Monthly Archives: September 2016

Traditional Financial Advice

Let’s say that you’re 30 and you inherit $500,000. What should you do with the money?

 

Traditional financial planning advice might look something like this:

 

  1. Establish an emergency fund
  2. Pay off debt
  3. Get yourself on track for retirement

 

That’s all nice and prudent, but is prudent always the right move?

 

I say no. Sometimes it pays to buck the traditional advice and be a little daring.

 

What Do You WANT?

 

No one lies on their deathbed feeling fulfilled because they made all the “right” decisions. No one is ever truly satisfied by checking off all the boxes someone else laid out for them.

 

True happiness comes from doing the things that matter to YOU. The things that scare you a little bit, excite you a lot, and just feel downright important.

 

Going back to the example above, assuming you suddenly and unexpectedly had a large amount of money, what if you asked yourself the following questions before making any decisions about what to do with it:

 

  • When you’re 80, what will you regret not having done?
  • When are you happiest in your life right now?
  • Is there anything you’ve been wanting to try but felt like it was too big a financial risk?

 

Maybe you’ve been wanting to quit your job so you could go back to school. Or maybe you’d like to take some time off to volunteer in another country while you learn a new language.

 

Those things don’t fit into the traditional financial planning paradigm but they’re the things that make your life worth living

 

And isn’t that the entire point?

 

Finding a Balance

 

Of course, traditional financial planning advice exists for a reason. Building an emergency fund, paying off debt, and investing give you the security and the freedom to enjoy yourself both today and in the future.

 

They just shouldn’t be the only things you consider. You should absolutely make room for the things that excite you too, and you don’t need to receive a big inheritance to do it.

 

Here are some thoughts on how you can balance the practical with the aspirational today, no matter what your financial situation looks like:

 

  1. Make a list of all the practical financial goals you know you should be working towards.
  2. Make a list of all the life goals you’d like to experience.
  3. Pick one from each list and put a dollar amount and timeline on each. How much will each cost and when would you like to achieve it?
  4. Divide the dollar amount for each by the number of months between now and your target completion date.
  5. Automate that monthly savings into separate accounts dedicated to those specific goals.
  6. If you can’t meet the full savings target now, save what you can and make it your mission to get to that full savings target over time.

The Psychology of Plastic Can Affect Buying Decisions

At some point in the midst of holiday shopping, most of us will dip into our wallets, take out a credit or debit card and make a purchase. Many times, we leave the mall or put down our tablets and phones having spent more money than we intended.
We’re moving into a world where we hold less cash and are increasingly comfortable using cards and electronic payment methods. Before diving into the possible effects this could have, I’d like to point to a famous quote by notorious gambler Julius Weintraub: “The guy who invented gambling was bright, but the guy who invented the chip was a genius.”

The psychology of symbolic money

When you go into a casino, you see people throwing chips around: $50 on red in roulette, raising $25 in poker, doubling down $100 in blackjack. Unfortunately, sometimes we can’t afford to lose the money we gamble away. The $100 lost on a double down in blackjack could have been several days of groceries for the family or overdue maintenance on the car. The $10,000 lost on a weekend binge could have been college tuition.
You may be able to relate to these examples personally or through family or friends. One aspect of the psychology of gambling is that people are parting with poker chips, rather than cash in their hand. The chip changes the form of your cash, not just physically but metaphorically, too. It can cause you to justify taking a risk. It can create an excuse so the $25 that was in your pocket is only a green chip on the blackjack table. The monetary value is the same, but your mind is more comfortable separating a poker chip from a bill in your pocket.

How it works with credit cards

The technological advances that have accelerated the use of credit and debit cards and other payment options can act in a similar way.
From 2006 to 2014, payment volume for Visa has increased from $2.13 billion to $4.76 billion. Other major credit card companies have shown similar increases. While this may or may not lead to carrying higher credit card balances, it most likely leads to less money in the bank account for the consumer.
In my opinion, we’re likely to spend more money with these cashless payment options. We pull out our cards or phones and make purchases without consciously contemplating the downstream impact as much as we would have if we’d paid in cash. We don’t physically hand the money over. Yes, we may hand a credit card over, but that’s the same motion whether we’re buying a pack of gum or a diamond ring. The rise of mobile payments creates even less friction for purchases, since buyers don’t have to sign anything.
Another consideration is the restriction that cash creates: If you don’t have enough cash to buy something, you can’t make the purchase.
For these reasons, people who use cards and mobile payments may be increasing their purchase frequency as well as the value of their purchases.

Know The Benefit When You Choose Social Security Survivors

Social Security Survivors benefits are paid to widows, children, parents and ex-spouses of covered workers.

The Social Security program actually consists of three benefit programs that make payments for various reasons. They are:

  1. Retirement benefits,
  2. Disability benefits,
  3. Survivors benefits.

This post covers number 3, Survivors benefits. These are not the same as the benefits commonly referred to as spousal benefits.

If a worker, who is covered by Social Security, dies and leaves family members behind, they are the “survivors” and are covered under the Survivors benefits program. Social Security will use the deceased worker’s record to calculate payments for his / her family.

There are four eligible parties that may receive payments after the worker’s death. They are the widow (or widower if the wife dies first), children, parent, and ex-spouse. Each has detailed rules for eligibility.

A widow(er) will get benefit payments if:

  • They are age 60+, or
  • Age 50+ and disabled, or
  • Any age and caring for a worker’s child under 16 or disabled and entitled to benefits on worker’s record.

A child will get benefit payments if:

  • They are under age 18, or
  • Between 18 and 19 and still in secondary school, or
  • Over age 18 and severely disabled before age 22.

A parent will get benefit payments if:

  • They are dependent on the deceased worker for greater than 50% of their support

An ex-spouse will get benefit payments if:

  • They fit one of the three requirements for widow(er) above and were married to covered worker for 10 or more years, and
  • They are not entitled to a larger benefit based on their own record, and
  • Not currently married unless marriage was after they turned 60 or 50 and are disabled.

Lets make a plan on your finance

As I meet with clients to present their financial plan, it is common to sense a figurative (and often literal) sigh of relief at the meeting’s end. Admittedly, some may just be glad to have survived the long presentation, but I’m fairly certain that most are relieved to have a path forward.

 

A recent article on Govexec.com (“From Voting to Writing a Will: The Power of Making a Plan”) struck a chord with me and added a little bit of science to my observation. In this piece, Todd Rogers and Adan Acevedo apply behavioral science to show how having a plan can reduce the “intention-to-action gap” that so many of us can relate to.

 

Ideally, we should have a plan in place before a crisis hits and we need to act. This is a central theme in all aspects of financial planning – do you have a Will, is your emergency fund sufficient, is your home adequately insured, are you saving enough for retirement? Thinking about these questions and then building a plan to address them can decrease some of the stress and anxiety in our lives.

 

During the recent Metro Washington Financial Planning Day, one of the presentations addressed the value of running a “financial fire drill.” As children we were taught to “stop, drop, and roll” during fire safety awareness events. As adults, a financial fire drill can help us assess whether we are prepared to address adversity in our financial lives.

 

An effective plan defines the desired end goal as well as the necessary steps to achieve that goal. We may need to adjust our initial path as “life happens,” but the planning process is iterative and can help keep us on track. I borrowed a bit of wisdom from my colleagues and now use it at the conclusion of each financial plan I write: “Financial planning is an ongoing process as opposed to a single event and your plan will need to change as your life changes.“ Do you have a plan to push beyond life’s challenges and reach your goals?

Prepare for Emergencies Tips

Last week Kristen and Julia, our rising high-school senior, visited McGill University in Montreal, Canada.  By all accounts it was a hugely successful trip. Julia is thrilled at the prospect of furthering her education and expanding her horizons. She will be 18-years old soon and “on her own” as a freshman, hopefully, at a college of her choice.

Students may be worried about making new friends, studying, and adjusting to college life. Parents or guardians may share these concerns too, but they should not neglect legal and financial matters. Our 18 year-olds are now adults who can enter into contracts, make their own health care decisions, and are afforded levels of privacy to which we may not be accustomed. Who will make medical decisions on behalf of your child if he or she is unable to do so? What will you do if you need to get medical information in a time of an emergency? Will you be able to have access or make decisions on financial/tuition matters with the bursar’s office? Is it important to have access to your child’s academic record? Consider these items allowing parents/guardians to assist their adult children before they leave for college:


Health care proxy
: This document allows your child to name someone they know and trust to make medical decisions on their behalf, if for any reason, they are unable to make the decision or communicate their wishes. While standard forms may be available on-line through state medical societies, your estate planning attorney can draft this document.


HIPPA release:
 The Health Insurance Portability and Accountability Act (HIPPA), a federal law, protects your child’s privacy even from parents. The act prohibits a health care provider from releasing any health care information unless your child provides the health care provider with a HIPPA release form naming you as an authorized recipient.


Durable power of attorney:
 This document allows your child to appoint an agent in order to manage his/ her financial matters. While parents may be paying the tuition bills, this does not grant authority to discuss or resolve their child’s financial issues with the college’s student accounts office or bursar’s office.


FERPA waiver:
 The Family Educational Rights and Privacy Act (FERPA) governs privacy of educational records and prohibits an institution from discussing a student’s record with anyone unless the student has granted authorization. Colleges may allow students to grant access to one or more individuals via an on-line wavier form. However, remember your children are gaining independence and responsibility. Simply engaging your student may prove an equally, if not a more effective means of communication about how they are doing in school.
It is important to keep signed forms available as you may need them if your child is traveling, and remember that authorizations can be modified or updated as their circumstances change.
This is not legal advice so please be sure to contact your estate planning attorney to address these important issues.  If you don’t have an estate attorney ask your family, friends or financial advisor for recommendations.