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Cause & Effect: Household Numbers on the Rise

hyder / January 23, 2012 / No comments

It may not be what you think – according to the Census Bureau, the number of individuals and families living together have taken a big jump in the past several years – and it’s not because grandma and grandpa are living with their grandkids.  The report found that 69.2 million, or 30% of families were “doubled-up” (households that include at least one person 18 or older who isn’t enrolled in school and isn’t the householder, spouse or cohabiting partner of the householder) in 2011, up from 61.7 million adults, or 27.7%, in 2007.  The surprising part?  The biggest increase comes from young people, ages 25-34, living with their parents.  Some 5.9 million, or 14.2% of 25-to-34 year olds, lived with their parents in 2011, up from 4.7 million before the recession.

The Cause:  With high unemployment rates, a meek economy and a surplus of students graduating from college with a laundry list of student loans to pay off, it’s not surprising that more and more young adults are living or moving back in with their parents.  What better way to save some money, look for a job and improve their financial standing?  Another interesting cause I read the other day was that unlike the past, many young adults find it quite pleasant to live with their parents these days.  With child-rearing strategies changing, more parents and their children are nurturing lasting relationships together.

The Effect:  The Census Bureau is having a tough time in figuring out the actual poverty rate of the United States: “These young adults who lived with their parents had an official poverty rate of only 8.4%, since the income of their entire family is compared with the poverty threshold,” David Johnson chief of the Housing and Household Economic Statistics Division at the U.S. Census Bureau said. “If their poverty status were determined by their own income, 45.3% would have had income falling below the poverty threshold for a single person under age 65.”

Another effect that affects the economy is a smaller number of households.  A reduced number of overall households leads to a reduction of consumers, including those in the housing market, which puts a huge drag on the economy.  Regardless of the misleading statistics, the biggest impact can be felt much closer to home.  While young adults living with their folks may be reaping the benefits, parents supporting adult children have less money to spend on themselves, not to mention less income to save for retirement.
Some experts say that there is a silver lining.  They believe that these young adults “doubling up” will eventually become financially stable and be able to move out, enter the housing market and start consuming again.  This boost in consumption would lead to an improvement in the broader economy.

Unfortunately, there’s no telling when that will happen, and in the meantime it’s not fair to many retirement-saving parents to allow their children to hurt their futures.  If you’re going to provide a home and various necessities for your post-graduates or financially-unstable children, make sure you set parameters that keep them from getting to comfortable in your house.  Don’t feel bad charging them some sort of rental fee and giving them a timeline in which they must move out or find a job.  Without structure the situation could get worse and put too much pressure on your financial future.

Category: Baby Boomers, budget, Investing / Tags: , , ,

3 Simple Steps to Create a Seriously Savvy Budget

hyder / January 16, 2012 / No comments

No, budgets are not attractive, fun or exciting in any way shape or form.  They are, however, the necessary evil that can assist in getting you and your family’s spending and saving habits back on track.  It’s difficult to understand why more individuals don’t already adhere to a budget, what with the economic crisis and unemployment still looming above us.  It would seem that the majority of individuals without a budget either don’t think they need one, are unaware of its benefits, or simply don’t like discussing or even thinking about their financial situation.  The unfortunate part about that last point is the fact that implementing a personal or family budget can help dig those individuals out of the financial holes they’ve already put themselves in.  And the best part?  It’s ridiculously easy to do.  From writing everything down on your own to downloading or purchasing budget software, technology has made it extremely simple to execute.

The first step in creating a budget (and all these tips go for individuals to families alike) is gathering every financial statement you can find.  Examples include bank statements, credit card statements, investment accounts, utility bills, and income information.  The idea is to gather any piece of information regarding an expense or income for you or your family in order to process the information into a monthly average.  Record all your sources of income – any type of cash flow that’s coming to you needs to be recorded.  Next, create a list of monthly expenses.  Examples include the mortgage payment, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, auto insurance, retirement or college savings – essentially everything you spend money on (even that daily latte from Starbucks!).

After you’ve created your list of expenses, you’ll want to break it up into two different categories – fixed and variable.  Fixed expenses are those that stay relatively the same each month and are essential parts of your way of living.  Examples of fixed expenses include your mortgage or rent, car payments, cable and/or internet service, trash pickup, credit card payments and so on.  For the most part, these expenses are essential yet not likely to change in the budget.  Variable expenses are those that will change from month to month and include items such as groceries, gasoline, entertainment, eating out and gifts, for example.  This category will be important when making adjustments.

The last steps include totaling both lists of expenses and income.  This is where you’ll need to make adjustments and determine what types of changes you’ll want to make to your spending and saving.  If your end result shows that your income outweighs your expenses, you can start prioritizing the excess to areas of your budget such as retirement savings or paying more on credit cards to eliminate that debt faster.  If you are in a situation where expenses are higher than income you should look at your variable expenses to find areas to cut.  Since these expenses are typically adjustable, it should be easy to shave a few dollars in a few areas to bring you closer to your income.  Once you’ve made your adjustments and have a reasonable budget to stick to, make sure you review it regularly to determine whether you are staying on track and all your numbers are up-to-date.

In addition to the steps I’ve mapped out, I’ve also put together a list of snapshot tips to help you in your budget creation and execution:

  • Be honest!
  • Track your spending to make sure it stays within your guidelines.
  • Use software to save grief – personal finance programs have built-in budget-making tools that can create your budget for you.
  • Don’t drive yourself crazy, or stop buying groceries!  Monitoring your spending can sometimes lead to overly-attentive detail – don’t go overboard.
  • Monitor your cash flow – it’s much more difficult to track where your cash is going, so keep those ATM receipts and watch your cash flow with more scrutiny.
  • Beware of expenses that may seem fixed – do you really need that $50 bottle of wine?
  • Aim to save at least 10% of your income for your future, such as investments and retirement planning.

Budgets aren’t easy to create, let alone stick to, but they are essential in getting a grip on your financial situation.  Looking over this list of tips, I’m sure you’re thinking, “okay, easy enough.”  But it’s not.  It takes time, effort and active dedication to continually be aware of your saving and spending habits.  The best part?  You won’t regret it; it is guaranteed to pay off in the end. Think of your personal budget like your map and journey to financial peace of mind.

Category: budget, Investing / Tags: , , ,

Financial Advice VS Financial Coaching: Which One is Right for YOU?

hyder / January 9, 2012 / No comments

You’ve heard the different terms describing financial planners and what they can do to secure your financial future.  The question is: did you know that there is a vast difference between a financial advisor and a financial coach?  From a bare-bone, definition standpoint, a financial advisor is “a professional who renders financial services to individuals,” whereas coaching is “a future-focused practice with the aim of helping clients determine and achieve personal goals.”  In other words, a financial advisor lends his hand in managing the wealth that you’ve already built; a financial coach helps you build that wealth from the get-go.  Would you rather go to a greenhouse and buy a plant?  Or go to a greenhouse, buy the seeds, learn how to nurture them and watch them grow?  Financial coaching gives you the tools and knowledge necessary to take those seeds home with you, plant them, and cultivate a bountiful garden.

First and foremost, it is important to point out that each and every individual is different – different goals, different savings plans, and different incomes.  Maybe you already have an impressive garden, and are looking for financial advice on investments and portfolio options.  Financial advisors manage the money you already have – you give them complete control of your assets and they do all the work.  While this model works great for some people, it’s not ideal for others.  Wealth coaching focuses on YOU.  It makes you a major actor in your financial building process.  Wealth coaches are educators and mentors that give you the unique tools and strategies necessary for financial freedom.  Why put your financial future in the hands of someone else when you could learn and build your financial path through a dynamic relationship where the goal is your financial success?  Here’s a breakdown of the major differences between financial advice and financial coaching:

Financial Coaching

Financial Advice

Follow the client’s agendaFollow the advisor’s agenda
Unique strategies, plans & portfoliosSimilar plans, strategies & portfolios
Client becomes expert & authorityAdvisor is authority
Dynamic relationship creates independenceRelationship creates dependence
Client is accountable and responsibleAdvisor is accountable and responsible
Posting questions and educatingDirecting
Focuses on learning and growth of clientFocuses on financial product and sales
Goal is to create a fully functional, educated, independent clientGoal is to create a portfolio for a dependent client
Teaches self-responsibilityAdvisor takes on responsibility
Paid for eliciting, educating, expanding, and supporting client’s whole financial successPaid for portfolio advice and transactions
Draws out client’s values, skills, and knowledgeImposes advisor’s values, skills, and knowledge on client

As you can see, there are pros and cons to each financial planning business model.  It all depends on where you are in your financial planning process.  The benefits of having a financial coach in your corner are endless: take control of your finances and learn how to harvest a secure and protected financial garden.  Or, buy the plants and enlist the help and advice of a certified gardener to be the expert and authority in your financial future.  Heck, do both!  Enlist the help of a financial planner to both coach and advise you in your financial decisions.  Regardless of your financial situation and where you are in your financial planning process, it is crucial to understand the importance of a second pair of educated eyes looking at your fiscal circumstances.

Category: Investing, Retirement / Tags: , , , ,

How to Stop Paying the Bank

hyder / January 3, 2012 / 2 comments

In this tight economy, even the smallest of unnecessary fees can be a burden to our strapped finances.  One of the best ways to not only curb unnecessary fees, but also manage our finances more successfully, is to supervise our banking operations more closely.  I mean, it’s our money, right?  You wouldn’t willingly hand your wallet or purse over to a stranger to monitor, would you?  Many individuals don’t keep a close watch on their bank and its operations because they’re unaware of their ability to control their accounts and make important decisions.  One of the biggest problems that bank customers face is the issue of overdraft fees.  According to a study by the Durham, N.C.-based Center for Responsible Lending, banks and credit unions collected nearly $24 billion in overdraft fees in 2008 – 35% more than two years earlier.  Below is a breakdown of how to put the consumer back in control and armed with the right knowledge to manage their finances successfully.

  1. Know your bank’s policies.  No, I’m talking about the seemingly endless, too-small to read fine print that most people can’t understand.  Regardless of whether you’re signing for a new account, or have been a veteran customer for over ten years, it’s up to you to find out the right information.  Do some investigative work and find out what’s most important to you.  Pick up the phone or even head to your local branch and start asking questions.
  2. Opt out of overdraft protection.  Many individuals don’t even know that they have overdraft protection, because some banks will enroll customers into the program without their approval.  The problem with overdraft protection?  The fees that come with it.  If you are enrolled in overdraft protection and your account goes negative, your bank will tack on hefty fees, daily, to cover for the charge.  No overdraft protection?  No overdraft fees.  However, your bank obviously won’t front the money for the charge you are attempting to make.  Some banks have programs that carry lines of credit for overdraft protection, and while the interest you would pay is less than the fees tacked on by the bank, it’s better to simply manage your bank accounts and maintain a minimum balance than pay the bank extra money.
  3. Enlist technology.  Instead of saying balance your checkbook (do those even exist anymore?), it’s more appropriate to say balance your technologies.  In this day and technologically-savvy age, more consumers are using online technologies to manage their money and finances.  Many banks will allow their customers to arrange for an alert to be sent to them by text message or e-mail if their balance falls below a certain amount, and when a payment date is coming up.
  4. Carry backup cards.  Of course credit cards come in handy when it comes to a lack of cash situation, but they are not the answer when it comes to managing your finances successfully.  While keeping an extra one or two credit cards on hand can help prevent running out of payment options if some sort of fraud-related hold strikes your account, prepaid cards are a better answer when it comes to avoiding interest rates, overdraft fees, and late payment penalties.
  5. Plead your case.  As I pointed out in the “know your bank’s policy” section, it is important to stay in contact with your bank and communicate with them when it comes to policies and fees.  If you slipped below your account balance or have an ATM fee that’s unreasonable, don’t hesitate to call your bank manager and plead your case.  Especially if you are a good customer and this is an uncommon occurrence, your bank should side with you and waive the fees.  Institutions trying to keep their customers should have discretion with these issues, in hopes of keeping their customers.  If they’re not sympathetic, take your business elsewhere.

The two main points to take away from this is knowing that as the consumer you hold the power.  It’s your money, and you should have control in its management and decisions.  Secondly, you must understand that it takes initiative to understand the banking process, but that it’s well worth the time and effort it takes to comprehend how your money is being taken care of.  Avoid giving your purse or wallet to a stranger, and stop paying your bank excessive and unnecessary fees – $40 coffees just aren’t worth it.

Category: Baby Boomers, Investing, Retirement / Tags: , , , ,

Do You Make These Investment Mistakes?

hyder / December 26, 2011 / 4 comments

Have you ever found yourself watching MarketWatch, CNBC or CNN and felt the need to immediately make an investment decision based on emotional or personality-driven thoughts or characteristics?  You’re not alone.  According to a recent global survey by Barclays Wealth, a large percentage of wealthy investors not only realize their tendency to make decisions based on emotions but would welcome help in dealing with the problem.  One of the keys to success is recognizing that a problem exists and devising mechanisms to control or limit bad decisions.  The report, “Risk and Rules: The Role of Control in Financial Decision Making,” listed the “Failures of Rationality,” which were found in four types of investment decisions:

  1. Failing to see the big picture.  Instead of making decisions while keeping the entire portfolio in mind, investors will end up investing too much in a single asset class, industry, or geographic market.
  2. Using a short-term decision horizon.  When investors focus on short-term returns instead of long-term wealth accumulation, their willingness to take short-term risks is too low and they often make the wrong investment decisions.
  3. Buying high and selling low.  Investors that do what’s comfortable for them during bullish or bearish market conditions tend to buy when markets are high and sell when markets are low, which is a risky strategy that fails to take advantage of market opportunities.
  4. Trading too frequently.  When investors’ emotional and personality traits take hold, they tend to take an irrational favoritism towards action, which can lead to an increase in investment costs and other poor decisions.

What else did the Barclays survey find?  There is substantial improvement in investment decisions as people get older.  Older investors were much less likely to trade too often, try to time the market or base investments on short-term considerations.  They were also more satisfied with their financial situation.  The survey also found that women are better long-term investors than men, who tend to take more risks and are more likely to favor frequent trading and efforts to time the market.  Because women have a higher desire to use self-control strategies (which they are also more likely to believe are effective), women tend to trade less and earn higher returns over time.
The report identified seven self-control strategies to help people counter their tendencies to make bad financial decisions:

  1. Limit the options. Purchase illiquid investments to avoid the urge to sell investments when the market is falling.
  2. Avoidance. Avoid information about how the market or portfolio is performing in order to stick to a long-term investment strategy.
  3. Rules. Establish and use rules to help make better financial decisions, such as spend only out of income and never out of capital.
  4. Deadlines. Set financial deadlines. For example, aim to save a certain amount of money by the end of the year.
  5. Cool off. Wait a few days after making a big financial decision before executing it.
  6. Delegation. Delegate financial decisions to others, such as allowing an investment adviser to manage your portfolio.
  7. Other people. Use other people to help reach financial goals. An example would be meeting with a financial adviser to make and execute a financial plan.

Even if these popular investment mistakes don’t apply to you, they still make a good point in the fact that making financial decisions shouldn’t be based on emotional or personality-driven thoughts or characteristics.  Having a rational investment strategy in place is crucial in making the right financial decisions.  You wouldn’t make a decision about buying a house or having surgery without thinking it over and going to the experts for advice, would you?  Your investment decisions and financial management choices not only determine your future, but the future of others as well.  Take advantage of the Barclays Wealth’s survey’s self-control strategies and get a solid grip on your investment decisions.

Category: Baby Boomers, Investing, Retirement / Tags: , , , ,

How Baby Boomers are Reinventing Retirement

hyder / December 15, 2011 / 3 comments
Not only have baby boomers reinvented each stage of life as they passed through it, but they will also reinvent retirement standards as well, changing the retirement landscape for generations to come.  Over 77 million baby boomers will by turning the ripe age of 65 this year, primetime candidates for retirement.  But wait, most boomers will never see themselves in the same crop of retirement ads that their parents were in.  A large percentage of baby boomers are pushing back their retirement and continuing to work.  As boomers age so does the rise in inflation, causing things that were once considered luxuries to be considered more as basic needs.  So, what will boomers actually have to combat differently than there parents?  We’ve put together some of the top ways baby boomers are reinventing retirement:
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  • Longer life expectances.  Some seniors will spend more years in retirement than they did in the workforce.  And more years in retirement lead to more years that need to be financed.  More and more employers are ridding themselves of pension and replacing it with 401(k)s instead.  Furthermore, raising the retirement age resulted in lower social security benefits.
  • Investment management.  The complex equation of life expectancy plus your savings or retirement plan has shifted from the employer and government to the individual.  Retirees need to decide on their own or with the assistance of a financial adviser how to adjust their portfolio allocations as they progress through their retirement years and how much of their nest egg to spend each year.
  • Tax allocation and required minimum distribution.  Taxes will take a big toll on retirees.  If boomers’ retirement money is in tax-deferred accounts, the government will take a large share because all withdrawals are taxed as regular income.  Required minimum distributions are calculated by dividing the balance of your retirement accounts by your life expectancy as determined by the IRS.  Seniors who fail to withdraw the correct amount will be required to pay a 50% penalty and income tax on the amount that should have been withdrawn.  Ouch!
  • Part-time employment.  Many Americans will continue to work during the traditional retirement years, and not only because they need the income, but also because they enjoy the mental stimulation and social opportunities a job can provide.  With that said, baby boomers don’t see retirement as a withdrawal from activity but as a new adventure.  Many seniors will travel, volunteer, and remain quite active.
  • Squeeze generation.  Most baby boomers will be facing a combination of caring for aging parents, helping their adult children, and tending to their own retirement needs.  This has lead to an increasing number of Americans entering their retirement years with debt.  Carrying debt into retirement means cutting back on discretionary expenses.

And don’t think baby boomers are flocking to seniors-only retirement communities.  Those days are long gone.  Welcome to the age of retirees working part time jobs, staying active and engaged in their community.  One of the biggest recommendations to baby boomers approaching retirement is to contact a retirement or financial planner to aid you in your decisions.  Even if you have a good grip on your retirement, it never hurts to have an educated second pair of eyes contribute to your financial security and protection.

Category: Baby Boomers, Investing, Retirement / Tags: , , , , , , ,
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