What You Should Know Before You Start Investing

Financial World – Basic Training

New investors, or investors who simply aren’t seasoned in the areas of finance, sometimes struggle to make sense of the sea of options available to them. 

Before you can create a successful portfolio that aligns with your specific financial situation and goals, you must first have a basic understanding of the investment vehicles (stocks, bonds, mutual funds), as well as concepts such as risk vs. reward and time horizon.  Then you have to have a general idea of what the market is doing, how it is reacting, and what those forces causing the reaction are.  You must then marry this with your own beliefs, predictions, and goals, then continuously monitor all of the above. 

To make it even more challenging, more and more options are becoming available to investors, and our economic and geopolitical worlds continue to shift at an ever increasing pace.  It is no wonder so many are admitting they would benefit from the advice of financial professionals (see survey results from our last blog entry). 

Our first responsibility as financial advisors is to educate investors.  This duty is ongoing, and is at the forefront of our minds every day.  Here is an article which is great for beginning investors.  Written by John DeFeo of the Street.com, it captures some basics and links to very good resources.  Enjoy!

How To Invest and Make Your Money Grow

Financial Literacy Low, Need for Financial Guidance High, and Geier Asset Management Answering The Call To Action

Financial Literacy Survey Reveals the Need for Advisors to Up Their Game

Financial Literacy Month has come to an end.  However we are left with some very powerful data to reflect on.  The National Foundation of Credit Counseling (NFCC) and the Network Branded Prepaid Card Association released the results of the 2013 Financial Literacy Survey.  The survey focuses on American’s attitudes and behaviors relating to finance. 

Not enough savings, not being able to pay financial obligations, health insurance, credit, and job loss were the top 5 financial concerns plaguing those consumers who participated in this survey (about 2,037 adults).  The numbers in these categories are amazing!  However, that was not what concerned me the most as a financial advisor.  The numbers that were even more unsettling were those related to grading their knowledge of personal finance.  40% of U.S. adults gave themselves a grade of C, D, or F, and 78% agree that they would benefit from additional advice and answers to everyday financial questions from a professional.

Click on the link to read the article by Credit Union Magazine, and get access to the actual survey results.   

http://www.creditunionmagazine.com/articles/38392-survey-reveals-consumers-top-financial-concerns

So why aren’t they reaching out to a financial professional?  What is holding them back?  Lack of trust, myths such as “I have to have a lot of money to work with a financial advisor,” not knowing where to find a reputable advisor, fear of sharing something as intimate as your financial life?  Whatever the reason, these numbers are alarming, and need to be reversed.  This serves as a call to action to advisors everywhere.  What can we do to help individuals and families take the next step with confidence and comfort? 

We have decided to offer free one hour financial consultations including 401k and investment portfolio reviews during the month of June.  Even if you just want to come in and ask questions relating to financial planning, retirement planning, saving strategies, refinancing options, or investing in general, we are ready and waiting.  Let’s change the numbers!  Give us a call at (410) 997-8000.  

Roth IRA Explained

The Anatomy of a ROTH IRA

Unfortunately the numbers aren’t real impressive when it comes to the number of Americans who have saved well for retirement.  According to a new Employee Benefit Research Institute survey of 1,003 workers age 25 and older and 251 retirees, 49% of workers say they doubt their ability to afford a comfortable retirement and 28% of employees say they don’t feel confident at all about their retirement prospects.  Saving for retirement seems to be a discussion many need to have.  There are different ways to save for retirement, but we are going to focus on one in particular in this post.

A ROTH IRA is one of the most popular retirement vehicles used today.  It has become a favorite among advisors primarily for its tax friendly benefits. Even if you already have an employer sponsored retirement plan, a ROTH IRA can be another excellent tool to complement your existing retirement savings strategy.  Below are the primary positive characteristics of a ROTH:

• Earnings and withdrawals are generally tax-free
• Unlike traditional IRAs, ROTH IRAs don’t require withdrawals during the owner’s lifetime
• Beneficiaries of ROTH IRAs don’t owe income tax on withdrawals and distributions can be stretched out over many years
• They allow owners to take penalty – free qualified distributions at age 591/2, but the first contribution must be at least 5 years before qualified distributions begin
• After 5 years, up to $10,000 of earnings can be withdrawn penalty – free to cover first time home buyer expenses
• You can contribute to a ROTH as long as you would like

There are a couple of limitations that should be pointed out as well:

• There are no tax breaks for contributions to a ROTH IRA
• Unlike traditional IRAs, ROTH IRAs are subject to income – eligibility restrictions.  Click here for a detailed chart of the 2013 income contribution limits.

If you are interested in opening a ROTH IRA, ask your financial advisor or give us a call.  If you would like to do your own research, check out www.mint.com/ira-center.  It is a great place to compare institutions and view minimum deposits, annual fees, etc…

Being Smart Regarding Debt and Savings

A Little Goes a Long Way

Sometimes it is difficult to visualize or imagine something little having a large impact.  That very mentality oftentimes keeps us from implementing strategies that can help us reach our own financial freedom.  Instead, we may find ourselves overwhelmed, procrastinating, and trying to justify doing nothing as a result of this almost paralyzed state.  It only takes one small act to operate as the trigger for a series of positive financial steps that will unfold in an almost serendipitous manner.  It helps to see examples or have it explained in a plain and simple manner.  I’ve selected three core areas to demonstrate how a little can go a long way.

Mortgage

1.)    Add an extra amount to your monthly payment ($20 or $200…either way it will make a difference).  Doing so will reduce your interest, as more is being applied to your principal, and this will also shorten the length of your loan.

(Make sure the extra is being applied to the principal and read your contract to ensure you won’t have to pay pre-payment penalties).

2.)    Making biweekly payments is a good option to consider if you can arrange to have this done automatically by your mortgage lender without third party intervention and without fees!  By making half of your regular mortgage payment every other week, you are in essence making 26 half payments or 13 full monthly payments at year end.  The extra annual payment can take about 6 years off of a 30 year mortgage.

Visit www.dinkytown.net for calculators that can show how much interest you can save or how many years you can chop off of your loan.

Credit Card Debt

1.)    Pay more than the minimum!  Take a $10,000 balance @ 18% APR – that would work out to be $250 minimum payment, which would cost you an extra $14,423 in interest (not including the $10,000 original balance you owe)

2.)    Use balance transfer cards offering 0 percent interest.  (You will have to pay a transfer fee of between 3-5% but if you know you are going to be making payments for a year or more—it is worth it).

Visit www.calcxml.com/calculators/how-long-will-it-take-to-pay-off-my-credit-card

Savings

1.)    Putting aside a little extra money every week can have a huge impact!  For example, just $20/week will equal to more than $1,000/year.  If you assume a 5% annual rate of return, after 10 years you will have $13,700.  After 20 years that number would grow to $36,100…and on and on.

2.)    Set up an automatic transfer from your checking account to your savings account, or have money automatically flow through to your savings account from a payroll deduction.  This way you are paying yourself without actually having to remember to and without requiring action on your part.

The important point to take away from all of this is that no amount is too small.  Every little bit helps when you take the time to put on your macro lens and view the big picture. 

How To Pay For College

Best Practices for Parents with College Bound Children

College -   it is supposed to be an exciting time, not to mention a proud moment in a parent’s life.  However, the stress associated with financing this endeavor is a heavy burden that many have a difficult time understanding and planning for. 

So what is a parent to do?  First, learn the school’s financial aid process, and complete the free application for Federal Student Aid (FAFSA) form each year.  Next, get yourself up to speed with the various loans available.  Visiting www.FinAid.org will help you compare loan terms, rates, limits and fees on some of these loans:

Education loans

Federal Government loans

Traditional Stafford loans

Federal plus Loans

Home equity loans

Kiplinger’s “7 Smart Ways to Pay for College” is a great read.  Another good resource is FastWeb.com.  This site is packed with information aimed at college planning/financing, and also helps identify scholarships your child may be eligible for.  

There is plenty of information available to parents.  You just have to put the time in to sift through it, and pull out the most credible and relevant data.  

Key Triggers: It May Be Time To Adjust Your Withholding

Withholdings – You Can’t Just Set and Forget!

Every employee must fill out what is known as a W-4 form, which tells the employer the amount of tax to withhold from an employee’s paycheck.  The form is based off of allowances, which are based on the IRS look up tables and used to figure out how much tax to withhold.  Basically the formula is total tax deduction divided by personal exemption amount (acts like a tax deduction because it reduces your taxable income).

As you focus your energy on calculating the amount of tax you either do or don’t owe, the primary area you will be concentrating on is that of withholding. You will be asked to report on marital status, allowances you qualify for, and any extra withholdings to report. 

There are key triggers that typically lead to withholding changes you should know:

• Change in income
• Change in household situation
  *Marriage – your household withholdings could go up or down depending upon whether your spouse is bringing in any income.
  *Divorce – your household income is affected and alimony is factored in.  Whether you are on the  paying or receiving end, there are specific forms to fill out relating to alimony.  Note…if you are on  the receiving end, you will be paying tax on it.

• Birth of children (equals new allowances, which reduce withholding)

A good practice to get into is to have a tax projection run every year to see where you stand from a tax standpoint.  You can project your income and deductions based on what you expect for the upcoming tax year, and then use the tax rates for the corresponding year to predict what your tax will be.  The last thing you want is to be surprised with a huge tax bill!!!!  After that, you can go to the IRS web site to check your allowances using their online calculator.

It is easy to forget to check your withholding every year, but a large tax bill is a painful reminder you could have avoided if you would have taken 30 minutes out of your day to do the math. 

Signs Your Financial Lifestyle Needs To Change

Are You Living Beyond Your Wallet?

According to the Consumer Reports Index, which measures American’s financial health, middle income families experiencing financial struggles rose during the month of January.  This comes as no surprise, as a large part of society has become extremely reliant on credit cards and loans for just about everything.  Despite the recession and depressed values in real estate, many are still chanting “consumption is king,” rather than “cash or saving is king.” 

Our tendency to compare ourselves to others does not help (keeping up with the Jones’ mentality), nor does the avoidance of altering a lifestyle one has become accustomed to (something many suffer from). 

So how do you know if you are living beyond your wallet, and what can you do about it?

• Emergency Fund is non – existent

You have not been able to put away a satisfactory amount to float you through times of trouble such as a lay off, medical emergency, or other unexpected large expense. It is ideal to have 3-6 months worth of expenses set aside to cover this need.

• You are robbing Peter to pay Paul

You find yourself delaying making payment to pay another vendor first because you don’t have enough funds to pay both bills on time

• Your credit score is below 600

Scores can range all the way up to 850.  Missed or late payments, outstanding judgments, total debt ratio, and too many credit cards can all add to this score being low, which will hinder your ability to get good financing rates or any loans at all.

• You exceed your credit limit

A red flag should be going up if you are using 50% or more of the credit available on your credit card, and unable to pay your outstanding balance down on monthly basis.  If you compare your credit card balance from year to year and notice you there has not been much change, there is more than likely an issue that should be addressed.

• Overdraft Fees continue to hit your account

Fees are incurred when money is withdrawn from the account via check processing, etc… and there is not enough in the account to cover it.

Overdraft protection is put in place to cover you when there is not enough money in your account.  It is a checking account feature offering a line of credit to write checks for more than the actual account balance.  While this may help you ward off overdraft fees, it can also be viewed as enabling you to continue to use money you don’t have.

• 35% or more of you income is going into your home via mortgage or rent payments, maintenance, etc…

Be careful not to bite off more than you can chew. What good is a big house if you can’t afford to eat or pay your utilities?

• Inability to save 10% of your pay to put towards retirement

This is one of those general rules of thumb figures.  The point is that you should not be living a lifestyle where you are unable to put money away for your retirement every year. 

Now what can you do about it?

• Create a budget, and while doing so cut back in any areas you can such as dining out, “extras such as caller id” with regard to your phone bill, making coffee at home rather than visiting the local Starbucks, clipping coupons to save on groceries, etc… Also look for ways to save in areas such as water and energy.
• Payoff any outstanding judgements
• Pay down your debt.  If you can’t do it on your own, look into other alternatives such as debt relief plans.  One resource is www.careonecredit.com.
• Limit credit card use and use fewer credit cards. 
• Look into whether refinancing your home or auto loan makes sense
• Stop focusing on the size of your house and focus on the quality of your life and ability to save.  Understand this may mean moving to a more affordable home.
• After your paycheck hits, pay your bills first and then pay yourself!  Take necessary steps to ensure saving such as setting up automatic transfers to your savings account, which can then be used to grow your emergency fund and/or retirement account

Visit our blog post entitled, “Simple Money Saving and Financial Planning Tips for 2013”