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Using The Money Management Tool: Connecting Accounts

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 a prospective client who has many accounts and struggles to keep track of where they are located.

Situation: A prospective client approached us looking for help managing his investments. He had about 10 different accounts – multiple checking and savings accounts and a several different retirement accounts from current and previous employers. These accounts were held with several different financial organizations.

Problem: He struggled to keep track of all the accounts. He was constantly forgetting passwords used to view his balances online. He was spending hours trying to stay organized and reading the statements. The inconvenience grew to the point where he just ignored his accounts.

Solution: The Money Management Tool could be used to connect all the accounts together. After establishing the connections between the tool and his accounts, he would be able to see daily account balances for all the accounts from a single account. No more trying to remember multiple passwords or trying to read different statements each month.

new account

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

Contact us today to get started.

Do It Yourself Investors May Be Hurting Themselves Without Knowing It

The last time I changed the oil on my car, I inadvertently drained the power steering fluid thinking it was engine oil.  Then I added engine oil and thought I was all set.  I proceeded to drive a car around town with no steering fluid and twice as much engine oil as I should have.  It didn’t take long before I realized I really screwed up my car.  It was an expensive mistake but I learned that maintaining my car should be done by the experts.

This same concept applies to investing as well.  These two articles capture some of the biggest issues we come across when we talk with prospective clients:

Financial Illiteracy May Have Cost Investors 200 Billion Over 20 Years

20 Common Investing Mistakes

15 Mistakes People Make In Retirement

Mistakes in retirement can be costly and unfortunately very common. Money magazine’s recent article captures 15 examples.

While I have seen every one of these 15 mistakes actually happen, the most common issue I’ve seen this year is Number 7 on the list: Not knowing how much to withdraw.

This has become more pronounced as a result of the flat market. Investors who saw an 8-10% rate of return on their account could take out about 8-10% each year and end up with an account balance close to what it was at the start of the year. But with the markets flat to down slightly, investors who continue to take out 8-10% each year are seeing their account down by that amount.

The general rule of thumb is to take 4% per year. Take out more on a regular basis and you run the risk of depleting the account.

The One-Page Financial Plan: A Book Review

I recently read Carl Richard’s “The One-Page Financial Plan” and was impressed with Richard’s approach to working through some complex financial issues.  In particular, he focused almost exclusively on the emotional issues that investors face.  What does money mean to the investor?  What are the investor’s goals?  It’s these issues that overwhelm many investors to the point where they give up or procrastinate for years.

For folks that need a plan and don’t know where to start, this is a useful resource.  It’s simple and easy to follow and the principles are very similar to what I employ with my clients. This is a great guide to help investors think about money in terms of goals and how to get on the same page with a spouse on what the future looks like.  It is the most difficult part of financial planning.

It lacks specificity and implementation ideas.  Since every investor has a unique situation.  This makes the title of the book a little misleading since you don’t end up with a true financial plan on one page.  The book doesn’t go into detail about growth rate assumptions or serial payments or how to calculate time value of money.  Rather it focuses on concepts at a high level.

If the goal is to starting thinking and talking about the future, this is a great place to start.

Get Ahead With Tax Planning Strategies for Next Year

Are you hunting for last minute ideas and strategies to reduce your tax bill? If so, consider spending that time preparing to reduce your tax bill for next year. It will be a lot more productive to take steps now that could reduce the tax bill for 2016 than to trying to hunt for some donation receipt. Here are a few strategies to consider going forward:

Get a handle on your income tax brackets: If you convert a portion of your IRA into a Roth, or you periodically cash in savings bonds, or if you have a taxable investment account or you can control when you recognize income, it’s critical that you understand your income tax bracket thresholds and plan throughout the year. Recognizing income (through a conversion or sale) can bump you up into a higher tax bracket and you end up paying more in taxes. Sometimes that tax can be steep and costly, affecting your income taxes, your social security taxation, and even your Medicare premiums!

Tax Loss Harvesting: If you have a taxable account, you are well aware of how frustrating it is to own an investment with a huge unrealized gain and don’t want to sell it because of the tax it will generate. The solution is to sell it in coordination with one or several investments that have underperformed. The gain and loss can offset each other. 2015 was a particularly great year to do tax loss harvesting, but we won’t be that lucky in the future.

Gifting Strategies: If you’re charitably inclined, consider giving gifts of appreciated stock. You get a tax deduction AND avoid paying capital gains on the stock. If you’re over 70.5, you can make direct charitable contributions from your IRA which can offset your annual Required Minimum Distribution.

Should I Pay Down Debt or Invest in the Market?

As individuals approach retirement they often ask themselves what they should do to maximize their income. Specifically, they may wonder if they should pay down their debts (credit cards, auto loans, or a mortgage) or should they invest more in the markets. The answer is often times more complicated than they expect.

Exploring Investments

It’s important for investors to understand what the after-tax cost of borrowing is, especially when a mortgage with interest rate is involved. It’s possible that after-tax returns can be higher than after-tax cost of debt. Borrowers who pay a low interest rate are in a better position to invest. Other factors that determine whether or not someone should invest instead of pay down debt favor the entrepreneur and people who are willing to take risks. An investor with a loan costing them 2% per year may want to keep that debt and instead invest in the market if they think they can get 5%-6%.

Managing Risk

Risk is determined by several factors such as age, income, time frame, market activity and taxes. Most experienced investors are aware that equities can be high risk assets. A leading factor that favors investing is high disposable income, which allows for higher risk tolerance. If we revisit the above example, the investor does run the risk of investing in the market in a bad year. In that case the investor still has to service the debt, but also watch their portfolio decline in value. The higher the interest rate on the loan, the more risk the investor takes that the return on the investments will not beat the interest rate.

Paying Debt & Cash Flow

Even though debt seems like a bad word, it is helpful to a credit score to have a certain amount of debt or credit history. The first priority should be saving up six months worth of monthly expenses as part of an emergency or safety net fund. Once this fund is in place, excess money can be used to pay down debt or invest. The main barometer for deciding between debt and investing is debt-to-income ratio. If the ratio is high, paying debt is usually the wiser choice. Tight cash flow is a red flag that budget cuts will be needed.

With low interest rates like we’ve seen, now is a good time to review your situation.