Life Insurance at the Right Price

While it may not be the most enjoyable thing to think about, getting life insurance is one of the best ways to ensure that your family will always have the financial resources it needs, even if you’re not there to provide for them.

When you shop around for life insurance, you’ll probably encounter two different types:

Term life insurance lasts for a set amount of time, typically 10-30 years. It provides pure protection and nothing more.

Whole life insurance lasts for your entire life, as long as you continue to pay the premiums. It also has a savings component that builds over time.

While insurance agents will often make whole life insurance sound like a good deal, the truth is that most people will save themselves a lot of money and create more financial security by sticking with term life insurance. Here’s why.

The Premium Difference
Term life insurance is a much cheaper way to get the protection your family needs. I recently got quotes for a 34-year-old male in New York looking for $1 million of life insurance coverage. Here were the estimated premiums:

30 year term life insurance = $939.98 per year

Whole life insurance = $11,240 per year

In other words, term life insurance would cost $10,300 less per year for the exact same amount of coverage. Needless to say, that is a stark difference in cost.

The Investment Difference
Cost alone is not an entirely fair comparison because there are differences in the policies. After all, whole life insurance accumulates savings in addition to providing protection while term life insurance does not. But even then you would likely come out ahead by buying term and investing the extra $10,300 elsewhere.

According to the whole life insurance illustration I received, the savings account was projected to grow to $739,945 after 31 years, which would equate to a 4.35% rate of return. Not bad.

But let’s say that you put that money into a 401(k) instead. Using conservative estimates, you might expect to receive a 6% long-term return. After 31 years, that money would grow to $925,865.

But that’s not the end of it. If you’re in the 25% tax bracket, contributing $10,300 to a 401(k) would save you $2,575 in taxes each year. If you also invested that $2,575 and earned the same 6% return, you would end up with another $231,466 after 31 years.

So, in summary, here’s how much money you would have after 31 years with each approach:

Whole life insurance = $739,945

Term life insurance and invest the difference = $1,157,331

Getting married help or hurt your federal tax liability

This is one of the most common questions I hear from newlyweds and something my wife and I considered when budgeting in our first year of marriage. Like many things in life, the correct answer is, “it depends.” Getting married can be a tax benefit to one couple and an increased liability for another.

Let us take a look at the case study below. For simplicity, we will only be referring to taxable income and will focus on single filing vs. married filing jointly.

Disclaimer – This analysis is for illustrative purposes only and should not be considered advice. Please consult your tax advisor to understand the impact to your specific situation.

Take a close look at the tax brackets below. What do you notice?

This couple would be in the position where getting married (refer to table 3) increases their tax liability by $4K. Ouch! The driver is that when married they reach the 33% tax bracket and when single only make it up to the 28% tax bracket.

I like these illustrations because they show getting married can impact your federal tax liability for better or for worse. In each scenario the couple had a total combined taxable income of $300K.

While it is unfortunate to get married and incur a higher tax bill, there are many other financial considerations:

Start the clock with your social security together1
Generally, you must be married one year before being eligible to receive spousal social security benefits
A divorced spouse must have been married 10 years to be eligible to receive spousal benefits
You can leave any amount of money to a spouse without paying estate taxes
You can shop for the best insurance between spouses, or better yet, put an uncovered spouse on your plan

There are many great articles that articulate even more tax and estate planning benefits to getting married. While I don’t recommend making the decision of marriage based on one’s tax situation, I do suggest that you analyze your combined tax situation when getting marred to avoid being surprised when you file. Mazel Tov!

Successfully navigating life and money

With the sights and sounds of spring in the air, we’re just weeks away from another big season: graduation! If you’re a parent or guardian of a soon-to-be-grad, you know that after the diploma is earned and perhaps a celebration party has been thrown, there comes the reality of “what now?”. Has there been discussion about him/her returning to the nest “for a little while”? These so-called “boomerang” arrangements where the child goes out to college and then returns home afterwards are not all that uncommon. Indeed, Gallup reported in 2013 that 14% of young adults aged 24-34 are currently living with their parents. If this is the plan at your house, and unless you’ve made an honor roll-worthy effort of communicating expectations (if so, go you!), there are likely a herd of questions when it comes to what that new life under one roof will look like. And make no mistake, life does look different at 23 then it did at 18.

Maybe you’ve considered questions such as: how long are they staying? What are the expectations? Do I charge rent? What stuff do we still pay for? So how do we navigate all this?

Years ago, my brother-in-law, Mike graduated from college in his home state and was interested in a migration to Minnesota to look for a job. Mike is a great guy, and we all quickly landed on the idea of him staying with us for a while. But before finalizing the deal, we decided to get as much as possible on the table up front to minimize frustrations so that we’d all still like each other when he moved on. Enter the Expectations Document.

While we had zero interest in being Mike’s surrogate parents, we felt that for his own growth and sanity (and for ours) that we better put some thoughts on paper to help us figure out a sustainable living plan. As we look back on what turned out to be a successful arrangement, we feel that the key was focusing on the big stuff and keeping the form to one page. It touched on (mostly financial) areas like:

Meals: Mike was welcome to any groceries in the fridge and to any meals we ate together at the house. Mike was responsible for purchasing ingredients and cooking one dinner a week for the household.
Activities: We recognized that we’d do some stuff separately and some altogether. We also clarified that if Mike joined us for a dinner or movie out, for example, he would pay his own way unless discussed otherwise.
Job search: Mike would actively be job hunting.
Rent: We implemented a graduated rent schedule to cover groceries and other incidentals (and to incent eventually moving on!). The first two months were rent free and then it went up each month until it capped out. We offered a refund of his last month’s rent once he was on his own.

When you lost control of your finances recently

Do you feel like you’ve lost control of your finances recently? Maybe you went overboard during the holiday season, or you’ve become lax in monitoring your spending.

Whatever the reason, here are some steps to reset your financial baseline in 2017.

Track your spending for the next 30 days
This exercise is as painful and time-consuming as it sounds. I’m listing it first because it’s the most important step. If you execute just one item on the list, do this. My wife and I did at the beginning of last year and we’re still seeing benefits.

The practice of tracking will make you more focused and frugal when it comes to spending money. You can compare it to a person tracking all of their calories or recording the weight they lift at the gym.

Assess all recurring subscriptions
Many people use at least one subscription service, such as a gym membership, styling subscription, wine club, meal delivery service, credit monitoring service or video streaming app. There’s nothing wrong with holding these subscriptions as long as you know how many you have and are receiving the value you expect. Ask yourself whether you’d join now if you weren’t already a member.

Save your annual raise
Often, merit increases go into effect and bonuses are paid in the first quarter. Make a habit of increasing the amount of your paycheck that goes to savings every time you get a raise. You can do this by increasing your 401(k) contribution percentage or the amount you send to your taxable investment or savings account.

» MORE: Best savings accounts

Renegotiate with vendors
This is a tactic from my experience in corporate finance. Every year, we’d list all of our vendors, assess the value of each and try to renegotiate better rates. We weren’t always successful, but our efforts always resulted in savings. I recommend you do the same with your personal vendors. Consider your cable, internet and phone service as a starting point and get more creative from there.

Fees and Financial Advisors

I have to admit that sometimes I’m embarrassed by my profession.

Despite the prevalence of financial advisors (it seems like there’s one on every corner), it’s pretty difficult to find, one who genuinely has your best interests in mind.

The majority of financial advisors either don’t have a legal obligation to act in your best interest OR have connections to financial companies that incentivize them to recommend high-cost products. Or both.

So how can you distinguish the trustworthy from the untrustworthy? Here are some key variables to consider.

Fiduciary vs. Non-Fiduciary

You may have heard the term fiduciary in the news recently, and it’s an important term to understand if you’re looking for a financial planner.

A fiduciary is someone who is required by law to act in your best interest. In the world of financial planning, a fiduciary is required to recommend the strategies and products that will best help you reach your personal goals, even if they aren’t in the financial planner’s best interest.

It might seem surprising that, many professionals who hold themselves out as financial planners are not fiduciaries. Many are simply representatives of financial companies tasked with selling that company’s products.

Others are fiduciaries sometimes and not other times. Our laws actually allow financial advisors to be fiduciaries when they’re giving advice, but then to “switch hats” and drop the fiduciary role when they recommend products. So you might get good advice about your overall investment strategy, but then be sold investments that are much more expensive than available alternatives.

It’s too bad that “doing what’s in your client’s best interest” is a differentiator, but it’s simply the current state of affairs. You deserve a financial planner who is a fiduciary 100% of the time.

Choose the Right 529 Plan

529 plans are one of the most popular ways to save for college, and for good reason. They offer tax-free growth and tax-free withdrawals for higher education expenses, making them essentially the Roth IRA of college savings.

The problem is that there are a LOT of 529 plans to choose from. Almost every state offers at least one 529 plan, and many offer multiple, and each one comes with a different set of fees, investment options, and features.

So, how can you choose the right 529 plan for your specific needs? Here are three big factors to consider.

1. State Income Tax Deduction
529 plan contributions are not deductible for federal income tax purposes, but some states offer a state income tax deduction IF you contribute to your home state’s plan. A small number of states – like Arizona, Kansas, and Pennsylvania – allow you to deduct your contributions no matter which 529 plan you use.

If your state offers an income tax deduction, that might be enough to make it worth using your state’s plan. For example, a 5% income tax deduction on $5,000 worth of annual contributions over a period of 10 years would save you $2,500.

You can figure out whether your state offers an income tax deduction here: FinAid – State Tax Deductions for 529 Contributions.

2. Investment Options
Most 529 plans are like 401(k)s in that you have a relatively limited set of investment options. They’re also like 401(k)s in that sometimes those options are good and sometimes they aren’t.

Ideally, you’d like to find a 529 plan with a solid lineup of low-cost index funds. Not only have index funds been shown to outperform actively managed funds, but lower cost investments tend to perform better than higher-cost investments. By combining those two qualities, you stand to end up with more money available for your child’s college education.

Let’s say that you contribute $5,000 per year and earn a 5% annual return over a 10 year period. By investing in mutual funds that charge you 0.10% per year instead of 1% per year, you would end up with an extra $3,232 in your 529 account.

3. Other Fees, Minimums, and Features
Some 529 plans charge annual account fees, administrative fees, transfer fees, and others. Some 529 plans require high minimum initial investments. Some 529 plans have better online platforms than others, or allow you to create your own age-based investment portfolio.

Avoiding fees is always a good idea, and the website has a great 529 fee study that can help you compare plans. And depending on the other specific features you’re looking for, certain plans may end up being more attractive than others.

Good Bank Worth to You

Your bank is the hub of your financial life. It’s where your paycheck is deposited. It’s where bills are paid. It’s where savings are directed to other accounts. And it’s where you work towards some of your most important near-term financial goals like building an emergency fund and saving for a down payment.

Given its importance, don’t you owe it to yourself to find a good bank? One that makes it easy to manage your financial life? One that not only doesn’t charge you ridiculous fees, but maybe even helps you grow your money too?

I think you do. Here’s how to find one.

What Makes a Bank Good?

First, let’s take a step back and talk about the qualities you should look for in a bank. Here are some of the things I consider when helping my clients choose the right bank for them:

Fees – Maintenance fees. Out-of-network ATM fees. Overdraft fees. Most fees are easily avoidable these days if you know where to look.
Requirements – Some banks require you to keep a certain balance in your account or make a certain number of transactions each month in order to avoid paying a fee.
Interest Rate – The more you earn, the quicker you can reach your goals. We’ll get into this in more detail below.
Online and App Capability – Most day-to-day banking is now done online or on your phone. Having a good user experience in both places is a must.
How Much is a Good Bank Worth?

Switching banks can be a hassle, so it’s worth asking whether it’s really worth it. How much money could you save by switching to a good bank?

Every situation is different, but let’s say that you have $100,000 saved up for a down payment and you’re just waiting for the right time to buy. If your bank charges a $12 monthly maintenance fee and pays a meager 0.01% in interest, you’ll actually LOSE money keeping it in a savings account. After two years, your $100,000 would turn into $99,732.

If instead you kept that money in a good bank that pays 1% interest with no fees, you’d wind up with $102,019. That’s an extra $2,287 that could be used for your down payment, or maybe for some furniture and decorations for your new house.

And even if you don’t have that much to save now, do you really want to waste $12 every single month, plus the lost interest, just because the one-time effort of switching is a hassle?

The bottom line is that there’s real money at stake. Money that could be used on you and your family instead of being donated to a big bank’s profit margin.

True Cost of Undersaving

A little while back I read an article citing research from the Federal Reserve that found that most people wouldn’t be able to cover an unexpected $400 expense without either selling something or going into debt. Similar research by the Pew Charitable Trusts found that 55% of people don’t have enough savings to replace one month’s worth of income.

The author shared some of his personal story as well, explaining that while he managed to send his daughters to private school and buy a house in the Hamptons, he sometimes had to borrow money from those same daughters, now adults, in order to pay for heating oil in the winter.

I definitely understand that some people genuinely don’t have room in their budget to save much, if anything, after accounting for necessary living expenses. But this article captured a different kind of situation; one in which people who do have money to save weren’t saving it.

And at least in the personal anecdotes shared in this article, it was clear that this choice was made because saving always felt like a sacrifice. Saving money meant foregoing the pleasure to spend it on things that were important today.

However, not saving can end up being the real sacrifice. Not saving money means you have less freedom to build the life you want for your family, both now and in the future. And in some cases it means being tied to decisions you don’t like but are forced to make because of the financial necessity.

On the other hand, saving money gives you choices. And since choice is the essence of freedom, I would argue that not saving means you are voluntarily giving up some of your freedom.

Saving Money Means…

Saving money means living without the stress of knowing that one unforeseen event could send you into financial chaos.

Saving money means that your expenses are lower, which means you require less income to pay for your needs, which means you have more flexibility to design your work around your life instead of the other way around.

Saving money means you have more freedom to switch to a single income, change careers, start a business, go back to school, travel the world, or spend more time on your health, hobbies or with the people you love.

Saving money means that you’ll eventually be free from the requirement of working for money, maybe even while you’re young enough to enjoy it.

Simply put, saving money means freedom. Freedom to make the choices you want to make. Freedom to live without financial stress. Freedom to take advantage of whatever opportunities life throws your way.

Costly Financial Mistakes You Could Be Making

A few weeks ago I discussed several mistakes people make with their finances that they are often aware of but fail to correct. This week, we dive into some of the sneakier financial mistakes people are making that they are not aware of!

Substantial assets are tied up in company stock. Company stock can be found in many forms; a 401k plan, employee purchase plans, restricted stock units (RSU’s), options, bonus payouts and more. These are all great opportunities to benefit from your company’s success and I often recommend employees take advantage when given the opportunity. However, over time it is wise to watch what percentage of your net worth is tied to the company you are working for. If the company struggles, chances are everything takes a hit at once: options become worthless, your bonus is smaller, the RSU’s decline sharply in value and in severe situations, you can even lose your job. Make sure to keep your net worth diversified!

Nondeductible IRA contributions. The problem here stems with many financial firms working to increase their assets through IRA contributions regardless of whether or not it’s beneficial for the client. I have seen this with all types of firms: large institutions, small banks and robo advisors. Contributing to one’s IRA is generally a great idea, if one gets a tax deduction. However, if you don’t qualify for a tax deduction the benefit is minimal (if existent) and can even lead to additional taxes if not documented properly. The qualifying rules can be confusing, Nerdwallet has a good article outlining the rules and limits. Nonetheless, there are select times when nondeductible IRA contributions can make sense. I suggest reading up on the details and consult with your tax or financial advisor before contributing to an IRA.

Insufficient or lack of disability insurance. Disability insurance is one of those items I hope my clients never have to cash in on. However, it is important to have, and can be crippling to your wealth if your coverage is weak. For many of the clients I work with, I have recommended they select the highest option within their group plan. Unfortunately, sometimes this isn’t enough as you should look at the policy holistically. For instance, when a highly compensated employee easily maxes out the monthly benefit. Also, many group policies don’t include bonuses in their calculations. The intricacies continue as the benefit is sometimes taxable and sometimes not (it is based on who is paying the premiums). At the end of the day there are several items that play a major role in the adequacy of one’s disability insurance. When you look at these items together make sure it provides an adequate salary replacement. If not, you should consider gap coverage. If you want to know more, here is an article that discusses aspects to disability insurance in greater detail.

Stop Making These Financial Blunders

Have you ever committed to a healthy night – gone to the gym, had a healthy dinner, skipped the wine, only to wind up with a late night trip to Ben and Jerry’s? Of course you have, at least in some sense… even though you knew that would wreck all of your hard work, you excused away your better judgement for the momentary gratification.

This article is not about ice cream, but how savvy people make financial mistakes they know they are making. These are the 5 most common I see.

No emergency fund. An emergency fund is vitally important for all households. The “book” says 3 – 6 months of living expenses is a good target depending on whether you are in a single income or duel income household. To be more precise, you should customize the amount based on your unique situation; such as; employment stability, industry variability, earnings volatility (salary vs. bonus vs commission) and expense composition.

Unqualified withdrawals from a 401k/IRA. There are times when it makes sense to partake in an unqualified withdrawal from a 401k/IRA. However, most of the time it does not. It is important to explore all possible options available before doing this, as it can’t be undone. Some alternatives that could make better sense are: spending down on one’s emergency fund, cut ongoing expenses, take a loan out of your 401K and even filing for bankruptcy.

Dismissing employers 401K match. If you have a 401k match available to you, take full advantage of it. This is a great opportunity to catapult your retirement savings. The caveat is, you are tying money up in a qualified retirement account, but you will likely thank yourself down the road. There are countless calculators online to show you the power of compounding in a retirement account. When you throw in an employer match, the downstream impact is enormous.

Carrying credit card debt and only paying the minimum balance due when one has cash available. Most of us know this is a bad habit, but many of us don’t know how bad or why. Many credit cards average an APR (Annual Percentage Rate) between 15% – 22%, which is much higher than any reasonable expectations for an investment return. A better strategy would be to take your savings, pay off your credit card in full and build your savings back up over the next several months. Carrying credit card debt and trying to improve your financial situation is like swimming with sandbags, it is going to weigh you down and wear you out.