September: The Taxes Post!


Here’s the next in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find August’s post here.


Have you ever had a surprise at tax time? Maybe you owed a lot more than you expected to, or got a much bigger refund than you anticipated (and that last one sounds nice, but it’s really not all that great - more on that later).


If you’re a regular salaried employee, you completed a W-4 form when you were hired. That form instructs employers to withhold a certain amount of tax from your pay. The amount depends on how you answered questions like whether you are married, whether you only have one job, if your spouse also works, and how many dependents you have. These are the personal allowances you claim - the more you claim, the less tax is withheld, and the fewer you claim, the more tax is withheld. You can even claim zero allowances to have the maximum amount of tax withheld.


Important: this number isn’t necessarily the same as the number of exemptions and dependents you claim when you file your tax return - that number is based on specific rules about whom you can claim as a dependent and what filing status you use. This number is just a way to manipulate the withholding to achieve a particular result. The two numbers don’t have to match.


If you’re self-employed, you pay estimated taxes quarterly based on your income, at a rate similarly decided early in the tax year.


One of the problems here is that it’s hard to predict what will happen throughout the year. Maybe you got a big unexpected bonus. Maybe you were out of work for a couple of months. Maybe your spouse had a big career change. Maybe the baby turned out to be twins. The point is, we’re at a good spot in the year to assess your situation and figure out if the year will end more or less as you expected it to, income tax-wise, and if not, to make some adjustments. So gather your most recent paystubs for all jobs worked this year (and income, expense and quarterly estimated tax information if you’re self-employed) and maybe last year’s tax return too and check out the IRS’ withholding calculator:


The calculator will tell you how to adjust now so that you end the year having paid very close to the correct amount of tax, IF you provide the correct inputs. Use last year’s return as a guide for credits and deductions. Remember to include all of your income for this year, including jobs you left, to make sure you get the most accurate picture. If there’s a change to be made, you’re still in time to do it, or at least be aware of what awaits you when you file a return.  


If you have been significantly underpaying, you might have just saved yourself a penalty. The IRS prefers that you pay your taxes all along, and imposes this penalty if you do not pay at least 90% of your tax for the current year or 100% of the prior’s year’s taxes, whichever is smaller.


On the other hand, if it turns out that you’ve been overpaying, it might not feel all that urgent to change anything, and in fact you might be looking forward to filing and getting the money back. But in general, it’s better to have the money all along. It is yours, after all, and you’re not earning anything on it. If you have debt, you could have been paying it down throughout the year, saving significant interest expenses. And if you can invest that money, that’s potentially a year’s worth of compounding you’re missing out on. So go conservative if you want, but don’t overpay by too much!

August: The Life Insurance Post (And Beneficiary Update Reminder!)


Here’s the next in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find July’s post here.


How do you know if you need more life insurance? Should you have any at all? What kind? What should you look for?


It’s likely that you have people, other than yourself, who are depending on either your income or on the services you provide (stay-at-home spouses and parents, that means you!), then you should have a policy in place to replace that income or that work if you die. There will probably also be end-of-life costs like medical and funeral expenses, and you want to make sure the money is there for those too.


At its most basic, life insurance pays a stated benefit to your named beneficiaries if you die. Very broadly, life insurance is split into two types: term and permanent.


Term insurance offers just the death benefit: you purchase a policy - let’s say it’s a 20-year, $1 million policy -  and pay the premiums. If you die during the 20 years, your named beneficiaries get $1 million. If you don’t die, the term ends and no one gets anything (you haven’t died though, so that’s pretty good). It’s simple and inexpensive. And if you stop paying your premiums during the term, the policy lapses and you no longer have coverage. Many policies are renewable, meaning that once the term ends, you can renew for an additional term.


Permanent life insurance offers the death benefit of a term policy, but without a predefined term: as long as premiums are paid, coverage continues. In addition, it builds up a cash value over time that can be withdrawn, borrowed against, or used to pay premiums later. This sounds nice, but in practice the additional savings feature is pretty expensive, and in my view the extra money you would pay for a permanent policy over a term policy is better directed toward a savings or investment strategy with a stated goal and characteristics you control (and with a return you get to keep) - I like to keep functions separate, so insurance should be insurance and investments should be investments. Permanent insurance has its place, but generally speaking, until you have a pretty complicated estate situation, term is just fine.


But how much do you need? There are several factors that affect the calculation:

  • How much annual income needs to be replaced, and for how long? OR
  • How much will it cost to hire someone to provide the services you do, and for how long - this means childcare, meal preparation, house upkeep and maintenance and other tasks? Think seriously about how life would be impacted
  • If there is a stay-at-home spouse, would they be able to return to work if needed? Would they require skills training or education?
  • Do you want to provide college funding? If so, how much and when will the children start college?
  • Do you have a mortgage you would want to pay off so that your family can remain in the home?
  • What other debts are outstanding?
  • How much do you have in savings now, both in qualified retirement accounts and taxable accounts?
  • Do you anticipate needing to provide for elderly parents?
  • How much insurance do you have now? It’s likely you have some coverage through your employer, probably equal to one year’s salary. Some employers allow you to purchase more (supplemental) coverage, and even spousal coverage, and this can be a good deal price-wise. But remember that this coverage is not portable - if you leave your job, you can’t take the policy with you, so make sure the new job has similar options.


Everyone’s situation is different, and a good financial planner will help you navigate the particulars. But there are some needs analysis calculators available online that will at least get you in the ballpark. Remember too that you don’t necessarily need the same amount of insurance for the entire term: you likely will need the most while your children are very young and labor-and-cost intensive. Term layering is the strategy of “stacking” policies of different terms, to give you the most coverage when you need it, and less as those needs cease - the kids are out of the house, the mortgage is nearly paid off, etc. It often costs less than one large policy covering the entire term.


A nice feature of life insurance is that the process to claim the benefit is pretty simple: the beneficiary simply calls the insurer to file a claim, provides a death certificate, and the benefit is paid. It’s tax-free to the beneficiary and occurs separately from the will or other estate issues, so there’s generally no delay and can be done very soon after death - helpful in covering those final expenses.


Very very important though: make sure those beneficiaries are correct. In fact, that’s really this month’s objective, along with understanding your life insurance needs: take a look at your beneficiaries (life insurance policies, 401ks, IRAs) as well as how your bank accounts are titled, and make sure they say what you want them to say. These instruments are considered “will substitutes”: that means your will doesn’t dictate what happens to them when you die, the beneficiary form or bank account title does. And if an ex-spouse or parent is named the beneficiary instead of your current spouse, well, that’s who will get the money. So make that the one thing you do right now: look up the beneficiaries and update as needed!

July: the 401k Post


Here’s the next in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find June’s post here.

For July, I thought we’d shift gears from talking about cash flow. Let’s discuss your 401k instead.

By now you’ve probably seen John Oliver’s hilarious recent segment on retirement savings in general, and 401K plans in particular. He, rightly, pointed out the importance of understanding the fees you pay to invest, and how the power of compounding works both in your favor - investing early pays off! - and against you: even seemingly small annual fees make an enormous dent in your eventual wealth. And for long-term investments like retirement savings, that matters a lot. How much? For a one-time $30,000 investment, losing 1% annually to fees over 30 years results in a loss in eventual value of about $50,000. And if you invest a regular annual amount, starting at $6,000 and increasing by inflation for 30 years, paying an extra 1% in fees leads to a loss of $130,000. That is real money. 

It’s important to note that both of these isolate the effect of just a 1% difference in fees (expressed as a difference in return). Nothing else changes: we hold the rest of the assumptions (performance, contribution rate, inflation rate) constant in order to highlight just how big an impact a relatively small number can make over time. Remember, you need to control what you can control! Market returns, tax rates and interest rates are squarely in the “cannot control” column. Expenses are something you can control somewhat, so it’s important that you do that where you can. But the truth of the matter is that it can be really difficult to tell what fees you’re paying in your employer plan. There are two kinds of fees: those associated with your account and those associated with the investments in that account. Here’s how you can get them.

First, locate copies of:

  • Your plan’s Summary Plan Description (available from HR)
  • Your plan’s Summary Annual Report (available from HR)
  • Your most recent statement (mailed to you or available on your plan's website)

On the Summary Annual Report, find the following:

  • The administrative expenses (an example from one I found online: $332,193). Make sure this number does not include benefits paid to participants.
  • The total plan assets at the end of the year (from that same one: $451,665,355).


  • Divide the first number by the second: $332,193/$451,665,355 = 0.000735, or 0.0735%
  • Multiply the result by the total value of your account on your statement (let's imagine a $50,000 account balance): .000735*$50,000 = $36.75

This is your portion of the expense of running the plan itself. However, it’s also possible that your employer is covering this fee, and you’re not paying it at all. In general, the larger the firm, the more likely that these costs won’t be passed on to participants (but then again, the larger the firm, the lower the expenses are likely to be in general). The Summary Plan Description will tell you, as will asking your HR department directly. It’s also possible that your statement will list all of these specifically, but it’s still good to check with the overall plan information.

The next fee (or group of fees) relates to the specific investment choices you’ve made. Here as well, the information is available, but you might have to do some digging. Ideally, all of the investment choices - those you’ve opted to invest in as well as the ones you haven’t - are listed clearly on the statement, with their expense ratios, or the amount you pay each year to own the fund. That’s unlikely to be the case though, so look up the menu of choices in the Summary Plan Description document, or on the website you use to access your plan account. But don't just add up all the expense ratios of the funds you've invested in! Here's what to do:

  • Make a list of all the funds you own, the amount invested in each, and its corresponding expense ratio. Here's a sample:

FUND ABC    $25,000  0.75%

FUND DEF    $10,000  0.55%

FUND XYZ     $15,000 1.25%

  • Multiply the amount invested in the fund by the expense ratio:

FUND ABC    $25,000*0.75% = $187.50

FUND DEF    $10,000*0.55% = $55.00

FUND XYZ     $15,000*1.25% = $187.50

  • Add up all the results: $187.50+$55.00+$187.50 = $430
  • Divide that by your total account balance: $430/$50,000 = .0086, or .86%.

Ideally, you want a broad range of low-cost index funds (the ones in the sample above are pretty high, but unfortunately not unusual for a typical plan). You will likely have some target-date funds available as well, which can be good choices depending on your situation. While fees aren’t the most important thing in making investment choices, there’s certainly no need to pay more than you have to for the same products. If you don’t know what choices are best for you and how to weigh it all with outside investments you may have, a qualified fee-only planner can help sort it all out and guide you to setting the right allocation from the available funds.

Add the two numbers you calculated above to find your total annual fees: .0086+0.000735=.009335, or .9335%

So now you have all the information for the expenses associated with your employer plan. What do you do next? How high is too high? Well, it’s difficult to say, but in general you don’t want to pay much more than 1% overall (smaller firms will be on the higher end, larger firms on the lower end, just due to economies of scale). If you find that you are, you might want to have a conversation with HR about your concerns. It’s a big deal for a lot of people, just not one that is particularly clear. Look up your firm on to see how it rates - sometimes having an outside opinion will help cement your case.

Also, while being aware of the fees and taking action to address them if excessive is absolutely something you should do, understand that this service does cost money to provide; there’s a lot of regulation and legal expense and paperwork and technology involved. So be realistic in your expectations, but the more pressure is put on plan administrators to make expenses transparent and reasonable, the better for everyone.


June: the cash flow management post


Here’s the next in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find April’s post here.

Here we are, halfway through the year already! It’s been a pretty interesting few months, and the next few promise to be similarly unpredictable. It's a great time to refocus on what you can control, like your spending. In prior months, we worked on centralizing your spending to gain insight into your habits and patterns. How much money will you have at the end of this month? How much will you have after six months? Now that you have enough data, let’s do something with it.

First, export the data to an Excel file. Once exported, sort the information so you can single out the irregular/non-monthly expenses, and set them aside.

Next, total up all of the regular spending and divide by the number of months. This will be your average monthly spending number. You will build your cash flow plan around this. For simplicity, we will assume that all the expenses will continue to be managed from one payment method (because now that you’ve done it for a while, you realize it really does make things clearer, right?)

Create a monthly projection that shows:

  • Opening bank account balance
  • Take-home income, according to your pay schedule
  • Expenses, as above and also include other items that weren’t captured (rent or mortgage, for example)
  • Transfers such as savings, 529, or investment account deposits
  • Debt payments
  • A reserve for the irregular expenses you identified above, so you can accurately anticipate them. You can either average them as with the monthly expenses above, or if there are a limited number, just add them to the relevant month

Project this out for at least a year. Apply increases or changes as appropriate (anticipated pay increases or bonuses, inflation). Now you have a pretty accurate snapshot of your finances over the next several months. 

Let’s look at what else is hidden in those numbers. How much savings is built into your current cash flow (both aftertax transfers and pretax contributions to retirement accounts)? Take a step back and look at the big picture. How much money do you have left at the end of the projection? Are you comfortable with the number?

If you want to change it, you have two options: spend less or earn more. To spend less, the likeliest target is the monthly all-inclusive spending amount, since that’s the one that includes your most discretionary spending. (You can also look to lower your housing expense, for example, but that’s going to be a tougher task). You can go back to the data you exported and create categories to help you lower your spending in a particular area, if you like. But since, as I say to everyone, a dollar’s a dollar, it doesn’t matter what you cut. An easier solution is simply to reduce that overall monthly amount. How low should it be? Low enough that you have to think about your spending.

This is how I manage my household finances. Here’s a secret: I almost never meet my spending goal. I’m almost always a little over. But just a little. That’s how I know it’s the right level: I need to keep an eye on spending in order to keep it under control and meet our saving and other goals. If it were too high, there wouldn’t be a need to keep spending in check (and in all honesty, we’d find something to spend the money on). If it were too low, it would be unrealistic and would mean that the projection isn’t accurate. So try to identify an amount that works for you in that way, and it's fine to do it in small steps: if you ultimately want to reduce your expenses by 20%, you can do it 5% at a time so it’s not such a shock (and that way, you’re more likely to stick with it). 

Don't be afraid to experiment: once you have it all in a usable format, you can create different scenarios (paying down debt quicker, increasing 401k contributions, taking a big vacation, picking up some side income) and get a sense of how the result makes you feel. Remember, the goal is to get into the habit of mindful, intentional spending. So now that you can predict the future, you can reshape it almost any way you like.

BICs, BICEs, the DOL and You


Big news recently from the Department of Labor (the DOL): the financial advisor who is making recommendations on your retirement accounts will soon have to adhere to a fiduciary standard, meaning they have to put your financial interests ahead of their own.

You’re probably thinking one or more of the following:

Um. They weren’t already?

Essentially, no. Financial advisors (and there are many, many different interpretations of that term) were not required to be fiduciaries when providing investment advice for retirement accounts. Registered Investment Advisors (regulated by the SEC) have always been subject to the fiduciary standard, while brokers (regulated by FINRA) have been subject to the suitability standard. The difference: under a fiduciary standard, the advisor must make recommendations that are in your best interest; under the suitability standard, the advisor can choose to recommend a product that is right for you, but not necessarily the best/least expensive option. Starting next April (with a transition period lasting until the end of 2017), any advisor making recommendations for IRA’s will be subject to the higher standard.

Why is this coming from the Department of Labor?

The DOL governs workplace retirement plans under ERISA (the Employee Retirement Investment Security Act of 1974). Those rules were put in place to provide a standard of conduct for advisors assisting plan participants. But those rules haven’t changed since 1975, and of course, the world of retirement investing has changed a lot since then, away from defined benefit plans and toward IRAs and 401ks. So this is a way of ensuring the same rules continue to apply regardless of what form your retirement savings take.

What changes?

Over the coming months, financial institutions will begin implementing Best Interest Contracts, or BICs, with their clients. (This will be a contract between the client and the institution, not the client and their advisor.) Without this contract in place, no commissions will be able to be earned. The contract stipulates that even though commissions are being earned, the best interest of the client must be upheld, compensation must be reasonable, and information about the products and compensation must be disclosed. For example, an advisor would need to ensure this is in place before recommending that a client roll over a 401k to a new IRA for the advisor to manage. In practice, this is likely to be integrated into current client agreements rather than presented as a separate document.

If the client and the institution have the BIC in place and its rules are followed, that constitutes a BICE - a Best Interest Contract Exemption; basically, an acknowledgement that the advisor is acting in a fiduciary capacity and will adhere to best-interest conduct standards; and that the institution has policies and procedures in place to ensure compliance and will not incentivize advisor conduct contrary to the standards.

Other institutions will qualify as Level Fee Fiduciaries, meaning they are compensated via a level fee, disclosed to the client, calculated as either a level percentage of Assets Under Management (AUM) or a set fee that doesn’t vary by investment, as in the case with retainer fees. Advisors that qualify for this exemption will still have some regulatory requirements: a statement of fiduciary status must be provided, and likely will just be made part of the client agreement, the standards of impartial conduct must be met, and reasons for recommending a rollover (for example) must be clearly documented, including a comparison of the costs of each option. But for many fee-only advisors, this will not represent a significant change to how they were already operating.

That all sounds pretty good, but what about non-retirement accounts?

It’s true, the new rule only applies to advice given on retirement assets. Most people have non-qualified (or taxable) accounts, real estate, debt, and savings for other goals. And many assets may be earmarked for retirement, but for the purposes of this rule, and investing in general, “retirement assets” refer to those in a qualified account or plan (like an IRA or employer plan). And everyone has planning considerations relating to home purchase, education funding, cash flow management, and insurance needs. None of those are covered by the new rule; the DOL would have no authority over that.


Yes. It’s possible that an advisor can provide fiduciary-standard advice for your IRA while still only having to meet the suitability standard for your other assets, and satisfy the rule.

So what now?

We're already seen some changes: some big firms like MetLife and AIG have given up their advisory business altogether; Charles Schwab will no longer sell mutual funds with sales loads.

Actual enforcement of the rules is envisioned to begin in April 2017. Between now and then, advisors will adapt new policies and procedures to ensure compliance with the law. Overall, this is definitely a step in the right direction. But there’s no guarantee that the rules won’t be weakened later. So take the opportunity to find out some things about your advisor (or to look for one, if you’re searching).

During the transition, a good idea is to check in with your advisor to get their thoughts about how the rule change impacts them. Industry pushback against the rule (from large broker-dealer firms primarily) was significant, and a future in which the small investor could no longer be serviced was held out as the nightmare scenario if the rule was passed, with the reason given that it would become too expensive and cumbersome from a regulatory perspective to assist smaller clients. While this is likely just industry posturing, it brings up important questions to ask:

  • Will this be a significant change in how your firm operates?
  • Have you been a fiduciary all along?
  • Once the change comes, will you be a fiduciary for all the advice you give me, or just for the official retirement assets?
  • How will your compensation change?

Obviously, the easiest/least complicated/most likely way to get yourself unconflicted advice 100% of the time is to work with a currently fee-only advisor, who under the rule will be operating under the Level Fee exemption but who already meets the standard sought anyway for all advice given, not just that pertaining to retirement assets. My sense is that eventually, everyone will move to that standard, but that will take a lot of adaptation in an industry not known for being nimble. I really think that long-lasting, true change will come only when demanded by the public.



Here’s the fourth in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find March’s post here.

How are you doing with centralizing your spending for a few months? In May, we’ll begin to use that data for something.

And how did you do with the March challenge - do you feel like you have better insight to your emotional response to spending money? So much of financial planning rests on emotion and behavior, and how we approach money. Understanding those behaviors, and why you do what you do when it comes to money, is an enormous part of making decisions that will make you happy in the long term.

A question: where does your cash live? In previous posts I’ve talked about the importance of emergency savings. A key aspect of that is where that emergency cash is - ideally it should be somewhere accessible, yet still separate from your regular spending money (it should be available quickly if you need it, after all); not be exposed to the swings of the securities markets, and hopefully providing the highest possible return while still meeting the other criteria - note that this won’t be a high return (since it’s not exposed to market or default risk), but you can find ways to get a return that’s higher than you would otherwise earn.

But first, spend some time to understand the characteristics of where the money is now. Is it mostly in checking? A bank savings account? Something else? First, make sure it’s FDIC insured - this covers up to $250,000 per depositor, per bank in case of bank failure. If you’re not sure whether your bank or saving institution is covered, check here. Any cash you have, whether for spending or emergency/goal saving, should be in an account at a covered institution.

Then, determine what you’re earning on that cash. Look at your last statement, where it will probably be listed. Typical rates on regular bank savings accounts these days are around 0.02% (checking accounts pay even less, but have a lot more flexibility). Prevailing rates at online savings accounts are above 1% - while this isn’t terribly high by any stretch of the imagination, it’s higher than most banks. It means about $10 more per year in interest for every $1,000 you have saved, and without putting your money at risk.

To pick a new savings account, make sure you can easily transfer between your savings and checking. Savings accounts have a limit of 6 transactions per month before the bank can charge you a fee, so make sure it’s one where you can do what you need in one step.

This is just one of the little things you can do to ensure mindfulness with your money, every step of the way. 


ZOM5QYEIMV Here’s the third in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success (and only a day late!). You can find February’s post here.


How’s it going with collecting your spending data? Last month’s goal was to begin centralizing all of your spending in one place for ease of analysis later. Has it been a difficult switch? If so, why? Were you spreading your expenses around to multiple credit cards, and a debit card, and using cash for other things? Was there a reason for that, or was there no rhyme or reason for what things get paid by which method?


And most importantly: explore your emotional reaction to committing to one method for all your expenses. If you chose a credit card is your method, were you tempted to ‘cheat’ and simply pay cash for some things? After all, if it’s not reported on the credit card it doesn’t count, right?


I suspect the above is a very common reason why budgeting is so hard for people: accountability. It’s so, so easy to convince ourselves that “one little purchase” won’t hurt. And the thing is, it probably won't: one purchase isn’t likely to blow your budget. But what it will do is propagate the feeling that spending is something to be ashamed of and hidden, rather than something you do because you really want to, and you know you can, and you planned ahead and prepared for it, and it will bring you real happiness. The purpose of using one payment method for all spending is so that we can really find the overall spending number that will work with your plan, and allow you to achieve your other, longer-term goals.


I think it’s really critical to work all these reactions and feelings out now, before we start really putting any numbers down. Take the next couple of months to really commit to the step, and confront any resistance you put up for yourself.


In the meantime, some other, non-budgeting steps to take:


Make your 2015 IRA contribution: April 18 is your deadline for filing your tax return, as well as the deadline to fund an IRA (traditional or Roth) for 2015. Get those contributions in!  The maximum amount you can invest is $5,500 (if you’re under 50) and $6,500 (if you’re over 50). If you’re wondering whether you’re under the income limits: here’s the IRS guidance for traditional deductible IRA income limits if you’re covered by a 401k or similar plan at work, if you’re not, and if you want to contribute to a non-deductible Roth IRA instead. (I’ll cover the difference between Roth and traditional IRAs in a later post.) Even better, if you feel comfortable you will be within the limits for 2016 as well, automate your current-year contributions too! You will get another year of growth.


Fund your health-savings account for 2015: April 18 is also the deadline to make a 2015 contribution to a health-savings account. (Maximum contributions: $3,350 for a single taxpayer, or $6,650 for a family). Like an IRA, savers over age 50 get an additional $1,000 catchup contribution. If you have a, high-deductible healthcare plan, a Health Savings Account can make a great extra savings vehicle for investors who are maxing out their contributions to their traditional 401(k)s. You get to deduct the contributions in the year they are made, they grow tax-free, and qualified withdrawals are tax-free.



Here’s the second in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find January’s post here.

Budgeting is everyone’s least favorite financial planning topic (except actual financial planners - we love them, but tend to call them something else so clients don't walk out of our offices). It conjures visions of deprivation, a second job’s worth of listmaking and tracking, and a general overall lack of fun.

Another reason no one likes budgets is that they’re hard to stick to. But I think that’s because when most of us make a budget, it’s based on what we want our finances to look like, not on reality. Then when we try to live that way, reality bites back, and it’s easy to feel like a failure.

Instead, for this month’s objective, we’re going to go about it a little differently. Before you can make a real budget (or spending plan, or cash flow projection), you need to know what the actual expenses are. And in order to do that, you need to be able to gather all your expenses, without missing anything. So this month’s challenge isn’t to create your budget - that will come later. For now, just commit to one spending method for as many expenses as possible, whether that’s cash, a credit card, or a debit card. Use one thing for everything, so you don’t have to look in so many places to figure out where the money is all going. I have some opinions about which method is best for most people, but for now don’t worry about making drastic changes - the whole point of this is to meet achievable objectives, right? - just pick the one that’s easiest now, and commit to using only that for a few months.

And here’s what will genuinely be the hard part: don’t change your behavior otherwise. Spend and save and earn as you normally do. In three months you will use the information gleaned to create an attainable budget based on actual numbers. Understanding your spending habits is the key to success.

While the spending information is building itself up, take some time to think about what you’re really trying to achieve. Make a list of the ultimate objectives of the exercise: more savings? More organization? A better sense of control over where your money is, and where it’s going? Or something else? When it’s time to create the budget, we will use both of these important pieces of information - the expense data and your objectives - to craft a plan that is rooted in reality but also shaped to get those objectives met.


H5HE9KUGX1 Here’s the first in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success.


Now that the holidays are over, it’s a good time to take a moment and assess everything. This isn’t about making resolutions, but about solidifying your plans and creating a reminder of what you’re trying to accomplish. Put into words what your most pressing concerns are: Debt? Retirement? Savings? A home purchase? Something else? Is it a general sense of wanting to be “better with money”, or is there something more specific? Ideally, what will give you the most satisfaction twelve months from now? You will refer back to this throughout the year as you accomplish your tasks, and it will help keep you focused.


Next, make a list of the obstacles that you think are standing in your way. Actually, organize these obstacles into two lists: things you can control and things you cannot control. What can’t you control? What the stock market will do this year (both as a whole and which sectors or companies will out/underperform), where interest rates will go, global news events, and so on. All of these certainly impact your financial life, but this is a good chance to acknowledge the misguidedness of the notion that we can, in fact, predict what will happen with any of them. But you can learn from your reactions to these events (this week’s notable stock market drops are a good test - did that make you nervous?) and use that insight to make good decisions. Begin to think about how you can organize your finances so that the factors within your control (like savings rate, asset allocation, and expenses) are given proper priority.


Create the following beginning-of-year recap of your finances. Just gather the information for now, you don’t need to do anything with the information yet. But be thorough.  

  • Make a list of all of your accounts - bank, brokerage, retirement, current and former employer plans, etc. Add a general estimate of the current balance in each.
  • Make a list of all of your liabilities - credit cards, student loans, home loans, and anything else, along with the current balance and the terms (interest rate and remaining payment period)
  • Note your current contribution percentage, if any, to your employer plans. Also note your employer match (again, if any)
  • Calculate how much life insurance and disability insurance coverage you have, either through your employer as well as any additional policies you’ve purchased


On a more practical note, begin preparing to file your taxes. Yes, it’s early, and many documents won’t be ready yet. But start anyway - make a February appointment with your tax professional, or purchase software if you do your own, and gather all the information you do have into a folder (digital or physical), where you’ll add documents as they become available. Filing early allows you to guard against a fraudulent return being filed in your name, gives you plenty of time to prepare before the payment is due (by April 18, 2016) if you owe more than you expected, as well as to adjust withholding and contribution rates if you’d like to impact the amount owed or refunded next year.

Set Small Objectives in 2016 to Meet Big Goals Later

L2XY1E8DEV Financial planners like me talk a lot about goals. We ask our clients to go beyond present-day concerns and think deeply about what financial success means to them. Then we work together to create a path to achieve that success, understand the tradeoffs along the way, and recommend and implement strategies to keep progressing toward that goal (and of course, adapting the plan as lives unfold unpredictably, the way they do).


Clients are often scared off when confronted with the amount of money they will need to save to achieve their big goals, especially when the time horizon is very long. So I generally don’t show them at first - the numbers are so large it’s unimaginable that the sum is reachable. But the individual steps really are, and don't seem as daunting. So these are better thought of as a series of objectives that must be met on the way to the ultimate goal.


This year, I’ll be sharing a series of monthly posts with small, achievable tasks. By the end of the year you will have addressed every major area of financial planning and hopefully gained some insight into what you would like a professional to help with, what kind of an investor you are, and what is standing in the way of creating a plan. All of this is intended to provide a clear path so that you can think about bigger goals.


Happy New Year!

KonMari-ing Your Financial Life

N7FUTW0RY5 You’ve likely heard about The Life-Changing Magic of Tidying Up, Marie Kondo’s how-to manual for decluttering and organizing your home. And you’re pretty much ready to have your life changed. Maybe that’s the New Year’s resolution you’re eyeing, maybe you’ve already started, or maybe you don’t know about any of this, but still want to tackle the piles of important (maybe?) papers that seem to accumulate.


I like Kondo’s philosophy of simplicity and streamlining and only keeping what truly makes you happy. It dovetails nicely with my approach to financial planning and how I encourage my clients to think about their financial lives: spend meaningfully and with intention, determine an investment philosophy that reflects your risk tolerance and time horizon, execute a simple strategy in line with that, then stick with it and ignore the noise. But just because last year’s tax return doesn’t spark joy doesn’t mean you should discard it. Here’s a list of what can be shredded and what should be kept (and for how long, and in what format).

Note: you’re probably receiving many of these electronically - just ensure you can access them via the provider’s website for as long as you will need, otherwise download them regularly. And even digital files can get cluttered and scattered, so title and organize them in a way that makes them easy to find if needed. Remember, if you switch banks or brokerage firms, make sure you have the appropriate statements for each account. You can likely access them even after account closure, but you’ll probably incur a fee to do so. 


Once you know these are correct, they're no longer needed. Sign up for e-delivery of these wherever possible to reduce clutter. Shred these now (or soon):

  • ATM receipts: once you record the transaction
  • Bank deposit slips: once the funds appear in your account
  • Receipts for things you bought on a credit card: when charges appear on your statement, unless you need it for a return or a warranty
  • Credit card and bank statements: when paid/reconciled
  • If any of the above relate tax deductions, see below for how long to keep tax backup documents

You might have to hold on to these a little while longer to make sure everything looks right, but at least once a year, you can purge these:

  • Utility bills, if not needed for business deductions (such as a home office): after a year
  • Paycheck stubs: once reconciled with your W2 and annual Social Security earnings statement
  • Brokerage statements: once you get your annual statement (see below for an exception). 
  • Medical bills and supporting payment documentation: until you know for sure the provider has acknowledged payment in full, by you or your insurance company. And keep in mind that you can deduct unreimbursed medical expenses in excess of 10% of your AGI (7.5% if you're over 65).

The IRS can generally audit a return for three years from the due date, but it's six years if a substantial underreporting of income is suspected. So keep these (digital is fine) for seven calendar years: 

  • Backup documents for tax returns (but not the return itself - see below).
  • Receipts for capital home improvements. They will be necessary to substantiate the cost basis of the home - capital improvements increase the cost basis and could lower your tax bill when you sell. Retain them for 7 years after the tax year during which the home is sold, not the year the improvements were performed.
  • Statements for taxable brokerage accounts if: 1) they prove what you paid for an investment purchased before 2011 (cost basis for securities bought in 2011 or later will be tracked by the brokerage firm) and 2) you don't have the accompanying annual statement. Retain until 7 years after the tax year in which the security is sold.

Scan and keep indefinitely:

  • Tax returns with proof that you filed and paid (if you owed)
  • IRS forms relating to nondeductible traditional IRA contributions and/or Roth conversions
  • Retirement and brokerage account annual statements
  • Receipts for large purchases, for insurance purposes
  • Payoff information for all satisfied loans
  • Annual Social Security benefit estimate statements

Keep hard copies indefinitely:

Some things just need to be kept in their original forms. Usually, a fireproof home lockbox or safe is preferable to a bank safety deposit box for these, since safety deposit boxes can be difficult to access in case of your death or incapacity. If your original estate documents are in a sealed safety deposit box, your heirs, executor, trustees and others you've asked to carry out your wishes will incur additional expense and delay in making sure those wishes are honored. Make sure a trusted relative or friend knows where the lockbox is and how to open it. 

  • Wills, living wills, powers of attorney, health care proxies
  • Marriage license
  • Birth certificates
  • Adoption paperwork
  • Deeds and titles for real estate
  • Citizenship papers
  • Custody agreement
  • Divorce certificate
  • Military records


Financial independence, the new retirement


Clients often come to me and say they 'should probably do some retirement planning'. They usually mean they want me to look at their various employer plans, rollover, Roths, and other assets, and figure out if they're on the right track to retire at some point.

But in order to do that, we need to discuss what they envision their retirement years will look like. Where will they live? Will they stop working completely at a particular age (and what age is that?) or will they gradually scale down? Do both spouses share the same ideals for later in life? Talks tend to break down when we get into those details, because 1) often, people feel like they can't think that far ahead; 2) indeed, people may be afraid to think that far ahead, not knowing if their assets will support them, and 3) who really knows anyway? If you're in your 20s, 30s, or 40s now, the only certainty is that your retirement will probably look nothing like your parents'. That presents both complications (it can become a lot more difficult to determine how much money you need to fund a future you can't really predict) and opportunity (you can shape that future far more than our predecessors could).

In his new book, The New Parents' Guide To Financial Independence, Mom and Dad Money's Matt Becker encourages us all to change our focus from planning for a clear-cut event (you cease all work at some point far in the future and begin to draw down the assets you've accumulated) to attaining financial independence – the state of having enough money that you no longer need to work. It's a subtle but important difference: the goal of reaching financial independence doesn't assume you will necessarily stop working at all; rather it allows you to continue to pursue the work you want to, if you choose to.

In his view, there's no reason why we shouldn't take the concepts of retirement planning – identify your goals and determine what it will take to achieve that goal – and apply them to our whole lives. He uses himself as an example: by achieving financial independence, he and his wife were able to allow him to pursue his goal of launching his own financial planning practice, which is work he finds personally fulfilling and in his words, “would still be doing it even if (he) won the lottery tomorrow”. They were able to take some time off from higher earnings and live on savings while Matt builds his business into something that sustains them for a long time. Maybe running your own business isn't a goal of yours. But what would you do with financial independence?

Matt's book is a step-by-step guide to answering that question, complete with clear illustrations of the power of savings vs the power of returns and the impact each can have on your progress; easy to use worksheets to assess your current position and how much you need to save (note that this step comes after you determine what your goals are); advice on what to do with the savings; and encouragement to stick with your plan when you miss your savings targets some months or if the market looks like it's working against you sometimes (both are all but guaranteed to happen).

And even if you do want a traditional retirement (work until 65 or 70, retire completely, activate hammock mode), that will work with Matt's model. Your goals are your own, and what's important is to identify what will make you the most happy and to actively plan to achieve that happiness.

Why You Shouldn't Time The Market

Buying low and selling high is the aim of the entire financial services industry, right? Yes. But that doesn't mean it's consistently possible. It just means a lot of people work really hard and spend a lot of money to convince you to try. Investors - you and me included - are subject to a lot of biases. We are affected by our emotional state, by quirks of personality, by the news of the day, and by various fallacies that can all lead to irrational decisions. If the market falls 2% in a day, should you buy? But what if it falls more tomorrow? If it reaches a new high, should you sell? What if it will keep going higher for another week? Shouldn't you try to figure it out? Remember, to successfully time the market you have to time it correctly twice: when to buy, and when to sell. In fact, to successfully beat a benchmark over the long term, you need to accurately time the market 74% of the time

The S&P500 returned 11.39% in 2014, (13.69% including dividends). The lowest close of the year - what would have been the time to buy to achieve the best possible return - occurred on February 3. Here's an example of the headlines from the middle of that day:

Not particularly encouraging. Sample quote: “Too much downside momentum and too little in the fear category to offer a safe entry point,” wrote a strategist (aka, a professional who tries to time the market). It certainly seemed like the selloff would continue. But you would have had to guess that this was in fact the low of the year, and this was the precise correct moment to buy, in order to time the market correctly.

The highest close of the year was reached on December 29. The headlines from that day were a snoozefest, typical of that late in the year, with light trading and no real news:

But again, an investor would have had to see through the inertia to recognize their exit point - the precise moment that they should sell.

So on top of the lack of clear direction indicating the best action to take, we also learn from our mistakes. We remember the regret of missing the Feb 3 low, and don't want to miss it again. We kick ourselves for not selling on December 29 when we should have. Those emotions will inform the next decisions we make, and will often lead us down the wrong path.

This is why so many investment managers and financial planners - me included - don't time the market, and strongly discourage clients from doing it either. It almost inevitably leads to a poor outcome over time, drives up costs from unnecessary transactions, and has been shown, over and over, to work against an investor's best interest.

None of us can see the future: not average investors, not professional investors, not the media. A lucky call once or twice is rarely repeatable over time. So instead of trying to do the impossible, go back to basics: appropriate asset allocation, low cost, diversified, passive funds, regular investments, and periodic rebalancing. You'll thank yourself in the long run.

Socially Responsible Investing: Can you do well and do good?

I hate disappointing people, especially young new clients who come to me full of idealism and motivation to make a difference in the world. But that's what this post will do, so I might as well come out and say that I'm not a fan of socially responsible investing as it's normally practiced, and I usually advise clients against it. Hopefully though, by the end you'll feel better about the possibility of making an impact with your investments, even if it's not the way you thought it was going to work.

Interest in socially responsible investing (the practice of only, or primarily, investing in companies that engage, or do not engage, in certain practices) is definitely on the rise. Cerulli Associates reports that more than 50% of institutional asset managers have recently received client requests for socially responsible investing (SRI) or environmental, social, governance (ESG) mandates. Money invested in mutual funds describing themselves as investing in a socially responsible manner is one of the fastest-growing segments of assets under management. The growing interest makes sense. There's an increased focus on sustainably produced food and clothing and consumers have shown to be willing to pay a premium for local or fair-trade items, to support business models that align with their ethics. And there's no lack of headlines about corporate malfeasance, questionable business practices, lack of consideration for the environment and unfair employment policies. So the desire to put pressure on companies via investment decisions is understandable.

But the problem is it doesn't work that way. When you buy a share of stock, the money doesn't go to the company that issued the stock, but to the other investor who sold it to you (and whom you don't know). The broker who conducted the transaction gets a commission. When you sell, it happens in reverse – the money comes from the anonymous buyer to you, the seller, with a bit being diverted to the broker. The company itself isn't really affected at all by these transactions, except in a very, very vague way – you can't have sellers without buyers, and if enough people refuse to buy shares, the stock price will go down. But you can decide for yourself whether you think that will really happen.

Picking and choosing individual companies to invest in is known as active investing, and that's not a good idea. People – whether individual retail investors or professional fund managers – are irrational, make poor decisions, are subject to biases and fallacies, and let emotions get in the way. When it comes to socially responsible investing, where you might have a particular attachment to a company (say, because you know they develop green energy alternatives and have generous employee benefits), this involvement makes it even more difficult to judge an investment rationally.

A much better strategy is the one I recommend to pretty much everyone: understand your risk tolerance and invest accordingly, diversify broadly, and keep fees low. You can calculate the excess return earned by the companies you find objectionable – one way is to take a look at this list, choose the fund you would have invested in or that mimics what you would have done, and compare it regularly to your actual returns. (Remember to account for fund management fees!) Then put that money to use in ways that can really move the needle: supporting political candidates that will further your causes, buying items produced or sold in ways that align with your ethics that might be more expensive than their competitors, and engaging in public education campaigns. Utilizing simple index funds allows you to capture as much return as possible by keeping fees low, and avoids participating in putting pressure on companies to deliver certain results, possibly at the expense of more costly or difficult to implement, but more fair, business practices. 

Ultimately, how you choose to invest your money is your decision, and if you decide you just can't stomach getting oil company profits, that's fine. Do what feels right to you, but make the most informed decision you can. My clients know that I constantly beat the drum of controlling what you can control – in this case, it's the fees you pay, and to whom you pay them – if you're on your own, Vanguard is a great choice because they are investor-owned; if a fee-only advisor manages your money for you, ask them to tell you more about their custodian and the custodian's practices); if you're working with a traditional commission-based advisor, take a close look at your statements and think about whether the money you're paying for your investments would be better spent going to a more worthy cause.

Emergency Savings - What You Need To Know

This has nothing to do with emergency funds. But it's funny and saving for a rainy day isn't super-exciting, so pretend Vince here is slow-clapping for you getting this done.

Should you have an emergency savings account? If so, what kind of account is best? What’s the right amount to have saved? When is it ok to dip into it?

Who needs an emergency savings account?

First things first: everyone should have an emergency savings fund. Unexpected car breakdowns, health expenses, home repairs, and emergency travel happen to everyone, and having some cash to cover them when they come up will keep you from relying on credit cards and compounding an already difficult situation. Even more importantly, a reserve works to cushion you for a while against job loss, and gives you some flexibility in choosing job offers.

What is an emergency savings account, anyway?

Now let’s define an emergency savings account. This should be a very liquid (read: basically cash) account that is easily accessed if needed, but not part of your regular budgeting. It should not be a brokerage account: bad news tends to follow itself, so you don’t want to have to sell investments and possibly incur trading losses or tax gains, making a bad situation worse. It should not be a tax-deferred retirement account (IRA, 401k or similar), since withdrawing from those will lead to taxes AND penalties. An online savings account is perfect for this kind of thing. These are FDIC insured (up to $250,000 per depositor) accounts that link to an existing checking account, making transfers very easy, and pay a bit more interest than a regular account at your local bank. Just remember, savings accounts are generally limited to 6 withdrawals or outgoing transfers in a month. You can compare current offers here: As long as the account offers FDIC insurance and ease of use, it’s a great choice.

How much should be in there?

So how much should you save? First, calculate a month of living expenses: rent or mortgage, utilities, insurance, car payments, groceries, all the things you can’t really put on hold. Aiming to reserve somewhere between three and six months’ worth of expenses is best (closer to three for a steady two-income household, six if there’s only one source of income, if income is irregular, or if you have kids or pets). Some clients feel more comfortable knowing that nine to twelve months’ of living expenses are covered. You can certainly save even more than that if you prefer, but with interest rates being so low, a large cash balance is probably put to better use elsewhere (accelerating debt paydown, starting an investment program, philanthropy, etc).

I can't save that much!

If you’re starting from scratch and overwhelmed at the thought of getting to the three month mark, just remember that it won’t happen all at once. Start small and just keep going. Keep an initial goal of just $1,000 in sight, and track your progress. Even $50 per paycheck is a good first step, and as always, automation is your friend: ask your payroll department at work whether you can set up multiple direct deposits, and divert a small amount to your savings account each pay period. If that’s not an option, set up the automatic transfer yourself to coincide with your pay periods. Either way, when you get used to the lower take-home amount, increase the amount diverted to savings little by little. It’s not all-or-nothing: just do the best you can, and don’t let the perfect be the enemy of the good. Even if you have just a few hundred dollars saved the next time a crisis occurs, that's a few hundred less you will have to borrow. 

When do I use it?

What constitutes an emergency? My definition: any unavoidable expense that you can’t cover with regular cash flow. Fixing the car or the boiler, getting a root canal, emergency veterinary care, buying food and paying rent when you’re between jobs and unemployment/severance isn’t enough - that’s what this account is for.

Savings of any kind - emergency, retirement, vacation, or anything else - buys you flexibility in the future. Establishing an emergency fund is one of the most important things you can do to create financial stability for yourself. It will decrease your reliance on consumer debt, allow you to hold out for a better job offer, and ultimately save you money even if no job loss occurs. I won't pretend building up a reserve is fun or exciting - after all, it's basically just money you hope to never have to spend, and that by definition won't be spent on anything fun - but the feeling of security it provides will hopefully make up for the more enjoyable expenses you may have to cut back on to get there.