed off on a 53-day road trip. Their journey took them on Route 66 from California to Chicago, up through Wisconsin, over to Yellowstone National Park, up through Canada, and then back to California. Along the way, they also managed a side trip to Greece. 

Bill and Kelly are in their early 70s and have been retired for several years. They cherish their extensive family that is spread across the country. They also have a passion for learning, history, community, investing, and the great outdoors.

“Retirement has its privileges, and I am grateful for the freedom,” said Bill. “I still remember those days when work would get in the way of the life I wanted to live.”

Clearly, having the time and energy resulting from retirement gave them the freedom to embark on their unforgettable odyssey. Prior to this cross-country and cross-continental excursion, Bill and Kelly spent a great deal of time planning what they had hoped to see and experience.

Embarking on the Trip of Their Dreams

For years, Kelly had dreamed of driving the famed historic Route 66 highway. To prepare for the trip, she gathered maps and books with every highlight from Santa Monica Pier to Chicago. She then spent two years planning the trip, arranging every stop, activity, and hotel stay.

Most days the couple drove only a few hours, allowing ample time for spontaneous adventures. This included enjoying a parade in Santa Rosa, New Mexico, and watching fireworks in Dubois, Wyoming.

While the adventurous couple crossed the country, they followed Route 66 most of the time. Often this meant cruising along at 50 mph on a two-lane highway through one gas station towns. They frequently stayed the night in retro hotels, many in dire need of renovation, which provided fodder for the stories they told friends and family later.  

While traveling from state to state, Bill and Kelly came across some of the nicest people they’d ever met and were reminded of how many good people there are in the world. Whether it was a helpful person at a motel desk or friendly travelers they met over breakfast, most everyone was kind and generous with their time and information.

Along with meeting new people, Bill and Kelly made several stops to visit family. In Kansas, Kelly attended a family reunion with 101 family members from all over the U.S. The couple even flew their two daughters to Kansas City to join the fun, and everyone spent a day at the community center of Olivet, Kansas, population 74. While the older generation talked, the kids played in the yard. The local farmers’ wives cooked up their favorite potluck specialties, so the visitors could enjoy a grand feast.

Afterward, Bill and Kelly dropped one daughter off at the airport who needed to return to work. Their other daughter joined them on their road trip as they traveled to Chicago and then Wisconsin, just in time to watch their granddaughter graduate from high school. 

From Greece to Canada and Everywhere in Between

Though they had already traveled thousands of miles, Bill and Kelly were about to embark on the longest leg of their journey yet. Two days after the reunion, they flew from Chicago to Greece with their 16- and 18-year-old granddaughters. The goal of this side trip was to provide the girls with an opportunity to taste authentic Greek food, receive an ancient history lesson, and experience a different culture and way of life.

When they returned to the U.S., it was time to head home. Since Kelly had planned the entire trip to that point, it was Bill’s turn to determine how they would get back to California. To keep things interesting, Bill’s travel planning included some spontaneous twists and turns.  

While he had hoped to visit Glacier National Park on the drive back, Bill had been unable to get lodging reservations in the park despite months of trying. Instead, he decided they would head west toward the park, planning one hotel ahead at a time. That decision allowed them to visit numerous must-see sites, including Mount Rushmore, the Black Hills, Custer State Park, Grand Teton National Park, and Yellowstone National Park.

Back on the road, Bill received some good news. He was finally able to secure lodging in Glacier National Park. He and Kelly spent four days exploring the beautiful mountains, alpine meadows and forests, waterfalls, and glaciers at the famous Montana destination. They went on tours, hiked, and even got a firsthand look at the local wildlife, including four bears! The experience enabled Bill to put into action his life’s motto: “The mountains refresh my soul.”

The couple was now a mere 35 miles south of Canada. After discovering that Banff National Park in Alberta, Canada, was only about 5 hours north, Bill decided it was time for another detour.

He and Kelly crossed the Canadian border and continued north. During their provincial journey, they witnessed breathtaking scenery in every direction. Since both Banff and Glacier National Parks reminded Bill of Switzerland, which he has visited before, he is now eager to make a return visit very soon!

After crossing back into the U.S., Bill and Kelly put on their blinders and headed southwest toward California. They wrapped up their grand expedition with one final stop before returning home: a two-night visit with their daughter in Fresno.

The Joy of Traveling

Bill and Kelly’s trip reminded me of how much joy can result from travel that focuses on personal values. My mentor and his wife took the opportunity to visit old friends, reunite with family, and meet new companions along the way. They incorporated their love of travel, learning, and history into each leg of their journey. They even took the opportunity to share some of their favorite interests with their grandchildren. By combining good planning with a bit of spontaneity, they enjoyed the trip of a lifetime.

Summing up the experience, Bill said: “I am grateful every day to be where I am. Most importantly, I have my health. The next item of importance is a response Warren Buffett made when he was asked how he would measure success. His answer was, ‘By how many of the people you want to have love you actually do love you.’”

With this in mind, may you find inspiration from your loved ones as you head into the holiday season. May you also find the time to focus on your priorities, putting your love, energy, and maybe even a little money into them.

As Robin Williams once said: “Please don’t worry so much. Because in the end, none of us have very long on this earth. Life is fleeting. And if you’re ever distressed, cast your eyes to the summer sky when the stars are strung across the velvety night. And when a shooting star streaks through the blackness, turning night into day…make a wish and think of me. Make your life spectacular.”

Why Stock Picking Is So Hard

By Shelley Murasko

Over two-thirds of mutual fund managers actively researching and picking stocks fail to beat the broad S&P 500® Index in any given year. Is this because financial managers are idiots and need to go back to MBA school?

Most likely, no. The fact is that it’s nearly impossible to consistently pick individual companies that will beat the performance of the stock market. As the following examples show, predicting the next stock winner is an exceedingly difficult task.

More Important Than the Internet

In 1999, an American company launched a product that was expected to sweep the world by storm. Apple co-founder Steve Jobs called it “the most amazing piece of technology since the personal computer” and offered $63 million to back the company.

Jeff Bezos, the founder of Amazon.com, said the “product was so revolutionary, you’ll have no problem selling it.”

John Doerr, the world’s most successful venture capitalist, pumped $80 million into it and bet it would be the fastest company to reach $1 billion in sales. He also predicted that it “would become more important than the internet.”

The inventor of this product, Dean Kamen, was described as a modern Thomas Edison. He already had a track record of remarkable breakthroughs, including a portable dialysis machine and a portable drug-infusion pump. Kamen stated that the product “will be to the car what the car was to the horse and buggy.”

Unfortunately, all these expectations were wrong. The Segway®, a two-wheeled personal transporter, limped along for about fifteen years but never reached the predicted level of success. Production was ultimately ceased in July 2020 when the 21 employees working at the Bedford, New Hampshire, plant were laid off.4

Disney’s Folly

In 1934, cartoonist Walt Disney became dissatisfied with producing cartoon shorts. He believed that a feature-length cartoon would be more profitable. When news leaked out about the making of his debut film, Snow White and the Seven Dwarfs, most in the film industry predicted the company would go bankrupt. They referred to it as “Disney’s Folly.”1 Even Disney’s wife said that no one would pay a dime to see animated dwarfs for 80 minutes.2

During production Disney faced many challenges, including limited technology that made it hard for animators to draw human characters in a way that would elicit emotion. The film cost $1.5 million to produce, which was three times over budget. Disney eventually had to mortgage his house to help finance the film’s production. All told, Snow White required the work of 750 artists, 32 animators, 25 background artists, 102 assistants, and the creation of thousands of drawings.3

“It was prophesied that nobody would sit through such a thing,” Disney said. “But there was only one way we could do it successfully, and that was to plunge ahead and go for broke: shoot the works. There could be no compromising on money, talent, or time, and this was at a time when the whole country was in the midst of a crippling depression.”3

Snow White and the Seven Dwarfs was clearly a project that could have finished Disney for good. Instead, it went on to change cinema. The film premiered to rave reviews on December 21, 1937. Snow White won numerous awards, including an Oscar for Disney. Today, it ranks among the top ten most profitable films of all time.

The Difficulty of Predicting the Next Microsoft®

As it turns out, it’s incredibly difficult to predict how a new product or service will evolve over its life cycle. There are simply too many factors needed for an accurate forecast, including competition, market demand, regulatory landscape, supply chain challenges, employee retention, and company leadership.

When selecting a stock, you’re picking a company you partially own to make money on the organization’s profits and growth. Thus, the key to picking a winning stock is successfully predicting how the company’s ideas are going to pan out over time.

As demonstrated above, knowing how a new product or service will unfold is nearly impossible even for the experts.

In addition, picking these great ideas can result in hefty spending on research and taxes. Doing so could greatly erode return, making it hard to outpace the low-cost index fund that owns the whole basket of stocks.

What’s an Investor to Do?

One option is to avoid individual stock picking with your “serious” money: the funds you’re counting on for retirement, sending kids to college, or funding your kitchen remodel. Instead, invest in a broad-market, low-cost index fund that not only puts you on the path to stock market returns but also gives you a much greater degree of reliability for achieving your financial goals.

If you decide to give stock picking a try, carve out no more than 10% of your investment dollars. Measure your performance versus an index, then assess whether it’s worth the time and effort.

Long story short is that, except in very rare occasions, no one is knowledgeable enough to reliably beat the market over an extended period with individual stock picking. When life goals require certain returns, choosing an inexpensive, well-diversified fund is likely going to deliver you more dependable results as you head toward your desired future. 

Sources:

1.       Wikipedia contributors. “Walt Disney.” Wikipedia. Retrieved from https://en.wikipedia.org/wiki/Walt_Disney.

2.       The Daily Coach staff. “Walt Disney’s Unique Vision.” The Daily Coach. Retrieved from https://www.thedaily.coach/p/walt-disneys-unique-vision.

3.       Lambie, Ryan. (Feb. 8, 2019). “Disney’s Snow White: The Risk That Changed Filmmaking Forever.” Den of Geek. Retrieved from https://www.denofgeek.com/movies/disneys-snow-white-the-risk-that-changed-filmmaking-forever.

4.       Wikipedia contributors. “Segway Inc.” Wikipedia. Retrieved from

5.       https://en.wikipedia.org/wiki/Segway_Inc.#:~:text=Independent%20years-,Segway%20Inc.,to%20customers%20in%20early%202002.

Risks

This article is being shared for educational purposes and should not be misconstrued as direct financial advice. Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. Diversification does not eliminate the risk of market loss.

The Five Biggest Financial Challenges for Women

By Shelley Murasko

Women have all the traits needed to succeed financially. They’re inquisitive, focused, diligent, connected, and collaborative. Yet a mere fifty years ago, women were not allowed to have credit cards or home mortgages.

Today, they have equal access to most financial instruments. In fact, women controlled one-third of the U.S. personal invested wealth in 2020. By 2030, it’s projected that they will control more than two-thirds.1

Furthermore, women are now the primary breadwinners for 65% of households. They’ve gained ground in almost every profession3 and now hold 52% of management positions. In addition, women are starting businesses at over twice the rate of their male counterparts.2

With all this financial success and progress, women still tend to stand in their own way when it comes to money.

In this article, I’ll cover five financial challenges women face and how to overcome them. While there are exceptions to these generalities, being aware of the challenges is the first step to making a difference in your financial life.

Financial Challenge #1: Throwing Away Your Financial Power

Despite the many strengths women possess, they can lack awareness of their financial situations. In most households, women defer major financial decisions to their male counterparts.1 Most don’t even like to discuss money.

This could stem from the lessons they learn as children. From a young age, many girls are instructed to be “cautious” with money, while boys are taught to be “smart” with money. This approach has led many women to question their ability to manage their finances with confidence.

These days the average household carries $8,590 in credit card debt4 and has saved an average of $182,000 upon retirement between ages 60 to 69.5 Since retirement planning is more do-it-yourself than ever before, there’s a need for everyone to participate.

Taking back your financial power starts with getting educated. Like Ben Franklin once said, “Investment in education is the best investment.”

Getting started is easy. You’ll find numerous courses online that you can take for free. Here are five worthwhile ones to consider:

·         edX’s Finance for Everyone: Smart Tools for Decision-Making

·         edX’s How to Save Money: Making Smart Financial Decisions

·         Brigham Young University’s personal finance courses

·         Udemy’s Personal Finance 101: Everything You Need to Know

·         Purdue University’s Planning for a Secure Retirement

Your local library or online bookstore is also a great place to expand your financial knowledge. Check out these personal finance books:

·         The Investment Answer by Daniel C. Goldie and Gordon S. Murray

·         The Elements of Investing by Burton Malkiel and Charles D. Ellis

·         Wall Street Journal. Complete Personal Finance Guidebook by Jeff D. Opdyke

·         Smart Women Finish Rich by David Bach

As women become educated about their finances, they’re more likely to take a seat at the financial table.

Financial Challenge #2: Overcomplicating Retirement

Whether it’s a lack of knowledge or a need for perfection, women tend to avoid retirement planning.

The first step is understanding how much you’ve saved and how much you’ll need to retire. To get a quick estimation, you can use a helpful tool like the T. Rowe Price® Retirement Income Calculator.

Another approach is outlined in Pete Adeney’s article, "The Shockingly Simple Math Behind Early Retirement," on mrmoneymustache.com. He suggests following these steps:

1.       Calculate your annual spending needs in retirement, including taxes in today’s dollars.

2.       Subtract your expected retirement income from #1 Annual Spending Needs, such as social security income or a pension.

3.       Take #2 x 25, or “30” if you’re more conservative with your investments, to calculate the total retirement savings needed.

This simple 1-2-3 approach uses the 4% safe withdrawal rate published in 1996 by the Trinity University finance team — arguably the best study ever done on how to draw money from investments in retirement.

Financial Challenge #3: Overcomplicating Investing

Vanguard’s founder John Bogle famously said, “Investing is simple, yet not easy.” Use the four key elements below as a guide, and you’ll be off to a good start with your investing.

1.       Allocate assets: Divide your money between stocks, bonds, and cash to minimize losses if one or more of your assets performs poorly. 

2.       Invest wisely: Choose high-quality mutual funds to increase your odds of getting good returns.

3.       Keep costs low: Ensure fund and advisory fees are under 1% so you have more cash to invest. 

4.       Be open to change: Systematically make updates to your portfolio over time to optimize your investments.

Notice what’s not on the list? Market timing. Bitcoin. Picking individual stocks.

While these topics are often found in money forums, they turn sensible investors into speculators. Some stock picking might not damage your financial health, but your serious money should be diversified. Sensible investing is not only about realizing a strong investment return but also doing this as reliably as possible.

The books mentioned earlier serve as a useful guide for balancing stocks and bonds. Still not sure where to begin? Consider a target date fund that will automatically allocate your money based on your retirement date.

As far as investment quality and fee management go, use data from investment research firm Morningstar to find top-quality mutual funds. Look for those that carry the analyst rating of Gold or Silver, with fees under 0.5%, to know that you’re in the top 10% of funds in any investment category.

Then remain patient and disciplined. These are two attributes that lead women to become better investors than men. Fidelity offered up this evidence: Over a 10-year period, its female customers earned an average of average 0.4% more annually than their male counterparts.

That may not seem like a lot, but over a few decades it can add up to tens of thousands of dollars or more.6 The reason: women buy and sell funds 50% less often than men.

Financial Challenge #4: Allowing “Thieves” to Steal from You

When you employ poor spending habits, you willingly allow others to steal your hard-earned money. The biggest thief of all is spending without purpose. According to the famous Swedish proverb, “She who buys what she does not need steals from herself.”

Carrying a credit card balance is an act of financial foolishness, though most Americans do it. Many households avoid the idea of a budget like the plague. Rather than paying themselves and building wealth, they buy products and services they don’t need and pay interest to others to do it.

Unless you have an employer pension, you should save at least 10% each year for your retirement. If you’re not able to do this, you shouldn’t be buying new cars, purchasing second homes, or paying for your child’s college education. Saving is how everyday Americans get rich.

Embrace using a spending tracker. For some, pencil and paper and an hour each month is all they need. For others, an online service like mint.com or YNAB is a useful tool.

Another thief we allow to steal from us is taxes. While everyone needs to pay their legal obligation each year, taking advantage of available tax-saving strategies is just smart financial planning.

Along with this, it can be worthwhile to work with a tax professional to ensure you’re filling out forms correctly and not overpaying on your taxes. You may even want to set up an annual tax planning meeting with your CPA to confirm that you’re using all the tax shelters and deductions for which you’re eligible. Another option is to take a tax course yourself to make sure you’re avoiding overpayment.

Financial Challenge #5: Planning for Longevity

People are living longer than those from past generations. While yesterday’s 60-year-old was often resigned to a rocking chair and brittle bones, today’s retirees are riding Harleys and taking up pickleball.

It’s especially important for women to ensure their money lasts well into retirement. That’s because they tend to outlive men by an average of five years.1 For a couple that retires at age 65, the averages show that at least one person will survive to age 93.7 Odds are that it will likely be the woman since four out of five centenarians are female.8

Since women tend to live longer, it’s wise to take these key considerations into account:

·         Do I have the assets and income to live to 100, including lifelong guaranteed income streams that cover all core expenses?

·         Have I mapped out what happens when I can no longer live on my own? Have I shared that with my family?

·         Have I reviewed potential nursing care costs and created a budget to pay for these expenses?

o   The average nursing home stay is 2.5 years; that extends to 10 years for Alzheimer’s patients.9

o   The annual living expenses for retirement center living is $70,000 to $120,000 per person.9

Women have made great strides with money. Soon they’ll own the majority of U.S household wealth. Learning about subjects like saving, investing, and retirement planning will lead women to even higher levels of financial success and security.

They’ll have greater influence within society as they seek ways to use their money with more purpose — whether it be for charitable donations, political contributions, or business investments. Once women have embraced their seat at the financial table, they’ll lead their families and society toward better financial outcomes.

Sources

1.       Pooneh, Baghai. (June 29, 2020). “Women as the next wave of growth in US wealth management.” McKinsey & Company. Retrieved online here.

2.       Davis, Krystle M. (May 13, 2019). “20 Facts and Figures To Know When Marketing To Women.” Forbes. Retrieved online here.

3.       Glynn, Sarah Jane. (March 29, 2021). “Breadwinning Mothers Are Critical to Families’ Economic Security.” The Center for American Progress. Retrieved online here.

4.       Comoreanu, Alina. (June 8, 2022). “Credit Card Debt Study.” Wallet Hub. Retrieved online here.

5.       Parker, Tim. (Dec. 3, 2021). “What’s the Average 401(k) Balance by Age?” Investopedia. Retrieved online here.

6.       Lieber, Ron. (Oct. 29, 2021). “Women May Be Better Investors Than Men. Let Me Mansplain Why.” New York Times. Retrieved online here.

7.       Fidelity Investments. (Sep. 28, 2021.) “Social Security tips for couples: See 3 ways that may help married couples boost their lifetime benefits.” Fidelity.com. Retrieved online here.

8.       Women You Should Know. (April 14, 2014). “4 in 5 Centenarians Are Women.” Women You Should Know. Retrieved online here.

9.       Deseret Mutual Benefit Administrators. (2022). Long Term Care Calculator. Deseret Mutual Benefit Administrators. Retrieved online here.

Taking the Long View with Your Investments

By Shelley Murasko

“Nothing in life worth doing is easy.”

My husband uses this line with our kids — a lot. In fact, he often makes them repeat it back to him.

It’s a slight rephrasing of a longer quote from former President Teddy Roosevelt: “Nothing in this world is worth having or worth doing unless it means effort, pain, difficulty…I have never in my life envied a human being who led an easy life.”

While sometimes I think this idea of “mandatory hardship to get rewards” is a little harsh, it applies to many situations. Parenting. Starting a company. Running a marathon. Losing weight. Learning math. You name it. The more pain, often, the more gain.

The same goes for investing. To capture the expected return, investors must endure difficult periods of volatility and intense emotions caused by a fluctuating market.

And what a difficult period we’ve had this year! 2022 has been one heck of a whiplash for investors.

It was a different story from 2019 to 2021, when investors enjoyed the ride of double digit returns in stocks. Coming into 2022, most investment portfolios were performing well above expected returns. All this growth in stocks happened despite the pandemic bearing down on the global economy.

In today’s market, stocks are now down by 18% and bonds by 6%!

So what’s going on? The answer is that no one knows for sure.

The Feds Rush to Stop the Party

Based on the timing of market movements, such as the 10% initial correction we saw in January, the biggest driver of portfolio declines impacting both stocks and bonds seems to be the Federal Reserve’s strong push to rein in inflation by taking money out of the economy.

What steps has the government taken to drain the punch bowl of abundant money it poured into the economy over the past couple of years? For starters, it raised the federal fund’s interest rate at a historically rapid rate — up 0.75% in just a few months. It also began pursuing quantitative tightening, a cycle where bonds are selling to the tune of $95 billion per month.

This constriction of money within the economy is certainly concerning. However, the driver for such action is the fact that we currently have a very strong economy across most measures: low unemployment, high cash reserves, ample corporate profits, manageable consumer debt levels, and relatively low interest rates, to name a few. Of course, this doesn’t take away the worry that the Fed could lead us into a recession if it accelerates money tightening too rapidly.

Global Conflict

Along with the worries about the Fed’s actions, we now have a war in Ukraine that persists with no end in sight. While the world is working to address the Russian-Ukrainian conflict across many fronts, global supply chains have frayed, oil supply has been threatened, and people around the world are facing higher prices on numerous goods and services.

Insurmountable Obstacles?

While we have plenty to worry about between Fed actions and world conflict, there are other issues that could play a role in upending recent stock gains. These include a heavy debt load in developing countries, stress in commodity markets, lingering effects of the COVID-19 virus, China’s slowing economy, climate change concerns, and fears of chaotic elections.  

We live in a precarious world. Fretting over investment losses has been a fixture of markets over hundreds of years. The financial crisis of 2007 is still in our rearview mirror and many worry that a period like that could come again.

When subprime mortgages sparked a global crisis in September 2007, it sent the MSCI U.S. Broad Market Index into a downward spiral that led to the market crash of 2008. Since then, that same stock market index has soared more than 300%!  While capturing the rewards offered during that time took discipline, courage, and a commitment to a long-term strategy, investors who stayed the course were rewarded with significant returns.

What Should You Do?

First, remember that the world has faced obstacles before. Whether it be wars, poverty, assassinations, or debt, capital markets have eventually carried on.

Also, remember that investors who stayed the course were ultimately rewarded with the expected market returns. Sometimes it took years to get back on track, but those who stuck it out and endured the pain achieved the gains they were pursuing.

There is no perfect investment recipe. A degree of volatility is a part of investing, whether you’re in a conservative or aggressive portfolio. As you look at your finances, make sure your investing strategy still works for your own personal timeline, risk tolerance, and income objectives.

Markets will always be unpredictable, and sometimes volatile, for long periods. We’re in such a time now. Rather than running for cover by selling your holdings when things aren’t looking so good, re-examine your portfolio to see that you’re still holding high-quality positions for the long haul.

Also, ponder ways to take advantage of this down cycle by considering the following actions:

·         Add money to your investments if you have excess cash on the sidelines.

·         Consider investing some of your cash reserves in I-bonds, which track inflation, and are currently offering attractive returns.

·         Expedite your annual Roth conversion where you can now convert on depressed values.

·         Harvest tax losses from your taxable portfolios.

·         Sell off low-quality funds or stocks that were held for tax gain-avoidance purposes.  

By acting on the things you can control, worries and negative feelings may lessen.

Lastly, find ways to mitigate the pain. Perhaps looking at statements or listening to money talk shows less often will give you more stamina for these volatile times. Enjoying other aspects of life may also defuse investment stress.

While the workings of the markets are sometimes painful and somewhat of a mystery, for those who stay in the game and take the long view, things tend to work out.

Whether it’s my husband’s input or Teddy Roosevelt’s, there’s something to be said about embracing the idea that many of the best things in life take patience, courage, and endurance. Sensible investing is one of those things.

Remember we’re here to help! If you need some input or guidance to pull you back from the cliff, don’t hesitate to give us a call.

How to Manage Inflation

By Shelley Murasko

The jury is still out on whether inflation will keep rising and just how long it might last. While there are signs that supply chain challenges are easing, the Russian invasion of Ukraine is likely countering the improvements by pushing oil and energy prices to record highs.

Not only does the cost of oil affect what you pay at the pump, it also trickles down into delivery costs, packaging, and raw materials used to make products.

Here in the U.S., there are steps you can take to manage your money during these difficult times. While the list below is not completely comprehensive, it offers several strategies you can use to reduce your inflation anxiety.

Put the Lid Back on Spending

Now that we’re coming out of the COVID lockdown, we Americans are ecstatic about getting our lives back. This has led to more travel, shopping, entertainment, and eating out than we might normally pursue.

If you’ve been making up for lost time with frivolous spending, however, it might be time to revisit your spending plan. In times of inflation, buying things you don’t really want or need can have a huge impact on your financial health. So, take the time to assess your spending, and trim any waste you uncover.

Track Your Spending

One way to assess your buying habits is to record your spending for a few months. Do this by writing it down on paper, logging it in an Excel spreadsheet, or printing off credit card statements. This will allow you to identify your biggest ticket items. Take this up a notch by using apps like YNAB (You Need a Budget) or mint.com.

By tracking where your money goes, you’ll be more likely to pinpoint areas you can improve and curtail spending that doesn’t align with your values.

Let’s say you bought a subscription for a video streaming service that made sense when you were stuck at home during lockdown, but now you don’t use it much anymore. You may want to consider ending the service so you can keep that money in your pocket. Or if you still use the service and want to continue it, call your provider to make sure you’re getting the best price.

Sell Your Unused Possessions

Another area to look at is your garage. Over the past two years, did you buy items that were useful while working from home, but now are sitting idle? Perhaps you have an e-bike or a work desk that is collecting dust. If you do, now is a great time to sell it at a profit.

What about the extra family car sitting in the driveway? It could provide another opportunity to make some money. With used cars in short supply these days, many are selling for thousands of dollars more than normal. It could be a quick way to fatten your wallet!

Manage the Psychology of Spending

As you buy an item or service, you may want to revisit why you’re making the purchase. We all take social cues from others that urge us to spend more. Just remember that your friends and neighbors don’t care as much about your clothing, makeup, kitchen appliances, or car as much as you think they do. If you actually value an item and have money in the bank to cover the expense, then feel free to proceed. If you’re only considering a purchase because you want to impress others, that’s a big red flag to rethink your buying decision.

Many of us see someone driving a Tesla or Porsche and dream about being the one in the driver’s seat. Yet very few of us look at the driver and think, “Wow! That guy or gal is so amazingly cool.” Therefore, if your goal in buying the latest model is to make an impression on others, pause to consider if it’s really something you need.

Another strategy is postponing a purchase, especially if it’s directly affected by current supply chain issues. Due to the chip shortage, for example, items like cars, appliances, and electronics are harder to come by. Thus, it might make sense to hold off on this type of purchase until supply chain issues resolve. In fact, waiting might lead you to change your mind on the purchase altogether, which could save you from regretting a purchase a few weeks or months down the road.

Scratch the Itch, but Don’t Break the Bank

We all have temptations to buy items that are wants and not needs. Finding ways to fulfill the impulse of buying an experience or product without overdoing it can shave wasteful dollars.

For example, if you love to travel, perhaps going somewhere close to home can satisfy your desire. San Diegans are lucky to live in such an amazing part of the country for local travel.

Whether you plan a visit to Catalina Island, Idyllwild, or Joshua Tree, you’ve got a wide variety of options when it comes to embarking on your next adventure. Interested in local treasures? Consult the Hidden San Diego website at Hidden.SanDiego.net to fill your days with fun!

If you have a longing to buy a certain car, perhaps you can scratch the itch by renting the model first. Websites like Turo.com can be fantastic for finding all types of interesting cars while traveling away from home or cruising in your local area.

Have an affinity for a little retail therapy after a bad day? Find something gently used at Poshmark.com or check out local thrift stores like My Sister’s Closet.

Lock in an Ultra-low Mortgage Rate

As inflation has proven to remain high, the Federal Reserve is on the path of increasing rates with a quarter point raise in March and six more hikes planned this year. This is leading to higher rates on all debt, including mortgages, car loans, and school loans. While buying a new car or house right now is not necessarily a great deal, refinancing the loans you already have could save you thousands.

If you’ve been waiting to lock in a lower rate, now is the time to act as rates seem positioned to go higher. Shaving at least half to a full percentage off your current rate can make this a worthwhile strategy.

Hedge Inflation with Investments

Globally diversified stocks and bonds have produced good returns in periods of high inflation. Investors worried about runaway inflation can hedge their risk with additional investment types, including Treasury Inflation Protected Bonds (TIPS), I-bonds, gold and other commodities.

Of course, hedging can have its own risks, but the tools are there if you choose to use them. As always, selecting one path over another requires clarity about your goals. The best defense may well be what it has always been: a well-diversified, risk-adjusted, goal-based portfolio.

Put More Money to Work

Now more than ever, allowing excess sums of money to sit in cash weakens your purchasing power every day. While it’s wise to have an emergency fund, it’s also a good move to smartly invest your surplus money. This will strengthen your wealth over time.

For working professionals, covering three to six months of your spending needs in cash is a good rule of thumb. For retirees, one to two years of cashflow from your savings accounts is the common recommendation. Ultimately, you should choose whatever amount allows you to sleep well at night. Just know that the downside is a guaranteed loss of return.

Take Stock of Your Income Streams

Part of the inflationary pressure we’re currently experiencing is due to higher wages. Knowing this, perhaps it’s time to negotiate for a higher salary at work. In addition, your pension and social security might increase in line with inflation. Knowing whether this is the case might give you peace of mind.

If you’re unhappy in your work, this year might be the perfect time to pursue a higher-paying job. According to Trade-Schools.net, the fastest-growing jobs from 2016 to 2026 include solar energy technicians, home health aides, physician assistants, nurses, statisticians, physical therapist assistants, and programmers.1 If you’re poised for a change, consider investing in yourself and broadening your career horizons.

Own Your Home

Depending on your local area, this might not be the time to buy a house. Home ownership, however, is considered a smart way to hedge inflation in the long run, especially if you have set yourself up with a 30-year, fixed-rate mortgage that establishes your monthly housing cost for years to come.

If you already own a home and are willing to downsize, moving to a 55+ community, relocating to a less desirable area, or selling your current home and buying a new one might give you a sustainable edge.

If you’re currently renting, know that you’re likely going to see higher fees soon. A prudent move might be buying a condo or small home where you can rent out a room.

No Crystal Ball on Inflation

No one knows for sure what is going to come of the current state of inflation. Rather than worry about what the future may hold, act now on the things you can control to ease your worry during these inflationary times.

If you have questions about this article or need guidance on financial matters, we’re happy to help!

Source:

1. Trade-schools.net. (Apr. 12, 2022). “31 High-Demand Jobs in 2020 for Almost Every Type of Person.” Trade-schools.net.

Are You Leaving Money On The Tax Table?

By Shelley Murasko

It’s tax season! As you work to finish your return, did you know you might be missing out on valuable tax breaks that could save you thousands of dollars?

In fact, a tax break could save you up to 50% of the deduction if you live in a high-income household. This is a result of the high tax brackets that top incomes can hit — 47% or higher in California — as well as the valuable credits and deductions that can be phased out.

Therefore, it’s well worth your time each year to maximize all possible tax breaks. Check out the list below of nine proven tax break opportunities that are often overlooked. Then consider which ones might be right for you. Just be sure to consult with your tax professional before implementing the following concepts as unique circumstances often apply.

1 – Accumulate Money in a Health Savings Account (HAS)

For working professionals, the HSA is the most misunderstood tax shelter. Interestingly, it ranks as one of the best ones out there. Why? It’s the only tax-friendly account that gives a tax deduction going into the account AND when the money comes out for use with health expenses.

When enrolled in an eligible high-deductible, health savings plan in 2022, you can contribute $3,650 as a single filer or $7,300 as a family. If you’re 55 and over, you can also make a $1,000 catch-up contribution.

Ideally, you’ll accumulate money in an HSA and let it build for retirement where it can then be used for Medicare premiums. Along the way, you can access it at any age for medical expenses, from sunscreen purchases to out-of-pocket doctor fees. In the event of a large expense, such as braces or a visit to the emergency room, you can tap your HSA to offset the financial challenge of these one-time expenses.

Most people mistakenly believe they must use up their account balance before the end of each year. While this is true of a Healthcare Federal Spending Account (FSA), it’s not the case with an HSA. Your money remains in your account until you’re ready to use it.

Another misnomer is that you can’t invest the funds that are in your HSA. In most cases, HSAs allow for an investing option once you have at least $2,000 in your account.

2 ‑ Maximize Your 401(k) or 403(b) at Work

Many of my clients truly believe they are maximizing their 401(k). After reviewing their accounts, however, I often find this is not actually true. Here are a few tips for rectifying this.  

If you’re under 50, you can contribute up to $20,500 into your 401(k) in 2022. This is in addition to the allowed employer match. If your employer gives you a $5,000 employer match, for instance, you can contribute an additional $20,500 for a total of $25,500. On top of that, you can bump this up in the year you turn 50 with a “catch-up” contribution of $6,500.

3 ‑ Choose a Roth 401(k) Over a Traditional 401(k)

The share of 401(k) plans offering a Roth savings option grew to 86% in 2020. This is up from 75% in 2019 and 49% a decade ago, according to the Plan Sponsor Council of America.1

The Roth 401(k) popularity does not mean it’s right for everyone, though. It’s best to work with a tax professional to determine if your tax bracket is lower now than it will be in retirement. If it clearly is lower now, then a Roth 401(k) contribution makes sense. If not, stick to the traditional 401(k) option.

Not sure which way the tax bracket will go for you in retirement, even after working with a CPA? Consider tax diversification where you divert half your contribution to the Roth 401(k) and half to the traditional 401(k).

4 – Make a Backdoor Roth Conversion

Ever heard of a backdoor Roth Conversion? This is a Roth IRA contribution that was originally added to a traditional IRA without deduction and then moved into the Roth. A backdoor Roth IRA is a legal way to get around the income limits that normally prevent high earners from owning Roth accounts.

When a regular IRA contribution is not deducted from income due to income limits, a smart move is to convert it to a Roth IRA before the contribution is invested. Since the money went into the traditional IRA after-tax, it’s allowed to be converted tax-free.

This tax opportunity has been getting some headlines lately as Congress debates on whether to remove this option. I hope they don’t as it’s one of the few ways that higher income individuals can smartly get savings into a Roth IRA.

The Backdoor Roth IRA conversion works best when there are no other assets in IRA accounts. If there are, then you will be subject to the “pro-rata rule.” It specifies how the IRS will treat pre-tax and after-tax contributions when you carry out a Roth conversion. Before proceeding, speak with your tax professional to understand your best option.

5 – Set Up a 529 College Savings Plan

Before you know it, your kids, or perhaps your grandkids, will be closing in on the college years. Hopefully you’ll be ready with ample college savings to get them off to a great start! Along the way, you can save some serious tax dollars by growing those college savings in a tax deferred 529 account.

According to Morningstar, the top 529 plans over the past decade include:

·         Utah: Utah Educational Savings Plan (UESP) at my529.org

·         Michigan: Michigan Education Savings Program (MESP) at misaves.com

·         Illinois: Bright Start 529 Plan at brightstart.com

The 529 plan you choose has nothing to do with the state where your child will attend college. However, in certain states you might earn an even higher deduction by using their state plan. Check with your state to understand their incentives. Also, while 529 savings must be used for college costs to avoid the 10% penalty, the savings can be transferred to alternate beneficiaries who are related to the current one. This built-in flexibility makes these plans a great way to pass on a legacy.

6 ‑ Use Tax-efficient Index Funds In Your Taxable Accounts

A capital gains distribution is a payment made by a mutual fund. This includes a portion of the proceeds from sales of the fund's stocks and other assets from within its portfolio. It’s the investor's pro-rata share of the proceeds from the fund's transactions.

You can find the capital gains distribution on your 1099 tax form from your taxable investment account under the dividend section.

Some capital gains are necessary, especially in a year like 2021 that recorded strong stock market performance. Yet you might find the distributions from actively-managed funds to be excessive relative to a low-cost, passively-managed, better-performing index fund.

This is just one more reason why low-cost index funds can make good sense in your investment portfolio.

7 ‑ Take Advantage of Qualified Charitable Distributions

Once you are age 70½, the IRS allows you to distribute up to $100,000 from your IRA tax-free that would normally be a taxable distribution. In addition, this distribution can count toward your Required Minimum Distribution (RMD).

Since there are not many ways to get money tax-free out of your traditional IRA, you might find this to be an appealing way to do so.

8 ‑ Give Money Through Donor-Advised Funds

The U.S. government wants you to give to charity. Thus, they offer many ways to donate your wealth while saving on taxes.

One of the most convenient ways to give to charity as tax-efficiently as possible is to open a donor-advised fund. You can give a lump sum to a dedicated charity account in one year to claim the tax deduction. Then you can distribute the charitable gifts out over several years.  

In a year where you have a lump sum of income from a sale of property or inheritance, you might find the donor-advised fund most useful for bringing your income down to a more reasonable level.

Clients also find it interesting that they can give an appreciated stock to a donor-advised fund. Check with your tax professional as income limits do apply.

9 ‑ Make the Most of Roth IRA Conversions

In a low-income year — perhaps you lose your job or retire early — it’s worthwhile to study whether converting your traditional IRA to a Roth IRA could make sense for your taxable future.

Although you still pay taxes on the amount converted, you avoid paying taxes on that same income in a future year when you are in a much higher bracket.  

Albert Einstein once said, “The hardest thing in the world to understand is the income tax." When he said that, our tax code was likely much simpler than it is today. While paying taxes is a necessary part of being an adult, taking advantage of tax breaks may ease the burden.

Have questions or concerns? Give us a call or send us an email. We’re here to help!

Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. Please consult your tax professional on all tax-related matters.

Sources:

1. Iacurci, Greg. (Dec. 27, 2021). CNBC. "Employers adding Roth 401(k) option at fast clip.” Retrieved from https://www.cnbc.com/2021/12/27/roth-401k-availability-grows-rapidly.html

Navigating the Turbulent Waters of Investing

By Shelley Murasko

“The true investor welcomes volatility ... a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.”

– Warren Buffett

Last summer, I decided to take my preteen kids on an ocean boat excursion. As the children of a father who suffers horrible seasickness on the water, they had never experienced deep sea boating. So on a beautiful morning in late July, we boarded the Catalina Express in Dana Point Harbor and set off for Catalina Island’s gem of a town, Avalon.

With family genetics in mind, I considered the possibility of nausea. Since the trip was only 90 minutes long, I figured we could overcome the turbulence by sitting on the outside deck and focusing on the horizon. Thinking back, I should have devised a better plan.

Although the large Catalina Express boats usually offer a smooth ride, every wave felt like a roller coaster. Within minutes, my daughter was nauseous, and my son was turning green. The sea’s turbulence made it impossible to enjoy the beauty of the day. In fact, friends who had planned to visit Catalina that same day canceled their trip due to the high waves.

Throughout the journey, I kept reminding the kids to stay calm and keep their eyes on the horizon. After all, once we were Catalina bound, our choices were limited. Jumping overboard was the least desirable option, so staying the course as calmly as possible was really all we could do.

As the seconds ticked by like hours, I hugged my kids tightly, continually searching the skyline for the craggy, emerald island of Catalina.

When we finally arrived, the day became quite joyful. We swam at Catalina Beach, hiked the hills, and took a Jeep® tour of the island that included a buffalo sighting. As evening approached and we prepared to head back to the mainland, we were sad the day was over.  

To avoid the discomfort of our previous boat ride, I vowed to be better prepared for the journey home. Before boarding the boat, I picked up some Dramamine® to head off any bouts of seasickness. As a result, my kids were much happier on the return trip. It helped that the evening waters were significantly calmer. Despite our rocky start, the trip was a success and a positive experience we will never forget.

The “Seasickness” of Stock Markets

Managing seasickness is similar to managing volatility during rough stock markets — like the one we’re facing now. The month of January got off to a very turbulent start, continuing into February. At the worst point, the U.S. stock index, the S&P 500, had dipped 12% while the NASDAQ had plummeted by 20%.

During times like these, I often wish I could send some metaphorical Dramamine in the mail with brokerage account statements. It would help clients shake off their lower statement balances more easily. Instead, I’ll share a few pointers for you to keep in mind as we endure this rocky ride.

Human Nature Abhors Loss

First, it helps to acknowledge that we humans are wired to feel distress when we see statements decline in value. Research has shown that investors often react more strongly to investment losses than gains.

In fact, a landmark study in 1995 found that investors felt 2.5 times worse about a $1 loss than the good feelings they experienced about a $1 gain.  1

Volatility Is Part of the Investing Experience

Just like choppy waters are a common occurrence during an ocean boating experience, volatility is inherent in investing. Since there’s risk when investing in businesses, there’s also an eventual return. After all, if this investing stuff was easy, the return would be very low. It’s by taking on stock market risk that we eventually get to experience the reward of capital gains.

Consider this example: From 1984 to 2018, the S&P 500 Index experienced a median intra-year decline of -9.9%.2 In other words, at least once a year, stocks dove about 10%. Yet they still posted positive returns in 29 of those 35 years with a median annualized total return of 13% and an average annualized return of 11%.2

Bear markets are always scary, but only devastating if you sell amid them. There have been 12 bear markets since 1901. The average duration was 22 months with an average decline of 42%.3 Navigating through turbulent waters can be unnerving, too. And yet the only way to get to your destination is to keep on cruising.

Turbulent Waters Won’t Tip Over a Balanced Boat

In case of an emergency or rough seas, it helps to keep a ship balanced. This counters the waves and reduces rocking. That’s why large cruise ships usually house several ballast tanks well under the waterline. These serve as a center of gravity to help maintain steadiness in bumpy seas.

If your portfolio features a reasonable asset allocation—somewhere in the range of a 60% to 40% stock/bond split—market corrections will only affect a portion of your overall nest egg. In addition, sensible retirement portfolios have a ballast just like the big cruise ships, which includes investment-grade bonds of various terms and varieties.

Additional balancing strategies are used for stock-heavy portfolios with much longer time horizons. They commonly include international and REIT funds in the structure to incorporate holdings that correlate differently to the U.S. stock market.  

Remember, This Too Shall Pass

Each generation has faced its share of challenges. While experiencing today’s choppy waters, it’s easy to become overwhelmed by the severity of the moment. History has dealt serious blows before, from the Global Depression to cold and hot wars to presidential assassinations and pandemics.

When viewed through the lens of history, we know that even the worst turbulence has not stopped the inevitable climb of the stock market. Why is this? Humans are remarkably resilient. In our free market system, the human potential for solving problems will eventually rise to the occasion once again. 

Your Future Self Is Counting on You to Stay the Course

Most financial plans—whether saving for college, retirement, or a house—are based on achieving a rate of return that can only be realized by staying the course through stock market waves. Your plan is no different.

Take a page from storied investor Warren Buffett. When asked by CNBC in 2009 how it felt to have lost 40% of his lifetime accumulation of capital, he said it felt about the same as it had the previous three times. The bottom line is that market corrections do not equal a financial loss unless you sell.

What Can You Do Now?

Now that we’ve seen a dip, here are a few sensible steps you can take to ride out the turbulence.

·         Keep a positive view of corrections. If you have high-quality investments, don’t be tempted to tinker with your portfolio. Experience shows that a correction’s “bark” is worse than its “bite.” Long-term investors can view a correction as an opportunity to add new money to proven investment positions at favorable prices.

·         Be less interested in your statements. Checking them once a quarter is more than enough for long-term investors. I am often amazed by the number of people who tell me they check their accounts daily. This is one more way the internet does investors a disservice.

·         Resort to stock market history. Refresh your memory on other near-death investment moments that turned out okay. Two interesting reads in this category are Stress Test (Geithner, 2015) and Boom and Bust: Financial Cycles and Human Prosperity (Pollock, 2010). Check them out to expand your learning.

·         Stay true to your allocation. Though it takes discipline and a degree of courage, check your percentage of stocks relative to bonds. If it’s under target, reallocate more to your stock funds.

·         Invest more. Once you have high-interest debts like credit cards paid off and an emergency fund established, add money to your investments consistently over time. You may even want to take advantage of market dips to maximize results.

·         Control what you can. There are many actions you can take, including a review of your spending priorities, tax planning such as adding to IRAs, or Roth IRA conversions at lower asset values. Another wise move might involve harvesting tax losses in taxable accounts.

Once a portfolio incorporates stocks to attain long-term growth, abandoning them in a during a correction is the worst option. The sea will eventually calm down. Though the ocean might offer calmer waves sooner than the stock market, it’s best to carry on as competently and as calmly as you can. Throughout the investing journey, sensible investors keep emotions in check and their eyes on the horizon.

Do you have questions or concerns? Call us, we are here to help.

Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks. 

Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.

Sources:

1. Hammond, Chris. (2015.) Southeastern University. "Behavioral finance: Its history and its future." Based on a 1995 study by Benartzi and Thaler.

2. Invesco. (Oct. 17, 2019.) Compelling Wealth Management Conversations 2018. Retrieved from https://www.invesco.com/us-rest/contentdetail.

3. JP Morgan. (Dec. 31, 2019.) JP Morgan Asset Management “Guide to the Markets,” p. 14. Retrieved from https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/.

Enough - Finding True Wealth

By Shelley Murasko

Celebrated authors Kurt Vonnegut and Joseph Heller once attended a Shelter Island party hosted by a billionaire hedge fund manager. As the two chatted, Vonnegut remarked that their host had earned more money in one day than Heller had over the entire lifetime of his extremely popular book, Catch-22. At that, Heller replied, “Yes, but I have something that he will never have — enough.”1

The Idea of Enough

In one word, Heller made a profound statement that has resonated for generations. While the Merriam-Webster Dictionary defines “enough” as “equal to what is needed,” the word also implies satisfaction with your current situation. In other words, you have enough if you are content with your money situation, your job title, your home’s square footage, and so on. Ultimately, having enough enables the possibility of other life pursuits and priorities.

We live in a society where the idea of enough is often elusive. To some extent, capitalism thrives on the idea of pursuing “more.” For example, marketing experts estimate that most Americans are exposed to around 4,000 to 10,000 advertisements each day that prompt untold amounts of consumption.2

In addition, the American Dream tells us that any person can reach a successful standard of living by working harder. Although there are debates about whether our current society has a successful standard of living, most people agree that we have quite a bit more today than past generations had.

Take my Grandmother Francis, for instance. She raised six kids on an Iowa farm during World War II. The family had one car (not a BMW), one TV (eventually), one phone, and communal beds in shared bedrooms.

The standard of living my grandmother earned through hard work over decades was attainable in my generation by age 25. Plus, we no longer had to share beds!

The Pros and Cons of Pursuing More

To some extent, pursuing a higher standard of living is part of fulfilling dreams. But where does it end or slow down? Is it possible that we are eventually held captive by our careers or retirement portfolios?

If individuals can cover their basic needs and still set aside savings for present and future financial requirements, then why is it that some people sacrifice well-being or family time in pursuit of more?

The truth is that some people experience great joy from work. Achieving goals can deliver a major dose of contentment. Work can also provide a sense of purpose.

In certain cases, work might be the “family” that some individuals lack in their personal lives. Thus, their network of support and social fulfillment derives from the work environment. Clearly, there are worthwhile reasons to dedicate time and energy toward work and career beyond the basic need for financial stability.

On the other hand, some people struggle with the balance between work and other priorities, especially if they dislike their job or coworkers.

If you’re in this situation, perhaps you’ve woken up in the night worried about employee hiring or customer complaints. Or maybe, after working another 12-hour day, you’ve found yourself looking in the mirror and realizing that you’re missing out on important life moments. Perhaps you’re tired of saying no too often to opportunities like rafting down the Grand Canyon with your friends or taking time to help a family member in need.

Your body may even try to tell you that enough is enough. We’ve all heard about a colleague who developed an ulcer triggered by a stressful working environment or suffered a heart attack while on a business trip.

An imbalance between your home and work life can also affect your personal relationships. Your loved ones might lose patience with your quest for more as they face another evening without you while you’re physically or mentally absent.

Pursuing More for the Right Reasons

In this quest for more in life, be wary of the danger of comparing yourself to others. As former President Theodore Roosevelt once said, “Comparison is the thief of joy.”

I can think of few things sadder than the immense lengths some people will go to impress others. This idea is reflected in the movie, Fight Club, when Tyler Durden says, “We buy things we don’t need to impress people we don’t like.”

For the self-aware, there is acknowledgement that some material pursuits are sought to impress friends, colleagues, and neighbors. Yet our psyches are not as good at recognizing when the new Lexus® is bought merely to make a statement in the employee parking lot or the Botox® injections are deemed necessary to look a certain way at the grocery store.

The Pursuit of Happiness

Many people spend their lives in a never-ending pursuit of happiness. You may write out a list of desires, then start chasing them down. The problem is that each desire, once satisfied, tends to get replaced by a new one. Thus, the cycle begins again.

After a lifetime of pursuit, you could end up no more satisfied than at the beginning. In fact, the quest for money, status, and material goods often makes life more stressful.

Ultimately, the quest for more may prevent you from having the energy or time to build a meaningful life — one spent strengthening relationships, discovering new passions, and digging into the well of deeper learning. In truth, the act of pursuing happiness may become the real thief of true joy.

Thus, it might be worth taking the time to reflect upon what enough really means to you. If your quest for more begins to feel like a prison sentence where you’re locked in a silo of career or money worries, that’s a big red flag!

What Is True Wealth?

If you don’t want to end up like the hedge fund manager at the beginning of this article, take a moment to be grateful for all you have. By doing so, you may be able to see that you likely have enough, and perhaps even more than enough.

In life, true wealth is more than bank accounts and toys and houses. It involves waking up to a day where you enjoy the task at hand.

As Steve Jobs once said, “I have looked in the mirror every morning and asked myself: If today were the last day of my life, would I want to do what I am about to do today? And whenever the answer has been ‘no’ for too many days in a row, I know I need to change something.”

Having control of your schedule, whether it’s working shorter workdays to have more free time in the evening or taking lunch breaks to see your kids’ concert, may be more valuable than a prestigious job title and globe-trotting lifestyle. Being able to say “yes” to important life moments, knowing work can wait, is a critical facet of a balanced life.

Along with more personal time, true wealth often comes in the form of good health. When asked what surprised him most about humanity, the Dalai Lama said: “Man. Because he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the result being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.”

The Satisfaction Mindset

Ultimately, how you think about what you have in life is essential. Satisfaction often boils down to mindset. True happiness comes from the inside, the inner knowledge that you can get through any situation that arises.

It’s a given that the stock market will fluctuate, surprise expenses will happen, and your political party won’t always reign supreme. Rather than allowing yourself to worry about these likely scenarios, learning how to deal with the unknown in a healthy way will allow you to be a happier person.

Author Nick Murray addressed this idea in his book, Simple Wealth, Inevitable Wealth, when he wrote, “No matter how much you have, if you’re still worried, you aren’t wealthy.”  

At the end of the day, it’s important to remember that you’re not your job. You’re not the amount of money you have in the bank. You’re not the car you drive or the clothes you wear. Rather, your personal wealth is made up of many things that don’t cost a dime.

So how can you know if your current mindset is setting you up to live a satisfying life? Take a few moments to consider the following questions: 

·       How grateful are you for what you do have?

·       How thankful are you for those in your life?

·       How often do you show them?

·       How rich are your conversations with your loved ones?

·       How often do you smile at a stranger?

·       How do you make people feel?

·       How generous are you with others and the causes you care about?

·       How often do you extend a hand to a neighbor in need?

·       How do you show up in life?

·       How gentle are you with yourself?

·       How do you view your situation in life?

On the eve of this beautiful new year, forget about creating a list of new goals and to dos for yourself. Instead, accept that you are enough, that others around you are enough, and that you have enough.

Then think about this: If constant striving for more was no longer a central axis of your daily existence, how happy and satisfying would your life be?

Sources:

1.      Booren, Steve. (July 18, 2021). “Improving Investory Behavior: Deciding on Enough!” Denver Post. Retrieved from https://prosperion.us/commentary/improving-investor-behavior-deciding-enough/.

2.      Simpson, Jon. (Aug. 25, 2017). “Finding Brand Success in the Digital World.” Forbes. Retrieved from https://www.forbes.com/sites/forbesagencycouncil/2017/08/25/finding-brand-success-in-the-digital-world/?sh=571602cb626e.

Why Compound Interest Is Your Most Powerful Financial Tool

There’s an often-told story that when Albert Einstein was asked what mankind's greatest invention was, he replied, "Compound interest." There's even one claim that Einstein called compound interest the "8th Wonder of the World."

While there’s some debate on whether Einstein really said any of this, there’s no doubt that compounding interest is an amazing financial tool.

As one Wall Street Journal article emphasized, compound interest is the “great equalizer.” Whether you’re a low-paid cashier or a highly successful investment banker, almost anyone can build great wealth with time and consistent investing.

What is Compound Interest Anyway?                           

Quite simply, compound interest is interest earned over time that gets added to the principal. Because interest builds on interest on the actual money you put aside, it grows at an exponential rate. 

What else grows exponentially? Human populations. Invasive plants. Pandemics. Fires. The mold in my refrigerator. Among these options, I’ll take the compound interest!

Despite several examples of exponential growth in our world, it’s been proven that the human brain has a hard time comprehending what it is and how it works. Which is why several smart people have tried to come up with different ways of teaching compound interest. Here are a few of those examples.

Ben Franklin and His Gifts to Boston and Philadelphia

When Ben Franklin passed away in 1790, he left behind a small gift of $4,000 each to the cities of Philadelphia and Boston. But using his gift came with a caveat: The cities must leave most of the donation invested for 100 years. After that time, 75% could be spent on public works and loans for tradesmen. In addition, the remainder must be invested for an additional century.

After the first 100 years, a portion of Franklin’s gift was used to fund a museum, a library, and thousands of scholarships for apprentices and medical students.

At the end of the 200-year period, the two cities combined still had $6.5 million to spend as they wished. Franklin’s experiment taught an important lesson about how money grows over time.

The Snowball Approach by Charlie Munger

Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway, has likened compound interest to a snowball rolling down a hill. Munger teaches investors to roll a well-packed financial snowball (in his opinion about $100,000) down the longest hill you can find and watch it grow!

In the beginning, the initial lump of “snow” (the principal) may seem small. Adding layer upon layer of additional snow (interest) on top of the lump, however, quickly amasses into a huge ball worthy of becoming the base of a large snowman (your nest egg).

“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things,” says Munger.

Math Lessons on the Golf Course with Tony Robbins

Tony Robbins, master communicator and author of MONEY Master the Game: 7 Simple Steps to Financial Freedom, is known to take people out on the golf course to teach them about compound interest. Here’s how he does it:

Robbins begins by suggesting to his golf buddies that they make the game more interesting by betting a dime a hole.

Since $0.10 multiplied by 18 holes is only $1.80, Robbins’ golfing buddies are usually quick to agree. 

Then, Robbins takes it to the next level. “I have an even better idea,” he says. “How about we start with $0.10 to the winner on the first hole, but then we double the award at each hole?”

A long pause. Most golfers do some quick math, maybe noting that by the 5th hole they’ll have to come up with about $2, and they nod their heads again.

Often it’s not until Robbins beats them on hole 15, and they’re each paying $1,600 to the winner, that the weaker golfers start to realize how badly they’ve been had. By the 18th hole, the winner receives a little over $13,000 from each golfing buddy.

For any doubters, here’s the math:

With this powerful example, Robbins teaches the power of compounding and how it can help you double your money. If you’re a good golfer, you might try this next time you’re out for a round!

How to Double Your Money and Understanding the “Rule of 72”

How often can you expect your savings to double? It depends on one number: the rate of interest or, in investment speak, the “rate of return.”

In investment circles, there’s a formula called “The Rule of 72.” This rule dictates that the number of years it takes to double your money is equal to the number 72 divided by the interest rate. If you can grow money at a 10% rate of return, which has resembled the stock market for several years, you simply take the number 72 and divide it by 10. The result is 7.2, which means it will take 7.2 years for your money to double. At an interest rate of 9%, you can expect to wait 8 years before your money doubles (72/9 = 8). 

If you started at age 0 and lived to age 80, you could double your savings 10 times. Thus, a $5,000 deposit at birth doubled 10 times grows to $5 million by age 80.

If your parents didn’t have the foresight to put $5,000 into an investment account when you were born, you still have an opportunity to use compound interest to expand your wealth later in life. Let’s say you invest $5,000 at age 25. As your investment’s interest builds upon itself, your money will continue to grow until you retire at 65, doubling five times. That $5,000 you started with balloons to $160,000. Not bad for one year’s savings of $5,000!

Holly Hippie vs. Lonny Lawyer by Shelley Murasko

My favorite story is the one where Holly Hippie decides at age 12 to collect cans every day at her local beach. She then invests her daily can-collecting earnings of $5 into the S&P 500 index fund. She does this until age 32 when she decides to stop worrying so much about saving extra. Fast forward to age 65. Holly Hippie now has $1.6 million put aside for retirement, despite her actual savings of only $36,500 (20 years of saving $5/day x 365 days = $1,825/year).

Holly’s new friend across the street, Lonny Lawyer, takes a very different approach and decides to live it up in her 20s and 30s. She always wears the latest fashions, owns the hottest car, and eats out daily at the fanciest restaurants. Lonny doesn’t start investing until age 40. Fortunately, as an attorney, she is now making over $200,000 a year and can set aside $15,000 each year into savings until she retires at 65.

Who do you think amasses the larger amount of retirement savings? If you guessed Holly the Hippie, you’re right! Lonny accumulates $1.2 million, but Holly retires with $1.6 million, a whole $400,000 more! To add insult to injury, Holly actually put $263,000 less into savings. Clearly small amounts set aside for a long time pack a very big punch!

The moral of all these stories is to start saving something, do it consistently at a decent rate of return, and give it as much time as you can to grow. In many cases, the length of time something is invested is just as meaningful, if not more meaningful, as the actual amount saved.

If you’re a 50-something reading this article, you may feel some regret if you didn’t start saving earlier. However, with a lifespan that could go into your 90s, you still have plenty of years to benefit from the incredible power of compound interest. As the saying goes, “You’re never going to be any younger than you are today!”

With all this said, now is a great time to re-examine your financial goals. Especially if you have goals that are creating funding concerns, such as paying for college, covering 30 years of retirement, or buying a car.

By understanding the power of compound interest and the difference it can make in your financial future, you’ll feel more confident about your goals. You may even be more motivated to find money to put aside now that you or your loved ones can benefit from down the road.

For help devising an investment strategy that allows you to get the most out of compound interest, give me a call or send me an email. I’m happy to answer any questions you may have.

Source: McGee, Suzanne. August 6th, 2021. “The 6 Concepts You Should Know to Be Financially Literate” Wall Street Journal. Retrieved from The 6 Concepts You Should Know to Be Financially Literate - WSJ

Making Smart Social Security Decisions to Boost Your Financial Security

As you approach retirement, there may be financial decisions you wish you could go back and redo. Saving more. Starting earlier. Investing in a diversified index fund instead of Enron. Asking for that raise. The list goes on and on.

While you can’t change your past financial decisions, there’s one very important decision you can still get right. That decision is when to claim social security.

Why Is It So Critical to Get Social Security Right?

Social security is the best longevity insurance for most individuals.

Not only does it pay you income for the remainder of your life, but the income paid rises with the cost of living. In addition, social security has tax-favorable treatment in most states. For married couples, it will often be the main source of income for a surviving spouse after the first spouse passes.

In most cases, your social security income is deemed fully available at age 66 or 67, depending on your birth year. After that, it grows an additional 8% for every year you wait to claim up until age 70. You’re eligible to claim as early as age 62. Unfortunately, this is when mistakes are often made.

For a dual-working married couple with decent earnings over a lifetime, waiting until 70 can be the difference between receiving $55,000 instead of $75,000 each year. Once you factor this over twenty years, the incremental dollars really add up!

For the typical American household, the value of social security represents 60% of retirement assets.1.  

Longevity Insurance Provides Long-Term Income

It’s important for you to think of social security as your key longevity insurance. Yet you may have false notions about the program, such as:

·   I can’t retire until I start social security. (Pensions, investments, and other savings can be applied to cover expenses until your optimal claiming age.)

·         I’m afraid the government will take this away. (This has never happened since the program began in 1935.)

·   I probably won’t live past the break-even age of 802. (The average life expectancy for those who have reached age 60 is 85.3 A 65-year-old couple has a 45% chance — almost 50/50 — that one of them will survive to age 90.4)

·   I want to start social security early so I can invest the extra money. (Despite good intentions, most people won’t do this.)

Social security is longevity insurance, plain and simple. It offers protection against running out of money as we age. People rarely do break-even calculations when they buy home insurance to protect against a catastrophic event like a fire. They shouldn’t do them with social security either.

Inflation-Adjusted Benefits Help You Retain Your Purchasing Power

Unlike many annuities that are sold as “longevity insurance,” social security increases based on a consumer price index each year. This annual adjustment has been in place since 1975. In recent years, the increase has ranged from 1–2%. However, for 2022, the increase is on track to be about 4–5%. 

This means you won’t lose purchasing power with this part of your retirement income. For a retirement that can last over 30 years, this is a very big deal! As one financial advisor said to me once, “My annuity payment looks pretty good now, but I doubt it will even buy a movie ticket for me in my 90s.” With your social security income, it will keep you on track to enjoy movies and more.

Favorable Taxation Keeps More Money in Your Pocket

At the federal level, each dollar of social security paid is not taxed completely. Depending on your income, anywhere from 15–50% of the income received will not be taxable.  

Forty-one states, including California, give tax-favorable treatment to social security income. In fact, in California, social security income is not taxed at the state level. I know what you’re thinking: “Wow! A tax break in California.” Yes, miracles do happen.  

Even in states that do tax social security (Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia), there’s usually a tax credit or deduction that offsets the cost of the tax.

Financial Security for the Surviving Spouse

Once a spouse passes, the surviving spouse loses one of the social security incomes. They do, however, get to keep the income that is the higher of the two social security incomes paid out. If your spouse pre-deceases you at an early age, this can be a really big deal! No one anticipates losing their spouse or a chunk of their income at 75, but it does happen. In many cases, it leaves the surviving spouse feeling much poorer.

For example, a woman I know was married to a doctor who passed away at 69. The social security benefits that would ultimately flow to the wife were seriously compromised in two ways. During the doctor’s working years, the doctor minimized W2 income like many business owners are encouraged to do in order to minimize payment into the social security system. Then, upon retirement, he decided to fire up his social security benefits at 62, the earliest age possible. As mentioned previously, this reduced his social security income by over 8% per year between ages 62 through 70. (Important note: spouses claiming spousal benefits do not get increases after their full retirement age of 66/67)

The end result was that the wife had to figure out how to manage on a much tighter budget than expected. It is very rare for me to see a client whose social security won’t cover their core living expenses like housing, utilities, and food. In this case, the surviving wife was left with a suboptimal income.

Optimizing Your Social Security Benefits

As a professional who has reviewed hundreds of social security claiming scenarios, I believe the best way to calculate the optimal claiming strategy is to use social security optimizer software. My favorite is Social Security Analyzer because it does an excellent job keeping up with the legislative changes in social security claiming options. 

While it often makes sense for at least one person in the household to wait until age 70 to claim social security benefits, there are several situations where claiming early might be a smart move. A couple of examples include having a disabled child claiming through you or being single and in poor health.

The software may also identify a welcome situation. I have worked with divorced clients who learned they could surprisingly claim benefits on their deceased ex-spouse while letting their own benefits grow until 70.

Ultimately, deciding when to claim social security should be made within the context of a retirement plan, ideally assembled by a certified financial planning professional who is doing the analysis with your best interest at heart. In addition to enhancing benefits, delayed claiming can open up the opportunity to do Roth IRA conversions in the years preceding social security.

The unfortunate truth is that many Americans mismanage their social security income. Considering that it’s often your largest retirement asset, this decision can have dire costs for both you and your spouse. Before you claim social security, be sure to take the time to get an appropriate analysis done so you can set yourself up for success in your retirement years.

For help devising your social security strategy, give me a call or send me an email. I’m happy to answer any questions you may have.

Sources:

1.        Templin, Neal. (May 9, 2021). “The Biggest Mistakes People Make With Social Security.” The Wall Street Journal. Retrieved from https://www.wsj.com/articles/the-biggest-mistakes-people-make-with-social-security-11620561601.

2.         Peterson, Jonathan. (2015). “How to Perform a Break Even Analysis for Your Social Security Benefits. “Dummies. Retrieved from https://www.dummies.com/personal-finance/retirement-options/how-to-perform-a-break-even-analysis-for-your-social-security-benefits/.

3.        Social Security Administration. (2019). Period Life Table, 2019. Retrieved from https://www.ssa.gov/oact/STATS/table4c6.html .

4.        Vernon, Steve. (June 24, 2013). “Living Too Long Is a Risk!” CBS News (Money Watch). Retrieved from https://www.cbsnews.com/news/living-too-long-is-a-risk/.

Exploring Life Goals While Going Off the Grid

I went to the woods because I wished to live deliberately, to front only the essential facts of life and see if I could not learn what it had to teach, and not, when I came to die, discover that I had not lived...I wanted to live deep and suck out all the marrow of life.”

– Henry David Thoreau, Walden

Back in January, my dear friend and hiking partner Sharon and her boyfriend invited me and my husband Mike to join them on hike. But not just any hike! This was to be a five-day, 35-mile hiking and backpacking trek in the Sierra Nevada Mountains from Thomas Edison Lake to Florence Lake.

It took me about a second to decide that, yes, I wanted to go. Mike, on the other hand, required a few days of thought before he too agreed. After that, preparations went into full force!

Beginning in April, the four of us planned out a training calendar to ensure we increased our mileage and elevation as the trip approached. Hikes during those months took us to Cedar Creek Falls, Mount Baldy, and Nevada Falls-Yosemite. We also scaled El Cajon Peak, a 14,000-foot mountain in Colorado, by way of the Grays and Torreys Trails.

Training hike at Cedar Creek Falls in San Diego. Yes, there are big falls in San Diego in the spring!

Inevitably, there were gaps in training from unexpected family events, illnesses, and busy lives; yet we still managed to log some tough miles prior to the trip.

Gearing Up for the Trip

In addition to conditioning our bodies, we had to do a fair amount of gear research. It was crucial to understand how to pack just enough to get us through the five days without overpacking. The goal was to put together two backpacks per couple that each came in under 30 pounds. Not a small feat considering we needed to carry five days of food, bear cannisters, bedding, and shelter!  

Thankfully, there’s a surplus of online hiking and backpacking information. Between a knowledgeable local blogger named “The Hiking Guy” and four hours of conversations with REI employees, we were able to pinpoint exactly what we needed for optimal packing.

By the time of our trip, we’d invested in the following equipment:

·         Backpack for Mike: $150

·         REI Co-op Quarter Dome Tent: $237 (REI Memorial Day Sale Price)

·         2 REI Co-op Magma Sleeping Bags: $462 (REI Memorial Day Sale Price)

·         Therm-A-Rest® NeoAir® Xlite™ Sleep Pads: $320

·         Sawyer® Squeeze Water Filters: $60

·         Jetboil® Cooking System and fuel: $98

·         Clothes (SPF shirts, quick-dry fabric hiking pants, Crocs™ shoes for after-hike wear, hiking socks, and a gently used Poshmark Puffer Coat): $250

Along with gear costs, we spent approximately $150 on permits and the cabin we planned to stay in after we finished our trek. All told, the grand total came to almost $1,800.

At first glance, spending that much for a backpacking trip may seem excessive. But it was critical to meet our basic needs like food, shelter, and clothing without packing so much weight that we had to quit after the first day.

Knowing that Mike and I can no longer sleep “anywhere” like we did in our 20s, we invested in equipment that we hoped would ensure a good night’s sleep. In addition to emphasizing lightweight, high-quality, sleep-friendly gear, I justified the expense knowing that we would have easily spent $2,000 on a typical week-long vacation. Besides, now we would have great gear to last us for future trips.

Luckily, it was an investment that paid off. And the trip itself? Even better than we expected!

As it turns out, we chose the best possible hiking partners for a challenging trip like this. Billy is a professional musician and nature lover with an uber-calm demeanor. He hails from the Yosemite area and grew up in these mountains, so we were able to tap into his local knowledge during our adventure. Sharon, an Aussie by birth, is his positive, photography-loving, outdoorsy soulmate who is very patient, calm, and stoic. In fact, she quietly endured a bunion and blisters for much of the hike without a single complaint.  

The Journey Begins

We began our journey from the Thomas Edison Lake area with a seven-mile, mostly uphill climb to our first camp spot. This proved to be our most difficult day of hiking. Upon joining with the John Muir Trail, the conditions improved and the steepness declined while we grew accustomed to carrying our packs.

We were amazed by the beauty and utter silence at the Edison Lake Campground.

As the days passed, we began to develop a routine that included:

• ·         Waking to the sunrise and birdsong

• ·         Enjoying coffee and oatmeal while soaking in gorgeous views

• ·         Practicing basic yoga on a granite slab

• ·         Packing gear at a leisurely pace and reviewing navigation

• ·         Hiking 4 to 8 miles with ample stops for water and snacks

• ·         Swimming in nature-made lakes, creeks and rivers

• ·         Setting up the fishing poles

• ·         Settling into camp by mid-afternoon

• ·         Enjoying “happy hour” with tea and hot cocoa

• ·         Setting up camp for the evening

• ·         Communing over freeze-dried meals like pad thai and spaghetti

• ·         Playing cards or watching the sunset while indulging in M&Ms or other “fancy” desserts as the days came to a close.

• ·         And, oh yes, getting an increasingly good night’s sleep, especially as the week progressed.

Along the way, we experienced occasional wildlife, natural hot springs, poetry readings, campfires, abundant stargazing, conversations with hard core 212-mile John Muir Trail hikers, and plenty of laughter.

We also spent ample time brainstorming trail names. This activity is a common tradition for endurance hikers, and we enjoyed playing with multiple ideas until the official trail names finally stuck: Back Story (Shelley), Four Seasons (Mike), Lil’ Wallaby (Sharon), and Air Dry (Billy).  

What I found most interesting was how, once you stripped away all the daily distractions of life such as emails, texts, work tasks, laundry, bills, and cooking, the most valuable aspects of life came to the surface. Living so deeply in the here and now enabled me to feel like I could be a much better person, friend and spouse. The conversations were richer. The moments of joy so much more stunning. Perhaps the fresh air, the deep quietude, and the plentiful endorphins created some sort of natural high. After a while, I was surprised to feel a longing to stay in the wilderness for longer as the miles progressed.

A Fresh Start

When our journey ended at the Florence Lake ferry, I felt compelled to make some changes. I found myself urgently unsubscribing from emails as we drove home. I especially wanted to brush aside anything that had to do with shopping. No more Target or Gap emails for me.

In addition, I found that I did not miss the news. I’ve since taken up a habit of only skimming the headlines unless a financial topic requires more attention. Once we reached home, I felt pressed to clean out unloved items from my closet.

While very much missing our kids over the trip, I recommitted myself to focusing a good part of every day on making a special moment with them. Lastly, I made a goal to enjoy time outside every morning. Even if it’s just a short walk with the dog or a spirited jaunt around the backyard, there’s something so grounding about spending time in the outdoors.

As the days pass, I keep going back to the trip photos that show Mike and me with such big smiles on our faces. It makes me wonder when our next adventure will happen and where it will take us.

Mike and me on the last day of our hiking trip, returning via the Florence Lake ferry.

So what does this have to do with money? Admittedly, this is quite a variation from my typical financial topic of the month. Don’t worry. I have plenty of those lined up for the future.

As I think back to my recent trip, I’m reminded of how important it is to be grateful. For good health, great friends, and the beauty of nature.

I’m also incredibly grateful for each of you who made this possible. After getting my email a month ago mentioning my “off the grid” trip, you took it in stride. That’s because you had the same confidence I did that the investing and financial planning process we’ve employed would keep your finances safe while I was away.

I’m also extremely grateful for my mentor, Paul, who offered to take urgent calls during my absence.

I hope hearing about my journey inspires you to seek your own adventure that sparks joy for you in new ways and wakens your spirit. After all, what good is a financial plan if it doesn’t give you the foundation for enlightenment in the pursuit of your highest values and goals?

Thoreau offered a challenge in his book Walden that he wrote while immersed in nature for two years. And it’s this: “Only one in a hundred million people is awake enough to experience a poetic and divine life. To be awake is to be alive.”

Will you accept his challenge and be that one?

Inflation and Investments

With the economy starting to recover from the COVID-19 pandemic and investor concerns turning increasingly toward inflation, Dimensional Fund Advisors Founder David Booth talked with Nobel laureate Eugene Fama about inflation and how investors should think about it in their portfolios. Excerpts from their conversation have been edited for clarity.

ON PREDICTING INFLATION

David Booth: Gene, you are a founding Director of Dimensional and have been involved in our research and corporate governance for more than 40 years. People may not know that you’ve also done a lot of research on inflation and interest rates.

We always tell people, “We don’t try to forecast. We try to be prepared for various outcomes.” Inflation is one of those things you want to be prepared for. There’s a pickup in inflation risk that wasn’t there, say, 10 years ago. Does that cause you to worry?

Eugene Fama: Historically what’s happened is, when there’s a spike, the spike persists for a long time. Inflation tends to be highly persistent once you get it. Once it goes down, it tends to be highly persistent on the downside. You’ve got to be prepared for that. Predicting next month’s inflation may not be very hard because this month’s inflation can be a pretty good predictor of next month’s inflation, or next quarter’s inflation, or even the next six months’ inflation. Persistence is a characteristic of inflation.

We haven’t been in a period of high inflation, or even moderate inflation, for at least 10 years, so I’m not particularly concerned that inflation will be high soon.

On How Investors Should Think About Inflation and their Financial Goals

Booth: Conditions change, so is there anything about the current environment and the risk of inflation heating up that would cause you to change your portfolio?

Fama: I don’t think anybody predicts the market very well. Market timing is risky in the sense that you’ve always emphasized: You may be out of the stock market at precisely the time when it generates its biggest returns. The nature of the stock market is you get a lot of the return in very short periods of time. So, you basically don’t want to be out for short periods of time, where you may actually be missing a good part of the return.

 I think you take a long-term perspective. You decide how much risk you’re willing to take, and then you choose a mix of bonds, stocks, Treasury Inflation-Protected Securities, and whatever else satisfies your long-term goals. And you forget about the short term. Maybe you rebalance occasionally because the weights can get out of whack, but you don’t try to time the market in any way, shape, or form. It’s a losing proposition.

Booth: As you get to the point in life where you actually need to use your portfolio, does that change the kinds of allocations you’d want?

 Fama: The classic answer to that was, yes, you’d shift more toward short-term hedges, short-term bonds. Once you had enough accumulated wealth that you thought you could make it through retirement, you’d want to hedge away any uncertainty that might disturb that. That’s a matter of taste and your willingness to take risk and your plans for the people you will leave behind, like your charities or your kids. All of that will influence how you make that decision. But the typical person who thinks they’ll spend all their money before they die probably wants to move into less risky stuff as they approach retirement.

 Booth: The notion of risk is pretty fuzzy. For example, if I decide that I want to hold Treasury bills or CDs when I retire, and you did that 40 years ago, when we started the firm, and you’ve got that 15% coupon, that’s pretty exciting. With $1 million at 15%, you’re getting $150,000 a year. Today you might get less than 1%.

 Fama: Right, but I remember when inflation was running at about 15%, so not much better off!

 Booth: Those are different kinds of risks.

 Fama: When you approach retirement, you’re basically concerned about what your real wealth will look like over the period of your retirement, and you have some incentives to hedge against that. You face the possibility, for example, that if you invest in stocks, you have a higher expected return, but you may lose 30% in a year and that might be devastating for your long-term consumption.

 Booth: I think part of planning is not only your investment portfolio, but what to do if you experience unexpected events of any kind. We’re kind of back to where we start our usual conversation: “Control what you can control.” You can’t control markets. What you can do is prepare yourself for what you’ll do in case bad events happen. Inflation is just one of many risk factors long-term investors need to be prepared for.

Eugene Fama is a member of the Board of Directors of the general partner of, and provides consulting services to, Dimensional Fund Advisors LP.

The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this document are strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

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Yoga and Investing

By Shelley Murasko

Over the years, I’ve become particularly fond of yoga as an exercise. After too many miles of distance running in my 20s, yoga ended up being a nice contrast to the years I spent pounding the pavement.

I practice a form of yoga called Bikram Yoga. Held in a studio heated up to 100 degrees, the teacher leads us through a series of 26 postures over the course of an hour. As you can imagine, it’s not hard to work up a sweat!

In one session, I can put my strength, flexibility, and cardiovascular system to the test. While all the classes are challenging, there’s one instructor who really pushes his students to hold poses longer and with more effort. When I leave his class, I feel like I might collapse on the way to the car. Now that’s a workout!   

Requiring a minimal amount of poses, “hot” yoga is simple but not always easy to adhere to. In many ways, a dedicated yoga practice reminds me of disciplined, diversified, low-cost index investing. As master investor Warren Buffett once said, “Investing is simple, but not easy.”

Simple at First Glance

On the surface, yoga can seem super simple. In fact, if you walked into a hot yoga studio while the heat was off and someone quickly showed you the 26 postures, you might think, “What’s the big deal? I can do this in my sleep. They call this exercise?”

Furthering this idea of simplicity, yoga requires a minimal amount of gear. You need only a yoga mat, towel, and big bottle of water to take part in a typical class. In fact, you don’t even need to go to a studio. You can perform yoga by following along with poses from a book or online course. While a heated studio is nice, you can get similar benefits in a non-heated room.

To reap the greatest rewards, however, attending a class at least three days a week is recommended. Dedicated yoga students make it a daily practice over several years. Instructor-led yoga, where poses and their benefits are explained in great detail, lead practitioners to work their heart, lungs and muscles more deeply.

Over time, yoga students memorize the sequences of the various postures. Yet most find they achieve greater benefits with an instructor who can guide them and offer hands-on adjustments versus working at home alone.

Similarly, investing on one’s own may sound simple at first. Just choose a brokerage company and a few funds and away you go, right? Sure, you can read a basic investing book and pick up enough information to become a do-it-yourself investor. For some unique individuals, investing on their own might work. However, the overall data tells us that having a financial advisor will usually lead to better investing results.

DIY-based Investments Tend to Underperform

Studies conducted by Dalbar showed that typical DIY investors earned an average 2.5% return on their investments from 1999 to 2019, barely beating inflation. A 50% stock/50% bond portfolio would have returned 5.5%.1 The simple aspects of smart investing, such as portfolio diversification, dollar cost averaging investment dollars, and steady asset allocation, are often not followed.  

DIY investors might also find themselves doubting the simple nature of their investment approach.  Questions like the ones following might arise that challenge their courage and consistency:

• Do I have enough funds?

• Are the funds high quality?

• Do the fund managers invest in their own funds?

• What will the Dow do this year?

• Can these low-cost funds really get me to a good retirement?

• Why does my neighbor seem to have it so easy with his GameStop® pick?

It’s only after years of investing that a person comes to appreciate the nuances and complexities of structuring an investment portfolio with high-quality funds. After all, it takes time to acquire a deep understanding of how to achieve not only return but reliability of return. Educated investors also must learn the importance of putting systems in place for every decision. This helps lessen emotional and behavioral tendencies that can eat away at returns.

Over time, a dedicated investor learns how to enhance return by staying diversified, focusing on structure, and keeping expenses low — not by relying on luck or “shooting from the hip.” This takes years of disciplined investing that is closely monitored.

These keen investors know how small and large company stocks interplay. They can identify gaps in performance between value and growth stocks. They have systems in place to take advantage of market drops, and they follow their systems with a high level of discipline.

In addition, these investors have likely reflected deeply on how much global exposure they really need, and they know that investing is about more than picking good funds or stocks. They understand why investing works best within the context of a current financial plan, and they update their financial plan consistently to ensure investments are in alignment with cashflow projections.

A Disciplined Approach Leads to Greater Rewards

A sensible investing discipline is highly effective and, over the long term, capital markets will reward patient investors. Historically, over decades, a broadly diversified U.S. stock fund has averaged about 9% to 10% annual return while a U.S. small cap value fund has averaged closer to 11% to 12%.

To achieve a solid return, a diversified U.S. stock investor must endure stock market drops of 30% to 40%. With experience, an investor embraces volatility as an opportunity to rebalance or get more money into the stock market. They see the market drops as a door opening, saying “Come on in! It’s a good time to enter and make some money.”

An investment-grade bond fund investor would have attained about 4% average return over the various time periods. The level of volatility here is much less.

When reviewing investment results like the “One Page Report” by Morningstar, you’ll see that a basic 60% stock fund and 40% bond fund like the Vanguard Wellington (VWENX) has averaged 10% return over the past ten years. Thus, a $10,000 investment would have grown to $25,000. Investing in a fund like this is a simple, yet very effective approach.   

There’s no one investment strategy that will perform well every year. But over enough time, with a good dose of courage to stay the course during tough times, capital markets have rewarded investors.

A yoga practitioner who is dedicated daily to performing the 26 key poses in a heated studio over several years will also reap rewards. In this case, the return is a moderate blood pressure, steady blood sugar control, muscular strength and flexibility.

In fact, a study done by the NIH concluded that Bikram Yoga improves the ability to process sugar, reduce cholesterol and fat and improve bone density. Most practitioners also report lower levels of stress and improved sleep as byproducts.2

Advisors Make It Easier to Stay Dedicated

Adhering to an exercise program like yoga over many years is never easy. Whether it’s time, cost or energy, there are many factors that can make it difficult to remain dedicated.

There have been times where I wanted to give up yoga because I felt I was no longer progressing. After falling out of a posture or feeling extra stiff in that same spot, I have asked myself, "What’s the point?"

This really became obvious during COVID times when the yoga studio was closed for months on end. I was left to my own devices to continue my practice at home. My first attempts of DIY, video-led yoga led to boredom, in which I switched to just walking or jogging each day. While great exercises, walking and jogging primarily offer benefits only to the legs along with a cardio boost. They also can occasionally result in sore hips and knees.

After starting to feel stiff and sore from running, I gave yoga another attempt and overdid it. I rushed into headstands one day and came away with a sore neck for weeks. Being at home made me feel like I could push my limits more than I should, and I suffered the consequences. 

Investors can feel the same way if they experience a series of false starts that lead to lackluster results. A common practice is putting money into what may be considered a good fund or stock. If a stock doesn’t show glowing results after a month or two, though, DIY investors often ditch it and move on to the next hot idea they read about in the newspaper — without taking the time to understand why the stock didn’t perform as expected.

This cycle of chasing performance is very common among DIY investors, and it can destroy returns. These same investors might have done a better job staying the course or, at least, ensuring no major changes were made if they had an advisor guiding them.

That’s because an advisor who is tapped into the pulse of the market can often explain its behavior based on historical data. For instance, perhaps a certain market segment is temporarily trailing. An advisor would be able to point this out to an investor and provide advice on how to manage a portfolio with this in mind.

If another investment was necessary, the advisor could guide the client to find the right investment without giving up on the investment category at the wrong time.

While yoga and investing are simple in principle, they can be rather challenging in practice — especially when it comes to sticking it out through thick and thin. Yet the only way to achieve the optimal health or wealth benefits is to stay disciplined and give your particular approach time to show results.  

Buffett once said that “achieving his first million was the hardest thing to do.” The right approach and help from an advisor can make it easier.

Whether you’re attempting your first million or are simply curious about an investment question, I’m here for you. Don’t hesitate to reach out.
 
Sources:

1. JP Morgan Chase. (March 31, 2021). “JP Morgan Chase’s Quarterly Slides, Guide to the Markets.” Pg. 80. DALBAR study of investor behavior based on data from mutual fund flows recorded annually.

2. Hewette, Zoe. (Oct. 5, 2015). “The Effects of Bikram Yoga on Health: Critical Review and Clinical Trial Recommendations.” NCBI – U.S. National Library of Medicine, NIH. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4609431/.

The ARP Act: A Breakdown of the Key Provisions

It’s been more than a year since the pandemic hit, and the country is still struggling to regain an economic foothold. Despite past efforts to stimulate the economy, 9.7 million people remain out of work and 200,000 businesses have closed permanently.

To help trigger a recovery in 2021, the government passed the American Rescue Plan (ARP) Act on March 11. The $1.9 trillion legislation intends to deliver a wide range of pandemic-related financial relief for citizens by providing a cash stimulus and reducing the tax burden for individuals and families. Here’s a list of the key aspects of the Act and how they can help you.

2021 Recovery Rebates (aka Stimulus Payments)

One of the most popular provisions of the ARP is a third round of cash stimulus payments. If eligible, you’ll receive $1,400 for yourself and an additional $1,400 for each adult or minor dependent. The new act expands the eligibility to all dependents in a household, including aging parents living with you and college-age dependents. Previously, only dependents under age 17 were eligible.

The ARP has made it more difficult to quality this time around, though. To see if you qualify, check out the income ranges below. If your income falls below the minimum range number, you’ll receive the full payout of $1,400 per qualifying person. If your income falls within the range, you’ll get a partial payment. If your income is equal to or greater than the maximum amount, you won’t receive anything. The phaseout income ranges are:

·         Single or married taxpayers filing separately: $75,000 to $80,000

·         Heads of household: $112,500 to $120,000

·         Married taxpayers filing jointly: $150,000 to $160,000

Child Tax Credit Enhancements

Families with children under age 18 at the end of this year will benefit from temporary changes to the Child Tax Credit in 2021. The ARP boosts the maximum credit from $2,000 to $3,000 for each qualifying child. For children under age six, the amount increases to $3,600 per child.

The ARP also makes the Child Tax Credit fully refundable. This means you can receive the full amount even if you don’t earn enough to pay taxes.

Another welcome benefit of the revised Child Tax Credit is that the IRS has been charged with paying 50% of your estimated Child Tax Credit between July 31 and December 31. In a sense, it’s like getting additional stimulus checks.

However, you may be required to pay back the credit if your actual income for 2021 ends up exceeding the phaseout restrictions, which are markedly lower than in the past. The phaseout ranges are listed below. If you make more than the amount listed, you’ll have to pay back your credit come tax time next year.

·         Taxpayers filing jointly: $150,000

·         Heads of household: $112,500

·         All other filers: $75,000

Child and Dependent Care Tax Credit Enhancements

Another positive for parents with young children is an upgraded Child and Dependent Care Tax Credit, which can mean money back for parents using a licensed care provider that enables the parents to work, including kids attending day camps. The ARP significantly increases the expense amount that is used to calculate this tax credit. The amount for taxpayers with one qualifying child has skyrocketed to $8,000 from the previous limit of $3,000. For two or more qualifying children, the amount goes up to $16,000!

To qualify, a child must be age 13 or younger for the entire year. The credit also applies to a spouse or other dependents who are unable to care for themselves and reside more than six months out of the year with you.

Another important change is the increase of the Applicable Percentage. To determine if you’re entitled to the Child and Dependent Care Tax Credit, your eligible expenses are multiplied by your Applicable Percentage.

Previously, the Applicable Percentage ranged from a low of 20% to a high of 35%. Under the ARP, the maximum percentage has been increased to 50%. Due to these changes, more people will receive the Child and Dependent Care Tax Credit on their 2021 taxes. And the amount they may receive is drastically higher. In fact, it’s nearly quadrupled compared to the regular parameters!

While these changes are great for many taxpayers, high wage earners with an average gross income (AGI) over $125,000 will see the amount of their tax credit decrease. Those who earn more than $440,000 won’t get any tax credit — even if they were able to claim it in past years. Those who fall below the $440,000 threshold but earn more than $125,000 may qualify, but they will see reductions in their Applicable Percentage of 1% for every $2,000.

If you happen to fall into the eligible range, you could be the recipient of fairly high credits.  What makes this even better is that the ARP makes the credit fully refundable whereas before it was not.

Unemployment Compensation Enhancements

At this point, many workers who were laid off or furloughed last year have been reinstated or have started jobs with new employers. While this is good news, there are more than 4 million who fall into the “long-term unemployed” category. This means they have been jobless for 27 weeks or more. The ARP helps job seekers by providing the following benefits through Sep. 6, 2021:

·         Expands the unemployment benefit period from 50 to 79 weeks

·         Extends unemployment compensation to self-employed workers

·         Continues the increased benefit amount of $300 per week

If you received unemployment compensation in 2020, up to $10,200 of it may be tax-free. To qualify, your AGI must fall below $150,000. If your spouse also received unemployment benefits in 2020 and your AGI was below the $150,000 threshold, you both may be able to claim the tax-free benefit for a total of $20,400.

Insurance Enhancements

Having medical insurance is always important, but it’s especially crucial now when dealing with the physical, mental and financial challenges spawned by the COVID-19 pandemic. If you’re laid off and don’t have Medicare or Medicaid, the ARP allows you to keep your current health insurance through COBRA between April and October 2021 at no cost. Considering that COBRA premiums can cost four times more than an employer-subsidized plan, this is a welcome benefit for many.

For those who purchase health insurance through a state-run health insurance Exchange, the ARP increases Premium Assistance Tax Credits to help them pay the fees. These changes make it possible for taxpayers whose incomes are up to 150% of the poverty line to receive free coverage. Under previous legislation, they’d have to pay up to 4% of their income for coverage.

Even those who make higher wages can receive partial credit, thanks to newly established premium percentage caps. For example, wage earners who are at 400% or above the poverty line(example = less than $106,000 annual income for family of four) will be capped at 8.5%. This means they won’t be required to pay more than 8.5% of their income for insurance premiums. Under these new provisions, which are in effect through 2022, nearly 15 million Americans are now eligible for subsidized health care coverage. Visit healthcare.gov for more details.

The ARP also expands Medicaid coverage for home- and community-based services as well as coverage for COVID-19 testing, treatment and vaccination.

Emergency Education Grants and Future Tax-Free Student Debt

If you have college-age students, the ARP offers a couple of provisions that may apply to you.

It adds an additional $40 billion in grant money to the Higher Education Emergency Relief Fund that was established as part of last year’s Coronavirus Aid, Relief, and Economic Security (CARES) Act. Colleges and universities are required to distribute at least 50% of that money in financial grants that do not need to be paid back. They may award grants to any student, though they must give priority to students in financial need.

The ARP also makes an attempt to help those with education-related loans. Though the act doesn’t offer debt forgiveness of student loans, as some had hoped, it does set the stage for making the forgiveness of this debt tax-free in the future. Under normal circumstances, forgiven loan debt would be considered taxable income. ARP provisions make it possible to discharge student debt, such as federally backed or private student loans. Since the canceled debt wouldn’t count as income, it reduces taxpayer burden. However, this applies only if the debt is forgiven between 2021 and 2025.

Additional Noteworthy ARP Provisions

Along with the key features noted above, the ARP also includes a few additional provisions that may apply to you.

·         Provides emergency rental and homeowners assistance for renters struggling to pay rent and utilities or homeowners who need help paying mortgages, utilities, homeowners insurance, and other homeowner expenses as a result of the pandemic. To learn more, visit the National Council of State Housing Agencies website to learn how individual states are distributing funds.

·         Extends the Employee Retention Credit through December 2021 and allows certain startup businesses to qualify for the credit. It also makes it possible for “severely financially distressed employers” to consider most of their wages as “qualified wages” when calculating the ERC.

·         Extends Limits on Excess Business Losses for Noncorporate Taxpayers through 2026. This provision allows taxpayers to offset non-business income (up to $500,000 for joint filers and $250,000 for single filers) with business losses. Normally, offsetting is not allowed.

Striking a Path Toward a Stronger Economy

The ARP offers many helpful financial advantages. From stimulus checks to tax credits to free health insurance coverage, this wide sweeping legislation offers much-needed financial aid to many Americans. 

Due to the intricate details woven into this piece of legislation, it can be difficult to determine if you qualify for certain aspects of the ARP. A smart move is to consult with your CPA or tax advisor to find out if you’re eligible for various credits, rebates, and payments provided under the new act.

Hopefully the provisions laid out in the ARP will bring you some financial relief and peace of mind as we move toward a stronger economy in the coming months. As always, I’m here to help if you have questions or need assistance with your financial planning. Feel free to email or call to get the conversation started!

Sources:

Levine, Jeffrey. (March 10, 2021). “The American Rescue Plan Act of 2021: Tax Credits, Stimulus Checks, and More That Advisors Need to Know!” Kitces.com. Retrieved from https://www.kitces.com/blog/the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more-that-advisors-need-to-know/?utm_source=rss&utm_medium=rss&utm_campaign=the-american-rescue-plan-act-of-2021-tax-credits-stimulus-checks-and-more-that-advisors-need-to-know&utm_source=Nerd%E2%80%99s+Eye+View+%7C+Kitces.com&utm_campaign=fc0995e3ad-NEV+MW&utm_medium=email&utm_term=0_4c81298299-fc0995e3ad-57130829.

Medintz, Scott. (April 16, 2021). “How the American Rescue Plan Can Help You.” Consumer Reports. Retrieved from https://www.msn.com/en-us/lifestyle/lifestyle-buzz/how-the-american-rescue-plan-can-help-you/ar-BB1eVnSr.

Moran, Jim. (April 14, 2021). “A Breakdown of the American Rescue Plan Act of 2021.” BusinessWest.com Blog. Retrieved from https://businesswest.com/blog/a-breakdown-of-the-american-rescue-plan-act-of-2021/.

Simon, Ruth. (April 16, 2021). “Covid-19’s Toll on U.S. Business? 200,000 Extra Closures in Pandemic’s First Year.” Dow Jones. Retrieved from https://www.morningstar.com/news/dow-jones/202104166182/covid-19s-toll-on-us-business-200000-extra-closures-in-pandemics-first-year.

U.S. Department of Labor. (April 2, 2021). “News Release: The Employment Situation – March 2021.” Bureau of Labor Statistics. Retrieved from https://www.bls.gov/news.release/pdf/empsit.pdf

The Top Habits of Wealth Builders

Happy New Year! January 1 is the day many of us go about jotting down New Year’s resolutions designed to help us improve ourselves and our lives. Popular themes include getting in shape, eating healthier, and improving relationships. All great options! Here’s another I recommend: developing good money habits that improve your financial situation.

After serving more than 90 families and writing financial plans for hundreds of clients, I’ve had a front row seat to all kinds of interesting money behaviors. If I had to boil it down to the two things my multi-million dollar clients do that set them apart from others, it would be the following:

·       Spend way less than they earn, even when they don’t have to

·       Invest as much as they can in stocks 

Most everything else that people worry about, like which stocks to pick, when to get in and out of the market, whether or not to clip coupons, or what the tax laws are going to be in five years, prove to be rather insignificant in the grand scheme of wealth building.

As you think about your own money behaviors, here are five important habits to consider if you want to grow your wealth in 2021.

Spend Less Than You Earn

Let’s start with maximizing your savings by minimizing spending. Data tells us that the average U.S. citizen generally directs about two-thirds of after-tax income to four main areas: housing, cars, food, and health insurance/costs.1  

If you can get these four things right while collecting a modest income, you will put yourself on a path to major wealth. After all, it’s never too late — or too early — to develop smart money habits.

As a case in point, I recently worked with some of my ten-year-old daughter’s friends on a game called the “Life Budgeting Project.” The winner of the game was the person who saved the most. In a matter of minutes, most of the girls went from living alone in a three-bedroom house and working in low-earning careers to commuting by public transport and choosing to become managers. In fact, the winner originally selected artist as her profession and then opted for CEO. Second place went from buying brand-name cars, clothes and cell phones to renting an apartment with two housemates and taking her food to work.

Of course, playing a game on paper is a lot different than real life. But if you learn to establish good habits with housing, auto, food and health, it can transform your ability to save.

Housing

While thinking about how to minimize housing costs, I was reminded of Thomas J. Stanley’s book, The Millionaire Next Door. Throughout its pages, Stanley covers many habits of the wealthy. The main idea of the book is that people who “look the wealthiest” rarely are.

When you consider housing, Stanley emphasizes the following: choose neighborhoods with tall trees and stay there for at least 20 years.

For those intent on buying a home, Stanley offers these guidelines: “The market value of the home you purchase should be less than three times your household's total annual realized income…and most millionaires rarely have a mortgage more than two times their income.” 2

I admire Stanley for his observations, and I would go even further to emphasize that there is no weakness in having roommates, buying a “starter home,” or retiring into a smaller residence. For sure, there may be years as a parent where choosing a neighborhood with great schools or a home with a large yard take priority. Outside of the child-rearing years, however, consider right-sizing to that which is a better fit for your priorities.

By the way, the cost of living in places like California and New York would probably not fit Stanley’s model. Yet there are still ways for you to manage your housing costs if you reside in these states. For example, you can compromise on house size or proximity to desirable communities to get started in the higher end housing markets. In addition, you might consider building and/or renting a backyard studio or portion of land.

While housing costs are certainly higher in prime states, you may find that other costs are lower, like heating, cooling, maintenance, a one-season wardrobe and property taxes.

Cars

With cars, Stanley emphasizes buying over leasing, driving the same car for at least 10 years, and choosing cars for reliability. He also says that the typical millionaire buys cars made by Toyota® or Honda®, rarely leases, and typically opts for used. Interestingly, he cites that 67% of BMW owners are not millionaires.

Food

As far as food budgeting goes, you can take simple steps to keep a lid on expenses. Across households, I’m shocked when people with minimal savings buy most of their groceries from expensive grocers like Whole Foods®. On the other hand, those with abundant savings are content with stores like Ralphs® and Sprouts®. Could food budget control really be that simple? Absolutely!

Another strategy is to minimize eating out. While working with one individual on reducing his sizeable debt, I noticed that he was eating out multiple times per day. This daily habit was routinely driving up his expenses.

When it comes to food, eating in and shopping at traditional, no-frills grocery stores are key to reducing your spending and boosting your savings.  

Health

High insurance premiums and unexpected health care costs can take a big bite out of any budget. By far the most effective lifetime strategy for keeping health costs low is to strive for good health. It’s important to get daily exercise, including strength training, and to eat plenty of veggies and fruits, especially as we age.

As far as health insurance, the costs have increased significantly over the years. To avoid overspending, follow these tips:

·       Obtain insurance through an employer, if possible, for lower health costs

·       Consider the Affordable Care Act options for lower income households (Important to note that the current act does not consider a household’s assets in the subsidy calculation)

·       Put aside funds in a Health Savings Account (HSA) to take advantage of tax deductions, which can offset healthcare costs

·       Embrace T.G.I.M. – Thank God for Medicare – if you’re 65 or older and in good shape, a healthy individual can expect lower costs

Investing in stocks

After developing strong savings habits by following the four strategies above, the next step is to put your money to work in diversified stocks.

Jeremy Siegel, a finance professor at the Wharton School of Business, is a proponent of this strategy. In his book, Stocks for the Long Run, he shines a light on the fact that, during most time periods, stocks have beaten other publicly traded investments like bonds, commodities and real estate investment trusts.

He specifically provides key data on annual “real” (after inflation) returns going back further in history than anyone has published before. From 1871–2001, for example, U.S. stocks averaged 6.8% real return, compared to bonds at 2.8% real return. Gold averaged a paltry -0.1% real return. In his book published in 1994, Siegel projected that stock returns in the future would be somewhat lower for at least a couple of decades, but they would still surpass bonds.

It’s important to note one period of abnormal underperformance in Siegel’s book: From 1966–1981, gold beat stocks due to very high inflation. In addition, Treasury bills beat stocks over this same period. Under typical inflation circumstances, however, stocks remain high performers.

So why not just throw in the towel, and put all your money in stocks?

For one, there can be a lengthy period of time where stocks run negative. From 2000–2010, for instance, the S&P 500 returned a -1% average annual return.

To offset these negative periods, sensible investors balance their goals of allocating strongly to stocks with the importance of holding enough in bonds and cash to cover their cashflow needs over a five to 10-year bleak stock performance period. The exact percentage to hold in these more conservative funds is very specific to your cash flow needs in the near term and your risk tolerance.

Of course, your ability to withstand a bear market crash like this past spring is also extremely relevant. Not everyone has the courage to stay the course during the volatility that will most definitely occur. There’s a reason typical retirees hold 40–50% of their savings in bonds.

Siegel’s book also faced a great deal of criticism from reputable economists like Yale’s Robert Shiller. He warned that 20 to 30-year holding periods were not necessarily risk free, and that purchasing stocks at a high price-to-earnings ratio could yield poor returns. Of course, putting your money into stocks all at one time can be minimized by dollar cost averaging. This tends to apply to most individuals who are steadily saving.

While there is no guarantee that stocks will offer superior returns to other investments, especially in the short term, there are compelling reasons why stock return will likely persist. The building blocks of stock market return continue to be dividend yield (currently averaging 1.8% across the S&P 5003) and corporate earning’s growth. The latter results from many factors, including population growth, inflation, innovation and household wealth expansion. Not just in the U.S., but globally as well. Also, we can’t forget that the extremely low interest rates of our times offer few other options. 

As you head into 2021, keep your money management habits in mind. Perhaps this is the year to amplify core wealth-building practices. There are so many possible behaviors to consider, and I encourage you to keep it simple by answering two questions:

·       Are you maximizing your savings with smart housing, car, food and health choices?

·       Are you putting each and every one of your spare dollars to work with emphasis on allocating to stocks?

If you can answer “yes” to both of these, then 2021 may be the year you stick to your New Year’s resolutions and start building your wealth significantly.

All trademarks are the property of their respective owners.

References

1.       U.S. Bureau of Labor Statistics. (Sep. 9, 2020.) “Consumer Expenditures – 2019.” U.S. Bureau of Labor Statistics. Retrieved from https://www.bls.gov/news.release/cesan.nr0.htm.

2.       Stanley, Thomas. (Dec. 8, 2009.) “$1 Million: Something or Nothing (Part 1).” Thomas J. Stanley blog. Retrieved from http://www.thomasjstanley.com/2009/12/1-million-something-or-nothing-part-i/.

3.       J.P. Morgan Chase. (Sep. 30, 2020.) “Guide to the Markets” presentation (page 4). Retrieved from Guide to the Markets | J.P. Morgan Asset Management.

Proven Ways to Access Cash if Your Emergency Fund Has Run Out

As we enter the third month of 2021, the pace of the U.S. economic recovery continues to be sluggish. Some of the slowdown is the result of continued lockdowns in many states, which are keeping businesses in certain sectors from reopening or functioning at full capacity.

Industries like leisure and hospitality, for example, continue to struggle with 61,000 jobs lost in January. Retail operations also took a hit as 38,000 jobs went on the chopping block during that same timeframe1.

The good news? The unemployment rate continues to fall, dipping slightly in the first two months to 6.3% with the addition of 49,000 jobs1. Even so, this is still far short of last year’s 50-year low of 3.5%.

Today, many Americans who were laid off or furloughed in 2020 as a result of the ongoing global pandemic are still looking for work. Currently data show the number of unemployed is somewhere between 10 and 20 million people2.

If you’re among them, staying afloat financially is likely one of your most pressing concerns right now. So what can you do if you’ve exhausted your emergency fund, are no longer eligible for unemployment benefits, or both?

Reducing Expenses Is Your First Priority

The first thing you should do is look for ways to reduce your spending. Evaluate how much you need to pay for essentials like food, shelter, and medical insurance. At the same time, consider how to cut non-essential items. Eat out less often and instead prepare food inexpensively at home. Reduce the frequency of services like housekeeping and landscaping. Ask service providers for loyalty discounts.  Shop around for lower car and home insurance premiums. Find out what else you can do by checking out these articles on living below your means and handling a sudden drop in income.

Painless Ways to Live Below Your Means — Wealthrise Financial Planning (wealthrisecfp.com)

How To Handle A Sudden Drop In Household Income — Wealthrise Financial Planning (wealthrisecfp.com)

If you’re still coming up short financially after going through this process, here are a six additional options to help you manage your expenses.

401(k) Loans

While it’s usually not recommended to borrow from your 401(k), these are unusual times. When you take a loan against your 401(k), you can borrow the amount you need to cover your immediate expenses without losing that portion of your investment account forever. Since you’re required to pay yourself back, you will restore your pre-pandemic balance once your financial situation improves and pay yourself back with interest along the way.

With a 401(k) loan, you avoid loan fees, high and/or adjustable interest rates, and unnecessary taxes. Not all plans allow loans, so be sure to check with your plan provider to find out if this is an option for you. As an alternative, you may qualify for an IRA hardship withdrawal. Check with this IRS link to see if you are eligible: Hardships, Early Withdrawals and Loans | Internal Revenue Service (irs.gov)

Zero-Interest Credit Cards

Another smart way to manage your expenses when your income is tight is to apply for a credit card that offers an introductory 0% APR on purchases. Some interest-free periods can last a year or longer, which means you can use your credit card to pay for essentials like food, medical expenses, and monthly bills without racking up huge interest fees.

To qualify for one of these offers, you need to have good credit (690 or higher), and you’ll be required to pay the minimum monthly amount. Here are a few that NerdWallet suggests3:

·       Citi® Diamond Preferred® Card: 0% APR for 18 months with no annual fee

·       U.S. Bank Visa® Platinum Card: 0% APR for 20 billing cycles with no annual fee

·       Wells Fargo Platinum card: 0% APR for 18 months with no annual fee

·       HSBC Gold Mastercard® credit card: 0% APR for 18 months with late fee waiver and no annual fee

If you currently have debt on a high-interest credit card, transferring that balance to a zero-interest card can keep you from piling up even more. Just keep in mind that the 0% APR won’t last forever, and you will eventually have to pay off the balance. Also, some companies charge transfer fees of 3% to 5%.

Credit Card Points and Programs

You can also increase cash by participating in credit card rewards programs as long as you pay your card balances completely and on time each month. Basically, when you make purchases, you earn points that you can then redeem for cash and other items. Before COVID-19, you may have held a credit card or two that allowed you to use your accumulated points for travel. But as the pandemic has raged on, credit card companies—even those whose primary focus has been travel—have shifted their programs to allow you to use points to pay for food, bills and online shopping4.

Start by checking with your card company to see if they, too, have shifted the focus of their plans to allow points to be spent on every day needs usually through the purchase of gift cards. If you don’t have a credit card that rewards points, here are a few cash back options recommended by NerdWallet that you may want to look into3:

·       Chase Freedom Unlimited®: 0% APR for 15 months with 1.5% to 3% ongoing cash back rewards + $200 bonus and no annual fee

·       Blue Cash Everyday® Card from American Express: 0% APR for 15 months with 3% grocery and 2% gas rewards + $200 cashback bonus and no annual fee

·       Capital One Quicksilver Cash Rewards Credit Card: 0% APR for 15 months with 1.5% non-expiring cash rewards + $200 cash bonus and no annual fee

·       Citi Double Cash Card: 0% APR for 18 months with 2% cashback rewards and no annual fee

You may have noticed that several of the rewards credit cards listed above also offer 0% APR introductory rates for a limited time. When you combine interest-free purchases with tax-free rewards program benefits, it’s like getting a double-bonus. You avoid paying interest fees while earning money for buying the essentials you need during these challenging times. Importantly, however, you need to make sure that you can pay off your balance either monthly or once the 0% period ends.

Taking advantage of the programs offered by credit card companies is a simple and easy way to put some extra cash in your wallet. But what if you’re seeking a truly significant source of cashflow? If you’re a homeowner, tapping the equity you’ve built in your home is another way to obtain a cash infusion.

Use the Hidden Cash in Your Home

Experts predict that the housing market will stabilize in 2021, and a tight housing supply will likely keep home values high. Because of this, your home’s market value may rise, and you’ll have more equity to access. On top of that, home equity interest rates should stay relatively low—ranging from 4.61% to 5.05%—so now is a good time to consider taking out a home loan5 if you are pressed for cashflow.

There are three different loan types you may want to consider: a home equity loan, a home equity line of credit (HELOC), and a retirees line of credit (ReLOC) also known as a reverse mortgage line of credit.

Home Equity Loan

A home equity loan allows you to obtain cash at a relatively low cost by using your home as collateral. If you’re able to secure a loan of this type, you’ll receive the payout as a lump sum. It also comes with a fixed interest rate. This means your monthly payment will be about the same each month, which makes it easier to budget.

Usually lenders will let you borrow up to 80% (and sometimes more) of your home’s current market value, not including yet-to-be-paid mortgage balances. As an example, let’s say you have a $600,000 home with $200,000 left on the mortgage. The amount of equity in your home would equate to $400,000. Eighty percent of that is $320,000, which is the amount you could access.  

To apply, you’ll follow the steps that are typical with any loan. You’ll need to ensure your credit is in good standing to prove you have a solid track record of paying your bills. You’ll also need to provide documentation showing that you can afford to pay back the loan.

The latter may be problematic if you’re currently unemployed. It’s still possible to obtain a loan of this type, but you’ll likely have to do one or more of the following: prove you have unemployment benefits or other streams of income, get a cosigner, provide collateral, or borrow money from a friend or relative.

Home Equity Line of Credit (HELOC)

A HELOC is similar to a home equity loan, but it tends to be a bit more flexible. Instead of getting a one-time, lump sum of cash, you take out money as you need it, up to a pre-approved maximum. A downside of a HELOC is that the interest rate varies, so the amount you pay can change month to month. This can make it difficult to budget; and ideally, you treat a HELOC as a very temporary loan.

Like a home equity loan, the lender will usually allow you to borrow 80% or more of your home’s value. The process to apply is the same as well.

Once your HELOC is set up, you can draw funds from it over a predetermined period of time. After that, you’ll enter the repayment period where you’ll have monthly payments to make over a designated timeframe. During this phase, the HELOC acts much like a standard mortgage loan.

Retirees Line of Credit (ReLOC)

For homeowners over age 62, there’s a third option to consider: a ReLOC. Also known as a reverse mortgage line of credit, it’s a way to turn your home’s equity into cash while you still live there. To qualify, you must own your home, and it must be your primary residence.

A ReLOC is similar to a HELOC with several advantages. Some of these include6:

·       Your line of credit continues to grow each year

·       You don’t make monthly mortgage payments – the lender pays YOU

·       The payments you receive are non-taxable because they’re considered loan proceeds, not income

·       You don’t pay back the money until you no longer live in the house permanently

·       The loan can’t be canceled, reduced or frozen – as long as you keep up with mortgage-related obligations such as HOA fees, property taxes, homeowner’s insurance, and standard home upkeep

·       You owe only what you borrowed, even if your home’s value decreases

There are a few disadvantages to be aware of as well. You’ll be required to pay for mortgage and homeowner’s insurance as long as you have the loan. If you fall behind on property taxes or insurance premiums, it could trigger a loan default or home foreclosure.

As with a traditional loan, you’ll also need to pay closing costs that may include servicing and appraisal fees. You can also expect to pay origination fees, which can run as high as $6,0007. These expenses can be taken out of the loan, but it will reduce the amount of cash you can withdraw. ReLOCs also tend to have higher interest rates versus traditional loans.

The loan will also become immediately due if you don’t maintain the house, you fail to pay property taxes or insurance premiums, or you move out, live outside the home for a year or more, or pass away.

The latter could put your heirs in a bind since they will be responsible for repaying the loan. In this case, they’ll have the option of selling the house, paying off the loan with their own funds in order to keep the house, taking out a new traditional mortgage to pay off the loan, or allowing the lender to proceed with foreclosure if they choose not to keep the property.

However, tapping into your home equity may be a necessity as it can serve as a viable source of income during this time of need. Whether you opt for a home equity loan, a HELOC or a ReLOC depends on your individual financial situation. For help deciding on the best choice for you, speak to a lender about your options.

Economic Recovery Is On the Horizon

Whether your strategy to make ends meet includes obtaining a 401(k) loan, applying for a rewards program credit card or taking out a long-term home loan, things will likely improve as the year progresses.

As more vaccines become available and the number of COVID-19 cases decreases, the economy will likely begin to recover. When that occurs, closed businesses will reopen and return to full capacity, and they’ll be looking to hire new employees like you to help them grow. If you’re a business owner, you’ll finally be able to welcome your customers back and once again start to prosper.

Remember that wealth is the result of smart spending, discipline, a lifetime of hard work, and good planning — even when times are tough. By reducing your expenses and consistently using strategies like budgeting and saving, you’ll be able to manage your money more effectively so it can grow over time.

In the meantime, please reach out with any questions about your finances. I’m always happy to help!

Trademarks are the property of their respective companies.

Sources:

1 - Thorbecke, Catherine. (Feb. 5, 2021.) “Unemployment rate dips to 6.3% as employers add 49,000 jobs last month.” ABC News. Retrieved from https://abcnews.go.com/Business/unemployment-rate-dips-63-employers-added-49000-jobs/story?id=75667033.

2 - Long, Heather. (Feb. 19, 2021.) “How many Americans are unemployed? It’s likely a lot more than 10 million.” The Washington Post. Retrieved from https://www.washingtonpost.com/business/2021/02/19/how-many-americans-unemployed/.

3 – NerdWallet. (Feb. 23, 2021.) “Best 0% APR and Low Interest Credit Cards of February 2021.” NerdWallet.com. Retrieved from https://www.nerdwallet.com/best/credit-cards/low-interest.

4 – Tsosie, Claire. (Mar. 19, 2020.) “3 Ways Credit Cards Can Help You Ride Out a Crisis.” NerdWallet.com. Retrieved from https://www.nerdwallet.com/article/credit-cards/ways-credit-cards-can-help-ride-out-crisis

5 – Wichter, Zach. (Jan. 4, 2021). “Home Equity Rates 2021 Review and Forecast.” Bankrate.com. Retrieved from https://www.bankrate.com/home-equity/home-equity-rates-forecast/.

6 – Paris, Mayra. (Feb. 1, 2021.) “What is a Reverse Mortgage? Pros and Cons.” Money.com. Retrieved from https://money.com/what-is-a-reverse-mortgage/.

7 – Branson, Michael G. (Dec. 2, 2020). “Reverse Mortgage Closing Costs & Fees Explained.” All Reverse Mortgage, Inc. Retrieved from https://reverse.mortgage/closing-costs.

On the Verge of Economic Recovery?

by Shelley Murasko, originally posted 11/01/2020

By all indications, 2020 was supposed to be a bounty year.

In February, the unemployment rate dropped to its lowest mark in 50 years.1 At 3.5%, it was a sign that businesses were doing well.

We were in the midst of the longest-running bull market, and it was showing no signs of ending. In fact, all three major stock indexes—the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite Index—were on the rise in mid-January.2

On top of that, the American economy was on the upswing after posting a 5.8% jump in retail sales in 2019. According to the Department of Commerce, this was an improvement over the past 30 years’ average.                        

The Pandemic Effect

Three months later, the world had turned upside down. The coronavirus continued to spread, prompting a pandemic and a subsequent shutdown that swept the globe.

With American businesses closed, consumer spending halted and the economy plummeted as the country recorded one of its sharpest downturns since the Great Depression.1

Unemployment skyrocketed, reaching a historic high of 14.7%.3 By May, more than 20.5 million Americans were out of work.

The previously soaring stock market suffered deep losses, forcing the end of the 11-year bull market. The S&P 500 experienced one of the most extreme swings, hitting a record high on Feb. 19, then nosediving by 35% for a new low on March 23.4

After months of dealing with the challenges brought on by COVID-19, you’re probably wondering: When will things return to normal or, at least, something closer to it?

Growing Optimism Amid the Current Crisis

It may be sooner than you think.

Despite the recent turmoil, the economy is already showing signs of recovery led by a strong turnaround in the technology sector.

Big tech companies like Apple, Microsoft and Google parent Alphabet are recording big gains. Apple, in particular, has had a banner year. The largest company in the U.S., Apple saw an increase of 111% and is now worth $2 trillion. 

A dozen companies in the NASDAQ 100 also saw share prices more than double since the market low.6 Here are a few of the top performers:

·         PayPal – stock price jumped from $85.26 to $198.18

·         Tesla – recorded an astounding 360% recovery

·         eBay – up markedly to 118%

These strong performances have propelled a rapid market rally. In just five months, the S&P 500 went from its lowest point in March to setting a new record high on Aug. 18.

Since then, stocks have rebounded by more than 50%. In early October, the Dow advanced 3.3% to record its best weekly gain since Aug. 7. Following suit, the S&P 500 moved up 3.8% and the Nasdaq Composite surged 4.6% for their best weekly finish since July 2.5

 Small-cap companies are also performing well, fueled by the possibility of additional government aid.7

Another positive sign is that second quarter corporate profits were better than expected for some major retailers. Walmart and Home Depot, for example, both exceeded the earnings expectations of Wall Street.1

A continual drop in unemployment has also generated national optimism. In September, the jobless rate dipped to 7.9%. Today, about half the jobs lost as a result of the shutdown have been recovered.3 The reopening of businesses has played a key role in this improvement.

“We remain hopeful that many of those job losses could be reversed quickly once the virus is brought under control—after all, the surge in the number of unemployed was due to temporary, rather than permanent, layoffs,” K.C. Mathews, executive vice president and chief executive officer at UMB Bank, said in a Yahoo! Finance article.8

As more businesses reopen, it’s likely the unemployment numbers will continue to fall. In fact, workers seeking employment may do well to apply at e-commerce and direct-to-consumer companies. The reason? These businesses have performed exceedingly well despite the economic downturn.

“As an advertising agency, Narrative has seen a revenue bounce for our e-commerce and direct-to-consumer clients that now exceed pre-COVID levels,” said Ken Chen, co-founder and managing partner at Narrative.8

More positive news is coming from the real estate sector. According to a USA today article, the housing market is showing signs of growth with new home construction figures up by 22.6% in July.1

Progress on a COVID-19 vaccine has also spurred a significant amount of optimism. The hope that we will have a viable serum soon seems to have pushed the markets toward more positive results.

Former Federal Reserve Chair Ben Bernanke shares this optimistic attitude. “The U.S. economy will recover and within a few years will show only modest marks of this experience,” he said in a Brookings Institute online event, Reuters reported.8

Potential for a Quick Economic Turnaround

No one knows when the coronavirus crisis will end. Right now we’re seeing signs of economic improvement, but a full recovery may not occur until an effective vaccine is developed. Once that happens, though, the economy could see a quick turnaround.

“If we solve the virus, we’ll quickly get our groove back,” Mark Zandi, the chief economist of Moody’s Analytics, told Kiplinger. “There will be pent-up demand, and interest rates will be low. Assuming the finance system is not taken out, we’ll see a period of good strong growth in the second half of 2021 going into 2022.”

The Best Strategy for Investing During a Crisis

As the wait for an approved vaccine continues, how should you be managing your investments? Should you stay in the market or get out until the crisis ends?

David Swensen, CIO at Yale University, believes that staying in is the best approach.

“When you sell in the midst of a crisis, you can put yourself in a position where your portfolio will never recover,” he said during a recent NPR interview.10

As an illustration of this, investors who “sat it out” in the spring due to the market turbulence missed out on substantial gains. According to S&P Dow Jones Indices, an investor who put $10,000 in an S&P 500 index fund on Dec. 31, 2019, would have seen it increase to $10,594.57 with dividends by Aug. 17, 2020.1

Investment guru Warren Buffett, who is confident the U.S. economy will bounce back from the current crisis9, is also a proponent of this investment strategy. He believes your smartest move is to stay in the market, even when it’s doing poorly.

“Nothing can basically stop America,” said Buffett during Berkshire Hathaway's online shareholders meeting earlier this year. “We haven’t really faced anything that quite resembles this problem, but we faced tougher problems. The American miracle, the American magic has always prevailed, and it will do so again.”

If you’d like to discuss your current investment strategy, I’d love to talk with you. Feel free to reach out to me at shelley@wealthrisecfp.com.

Sources:

1 - Menton, Jessica. (Aug. 18, 2020). “The stock market closes at a record high, defying the COVID-fueled recession battering the US economy.” USA Today. Retrieved from https://www.usatoday.com/story/money/2020/08/18/s-p-500-hit-record-optimism-economic-recovery/3390056001/.

2 - Zacks Equity Research. (Jan. 17, 2020). “Stock Market News for Jan 17, 2020.” Yahoo! Finance. Retrieved from https://finance.yahoo.com/news/stock-market-news-jan-17-143302943.html 

3 - Rushe, Dominic and Sainato, Michael. (Oct. 2, 2020). “US unemployment rate falls to 7.9% in last look at jobs market before elections.” The Guardian. Retrieved from https://www.theguardian.com/business/2020/oct/02/us-unemployment-numbers-elections-economy-jobs.

4 - Belvedere, Matthew J. (Apr. 16, 2020). “The March low may have been the market bottom, says CEO of the world’s largest money manager.” CNBC.com. Retrieved from https://www.cnbc.com/2020/04/16/larry-fink-coronavirus-low-last-month-may-have-been-the-market-bottom.html.

5 – Zachs Equity Research. (Oct. 12, 2020). “Stock Market News for Oct 12, 2020.” Yahoo! Finance. Retrieved from https://finance.yahoo.com/news/stock-market-news-oct-12-135501433.html.

6 - Canellis, David. (Aug. 21, 2020). “Apple worth $1 trillion more since COVID-19 crashed the NASDAQ 100.” The Next Web / Hard Fork. Retrieved from https://thenextweb.com/hardfork/2020/08/21/apple-tesla-stock-covid-bounce-nasdaq-market-index-crash-market-values/.

7 - Wang, Lu and Ferro, Jonathan. (Oct. 9, 2020). “Never Mind the Narratives: ‘This Market Wants to Go Higher’.” Yahoo Finance. Retrieved from https://finance.yahoo.com/news/never-mind-narratives-market-wants-200732205.html.

8 – Olya, Gabrielle. (Oct. 9, 2020). “25 Experts’ Predictions on When We Will Bounce Back From COVID-19.” Yahoo! Finance. Retrieved from https://finance.yahoo.com/news/17-experts-predictions-bounce-back-183000197.html.

9 – Whiteman, Doug. (Oct. 7, 2020). “Warren Buffett says this is the way you get through COVID financially.” Yahoo! News. Retrieved from https://news.yahoo.com/warren-buffett-says-covid-19-151000444.html.

10 – NPR Life Kit Podcast. (Aug. 21, 2020). “How to Invest – Even During a Pandemic.” NPR. Retrieved from https://www.npr.org/transcripts/904280484.

 Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Investing involves risks.  Wealthrise Financial Planning is an investment advisor registered with FINRA. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.

Eight Strategies for Enjoyable Gift-giving this Season

Winston Churchill once said, “We make a living by what we get, we make a life by what we give.”

2020 has marked one of the toughest years for many across the world. After several months of quarantining and careful social distancing, some have managed to set aside extra cash. At the same time, these same people feel limited by what they can do over the holidays.

Perhaps this is the year where you totally rock your gifting strategy. Below are eight gift-giving options you can try.

1.       Check out charity websites. Have the means to give, but don’t know how to find a worthy charity? Guidestar.org can help you find or verify charity information. You can also discover new charities and filter for those with gold or platinum ratings.

2.       Take advantage of tax-favored charitable giving. Just remember to vet any ideas you’re considering through your tax professional first.

a.       Qualified charitable distributions. Over age 70? You can do a tax-free distribution from your IRA to a 501(c)(3) organization (e.g., churches, COVID-19 aid organizations, hurricane or fire relief agencies) up to $100,000. The IRS allows very few tax-free distributions from an IRA, so you should take advantage of the few that do exist. Contact your financial advisor to learn how easy this is. In a year where you have to take your Required Minimum Distribution, this counts towards the requirement.

b.       Donor-advised funds. These charitable giving accounts were created to manage charitable donations on behalf of an organization or individual. Contributions are particularly helpful in years of sizeable income (property sale, business liquidations). In this case, you can lump all your giving into one year to get a maximum itemized deduction. As such, charitable deductions are most relevant for those who itemize.

To participate in a donor-advised fund, open an account in the fund and deposit cash or securities. While you must surrender ownership of anything you put into the fund, you retain the ability to invest the funds. You receive the tax deduction in the year that you give to the donor-advised fund, and you can distribute to the charities over time.

c.       Appreciated stock. Instead of cash, give shares of appreciated stock. This allows you to avoid the capital gain on the stock shares you give.

3.       Keep your focus on affordability. Even if 2020 has not been a stellar year for you financially, you can still give without breaking your bank account. Get creative on maximizing the fun while minimizing the cost! Here are a few ideas

a.       Play Secret Santa. With Secret Santa, a group of friends or colleagues exchange presents anonymously. To set up, each participant draws or is assigned a group member’s name. Each person then makes or buys a gift—spending limits are set ahead of time—for the person whose name they drew. But be sure to keep your recipient’s name a secret. That’s part of the fun!

b.       Organize a White Elephant gift exchange. The goal of a White Elephant gift exchange is to entertain party-goers rather than to gain a genuinely valuable or highly sought-after item. In fact, amusing, impractical and odd gifts make for biggest laughs! Social distancing keeping you apart? No problem! Organize a White Elephant gift exchange via Zoom! You may even explore White Elephant Online - Your Online Gift Exchange

c.       Share the gift cost. If your gift idea is too expensive for you to manage on your own, go in on the gift with others.

d.       Give your time. You don’t need to buy a gift to show you care. Instead of exchanging presents, meet up for coffee, go for a walk, or schedule a Zoom call. Odds are your recipient will enjoy simply spending time with you.

e.       Think homemade. For some people on your holiday list, a homemade gift may be more meaningful than a store-bought item. Create a photo album filled with photos of you and the recipient. Build a shadow box that contains special mementos of your times together. Or package holiday cookies or other food items in a decorative box or basket. Need help getting started? Etsy and Pinterest offer a bounty of homemade gift ideas.

f.        Set a limit. If you love giving gifts, consider setting a gift quantity or spending limit. That way you still get to experience the joy of giving while keeping your spending under control.

g.       Offer your help. Another way to give is by offering to help others. This could mean setting up a friend’s internet TV, fixing a broken gutter, or making a gourmet dinner. Whatever your special skills are, put them to the task.

4.       Remember that it’s the thought that counts. Take the time to sit and ponder what to give your loved ones for Christmas. In some cases, they might appreciate a hand-written card or a customized photo book rather than yet another gift card to stick in their wallet. Get started with these ideas:

a.       Engage in a buddy brainstorm. Spend time brainstorming gift ideas with a trusted friend. Tap the power of Google or Amazon for tips on what to buy someone who likes a certain activity like yoga, baseball or board games.

b.       Make a list throughout the year. When visiting friends or relatives, pay attention to items they might need around the house or things they mention during conversations.

c.       Request to view Amazon wish lists. Many people keep a public “wish list” on Amazon. Ask to review it, so you can discover items they’d like to receive.

5.       Consider core values. Are your recipients big on saving time? Maintaining good health? Partaking in novel experiences? With this in mind, consider gift ideas that address their core values:

a.       Tickets to outdoor activities like the zoo or botanical gardens.

b.       Gift card for a cleaning service or handyman through Handy.com.

c.       A week of meal prep from a service like Blue Apron.

d.       Babysitting services for a family with young children.

e.       A customized calendar of top coronavirus-conscious adventures in your local area designed to inspire fun times in 2021.

6.       Give gift cards. If you find yourself running out of time, a gift card is still a safe bet. Many people appreciate being able to choose their own present, especially when someone else is footing the bill. Just be sure to choose gift cards at stores where your pals are likely to shop.  

7.       Manage the hard-to-buy-for people. What about giving to the person who has everything? We all have someone in our lives who is impossible to buy for. For that person, you might consider the following:

a.       Tasty gifts. Make something homemade or order from a specialty food company like Harry & David, Baker & Olive, or Ben & Jerry’s.

b.       Category-specific gifts. You can almost never go wrong by sending flowers to a woman. Men are more likely to appreciate a meat treat from Omaha Steaks or Dan the Sausage Man. For your vegan friends, gift them a sampling of Beyond Meat products.

c.       Buy one, donate one gifts. Combine utility with charity by purchasing from a site like Coffee4kids, Bomba Socks, Uncommon Goods, or Tom’s who donate items to those in need along with each purchase.  

d.       Comfort gifts. When the weather cools off, there’s nothing better than a cozy blanket, winter-scented candle, or a warm pair of socks to offer your special someone comfort during the chilly winter months.

e.       Gifts that keep giving. Buy your friend a subscription to a magazine or video service like Outside Magazine or Hulu that they can enjoy all year long.

8.       Put it on hold. Getting stressed out just thinking about the holidays this year? Take a year off. That’s right. You heard me. Give yourself a break. Spend your weekends in December meditating, traveling, journaling and catching up with old friends. Then choose to leave the shopping for everyone else. Reach out to your fellow gift exchangers now, and give them a break too. Skip sending the annual holiday cards or try an ecard like those designed by Jacquie Lawson.

Whatever you end up doing this holiday season, make sure it comes with a healthy dose of self-care. This has been an extremely challenging year, and you deserve to savor the coming months without breaking the bank or burying yourself in more stress.

Homeowners are buzzing about it...

Subject line:   Homeowners are buzzing about it ...

Is Now A Good Time To Refinance Your Mortgage Loan?

By Shelley Murasko

If you have been looking for a way to access extra cash or to save thousands in interest, refinancing your home may be a sound strategy. With interest rates plunging to their lowest point in 50 years, homeowners with good credit are snagging average interest rates of 2.98% for 30-year fixed rate mortgages.1

By securing one of these ultra-low interest rates, you could be saving tens of thousands of dollars over the life of your home loan. And that’s money you could put toward investments that will further grow your nest egg.

If you haven’t refinanced yet, here are a few reasons why you should be considering it.

Why should you refinance?

When you refinance, you replace your old loan with a new one. This transaction allows you to settle your current mortgage and set up a new loan with better terms to pay off the remaining balance.

Homeowners refinance their mortgages for many reasons, and your best friend’s or your neighbor’s motives may differ from yours. Here are some of the most common reasons to refinance your home:

·         Lower your interest rate and monthly payments
When you lower your interest rate, you could save thousands of dollars throughout your loan’s lifetime. Depending on the length of your loan, you could reduce your monthly payments too. If your income has decreased due to the current economic downturn, lower monthly payments would leave extra cash to pay for essential items like food, utilities and gas or help you reduce debt from credit cards and car payments.

For example, let’s say you have a 30-year fixed rate loan with a remaining balance of $350,000. Your current interest rate is 4.125% and you have excellent credit. If you refinanced with a 30-year fixed rate loan at 3.125%, you’d reduce your payment by $350 per month while also saving $16,000 in interest over the life of the loan.

·         Shorten the term of your loan

If you’ve been paying off your loan for a decade or more, you may want to consider swapping your 30-year loan for one with a shorter-term such as a 10-year, 15-year, or 20-year. While this may drive up your monthly payments, you’ll increase your equity at a faster rate and reduce interest fees, saving you money in the long-run.

Using the same example from the bullet above, you could save a significant amount of money if you swapped your 30-year loan for a 15-year fixed rate loan at 2.75%. In this case, you’d increase your monthly payment by $500 per month, save $130,000 off the interest over the life of the loan, and pay off your mortgage seven years earlier.

·         Cash-out refinance

If you’ve built up equity in your home, you can cash out and use it to invest the money in other ways. For example, you could use the funds to strengthen your investment portfolio, start a business, or save for a child’s education. The cash you receive in this type of transaction is tax-free and you can spend it however you want.

·         Change loan type

If you currently have an adjustable rate mortgage (ARM) and are worried about rates increasing in the future, refinancing offers the opportunity to switch to a fixed rate loan. With interest rates at an all-time low, you could lock in an excellent rate that will save you money and give you peace of mind.

·         Get rid of mortgage insurance

If the down payment on your original loan was less than 20%, you’re likely carrying private mortgage insurance (PMI) on top of your monthly mortgage payment. This can exceed 1% of your loan principal. To get rid of this liability, you can refinance into a conventional loan and reduce the lifetime borrowing costs. To remove the PMI, your home must have increased in value and/or you must have built up at least 20% in equity.

·         Consolidate debt

Some homeowners opt to refinance to consolidate debt and pay it off at a lower rate. While this may work in theory, you may find yourself in the same situation in the future if you don’t change your spending habits. The danger here is that you could end up losing your home if you default on your loan. Only refinance for this reason if you can commit to making your monthly payments and ideally preserve 20% equity in your home.

Whatever reason you have for refinancing, the most popular goals are to save money by reducing monthly payments and/or pay less interest over the life of the loan. Just keep in mind that there are hefty closing costs you’ll have to pay to establish the new loan, which can range from $3000-$10,000. Some of these costs include:

·         Loan origination fees – can be as high as 1.5% of the loan value

·         Appraisal fees – usually $500 or less

·         Mortgage discount points – each point costs 1% of the loan value to get a 0.25% rate decreas

·         Title insurance premiums – ranges between $400 and $1,000

·         Title insurance changes, if needed – varies depending on loan size

·         Upfront fees to impound mortgage insurance and property taxes, if needed – varies

As you can see, these costs can add up quickly. That’s why it’s important to clearly understand what you’ll be paying before you commit to a refinance. In addition, be sure to add in any prepayment penalty on your current loan to get the full view of your potential payout.

When should you refinance?

Under normal circumstances, experts say it’s a good time to refinance if you can lower your interest rate by at least 2%. Some even believe a 1% savings is enough incentive to proceed.2 With interest rates sinking below 3% in July and August, it’s a wise financial move to at least look into it.   

But don’t wait too long. Interest rates won’t stay this low forever, and the sooner you act, the better your chances are of locking in a competitive rate.

To decide if refinancing is an option for you, start by running an analysis using these mortgage refinance calculators:

·         https://financialmentor.com/calculator/mortgage-refinance-calculator

·         https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

What items do you need to refinance?

If you decide you do want to pursue a refinance, a lender is far more likely to approve you for a loan if you can show you’re a low-risk prospect. Here are a few items that will increase your chances:

·         Good credit

If you have a high credit rating, you’re more likely to get approved for a loan with a low interest rate. You typically need a minimum credit rating of 620 for a conventional loan or 580 for a Federal Housing Administration (FHA) loan. If your credit rating is too low, you can increase it by fixing errors, paying down credit card balances and staying below your spending limits.

·         Steady stream of income

Lenders want proof that you’ll be able to repay the loan. If you’re gainfully employed, you have an advantage because you’re more likely to get approved. If you’ve been laid off or furloughed, this will count against you. Unemployment payouts are not considered steady income, so they won’t help your case. The exception is if you are a seasonal employee who receives unemployment consistently during your off-season working periods.

·         Sufficient equity

When assessing risk, lenders use the loan-to-value (LTV) ratio as an indicator. This is the loan amount you owe compared to your home’s current market value. A high LTV ratio means you’re a risky investment because the lender would lose a greater amount of money if you defaulted on the loan. A low LTV ratio means you have ample equity and owe less on the loan than your home is worth. This makes you a better candidate.

For a home mortgage, you can quality if you have at least 20% equity and an LTV ratio of up to 80%. Equity of at least 20% also removes the need for private mortgage insurance, which can eliminate fees of 1% or more over the lifetime of your loan.3

What’s the process to refinance?

If your credit, equity and source of steady income are in good shape, you’re ready to begin the refinancing process. Here’s what you’ll need to do:

·         Gather income-related documents. This includes items like your most recent pay stubs, bank statements, tax returns, proof of insurance, and personal identification.

·         Prequalify for a loan. Reach out to lenders for a “soft credit inquiry” that won’t harm your credit score. This can tell you what loan amount you’ll qualify for along with the interest rate and terms you can expect to get. Be sure to shop around to at least three lenders to determine which lenders provide the lowest mortgage rates.

·         Apply for the refinance loan. Contact your selected lender and provide the appropriate paperwork about your income, identity and current loan parameters.

·         Schedule the closing. During this phase, you’ll need to get a home appraisal, and the lender will proceed with the needed paperwork.

·         Sign the closing documents. You’ll get your closing paperwork about three days before closing. At this point, you’ll need to sign multiple documents to complete the transaction.

·         Get set up with your new lender. Once the loan closes, your new lender will pay your former escrow and mortgage companies. From that point on, you’ll be dealing only with your new lender to make payments.

Normally, you’d be able to close on your refinance loan in about 30 days. With the favorable interest rates, however, multitudes of homeowners have been clamoring to refinance over the past six months. This means you’ll likely find a backlog awaiting you, so expect a longer wait time.

What if you don’t qualify?

If you’ve been laid off or furloughed due to the current economic situation, you’ll find it hard to qualify for refinancing. Lenders require proof of a steady stream of income before they’ll grant you a mortgage. Fortunately, you have other options that could still get you the loan.

·        Get a cosigner

If you’re unemployed or your credit score is low, you may still be able to refinance your home if you have a cosigner. This is a person with a steady income who promises to pay the loan payments if you’re unable to. If he or she has a strong credit rating, the odds of you getting the loan increase.

·         Research government loan programs

If you don’t have enough home equity built up, refinancing programs through the Federal Housing Administration, U.S. Department of Agriculture and U.S. Department of Veterans Affairs may be able to help. You must meet certain criteria, but it’s worth looking into.

Federal loans backed by Fannie Mae and Freddie Mac are another option. These government lenders allow you to use unemployment benefits as income, but only if you’re a seasonal worker.

A third route is to ask your lender or mortgage servicer about coronavirus mortgage relief options. Learn more about them at these links: https://www.investopedia.com/how-to-get-mortgage-relief-4800539 or https://www.consumerfinance.gov/coronavirus/mortgage-and-housing-assistance/mortgage-relief/.

·         Discuss options with your current lender
Lenders want to get repaid, so they’re often willing to negotiate a new payment plan or a loan modification. The latter is a change in your current loan terms, which can reduce your monthly payments and make them more affordable. Give your lender a call and see what they can do to help you.

·         Talk to a HUD-approved housing counselor
A housing counselor can help you figure out the options available to you, based on your current situation. Many of the services offered are free or at low cost, and you can access help online or via phone. Get more details here: https://www.hud.gov/i_want_to/talk_to_a_housing_counselor.

·         Prepay your mortgage by sending in extra payments on a periodic basis instead.

For many homeowners, the higher monthly cost of a shorter loan term isn’t in the budget. This is why some homeowners skip the refinance and opt to “prepay” their mortgage instead. You don’t get access to new, lower rates, but you take better control of your loan.

·         Prepaying your mortgage means to send “extra” payments to your lender each month, which chips away at the amount you owe faster than your amortization schedule prescribes.

How to avoid refinancing pitfalls

Refinancing your home can be a complicated process, so be sure you understand what you’re getting into if you decide to proceed. You can avoid the traditional pitfalls if you follow the tips below.

·         Factor in the closing costs. While refinancing can save you in terms of monthly payments or overall interest fees, it also comes with hefty closing costs.

·         Don’t refinance if you’re planning to move soon. After your refinancing goes through, you’ll want to stay in your home long enough to recoup your closing costs. For example, let’s say you save $200 in monthly payments by refinancing but incur $5,000 in closing costs. As a result, it will take you 25 months to break even.5 If you’re planning to stay in your home for two years or more, refinancing is a smart move. If not, it would be wiser to forgo refinancing so you don’t lose money.

·         Boost a low credit rating before applying. You won’t be able to get a competitive interest rate with a low credit score. In this case, take some time to boost your credit rating to at least 620 (or 580 for an FHA loan) before applying for a refinance.

·         Be sure to seek out multiple offers. If you take the first offer you get, you might miss out on a better deal. Instead, shop around. Get offers from at least three different lenders, so you can select the one who offers you the best terms.

Note: Applying for a refinance can temporarily reduce your credit score. To lessen the damage, a good tactic is to apply to multiple lenders in a short time frame, say between 30 and 45 days. This will count as a single inquiry and will have less impact on your score.

·         Avoid so-called “no-cost” refinancing. This is a ploy to lure loan seekers. In reality, a no-cost refinance doesn’t exist. There are costs associated with refinancing, and lenders simply roll them in to your loan or charge you a higher interest rate to recoup these fees. You can still consider a no-cost refinance; just realize that you’re not really getting anything for free.

·         Consider mortgage prepayment penalties. Before refinancing, ask your lender if you’ll be penalized for paying off your current loan early. If you will, find out how much the penalty will set you back so you can decide if the refinance is worth the cost. 

·         Rethink refinancing if you’ve already got a good rate. If you’ve already got a rate around 3%, refinancing may offer little benefit. To see if it makes financial sense, assess how much you’ll save each month and compare it to your closing costs and the interest savings over the life of the loan. If the savings is trivial, you may be better off sticking with your current loan and simply making extra payments against the principal each year instead.

·         Assess the remaining lifespan of your current loan. If you’re within the last 10 years of paying off your current loan, the benefits might be too slight to make it worth the effort.

Is refinancing really worth it?

With interest rates at an all-time low, experts continue to trumpet the news that now is an ideal time to refinance your home—primarily, if you have steady income and your current interest rate is more than 4%. If this applies to you, refinancing could provide you with a way to lower your housing costs on a long-term basis.

However, you will want to put some effort into determining if refinancing is right for you. The best approach is to do the math and let the numbers tell you if the potential benefits outweigh the costs.

Have questions about how the interest rate drop may affect your finances? Let’s talk! Get in touch with me by replying to this email.

Sources:

1 - Backman, Maurie. (July 16, 2020). "The 30-year mortgage has reached a record low." The Ascent. Retrieved from https://www.fool.com/the-ascent/mortgages/articles/30-year-mortgage-has-reached-record-low/?utm_source=usa-today&utm_medium=feed&utm_campaign=article&referring_guid=349ea544-ae0d-47e0-b06e-181ef9745622.

2 - Investopedia staff. (Mar. 16, 2020). "When (and when not) to refinance your mortgage." Investopedia. Retrieved from https://www.investopedia.com/mortgage/refinance/when-and-when-not-to-refinance-mortgage/.

3 - Pritchard, Justin. (Mar. 10, 2020.) "What qualifications do you need to refinance a loan?" The Balance. Retrieved from https://www.thebalance.com/can-i-refinance-315504.

4 - Martucci, Brian. (Apr. 27. 2020). "When should I refinance my mortgage loan?" Money Crashers. Retrieved from https://www.moneycrashers.com/should-i-refinance-my-mortgage/.

5 - Backman, Maurie. (Aug. 16, 2020). "4 mortgage refinancing mistakes to avoid." The Ascent. Retrieved from https://www.fool.com/the-ascent/mortgages/articles/4-mortgage-refinancing-mistakes-to-avoid/.

6 - Gumbinger, Keith. (Feb. 8, 2013). "I have 3 years left on my loan, should I refinance?" HSH. Retrieved from https://www.hsh.com/refinance/i-have-3-years-left-on-my-loan-should-i-refinance.html.

How To Put Your Lazy Cash To Work For You

It’s official. The United States hit a record savings rate of 33% in April. This was due in part to the coronavirus shutdown ... along with billions of stimulus dollars dished out by the government.

This is great news!

A high savings rate means more Americans are on the path to financial freedom or, at least, financial security. So what’s the best way to handle these extra savings?

Putting money to good use really comes down to mindset. Think of each dollar as an “employee” ready to go to work for you. If you were running a small company, you’d make sure you were getting peak output from your employees.

So put on your boss hat and get to work directing those dollars! You don’t want your savings eating donuts lazily in the breakroom. Do you?

Prep for the unexpected with an emergency fund

I’m often shocked by how much “lazy” cash a person will hold. Often, it’s because he or she claims to be waiting for the right time to invest. Since not even financial wiz Warren Buffett knows how to time the market reliably, it’s pretty safe to assume you don’t either. With that in mind, a good principle is to invest when you have extra money to invest.

So how do you know if you have enough extra cash to do that? Start by setting aside enough to cover 1-2 months of your household spending needs.

Once you’ve settled on a reasonable stash to cover bills, you can move on to the next step: establishing your official emergency fund. This is an account full of money to help you through a job layoff or major unexpected expense, like a car accident or home repair.

An emergency fund should cover 3-6 months of your spending needs if you’re currently working. If you’re retired, it should include about one year of spending coverage.

Hold this emergency fund in the highest interest bearing, FDIC insured account you can find. For help with this, search websites like www.bankrate/banking. Or you can consult directly with your brokerage account advisor.

In the current interest rate environment, you can expect about 1% on 6-month CDs and 1.35% on money market accounts that are FDIC insured up to $250,000. This paltry rate of 1-1.5% isn’t much, but the return is backed by government insurance. This means your emergency fund interest rate is basically guaranteed.

Eight money-making ideas for building wealth

Once you’ve set aside your emergency fund, move the rest of your excess cash to one of the options below. These “hard-working dollar” ideas allow you to earn returns by investing your money, avoiding interest payments on debt, and/or earning return from an employer match or IRS tax break. Generally, these ideas are in order of priority:

1.       Get the 401(k) employer match - Approximate return opportunity: 69%

If your company offers a 401(k) match, contribute up to that point. This allows you to earn return from the employer, which is typically 50%. You’ll also receive investment return by putting money in low-cost index funds. These may include target date funds, if available, at a rate of about 6-8% per year over time. You may get an additional 10-15% return based on the difference in your marginal tax bracket between now and retirement, but best to confirm this with your tax professional.

2.       Open a Health Savings Accounts - Approximate return opportunity: 38%

If you’re in an HSA-eligible medical plan, contribute up to the limit ($7,100 for families and $3,550 for individuals). This results in a tax break at your marginal rate going in (up to 25-35%). It’s also tax-free coming out if used for medical expenses. In addition, these dollars can earn return in mutual fund investments, giving you another 6-8%.

3.       Pay off credit card debt - Approximate return opportunity: 12-22% (depends on interest rate)

Most credit cards charge interest at a rate of 12-22%. Paying off this debt automatically delivers you a double digit return. Most individuals should ALWAYS pay off their credit cards, preventing debt in the first place. Think of it this way: Any recurring balance is like a small fire burning down your financial house. Put it out as quickly as you can.

4.       Exceed the 401(k) match limit - Approximate return opportunity: 19%

If you’re already getting the 401(k) employer match, consider investing up to the maximum limit ($19,500 in 2020 if under age 50, and $26,000 if over age 50). By going beyond the match savings described in #1 above, you’ll get an additional tax break now. If you’re in your low earning years (annual income of less than $40,000 for individuals and $80,000 for families), you might opt for a Roth 401(k) or Roth IRA instead.

5.       Pay off additional debt - Approximate return opportunity: 6% (depends on interest rate)

Do you have outstanding college loans, helocs or car loans with an interest rate of 6% or more? Pay them off and recoup the money that would have gone toward the loan interest.

6.       Invest in a college savings plan - Approximate return opportunity: 6-8%

If you’ve got kids or grandkids heading to college in the future, put funds in a 529 plan that grows tax-free. The plans offered by Utah and Virginia are worth a look. They consistently rank in the top five, based on Morningstar’s annual review of the country’s top 529 plans. Be sure to check your state’s plan too. You may be able to get state tax deductions. Important note: Grandparents should NOT open these plans in their own name. It could lower the amount of financial aid their grandchild receives. (Contact me to learn more.)

7.       Invest in a taxable investment brokerage account - Approximate return opportunity: 5-7%

Planning to make a large purchase far into the future? Perhaps you’re saving up for a new car or house. Or maybe you want another way to increase your retirement fund. Putting money into this type of account can help your money grow on autopilot. That way you’ll have the cash you need when it’s time to pay for that big item. Err on the side of conservative investment allocations, depending on your timeframe.

8.       Pay down part of your home loan - Approximate return opportunity: 3-5% (depends on interest rate)

If you’ve got cash to spare, consider paying down your mortgage. It’s an easy way to get an instant return equal to your interest rate. Keep in mind this is minus the tax benefit if you’re itemizing deductions.

Time in the market matters most

When you put your money to work using one or more of the options above, you’re setting yourself up to grow more wealth. You’ll also be ahead of many others who hoard their cash, waiting for the perfect time to invest.

People who wait act as if a beacon from outer space is going to come down and alert them when to act. Something that top investors insist is very unlikely to go well most of the time.

What matters most in the world of investing is time IN the market. Not timing the market, despite what the TV commentators push on their daily shows. If you follow the ideas I’ve mentioned and sensibly direct your dollars, you’ll earn returns ranging from 3-69%.

An average return of about 7% will set you on a path to doubling the dollars you save every 10 years. This is how you can take a mere $10,000 saved per year, and build it to $20,000 10 years later.

Over time it will continue to grow, even while you sleep. Before long it will be at $40,000, then $80,000 and so on. Time and careful direction of your dollar bill “employees” can build to over 1 million before you’re 50.

 At that amount, your team of hard-working dollars will give you about $40,000 annually for the rest of your life. Hopefully, you’re beginning to see the tremendous amount of freedom you can get with time and patience.

If you’re in the fortunate position of having extra savings after months of shutdown, make the most of this opportunity now and put those lazy dollars to work!

Need help investing your “lazy” dollars? Let’s work together to build your investments. Reply to this email or call me at 760-508-0368.

References:

Fitzgerald, Maggie. (May 29, 2020.) “U.S. savings rate hits record 33% as coronavirus causes Americans to stockpile cash, curb spending.” CNBC. Retrieved from https://www.cnbc.com/2020/05/29/us-savings-rate-hits-record-33percent-as-coronavirus-causes-americans-to-stockpile-cash-curb-spending.html