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Friday, November 30, 2018

Concurrent and Sequential Goal-Setting



Last week, an article about financial goal-setting by Liz Weston that I was interviewed for was published by The New York Times. The key point of the piece is that people can save for multiple financial goals at the same time rather than sequencing them one by one. By doing so, compound interest is not delayed on savings for long-term goals, like retirement, that come later in life. The earliest savings that people set aside will have the longest amount of time to grow.


Interestingly, some readers questioned this premise and argued for a strategy of tackling financial goals one small step at a time. Thus, I decided to explore financial goal-setting a bit more detail in this post.


Basically, there are two ways to approach the achievement of financial goals:
  • Concurrently; i.e., working on (saving for) two or more financial goals at the same time (multi-task)
  • Sequentially; i.e., working on one financial goal at a time in a series of steps (single task)
     
    Each method of addressing financial goals has pros and cons.  For example, you can intensely focus on one goal at a time with sequential goal-setting. It is also simpler to set up and manage single-goal savings than plans for multiple goals.
     
    However, the biggest disadvantage of sequential goal setting is that compound interest is not retroactive. If it takes someone up to a decade to get around to long-term savings, that is time that interest is not earned. The earliest years of savings toward a long-term goal are the most powerful ones. Based on the Rule of 72, you can double a sum of money in 9 years with an 8% average return. By delaying long-term saving, you can lose a full compound interest doubling period.
     
    So what is the best way to save money for financial goals? It depends. In the end, the most important thing to remember is that you are taking positive action one way or the other. Celebrate that fact, weigh the pros and cons of concurrent and sequential goal-setting strategies and personal preferences, and follow a regular savings strategy that works for you.
     



Tuesday, November 20, 2018

10 Financial Planning Items to Be Grateful For


On Thanksgiving, it is customary to express gratitude for good things that have happened in our lives. Often, this includes our family, friends, and shared memories, but it can also include positive events that have happened with our jobs and personal finances. Below are ten items to be grateful for on Thanksgiving. Best wishes for a wonderful holiday weekend.

  • Positive Cash Flow- Consider yourself blessed if your income exceeds your expenses, including savings for future financial goals. Over one-fifth of Americans are not able to pay their monthly bills in full.
     
  • Increased Savings- Having more money saved this year than last year is a very positive step forward.
     
  • Decreased Debt- Having less debt to repay than last year is also a very positive step forward.
     
  • A Good Credit Score- A credit score of 740+ will get you the best (lowest) interest rates on loans and credit cards. Only 45% of credit users fall within the ranges of 740 to 799 (25%) and 800 to 850 (20%).
     
  • An Adequate Emergency Fund- Having at least 3 months of expenses set aside in savings provides peace of mind when “stuff happens” in life. Almost half (45%) of Americans do not have even 3 months of expenses saved.
     
  • Adequate Insurance- Large losses like disability, liability, property damage, and a life-threatening illness are a lot less costly when there is a third party available to help pay some of these expenses.
     
  • Good Health- Virgil once said “The Greatest Wealth is Health.” Paying attention to diet, sleep, and physical activity and having a good physical health status can help reduce costly out-of-pocket medical expenses.
     
  • A Good Job- Jobs/careers provide an ongoing source of income and employee benefits such as health insurance plans and 401(k) plan matching. Even better, recent news reports indicated that many workers received a raise in 2018.
     
  • Free Money and Savings- Let’s be grateful for cash-back rewards credit cards, 401(k) plan matching, promo codes on social media, door busters, and other shopping savings opportunities.
     
  • New Consumer-Friendly Laws and Policies- An example is free credit freezes nationwide.  Another is new Medicare cards without Social Security numbers to reduce the risk of identity theft fraud.

Sunday, November 18, 2018

Take-Aways from the AFCPE Symposium


Last week, I attended the annual Association for Financial Counseling and Planning Education (AFCPE) Symposium for financial educators and counselors. Below are five key take-aways that resonated with me:

  • Brent Neiser from the National Endowment for Financial Education noted that America has a weight problem: a growing stack of financial “to-dos” (tasks). He encouraged attendees to set meaningful and attainable goals, cut options to a manageable number, take small actions toward goals, and automate actions (e.g., saving for retirement) where possible so that financial tasks are accomplished. Then celebrate “wins” and learn and repeat.
     
  • A session on gambling by Cooperative Extension educators in Minnesota noted that those who gamble at a young age are more susceptible to gambling problems later in life. Studies reveal a later onset of gambling for women (age 32.4) vs. men (age 20.4). However, once gambling, women progress to having a gambling disorder twice as fast as men.
     
  • Credit counselor Todd Christensen noted that income is not directly or indirectly factored into a person’s credit score. If people use credit wisely, regardless of their income, they can have a high credit score. In addition, checking your own credit, through one of the credit bureaus or www.AnnualCreditReport.com, has no effect on your credit score.
     
  • Financial counselor Diana Yacob noted that “You can change the course of someone’s life with your words.” Professionals in personal finance (or any industry) can check the simplicity of their messaging with the Simple Writer web site: https://xkcd.com/simplewriter/ which encourages use of the 1,000 most common words in the U.S.
     
  • Speakers from Financial Empowerment Centers led a workshop about savings counseling and noted that people who have a reason to save, save more money. Their pilot study of a financial counseling program found that the most common savings behavior that people had was to physically separate their spending money and savings.

Wednesday, November 7, 2018

Financial Planning for Remarriages


Not only do they merge their financial lives, as all married couples do, but remarried couples also bring with them financial “issues” from their previous marriage(s) such as unpaid debts and payments to, or income from, an ex-spouse for alimony and/or child support obligations. Estate planning is also complicated by remarriage (e.g., providing for both a new spouse and children from a prior marriage). Below are six financial planning tips for people who are remarrying:           

¨      Consider a Prenuptial Agreement (a.k.a., prenup)- Interview at least three family law attorneys to prepare a plan. Define assets that each partner brings to the marriage, how they will be titled, how expenses and existing debts will be repaid, and how property will be distributed in the event of death or divorce.

 

¨      Develop a Spending Plan (a.k.a., budget)- Include anticipated income and expenses and decide who will pay what bills. It is generally fairer to all involved to pay current expenses (not those related to a prior marriage) in proportion to each partner’s contribution to total household income.

 

¨      Separate the Past From the Present- Accept the fact that support payments to an ex-spouse are an ongoing “fixed expense.” Remarried couples may prefer paying support obligations and other expenses for children with their personal funds so they are not constantly “visible” to their new spouse.

 

¨      Treat Children Fairly- Develop uniform policies for all children living at home regarding allowances, spending money, payment for services, and equipment purchases (e.g., cell phone). Otherwise, children and stepchildren, alike, are likely to cry “unfair” about differences in the parents’ money management practices.

 

¨      Consider a QTIP trust- Create this legal document to leave income to a spouse for life but distribute assets to children from a prior marriage.

 

Communication about financial matters is important in all marriages but especially in remarriages which come with more complications and where spouses may have developed long-standing money management practices. The University of Florida publication So You Want to Remarry? has additional information about financial issues related to remarriage.

Thursday, November 1, 2018

Financial Planning for a Divorce


Death, disability, and divorce are three common life events that impact personal finances. Divorce is the only one that cannot be provided for in advance with some type of insurance. What to do? Consider these seven action steps:

¨      Learn the Local Laws- Determine if the divorce will be filed in a community property state or the majority of states with an equitable distribution approach where property acquired during a marriage in either or both spouse’s name (except gifts and inheritances) is considered a marital asset subject to division in a property settlement agreement.

 

¨      Prepare a Net Worth Statement- Tally up assets minus debts (net worth) because an attorney and the courts will request a complete accounting of a couple’s separate and joint property.

 

¨      Do Some Math- Consider carefully whether either spouse can afford to keep the family home following divorce, especially if it took two paychecks to qualify for the mortgage.

 

¨      Protect a Good Credit History- Close joint credit accounts with an ex-spouse. Also request duplicate statements from creditors if you have doubts that an ex-spouse will make payments on jointly-held debts as per a divorce decree.

 

¨      Prepare to Live on Less-Develop a realistic post-divorce budget that may involve “downsizing” from your previous lifestyle as part of a married couple. Do not attempt to try to live beyond your means using payday loans or credit.

 

¨      Review Insurance Coverage- Make sure that the spouse(s) paying alimony and/or child support have adequate life and disability insurance so that payments will continue no matter what.

 

¨      Consider Retirement Plan Distributions- Make arrangements to share spousal benefits earned by a worker during a marriage with a Qualified Domestic Relations Order (QDRO). This is a court-ordered document that tells the retirement plan administrator how to divide benefits between divorcing spouses.

Red Flags of Investment Fraud

This week, I taught my Rutgers students about investment frauds like Pyramid and Ponzi schemes.  Each year, thousands of consumers lose ...