Archive for Financial Education

Mind over Money with Dr. Alec Baker – Part Three

Alec Baker, Denver Financial Planner

Welcome to Part 3 of my interview with Dr. Alec Baker of Peak Living Psychology.   To finish off Dr. Baker’s interview, I wanted to end on a positive note.

 

KS:  What are some shared characteristics you see of individuals who are good with their money?

 

AB:  People who are good with their money are self-aware – they know their core beliefs around money and manage their emotional responses to make good choices. They are practiced at saying “no” to both themselves and to others.

 

These individuals have core beliefs that are firm, but flexible.  They also have a solid grasp on their risk tolerance and manage anxiety rather than either being governed by it or ignoring it completely.  If these individuals are part of a couple they have good communication with their partner that helps them make money a functional part of their relationship.

 

Imagine a 28-year-old single man who makes about $80k per year.  He goes out on the weekends and especially likes to go to sporting events. He’s at an age where people are getting married, which means 3-4 invites to bachelor parties and weddings each year.  This young man hates to say no, but he has a spending plan that he consults regularly.

 

It helps him know when skipping a night out or passing on tickets to the Broncos game will help him say “yes” to bigger events without creating credit card debt.  When the 4th invite to a bachelor party for the year rolls around and he sees that it will cost him $1500 for the weekend, he consults his spending plan and declines the invitation because he only has $500 left in savings.  He focuses on seeing everyone at the wedding and knows that good friends won’t hold it against him.

 

In a different demographic, imagine a family of 4 with two working parents.  The parents have a detailed spending plan that includes individual spending for each person and money for the children’s sports and music lessons. They sit down once each month to go over the plan, evaluate where they stand, and make small adjustments as needed.

 

They are open and honest about their spending patterns and their incomes while having a mutually agreed upon arrangement for how each of them contributes to the family finances.  They have spent time learning about each other’s core beliefs around money how it impacts their choices so that they can be compassionate with one another about mistakes and supportive around making necessary changes when they become obvious.  Lastly, they work with a financial planner who can provide them with support and advice around long term planning and their financial legacy.

 

KS:  This concludes our series with Dr. Alec Baker.  What I have taken away is that problems and success with money is often not about money at all, but believes, values, and communication.  Thanks to Dr. Baker for participating!

 

Dr. Alec BakerDr. Alec Baker owns and operates Peak Living Psychology – a full service psychological services practice located in South Denver.  Peak Living Psychology offers financial therapy, traditional psychotherapy, and psychological assessment services to the Denver metro area with a focus on helping individuals and families cultivate the best things in life.  More information can be found at alecbakerpsyd.com

WTF (What the Finance) is Blockchain?

blockchain, denver financial planner

Continuing with my new WTF series that started last month with Bitcoin, today’s explanation (attempt!) is about Blockchain.  A lot of people have been using Bitcoin/cryptocurrency/blockchain as interchangeable words, but they are not the same thing.

 

Cryptocurrency

 

Cryptocurrency is a way for paying for goods and services with money that somebody made up and that is not backed by any country or central bank.  Its value is the perception that it has value, not backed by any actual thing or taxing authority.

 

Bitcoin

 

Bitcoin is a brand of cryptocurrency.  There are many others.  They include Litecoin, Ethereum, Zcash, Ripple, and Monero.  Is cryptocurrency the money of the future?  Maybe.  Is Bitcoin the one that will last?  Hard to say.  Think of the early players of the internet age (AOL, Pets.com) that seemed like such giants at the time, but are no longer as relevant.

 

Blockchain

 

This brings us to the title of the blog – Blockchain.  Blockchain is the method by which cryptocurrency transactions are tracked.  But, blockchain can be used for many other things besides cryptocurrency transactions.  In other words, Bitcoin needs Blockchain to function, but blockchain does not need Bitcoin.

 

Blockchain is Distributed Ledger Technology.  It’s a way to track transactions that’s different from the currently used Centralized Ledger.  With a centralized ledger, a trusted third-party controls data and sends that data out to the interested parties.  What could possibly go wrong?  Ask Target, Equifax, or any other large firm whose centralized data has been breached and sold on the black market to identity thieves.

 

With Distributed Ledger Technology, the transaction (purchase, contract, transportation, etc.) each party to the transaction has a copy of the data.  The shared infrastructure is more transparent and the processing more automated.  Each transaction has its own special code and cannot be deleted from storage.  Data can be added to the Distributed Ledger, but not deleted.

Who is using this?

 

Companies as diverse as Walmart, L.L. Bean, Bank of America, Nasdaq, and, yes, Bitcoin are using blockchain technology to speed up transactions and safeguard data.

 

Here is an example.  Say a large grocery chain has a report in the Denver area of tainted eggs that made some customers sick.  With centralized ledger technology tracking transportation of the eggs, the origin of the tainted egg can’t be specifically pinpointed beyond the most local distribution center.  Every egg from that supplier in the Denver area stores must be pulled from the shelves.

 

Using blockchain technology, each egg carton is tagged with a sensor that has a unique code.  The sensor tracks the transportation of that carton to its final destination.  The egg bought by the sick person can be traced back to the specific batch and supplier it came from.  Only those eggs can be destroyed, saving time, money, and waste.

 

While Bitcoin futures would not be an investment recommendation from most long-term financial planners, watching the future of blockchain technology may be a more worthwhile use of research.

Ideas to protect yourself from a stock market drop

stock market drop, denver financial planner

This 9-year rise in the stock market has been called “the most hated stock rally ever.”  Maybe people are so scarred by the Great Recession that they can’t believe good news will ever happen again in the stock market.  Even though it’s been happening (at least in the U.S. with only minor hiccups) for 9 years.

Here’s the reality.

People are always telling me the stock market is getting ready to drop.  “It CAN’T go any higher,” the people tell me.  Well, guess what – it CAN go higher, and in fact historically, it HAS always gone higher.  In general.  And with some recessions along the way.

 

stock market drop, denver financial planner

 

Hey, I’m not suggesting we will never have another recession.  We will, and they will happen about every 7-8 years and last about 12-18 months.  For the REST of your LIFE.  So stop being so hysterical.

Is this fluctuation normal??

Just like summers are followed by hurricane seasons, the economy is cyclical.  Do you quit enjoying summers because it may rain later?  No!  The best thing to do is get your portfolio ready, and be prepared to ride out the rough seas to get to the lovely tropical island on the other side.

Get your portfolio ready.

The first method to getting your portfolio ready for the next U.S. recession is good old-fashioned diversification.  By that, I mean owning investments that don’t behave the same as the U.S. stock market.  These can be things like bonds, real estate, international stocks.  Even small and medium sized U.S. companies have different price swings that large U.S. companies.  Work with your financial advisor (or even online tools) to come up with a mix of investment types that makes sense for your time horizon.

 

Another old idea is called the Anchor Strategy.  This is useful for money that you’d like to see grow, but have a very specific time horizon for it’s use.  For example, let’s say you want to buy a second home in 10 years and you have $50,000 saved.  You don’t want to put your $50,000 at risk, but you’d like to see some growth.

 

The Anchor Strategy has you buying enough Zero-Coupon Bonds to grow back to your original $50,000 in 10 years.  You could buy 50 10-year maturity zero-coupon Coca Cola bonds at $948.00 each or $49,200 (quote from Fidelity.com on January 17, 2018).  That investment should grow back to the original $50,000 in 10 years, assuming Coca Cola stays in business.

 

The remaining $10,100, you could put into an S&P 500 index fund.  Say, you averaged 7%/year over the next 10 years on the Index Fund investment.  You’d have $19,800 from that part of the investment pool. The total investment in this example would grow to just under $70,000 with very low risk.  Granted, the return isn’t all that great, either, but the peace of mind is there.

 

Again, none of this is personalized investment advice to you, but could provide some talking points the next time you meet with your financial adviser.

Do you REALLY know the difference between tax-free and tax-deferred?

tax-deferred

What’s the difference?

 

Often people need help deciding whether to save for retirement in a Traditional or Roth-type of account; another way to put that is do you want tax-free or tax-deferred?  This question can come up when you are signing up for your retirement plan at work or when you are deciding to open your own Individual IRA.

The brick wall is that most people don’t understand the difference, so how can they make an informed decision?  I am here to help!

Taxes and Savings

Cast your memory back to when your savings account at the bank earned something called “interest.”  Yes, I know it was long ago. But, do you remember that at the end of the year, you would get a 1099 for interest earned? You would add that dollar amount to your income for the year and pay taxes on it.

The same process happens in your non-retirement and non-college investment accounts.  Every year you get a 1099 from your investment company reporting dividends, interest, and capital gains earned in the account.  That income is taxable to you in that year.  These are called “taxable” accounts.

Retirement accounts give us a break from those pesky annual 1099s and tax payments.  This is to encourage us to save for our old age by giving us tax incentives.

 

Tax-Deferred

In a tax-deferred account (Traditional IRAs, Traditional 401(k)s), you get to shelter your annual contribution from income taxes and not pay yearly taxes on interest/dividends/capital gains.  When you take the money out for retirement spending, you will owe income taxes on the withdrawals you make each year from the accounts.

Tax-Free

In a tax-free account (Roth IRAs, Roth 401(k)s), you do NOT get a tax deduction for the amounts you add to the account each year.  The account grows without annual taxes like the Traditional accounts above.  The big difference here is on the withdrawals.  When you take money out of Roth accounts in retirement, you will owe NO income taxes.

The difference.

So, the difference in a nutshell is do you want a tax break now (Traditional) or tax break in retirement (Roth)?  There is no right or wrong answer since we don’t know if your taxes are higher now or later.  Sometimes the best solution is to diversify – use a little of both.

Mid-Year Financial Check-Up: 4 things you should think about now

financial check-up

It’s July already????

 

Yikes, 2017 has gone by quickly!  Time to do a financial check-up on those New Year’s Resolutions to see how you are doing.  I don’t know what your resolutions were, so here are a few common ones that there is still time to tackle.  BEFORE you are making your resolutions for 2018, that is.

 

College

 

  1. Starting a 529 plan for your kids’ college. It doesn’t have to be much.  Just $50 to start and $25/month can get you going in a Colorado Direct Investment portfolio managed by Vanguard.

Retirement

 

  1. Increasing your 401(k) contribution at least 1% from last year. Most plans let you go online and change your savings amount any time during the year.  Don’t delay!  Save more today!

Health Benefits

 

  1. Use your Flexible Benefits Account money. Did you set aside pre-tax money this year to finally get those glasses, map those moles, fix that tooth, or other medical procedures you’ve been putting off?  That money has to be spent by year-end, so get those appointments made!

Budget

 

  1. Use an app to see how much you are really spending on…clothes, liquor, lunches out, fishing gear, workout clothes, kids’ sports, whatever! Try mint.com, youneedabudget.com, mvelopes.com for free and easy ways to track spending.

 

Okay, that’s enough for now.  If you do even two of those four items before the Fourth of July fireworks, I’ll consider it a victory.

Debt-free would be nice. But SHOULD you pay off your mortgage?

pay off

The payoff?

 

Wondering if you should pay off your mortgage early or stick with those monthly payments? You’re not alone. In this article from dynamicnsurance.com, I’m asked whether getting rid of your mortgage is actually a good idea.

I advise….

 

“If a client thinks they’ll be in a house for 10 years after the mortgage payoff, I encourage them to do it,” said Kristi C. Sullivan, CFP and owner of Sullivan Financial Planning. “But if they want to move soon after they are able to pay off the mortgage, I don’t.”

 

Click here for more expert advice….

 

Your Tax Refund: What you can do with that extra cash

tax refund

Got your tax refund? Let’s go crazy!

 

Shoot. You know me better than that.

The average US tax refund was $2,800 in 2016.  What to do with that mad money?

 

Here are some ideas, in order, from your friendly financial planner:

 

  1. Pay off credit card debt if you have it.
  2. Create or add to your emergency fund if you don’t have one or it’s skimpy. You should have at least 3 months’ essential expenses (rent, food, medical, utilities, car payment) set aside in a savings account.  Your 401(k) at work is NOT your emergency fund.
  3. Increase your contribution to your work retirement plan and use the tax refund to make up the smaller amount in your paycheck. Don’t have a retirement plan at work?  Open an Individual Retirement Account (IRA) at your bank or a discount brokerage firm.
  4. Put the money in a 529 account for your kid(s) college.
  5. If you’ve covered all those bases, reward yourself! Put the money in a vacation fund or refresh a room in your house with new paint and lighting.  Or treat a group of friends to a dinner and a movie.

 

Happy after-tax season!

 

Article Links:

 

This blog focused on small niche funds or ETFs.  For a list of more broad based mutual funds that meet a sustainability criteria, check out this article from Barron’s by Leslie P. Norton and Crystal Kim in October of 2016.  (Click here.)

 

This article has great advice about cleaning out a late loved one’s home. (Click here.)

 

Here is an article with some good ammo for those Social Security Number requesters. (Click here.)

 

Still looking for ways to deploy that tax refund?  Here are more ideas. (Click here.) 

Cost of Living: How much should you be spending on rent?

Kristi's Quotes

If you’re paying more than 28% of your salary on rent…

 

…you’re paying too much. In this article from Credit.com, I detail how your monthly expenses should be allotted.

 

Let’s take a look

 

If you’re like many Americans, you have debt. This is especially prevalent among young college grads. That has to be a factor in deciding what you can afford in housing costs.

“The conventional statistic is that no more than 28% of gross salary be spent on housing and no more than 36% on consumer debt. However, that does not at all take into account other obligations in people’s budgets,” said Kristi C. Sullivan, a CFP in Denver, in an email. “Student loans are a large bill for many and if that’s the case, you can’t afford to spend 28% on housing because then you’ll have nothing left for food. Rent is not the fixed expense people think it is. You can lower this cost by living in a less desirable area of town, having roommates, or living in a smaller place.”

Roberge said a common mindset he sees is that people will find a place, decide to move in and figure they’ll make everything else work afterward. To improve your chances at financial success and stability, you need to plan more carefully.

 

Click here for more….

Reverse Mortgages: How do you know if it’s right for you?

Kristi's Quotes

Let’s get detailed about reverse mortgages.

This isn’t the first time I’ve tackled this subject. But Investopedia recently published a more detailed article (written by yours truly) that provides more information about reverse mortgages and whether or not they’re right for you.

Take a look.

 

Chances are high that when I mention the idea of a reverse mortgage to clients, I’ll be met with a very sour expression. I think this is because of the impression that these instruments are expensive and that you give up ownership of your home to use them.

Now I am no expert in these products, but for clients who have most of their net worth tied up in their homes, finding a way to use that equity to pay bills is a must.

Reverse Mortgage Basics

Here are some reverse mortgage basics:

  • Reverse mortgages are also known as home equity conversion mortgages (HECM) and are administered by the FHA.
  • You enter an arrangement with the lender to take money out of your home based on the amount of equity you have and your age.
  • You don’t have to have earned income to qualify.
  • You keep the ownership of your house until the last occupant dies or moves out.
  • You can receive the income from home equity in a variety of ways: For a specific time period, as a credit line to use as needed, or for your lifetime or the time that you or your spouse occupy the home.
  • When you pass away or move from the home, whatever equity is left after the debt and fees are paid will pass back to you (if living) or to your estate. (For related reading, see: How Does a Reverse Mortgage Work?)

Your Financial Goals: Are you keeping your New Year’s resolution?

Kristi's Quotes

Yes, I know that New Year’s was a few months ago, but I just thought I’d check in and see how you’re doing with all of those financial goals you made at the beginning of the year.

 

Here’s an article that might get you back on track: Jean Chatzky, one of my favorite personal financial authors, included me in this piece that helps people achieve the monetary goals that they set way back in January.

Achieving your financial goals.

 

Only 8 percent of people who make resolutions are successful in achieving them.

That sounds like a challenge to me. Nothing gets me motivated like someone thinking I won’t succeed. So let’s make this the year we successfully keep our resolutions. And while I can’t help you lose weight or get organized, I can certainly help with the financial piece of the puzzle.

Here are five steps you can take to help stick to your resolution.

Build in rewards. You don’t want to sabotage your efforts, but much like cheat days help you diet — if you know there’s cake on Saturday, you’re more likely to eat clean on Tuesday — a small reward can give you the motivation you need to keep moving when the urge to spend strikes. “Reward yourself for small victories along the way to stay motivated,” says Kristi Sullivan, a Denver-based CFP professional. “For example, if your goal is to save $2,000, treat yourself to a movie, facial or drink with a friend for every $500 saved.”
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