Around this time of year, the majority of Americans are happily awaiting their refunds or have already pocketed them. According to IRS tax statistics, approximately 75 percent of individual returns filed show an overpayment to the government. The average refund is over $3,000.
Major retailers, car dealers and other merchants love those refunds, too. It won’t be long before the sales and promotions begin in an attempt to get cash-laden consumers to part with their money. According to a CNN survey, Americans are more in the mood to splurge this year than they have been in the recent past. Plans for a big purchase or a vacation have ticked up, while intentions to pay down debt are down.
Unfortunately, most taxpayers see refunds as “found money” or extra money that is not subject to the control of their budgets. Ask the average American if it is better to get $2,000 back from the IRS or to owe $2,000, and it would be hard to find anyone – except perhaps a stray mathematician or economist – who would not claim the refund as by far the better outcome.
However, from a balance sheet point of view, there is absolutely no difference between the two. An April 15th liability to the government is offset by having more assets (ie., savings or goods) as a result of not having more withholdings or higher estimates paid into the IRS during the tax year. Getting money back or paying money to the government is completely neutral when it comes to your net worth.
Refunds are not “extra money” you did not have: they are simply returns of your own money, at interest rates even more insultingly low than what you can get from money markets: namely, zero. Nor are refunds “found money” – they are instead “unplanned for money.” It is for this last reason that most tax and planning professionals – and this CFP® professional in particular – do not share their clients’ glee at the prospect of a big IRS check. What my clients see as a “bonanza” I see as a “budget buster.” The discipline of matching periodic income with periodic expenses – a must for effective planning – is entirely disrupted when money that should have been prudently spent or saved in 2010 is now arriving in 2011.
The $3,000 boomerang that's coming back to the average American this year does not, however, need to be a complete write-off when it comes to sound financial planning. Here are just a few good ideas for that refund that can make both you and your financial planner happy:
Pay off credit card debt. The average interest rate on credit cards is 14.65%. As mentioned, the average interest income on money left on deposit with the IRS is zero. Get that non-performing money working much harder and more productively, by paying down card balances.
Add to your emergency fund reserves. The consensus recommendation for emergency funds has recently changed from having 3 months of expenses set aside, to having 6 months or more.
Best of all, do some 2011 tax planning. Work with a CFP® professional or tax advisor to determine what your 2011 liability will be, and adjust your withholdings or estimated payments accordingly. Make a plan for having an expected $250 more a month in 2011 rather than an unexpected $3,000 in 2012.
For more ideas on planning for your money, rather than letting it hit you from behind, you can visit www.letsmakeaplan.org or www.CFP.net.
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Financial Planning for Your Life Now
CFP Board's Consumer Advocate, Eleanor Blayney, CFP®, Offers Several Tips for Spring Financial Cleaning Digested from: Financial Planners Recommend Spring Financial Cleaning Accounting Today (03/15/11)
Now that it is spring, consumers should take some time to get their financial lives in order, says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®. Blayney notes that one thing consumers can do is determine which financial documents they need to keep and which ones can be discarded. "Your goal should be to get into those forgotten corners, deal with the clutter, recycle the stuff that has value, and throw out the rest," she says. After consumers determine which documents they need to keep, they should create a three-tiered storage system made of hanging files for information they will need within the next year, such as receipts and transaction confirmations; storage bins for documents that will be needed for longer than a year, such as tax returns, which need to be kept for three years after they are filed; and a fireproof, lockable safe for items that are difficult to replace, such as Social Security cards and wills. In addition to organizing financial documents, Blayney urges consumers to save for an emergency fund by setting up a regular automatic transfer from their paychecks or checking accounts to a savings account. Consumers should also send reminders to their mobile phones and computers about bills that need to be paid so they can avoid paying them late, Blayney says. Finally, Blayney notes that consumers should see a CERTIFIED FINANCIAL PLANNER™ professional to help them develop comprehensive financial plans that are consistent with their goals.
Last Year's Tax Return Can Help Guide This Year's Investments, Says CFP Board's Consumer Advocate, Eleanor Blayney, CFP® Digested from: 2010 Tax Return Can Guide 2011 Investments STLToday.com (03/06/11) Andrew Leckey
Your 2010 tax return can be used to help determine your optimal 2011 investment strategy. Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®, says that taxpayers who are receiving a large tax refund should strive to avoid a recurrence. "Receiving a big tax refund is madness because it basically involves giving money each week for an entire year with no interest paid on it," she notes, adding that people who think a refund constitutes some kind of financial planning because they avoid paying a tax bill with their return are wrong. What they are actually doing is leaving money on account with the U.S. Treasury. However, if one owes a very large amount that is difficult to pay, then the withholding at work should be increased. The return can help ascertain whether taxable or tax-free investments are the most sensible instruments for one's bottom line. "Look at the return to see if you're holding municipal bonds and, if so, if you're getting adequate value from them," Blayney suggests. "The yield on tax-exempt vehicles is not that great, and you might be better off going with a taxable bond instead."
Children Are 'Good Motivators' of Sound Financial Habits, Says CFP Board's Consumer Advocate, Eleanor Blayney, CFP® Digested from: Start With $10,000 and Retire a Millionaire MarketWatch (03/25/11) Jonathan Burton
A 25-year-old could have a million dollars saved for retirement by the time he turns 65, if he starts with $10,000, invests $320 a month, and achieves a 7 percent annual compound rate of return. However, many workers in their 20s are not saving for retirement due to college debt and other bills. Among people between the ages of 18 and 33, 53 percent have nothing saved for retirement. If they wait until they are 35 to begin saving, workers will have to invest $775 a month and achieve a 7 percent annual rate of return to turn that same $10,000 into $1 million. By the age of 35, employees may want to begin saving in order to teach their kids how to handle money. "Children can be extremely good motivators to good financial habits," says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®, adding that teaching kids can encourage parents to be "financially smart." Younger workers who don't put anything away for retirement will have to invest $1,850 per month when they turn 45 and achieve a 7 percent annual rate of return for the next 20 years in order to turn their $10,000 into $1 million. By the time workers turn 55, the amount that needs to be invested in order to grow $10,000 into a million increases to $5,700 a month. An employee in this situation will need to reduce their expenses, save what they can, and work longer.
CFP Board's Consumer Advocate, Eleanor Blayney, CFP®, Suggests 'Thinking Outside of Your Box' Digested from: 3 Strategies for Survival in Retirement SmartMoney (03/14/11) Reshma Kapadia
A growing group of retirement experts is zeroing in on a handful of tactics and investment products aimed at creating a source of steady and sufficient income for investors. The products include everything from annuities to reverse mortgages, and while they are not headline grabbers, they may be lifesavers. "It just involves thinking outside of your box," says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®. Still, some of the new tactics have drawbacks, including somewhat high fees on annuities and reverse mortgages, as well as the complexity of products that come with a slew of conditions. The Obama administration helped boost the profile of income annuities last year when it said these products could be a good way to mitigate the risk that retirees will outlive their money. While many experts are still wary of some of the more complex annuities, they say immediate-income annuities merit a fresh look, especially since some financial firms are offering more-straightforward products at lower cost than what was available only a few years ago. By establishing a steady base of income similar to a standard pension, annuities allow investors to make bolder choices with their funds. Variable annuities are more complex, since their value changes with the underlying investments in a portfolio. Until recently, reverse mortgages were viewed with skepticism by many experts, but thanks in large part to a move by the federal government, sky-high fees on some of these products have dropped sharply. Fees remain the biggest drawback, however, with eligible borrowers -- homeowners over age 62 -- proffering 2 percent of the home value up front, on top of other fees, to turn some of their equity into cash.
There are several misconceptions about retirement planning, such as believing that $1 million will be sufficient. Such estimates are usually based on retirement calculators, which usually use too few variables and fail to make frequent updates. Anticipating every expense is difficult, so consumers should think of their "magic number" only as a baseline. Assuming that people tend to spend less money when they are older is also incorrect. Federal statistics show that the spending categories that drop the most after age 65 include education and pensions, but most other categories drop only slightly. Younger, more active retirees often see spending rise significantly in areas like travel and entertainment. Some experts recommend that consumers undertake a trial year during which they live on a reduced, retirement-level budget. Another retirement myth is that older people need more bonds. Expert Diahann Lassus advises boomers to keep roughly 50 percent to 65 percent of their portfolio in stocks, including high-dividend stocks that can replace a portion of the income retirees get from bonds. Finally, it is not always true that moving to a low-tax state is beneficial due to factors like high sales tax and rising property taxes; boomers need to examine the data before making a decision to relocate to another state.
Hiring a CERTIFIED FINANCIAL PLANNER™ Professional
The CFP Board Web Site Is a Helpful Tool to Use for Evaluating CERTIFIED FINANCIAL PLANNER(TM) Professionals Digested from: What You Need to Know to Find a Reputable Financial Planner WPTV 5 (Fla.) (04/04/11) Claudia Buck
There are several things to consider when hiring a financial planner, including the planner's credentials. Consumers can check the credentials and background of financial planners, brokers, and investment advisers by checking the Certified Financial Planner Board of Standards' Web site. While checking the planner's credentials, consumers should consider what kind of title the planner uses. Although titles such as CERTIFIED FINANCIAL PLANNER™ professional require recipients to complete certain coursework and professional exams, take part in regular continuing education, and meet certain professional standards, other titles do not require prerequisites, exams, or continuing education and are essentially meaningless. In addition to checking a financial planner's credentials, consumers should try to establish that the financial planner is credible by asking questions about their background and training and how long they have been in business, among other things. Consumers should not simply rely on a recommendation from a friend or family member when choosing a financial planner. Finally, consumers should consider how a financial planner is compensated. Consumers are urged to hire fee-only advisers, which means that they are paid directly for their services and do not charge a commission.
Consider Choosing a Financial Adviser With a CERTIFIED FINANCIAL PLANNER(TM) Professional Designation From the CFP Board Digested from: Working With a Financial Adviser: Whom Do You Trust? Consumerism Commentary (03/18/11)
There are several different types of financial advisers that one can choose from. The first type of financial adviser is a financial planner, who helps clients make financial decisions and evaluates their financial picture in its totality. Financial planners typically carry a designation from the Certified Financial Planner Board of Standards, though not always. Another type of financial adviser is an investment or insurance salesperson, who will steer clients toward purchasing products they receive a commission for selling. The third type of financial adviser is an asset manager, who makes investments for clients and takes a certain percentage of clients' assets. In addition to considering which type of financial adviser they need, consumers should be sure to look for an adviser with fiduciary responsibility, which means that the adviser is required to base his advice only on what is in the client's best interest. Not all advisers have this responsibility. Some advisers have suitability responsibility, which means that their advice needs to be an appropriate, but not necessarily the best, choice for clients. Finally, consumers should choose a financial adviser who works on a fee basis rather than one who works on commission, since advisers who work on a fee basis usually have their clients' best interests at heart.
CFP Board's CERTIFIED FINANCIAL PLANNER(TM) Professional Designation Denotes Highest Ethical Standards Digested from: Certified Financial Planner Title Denotes Highest of Ethics Snohomish County Business Journal (03/31/11) Erin Eddins
Few financial services industry credentials can match the credibility accorded by the CERTIFIED FINANCIAL PLANNER™ professional designation awarded by the Certified Financial Planner Board of Standards to professionals who complete a rigorous certification process that includes education, examination, and experience requirements with strict ethics requirements that hold certificants to a fiduciary duty of care. Candidates are required to complete a course of study encompassing about 100 financial planning topics, and over 200 accredited institutions offer a CFP® certification curriculum. The next step after completing the educational element is to pass the CFP® certification exam, a 10-hour, two-day assessment of the applicant's ability to unify their knowledge of the CFP Board's topic areas and apply it to real-life financial planning scenarios. Only financial planners with verifiable experience can receive the CFP® certification, and applicants must have earned a qualified bachelor's degree and have spent a minimum of three years delivering all or part of the personal financial planning process to clients. In addition, applicants are required to pass the CFP Board's candidate fitness standards, and must agree to comply with the board's ethical standards, which demand that they give their clients' interests overriding priority. Financial planners who receive CFP certification also must complete 30 hours of continuing education requirements biennially in order to confirm their ongoing competency and pass periodic background checks to guarantee their commitment to providing ethical services.
Financial Professionals Should Put Their Clients' Best Interests Ahead of Their Own, Says the CFP Board Digested from: Planners Push Back Against Push-Back of Universal Standard Date InvestmentNews (03/29/11) Dan Jamieson
The Financial Planning Coalition is going on the defensive against attempts to postpone the imposition of a fiduciary duty on all retail advisers. House Republicans in March called for the Securities and Exchange Commission (SEC) to carry out a cost benefit analysis before moving ahead with fiduciary rulemaking. But the coalition believes "this issue has been studied extensively" already, Marilyn Mohrman-Gillis, managing director of public policy and communications for the Certified Financial Planner Board of Standards, said on a March 29 conference call with reporters. "The SEC's 200-page study [on fiduciary duty] was comprehensive, there have been other numerous research efforts, and our own study found that 97 percent of investors felt financial professionals" should adhere to a fiduciary standard, she said. She added that if the SEC believes further research is required, the coalition would support that. But in the meantime, the coalition is "urging that the SEC move forward" with rulemaking, she said. The coalition in March sent a letter to all Capitol Hill lawmakers supporting what it referred to as "common sense reform" of a fiduciary standard. The letter noted that opponents of a fiduciary duty "prefer the status quo, a system in which many investors unknowingly receive advice that mainly benefits their advisor."
Helping Your Kids Develop Good Financial Habits Now Will Pay Off Later Digested from: Young Need to Get a Financial Life Early Buffalo News (03/19/11) David Robinson
Financial experts say that learning good financial skills is important for students, now more than ever. Students now must face not only the daily demands of financial budgeting and money management, but more long-term issues such as retirement savings and college costs. Parents can help further their children's financial education by helping them save, possibly giving them an allowance, while not allowing their children to develop a sense of entitlement. Experts still debate the idea of giving children an allowance, but parents should at least emphasize savings, and make it clear that the child is expected to pay for some things. Parents also should not keep the family budget a secret, and allow children to realize how it limits spending decisions. Children can also be included in investing and be educated on credit and its risks.
Women CAN Change Their Financial Future Digested from: Five Ways Women Sabotage Their Financial Futures Daily Finance (03/11/2011) Sheryl Nance-Nash
Women have made broad economic gains in recent years, but still lag in saving for retirement, according to a recent survey. Whether married or single, women must focus more on their financial futures, and many need to make some changes to their heads and heart. According to Lynn Ballou, CFP®, women are hard-wired to want to save the world, which she calls the Statue of Liberty or Mother Teresa syndrome. Women are often willing to assist adult children who are experiencing difficulties, such as unemployment or divorce, and will even fund their children's education before their own retirement. They need to learn to say no and pay themselves first, says Mitchell Kauffman, CFP®. "I tell clients if they have ever flown, they have heard the flight attendant remind them to put the life vest and oxygen mask on themselves first, even before they help family members," Kauffman says. Women must face their fear when it comes to making financial decisions and stop procrastinating; managing personal finances is a learned skill that must be practiced. They need to avoid the trap of purchasing the latest "in" items, such as designer bags and jackets, that they can not afford. Moreover, women need to remove their feelings from their finances, be patient, and trust their instincts, as they move forward with managing their financial life.
Take Steps to Ensure Your Financial Future Digested from: Financial Advising for Women: The Top 10 Challenges Women Face Financial Planning (03/16/11) Mitchell E. Kauffman
Women tend to live longer than their spouse, so it is essential for women to take steps to secure their financial futures. Many studies show that following the death of a spouse, up to 80 percent of life insurance proceeds can be used within months. Experts advise women to focus on paying themselves first before assisting family members, and identify whether they spend money to satisfy emotional needs. The next step should be finding ways to cope with challenging times that do not require spending money. Women should also be careful not to pay off a mortgage if it is not in their best interest. Ideally, that decision should be reached after considering their tax bracket, the size of the portfolio relative to the size of the loan, projected cash flow, and the liquidity of assets. Many women also make the mistake of remaining in their home even if it is too large or expensive for them. Other potential problems women face include failing to update their estate plan, not taking their individual needs into account when forming an investment plan, and being overly conservative or aggressive with investments. It is also important that women get advice from an adviser who is certified in financial planning, not hold investments for too long, and not withdraw too much or too little from their retirement plan.
CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn.
The mission of Certified Financial Planner Board of Standards, Inc. is to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for personal financial planning. The Board of Directors, in furthering CFP Board’s mission, acts on behalf of the public, CFP® certificants and other stakeholders. CFP Board awards CFP® certification to individuals in the U.S who successfully complete CFP Board’s initial and ongoing certification requirements. There are currently more than 62,000 CFP® professionals in the United States dedicated to helping clients meet their life goals through competent and ethical financial planning.
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