From CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
Investing for Your Financial Independence
Americans have always been fierce about their freedoms, and will go to just about any lengths to protect them, including putting on costumes and dumping a whole boatload of tea into the Boston Harbor.
Even as we commemorate our nation’s 236th birthday this month, we still struggle for independence. But today it’s against a less notable tyrant than the frilly-wigged King George III. Our modern-day oppressor takes the form of widespread economic insecurity. Too many Americans lack the financial resources to be able to exercise a full range of choice over how they live their lives. They have lost their birthright to the American dream: to own a home, to provide for their families, to work hard and retire comfortably. They are constrained by necessity, rather than liberated by choice.
Financial planning is the answer. The process involves first looking at the financial realities of today – at one’s cash flow, debt, and exposure to risk. It then considers the possibilities for the future: a secure and healthy retirement, education for children, a satisfying legacy for family and community. The critical planning link between the two, between today’s facts and tomorrow’s goals, is investing, this month’s topic in CFP Board’s “12 in ’12” financial topics campaign.
Our American forefathers decided that the only way to achieve political freedom was to revolt, and we should consider investing no less necessary to our financial freedom. In fact, the experience of the early patriots, equipped with gunpowder and muskets rather than the not-yet-invented tools of financial planning, nevertheless has a lot to teach consumers about how to wage a winning investment campaign.
Here are some important revolutionary principles for successful investing:
- Maintain home field advantage.
One reason for the British defeat was their unfamiliarity with the American countryside. Venturing into unfamiliar investment areas or exotic, complicated derivatives can also be a prescription for failure. Invest in what you understand. Start simple by creating cash reserves first for tomorrow’s needs, then adding more complex and risky investments as your time horizon gets longer, you build a larger portfolio, and you become a more experienced investor.
- Be prepared to lose battles in order to win the war.
The Americans lost more battles in the Revolution than they won, but they nevertheless achieved their overall dream of independence. Losses are a necessary part of investing as well: without some downside, there can be no upside and therefore no possibility of creating a better future than what we face today. When you play it safe today by choosing only cash or fixed income investments and avoiding equities, you lose in the long-term to inflation and diminished wealth.
- Not enough is no excuse. Start now. Start anyway.
If Ethan Allen or George Washington had waited until there were enough militiamen to match the number of redcoats, we might still be drinking lukewarm beer. The time to invest is now. The amount to invest is whatever can be carved out from today’s wants to put toward tomorrow’s needs. The earlier you begin, the less you need to invest to meet any given future goal (This is due to another principle also considered revolutionary: the power of compound interest. For an even more powerful device, put that compound interest into a tax-deferred investment vehicle).
- Build flexibility into your investment plan.
Paul Revere knew the British were coming, but not how they would arrive. So he hedged his bets and prepared for alternative scenarios. His “One if by land, two if by sea” approach works for smart investing, too. The future is inherently uncertain, so it’s important to position your investments with a variety of economic possibilities in mind. Whether interest rates move up or down, whether the Eurozone disbands or emerges fiscally stronger, whether the Republicans or Democrats take the Senate in November, there should be enough diversification in your portfolio so that some of your investments come out ahead.
- Don’t simply follow the leaders.
The dynamics of war, as well as those of investment markets, means that yesterday’s successful strategy usually becomes today’s loser. What worked for the British infantry in the past – namely lining up troops and marching straight into battle –- did not work against the Americans, who waged war far more unconventionally, attacking supply lines and shooting from behind trees. Investing in the latest hot sector or stock (think Facebook), just because everyone else is, is a bit like following others straight into enemy fire. It’s good way to lose big. Call it guerrilla warfare, or call it contrarian investing – it pays to think differently from what everyone else is doing.
- Ask for outside help.
As determined and scrappy as the American revolutionaries were, they would not have won the war without the outside help of France, Spain, and the Netherlands. Investors need outside support, too, even when they have the requisite knowledge and perspective to make good investment decisions. They need the steady hand of experienced professionals – those who by training and experience can look through the fear and greed that often plagues us when we are making decisions about our own money. Look for a CFP® professional to help you with an investment plan, as well as assisting you with the ongoing management and assessment of your investments.
At end of the day, investing, as a fundamental part of comprehensive financial planning, will never be considered as courageous or historically significant as staging a revolution, even if both activities are inspired by a vision of a future that is better than today. Patrick Henry famously declared that he would rather die than to live without liberty. Unfortunately, no such powerful oratory exists to support the cause of investing, the wise and witty sayings of Warren Buffett notwithstanding. However consider this: without careful planning and investing, you won’t necessarily die, but it’s questionable if your later years will really be worth living.
From CFP Board Ambassador Mark DiGiovanni, CFP®
Taking Advantage of Your Financial Planner
If you consider that the author of this article is a CERTIFIED FINANCIAL PLANNER™ professional you may be skeptical about a title that suggests I be taken advantage of or about the motives of yours truly. So let me state up front that I love it when my clients take advantage of me. I also try to avoid being offended when my clients don’t take advantage of me.
I should probably clarify the definition of “take advantage of.” The definition espoused by cynical types is that to take advantage means to deceive someone or to impose on someone. If you judge everything from the perspective of a zero sum game, where one person’s gain must come from another’s loss, then that definition makes sense. However, my definition of “take advantage of” in this case means to utilize something or someone to the fullest extent.
If we are looking to utilize something or someone to its fullest extent, the first best thing to do is get someone or something worth utilizing. Naturally, you can’t take advantage of your financial planner if you don’t have a financial planner. If you don’t yet use the services of a financial planner, the time to start is immediately after you finish reading this article. The best type of financial planner to take advantage of, in fact the only type of financial planner you should use, is one who has the CFP®
certification. A CFP®
professional must adhere to strict educational, examination, experience and ethical standards. If you’re going to take advantage of someone, why not take advantage of one of the best? Working with a CFP®
professional is your best assurance that the person you will be taking advantage of has more of what you want to utilize.
As a CFP®
professional, I sometimes get frustrated when my clients see me primarily (if not exclusively) as their investment manager. I am not alone in this regard. Most CFP®
professionals have clients who don’t understand all the ways their financial planner can be of help. All CFP®
professionals must pass exams and demonstrate proficiency in the areas of investments, insurance, tax planning, retirement planning and estate planning. Additionally, in recent years the emerging fields of behavioral economics and neuro-economics are teaching us how the human mind works in ways to sabotage our financial plans and how the human brain functions when confronted with financial facts and figures. It’s all fascinating stuff, and this new knowledge helps us better serve our clients, which why we get the CFP®
certification in the first place.
There are self-serving reasons, for both planner and client, to take advantage of the CFP®
professional’s full breadth of knowledge. Allow me to illustrate with a hypothetical example. I have a client couple who thinks of me almost exclusively as someone who manages their investments. Because I know that investments are often only the tip of the clients’ financial iceberg, I work to develop deeper conversations about the other financial aspects of their lives and also about their experiences and feelings about money in general. In these conversations, the following facts come to light:
- They are caring for a handicapped niece whose parents were killed in a car accident.
- Neither of them has wills.
- The husband has a small 20-year term life insurance policy; the wife has no life insurance.
- His parents are wealthy, but his relationship with them is strained at present.
- He works in the family business and has an illiquid interest in the business.
- She is a prolific spender; he is a prolific saver.
- He has a daughter from a previous marriage who has been accepted to Harvard (no scholarship, though).
If this couple views me only as an investment advisor, they won’t take advantage of the many ways I can help them with these other issues. For example, my clients need wills and/or trusts to protect the daughter and the niece in the event one or the other passes away prematurely. I am not an attorney, but I can recommend one who can handle this for them. The husband and wife have different ideas about saving and spending, which is likely to put a strain on the marriage. I can help them find common ground and work out a savings and spending plan they both can live with. They have the potential to have considerable wealth in the future, but none of it is guaranteed. I can help them prepare for a worst-case scenario, take full advantage of a best-case scenario and keep them moving toward their long term goals in a most-likely-case scenario.
By taking full advantage of their financial planner, these clients can reap rewards that go beyond the financial, although additional financial rewards are a good thing, too. As their financial planner, I receive not the satisfaction of working with pleased and loyal clients; I will also likely be rewarded with new clients, additional revenue and greater opportunities to be taken advantage of. The more they ask of me, the happier I am. I love being a CFP®
From CFP Board Ambassador Rita Cheng, CFP®
Financial Literacy is the Key to Economic Success
During summer vacation, instructors and children typically enjoy a break of 6 to 12 weeks, depending on where they live. Learning does not necessarily end when summer begins, though. Take advantage of this break from rigorous homework and hectic after-school activity schedules and consider using this opportunity to share your good money habits with your children and teach your children about financial responsibility.
The most valuable financial advice that my dad instilled in me was not to define myself by what I have, but rather by my accomplishments and education. He insisted that while money did not buy happiness, it did provide peace of mind, freedom and flexibility.
My father emigrated from Taiwan in the 1960s with only $17 to his name and the clothes on his back. Even though he was poor in the material and financial sense, he never considered himself poor. His mantra was that financial wealth alone did not represent one’s “true wealth.” He stressed the fact that he was rich in spirit and blessed with his education.
I learned that money should not be the sole determining factor for the decisions I make in life. His financial wisdom and insight have enabled me to adopt a balanced, holistic approach to financial matters, for which I am eternally grateful.
The Circle of Life
I hope to further my dad’s legacy and instill values of financial stewardship and reverence for one’s elders. Unfortunately, I never had the opportunity to meet any of my grandfathers, as they passed away even before my parents got married.
My three children are fortunate to know my dad, and though he now faces the physical challenges that accompany Parkinson’s Disease, my children treat him – and other individuals with physical limitations – with patience and compassion.
True to my dad’s advice, I don’t define success merely by accomplishing what I desire to achieve. As parents, we all aspire to bestow our children with the tools, knowledge and resources to achieve academic success. I also impart the importance of prudent money management and effective time management.
My moment of clarity occurred when my eldest daughter Sarina proudly exclaimed, “Mom, I realize that if I continue to manage my time and money well, as well as believe in my ability to overcome obstacles and challenges on my own, there’s no limit to what I can achieve.”
Keeping that goal in mind, consider these three money-saving strategies to help teach your children how to best manage their money. They are simple and effective, even for children in elementary school.
- Create a family financial mission statement. Solicit input from your family about what each member thinks is important. Is it eating out, taking vacations, saving for college – or all of these goals? Have an open conversation with your spouse and children to get them thinking about the meaning of money, the challenge of earning it and importance of saving for what you truly value.
- Take opportunities in your daily activities to model how you make money decisions. By discussing money-making decisions as you shop, cook and pay bills, you provide concrete examples that your children can model. Plus, taking the kids to the grocery store and cooking dinner afterward teaches them to apply their math skills in the real world. Having them bag groceries with you at the check-out shows them how much it really costs to fill up the fridge each week.
- Allow children firsthand experience in earning, saving, and spending their own money. Allowances are great – so long as the kids actually do chores to earn the cash. Be sure to set up a savings account for them early, and let them manage the records so they can see how much money they are saving over the years. By the time they hit their teens, this will be a valuable lesson when it comes to wanting to spend their savings on clothes, food and friends – and still save for college. Then, by the time they head off to the university of their dreams they will be more likely to have a savvy sensibility about managing their expenses. Remember, children need to have the benefit of making their own decisions–and learning from their mistakes – so that as adults they are as wise as my dad.
Financial Planning for Your Life Now
Manage Your Debt Wisely, Using These Strategies
Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®
offers these five tips to help families manage their debts. First, match assets and liabilities to ensure there are enough assets on hand in the event of an emergency. Blayney says to avoid financing a long-term asset, such as a home, with a short-term credit-card loan, or borrowing long-term for a short-term asset. Second, maintain liquid savings, even if this means refinancing a mortgage at a lower-rate, if this is a possible option. Even then, "you may need to dip into savings to pay out-of-pocket closing costs – a good idea only if you can immediately begin rebuilding your liquid savings," she says. Third, borrowers who take out loans at a variable interest rate should prepare themselves for the moment when today's record-low interest rates begin to rise, which will cause the cost of loans to increase. Fourth, remember not to pay down debt at the expense of stashing away funds for retirement. Blayney advises, "It may be wise to pay down your debts more slowly and max out saving in a 401(k) plan, especially if that plan offers an employer match." And finally, eliminate debt as quickly as possible.
Use Your Wedding Cash to Build Financial 'Peace of Mind'
The money received by newlyweds from their wedding can be an opportunity to lay the foundation for a strong financial future. In other words, give yourself the gift of "peace of mind," says Lynn Ballou, CFP®
. This includes having an emergency fund of at least 3 months to 6 months worth of non-discretionary spending in an account separate from a checking account. A portion of the wedding cash can be used to start or add to this "life happens" account, says Steve Repak, CFP®
. Experts also advise using the cash to pay wedding expenses, reduce or eliminate credit card debt, or make monthly student loan payments. Another option for couples is using the money for major or minor maintenance of their home to prevent future, larger problems or toward a down payment for a new home. They can additionally think about starting or adding to an IRA or Roth IRA. Repak observes that, "I think it is okay, after you put some money into savings and pay down your debt, to take some of your wedding cash and spend it any way you want. Extremes seldom work and I have found that couples who have balance in their lives are happier."
Take Steps Now to Ensure Your Finances Don't Affect Your Marriage
Studies show finances are the main reason for marital problems for most couples. As a result, a suitable gift for newlyweds from older couples may be paid sessions with a CERTIFIED FINANCIAL PLANNER™ professional, suggests Kimberly Foss, CFP®
. Such a gift helps the new couple clarify and understand their finances, merge accounts if needed, set up budgets, and establish long-term savings plans. "The use of credit cards, no inadequate saving or emergency fund, and attitudes about handling money are listed among the greatest obstacles to overcome in the newly created marital union," says Foss. New couples should be comfortable discussing finances by scheduling regular meetings to discuss the budget and identify costly purchases that may soon be needed. "Just because your money beliefs don't fit immediately, doesn't mean you can't both work on it together, find some middle ground, and move forward to your happily ever after," Foss asserts. Other key points she recommends include being willing to compromise, identifying and prioritizing future goals, and discussing finances with an expert. Several potential advisers should be interviewed to ensure a good fit prior to selecting one.
Dad, You Play an Important Role in Your Family's Financial Future
The Sacramento Bee gathered some wisdom from local financial professionals who also happen to be fathers, considering fathers have an enormous financial impact on their families. Financial expert Kelly Brothers said parents should save for college now and tell people they have opened a 529 college savings plan, noting that this will be powerful for children to learn and that grandparents, aunts, and uncles should know there is an easy gift alternative. Kevin Young, CFP®
said parents should make paying for college a shared expense. "Early on, children need to understand that paying for college should be a joint effort: i.e., tax-free savings, scholarships, student loans, pay-as-you-go, student work programs," said Young. Bruce Kajiwara, CFP®
said he tries to instill in his children the lesson of creating wealth, or saving to take them from college to retirement. After his daughters graduated from college, Kajiwara gave them advice: "With your first job, you need to save 15 percent of your salary in your employer's 401(k)." He says his oldest daughter and her husband have taken his savings message to heart, and now have opened a separate account for buying their first house.
Financial Planning for Your Retirement
Protect Your Retirement From Your Adult Children
More adult children are moving back home as a result of negative life events such as unemployment, substance abuse, and divorce, creating a financial strain on parents who need to continue to save for a comfortable retirement. According to a recent survey from the Pew Research Center, the economy has led to "boomerang kids" for three in 10 parents--29 percent--in the past few years. Parents should work with a financial adviser to get a baseline understanding of their current expenses and progress toward their retirement saving goals, and to project the additional expense of the child returning home, says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®
. And parents could share the analysis with their child. "He or she could even be a part of the discussion with the [financial professional]," says Blayney. "This has the advantage of keeping the discussion objective and factual, and out of the usual parent-child conflict zone." Blayney also believes a contract between parents and the child would be helpful because it would specify expectations for household expenses and responsibilities, as well as the time period for the living arrangement.
Even Though You've Retired, You Still Need to Work at Managing Your Assets
Many Americans see retirement as a "goal" to achieve, but keeping money available and protecting assets requires continuous management throughout retirement. Jeff Rose, CFP®
points out some tips that retirees should follow to keep their income during this time of life. First, retirees should still rebalance their portfolios due to the constantly changing economic situation and markets. Individuals should occasionally assess their portfolio and how it is working for them. The second tip is to consider life insurance; even when purchased during retirement, it can help take care of any dependents, such as a spouse, or help pay funeral expenses and estate taxes. The third tip for retirees is to conduct and maintain estate planning, including setting up power of attorney and healthcare proxy situations. Retirees should also review their estates and assets, including beneficiary information, at least once a year to make sure all is in order.
Financial Planning for Women
Women, You Should Focus on Growth
Men and women have different approaches to investing, and each could learn a lot from the other. Research has suggested that women investors tend to get better results than men, in part because they do not trust their financial skills enough to make mistakes that men often make when they handle their own finances. Women’s portfolios consistently outperform men’s by one percentage point a year on a risk-adjusted basis, so there is virtue in asking for guidance. In the 2008 market crash men were more likely to dump stocks than women, with many then missing out on the rally. Women tend not to act brashly and wait a few days before making a move, and men would do well to institute a similar cooling-off period. A study from Barclays Wealth found that men trade more often and act on tips because they are over-confident, while women tend to do a lot of research before acting. Meanwhile women could also take a few tips from the more brash behavior of men--women tend to keep more money in bonds than stocks out of the perception they are safer, but because they live longer than men they need to focus on growth, says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®
. Women also should negotiate their salaries more often and ask for more, as men do, which could cost them up to $500,000 over the course of a career. More men estimate retirement expenses than women, at a rate of about 58 percent to 44 percent, and women really should start because that is the beginning point of any good financial plan.
Women Are Good Investors
An increasing number of financial advisers are realizing that women should be considered good clients, and many of them are in control of a lot of money. A new survey by personal-finance site DailyWorth says that women are the primary financial decision-makers in most American households, with 76 percent of women reported being their household's primary retirement planner. However, many women are wary of the traditionally masculine financial-planning world, and may feel like they are being patronized. "When women are asked which industries do the best job of addressing their needs, financial services comes out at the bottom," says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®
. "Financial advisers need to forge better partnerships with women and figure out how to win their trust." Some financial professionals report certain gender-specific behaviors: women usually take longer to make big financial decisions and want more data and explanations before making a move. Research also suggests that they are more willing to accept lower returns for less risk, and tend to see end goals, such as saving for college, taking care of aging parents, or financial peace of mind. In contrast, most male investors concentrate on data like percentage annual gain. When it comes to financial planning, women tend to prefer proper communication rather than high returns. However, academics Brad Barber of UC Davis and Terrance Odean of UC Berkeley found that men generally trade more and perform worse than women, who tend to think more about the long term.
Care Giving, Divorce, May Put You at Financial Risk
Women make up 51 percent of the U.S. population, about 65 percent of the workforce, and control 65 percent of global spending, and they have unique concerns when it comes to managing money, writes Lewis Walker, CFP®
. Women live longer than men and want help planning for that longevity. Their buying decisions are holistic and they prefer to ask and be asked questions, desiring education and a conversation from their financial advisers. Many are concerned about financial security, their top concern for retirement being poverty, according to Betty Meredith, CFP®
. Women must focus early on planning retirement income-building vehicles, insurance for spouses, estate planning, and Social Security strategies. The second-largest concern for women in retirement is caregiving, and Meredith says women who are caregivers are 2.5 times more likely to end up in poverty. Women should discuss family care with their advisers and understand the use of long-term care insurance. The next concern for women is divorce, which “derails retirement,” Meredith says. When a married person earns a pension it is a joint asset, and it is often a good idea in the division of assets to go for pension rather than those items with higher current values in order to ensure a secure retirement. Ultimately women know there is a good chance they will be alone in retirement and they are looking for help from their adviser to create a future with financial and emotional security.
Financial Planning for Your Children
Prepare Your Child Financially Before They Go to College
First-year college students should take advantage of this time in their lives to acquire financial responsibility skills, with familial guidance. Tracy Green, CFP®
suggests starting with a comprehensive count of a student's expenses, including tuition and cost of room and board and textbooks. A provision for gas and parking should be made if the student will have an automobile on campus, while students living off-campus will want to include the cost of taking out renter's insurance on computers, TVs, and other valuables. Dues to a fraternity or sorority also should be factored in. Pooling income sources is the next step, with Green pointing out that it is important for young adults to see the costs of the education and the money-saving steps their families have taken. Mapping out a student's financial responsibilities also is crucial, with Green warning that "you can hurt students by not assigning any responsibility to them. The worst thing parents can do is give their kid a credit card without limitations or stipulations." Parents/grandparents should establish ground rules for both their and their children/grandchildren's financial contributions, while the next step is setting up the appropriate financial accounts. Checking accounts should be opened at a bank with branches that are accessible to both parents/grandparents and children/grandchildren, while Green says students must be knowledgeable about checkbook balancing. A credit card account also should be opened for first-year students before they begin studying, as students find themselves bombarded with card offers that frequently carry high interest rates. Green recommends that students begin to receive orientation on financial responsibility not long after graduation from high school. "If your student is going off to college in the fall, you should start to get serious in June when the graduation celebrations start to die down; look to have it all done by the beginning of August," Green advises.
Your Children May Qualify for Social Security Benefits
Most people are not aware that eligibility for Social Security benefits is not limited to the wage earner in a family, according to Gary Gilgen, CFP®
. Gilgen has come to know the Social Security rules by working with many clients who are in or near retirement. He even received benefits as a child because his father was disabled. The dependent children, whether natural, adopted, or step children; grandchildren; and even parents of a worker, can qualify under the breadwinner's earnings record, says Gilgen. The wage earner can be disabled, retired, or deceased for the child to be eligible for benefits. A disabled child can continue to collect benefits after age 18, and a child who enters college can resume benefits in some circumstances. A widow or widower may collect benefits if he or she is caring for a child of the deceased spouse and who is under age 16. More than 4 million minors in the United States collect Social Security benefits.
Hiring a CERTIFIED FINANCIAL PLANNER™ Professional
How to Hire Your CERTIFIED FINANCIAL PLANNER™ Professional
When looking for a financial advisor one always wants to find the best, but it is not always easy to figure out who they are. Erik Carter, CFP®
says you should look for an advisor who charges a fee rather than commission. Next, the advisor should be a CERTIFIED FINANCIAL PLANNER™ professional as this is the most widely recognized designation for advisors and requires financial education, a 10-hour exam, three years of experience, and background checks, as well as ongoing continuing education courses. Experience is important as well, and Carter’s firm requires ten years of full-time experience from its advisors. Through interviews the firm also gauges whether the applicant’s personality is a good fit, and investors should do the same when looking for an advisor--narrow the field down to three or so and interview them to see whose personality and ability to provide guidance is a good fit. And finally, checking references and credit reports is important, and investors can talk to some of the advisor’s other clients as well as checking with FINRA, Advisor Check, and Brightscope to see if there are any criminal charges, convictions, investigations, customer disputes, or disciplinary actions on file.
What You Need to Know About Choosing Your CERTIFIED FINANCIAL PLANNER™ Professional
Judy Haselton, CFP®
says before selecting a financial adviser, consumers need to be sure the prospective adviser is competent in his or her field. Advisers should be readily available, have integrity, and be committed to ethical behavior. This is important because the client and adviser will be examining such things as financial goals, emotional relationships with money, and aspirations for the family. If the adviser will be handling investments as well, the client and adviser should determine what investment approaches both are comfortable with. It is also important to request a written disclosure document from the adviser called a Firm Brochure, which is filed with the Financial Industry Regulatory Authority. Designations held by a prospective adviser should be examined, such as the CERTIFIED FINANCIAL PLANNER™ professional designation, as well as any licenses to sell certain financial products like life insurance or securities. Another key step is seeing how the adviser is paid for his or her services, such as via commissions or on a fee-only basis. Consumers should check to see whether there is a minimum net worth requirement or minimum annual fee. Ideally, a good fit between a client and adviser may lead to a connection that lasts for many years.
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