Three Steps to Curing a Holiday Spending Hangover

 You enjoyed your holiday season to the fullest – great gifts for everyone, parties and evenings out with family and friends.  But now the credit card bills are arriving, and you are feeling the pain and misery of your holiday spending hangover.  

3 steps to help you recover and get yourself back on track:

1. Take a Break:  From the plastic, that is.  No need to abstain from all spending, but moving to a “pay cash” system and avoiding the use of credit cards, at least until the holiday bills are paid in full, will help to get your responsible spending back on track.
2. Replenish:  With a traditional party hangover, it is important to replenish your body with water and healthy foods.  Similarly, with a spending hangover, it is important to replenish your bank account.  Rebuild your savings to get your New Year off to a solid start.
3. Exercise:  Set a spending plan and stick to it to get your finances off to a healthy start.  Map out your monthly spending and monitor.  Just like a healthy exercise plan, tracking is the best way to ensure success.

Enjoying the holidays and special times with family and friends is important to your overall enjoyment of life.  If you occasionally go a little bit overboard, simply follow these steps to get yourself back on track and on your way to fulfilling your longer-term financial goals.

Sandra Adams, CFP® is a Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of Raymond James. #C13-002512

This New Year Take Our Resolution Challenge

 The beginning of a new year gives us a clean slate to get on the right track.  Then it happens … we all do it.  With the best intentions we make those dreaded New Year resolutions that very rarely get accomplished. Then we find ourselves in the same boat as we were the year before.  Have you ever noticed how busy the gym is in January and how it magically goes back to normal capacity within a few months?  I’m just as guilty as the next person with failed resolutions. However, this year I’m going to make a challenge to our fine clients at The Center.   Make a New Year resolution to sit down for just an hour in January and make a game plan for your finances in 2014.  It’s not a challenge to save “X” amount for retirement or to rollover that 401k plan to an IRA that has been with an ex-employer for a few years. These are individual goals that you can work into your plan.  My challenge is rather to open up the discussion, take a close look at your own personal financial scenario, and set some goals that you would like to achieve in 2014. 

Think of the approach in terms of the famous Fitzhugh Dodson quote: “Without goals, and plans to reach them, you are like a ship that has set sail with no destination.”  As your trusted advisors, we are here to help you identify these goals and work with you to navigate through them until they are accomplished.  We look forward to working with you in this New Year and wish our clients and their families and friends nothing but the best for 2014 and beyond!

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  C13-001740.

How I Set My Own Financial New Year’s Resolutions

 If you are like me, each year you make a list of New Year’s resolutions that don’t end up making it to spring time, much less the entire year… i.e. going to the gym, eating healthy, etc. Well, this year I plan to not only stick to my goals, but also add goals for my financial well-being to the list. Make improving your financial well-being part of your annual resolution procedure … and stick to it! In hopes of getting you going, here are mine:

I will make a budget, and use it to improve my spending habits

 This doesn’t have to be as gruesome as you think. Consider using a tool such as Mint.com that automates, aggregates, and updates for you. Track your progress monthly with their charts and see what areas you can cut back (like the Jimmy John’s sandwich that is oh so convenient to have delivered for lunch multiple times per week).  

I will spend less, and thus save more

• Take advantage of coupons, Groupons, or any other deals out there. I’m not saying become an extreme couponer like you see on TV (unless you have the time and energy for that), but there are easy potential ways to save on your expected purchases. Try a quick Google search for sales or price comparisons before you head out to make that buy.
• Don’t pay for pricey added features that you don’t use, just because you get a deal for bundling (i.e. cable, cell phones, internet). If you lead a busy life and don’t have the time to watch TV very often, consider a streaming option such as Netflix, Hulu, or Roku instead of paying for pricey cable.
• If you get an end-of-year bonus, put it into savings (or at least majority of it) instead of going on a shopping spree and spending it all in one day. For your job well done, treat yourself to something satisfying yet small in expense (maybe that Biggby specialty coffee you hardly ever buy because it’s expensive), then transfer the rest to savings. 

I will plan for future retirement

Take advantage of employer matching 401(k)s. If you get a raise for the upcoming year, consider increasing your 401(k) contribution as well. Then your increased income goes directly into your retirement savings instead of into your checking account, where it will be tempting to spend.

I will create a long term vision and strive to make it my future reality

Start an emergency fund (the Center recommends 3-6 months of expenses). This may take some time, depending on if you have one started. Once your emergency fund is sufficient, consider compartmentalizing your incoming savings for your long-term visions (click here for recent post about compartmentalizing).

The little things add up before you realize it, so strive to break the constant bad spending habits (the daily Jimmy John’s or Biggby coffee); but have fun treating yourself sometimes as well. Finding enjoyment while staying within your means will help you stick to your resolutions long term and may improve your financial well-being.

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Any opinions are those of Center for Financial Planning, Inc., and not necessarily of RJFS or Raymond James. C13-001741.

Is Too Much Success a Penalty at Tax Time?

Many investors have been so successful they may face a potentially hefty tax bill for 2013.  This bull market we are experiencing in the U.S. has had such strong legs for a long period of time many investors have few, if any, capital losses to harvest to help offset the gains they have accumulated in their equity investments. In some ways this is a great problem to have. 

Tax Increases

This year there were a couple of noteworthy tax increases to keep in mind.  The maximum tax rate on capital gains has increased from 15% to 20%.  Taxpayers with taxable income north of $400,000 ($450,000 for couples) will be affected by this increase.  There is also the new Medicare investment income “surtax” affecting taxpayers with modified adjusted gross income over $200,000 ($250,000 for couples).  This tax is an additional 3.8% on investment income (interest, capital gains, dividends etc.).

Look for Bond Losses

Some taxpayers may still have tax losses from 2008-2009 to help offset gains, but for many these have run out during the successful run the markets have enjoyed for the past 4 ½ years.  One place to look for some losses this year may be in the bond portion of your portfolio (if applicable).  There may be an opportunity to swap to a similar investment for a short period of time, at least 31 days, to harvest those losses to help offset other gains you may have. 

Harvesting Losses

Make sure you are reviewing your portfolio throughout the year for tax losses to harvest.  Bond losses were at their peak during late summer and into the fall, but if you wait until December to harvest those losses, they could be much diminished from what they were.  The end of the year is rarely the best time of the year to harvest tax losses.  Personal circumstances vary widely so it is critical to work with your tax professional and financial advisor today to prepare for the risk of higher taxes in your future.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal matters with the appropriate professional.

Compartmentalize Your Finances

 Love Starbucks? A lot of us do, but try answering this question I recently heard posed by a behavioral finance professor:  “Would you be more inclined to order a latte that was advertised as 95% fat free, or one labeled 5% fat?”  The two $5 drinks are the exact same, however, I would venture to say 99.9% of people (including me) would choose the drink that was advertised as 95% fat free.  Perception is as powerful force in the coffee world as it is in the investment world. Perception can work against you when it comes to savings or it can fuel you. Much of that depends on how you compartmentalize.

The Behavioral Finance of Compartmentalizing

So what does it mean to compartmentalize?  Simply put it is separating two or more things from each other.  In personal finance, separating certain accounts to have individual goals can have a tremendous effect on the likelihood of savings and overall success of the individual’s financial plan.  For instance, one of the most important pieces of a financial plan is maintaining an adequate emergency fund for the dreaded unknowns – such as job loss, unexpected home improvements, medical expenses, etc. (The Center team usually recommends that clients maintain 3 – 12 months of living expenses in a cash account that is not subject to market risk). 

Establish Separate Accounts

If you find yourself constantly transferring funds from your savings to your checking account each month because they are at the same institution and the ease of the transfer is just to easy to resist, consider making a change!  Why not open a savings account at a completely different financial institution and maintain your emergency fund there, knowing this money cannot be touched except for an emergency. 

Give it a Label

Many banks now allow you to name an account and personalize it.  So instead of seeing your account being titled as “Savings” each time you log in, it would read “Emergency fund – don’t touch!”  Adding that “name” or “purpose” to the account has been proven to dramatically increase savings levels and decrease the likelihood of spending out of the account. 

Keep it Simple

Separating accounts for each individual goal in retirement, however, is pretty unrealistic.  Who wants to have 20 different IRA accounts?  At The Center, we like to keep things simple to stay organized and on track.  However, our advisors do encourage clients to compartmentalize in their minds when looking at their overall stock/bond/cash allocation to stay focused and not lose track of the purpose of each type of asset that is held within the portfolio.  Each “bucket” of funds has a purpose and impact on the total portfolio and it is The Center’s job as your trusted advisor team to help you fill each one and utilize them to their maximum potential.  

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Vacation Homes: Dreams or Nightmares?

Each year in August, and again in January, after trips to a warm destinations for summer or winter fabulous summer vacations, we get calls from clients who have found their dream “home away from home”.  The dream is usually a condo located at a favorite vacation spot and a place where they can drive up, find a warm bed waiting, and the next day the beach beckons for a relaxing walk.

But hold on just a minute.  When you open those doors you might also find a leaky toilet or a few critters who also like your home.  It is then you begin to discover there are many good things about a second home but also lots to think about before signing on the dotted line. Here are a few checklist items for your consideration:

Location and Use

• How often will it be used? 

• Is it easy to get to or is the expense of getting there a consideration?

• Are you close to attractive features? 

• Is it a desirable property in case you wish to sell?

Maintenance

• Older condos may be ready for big outside assessments and lots of inside updates as well. Ongoing maintenance is a necessity when you own property regardless of age.   It is also the biggest complaint of owners.  If the property is rented, both the need for maintenance and complaints triple. Who is going to take care of maintenance and what is the cost?

• If the renters are family members how are increased utility bills going to be handled---yes they can be substantial.

Amenities 

• You may have fallen in love with the swimming pool but are you going to use the tennis courts, golf course and clubhouse? You will be paying for them.

Costs   

• The purchase cost is just the beginning.  The monthly association dues rarely go down.  Periodic assessments for parking lots and landscaping can be substantial. 

• You also need to know about insurance costs and added on fees for particular activities or uses.

• Furniture is also a consideration.

If you find the monthly costs are going to strain your budget, you might want to rethink the decision to buy.  One couple had a sound practice of not financing a second home until the first one was paid in full. If you are relying on rentals to cover most of the costs, it is best to have a contingency plan since renters may be scarce in poor economic times.

A second home can be a wonderful place for the family to gather and for you to have a relaxing respite from daily demands.  Like most things in life, make sure it will bring you satisfaction that you can afford.

Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

House Hunting How-To: Deciding on the Best Down Payment

 You have decided to purchase a new home. Now questions start racing through your mind. How much do we put down?  What is our interest rate going to be?  Do we get a fixed loan or a variable loan? Do we finance it over 15 years or 30 years? In today’s historically low interest rate environment the answer to some of these questions may surprise you.

Let’s take a scenario between John Doe and John’s identical twin brother Jack Doe.  John and Jack have the same exact job, the same income, and the same assets.  Everything about them is the same except for how they approach money decisions.  John is a firm believer in staying out of debt. He doesn’t believe in financing anything. He pays cash for cars, houses, vacations etc…  Jack on the other hand believes that responsible use of debt could be a good way to get ahead in life.  He firmly believes that you shouldn’t put more then 20% down on a house, you should finance a car, especially when interest rates are less then 3%, he’ll even put a vacation on a credit card to earn the mileage points, making sure he pays it off within a month or two. 

John and Jack are looking to purchase an identical home in the same neighborhood; same square footage, same interior design, same lawn animals, same everything.  The purchase price of the house is $250,000. They both have identical investment portfolios valued at $250,000. John has the option to finance it with a 30-year fixed loan at 3.5%.  But instead John takes a look at his finances and decides he will take the money out of his investment portfolio and buy the house outright.  John now has no money left in his investment portfolio, but at least this will save him that pesky $1,200 mortgage payment over the next 30 years. He doesn’t like the fact that his investment portfolio now has a 0 balance, but he intends to rebuild his drained investment account by adding $1,200 each month. 

Jack, on the other hand, decides he is only going to put down 20% on the house and keep the rest of his money invested. He needs to come up with 20% of $250,000, or $50,000. After the down payment, Jack will have $200,000 remaining in his investment account.  He won’t be able to add any funds to his investment account because he needs that money to pay the mortgage.

Let’s break down the impact of their decisions after 10 years factoring at a 6% interest rate compounded annually for their investments. Let’s also assume the value of their homes has also appreciated in value at 6%:

Jack has less equity in his house because he put 20% down so, after 10 years, he still owes the bank $150,000 on the original $200,000 mortgage note. From the totals, it might appear that Jack made a slightly better money decision, but life is not quite that simple.  We can’t possibly account for all the “what if’s” that life might throw at the two brothers over that 10 year period. 

Here are some things to consider: 

• What if John had a sudden emergency such as an unexpected job loss over that 10-year period?  He has no liquidity to tap into to help him pay the bills because he spent it all on the house. 
• How much mortgage interest can John deduct off his income tax bill annually?  None because he doesn’t have a mortgage! 
• What if house prices in the neighborhood depreciate in value instead of appreciate?  Jack could potentially hand the keys back to the bank whereas John could be stuck with a rapidly depreciating asset.
• What if John isn’t as disciplined as he thought he was and starts spending the $1,200 a month instead of saving it?  Jack might not be as prone to this problem because there is a big consequence to him not paying the bank $1,200 a month which is that he loses the house.   

As you can see, having a mortgage might not be the worst thing in the world. Even though it bucks the traditional value of having a home paid off as quickly as possible, there can even be some advantages to using debt responsibly. Make sure you talk to your financial planner when deciding if you’ll follow Jack or John’s example.

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The example contained herein is hypothetical and for illustration purposes only.  It is not intended to reflect the actual performance of any particular investment.  Actual investor results will vary.  Investing involves risk and investors may incur a profit or a loss.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any financial or mortgage matters with the appropriate professional.

Personal Emergency Reserve Savings

 The other day during my morning drive to work, I heard a rather startling statistic on our local news radio program – 40% of Michigan residents have NO (that means $0) savings!  Michigan is number 26 of the 50 states in savings rankings, which means that there are 24 states that are worse.  OUCH!

There is no doubt that with the market downturn of 2008 and the slow economic recovery in the last several years, many families had no choice but to dig into savings to survive. But that’s exactly one of the reasons that emergency reserve savings are so important!  Now that more people are back to work and are back to a more normal cash flow, it’s time to get back to business and build the reserves again.

How much emergency savings do you really need?   

Experts don’t always agree on an exact number, but many financial planners recommend having at least three to six months living expenses in an emergency fund, invested in cash or cash alternative investments.  For some, it is easier to pick a specific dollar amount as an achievable goal (say $10,000 or $20,000).  Clearly, the higher your monthly expenditures, the higher your reserve savings should be, especially if the majority of those monthly expenditures are non-discretionary.

Whether you are one of Michigan’s 40% with no savings, or are just someone who doesn’t have enough set aside for an emergency, start “reserving” some cash today. 

To get started, here are a few tips to consider:

• Save aggressively.  Use payroll deduction from your paycheck, if possible, or budget in savings (i.e. have an amount automatically moved from your checking to a savings or investment account on a monthly or bi-monthly basis).
• Reduce your discretionary spending.  Remind yourself that this is likely a temporary adjustment until your reserve savings reach an adequate level.
• Consider other resources until reserves are built.  Do you have cash value life insurance that you can borrow from if you have an urgent need?  Do you have other investments generating income that can be pulled off to build reserves? 

Hopefully, you’ll never have to tap into the funds you are committing to setting aside. But it is impossible to know what is around the next bend and it is always best to be prepared. The time to start (or continue) building your emergency reserves is now!  Consult a Certified Financial Planner™ for these and other ways to help save for your financial future.

Sandra Adams, CFP® is a Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision.  Prior to making an investment decision, please consult with your financial advisor about your individual situation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

College Students and Debt

Recently I read an article about the level of debt college students have at the time they graduate.  No, I am not talking about student loans. Those are overwhelming enough.  I am talking about credit card debt.  One study found that the average college student has 4 to 6 credit cards.  The combined balances on those cards averaged between $3,000-7,000. Can you imagine beginning a new career with that much financial burden? It is a formula for disaster.

I remember, in what seems like the not-so-distant past, our 17-year-old college freshmen whispering through the phone that no one on her floor had a clue of how to balance a checkbook and they were bouncing checks all over the place. Today, you’d replace “balancing a checkbook” with “responsibly handling a credit card” but in either case, it is a reminder that when students enter the halls of higher education, they do not have instant financial savvy. But it can be learned. Wise parents give their student some financial responsibility while they are still under their wing. Before leaving the parental home:

• Try designating bills they have to pay with their own earned money or an allowance.
• Talk to them about the use of credit and more importantly the consequences of misuses of credit and what it can mean when trying to purchase a car or qualify for a mortgage.
• Start with a loaded credit card, they are a great way for students to experiment. Its easy to see how quickly pizza and incidentals can add up over time. When the card is empty, it can be a long month.
• Let them make small mistakes under your guidance and let them work their way out.

Last but not least, tell your student you are going to have joint statements for whatever time period you deem necessary to give them help. Discuss money situations---that is what adults do.

Keep in mind you taught them to skate, you taught them to ride a bike and to drive a car.  Managing money should get the same attention.

Where Did It Go?

Do you find that you ever have too much month at the end of your money? Be honest, in the blink of an eye, extra money seems to vanish. For those still in their earnings years, one of the keys to accumulating wealth, thus achieving your financial objectives, is to stop the disappearing act. Transfer dollars from your monthly cash flow to your net worth statement by adding funds to your savings accounts, taxable investment accounts, and retirement accounts (such as employer sponsored 401k and 403b accounts) and IRA’s (Traditional or ROTH).  Another smart move is to use funds from your monthly cash flow to pay down debt … also improving your net worth statement.

Saving money and improving your overall financial position is easier said than done.  The truth is that saving money is more than simply a function of dollars and cents; it requires discipline and perseverance.  You may have heard the strategy of “paying yourself first”.  The most effective way to pay yourself first is to set up automatic savings programs.  The 401k (or other employer plan) is the best way to do this – but you can also establish similar automated savings plans with brokerage companies and financial institutions such as banks or credit unions.

Just as important, be intentional with your 2012 spending.  Rather than thinking in terms of a budget (which sounds a lot like dieting) – think about establishing a “spending plan” instead. Planning your expenses as best you can will help ensure that you spend money on the things that add value to your life and should help keep your money from mysteriously vanishing at the end of the month.

For a free resource to help track your cash flow email: Timothy.Wyman@CenterFinPlan.com

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.