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Using The Money Management Tool: Setting a Budget

Recently we introduced The Money Management Tool to help clients better organize their financial lives. The tool has lots of features and we will occasional explain how some of the features are being used by our clients (or should be used) to help them reach their financial goals.

This post will deal with prospective client who needed some help staying on budget.

Situation: A young couple with two children asked us for guidance on getting a handle on their debts. They had multiple credit card balances with obscene interest rates, a result of unexpected bills. They were spending more and more of their income to make debt payments instead of saving for retirement. They were slowly realizing that they would not be digging themselves out of debt anytime soon and needed a plan to get back on track to save for retirement.

Problem: During the initial meeting, we discovered a significant amount of their take-home pay was going toward non-essential expenses, such as the most premium cable package available and eating out for lunch every single day.

Solution: Directing savings originally intended for retirement to pay down credit card debt is an acceptable strategy in some cases. But when there is a lot of non-essential spending occurring, a tightening of the belt should be the first strategy. In this case, the client could connect their credit card account to The Money Management Tool and analyze their spending habits to see just how much is spent on restaurants and entertainment. They could then develop a budget to help them stay on track.

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If you or someone you know needs help getting their financial house in order, this tool can help.

Contact us today to get started.

The Relationship Between Happiness and Income Is Being Turned Upside Down

New research on the relationship between happiness and income is changing the rule of thumb. For years, it has been touted that an annual income of $75,000 is ideal and earning more than that results in a diminishing return of happiness.

Contrary to the old rule of thumb, there is a linear relationship between money and happiness, suggesting the more some makes, the happier they are in life.

So, maybe money can buy happiness after all?

You can read the study here

Is Retirement Savings Being Crowded Out by Student Debt?

A recent study conducted by HelloWallet suggests that a dollar of student loan debt is associated with a 35-cent decrease in retirement account balances! That means, investors with lots of student loans are unable to save as much for retirement.

This is a big problem on a large scale:

  1. 60% of college graduates take on some form of student loan.
  2. The average loan size has tripled over two decades form $9,400 to $27,300
  3. There is more student loan debt than credit card debt.

You can read the study here

I take issue with this study in several areas:

  1. The study assumes that people have a given number of dollars available and must split it between debt repayment and saving for retirement. In reality, I am seeing many people make significant sacrifices in their lifestyle in order to stay on top of their debts and retirement planning. People are living at home longer, avoiding more debt by not buying a house, or living a more modest lifestyle.
  2. People I see coming out of college with significant levels of debt are going through a crash course in personal finance much faster than those with no student loans. They are experiencing a wake-up call in their 20s and 30s as opposed to their 40’s or 50’s. Smart financial habits that they develop now could lead them to a more prosperous future.
  3. I’m working with many families on a more complicated dilemma. Not only do they need to weigh existing student loan debts and saving for retirement, but they also struggle to save for their own children’s education.

The final issue I take with this study is a line repeated multiple times: “There are few widely available tools to help individuals decide whether to prioritize student loan repayments or retirement savings.” In reality, there are lots of tools available to help people analyze that question, such as a Certified Financial Planner™ professional.

What Sets Us Apart From 83% Of All Financial Advisors

Even as the country moves toward economic recovery, personal financial security is still uppermost in many peoples’ minds. They’re eager for advice about their retirement, estate plan, insurance, emergency funds, liabilities and their asset allocation. It’s never been more important for clients and financial advisors to take a holistic approach – looking at an individual’s entire financial picture, not just one aspect or another. Working with a CERTIFIED FINANCIAL PLANNER™ professional is assurance that he or she is a credentialed expert who does just that, and performs to high ethical and professional standards.

Following in my father’s footsteps, I’ve recently become a CFP® professional. The designation comes with extensive training in financial planning, estate planning, insurance, investments, taxes, employee benefits and retirement planning, as well as in CFP Board’s Standards of Professional Conduct, which are rigorously enforced. As a CFP® professional, I’m required to uphold my certification through continuing education – something to consider with new financial instruments appearing regularly on the consumer market. It’s little wonder that CFP® certification is the most recognized in the industry for personal financial planning. So as you think about your financial future, please bear in mind that only 17% of all financial advisors in the industry can claim this distinction.

Most Valuable Career Skills You Need

Money Magazine’s recent article on career skills shows that an entirely new breed of skills are needed to remain competitive in today’s markets.  The top four skills all deal with data – data mining, data modeling, search engine marketing and statistical analysis.  Just about every skill mentioned involves technology from computer aided design to IT to technical sales.  And there are a few staples that we all would expect to see – new business development, strategic planning, and financial analysis.

The full article can be found here

 

 

The Reverse Mortgage in Your Retirement Income Strategy

Recently, I had a few conversations with clients about their retirement portfolios. In these cases, there was some disappointment with the returns that the markets have provided, or not provided, in the last couple of years. For them, and I suspect other clients as well, there’s an added complication: taking big distributions every month, or every year, can reduce the IRA balance significantly and quickly. They fear they’re running out of money.

These discussions have led to my taking a refresher course on the concept of a reverse mortgage, loans that let you borrow against the value of your home, but don’t require repayment while you’re still living in it. This type of loan has been around for a while, but it may become more popular for several reasons. Here is what I learned.

Five Things You Should Know About Reverse Mortgages:

  1. Federal laws and regulations implemented in 2013 and 2015 were the game-changers. Added safeguards make these government-backed loans safer for both the borrower (especially seniors) and the banker, and also cheaper than they used to be (but still more expensive than a traditional home-equity line of credit). Most reverse mortgages today are Home Equity Conversion Mortgages (HECMs), a type of Federal Housing Administration (FHA) insured reverse mortgage. Home Equity Conversion Mortgages allow seniors, age 62 or older, to convert the equity in their home to cash up front, or a line of credit.
  2. Your age is a factor. The older you are, and the more equity you have in your home, the more you can borrow. The loan can amount from 50% to 70% of your home’s value. (You can estimate your borrowing limit at reversemortage.org)
  3. You’ll have a safety net. You can take the loan as a lump sum, monthly payments, or a line of credit. But the borrowing has no set time limit. And the lender can’t freeze, cancel, or reduce your credit line; in fact, it’ll grow over time whether you use it or not! The newer rules have the government on the hook in case the reverse mortgage ever grows to exceed the home’s value. Plus, if one spouse dies, or has to go to a nursing home, the non-borrowing spouse can’t be kicked out.
  4. There can be multiple benefits. If you’re 62 or older, you can establish a line of credit with an HECM, whether you need the money now or not. You might need it later. That credit line will grow annually, perhaps substantially over the years. When you do tap your credit line, you pay no income taxes. This added borrowing might relieve some financial pressure. Perhaps you’d postpone receiving your Social Security benefits, or reduce withdrawals from your IRA, or pay the taxes from a Roth conversion, or undertake some age-in-place renovations to your home. A lump sum withdrawal might be used to pay off an existing mortgage, perhaps entirely, or more quickly, and thus reduce the expense of monthly mortgage payments.
  5. You can still get into trouble. If you don’t pay your property taxes and your homeowner insurance, you can still lose your house. If you want to move out of the home, the HECM must be paid off (it holds a lien on your house). So if you can’t live with these restrictions, downsizing is probably a better idea.

Your retirement portfolio should not be the only resource you use for your income. I’ve always been a proponent of the 3-legged stool for income stability. For many people, the HECM can become one of those legs.