Monthly Archives: November 2017

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.

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!

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.

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.

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.