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CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
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Spring Cleaning
Tax season is in full bloom and Americans are up to their elbows in statements, receipts and 1099s. The IRS tells us it will only take an hour or so to fill out our 1040, but they clearly have not factored in the time it takes us to sort through, let alone find, our financial information. Thoughts of a giant post-April 15th bonfire may come to mind, but before you light the match, consider another, more sensible way to handle your finances.
Try a major financial spring-cleaning. 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.
Here are 10 ways to freshen up your finances:
- Set up a three-tier storage system: get hanging files for information you will need within the next year, such as receipts or transaction confirmations; storage bins for documents you need to save for more than one year, such as tax returns (3 years after filing) or real estate records (for as long as you own the property, plus 3 years); and a fireproof, lockable box for difficult-to-replace items such as your Social Security card, wills and other estate planning documents.
- While you have your hands on those estate planning documents, reread them to make sure nothing has changed in your life that might require some revisions.
- Make a clean sweep of your estate plan by checking to make sure the correct beneficiaries are designated on your insurance policies and qualified retirement accounts.
- Get your free credit report available annually (www.annualcreditreport.com) and clean up any entries made by creditors that are incorrect.
- Set up an automatic transfer from your paycheck or checking account to a savings account and begin building an emergency reserve funded. Then forget about those savings. Just like that dust accumulating on the top of the fridge, it’s out of sight, out of mind and most importantly, out of your easy reach.
- Don’t ever again trip over the clutter of your busy life and forget to pay a bill or a credit card account on time. Use your mobile phone or computer to send you reminders of payments due and thereby avoid those dirty, rotten late fees!
- While you are changing your clocks and checking your smoke detectors, check your home insurance coverage as well. Make sure you have the necessary amount of coverage to avoid any major out-of-pocket losses in the event of a fire or other disaster.
- Make your next spring cleaning a much easier job by consolidating your investment accounts with one provider. Often, custodians will provide a single statement on your accounts, even if the accounts must be separately titled. Having a single source for your investment information makes the job of monitoring and rebalancing your accounts more efficient. Be aware, however, that holding all your accounts with a single custodian can limit the amount of SIPC or FDIC coverage available to you.
- When those spring showers keep you cooped up for a long afternoon, review all your checks, credit card statements and debit transactions from the year before. If you have online banking, you can usually export a year’s worth of transactions into a spreadsheet, which you can then sort and classify. You’ll see where you are spending the most money and can therefore focus your budgeting and cost–saving efforts accordingly. This review should also provide the basis for a workable budget going forward – a must for anyone wanting to clean up his or her finances.
- Once your financial information is in order, take it to a CERTIFIED FINANCIAL PLANNER™ professional who can then develop a comprehensive financial plan for getting you to your lifetime goals. To find a CFP® professional in your area, go to www.CFP.net.
The best part of this spring-cleaning exercise: no heavy lifting or elbow grease required. All that is needed is time. And the more time you put in now, the less time it will take to manage your finances in the future. Imagine this: come next tax season, you might even be able to get your taxes done within the IRS time estimate!
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Financial Planning for Your Life Now
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Be Careful When Buying Risky Stocks, Cautions CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
Digested from: Taking a Flier With a Stock Market ‘Lottery Ticket’
Worcester Telegram & Gazette (MA) (02/27/11) Dave Carpenter
It can be dangerous for average investors to be overly focused on buying stocks that seem like they are about to take off. Such a strategy can be problematic because it mixes investing with gambling. In addition, investors should not dip into their savings or hurt their financial security in order to find the next big stock. Investors who choose to invest in risky stock should invest just a small portion of their holdings in the stock and should look for companies with strong management, demonstrated potential, and an understandable business model, according to one expert. Investors should also look for companies that offer unique products or services that take advantage of broad societal trends. But investors who opt to put money into stocks they think may be the next big thing should be prepared to lose some of their investment because it is very difficult to identify stocks that are about to experience big increases in their prices, says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP® . Blayney says, "I'd rather see people look at a small-cap growth fund and enjoy the bounce up that may be expected."
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CFP Board's Consumer Advocate, Eleanor Blayney, CFP®, Recommends Using a Budget to Help Create Wealth
Digested from: Frugal for the Future
Mail Tribune (OR) (02/27/11) Susan Tompor
There are several strategies people can use to save or make money, including reducing spending where possible. "Budgeting is the new investing, in terms of wealth creation," notes Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®. Blayney advises consumers to estimate what taxes they would owe as part of their regular monthly budget so that both positive and negative tax-time shocks can be avoided. Scrutiny also should be paid to small, unusual charges that can add up for things such as club memberships or credit monitoring services. Other strategies include immediately increasing one's retirement savings to take advantage of a one-year-only 2 percent payroll tax cut. Another tactic is to stop paying for services that are never or rarely used. There is value in shopping around for interest rates on auto loans, mortgages, and other financial products. Finally, consider splitting take-home pay 70-20-10 between living expenses, bigger necessities and emergencies, and longer-term savings such as college or retirement.
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Make Spending More Difficult Recommends CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
Digested from: Savings: 3 Ways to Beef Up Your Rainy-Day Fund
Reuters (02/21/11)
Experts say too many people are neglecting to pay down debt or focus on saving. “There was a little bit of a spike in the savings rate after the economic meltdown, but about a week or so ago, they were reporting consumer confidence appears to be up because people are using their credit cards again,” says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP® . The Bureau of Economic Analysis reports that personal savings as a percentage of disposable income was 5.3 percent in December 2010, compared with 5.5 percent in November. To encourage consumers to boost savings, more than 1,000 non-profit organizations came together to promote America Saves Week from Feb. 20-27. The campaign sought to provide debt-reduction and savings assistance to individuals via employers, educators, financial institutions, the military, government, and non-profits. Blayney, whose organization is a national partner organization of America Saves Week, recommends that consumers make spending more visible and difficult in order reduce the urge to reach for the wallet. “If it becomes a pain to get the check book out every time you're in the store, that may introduce just enough time to reflect and for you to say, 'You know, I’m not sure I really need this or want this. 'The visible part is that you know where you’re spending is going," she explains.
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Should You Pay Off Your Mortgage?
Digested from: Should you Pay Off the House?
CNN Money (02/22/11) Lisa Gibbs
Many homeowners are thinking about paying off their mortgage. It is important to note that mortgage interest is tax-deductible, and placing money in stocks has historically generated higher returns in the long run than real estate investments. Consumers with credit card debt or who are not maximizing their 401(k) should focus on these issues first, and have at least six months' worth of living expenses in cash. Retirees and near-retirees considering a lump-sum payoff must make sure they have sufficient liquid savings for unexpected emergencies like medical expenses, especially because it is difficult to tap equity on homes without first mortgages. In addition, consumers should not remove money from their IRA to pay off their home loan because IRA funds are taxed at ordinary income rates. Homeowners who intend to trade up to a larger home or downsize to a smaller one within five years also do not need to put extra money into their mortgage. The interest tax deduction can be estimated by multiplying how much mortgage interest the consumer paid in the previous year by the consumer's tax rate (federal plus state). A couple in the 28 percent tax bracket with a $200,000 loan at 5 percent, for example, would save $2,781 in taxes in the first year of a loan.
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Financial Planning for Women
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CFP Board's Consumer Advocate, Eleanor Blayney, CFP®, Says Women Need Advisers, Annuities for Retirement
Digested from: Women Need Advisors, Annuities for Retirement
Financial Planning (02/03/11) Donna Mitchell
A new study by the Insured Retirement Institute (IRI) found that more than half of women who work hold management and professional jobs and that a significant portion of working women are likely to be single during their retirement years. In addition, 95 percent of these women say they are the financial decision-makers in their households, so it is important that financial advisers help women learn about how annuities can help them prepare for retirement. Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®, says the results of the IRI survey are similar to what she sees in her own work. "The need for long-term care counseling is much greater among women in general and even more so among single women," Blayney says, noting that the longevity difference between men and women can be as long as five years. The survey also found that women drew significantly smaller payments from Social Security and pensions than men. The average monthly OASDI (Old-Age, Survivors, and Disability Insurance) payment to retired women was 87 percent of the amount paid to men. Women between the ages of 62 and 69 received even less--between 82 percent and 83 percent--of that of their male counterparts. "Fixed annuities that are structured in a way to protect the holders from rising inflation--we need to be pushing providers for more of this kind of instrument,” Blayney says.
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Hiring a CERTIFIED FINANCIAL PLANNER™ Professional
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Your Adviser Should Have a Holistic Picture of Your Finances, Suggests CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
Digested from: Voices: Eleanor Blayney, On Seeing the Whole Picture
Wall Street Journal (02/07/11) Eleanor Blayney, CFP®
Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®, says it is crucial for advisers to have a holistic view of their clients' financial circumstances. She notes that tax uncertainty is currently high due to uncertainty about new taxes from health care reform legislation, especially for the affluent. When these factors are taken into account, it becomes clear that there is no single, clear-cut solution. The situation calls for advisers working with clients to make forecasts for the next five years, based on clients' future income streams. Advisers must take into account their clients' investment plans, especially because high-income taxpayers are at risk of seeing their dividend-paying stocks severely impacted. This could require reexamining the role of dividend stocks in a portfolio, and determining if the client should use capital appreciation as a strategy. Advisers should also be able to conduct cash flow projections and form "if, then" scenarios for clients. Specific strategies that advisers might consider include exercising stock options before year-end and accelerating income into 2010.
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Windfall: Consult the CFP Board Web Site to Find a CERTIFIED FINANCIAL PLANNER™ Professional
Digested from: 'GMA' Quick Tip: New Wealth Planning
ABC News (02/18/11) Mellody Hobson
There are several steps that individuals should take when they experience a large financial windfall, according to "Good Morning America" personal finance contributor Mellody Hobson. For starters, those who have acquired new wealth should turn to the Certified Financial Planner Board of Standards' Web site to find a CERTIFIED FINANCIAL PLANNER™ professional who can help them develop a plan for their money. If the individual decides to give some or all of the money to charity, they should use the Web to find organizations that meet their goals and are able to pass most of their donations on to people in need. Those who want to give money to charity may want to visit the charities and interview staff members to make sure the organization is a good fit. Finally, Hobson noted that people who have come into large amounts of money should create a will, either with the help of an attorney or a Web site such as Legalzoom.com.
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Check Your CERTIFIED FINANCIAL PLANNER™ Professional's Credentials With the Certified Financial Planner Board of Standards
Digested from: Be Own Consumer Watchdog
Abilene Reporter-News (TX) (02/12/11)
When selecting a financial adviser, it is important to get references from family and friends, according to Consumer Reports Money Adviser. However, it is important to research these references further because one person's good experience might not be the case for others. Consumer Reports Money Adviser recommends checking an adviser's contact information, such as telephone number and physical address, especially if business is conducted online. The Web site's owner can be verified by entering an Internet address on a "who-is" server, such as www.who.is/whois. Consumers should also get information on registered financial firms and individual brokers from affiliations and should check certifications. Some professional organizations take complaints from consumers, rate businesses, issue certifications, and maintain lists of members who have agreed to conform to its standards. If a certification or professional designation is unfamiliar, consumers can contact the issuer to verify them. Consumer Reports Money Adviser recommends checking with the Certified Financial Planner Board of Standards.
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Select a CERTIFIED FINANCIAL PLANNER™ Professional With the Help of the Certified Financial Planner Board of Standards Web Site
Digested from: 5 Reasons Investors Fail to Plan
U.S. News & World Report (02/09/11) Kelly Campbell
One of the biggest mistakes committed by investors is procrastination, which can be avoided by setting deadlines. So instead of just planning to open an IRA, it is better to pledge to open an IRA by the end of the month. Many investors are unsure of where to start, so they should put everything down on paper. When selecting a financial planner, a consumer should first visit the Certified Financial Planner Board of Standards web site and make a list of nearby CERTIFIED FINANCIAL PLANNER™ professionals. Another common error people make is setting excessively high goals. It is better to break down goals into smaller steps, such as choosing a financial planner by the end of the month and forming a plan by the end of the next month. Plan implementation can occur by summer, followed by a six-month review by December. It is also important that investors never give up or feel that it is too late for them. Rather, it is crucial to think differently and try to come up with an alternative strategy. Many investors get derailed by a lack of knowledge about managing their finances and not using the services of a professional. Such individuals often get stuck in a vicious cycle of making money and losing it.
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Financial Planning for Your Retirement
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Baby Boomers' 401(k) Nest Eggs Insufficient for Retirement
Digested from: Boomers Find 401(k) Plans Come Up Short
SmartMoney(02/22/11) E.S. Browning
Baby boomers are learning to their chagrin that their 401(k) retirement plans are falling short of expectations, with the average household headed by a person age 60 to 62 with a 401(k) account having less than 25 percent of what is required to maintain their standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by Boston College's Center for Retirement Research. The 401(k) shortfall is forcing many people to postpone retirement, move to less expensive housing, purchase less costly food, cut back on travel, and take bigger investment risks. Many baby boomers facing this reality did not receive good or sufficient financial advice. Advisers say that unless people start saving earlier and contributing more to their 401(k)s, they will reach retirement age with too small a nest egg. The Center for Retirement Research calculates that in 2009 households headed by people age 60 to 62 with a 401(k)-type account at their jobs had an average income of $87,700, and the 85 percent required for retirement would be $74,545 per year. Experts say Social Security will furnish just $35,080 a year for that median household, and most 401(k)s do not come near providing the other $39,465. Only 8 percent of households nearing retirement have the $636,673 or more in their 401(k)s that would be needed to satisfy such costs. The 2007-2009 financial crisis has exacerbated these difficulties.
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Set Achievable Benchmarks to Reach Your Retirement Goals
Digested from: Retirement Savings Goal Is No Magic Number
Philly.com (02/09/11) Dave Carpenter
Many people worry about finding their magic "number," or the amount of money they need to retire comfortably. The concept has become especially prominent in the wake of market downturns that eroded retirement savings and confidence. But the approach may actually be a hindrance because it attempts to reach a large sum of money within decades rather than set achievable benchmarks. It is generally believed that consumers will need roughly 70 percent to 85 percent of their pre-retirement income to maintain a similar standard of living in retirement. A widely used capital-to-income ratio suggests that consumers should have about 12 times their income in assets by age 65 in order to generate 80 percent of pre-retirement income. This formula calls for having 5.2 times a person's income set aside at age 50, where a person with a $60,000 salary at that age would need to have $312,000 in savings. But reducing spending expectations in retirement makes it easier to keep pace. For instance, having 10 times a person's income saved by age 65 would let him or her live on 70 percent of pre-retirement income. Some experts believe that online retirement calculators involve excessive guesswork and overestimate the degree of spending in retirement.
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Financial Planning for Your Children
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Are You Taking a Risk Investing in a Prepaid Tuition Plan?
Digested from: The End of Prepaid Tuition Plans?
Smart Money (02/10/11) Jilian Mincer
A number of states are in the process of overhauling their prepaid college tuition plans or have shut them down altogether. Washington state, for example, is considering overhauling its Guaranteed Education Tuition plan in order to prepare for a possible shortfall, even though the program is currently solvent. Tennessee, meanwhile, recently became the eighth state to close its prepaid college tuition plan over the last several years. Only 11 states currently have prepaid college tuition plans that are open to new investment, and some of them may close their plans as well because budget problems mean the states may not be able to bail out the programs if they need help, says Jackie Williams, the director of the New America Foundation's college-savings initiative. Parents who live in one of these 11 states and want to invest in their prepaid college tuition plans should do so now, but they should do their homework first, experts say. Andrea Feirstein, a consultant to states and public 529 plans, says parents should know that some states are not required to bail out their plans if they experience a shortfall. Feirstein notes that prepaid college tuition plans are only a good value for students who will attend an in-state school, though other experts say some plans may not be a good value at all.
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