Hard Work Doesn’t Create Wealth

Posted On September 21, 2024 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

When asked about their success, some wealthy people are quick to cite hard work as their key to success. I’m sure they have worked hard. But hard work doesn’t create wealth.

“Hard work” is a classic example of the correlation-causation fallacy. Wealthy people did work hard, but the vast majority of hard working people are not going to become wealthy. Instead, I want to talk about what really helps people to become wealthy: intention and process. Once those are in place, there may well be hard work, discipline, patience, and grit. Those are the fuel for creating wealth, but they are not the engine. The engine is creating intention and process.

Intention

Wealth is not an accident, it requires intention, financial literacy, and planning. When we are clear on our goals and values, our decisions start to become more aligned. My wealthy clients have made economic security a high priority. They focus on building a high income that supports their goals. Their intentions shape their education, careers, spending habits, personal vision, and other life-long decisions. Wealthy people have a wealthy mindset and focus on the following:

Living below your means. Most Americans spend 100% of their income. (Some spend more and go into debt.) If you can make frugal choices on your house, car, and leisure spending (especially eating out and vacations), you can place yourself in a situation where you can save a meaningful amount of money.
Delayed gratification. Your future self will thank you for the actions you take today. The more you can save today, the faster you may reach your finish line. Focus on increasing your income, not so you can spend more, but so that you can save more.
Understand things will not make you happy. We live in a consumer culture of materialism. There are too many people who are focused on appearing successful rather than being successful. Your home is not an investment, it is an expense.
Track your net worth, know your assets and liabilities. Have a plan. Most Americans spend more time planning a week of vacation than they do their entire future. Hoping you become wealthy is not a plan.
Start early. Compounding is amazing. Believe in the process and stick with it.

At retirement age, some investors will be millionaires. And they will work alongside people who have the same paycheck but who will retire with almost nothing. The successful made different decisions. They put in the maximum in their 401(k), not the minimum to get the company match. Their decisions reflected their intention to achieve financial success.

Process: Automatic Beats Hope

The process of becoming wealthy is simple. Save regularly over time and invest efficiently. It’s really not rocket science. The key is to make the process automatic. If you wait until the end of the year to fund your Roth IRA, you might not have an extra $7,000 lying around for you and your spouse. But if you set up monthly contributions of $583, you can achieve the same result. And then you don’t even have to think about it. Otherwise, if you are putting yourself in a position where you are hoping you can save, you are setting yourself up to fail.

Automate your contributions to your 401(k), IRA, 529 or other accounts. You can’t spend the money that is automatically contributed. Increase these contributions every year until you reach the maximum.
Don’t time the market. You will experience a Bear Market every 4-10 years. If you panic and sell everything, you cannot recover. In hindsight, every Bear Market (2000, 2008, 2020), was an amazing buying opportunity. Keep buying all the time. When you are young, you should love buying in a Bear Market.
Don’t aim to beat the market. In 20 years as a wealth manager, I’ve never met anyone who was wealthy because of their brilliant stock picks. The market does whatever it does. And what it has done over the years is fantastic and more than enough. Focus on what you can control: your savings rate. And then keep costs, taxes, and turnover low. Index funds work.
Be an optimist. You have to have some faith in the process. Not a blind faith, but the fortitude to stick with the plan when times are tough.

Things Always Change

America is the land of opportunity. We’ve never had a more level playing field than today for any American to become wealthy. Unfortunately, it is also becoming harder to get ahead. Many young adults face a tougher time than their parents in buying a house, paying off student loans, and being able to save. The wealth gap is widening and attaining economic security is becoming more challenging.

Even against that backdrop, it is still possible to become wealthy. Everyone wants to be a millionaire, but they have to first figure out how to get to $100,000. Once you’ve done that, getting to $200k and then $400k, is just a matter of time. Wealth creates more wealth. You build a savings muscle and establish your wealth engine, and then it just works for you.

Intention sets your focus and creates the decisions which enable you to save. Take control of your financial life and have a plan. Process is understanding what works and keeping your momentum headed in the right direction. Automate your savings and you remove yourself as the roadblock to your success. Neither intention nor process require hard work. They are a mindset.

You should work hard to develop your career and maximize your earnings. But that hard work won’t create wealth if you don’t have alignment on how your money can create your financial independence for you over time. Years from now, when a young investor asks about the cause of your success, I hope you can give the right answer. It was intention and process, not hard work, that created your wealth.

House Hacking

Posted On October 22, 2021 By Scott Stratton, CFP(R), CFA In Financial Planning /

If you are looking to buy a home and want to really grow your wealth, consider house hacking. Our ability to save, invest, and grow real wealth begins with a very simple premise. You have to spend less than you make. It couldn’t be more simple, but that doesn’t make it easy.

For most people, your three biggest expenses are housing, taxes, and cars. If we manage those three expenses well, you may be able to save a significant amount of your income. The more you save, the faster you grow, and the sooner you might reach your goals. Read more: Five Wealth Building Habits

The problem is that most Americans are doing the opposite and creating a lifestyle which consumes 100% of their income. And then there is nothing, zero, left to invest.

House Hacking gives you an incredible opportunity to reduce your biggest expense, in some cases, down to zero. Here’s how. Instead of buying a single family home, you buy a duplex, triplex, or four-plex. You live in one unit and rent out the rest. Your tenants will cover much or even all of your mortgage. You can live there with little or no monthly expenses.

With a house hack, you are freeing up your income so you can save and invest. You can pay off your credit cards. Maximize your 401(k) and Roth IRAs. Start saving for college in a 529. And it’s all because you were willing to live in a multi-family home rather than spending thousands every month on a single family home.

The Details

Sure, house hacking isn’t going to be for everyone. But maybe you want to ask how this might work, if you were to consider it. Although you are buying a multi-family building, you are going to use the house as your primary residence and live there. That means you can still use an FHA mortgage and not have to get a more expensive mortgage for a rental or investment property. With an FHA mortgage, you can put as little as 3.5% down with a FICO score of just 580.

Of course, if you have 20% to put down, you could also do a conventional mortgage as a primary residence. Or, if you’re a veteran, you might be eligible for a VA loan with zero down.

Once you have the property, you can split costs between the area where you live and the area which you rent. This means you can also enjoy some of the tax benefits of being a landlord. Let’s say for example, that your building is 3,000 square feet and you live in 1,200 feet and rent out the rest. You occupy 40% and have 60% as a rental.

Then you can look at your costs, such as insurance, utilities, repairs, taxes, etc. For your bills on the whole house, you can allocate 60% of those costs against your rental income on Schedule E. For the 40% where you live, you can also qualify for the Section 121 capital gains exclusion, when you sell.

Living with other people in the same building might not be your dream situation, but if you can make it work, there could be great benefits for you financially. When you manage your biggest expenses, it becomes easy to have money left over to save and invest. Put your savings on autopilot. Maximize your 401(k). Put $500 month into your Roth IRA to get to the $6,000 annual limit.

Who Can Do a House Hack

House hacking certainly makes sense for a first time home buyer, a single person, or a young couple. That’s probably the typical situation. But it could also work well for older investors who want to turbo charge their savings while they are still working. And if you could reduce your monthly housing cost from $2,000 to $200 or $0 a month, would that change when you will be able to retire? Probably. A house hack might enable you to retire at 55 versus 65. Under the 4% rule, reducing your expenses by $2,000 a month means you now need $600,000 less in your nest egg to retire.

Most of us will resist making a sacrifice to be able to save. Still, if you have an open mind, a house hack might be a brilliant way to save and invest. While your friends and colleagues are barely saving anything, you might be able to put away 50% of your income while your tenants are paying down your mortgage. If you can invest $2,000 a month for 10 years, at a 7% return, you could have $344,000. That might be worth a small sacrifice.

Housing is an expense. Your house should go up in value over time, but the expenses of interest, taxes, insurance, and upkeep are not building your wealth. What if you get someone else to pay for your house? When you reduce those expenses, you are giving yourself a tremendous opportunity to save and invest in appreciating assets. If that is important to you, look for creative ways to cut your biggest expenses!

Have you done a house hack? I’d love to hear from you about your experiences. Send me a note!

When Can You Splurge?

Posted On May 2, 2021 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

We all have things we enjoy, and the question of when can you splurge has unique financial planning considerations. We probably think about these choices, consciously or subconsciously, every day. And while I don’t think there can be a hard and fast rule, there are some things to consider. Once we start peeling back the proverbial onion, there are many psychological layers to this question. We all have a relationship with money. It is based on our experiences, upbringing, and innate preferences. The question isn’t just When can you splurge? It is How can you have a better, more effective relationship with your money?

“Money makes a terrible master but an excellent servant”
P.T. Barnum

First, let’s define what we mean by splurge. Clearly, your normal living expenses should not count as a splurge. But, even this is problematic. There are many Americans who have adopted a lifestyle which they cannot afford. Their choice of housing, cars, vacations, clothes, etc. consumes all of their income. And then when an emergency does occur, it has to go on the credit card. They end up in debt and there is no way to pay off those debts with their current consumption. They don’t see that they are splurging already, and spending in an out of control manner. Read more: Machiavelli and Happiness in an Age of Materialism.

A definition of splurge as “to spend money freely or extravagantly, especially on something special as a way to make yourself feel good.” Most definitions imply wastefulness and vanity. But I also think that occasionally being able to spend money on things which you enjoy is a great freedom. We all may have interests which make no sense to others. Perhaps it is cars, or watches, or shoes, or a boat. To us, it is the realization of a dream. To someone else, it would be a waste of money. That’s okay. The blue car pictured above is my splurge from this March. Maybe that doesn’t do anything for you. For me, a lightweight sports car with a manual transmission is a joy.

When Not to Splurge

Let’s begin by laying down a few prerequisites for a splurge. Perhaps it is easiest to think of these as a checklist:

Can you pay in Cash? Or would this splurge be funded by credit card debt? If you don’t have the cash to purchase an item, maybe you should hold off until you can afford it.
Do you have an emergency fund with at least 3-6 months of living expenses?
Are you funding accounts for your long-term goals? For example, a 401(k) or IRA for retirement, a savings account for a house down payment, or a 529 plan for your kid’s college.

If you can pass these three prerequisites, then the splurge is not going to hurt you. After all, we don’t want to look back on our splurges with regret and be angry that we made a mistake. Number one, credit cards, also suggests that if you presently have a lot of credit card debt, you should not splurge. You should prioritize paying off your cards, first. How much should you save for number three? If you are in your 20’s and are currently saving at least 12% towards your 401(k), I think you are off to a good start. If you got a late start, you may need to save more than 12% to be prepared for retirement. Read more: What percentage should you save?

Start with a Plan

My purpose as a Financial Planner is to help you be smart with your money. Our ultimate goal is to make sure you achieve your financial goals. With that in mind, we are always looking to design long-term diversified investment strategies built within a planning process. We are always looking for the most cost-efficient, high-value ways to manage your money.

The beauty of the plan is that it creates awareness and a process for change. For some individuals, that may mean establishing automatic savings programs to fulfill your needs for retirement, debt management, house goals, college savings, etc. We can break down each goal into a monthly target and set it on auto-pilot. Read more: Do You Hate Saving Money?

For others, a plan can show them that they are on track. Because many people are afraid to splurge. And I am writing for them, too. Yes, there are people who need to splurge less. But there are also people who need to splurge more.

If your relationship to money is centered on fear, anxiety, and regret, you are carrying a terrible amount of stress with you at all times. This is a scarcity mentality, which is psychologically harmful. It impacts your behavior and hurts your satisfaction. In one study, adults who had a positive attitude about aging lived 7.5 years longer than those with a negative mindset. Your thoughts matter! Read more: 5 Ways to Go From A Scarcity to Abundance Mindset.

Your plan will let you know how much you can splurge and give you the confidence that you aren’t doing anything to hurt your future self. Maturity is often defined as the ability to delay gratification. We all need to save for the future. Still, splurging doesn’t require that we have already accomplished all our goals! Only that we are presently taking the steps necessary to get us there. If you want to feel more confident about your splurge, start with your financial plan. Otherwise, how do you know?

But Should You Splurge?

Still not sure if a splurge is a good idea? Afraid you will regret a big purchase? A few last thoughts.

Avoid impulse buys. Shopping as therapy for stress, boredom, or other problems is only a band-aid. Find a better solution. Talk to a friend, go for a walk, do something that makes you feel better and actually addresses the emotional need.
Could this be easily reversed? Some items hold their value. If you buy an item for $3,000 and could resell it in a couple of years for $3,000, it’s a fairly low risk proposition. And if it brings you joy, then why not.
Have you shopped around and done your research? Can you buy used or find an alternative? A splurge doesn’t have to be reckless; see if you can find a great deal.
Do you have a bucket list of experiences that you’d like to do and and see? A splurge can also be a trip or event, and it is healthy to spend on creating memories and not simply buying more things. We only get so many trips around the sun. Our time here will go quickly and it is finite. 10 years from now, you may still smile when you think about that epic vacation to Machu Picchu. You probably aren’t going to be thinking about what it cost because in the long run, it didn’t matter.
An itch needs to be scratched. Sometimes, an idea takes hold and we simply need to do something. If it doesn’t go away, maybe we will be richer as a person for having allowed ourselves to live a little more freely. What is the worst that will happen if you do this one splurge?

Intention, Choice, and Balance

Money is a great tool to lead a satisfying and interesting life. We all know that more things can’t bring you happiness. And we all know someone who spends too much and rationalizes it as “self-care”. How can you find a balance? At the one extreme, many Americans are not saving anything and are two paychecks away from being broke. At the other extreme, there are hoarders who are paralyzed with fear of spending and losing their money. I’m a frugal person, but this can be taken too far.

Choose what is truly important to your life. Don’t let others decide for you what is a good use of your money. But be smart. Start with a plan and cover your bases. When you have your savings plan established, be intentional with your spending so your choices align with your goals. By that I mean, don’t just spend blindly, splurge in ways that are meaningful to you. Maybe bonding on a family vacation is more important than upgrading your car this year. Maybe keeping your housing costs reasonable will allow you to spend on other priorities. The balance is deciding where to splurge and where to not spend your money. The right balance is to splurge neither too much, nor too little. Never splurge to keep up with the Joneses.

When can you splurge? I’m not going to show you the compound interest on a daily cup of Starbucks. I’m not interested in slapping people on the wrist to make them feel bad about how they spend their money. I believe you can align the head and the heart on your spending. When you have invested time and energy into your financial plan, you will have earned the confidence to know when you can splurge. Then, giving yourself permission to splurge will not be from weakness, but to help you live the life you truly want.

Your Goals for 2019

Posted On January 13, 2019 By Scott Stratton, CFP(R), CFA In Financial Planning /

Welcome to 2019! A new year brings a fresh chance to accomplish your goals. Maybe you’re dreaming that this will be the year you buy your first home. Maybe you’ve realized that your kids are one year closer to college and it’s time you start preparing. Maybe this is the year you want to exit from your current job so you can spend more time doing the things you love.

Even if your goals are further out than 2019, by December 31 of this year, you can either be several steps closer to achieving those goals, or you can sit right where you are today and risk that they will remain forever out of reach. Time stands still for no one. This is the only chance to do 2019 before it is gone forever.

Many of your goals have a financial component. Whether it is becoming a home owner, paying off your student loans, getting married, saving for a college education, planning for your retirement, or supporting your favorite charity, we can help you achieve your goals. The objective of our financial planning is not to own a bunch of stocks and bonds or get a nice tax break, it is about finding an effective, efficient, and logical way to help you accomplish your life’s goals.

We love when someone has a concrete, specific objective. When you truly embrace an important goal, there is ample reason to find the discipline for whatever steps are needed to achieve your objectives. I can tell you all about the benefits of a Roth IRA or a 529 College Savings Plan, but if that doesn’t fit into your needs, all my words are worthless. The “why” has to be there first, before we can get excited about “how” we are going to do it.

If you have goals that you want to accomplish in 2019 – or 2020 or 2029 – I’d like to invite you to join us and become a client of Good Life Wealth Management today. We serve smart investors who value personalized advice centered on their goals.

I’d welcome the opportunity to share our approach and allow you to consider whether it would be a good fit for you and your family.

Our process focuses on planning first – we want to fully understand your goals and needs before we make any kind of recommendation. You would think this would be universal, but believe me, most of the financial industry has a product that they want to sell you before they have even met you. (Read our 13 Guiding Beliefs.)
We have no investment minimums. Younger professionals have financial goals and complex, competing objectives (hello, student loans!) even if they haven’t started investing or only have a small balance in a 401(k). We think helping young professionals build a strong financial foundation is important work. This is our Wealth Builder Program.
I’ve been a financial planner for 15 years and hold the Certified Financial Planner and Chartered Financial Analyst designations. Professional expertise and deep investment experience should be a given if you’re seeking financial advice. (More about Scott.)
Having your own plan means that you have taken an objective measure of where you are today, that we have created specific goals and objectives, and that we identify and implement steps to achieve those goals. While this is often savings and investment based, we’re going to evaluate your whole financial picture, from taxes and employee benefits to estate planning and life insurance. Bringing in a professional delivers accountability to a plan and protects you from what you don’t know you don’t know. (Financial Planning Services)
We are a Fiduciary, legally required to place client interests ahead of our own. Our fees are easy to understand and transparent. We aim to eliminate conflicts of interest wherever possible and if not possible, reduce and disclose. I invest in our Growth 70/30 model right along with our clients; if I thought there was a better way to invest, we would do that instead. (Skin in the Game)

Successful people – in any field – seek out the help and expertise of others. They surround themselves with knowledgeable professionals, not to abdicate responsibility, but to improve their understanding through asking the right questions. I became a financial planner to help others achieve their goals, and I love my job. For me, it is endlessly interesting and personally rewarding.

You could make a New Year’s resolution about your finances, but I genuinely believe you are more like to have a good outcome if you hire the right advisor who can help guide your journey. If you want 2019 to be the year when you turned your dreams into goals and a plan, then let’s talk about how we can work together.

You CAN Invest in a Taxable Account

Posted On September 29, 2018 By Scott Stratton, CFP(R), CFA In Financial Planning /

I spend a lot of time talking about retirement accounts, and for many Americans, the only stocks they will ever own are in their 401(k) and IRAs. I don’t know why, but many have never even considered investing outside of a retirement account, and a few have even thought it was not possible.

It is a GREAT idea to invest outside of your retirement accounts. Why? Because the contribution limits are so low for IRAs ($5,500) and 401(k) accounts ($18,500). There are a lot of people who put in that amount and then think they can’t do any more investing or that they don’t need to. There’s nothing magical about these amounts. No one is promised that if you save $5,500 a year into an IRA that you will have enough to retire (especially if you are getting a late start). And if you have ambitions to be wealthy, it may take you 30 or 40 years of 401(k) contributions to break the $1 million mark.

While we often talk about the tax benefits of retirement contributions, let’s actually run through the math of an IRA investment and making the same investment in a taxable account. The results may surprise you.

Let’s say you put in $5,000 to a Traditional IRA this year and also deposit $5,000 into a taxable account. In each account, you buy the same investment, such as a S&P 500 ETF, and hold it for 20 years until retirement. Assuming you get an 8% annualized return for those 20 years, in both accounts, your position would have grown to $23,304.79.

At the 20 year mark you withdraw both accounts. What taxes are due?

From the Traditional IRA, the entire withdrawal is treated as ordinary income. You may be in the 24% tax bracket, in which case you would owe $5,593.15 in taxes. That’s pretty painful and the reason why so many retirees hate taking money out of their IRAs and limit their withdrawals to their Required Minimum Distributions.

What about for the taxable account? You started with a $5,000 cost basis, so your taxable gain is $18,304.79. It is a long-term capital gain (more than one year), and will be taxed at the capital gains rate of 15%. Your tax due is $2,745.72. That’s less than half of the tax you’d pay on the withdrawal from the retirement account that you did for the “tax benefit”. Is that IRA a scam?

No, because you also got an upfront tax deduction for the IRA contribution. If you were in the 24% bracket, you would have saved $1,200 in taxes for making that $5,000 contribution. If you subtract the $1,200 in tax savings from $5,593, you still see that your net taxes paid was quite high: $4,393.

However, that is ignoring the time value of money and getting to save that $1,200 now. If you actually invest the $1,200 you saved that year, and have it grow at 8% for 20 years, guess what it grows to? $5593.15. (If you invested this in a retirement account, you will owe 24% in taxes on this gain, or another $1342.)

The key to coming out ahead with doing an IRA versus a taxable account is that you need to actually invest the tax savings you receive in year one. If you just consume that tax savings, instead of saving it, you actually might have been better off instead doing the taxable account where you could receive the lower capital gains rate.

The best solution is to maximize your retirement accounts AND save in a taxable account. If you want to become a millionaire in 10 years, save $5,466 a month. People have ambitious finish lines, but don’t set savings goals that are in line and realistic with their goals. The short-term activity has to match the long-term objectives. Once you are in retirement, it is a great benefit to have different types of accounts – IRAs, Roth, and taxable – to manage your tax liability.

My point is: Don’t be afraid of a taxable account. Retirement accounts are good, but mainly if you are going to save the upfront tax benefit you receive! Today’s ETFs are very tax efficient. While you will likely have dividend distributions of about two percent a year in a US equity ETF, when you reinvest those dividends, you are also increasing your cost basis. If you’re looking to invest in both a retirement and taxable account, let’s talk about how you can do this in the most effective way possible.

Financial Planning In Your Fifties

Posted On August 8, 2018 By Scott Stratton, CFP(R), CFA In Financial Planning /

My hope for every fifty-something investor is that you have by now attained financial independence, where you have enough assets to stop working if you wanted and live off your investments. Most aren’t quite there yet, but if you’re working with me, we have a good idea of your finish line, a quantifiable goal, and the steps needed to get there.

What does scare me is when someone says that they plan to never retire, so this doesn’t matter or apply to them. While it’s natural to wish that time would stand still or that things won’t change, it’s a poor plan to assume that change isn’t going to happen to your life.

I think of a relative who worked for one company for 30 years, until age 59, when they went out of business. He was used to making a certain level of income, which just wasn’t available in his small town, for someone with skills that didn’t easily carryover to other types of business. He was planning to work forever, but it turns out, he wasn’t interested in jobs that paid 50% of his previous salary. He was unemployed for three years, before starting Social Security at age 62.

See: The Boomer’s Guide to Surviving A Lay-Off

For many employees in their fifties and sixties, they want to keep working, but if they lose their job, they discover how tough it is to get another high-paying job in today’s economy. Others leave work due to health issues, or to care for an ailing spouse. The point is that things change. It’s great to work if you want to, but not because you have to. The single-minded goal of every fifty-something investor should be to build their nest egg to where they would be fine if they didn’t work.

1) Prepare your retirement finish line. What size nest egg should you have? At a 4% withdrawal rate, you need 25-times your annual needs. Need $50,000 in withdrawals? Your goal is $1.25 million. Are you there now? How much do you need to save to get there? And while you are at it, download your Social Security statement.

Why 3% withdrawals might be better for retiring early: Can You Retire In Your Fifties?

2) Increase your contributions to catch-up levels. In the calendar year that you turn fifty, you can now contribute an extra $1,000 to an IRA ($6,500 total), and an additional $6,000 to your 401(k) or 403(b) ($24,500 total for 2018). There’s also a $1,000 catch-up for Health Savings Accounts (HSA), but you have to be 55 for the HSA catch-up.

Learn about The Secret Way to Contribute $35,000 to a Roth IRA.

3) While it’s possible to manage debt into retirement, most people are more confident about their finances when they are debt-free before they retire. I’d suggest you avoid creating new debt in your fifties and consider paying your mortgage off entirely.

4) Many of us are going to need some type of long-term care in the future, especially as life expectancy rises with medical advances. Increasingly, in-home care can allow people in their eighties to remain in their home. Why are we talking about this now? The most cost effective time to buy long-term care insurance is in your fifties to early sixties. You can’t wait until you have a need for care, and then apply for insurance. Instead, we ought to look at creating a pool of funds that could provide this care should you or your spouse need it, decades in the future.

5) Rethink Retirement. Some of you will have a traditional retirement, where one day you stop working and never work another day. However, many of you will have a very different “retirement” than your parents. Maybe you change careers, go to part-time, start a business, or find new sources of income. It’s all possible! Let’s figure out how to make it happen.

See: Replacing Retirement With Work-Life Balance.

Financial Planning In Your Forties

Posted On August 8, 2018 By Scott Stratton, CFP(R), CFA In Financial Planning /

In your forties, it’s time to get serious about your money. Let’s take care of business and establish your financial plan. You can create your future. When I meet with people in their sixties, their net worth and retirement preparedness has little to do with their income, but has a lot to do with how consistent they were with their planning and saving in their thirties and forties. So, be the 40 year old that will make your 65 year old self proud.

1. You are behind. Chances are that you have neglected some aspects of your financial planning at this point and many people in their forties are not on a trajectory that will lead to a comfortable future. Some people are only a little behind and just need to add a few things, but others are severely in danger. You still have the potential for significant compounding of your investments so take advantage of the fact that time is on your side.

Here’s a checklist of what you should have:

savings plan of how much to save and where;
a retirement plan that calculates a finish line when you can retire;
an estate plan;
a college funding plan for your kids;
comprehensive insurance for your assets, life, and for unexpected liabilities;
tax strategies to minimize your tax bills;
a disciplined, investment program and target asset allocation.

Catch up: Financial Planning In Your Twenties
Financial Planning In Your Thirties

2. Get Rid of Debt. At this point, you should have a mortgage as your only debt. You should have paid off your student loans, and should be paying your credit cards in full every month. “Living within your means” means you don’t borrow money for furnishings, vacations, or toys.

If you are serious about your financial future, you will recognize that cars are a terrible waste of money. All cars lose about 50% of their value within five years. I see a lot of people who are leasing a Mercedes or driving a new $65,000 truck who tell me they cannot afford to put $400 a month into an IRA. My advice: keep your current car for as long as possible, 100,000 miles or more, then buy used and pay cash.

See: Rethink Your Car Expenses
Should You Get A New Car to Save Gas?

3. Save Based on Goals. In your twenties and thirties, you probably saved based on ability: I can afford to save $300 a month, or, I’ll save 10% to my 401(k). That’s okay to start, but it’s not looking at what is actually needed to accomplish your goals. Maybe you didn’t even have a goal! When your goal is specific, a course of action becomes obvious. If your goal is to pay for four years of tuition at a certain university, we can project how much that will cost and how much we need to save to achieve that goal.

For financial independence, start with your living expenses and apply a 4% withdrawal rate. If you need $60,000 a year to spend, that would require a portfolio of $1,500,000 (4% = $60,000). Now you have a specific goal. How much do you need to save to get to $1.5 million at age 65? Can you do it by 62? Are your investments likely to achieve the return necessary to reach your finish line? Your actions – spending, saving, and investing – should be based on a plan for your goals.

See: Setting Your Financial Goals

4. Family Needs. Increasingly, we are seeing adults who besides having to plan for their own future and their children’s needs are having to help their retired parents with care or financial support. Have a conversation with your parents and understand how they have planned for their retirement. Do they have a retirement income plan and an estate plan? Are you seeing any signs of memory loss or a decline in cognitive skills? These are signs of potential difficulty managing money in the future. If your parents are in their seventies or older, it might be a good idea to have conversations about money and their wishes. And of course, they might need a financial planner to help them as well.

See: Financial Planning for the Sandwich Generation

5. Umbrella Policy. When it comes to insurance, don’t just get “a” policy. Take the time to understand what your policies cover and exclude and make sure your coverage is more than adequate. People who look only at getting the lowest rate on their home and auto insurance are likely to be disappointed by their coverage, exclusions, and deductibles if, or should I say when, they have a claim. It’s important to make sure you have enough insurance, especially as your net worth grows.

That’s why I recommend clients consider an Umbrella Policy, which will supplement the liability coverage on your home and auto policies. If you have a car accident, your umbrella policy can provide another $1 million or more in coverage above the $250,000 limit on your auto policy. For a few hundred dollars a year, it’s worth owning an umbrella. If you don’t have a policy, or want to shop rates, I can refer you to an independent agent who can help you consider your options.

See: Don’t Forget Your Umbrella

Financial Planning In Your Thirties

Posted On June 23, 2018 By Scott Stratton, CFP(R), CFA In Financial Planning /

In your thirties, you are establishing the financial habits which will last for the rest of your life. Choose carefully! You might think that it was tough to save and invest in your twenties. Well, I wish I could say things get easier in your thirties, but there are going to be new demands and expenses. You might still have student loans, but will be adding in a mortgage and car payments. Besides your own expenses, you may have a young family and all the joys and bills of day care, pre-school, and then clubs, sports, and music lessons. Your time and your money can disappear very quickly!

It’s important that you don’t delay your financial planning for another year. One year can turn into five or ten before you know it. I know it is easy to feel overwhelmed with all the financial pressures you face. Although there is a lot to do, we can help you get through the process and take the steps to create financial security and eventually, financial independence.

1. Catch Up. Most people in their thirties still need to do some of the key steps we discussed for your twenties: establishing an emergency fund, managing debt, tracking net worth, starting investing, and getting term life insurance.

See: Financial Planning in Your Twenties

2. Increase Savings. As your career progresses, you may find you are being promoted from entry-level to higher paid positions. You might change employers, relocate, or even pursue a new, more lucrative career. From 30 to 39, you might see a significant increase in your income. The question is: When you get a raise, will you spend it or save it? If you can get in the habit of increasing your saving and investing, you can generate a significant amount of investment capital in your thirties.

The challenge is that you will see so many friends who are buying a bigger house, leasing two luxury cars, taking lavish vacations, or buying a boat or a lake house. You have to resist the temptation to “Keep up with the Joneses”. They may be taking on a vast amount of debt to fund their lifestyle and are not being responsible with their money. Just because a bank will give you a credit card or loan, doesn’t mean it’s a good idea to spend the money.

3. Put Your Investing on Auto-Pilot. What works is squirreling away money consistently. Set up the accounts you need: 401(k), Roth IRA, 529 Plan, Health Savings Account (HSA), etc. Pay yourself first and set up monthly automatic contributions to each account. Don’t worry if you have to start small, you can always increase your amounts later. If you don’t make contributions automatic, you probably aren’t going to have an extra $5,500 lying around at the end of the year to fund your IRA.

See: How Much Should You Contribute to Your 401(k)?

4. 15-Year Mortgage. If you begin your house search process with the pre-approval for a 15-year mortgage, you can save a fortune in interest over the life of the loan. Of course, you also have the opportunity to own your house free and clear in just 15 years. Even if you move after 10 years, you will have significantly more equity if you started with a 15 year rather than a 30 year loan.

See: The 15-Year Mortgage: Myth and Reality

5. Start a 529 College Savings Plan. The sooner you can starting saving for your kids’ college, the more time you can enjoy the benefits of compounding. And since a chief benefit of 529 Plans is tax-free growth, you get more benefit by starting at age 6 than at age 16. An early start is helpful.

See: How Much Will It Cost to Send Your Kids to College?

6. Establish an Estate Plan. No one wants to think about their own mortality, but this is an important step that you need to take. If you have minor children, you really do not want to leave decisions about what happens to your children (and the money to support them) in the hands of a Judge who doesn’t know you. Courts are bound by rules that may lead to outcomes that you would not have wanted. I can refer you to an attorney who can complete this process with you. The cost for most plans will be only $750.

See: What Happens If You Die Without a Will.

Financial Planning in Your Twenties

Posted On June 23, 2018 By Scott Stratton, CFP(R), CFA In Financial Planning / 2 Comments

In your twenties, you are out of college, starting your career and maybe will be starting a family soon. What is most essential is to realize is that financial planning is not just for people your parents’ age who are getting ready to retire. Financial Planning is for YOU!

The steps you take in your twenties will lay the groundwork for the rest of your life. Will you become wealthy or will you be just one step ahead of your bills and debt like many Americans? A lot of us older folks wish we could be twenty-five again but with what we know at 45 or 65. Then we could get an early start and be in much better position later.

So, let’s get organized, educate ourselves about money, investing, and taxes. Define your goals and create a written financial plan. It’s an exciting time to be seeing your hard work starting to pay off. There are plenty of money issues that create a lot of stress: student loans, credit cards, buying a car, housing affordability, low paying entry level jobs, etc. We need to tackle those issues head-on.

Here are five crucial steps for being in your twenties.

1. Emergency Fund. Keep three to six months of living expenses in a safe, liquid account that is separate from your regular checking or bank account. Unplanned expenses are an inevitable reality of life. Cars break down, houses need repair, injury or illness happens. It’s not really a matter of “if” these things will occur, but just when. An emergency fund is a prerequisite before you can start to invest for long-term goals.

2. Manage Debt. Avoid taking on new debt and be smart about managing your existing liabilities, such as student loans, car payments, and credit cards. You have to plan for how to pay off your loans, while still having a plan for the rest of your financial goals, too.

See Should You Invest or Pay Off Student Loans First?

3. Annual Net Worth Statement. Adding up all your assets and liabilities is a key step to managing your financial life. Understand where you are today and direct your cash flow to grow your net worth. By tracking this annually, you are not only measuring your progress, but creating a sense of urgency that will help align your short-term decisions with your long-term goals and dreams.

4. Start Investing NOW. Don’t think that you can make up for lost time later. Compounding works over time and the earlier you start, the earlier you can reach the finish line.

See The Cost of Waiting from 25 to 35

5. Term Life Insurance. You might not have significant assets today, but when you are young, you have the largest amount of future lifetime income. If you have a spouse or family, the greatest need for protection is at age 25, not at 65, when most of your earnings years are behind you. We don’t use insurance as an investment; it is to protect against potentially devastating and rare risks. So, buy a term life policy. If you are healthy, it may be only a few hundred dollars a year. And if something were to happen to you, the term policy would be the most important financial planning step we took. Don’t skip this!

See A Young Family’s Guide to Life Insurance

Vanguard’s Measure of Our Value

Posted On March 17, 2018 By Scott Stratton, CFP(R), CFA In Behavioral Finance /

We create value for you through holistic financial planning, looking at your entire financial picture to create a comprehensive approach to investing your money, gaining financial independence, and safeguarding you from risks. This sounds great, but let’s face it, it’s pretty vague. The numerical benefits of hiring a financial advisor can be difficult to evaluate. Since 2001, Vanguard has spent considerable resources in measuring how I can add value for investors like you.

Their study is called Vanguard Advisor’s Alpha and they have identified areas where financial advisors create tangible value. Their aim is to quantify how much a client might benefit from each process a financial advisor could offer. Vanguard’s conclusion is that an advisor like me can add 3% a year in benefits through effective Portfolio Construction, Behavioral Coaching, and Wealth Management.

Their recommended approach in these areas very much reflects what I do for each client. Not all advisors use these steps with their clients. If your advisor isn’t talking about these actions, you could be missing out. Vanguard has analyzed how much a client might gain from each step in our financial planning process. Benefits, below, are measured in basis points (bps), where 1 bp equals 0.01% in annual benefits.

1. Portfolio Construction

Suitable Asset Allocation / Diversification >0 bps
Cost Savings (Expense Ratios) 40 bps
Annual Rebalancing 35 bps

Our approach is to create long-term, diversified investment strategies for each client. We start with a top-down asset allocation and use ultra low-cost ETFs and institutional-class mutual funds to implement our allocation. Portfolios are rebalanced annually.

2. Behavioral Coaching

Estimated Benefit 150 bps

There is a huge benefit to coaching and that’s why we prefer to write about behavioral finance topics than giving you “weekly market updates”. You can’t control what the market does, but you can control how you respond. And how you respond ends up being one of the biggest determinants of your long-term results.

We take the time to create a solid plan, educate you on our approach, and reinforce the importance of sticking with the plan. There are real risks to having a knee-jerk reaction to a bear market, chasing performance, or buying into bitcoin or whatever fad is currently making the headlines. Based on Vanguard’s calculations, the value of Behavioral Coaching is actually greater than investing steps like asset location or rebalancing.

3. Wealth Management

Asset Location 0 to 75 bps
Spending Strategies (withdrawal order) 0 to 110 bps
Total Return versus income approach >0 bps

Asset location is creating tax savings by placing certain investments in retirement accounts and certain investments in taxable accounts. Spending Strategies, for retirement typically, are another area of considerable attention here at Good Life Wealth. Go to our Blog and you can find all of our past articles (currently 197). In the upper right, use the Search bar and you can find several articles explaining these concepts and how we implement them.

Vanguard lists some of these benefits as 0 bps with the explanation that the value can be “significant” but is too individual to quantify accurately. When they do add up the benefits we can achieve in Portfolio Management, Behavioral Coaching, and Wealth Management, Vanguard believes we are adding 3% a year in potential benefits for many clients.

We hope this may help those who are on the fence, wondering if it is worth it to hire us as your financial advisor. There is a value to what we offer or I wouldn’t be in this profession. The Vanguard study doesn’t consider our benefits in helping you with tax planning, risk management, estate planning, college funding, or other areas. They also don’t consider intangible benefits, such as peace of mind, saving time by hiring an expert versus trying to do it yourself, or the fact that investors who create a retirement plan with an advisor save 50% more than those who do not.

We offer two distinct programs to meet you where you are today and help you get to where you want to be. We are welcoming new clients for 2018. Do you have questions about how we might add value for you? Let’s talk.

Premiere Wealth Management
Comprehensive financial planning and portfolio management
Cost is 1% annually, for clients with $250,000 or more to invest

Wealth Builder Program
Subscription program to build your net worth with expert financial planning in the areas you need
Cost is $200/month, for clients with $0 to $249,999