Recently, a prospective client walked into my office concerned about his portfolio and was seeking investment advice. The interesting fact was the investment question was not the right question. Investments were not the issue, and this is not uncommon.
While investments are the easy target for financial blame or success for that matter, investments are usually not the catalyst to wealth. Real wealth is created by managing financial elements that can be controlled, and the stock market certainly cannot be controlled. It’s more important to ask questions that will assist in wealth creation.
What questions should you be asking yourself?
1. Are you spending less than you earn?
This is the starting point for all looking to create wealth. If expenditures exceed income, financial success will not be attainable. Actually, it’s quite simple: most financial problems can be solved in one or two ways….earn more or spend less. Living within your means is the first step to financial freedom.
2. How much are you savings?
Spending less then you earn may not be enough. A good target is to save at least 10% of earnings. This financial tenet is the foundational footing in which all financial growth is built upon.
3. How much are you paying in taxes?
Taxes are the single largest recurring expense that most of us will have from now until the day we die…..and maybe even after death as well. While taxes are a requirement, maximizing tax savings strategies are the responsibility of the taxpayer, and most taxpayers simply fail to utilize available strategies. Whether the cause is laziness or a lack of tax knowledge, the end result of anemic tax management can cost thousands of dollars.
4. Do you have consumer debt?
Not all debt is bad, but consumer debt (credit card, car loans, revolving debt from furniture stores…etc) is detrimental to financial success. Most often, debt is incurred because of spending issues….spending more than you earn. Elimination of consumer debt is paramount for financial stability.
While poor investment returns may get the blame for the lack of financial growth, the usual suspects to poor financial growth can be attributed more often to one of the four areas above and not investment returns. Investments are an integral piece of the financial planning pie, but investments are not the holy grail to financial bliss.
Control the areas centered around the four questions above and then worry about investments. Spend less than you earn, save at least 10% of your earnings, reduce taxes, and eliminate consumer debt, and financial progress is just around the corner.
Can you honestly and successfully answer these four questions? Are you worried about investments when investments aren’t the true thorn in your side?
Monday, November 29, 2010
Tuesday, November 16, 2010
Why Vision Matters!
Many of us business owners have spent time in thought contemplating business goals, but, while goal setting is certainly an important part of a successful business venture, vision is the glue needed to adhere our goals to the values in our lives. Goals are mile stones, and vision is the guiding purpose of our goals. A business without goals may be at risk of failure, but a goal without vision can destroy happiness. For example, simply setting a goal to find a job is not enough. Vision is needed to establish the purpose of employment.
So how does vision help my business? One needs vision to develop a proper plan, so, again, a plan without vision may not capture the values of the business owner. Let’s explore a little deeper. Let’s say a business owner has a goal to generate $100k in revenue. Is that enough? Maybe….but probably not. What is the vision of the owner? Does the goal incorporate this vision? Maybe the $100k goal is obtainable but at the expense of the owner’s family due to travel for business. A plan that includes vision can help ensure that a business will stay connected to the values of the owner and optimize a great work-life balance.
The best place to start is by asking yourself about the continuity between your business life and your personal life. Set the overall vision of your business. How does your work life balance look? Does your business involve employees? If so, how many and how would you like to treat them? These questions can help set the stage for vision creation. Once the vision is created the goals should be set and measured against the vision to make sure they are congruent.
Large and small companies write vision statements to guide the decision making process. If a decision is in opposition to the vision statement, the decision should be reconsidered. For example, a business owner has the following vision statement….To create the best widgets in the most ethical manner. So, if the business owner can outsource the widget production to a factory overseas with deplorable conditions but increase profits 10%, the decision flys directly in opposition to the vision statement.
Goals and vision work hand in glove to create a successful business, but one without the other can create a crack in the path to happiness. When creating a business plan don’t forget to include a vision statement. Do you have a vision statement? What are you doing with your business to create a great work-life balance?
So how does vision help my business? One needs vision to develop a proper plan, so, again, a plan without vision may not capture the values of the business owner. Let’s explore a little deeper. Let’s say a business owner has a goal to generate $100k in revenue. Is that enough? Maybe….but probably not. What is the vision of the owner? Does the goal incorporate this vision? Maybe the $100k goal is obtainable but at the expense of the owner’s family due to travel for business. A plan that includes vision can help ensure that a business will stay connected to the values of the owner and optimize a great work-life balance.
The best place to start is by asking yourself about the continuity between your business life and your personal life. Set the overall vision of your business. How does your work life balance look? Does your business involve employees? If so, how many and how would you like to treat them? These questions can help set the stage for vision creation. Once the vision is created the goals should be set and measured against the vision to make sure they are congruent.
Large and small companies write vision statements to guide the decision making process. If a decision is in opposition to the vision statement, the decision should be reconsidered. For example, a business owner has the following vision statement….To create the best widgets in the most ethical manner. So, if the business owner can outsource the widget production to a factory overseas with deplorable conditions but increase profits 10%, the decision flys directly in opposition to the vision statement.
Goals and vision work hand in glove to create a successful business, but one without the other can create a crack in the path to happiness. When creating a business plan don’t forget to include a vision statement. Do you have a vision statement? What are you doing with your business to create a great work-life balance?
Thursday, November 11, 2010
Tax Diversification and the ROTH Conversion Debate!
If the downturn of 2000-2002 didn’t teach us about portfolio diversification, 2008-2009 certainly did. Simply put, diversification spreads risk. Most people understand the importance of portfolio diversification, but tax diversification is still a mystery to most. Essentially, the theory is to maximize tax reduction strategies and reduce taxation. My clients hear me talk about this rather frequently. One particular area where this is often overlooked is in the world of ROTH conversions.
A ROTH conversion can be an great tool for some folks, but a conversion for others may not be all that it is cracked up to be. This is where tax diversification comes into the picture. The beauty of tax diversification is that it gives you choices. Since we don’t know where tax rates will be when we retire, having options of pulling money out where it makes the most sense is a wonderful way to manage our tax liability. Here’s how it fits into the ROTH conversion topic.
For example, I have a 45 year old client that has a small IRA ($50K) that for many advisors would look ripe for converting. This client also makes a ROTH contribution every year (due to restrictions) and has a nice nest egg in his ROTH account. So, let’s move ahead to retirement when the client is taking distributions from these accounts. If the only funds withdrawn are from the ROTH account, he will leave tax savings on the table. The tax code allows for a standard deduction and personal exemption that will eat up some taxable income every year. To chew up the income reduced by the standard deduction and exemption, the traditional IRA is a great place to pull from. Currently, a single tax payer, age 65 earning social security but no other taxable income, can withdraw roughly $10,750* from an IRA and not pay tax on that withdrawal.….all while still withdrawing from the tax-free ROTH. One of the great sins in tax planning is to let free money go to waste.
Without making this more complicated than it needs to be, here is an easy way to think about it. For the current tax year, the 65 year old tax payer in the example above can pull $10,750 from a traditional IRA tax free. This taxpayer also received the tax deduction on the money when it was originally contributed to the traditional IRA, which saved tax dollars at the time of the contribution. This creates the best of both worlds for this money: it’s contributed on a pre-taxed basis and is withdrawn tax free. This is tax diversification at its best.
Let’s go back to my original example. Essentially, we learned that my client doesn’t need to convert this IRA. He will be able to capture the same result in retirement as if he had converted…..but just a piece at a time. If he had converted his $50k IRA to a ROTH, it would have cost him $12,500 in taxes. This truly illustrates the magnitude and complexity of the ROTH conversion debate. It also points to the value in proper tax planning and creating tax diversification. So if you are considering converting an IRA to a ROTH, you should ask yourself if you are improving or reducing your tax diversification for retirement. Do you have a tax diversification story or idea you would like to share? I would love to hear from you!
*This is a generic example to illustrate a point. Your situation may be different, so you should consult a tax professional.
A ROTH conversion can be an great tool for some folks, but a conversion for others may not be all that it is cracked up to be. This is where tax diversification comes into the picture. The beauty of tax diversification is that it gives you choices. Since we don’t know where tax rates will be when we retire, having options of pulling money out where it makes the most sense is a wonderful way to manage our tax liability. Here’s how it fits into the ROTH conversion topic.
For example, I have a 45 year old client that has a small IRA ($50K) that for many advisors would look ripe for converting. This client also makes a ROTH contribution every year (due to restrictions) and has a nice nest egg in his ROTH account. So, let’s move ahead to retirement when the client is taking distributions from these accounts. If the only funds withdrawn are from the ROTH account, he will leave tax savings on the table. The tax code allows for a standard deduction and personal exemption that will eat up some taxable income every year. To chew up the income reduced by the standard deduction and exemption, the traditional IRA is a great place to pull from. Currently, a single tax payer, age 65 earning social security but no other taxable income, can withdraw roughly $10,750* from an IRA and not pay tax on that withdrawal.….all while still withdrawing from the tax-free ROTH. One of the great sins in tax planning is to let free money go to waste.
Without making this more complicated than it needs to be, here is an easy way to think about it. For the current tax year, the 65 year old tax payer in the example above can pull $10,750 from a traditional IRA tax free. This taxpayer also received the tax deduction on the money when it was originally contributed to the traditional IRA, which saved tax dollars at the time of the contribution. This creates the best of both worlds for this money: it’s contributed on a pre-taxed basis and is withdrawn tax free. This is tax diversification at its best.
Let’s go back to my original example. Essentially, we learned that my client doesn’t need to convert this IRA. He will be able to capture the same result in retirement as if he had converted…..but just a piece at a time. If he had converted his $50k IRA to a ROTH, it would have cost him $12,500 in taxes. This truly illustrates the magnitude and complexity of the ROTH conversion debate. It also points to the value in proper tax planning and creating tax diversification. So if you are considering converting an IRA to a ROTH, you should ask yourself if you are improving or reducing your tax diversification for retirement. Do you have a tax diversification story or idea you would like to share? I would love to hear from you!
*This is a generic example to illustrate a point. Your situation may be different, so you should consult a tax professional.
Tuesday, November 2, 2010
Rome was not Built in a Day!
One of the stereotypical American traits is impatience. I want it, and I want it now! Sound familiar? This can be damaging from a financial standpoint…..not only from a spending perspective, but also from a planning perspective.
Financial planning is a process, or at least it should be. Some planning firms (mostly sales driven firms) operate as if the financial planning is event oriented. This means the planning is usually completed with the presentation of a hefty multi-page, disorienting, chart and graph filled report. While these plans are usually well done, they are missing one key component: the fact that life happens. A plan put into action today is usually obsolete tomorrow.
Life is constantly changing, and so should your financial planning. Every new job, home or car purchase, or a birth of a child can dramatically change a financial plan. Even smaller expenditures can throw a wrench in the mix. Ever had to pony up for a new HVAC unit? The ebb and flow of life can certainly be beautiful, but financial give and take is not conducive to a static financial plan.
As a comprehensive planner, I love the fact that my clients’ lives keep me on my toes. I love the challenges associated with the first time entrepreneur. Financial plans for entrepreneurs are always changing. I also love the challenges of a busy family with kids starting private school. Today’s education costs can certainly create a need for dynamic planning. The list of challenges goes on and on.
Developing a financial plan, implementing the plan, and then letting it go is dangerous. Financial planning is a process. Financial planning should be flexible. This is why I love my retainer business model. This allows me to assist my clients as their lives ebb and flow. Is your financial plan dynamic? Is it ever changing? The flexibility needs to come from your planner. If you don’t have the ability to be flexible, it may be time to search for a new advisor. Remember, life will not conform to your financial plan…..your plan needs to conform to life! Does your?
Financial planning is a process, or at least it should be. Some planning firms (mostly sales driven firms) operate as if the financial planning is event oriented. This means the planning is usually completed with the presentation of a hefty multi-page, disorienting, chart and graph filled report. While these plans are usually well done, they are missing one key component: the fact that life happens. A plan put into action today is usually obsolete tomorrow.
Life is constantly changing, and so should your financial planning. Every new job, home or car purchase, or a birth of a child can dramatically change a financial plan. Even smaller expenditures can throw a wrench in the mix. Ever had to pony up for a new HVAC unit? The ebb and flow of life can certainly be beautiful, but financial give and take is not conducive to a static financial plan.
As a comprehensive planner, I love the fact that my clients’ lives keep me on my toes. I love the challenges associated with the first time entrepreneur. Financial plans for entrepreneurs are always changing. I also love the challenges of a busy family with kids starting private school. Today’s education costs can certainly create a need for dynamic planning. The list of challenges goes on and on.
Developing a financial plan, implementing the plan, and then letting it go is dangerous. Financial planning is a process. Financial planning should be flexible. This is why I love my retainer business model. This allows me to assist my clients as their lives ebb and flow. Is your financial plan dynamic? Is it ever changing? The flexibility needs to come from your planner. If you don’t have the ability to be flexible, it may be time to search for a new advisor. Remember, life will not conform to your financial plan…..your plan needs to conform to life! Does your?
Monday, November 1, 2010
When Buying or Refinancing a Home You Should…
Make sure you understand the fine print!
It’s a great time to buy or refinance a home. Interest rates are extremely low (recent 30 year fixed rates are as low as 4%!). While this great interest rate opportunity creates a terrific chance to lower your monthly payment, it also can create confusion. The confusion lies in understanding the good faith estimate (GFE) and the HUD closing statement.
The GFE is the proposal the lender sends to you outlining your projected closing costs and the new mortgage payment amount. So often people will only look to the bottom line of their GFE to determine their new monthly payment and disregard the closing cost and fees. This can be a big mistake!
You must read the fine print, or have someone who understands these documents read it for you. Once you are comfortable with the information on your good faith estimate, you should request to review the actual closing statement a day or two before the closing. If you find mistakes, ask to have corrections made.
Closing costs and fees make buying or refinancing a home a very expensive process. The costs and fees associated with the transaction are thousands of dollars. You are paying these costs, so make sure you understand what you are paying for. If you don’t understand, ask for clarification.
It’s a great time to buy or refinance a home. Interest rates are extremely low (recent 30 year fixed rates are as low as 4%!). While this great interest rate opportunity creates a terrific chance to lower your monthly payment, it also can create confusion. The confusion lies in understanding the good faith estimate (GFE) and the HUD closing statement.
The GFE is the proposal the lender sends to you outlining your projected closing costs and the new mortgage payment amount. So often people will only look to the bottom line of their GFE to determine their new monthly payment and disregard the closing cost and fees. This can be a big mistake!
You must read the fine print, or have someone who understands these documents read it for you. Once you are comfortable with the information on your good faith estimate, you should request to review the actual closing statement a day or two before the closing. If you find mistakes, ask to have corrections made.
Closing costs and fees make buying or refinancing a home a very expensive process. The costs and fees associated with the transaction are thousands of dollars. You are paying these costs, so make sure you understand what you are paying for. If you don’t understand, ask for clarification.
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