From CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
Don't Let Yesterday's Debts Hamper Today's New Beginnings: Managing Debt during June's Many Life Transitions
January first is traditionally the start of a new year, but the time for new beginnings really belongs in June. Lives are more apt to change in this spring-to-summer month, as couples marry and graduates begin new jobs or find new housing, than at the beginning of the calendar year. And as we all know, the resolutions we make on New Year’s Day are usually far less permanent than the changes we experience as a new spouse or employee.
As we take on new roles and responsibilities in new places, the issue of debt and credit management becomes a primary financial concern. College graduates who have financed their education with deferred student loans now have to start repaying these loans. Newlyweds may have racked up debt to pay for their wedding or are trying to qualify for a mortgage on a first home. New jobs and leases can only be obtained with acceptable credit scores. If you don’t have money – as is the case with many individuals just starting out – you need to be able to borrow. And if you borrow, you need to be able to do so at rates that allow you to retire that debt and build wealth for the other life transitions still ahead – children, retirement, caring for family members, etc.
You need, in other words, a debt management plan as part of an overall financial plan, developed with the assistance of a CFP®
professional. It’s not enough to simply pay down your debts according to the terms set by the lender. Doing so may keep you from defaulting on a loan, thereby avoiding any hits to your credit score, but could also result in unnecessary extra interest costs over your lifetime. As anyone who pays just the required monthly amount on a credit card knows, it can take years to pay off the money borrowed for items that have long since been consumed, discarded, broken or forgotten.
At the same time, focusing only on paying down debt as fast as possible may also be counterproductive to wealth creation. Leverage, which involves using borrowed money to purchase assets that are expected to grow at a higher rate than interest costs, can still be a smart wealth strategy if managed prudently. So can “indirect” leverage – whereby an individual might choose not to pay off existing debt, in order to be able to invest in a business or the market.
Smart debt management goes well beyond just trying to get the best interest rate or finding ways to prop up your credit score. Your debt needs to be considered in the context of all your financial circumstances and needs. What is right for one individual in terms of the appropriate amount and cost of borrowing may be wrong for another. Here are some of the not-so-obvious factors that a CFP®
professional will consider in advising you:
The duration of your assets and liabilities:
When you take out a short term loan (think credit cards which are, in effect, monthly rolling loans) to finance a long term asset (think your home), there could be trouble ahead. What happens when the loan is due next month or next year and you cannot realize the value of your long-term asset to pay it off? The banking system was created to take this kind of risk, accepting deposits that can be withdrawn at any time, to make longer-term business and mortgage loans. But the difference between a bank and an individual is that the bank has a more or less guaranteed back-up in the form of money that can be borrowed from other banks or from the Federal Reserve to reimburse its depositor-lenders. You are not so lucky.
By the same token, borrowing long-term for a short-term asset can spell trouble, too. Asking your brother-in-law for a 10-year loan for a car that won’t make it till next year is a recipe for disaster, not only for your balance sheet, but possibly for your family relationships.
Sometimes it is not possible to perfectly match the duration of our assets and liabilities. In this case, a CFP®
professional will also take your liquidity into account in advising you about your debt. Do you have reserves that can be used to pay a loan coming due, before you can draw upon the value of your longer-term assets? A good example would be the decision to refinance your mortgage at a lower rate, without increasing the outstanding balance. To take advantage of this strategy, you may need liquidity in the form of ready cash to pay the transaction's costs and points.
Interest rate risk:
What happens to your debt when interest rates rise? If you have borrowed money at a variable interest rate, such as a margin loan, the cost of the loan will track the increased level of interest rates. If, at the same time, increased interest rates negatively impact your asset holdings, you may experience a classic margin squeeze. It’s important therefore to have your CFP®
professional assess the appropriate amount of interest rate risk exposure in your balance sheet.
Priority of financial goals:
You may be determined to get those credit card balances eliminated as soon as possible. Good for you! However, your CFP®
professional may advise you to direct your extra cash first towards 401(k) contributions in order to get an employer match, or to set up an emergency fund, so that in the event of a crisis, you are not driven again to the high-cost credit cards. It is a question of balancing your short and longer-term priorities in a way that makes most sense for your individual circumstances.
Ratio of discretionary to non-discretionary expense:
Most debt has to be serviced every month, thus becoming a recurring fixed, non-discretionary expense. The larger these expenses, as compared to those expenses over which you have control in terms of their amount and when they are paid, the less planning room you have to react to changing circumstances. This is of particular importance to retirees, who may be living off of their investment portfolios. When the market takes a steep drop, the best strategy is to avoid taking money from investments. But if you have a large debt burden, this may not be possible. Your CFP®
professional will take this risk into account, and may advise you to eliminate debt, even when interest rates on loans seem extremely favorable.
There is clearly no right or wrong approach to managing debt. Nevertheless, we tend to think about debt far too simplistically. Witness the movement in this country from the notion that borrowing is a good growth strategy to the conviction that all debt is bad. Let a CFP®
professional help you find a balanced and thoughtful approach that fully reflects all the financial facts and circumstances of your life.
From CFP Board Ambassador Nancy McCready, CFP®
“Discipline is Power”: Don’t Wait for a Crisis to Start Planning Your Financial Future
One of the most memorable and succinct pieces of career advice that I have ever received was from a successful woman executive many years ago – “Discipline is power.”
This advice applies to our overall financial lives as well. I find that many people consider at one time or another that it might be useful to get professional financial guidance with a concern, but fail to follow through – until an emergency disrupts their lives. The triggering event may be divorce or the death of a loved one. Other momentous changes, such as job termination, poor investment performance, bankruptcy or even a positive development, such as a financial windfall – can finally push some people past their deeply ingrained resistance to seeking help.
Waiting until a crisis strikes to take action keeps us in a reactive mode and limits our choices. Individuals who lack financial discipline or understanding are simply less likely to reach their full potential – or even hang onto any unexpected bounty that may drop into their laps.
We tend to think of discipline as arduous and uncomfortable for the average person, but social media author Chris Brogan writes that, “Discipline isn’t willpower. Discipline is setting up the perfect environment to achieve the goals you have.”
By contrast, failing to seize the reins of your financial life and make plans can be costly in more ways than we might realize. Research has shown that employees spend a significant amount of work time dealing with financial stresses, here and abroad. A 2009 study conducted by the Institute for Employment Studies among private and public sector workers in the United Kingdom concluded that, “Over a quarter of employees are worried about debt, with one in five reporting they are being kept awake at night by financial worries and over 10 per cent saying their health was suffering as a result. Additionally, workers with fewer financial worries report better productivity at work than those with concerns.” Numerous studies conducted by American media outlets in recent years report even higher levels of financial stress, especially since the onset of the global financial crisis in 2008.
According to a recent Merrill Lynch Affluent Insights Survey©
, which surveyed 1,000 affluent Americans, 66 percent of the female respondents and 54 percent of the male respondents are concerned about their retirement assets lasting throughout their lifetime.
So, think of financial discipline and planning as “setting up the perfect environment” to make the most of your life and your resources. Some of us are good at managing a particular aspect of our financial lives, but fail to see the big picture or give much thought to our vision for the long-term. I have often heard it said that most people spend more time planning their vacations than their retirement.
Financial planning, in its highest form, focuses on bringing the use of your money into alignment with your life goals and personal values – what you want out of life and how you wish to go about living it and relating to others. Ultimately, it comes down to finding peace of mind about money. We are each responsible for our own financial well-being – and this recognition becomes increasingly critical as career paths, health care, company benefits, retirement plans and Social Security undergo continuing change.
When is the right time to get started on your personal financial plan? Now. The Certified Financial Planner Board of Standards offers consumers a variety of valuable tools to help launch you inn the right direction at www.letsmakeaplan.org
. You can download a copy of The Consumer Guide to Financial Planning, which explains the financial planning process, how to choose a reputable financial advisor and financial self-defense. You owe it to yourself to get moving.
From CFP Board Ambassador Paul Jarvis, CFP®
Tips for Women from a Man
Recently, I was asked to speak at a women’s conference to share my top financial ideas for women to embrace. Since many available money tools can be used by both men and women, I ran a Google search on “women and financial planning” and guess what was at the top of the list. A DIVORCE CHECKLIST
. Apparently, many think the best advice is to divorce your husband and do it efficiently!
Money-specific advice, in many ways, is gender neutral so to simplify my pursuit, I asked my wife, relatives and female co-workers four questions.
Below are the results of my conversations with highlights on the most common and the most meaningful answers.What is your first memory of money?Most Common: Parents fighting about money
This answer was by far the most common response and offers everyone a very meaningful tip: make sure you are involved with your money and understand the why behind each decision. Also, educate your children about money and the importance of saving. Every person who took my survey and was a saver indicated that a parent or relative had taught her those skills. This can be as simple as showing children how to save birthday money or you can have more fun with it by matching each dollar that they save in their piggy bank. Meaningful: Watching my mom sit down on the weekends to pay bills, balance the check book and plan out the spending allowances for the month. I do this myself now as an adult.
Another idea is to put your spending record down on paper and share with your spouse so together you can see where all the money goes from paycheck to paycheck.What is your top financial tip for women? Most Common: Be involved and live within your means.Meaningful: Be involved in all decisions to do with your money. Don't let your spouse make all the decisions. Start right from the beginning putting away a portion of your paycheck in savings. Even if it is a small amount at first, it teaches you how to live on less. Make sure to have at least six months of your regular expenses put away in savings in case you have any emergency.
Don't spend more than you make. So many of my friends are using credit cards and get wrapped up in trying to stay so trendy and obtaining the new clothes/shoes/handbags in whatever way they can.
Live like no one else, so in the future, you can live like no one else.
Have meaningful conversations with your significant other about your budget and set specific goals both long-term and short-term to quantify those dreams into dollars.Do you feel you are on track financially? Meaningful: [Yes] because I am saving on a regular basis, but yet, I am not saving enough to reach my goal. I am aware of this though and slowly making lifestyle changes when possible.
This person acknowledges the fact that they have a weakness in their planning but they are fixing it by adjusting their lifestyle. I especially like this last comment because I think about my own budget and how I realized how much I was spending on my morning latte, muffin and lunch trips to the local sub shop.
By replacing my morning latte and muffin run with homemade coffee and muffins, I saved $4/day (Yes, my latte and muffin habit did carryover to the weekend). By bringing my lunch each weekday and eating at home for lunch on the weekends, I was able to save, on average, $8/day.
Think about it: $4/day savings on lattes & muffins ($1,460/year) and $8/day savings on lunch ($2,920/year) is a total of $12/day savings
- after 10 years earning 5%, you would accumulate $56,823.
- after 30 years earning 5%, you would accumulate $304,956
- after 30 years earning 8%, you would accumulate $548,610
I now save that amount in my retirement in addition to my regular deferrals.How many pairs of shoes do you own?
The background on this question was a conversation between a female co-worker and me. She said that her and her friends had a very difficult time separating wants and needs. She wants to buy new shoes all the time but realizes she doesn’t necessarily need them. It was that interaction that made me start thinking about a common and quantifiable way to measure wants versus needs.Meaningful:Those with the most shoes (100+) indicated that they didn’t have enough and those with the fewest number of shoes (6) indicated they thought they had too many.
The person who owned the fewest number of shoes was also the person that focused directly on her budget and understood her financial priorities.
Each participant whom I spoke to after the results, indicated she needed help, direction and a plan.
When I talk about direction, I mean a financial plan. A financial plan involves some of the following best practices:
- Set measurable goals.
- Understand the effect your financial decisions have on other financial issues.
- Re-evaluate your financial plan periodically.
- Start now - don’t assume financial planning is for when you get older.
- Start with what you’ve got - don’t assume financial planning is only for the wealthy.
- Take charge - you are in control of the financial planning engagement.
- Look at the big picture - financial planning is more than just retirement planning or tax planning.
- Don’t confuse financial planning with investing.
- Don’t expect unrealistic returns on investments.
- Don’t wait until a money crisis to begin financial planning.
For additional help, contact your local CERTIFIED FINANCIAL PLANNER™ professional by visiting www.letsmakeaplan.org
professionals are uniquely qualified to help individuals pull all their finances together, solve financial problems and make a plan to achieve their financial goals. Each CFP®
professional has met rigorous professional standards and has agreed to adhere to the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence when dealing with clients.
Financial Planning for Your Children
Three CERTIFIED FINANCIAL PLANNER™ Professionals Offer Savvy Advice to Kids of All Ages
Moms who do double-duty as CERTIFIED FINANCIAL PLANNER™ professionals share their tips for teaching kids about money. CFP Board Ambassador Rita Cheng, CFP®
says to distinguish between needs and wants, which differ by family, community, and income level. Other moms tell their children not to spend all of their money in one place. CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
, insisted that half of what her daughter made working part-time jobs as a teenager be put away in savings. Blayney remembers telling her daughter that money is divisible, and that "you can spend some, save, invest, give." CFP Board Ambassador Lynn Ballou, CFP®
emphasizes the importance of budgeting and of determining net income, and how to make what is available work within one's lifestyle. Blayney understands that often times, putting space between an initial urge to buy something makes a big difference. "It's amazing how much the impulse to spend goes away if you give it time," Blayney says. "So, give it time, give it time." She recommends shopping with a list and getting a good night's rest beforehand, and cautions people to avoid making shopping a source of pleasure and entertainment. Finally, Cheng helps her kids become smart consumers by teaching them how to clip discount coupons. "It's a way to encourage the habit of savings but also make it fun," she says.
Tips to Help You Determine How Much Financial Help to Give Your Adult Children
"On the one hand as parents we want to do anything and everything we can to help our children succeed, but on the other hand we don't want to create an unhealthy financial co-dependency situation with no end in sight," says CFP Board Ambassador Lynn Ballou, CFP®
. First, avoid reverting back to a parent-child role, and remember that adult children should be treated like any friend who is experiencing a financial hardship that may be embarrassing to talk about. Second, figure out if the child's behavior is a one-time event or a pattern, and consider making any support contingent on the adult child meeting with a financial counselor to work on financial behavior correction. Third, meet with your own planner to determine what level of support is appropriate, be it letting a child live at home rent-free for a set period of time, or providing a gift or loan based on what the parent can afford. Fourth, when loaning money, keep it practical by thinking about how much the adult child can realistically be expected to repay and when. Finally, if one child is in a more financially needy position and other siblings are not, stave off feelings of resentment by considering putting a provision in the estate plan that would equalize matters by deducting any imbalance from the adult child's share of the estate.
Financial Planning for Your Life Now
How to Minimize Your Personal Financial Risks
The Certified Financial Planner Board of Standards has released guidelines on helping clients minimize personal risks as part of a year-long outreach initiative. CFP Board's Consumer Advocate, Eleanor Blayney, CFP®
, is responsible for creating and launching the "12 for 12 Approach to Financial Confidence" campaign. "So many people think financial planning equals investment advice, when in fact CFP®
professionals take a far broader view of an individual's financial situation," she says. Blayney urges consumers to avoid taking unneeded risks, although she notes that risks must be examined in the short and long term. For instance, avoiding equities because of a potential decline in the stock market may result in the loss of long-term benefits realized through the overall trend of stock market gains. Blayney advocates taking steps to mitigate risk, such as diversifying a 401(k) or investment portfolio. She also says the purchase of insurance is beneficial because it spreads risk out to a third party for a lower price than if a consumer were to pay alone for unexpected events. Blayney's recommendations for insurance include insuring only what the consumer cannot afford to lose, focusing on acquiring insurance that offers the best protection from loss, and curbing insurance costs by using proactive risk management strategies (such as not smoking and installing a home security system).
Leaving the Workforce to Care for Your Aging Parent Presents Some Financial Risks
Workers who are considering leaving the workforce early to care for aging parents should think hard about the financial risk. According to research from MetLife, a generation of 50-plus caregivers is losing an average of $303,880 when they quit work to take care of a parent. Nancy Wurtzel, 56, says she did not give enough thought to the financial implications of shuttering her public relations business and moving from Los Angeles back to a small town in Minnesota to care for her 91-year-old mother, who has dementia. Wurtzel, who is living on her savings, says, "I'm in OK shape now, but I can't continue like this, or I won't have anything for retirement." Workers will need to consider whether they can handle the day-to-day obligations of caregiving, and whether they will be able to maintain their job skills and contacts, considering the average caregiver spends 4.6 years in that role, according to a 2009 study from the National Alliance for Caregiving. "Four years can be a professional lifetime in terms of the technology changes and new events in a profession," says Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®
. An aging parent may be willing to pay their son or daughter to take on the caregiver role, and a lawyer should be contacted to draft a caregiver agreement that outlines the provided services and the cost. A legal agreement also would allow the caregiver to make contributions to a traditional or Roth IRA.
Financial Planning for Women
Women, 'Know Your Worth'
Several recent studies show that women are very optimistic about the economy but not so confident about their skills for managing money, and many CERTIFIED FINANCIAL PLANNER™ professionals are working to change that. Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP®
says attracting more female clients is a hot topic among advisers today and all the major financial firms have done studies on the issue. It is a profession dominated by men, and advisers often do not engage a woman if she comes in to a client meeting with her husband, Blayney says. “I think we have underserved women,” she says. “They're not a niche market; they're the majority of clients for financial advisers.” After the age of 65 the majority of women are single, she says, either by divorce or the death of a spouse, and many are worried about outliving their retirement income. Blayney says advisers need to use more “appreciative listening,” which means not just paying close attention to the speaker’s words and body language but also solving problems by focusing on what is working rather than what is broken. An adviser might, for example, point out areas where a woman is competent with her finances, rather than noting where she has strayed from her budget or failed to save. Social media is also a good way to reach women, Blayney says, as research has shown they are the majority users of social media. Advisers can help women with not just financial capital issues but also with career management choices that can increase their wealth, such as asking for a raise, Blayney says. “My piece of advice to all women is the advice I would give my daughter: Know your worth,” she says. “Don't be afraid to ask for what you are worth. If the answer is no, go to where the answer is yes.”
Financial Planning for Your Retirement
Investments to Consider if Your Retirement Portfolio Isn't Generating a Decent Return
Scott McClatchey, CFP®
says workers should consider adjusting their retirement portfolios to include investments other than the standard money-market funds and CDs, which are yielding little due to historically low interest rates. One yield source that might be worth a look are real estate investment trusts, which let an investor enter the commercial real estate sector without the obligations of property management and give investors a fractional ownership share of a major-league real estate portfolio with potential for dividend payments and modest returns. Another option, dividend stocks, were a standout during the recession as investors could turn them in for cash flow. These products are usually issued by established corporations in critical industries. For investors willing to take on the higher volatility and potential for default, there are high-yield and foreign bonds, which benefit from both higher inherent yields and the declining U.S. dollar. Finally, investors can turn to utilities as a buffer since these stocks have the potential for hefty dividends in good and bad market climates.
Are Your Retirement Savings in a Roth 401(k)?
Tax experts are enthusiastic about Roth 401(k) plans because investors who use them do not have to worry about paying taxes on money withdrawn in the future. Barry Picker, CFP®
puts his savings into a traditional 401(k) as well as a Roth 401(k) each year as a strategy to ease the tax burden of retirement. Picker views his decision to pay taxes now instead of later as a compromise, considering there is no way to know where tax breaks will be in the future. "I am giving up some control over managing my tax bracket today for being able to manage it in retirement," according to Picker. "That's going to be valuable to me later." What is more, the distribution from a traditional 401(k), which will be taxed as ordinary income, could push retirees into a higher marginal tax bracket and reduce the net value of their Social Security benefit. Still, most workers have not made the switch to a Roth 401(k), a relatively new option in employer retirement plans (since 2006) that is offered by only about 40 percent of employers. Workers should keep in mind that converting an existing traditional 401(k) to a Roth would mean they would have to pay taxes now on the conversion; a better approach may be to shift new 401(k) contributions to a Roth.
When Preparing for Your Retirement, Consider Both Your Finances and Your Lifestyle
Andrea Bulen, CFP®
says when consumers think about their income, they should also set goals for retirement. "Set those goals and plan out what you will need to do to achieve them. Is your retirement income sufficient to meet those goals?" Consumers should also consider how they will change their lifestyle in retirement from a monetary perspective as well as from a day-to-day perspective. Bulen says this could include asking, "What would an ideal week in retirement look like?" and "What would an ideal week in retirement look like for your spouse?" and whether those weeks would be compatible. She also recommends that spouses discuss their fears about retirement before it is too late. Experts also advise married couples to examine different ways they can take Social Security and to investigate which accounts house which investments. Retirees typically migrate to more conservative portfolios, and may benefit from keeping most bond moneys in a tax-deferred account such as a Roth IRA or traditional IRA to minimize taxes. Dividends can also be tax-efficient if they are qualified, or taxed at a maximum rate of 15 percent versus 35 percent for ordinary income.
Hiring a CERTIFIED FINANCIAL PLANNER™ Professional
CFP Board Encourages You to Question Your Potential CERTIFIED FINANCIAL PLANNER™ Professional
Certified Financial Planner Board of Standards reminds investors that they must ask the right questions to see if a financial planner is a good fit for them. CFP Board lists the following questions to ask: What experience do you have?; What are your qualifications, and what specifically did you learn?; What services do you provide and are you independent?; What is your financial planning approach?; Will you be the only planner working with me?; Do you have a succession plan, and if so, who with?; How will I remunerate you for your services and what are your standard rates?; Have you ever been publicly disciplined for any unlawful or unethical actions in your professional life?; Can I have this information in writing?, and; Why are you in this business? Looking at how a planner answers these questions "might help you find a really good adviser to work with," says Scott Webb, CFP®
Your CERTIFIED FINANCIAL PLANNER™ Professional Should Have Good Habits
Finding the right financial adviser can be difficult, but Jim Pasztor, CFP®
and author of “Finding a Real Cowboy: How to Protect Your Money from Wall Street and Financial Planner Wannabes,” says there are 10 things to look for that show an adviser has a fiduciary mindset. The first is that the adviser acts as a fiduciary at all times and chooses what is right over what is most profitable even when not required to do so by law. This can be difficult to determine until after the adviser has been hired, though, so it is important to ask for references and look for examples of client loyalty. Other things to look for are that the adviser charges a standard fee rather than commission, discloses any conflicts of interest and compensation in writing, has a CERTIFIED FINANCIAL PLANNER™ professional designation, is experienced with complex financial situations, and is a member of a leading professional organization. The adviser should also have a clean regulatory record and should regularly attend conferences and continuing education in order to stay up to date on the latest regulations and trends. Finally, the adviser should be one who considers the big picture of the client’s financial situation before recommending products or actions, and should have a process for determining a client’s needs. Service is ultimately what separates good and bad advisers, and the ultimate way to determine the quality of an adviser is that goals are being met, progress is being made, and fiduciary standards are being met.
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