The 15 Year Mortgage: Myth and Reality

Posted On November 9, 2015 By Admin In Financial Planning /

Everyone seems to be talking about Real Estate again. This month, I sat with three friends, and remarkably, all three were looking at moving and buying a new house. Real Estate is hot right now in Dallas, and almost everywhere else, too. The losses from 2009 have been erased and prices are making new highs. Even if you aren’t looking to move, chances are good that your property tax assessment has moved up significantly in the past two years.

Major corporate offices are being built in North Dallas, bringing tens of thousands of jobs to the area. And those relatively well-paid corporate employees are going to want to live in close commuting distance to work. Home owners have equity in their property, and interest rates, which have remained low, are expected to start creeping up. Many feel like right now is the perfect time to move up to their dream house. It has been a seller’s market, with many houses being sold quickly and often meeting or exceeding asking prices.

Anyone who has read this blog or my book, knows that I recommend home buyers consider a 15 year rather than a 30 year mortgage. Let’s go through those numbers in detail and consider the myths and reality of your mortgage decision.

For our example, let’s assume you are buying a $250,000 house and putting 20%, or $50,000, down. You will finance $200,000 through a mortgage.

At an average current rate of 3%, your monthly payment on a 15 year mortgage (not including taxes or insurance) is $1381.16. The 30 year mortgage will cost you approximately 3.75%, but your monthly payment will be only $926.23.

15 Year Mortgage @ 3.00%	30 Year Mortgage @ 3.75%
payment $1381.16	payment $926.23
	difference = $454.93

A lot of people will look at the 30 year mortgage and will say that it “saves” them $454.93 a month. Let’s break that down. On the 15 year mortgage, your first payment consists of $500 interest and $881.16 in principal. On the 30 year note, the first payment includes $625 in interest while only $301.23 is applied towards interest. Most of your payment on the 15 year note is going towards principal, building your equity, where as most of the 30 year payment goes towards interest. So, even though the 15 year note costs $454.93 more, in the first month, it applies $579.93 more towards your principal.

15 Year Mortgage	30 Year Mortgage
payment $1381.16	payment $926.23
principal $881.16	principal $301.23
difference = $579.93

After making 10 years of payments, your remaining balance on the 15 year note would be $76,864.99 and you will have paid $42,604.59 in total interest. On the 30 year, $200,000 mortgage, your balance after 10 years is still $156,223.55, and you will have paid $67,371.29 in total interest. At this point, the person who chose the 15 year note has paid off most of their loan and has the end in sight.

15 Year Mortgage @ 10 years	30 Year Mortgage @ 10 years
Balance $76,864.99	Balance $156,223.55
Interest Paid $42,604.59	Interest Paid $67,371.29

Assuming your home value increases a modest 1% a year, here’s a look at how your home equity would compare after 10 years under both mortgages.

15 Year Mortgage @ 10 years	30 Year Mortgage @ 10 years
Home Value $276,156	Home Value $276,156
Balance $76,865	Balance $156,224
Equity $199,291	Equity $119,932
Difference = $79,359

The nearly $80,000 difference in equity after 10 years shows how the 15 year mortgage is a really another way of “forced savings”. You would have equity to buy another house if you should want or need to move. Or if you’d like to retire, a 15 year mortgage may enable you to have no house payment when you reach retirement age.

So far this is pretty simple. But you may be wondering, what if I were to choose the 30 year mortgage and invest the difference of $454.93 per month? If you did this for 10 years, and earned 7%, you would have an investment account with $78,740. That’s almost the same as the difference in equity in the chart above.

Let’s take this further and assume that you invest the $454.93 for the full 30 years. How would this compare to paying the 15 year mortgage and then investing $1381.16 for the following 15 years?

15 Year Mortgage

30 Year Mortgage

Pay mortgage for 15 years, then invest $1381.16

for the next 15 years, at 7%

Invest the difference of $454.93 for 30 years, at 7%

Investment Value $437,760

Investment Value $554,959

This shows that choosing the 30 year mortgage and investing the difference versus a 15 year mortgage could generate a better outcome over 30 years. So then why would I suggest that home buyers choose the 15 year product instead? Here are two reasons:

1) If you go to a bank, mortgage broker, or realtor and say that you can afford a $1381 per month payment, they are not likely to help you decide between a 15 or 30 year mortgage. Rather, they will assume you will choose the 30 year note and then tell you how much house you can “afford”.

Instead of looking at the $250,000 house in our example, you could afford a $370,000 house with a 30 year note. And you will not be investing the $454 per month difference as in the theoretical example. With the more expensive house comes more expensive costs, including taxes, insurance, utilities, and maintenance.

People who become wealthy look at their housing as a cost, not as an investment. While you can afford a more expensive house under a 30 year mortgage, that doesn’t mean that it is in your best interest to do so, if you have other financial goals such as retirement.

It is vitally important to remember that there is a conflict of interest throughout most the real estate industry. People who are paid commissions have an incentive to put you in the most expensive house and mortgage that the bank will allow them to sell. They do not get paid to help you retire, save in your 401(k), or send your kids to college. It’s remarkable to me that six years after the sub-prime crisis that there has been so little change to the fundamental conflicts of interest in the real estate industry.

2) I don’t know very many people who actually have the discipline to invest the $454.93 a month they would “save” with a 30 year mortgage. More likely, they will increase their other discretionary spending (cars, vacations, furnishings, etc.) that accompany “keeping up with the Joneses” in a nice neighborhood.

The only way someone would be able to make it work would be automate the process and establish a recurring monthly deposit of $454 into a mutual fund or IRA. By the way, the 30 year example above only showed a good outcome because I assumed the investment was made into stocks and earn 7% for 30 years. If you put that money in cash and only earn 3%, the 15 year mortgage produces the superior outcome. The 30 year mortgage only produces a better outcome if you can greatly exceed the cost of borrowing (3.75% in our example). Here’s what it looks like if returns are only 3% over 30 years:

15 Year Mortgage

30 Year Mortgage

Pay mortgage for 15 years, then invest $1381.16

for the next 15 years, at 3%

Invest the difference of $454.93 for 30 years, at 3%

Investment Value $313,486

Investment Value $265,105

My fear of the 30 year mortgage is that it is not used by consumers or real estate professionals to maximize saving and growth investing. If it was, it would be a good tool for increasing your net worth. Rather it is used to maximize the amount of home you can purchase today.

For professions where career income is expected to rise only at the rate of inflation (such as teachers and musicians), your income is not going to increase fast enough to enable future saving when you take on a jumbo-sized mortgage. The result is that all your disposable income will go towards the house, with very little towards retirement, saving, or investment.

If today’s real estate market has you excited, be careful. It’s great that your home value has shot up 20% or more in the past couple of years. That makes it a great time to downsize, but actually an expensive time to buy a bigger house. We are lucky in Dallas that Real Estate prices have remained affordable; in many cities on the coasts, home buyers have no choice but to use the 30 year mortgage because prices are so high. If you start with the 15 year mortgage in mind when you are considering how much house you can afford, it can help you increase your net worth faster.

Vulnerability Analysis

Posted On October 12, 2015 By Admin In Financial Planning /

You’ve worked hard, saved for decades, and have saved a nice nest egg for yourself and your family. One day, you are involved in a serious auto accident and the other party sues you. A sympathetic jury finds you liable for $10 million from the accident. How much of your assets could be seized by creditors?

You probably have never thought about this question, and hopefully, you will never be in such a scenario. However, we live in a litigious society, and if you have wealth, you can be sure that there are thousands of attorneys who would jump at the chance to bring a lawsuit against someone with deep pockets.

What we offer our clients is a Vulnerability Analysis, where we look at all of your assets and calculate what percentage of your assets could be seized by creditors. The goal of our Vulnerability Analysis is to determine the creditor status of each asset and help you substantially shift your wealth into assets which are exempt from creditors.

We will determine how much of a buffer your insurance will offer and show you which of your assets could be attached by creditors. We will make recommendations for moving funds to accounts, assets, and trusts which will offer creditor protection. It’s important to take these steps today, because you cannot “hide” assets from creditors after an event has occurred. By undergoing our Vulnerability Analysis process, you will know you have protected a large portion of your wealth from creditors, if you should ever find yourself in the unfortunate situation of being sued.

Each year, we can update your Vulnerability Analysis and make sure that you are protecting your family. While this analysis is particularly valuable for doctors who potentially face malpractice claims, it is also beneficial for anyone who owns a business or property. And while some professionals are keenly aware of the possibility of being sued, the reality is that almost anyone could be sued, even for the actions of their teenage children.

You may have done everything right for the last 25 years, but if all your assets are in non-exempt accounts, then your vulnerability is 100% today. That’s why the value of financial planning includes much more than just which mutual funds you pick. Our Vulnerability Analysis process is included for our Wealth Management clients; call or email me to find out how you can become a client.

I was the driver of the car in this photo. On June 15 of this year, another driver ran a red light and hit us, totalling the car. The other driver admitted he was at fault, was distracted and didn’t see the red light. Luckily, we all survived. You always think these things only happen to other people, but accidents can happen to anyone. Hope for the best and prepare for the worst.

Financial Planning for the Sandwich Generation

Nearly every day, I talk with someone who is a member of the “sandwich” generation. No, this isn’t a group of people who like peanut butter and jelly. The sandwich generation refers to people, primarily Baby Boomers, who are caring and providing for both their own children and older family members, most often their aging parents.

This can create quite a strain, emotionally and financially, as adults have to prioritize their time and money to care for their own children as well as their aging relatives who may be dealing with health issues, financial problems, and sometimes declining mental faculties and decision making abilities. Needless to say, given these competing demands, their own retirement planning is often the casualty. Some become full-time caregivers and may be out of the workforce for years while they care for an ailing family member.

In recent months, I’ve heard many sad and difficult situations, including:

An 89-year old Grandmother who decided to have cataract surgery only when they said if she did not have surgery, they would take away her driver’s license. No one wants to lose their independence, but maybe her driving isn’t such a great idea, both for her own safety and for others on the road.
A relative’s 90-year old mother fell and could not get up. She was unable to reach a phone and spent more than four hours on the floor before someone found her. This was not her first fall incident, and still the children had to go to great lengths to convince their parents that they needed to move to a retirement home. The parents are nearly broke, so the bills will be paid by the son, who is also providing for two college-aged children.
A friend’s mother went into hospice and passed away shortly thereafter. He spent the whole summer sorting through her belongings and trying to ready her home for sale. Given her vast collection of items, there are still many months of work ahead.
A friend’s older sister was diagnosed with ALS this week. She lives alone, but recently suffered a nasty fall which resulted in a large gash to her head.
A statistic from the MIT AgeLab: for people over the age of 70, a broken hip has a 50% mortality rate within 18 months. This is not usually a direct result of the injury, but from a rapidly declining health situation if they become wheelchair-bound. It’s use it or lose it, when it comes to our mobility and health.

We are living longer today, which is a great blessing. However, it also means that many of us will live to an age where we may eventually need some assistance. This is a good problem to have. If everyone only lived into their 50’s, like we did in the 1800’s, we wouldn’t need to address these issues! We should be thankful that medical advances have so greatly extended our longevity over the past century.

While there are many difficult emotional aspects to these conversations, there are many financial considerations as well. If you are part of the sandwich generation, we can help you navigate the difficult decisions you face with your aging parents while making sure that you are also managing your own financial goals.

People who have these conversations with their financial planner in their 60’s may save a great deal of stress and burden on their children in 15 or 20 years. We can help you plan better to make sure that your future doesn’t depend on your children’s finances and generosity. Here are some thoughts about how you can remain healthy and happy as you age:

Create an income plan that budgets for rising health care costs. You do not want to run out of money in your 80’s and have to spend down your assets to qualify for Medicaid. That may be a safety net, but it is a lousy plan.
Work on your home to create a physical space which will allow you to “age in place”. A safe home can not only help prevent injury, but can allow you stay independent for longer.
While no one wants to be in a nursing home, if you live long enough, it is almost inevitable that you will eventually require some help with the Activities of Daily Living. Some are in denial about their abilities in this regard, and it is only a major event, like a broken hip, which eventually prompts a move.
A Long-Term Care insurance policy can pay for home health care. Rather than thinking of an LTC policy as a “nursing home” policy, think of it as the policy which can keep you out of a nursing home.
Today’s retirement communities offer a wide range of services, from truly independent living to round-the-clock skilled nursing. There are many benefits to being part of a community and spending time with friends who have similar interests and backgrounds. Health care professionals are beginning to recognize the significant impact that a social network has on healthy aging.
Create an estate plan which will not create an unnecessary burden on your heirs. Don’t leave a mess for your children to have to clean up.
Reduce taxes on your estate and your heirs. I saw two unfortunate tax situations this year which could have been avoided with better planning. In one situation, an elderly aunt made her nephew the joint owner of her home. The result: no step-up in cost basis on this out-of-state property! In another situation, a father made the beneficiary of his IRA a trust. The IRA was distributed to the trust and was not correctly established as a stretch IRA. As a result, the entire distribution is taxable in 2015. And since the beneficiary was a trust, the applicable tax rate will be 39.6%!

If you are already retired, we can make sure you have a retirement income plan, health care funding, and an estate plan to carry out your wishes. Don’t wait. Our cognitive abilities decline slightly each year, so it’s best to make these decisions in your 60’s or early 70’s and not wait until your 80’s or 90’s.

Men, especially, seem to be in denial about the importance of this planning. Typically, the husband does die first and most retirement homes I have visited are 60% to 90% women. So gentlemen, if you don’t want to plan for yourself, plan for your wife. If you fail to plan for her, sorry, that’s just plain irresponsible. And hopefully you agree she deserves better.

Whether you are in the sandwich generation or just want to make sure you aren’t going to make your children part of the sandwich generation in the future, financial planning can help.

Don’t Budget; Focus on Saving

Posted On September 14, 2015 By Admin In Financial Planning /

I used to feel a bit sheepish when clients asked about my personal household budget, because I don’t have one and never have. I always worried that I was being lazy and a poor role model for my clients. I’d see articles, books, or CFP materials touting the benefits of having a budget to be able to track your spending. Some said that without a budget, you would not be able to plan how to achieve your financial goals.

Eventually, I came to recognize that you don’t need to have a budget to accomplish financial goals and that creating a budget would be a waste of time. It’s true, I don’t know how much I spend on dog food, and I don’t have a set amount that I plan to spend on clothing, eating out at restaurants, or for car maintenance. Over the years, I’ve found that many successful investors skip making a budget and that it is not the prerequisite that many people would have you believe.

If you follow these three steps, you won’t need a budget, either:

Put your saving on autopilot. Figure out how much you need to save to accomplish your goals. Set up your contributions to your 401(k), IRAs, and other accounts. If you are saving your target amount (or more), don’t worry about spending the rest of your income. I think of this as reverse budgeting. Save first, and then whatever is leftover is yours to spend.
Don’t ever deplete your cash. While I don’t have a set monthly budget, I am aware of our spending and follow our credit card transactions weekly. We pay our credit cards every month and never carry a balance. In months when there are large expenses, we can always reduce discretionary spending or postpone other purchases. We keep an emergency fund, but after 17 years of marriage, we’ve never touched it. We won’t make a purchase if it requires dipping into the investment portfolio; we will have to build up cash in checking before making a large purchase, such as a vehicle.
Live frugally. Luckily, I don’t enjoy shopping, so I am not often tempted to buy new things. When I do want to make a purchase, it is never an impulse buy. I’ll do my homework, research online, and make sure we are getting a good deal. For me, the knowledge of how $50,000 could grow over the rest of my life is much more attractive than a $50,000 boat. So, I’m not sure I’ll ever be willing to sink huge amounts of money into depreciating assets.

I know that for some people, spending is like a gas that will expand to fill whatever space you allow it to have. For these folks, creating a budget is helpful so they actually know where their money is going. Many people have benefited from having a budget, and if it has benefited you, that’s wonderful. I am all about empowering people to take control of their finances and make informed changes for a better life. My point is not that no one should have a budget, just that not everyone needs to have a budget if you are meeting your savings goals without one.

Not sure how much you need to save to reach your financial goals? Check out the Savings Goal Calculator on Bankrate.com. Enter your current portfolio value as the “first deposit” and your ending goal under “How much do you want to save?”. Want a more sophisticated analysis to consider market fluctuations? Contact me for a consultation; we have terrific goal-based financial planning tools!

Can Being Frugal Make You Happy?

Posted On August 24, 2015 By Admin In Behavioral Finance, Financial Planning /

Gen Y is bringing frugality back in style. As a financial planner, I’m delighted to find frugality is cool now. I’ve read their blogs (where else would they write?) with fascination and appreciation for their candor. I’m calling this the New Frugality, and you’ve probably heard or read about some of these ideas, including the Tiny House, where people live in a home often smaller than 200 square feet. Others are embracing Minimalist Wardrobes, creating a personal, seasonal clothing uniform (think Steve Jobs with his jeans and black mock turtleneck). This past week, there was an article in Forbes about the Frugalwoods, an anonymous Boston couple who is saving 71% of their income so that they can retire at age 33 and move to a Vermont homestead with their rescue Greyhound.

In these blogs, the authors are never afraid to share their personal stories, from big-picture motivations and life philosophies, to the smallest minutiae of their daily decisions. Along the way, we invariably learn of their challenges, missteps, and triumphs. The blogs are part diary, part instruction manual, and part entertainment for their friends and fans. Even with different goals and approaches, there are common beliefs.

The New Frugality believes that less is more, and does not buy into the modern American idea that “buying more stuff” can make you happy. They have a maturity (which takes some people 70 years to develop) that recognizes that happiness comes from rewarding experiences, positive relationships, and a work/life balance that includes a higher purpose.
They want off the financial treadmill. Some had large student loans or crippling credit card debt before having an epiphany about becoming debt-free. Others found their corporate careers unsatisfying and were brave enough to recognize that spending the next 40 years in a job they hate isn’t worth it just to be able to afford a big house and a fancy car.
While others may view their frugality as a sacrifice, they often find that simplifying their lives and eliminating clutter brings a clarity to their sense of what is truly important to them.

The New Frugality is about seeking the quality of life you want today, rather than believing you should wait until some future date, i.e. retirement, before you can really do what you want. It’s an implicit rejection of the old notion of working 50 hours a week until age 65, then never working again.

[In case you are wondering, I contrast the New Frugality with previous beliefs about frugality which were created by those who lived through The Great Depression and who raised their children in a different, frugal manner. While both the old and new approaches want to stretch each dollar, the old frugality was characterized by self-reliance, never throwing away anything you might need in the future, risk avoidance, and mistrust of financial systems. Some of those traits were largely fear-based, which does not resonate with the abundance mentality I embrace and believe is required to be a patient and successful investor.]

Does frugality make you happy? I think the most literal answer is no. By that, I mean that if you are unhappy, spending less won’t make you happy. If you really enjoy going to Starbucks every morning, cutting out that $5/day habit isn’t automatically going to improve your satisfaction, even if it enables you to save $1,825 a year. Frugality works for these bloggers because they were willing to embrace changes to their habits even though society was telling them to spend more money instead. There’s no doubt that frugality is financially beneficial, but the sources of happiness include a lot more than just your financial situation.

Reading their blogs can help you appreciate your own spending more as well as to feel good, and not alone, when you do choose a frugal approach. We are continually bombarded with advertising that suggests we’d be happier, cooler, and more attractive if we had the right car, clothes, or beauty products. We’re told that our current life would be better if we had a bigger home, nicer furniture, or luxury vacations. Of course that’s not true. We know that spending to increase our satisfaction is at best a fleeting pleasure which can leave consumers addicted to living beyond their means. Unfortunately, there are so few voices pushing back on the advertisers’ message to consume.

Even if you don’t want to live in a tiny house, reduce your wardrobe to a few pieces, or bike to work, you can still take frugal steps to ensure you are working towards true financial independence, which we define as working because you want to and not because you have to. Here are six lessons to take away from the New Frugality:

Beware of lifestyle creep. Many of us were very happy in college, even though we may have had a rickety car, tiny apartment, and slept on a futon. It doesn’t take long after graduation to discover the urge to “keep up the Joneses”, as friends buy big houses and fancy cars. How can they afford it? Oftentimes, they can’t and they’re up to their eyeballs in debt. They’re more concerned about their image than their net worth, and that’s not something to emulate! If you increase your living expenses every time your income goes up, you aren’t ever going to become wealthy.
Save at least 15% of your income. Set financial goals, including a “finish line”. If you are highly motivated (or just impatient, like me), you will realize that the more you save, the sooner you will reach your finish line. Saving then is not a sacrifice, but the fastest, most direct way to achieve financial independence. When your goals are more important to you than a new (fill in the blank), your spending decisions become much easier.
Avoid impulse buys and emotional shopping, that is shopping to distract you from sadness, frustration, or boredom. Never buy on credit; if you don’t have cash to pay for something, it’s not worth going into debt. Be conscious and intentional about your spending behavior. Do your choices reflect your goals and beliefs?
Buy used. There is a growing market for used items, often selling at a small fraction of the cost of new items. This is the Craigslist economy, which is growing around the country. You can often buy what you need without paying full retail prices.
Savor success. There is a great deal of intrinsic satisfaction in becoming financially independent. Even taking the initial steps towards creating a positive cash flow are great confidence boosters because people feel empowered when they take control of their financial life. As every financial planner will tell you, the more you need to spend, the larger the nest egg required to be able to fund your future needs. Therefore, when you reduce your spending, you not only can save more, but you also reduce the size of the nest egg you will need to replace your income.
Reduce stress. While money is not the source of true happiness, there is no doubt that being broke, in debt, or just knowing you are not setting enough aside for the future, can be a significant source of personal anxiety and marital friction.

As a bonus, you will find great common sense financial planning tips on these blogs. What are the Frugalwoods doing with the 71% of their income the save? They maximize their 401(k) contributions and invest the rest in the market. They write: We’ve done well because we invest in boring index funds and we don’t sell when the market is down. That’s a great recipe for success!

Reading about the New Frugality is entertaining because many authors are willing to take their frugal habits to quite an extreme. Even if we don’t adopt their spartan lifestyle, they can remind us that we don’t have to spend money to be happy.

Five Financial Planning Steps When Getting Remarried

Posted On August 17, 2015 By Admin In Financial Planning /

For couples getting remarried, there are often additional financial complications and concerns compared to a first marriage. In a second marriage, there may be assets, income, and children which require special consideration. There are many ways to address these thorny issues so that you can focus on moving forward with your relationship and not let financial worries hold you back. Here are five financial planning steps to help:

1) Redo your financial plan. By working with a financial advisor who holds the Certified Financial Planner designation, you can create a comprehensive financial plan and know that your advisor is not just there to sell you investments or insurance. An advisor is a neutral, third-party expert who can help with your budget, savings, and spending goals as a couple. Your advisor can facilitate this conversation and create an objective plan that considers your joint assets, income, and expenses.

Specifically, your advisor should help you:

– Prepare a net worth statement detailing all your assets and liabilities.

– Determine when you might be able to retire and what income you should plan for in retirement.

– Evaluate your income and expenses. If you are working, we can determine how much you need to save to achieve your retirement goals. If you are retired, we can calculate how much you can safely withdraw from your portfolio each year. Use this information to develop your joint budget.

2) Discuss and recognize your differences. Often, couples do combine their finances, and there are some reasons and potential benefits from doing so. However, in many cases, adults who have managed their finances independently for many years will want to keep their finances separate. This can work well, especially once you decide on the logistics of how to split joint expenses like housing. While you could choose to continue to work with separate financial advisors, we can manage your portfolios separately based on your individual needs. This is increasingly common today, and does not pose any significant difficulty to manage two portfolios and sets of objectives. The benefit of working with one advisor is that you are making sure that your separate finances will be adequate to fulfill your individual and joint financial needs.

3) Update Beneficiaries. Redo your estate plans and be sure to update beneficiaries on 401(k) accounts, IRAs, and insurance policies. It is surprising how often this vital step gets overlooked or only partially completed.

4) QTIP Trust. When couples have grown children from a previous marriage, things can get complicated. There can be a tension between the kids and the new spouse about finances, as well as a concern for the parent that their kids could be excluded from an inheritance if their spouse should outlive them. There are risks when a couple sets up their estate plan to leave everything to their spouse. The surviving spouse might get remarried or choose to exclude the children. Sometimes, there is a concern that spendthrift children could manipulate the surviving spouse and get their hands on the a lifetime of savings.

One solution to this is a QTIP trust, which stands for Qualified Terminal Interest Property. A spouse leaves his or her individual assets to the trust. The surviving spouse, then, is a beneficiary of the trust and will receive annual income to pay for living expenses; they can access principal of the trust only under very limited circumstances, such as for medical needs, as proscribed in the trust instructions. When the second spouse passes away, the remainder goes to the heirs of the first spouse, under an irrevocable designation. This way, the first spouse can be assured they have provided for their spouse and that the remainder will absolutely go to their children. When you establish your estate plan and QTIP trust, by all means, tell your kids what you are doing and what they can expect. Even if they have never said anything, they may be wondering or concerned about your estate plan, and knowing that you have taken care of them will make it easier to accept your new spouse.

Besides establishing a QTIP trust, there are a couple of other ways to set money aside for children or grandchildren. If there are sufficient assets, a simple approach is to leave property and joint assets to the spouse and use beneficiary designations from life insurance or IRAs to leave money to children. For grandchildren, consider setting up 529 college savings plans and naming children as successor participants to manage the accounts after you pass.

5) Maintain Separate Property. In Community Property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), assets acquired during the marriage are generally considered to be jointly owned regardless of title. Only assets which pre-date the marriage are considered Separate Property, along with inheritances and gifts received. The challenge, however, is that assets are deemed to be community property unless you can prove that they are separate. If funds are commingled, contributions received, or dividends and interest reinvested, you may inadvertently cause the separate property to become community property. When a couple is getting remarried, it is important for both spouses to understand their separate property rights and take steps to ensure that these assets maintain their separate property character. For details on how to do this, please see my post, Community Property and Marriage.

Second marriages are increasingly common today, and each one has its own unique set of financial details. Smart financial planning can help provide solutions to these complex issues and ensure that both spouses are protected and able to accomplish their goals as a couple as well as individually.

Five Ways to Be Richer in One Year

Posted On July 13, 2015 By Admin In Financial Planning /

When I tell people I’m a financial planner, I often get a response like “I wish I needed that service”. I know a lot of people live from paycheck to paycheck, including people who have graduate degrees and good jobs. It’s tough to have a conversation about something as far away as retirement when someone is worried about how they’re going to pay their bills two months from now.

No matter where you are today, it is not a hopeless situation; anyone can change their position for the better. It requires a plan, the willingness to make a couple of changes, and the determination to stick with it. If you’d like to be richer in one year from now, here’s how to get started.

1) Get organized. Do you know how much you owe on credit cards or what the interest rate is? How much money do you need each month to cover your bills? How much should be left over to save or invest? Establish a filing system, or use a tool like Mint.com or Quicken so you know how much you are spending and where. Like a lot of things in life, preparation is half the battle when it comes to personal finance. It can feel a bit daunting at first to take an in depth look at your finances, but ultimately it’s empowering because you will discover for yourself what you need to do.

2) Start tracking your net worth. There are two parts of your net worth: your assets (home, savings, investments, 401(k), etc) and your liabilities (mortgage, credit cards, other debt). Your assets minus your liabilities equals your net worth. If you take 30-45 minutes to calculate your net worth every month, it will change how you think. Just like starting a food journal or an exercise diary, tracking your net worth will make you mindful of your behavior. When you create a higher level of self-awareness of your actions, you will automatically start to change your habits for the better. And of course, if you don’t track it, how will you know if you are richer in one year?

3) Plan your spending. Most of us have a fixed salary where our ability to save depends on spending less than we make. People assume that if they made more money, it would be easy to save more. Unfortunately, what I have actually found as a financial advisor is that families who make $100,000 are just as likely to be broke as families who make $75,000. They may have a bigger house or a fancier car, but they’re no richer. If we want to save more, we have to learn to spend less.

The key to spending less is to find a system or process that works for you. For some people, creating a detailed and strict budget is key. For others, it may work best to become a cash consumer, where you leave the credit cards at home and only spend a set amount of cash each week. It can be helpful to comparison shop all your recurring bills and look to switch providers to save money. (For example, home/auto insurance, cell phones, gym membership, electric provider, etc.) Lastly, people are saving money by dropping their landlines, or dropping cable for Netflix.

4) Put your saving on autopilot. Money that you don’t see can’t be spent. You’re more likely to be a successful saver when you establish automatic contributions, versus waiting until the end of the year and hoping that something will be left over to invest. If your company offers a 401(k) match, that’s always your best place to start. If a 401(k) is not available, consider a Roth or Traditional IRA. If you don’t have an emergency fund, set up a savings account separate from your checking account, so you can’t easily access those funds. Even if you can only save $100 or $200 a month for now, that’s okay, because you’re creating a valuable habit. When you get a raise or receive a bonus, try to increase your automatic contributions by the amount of your raise.

5) Don’t go it alone. People are more successful when they have help, good advice, and accountability from another person. That may mean hiring a Certified Financial Planner, joining a Dave Ramsey Financial Peace class at a local church, or finding a knowledgeable friend who can lend an ear. If you’re looking for help with debt and improving your credit, contact the National Foundation for Credit Counseling at www.nfcc.org or by phone at 800-388-2227.

If you make these five changes today, you will be richer a year from now. Habits are important. For most people, wealth isn’t accumulated suddenly or through significant events, but by years of getting the small decisions right. Build a strong financial foundation, then you will find that a financial advisor can help you take the next steps to creating the financial life of your dreams.

Our First Year, in Review

Posted On June 1, 2015 By Admin In Financial Planning /

It’s our one-year anniversary at Good Life Wealth Management and we want to thank all of our clients, readers, and friends for your support this year. We’re only getting started with the great things we want to do, so please keep following for future news!

We’re donating 10% of our profits for 2015 to Operation Kindness and there’s nothing we would love more than being able to write them a large check at the end of the year. If you’re looking for a financial advisor, want to make a change in your current approach (or lack thereof), or just want a second opinion, please don’t hesitate to give us a call.

Over the past year, I’ve posted 53 articles to share important financial planning concepts which can help you achieve your goals. Chances are good that if you have a common financial question, I may have written about it already. Here are the articles we’ve posted over the past year; if you see one of interest, please click on the link. Thank you for reading!

Introducing Good Life Wealth Management

Three Studies for Smart Investors

6 Steps to Save on Investment Taxes

Who’s Going to Pay for Your Retirement, Freelancer?

Why Alan Didn’t Rollover His 401(k)

8 Questions Grandparents Ask About 529 Plans

How to Maximize Your Social Security

A Young Family’s Guide to Life Insurance

Catching Up For Retirement

Student Loan Strategies: Maximizing Net Worth

Health Savings Accounts

Socially Responsible Investing

Retirement Withdrawal Rates

Machiavelli and Happiness in an Age of Materialism

5 Tax Mistakes New Retirees Must Avoid

The AFM Pension Plan: What Every Musician Needs to Know

5 Techniques for Goal Achievement

The Geography of Retirement

Bringing Financial Planning to All

Community Property and Marriage

Adversity or Opportunity?

Retirement Cash Flow: 3 Mistakes to Avoid

5 Tax Savings Strategies for RMDs

5 Ways to Save Money When Adopting a Pet

How Some Investors Saved 50% More

An Attitude of Gratitude

5 Retirement Strategies for 2015

Are Your Retirement Expectations Realistic?

Year-End Tax Loss Harvesting

What Not to Do With Your 401(k) in 2015

The Dangers Facing Fixed Income in 2015

Are Equities Overvalued?

A Business Owner’s Guide to Social Security

Should You Invest in Real Estate?

How to Become a Millionaire in 10 Years

Indexing Wins Again in 2014

Get Off the Sidelines: 3 Ways to Put Cash to Work

Proposed Federal Budget Takes Aim at Investors

4 Strategies to Reduce the Medicare Surtax

Retiring Soon? How to Handle Market Corrections

Three Things Millennials Can Teach Us About Money

Deferral Rates Trump Fund Performance

How Much Can You Withdraw in Retirement?

Growth Versus Value: An Inflection Point?

Our Investment Process

Which IRA is Right for You?

Rethink Your Car Expenses

Will the IRS Inherit Your IRA?

Fixed Income: Four Ways to Invest

Setting Your Financial Goals

Giving: What’s Your Plan?

Are We Heading For a Bear Market?

Should You Hedge Your Foreign Currency Exposure?

Have a question or a topic you’d like to learn more about? Send your questions to [email protected].

Giving: What’s Your Plan?

Posted On May 11, 2015 By Admin In Financial Planning /

Charitable giving is a natural product of financial success. It is truly rewarding to be able to support people and organizations you believe in and help them to become successful and make our community and world a better place. A person is truly rich if they can give to others without fear of running out of money for themselves. And that’s why I am always amazed and inspired by my clients and friends who give generously, who tithe, and who do so with breathtaking confidence. The miser who can’t part with a single dollar may be able to accumulate, but hoarding or living in fear is the opposite of the financial peace we seek. Indeed, subscribing to an abundance mentality means that you can share your blessings with others and fully experience the joy of giving.

You may have questions about how to best achieve your charitable ambitions in conjunction with your other financial goals. If you have you ever asked yourself any of these questions, we have the answers and expertise to help you.

How much can we give to charity each year and still meet our goals for retirement and college savings?
How much can we give to family or friends without having to file a gift tax return?
What is the best way to give money to grandchildren? UTMA, 529 College Savings Plan, Children’s Trust, or other methods? What are the financial aid implications of my gift to a grandchild?
What tax benefits would we receive for donating appreciated securities, instead of donating cash, to our favorite charities?
Are we candidates for a Donor Advised Fund, a private foundation, or a family trust? How does a Donor Advised Fund work?
We’ve had a windfall year (sale of business, inheritance, etc.). How can we maximize our current year tax deductions and allow for future charitable bequests?
How can I provide for my spouse, if something should happen to me, and still be sure to leave something for my children or favorite charity. Which are the best accounts to leave to my spouse, children, or charities? And what tax implications will there be for my estate and beneficiaries?

These are all important considerations for a comprehensive financial plan, and while there is no one-size-fits-all answer, there are many tools and techniques which can help you make the most of your giving. Whether you’ve been investing for 5 years or 50 years, we’re here to give you the expert advice on how to achieve your giving goals as part of your overall financial plan.

Because we believe generosity is the pinnacle of financial independence, Good Life Wealth Management will donate a minimum of 10% of its profits annually to charitable organizations. For 2015, our primary recipient will be Operation Kindness, the largest and oldest no-kill animal shelter in North Texas.

Setting Your Financial Goals

Posted On May 5, 2015 By Admin In Financial Planning /

No achievement occurs by accident. It takes intention, planning, hard work, and perseverance to accomplish a significant task. For this reason, I have always been a big believer in setting goals in writing. For something to be a “goal”, it needs to be concrete and not merely a vague desire. Your chance of achieving a goal is dramatically improved when it is SMART: Specific, Measurable, Attainable, Realistic, and Timely. This simple, perhaps corny, acronym has guided many for decades because it works.

When a goal meets the SMART criteria, you can lay out a blueprint of steps you will take to accomplish your goal. We can break these steps down further into long-term, intermediate, and short-term goals. If your long-term goal is to graduate from college with a certain major, that will require a series of required and elective courses and credit hours you must complete. That is a four-year goal. The intermediate goal might be to pass specific courses this semester. You have to pass Econ 101 before you can take Econ 102. The short-term goal is to do the reading and homework that is assigned for this week. If you don’t do the short-term work, you cannot pass the course this semester, or graduate in four years. Your short-term goals feed into your intermediate goals and into your long-term goals.

This concept is so basic and universal, that it seems almost unnecessary to even need to mention this. Unfortunately, when it comes to finances, many people don’t apply this same thinking and planning process that has enabled them to succeed in other areas of life. They don’t set SMART goals, nor do they work on short-term objectives which will enable them to achieve their long-term goals.

Instead, they hope that the finances will magically take care of themselves. Or that they don’t need to worry about it now, because it will be easier later. Or fatalistically, that the game is rigged and that they shouldn’t even bother trying.

The desire should be to become wealthy. Unfortunately, this statement carries a social stigma for many of us. It’s not something we’d want to say in public, put on our resume, or post as our Facebook status. We are taught to be humble, eschew materialism, and reject greed, as we should. We have heard that the love of money is the root of all evil. We may sub-consciously believe that people who have money have gotten it by exploiting others, cheating, or deceit.

Unfortunately, these beliefs are ultimately self-limiting. They create an excuse for not setting financial goals and keep smart people poor. Chances are that you simply have not looked at finances as an area where you have as much control as other areas of your life. Many people spend more time planning their next vacation than they do planning their financial goals. Granted, a vacation is more fun than organizing your finances, but financial planning has to start with you. No one else can make you do it.

You need to sincerely have the desire to become wealthy. Without that strong drive, you will not be successful. It is like training for a marathon – you don’t just wake up one day and go run a marathon. It takes planning, training, perseverance, and dedication. If you cannot imagine yourself as deserving to be “wealthy”, you may find that another term may be more meaningful for you and resonates with you personally. Consider: financial independence, security, or abundance. As in “my desire is to create a life of abundance for my family”. Let’s avoid framing a goal in negative-terms, what it is not, but you could also say that the goal of financial independence is to eliminate stress and fear of running out of money. Whatever terminology or mantra fits best for you, it is essential that you adopt this desire earnestly.

I view money like water – it is the most abundant resource on the planet, available to us in vast and limitless quantities. The world is literally awash in money. However, it is also true that many of us live in a desert where water is scarce and hard to come by. We can bemoan this fact, but that will not get us any closer to the water. Even worse, we may have decided to live in the desert, but then claim that we have no choice. We think that because there is no water here, that there is no water anywhere, which is false. We may give up, since there is no water here. Or, we may stubbornly keep digging a deeper well, even though our efforts are getting us nowhere.

We have to empower ourselves to recognize that there is no one holding us back from finding water. We should stop blaming ourselves if we do not find water where it isn’t located. But we do have to move on, and accept that we will go to where the water is. Some people seem to be natural at finding water, and once they have that skill, they don’t ever have to fear being thirsty again. They have created a well that provides them abundantly. Even if they lost all the water they have now, they could go out and find more. It is there for the taking.

Many people fail to realize that they are in a desert and think that those who have an abundance of water are smarter, harder-working, lucky, or just born with it. And while that may sometimes be true, I can tell you that many, many people who lead a life of abundance are not better educated or any of these things. They simply have taken a step back and made deliberate choices to be where the water is located. They believe that they do deserve abundance and will take the steps to earn all that they can.

A desire for wealth will not take you very far by itself. For this to become a goal that you can use to take actionable steps, it must be more concrete. A SMART goal gives you the road map and lays out your short-term, intermediate, and long-term goals.

When I started Good Life Wealth Management, a few advisors told me to set high account minimums and only accept clients who had $500,000, $1 million, or more. I understand their business rationale, but previously working at a firm where a $1 million account was considered a nuisance, I missed the thrill of helping investors set goals and chart their own road map.

If you’ve been waiting to get started, afraid to find out how much you should be doing, don’t delay further. Let’s get started on your goals today.

The 15 Year Mortgage: Myth and Reality

Vulnerability Analysis

Financial Planning for the Sandwich Generation

Don’t Budget; Focus on Saving

Can Being Frugal Make You Happy?

Five Financial Planning Steps When Getting Remarried

Five Ways to Be Richer in One Year

Our First Year, in Review

Giving: What’s Your Plan?

Setting Your Financial Goals

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